1

Brazil’s Opportunities for Investment

Luiz Awazu Pereira da Silva*

Bilateral Annual Meeting

Conselho Empresarial Brasil-China (CEBC)

Brasília – July 17, 2014

(*) Deputy-Governor, International Affairs and Financial Regulation, Banco Central do Brasil

(BCB). These remarks are personal and do not necessarily reflect the opinions of the BCB.

2

1. Large and diversified economy, potential to be used as

a regional hub for production and exports

2. Strong fundamentals capable of ensuring

macroeconomic and financial stability

3. Sustainable development model aiming at increasing

social and financial inclusion; meeting environmental

standards; fostering more investment (infrastructure)

4. Capacity to react timely and respond to shocks and

challenges; demonstrated resilience to crisis using

textbook macro policies, domestic and external buffers

5. Pragmatism: neither excessive optimism nor pessimisim;

awareness of potential for higher TFP, “Low Hanging

Fruits”

Summary: Good Reasons to Invest in Brazil

3

• One of the largest countries in terms of

territory, population and GDP

• 7th largest GDP: US$ 2,243 billion (2013)

• Continental country: 5th largest area

8,515,767 km2

• 5th largest population: 201 million people

(2013)

• Vast natural resources, including recently

discovered large offshore oil fields

• Diversified industrial base, dynamic and

sophisticated private sector, and well-

structured public sector

• Strong institutions, social inclusion and

democracy with stable political system

Sources: IBGE / BCB / IMF

A Large and Diversified Economy

• Brazil has good relations with all its

neighbors and has increased its ties

with all regions of the world

4 Source: IMF World Economic Outlook, Apr/2014

Brazil is Well Positioned in South America

South America GDP (PPP, USD bi, 2014)

2.505

560

794

412

369

352 Total GDP

US$5.3 trillion

5 Source: MDIC

Brazilian Exports are Very Well Diversified

Composition Destination

US 10,2%

EU*** 17,0%

Germany 2,7%

Asia** 13,1%

China 19,0%

Latin America & Caribbean*

14,1%

Argentina 8,1%

Others 15,8%

* excluded Argentina

** excluded China and Middle East

*** excluded Germany

Primary Products

47,8%

Manufactured Products

39,3%

Semi-Manufactured products

12,9%

Exports in 2013

6 Source: Mdic and Unctad

South America is a Key Market for Manufacturing Goods

Regional Destination Country Destination

within South America

Manufacturing Exports in 2013 US$85,1 billion

Argentina

55%

Chile 9%

Paraguay

8%

Venezuela

7%

Colombia

7%

Peru 6%

Bolivia 4%

Uruguay 4%

*excluded Middle East

South America

40%

EU 21%

Others 17%

USA 15%

Asia* 7%

7 Source: BCB

Organizations and Forums Enhance Regional Integration

LATIN AMERICA

SOUTH AMERICA

UNASUL MERCOSUL ALADI

CCR SML RMFPBC GMC

SGT-4 SGT-12

8

Largest brewer in Latin America. One of the largest beer producers in the world

World leader in meat production. World’s largest exporter of animal protein

Third largest manufacturer of commercial jets in the world

Largest long steel producer in the Americas and the second largest in the world

Operates in 23 countries (engineering, construction, infrastructure, energy, industry)

The only steel sheet producer in Brazil and the world 5th larger producer

Largest world producer of iron ore and second largest of nickel

Largest producer of thermoplastic resins in the Americas

One of the 10 largest food companies in the world, exports to 140 countries

Source: Exame, Valor Econômico, Companies’ Websites

Brazil Has Firms as Global Players

9

• Main features of the macroeconomic policy framework:

- Inflation targeting

- Fiscal responsibility

- Exchange rate flexibility

• The macroeconomic fundamentals, combined with

adequate prudential policy and strong bank supervision,

resulted in:

- Capacity to absorb internal and external shocks

- Macroeconomic and financial stability

- Sustainable growth

- Credit and capital market development

- Social and financial inclusion

Brazil’s Strong Macroeconomic Fundamentals

10 Source: Bloomberg

Ind

ex D

ec 0

7 =

100

Cumulative Real GDP Growth

Brazil’s Economy Weathered Well the Global Crisis

119.0

118.2

120.6

110.6

106.1

97.8

90

95

100

105

110

115

120

1254Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

Poland Brazil South Korea Mexico USA Euro Zone

11 Source: IBGE

Brazil’s Investment Ratio at New Level %

of

GD

P

18,3

16,9

17,4

17,0

15,7

16,8

17,0

16,4

15,3

16,1 15,9

16,4

17,4

19,1

18,1

19,5

19,3

18,2 18,2 18,1

14

15

16

17

18

19

20199

5

199

6

199

7

199

8

19

99

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

20

08

200

9

201

0

201

1

201

2

201

3

201

4*

*1Q 2014 (12 months)

12 Source: BCB

FDI into Brazil is Strong and Remained Stable U

S$ b

illio

n

*May 14 (12 months)

1,5 1,4 0,3 1,2 2,8 1,1 1,0 1,1 2,1 1,3 2,1 4,4

10,8

19,0

28,9 28,6 32,8

22,5

16,6

10,1

18,1 15,1

18,8

34,6

45,1

25,9

48,5

66,7 65,3

64,0

66,5

0

10

20

30

40

50

60

70

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

20

02

200

4

200

6

20

08

201

0

201

2

20

14

*

13 Source: UNCTAD

US

$ b

illio

n

Brazil is One of the Leading Recipients of FDI

28

31

32

37

38

40

46

53

56

63

64

72

94

127

159

0 60 120 180

India

Luxembourg

Germany

Spain

Mexico

Australia

Ireland

UK

Singapore

Brazil

Canada

Hong Kong

Russia

China

USA

2013

29,5

31,6

34,3

40,4

40,9

41,4

51,1

52,9

64,0

65,8

66,7

96,1

103,3

124,0

226,9

0 60 120 180 240

Spain

India

Italy

Germany

France

Canada

UK

Russia

Singapore

Australia

Brazil

Hong Kong

Belgium

China

USA

2011

19,3

22,6

26,4

27,3

39,6

44,1

47,2

48,5

54,4

58,9

62,5

65,3

72,5

119,7

146,7

0 50 100 150

Belgium

Luxembourg

Chile

India

Ireland

Russia

Canada

Australia

Singapore

France

UK

Brazil

Hong Kong

China

USA

2012

14

5%

7%

7%

7%

7%

10%

12%

17%

30%

33%

0 5 10 15 20 25 30 35

Mexico

Japan

Indonesia

Russia

India

UK

Brazil

Germany

US

China

%

Which 3 countries, excluding the country in which the CEO is based, do they consider most

important for their overall growth prospects over the next 12 months? *

Source: PwC 17th Annual Global CEO Survey *Base: 1,344 respondents

Global CEO Survey 2014: Brazil is a Key Country

15 Source: Conab

Brazil’s Agricultural Performance is Remarkable m

illio

n h

ecta

res,

mill

ion

to

ns

*estimate in June

37,9

39,1

36,6

37,8

43,9 47,9 47,7

47,4 50,9

56,9

57,9

76,0 78,4

83,0

123,2

122,5 135,1

149,3 166,2

193,6

20

40

60

80

100

120

140

160

180

20090/9

1

91/9

2

92/9

3

93/9

4

94/9

5

95/9

6

96/9

7

97/9

8

98/9

9

99/0

0

00

/01

01/0

2

02/0

3

03/0

4

04/0

5

05/0

6

06/0

7

07/0

8

08/0

9

09/1

0

10/1

1

11/1

2

12/1

3

13/1

4*

Cropped Area (1991-2013)

Growth: 41% = 1.6% / year

Production (1991-2013)

Growth: 223% = 5.5% / year

Grains: Production and Cropped Area

16

Liquid Assets to Short Term

Liabilities

11,6

12,0

13,3

13,4

13,9

14,0

14,3

14,4

14,4

14,7

14,8

15,7

16,1

16,4

17,1

19,1

10 12 14 16 18 20

Australia

Spain

India

Russia

Italy

South Korea

France

United States

Canada

Japan

South Africa

Turkey

Mexico

United Kingdom

Brazil

Germany

26,1

36,1

40,0

44,9

45,0

46,7

49,9

72,5

76,4

82,0

96,9

121,4

140,3

160,0

0 50 100 150 200

India

South Africa

United Kingdom

Canada

Australia

Mexico

Japan

Turkey

United States

Russia

Italy

South Korea

Germany

Brazil

-86,3

-31,9

-22,2

-19,2

-14,7

-14,5

-13,6

-13,6

-10,9

-6,0

-3,9

-3,2

7,7

10,6

-120 -20 80

Italy

Spain

South Africa

Japan

Australia

United Kingdom

United States

India

Russia

Canada

South Korea

Turkey

Mexico

Brazil

Source: IMF (FSI – latest available data)

Brazil’s Financial System is Sound…

Regulatory Capital to

Risk-Weighted Assets ( Provisions – NPL) / Capital

Source: BCB

Mar 14

Origin of Bank Funding

95,7

88,7 86,3

91,4

4,3

11,3 13,7

8,6

60%

80%

100%

public-owned private-owned foreign-controlled total

Domestic External

Brazil’s Banks Not Dependent on External Funding

18 Source: BCB

Brazil’s Net Public Debt Falling Despite the Crisis %

of

GD

P

*May 14

-26.2 p.p.

of GDP

52,0

60,4

54,8

50,6 48,4

47,3 45,5

38,5

42,1

39,1

36,4 35,3

33,6 34,6

20

25

30

35

40

45

50

55

60

65

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

20

12

201

3

201

4*

-25.8 p.p.

of GDP

19 Sources: IBGE / Ipea

Income Inequality, Poverty Have Declined in Brazil

0,490

0,500

0,510

0,520

0,530

0,540

0,550

0,560

0,570

14

16

18

20

22

24

26

28

30

32

34

36200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

1

201

2

Poverty headcount ratio below poverty line (LHS) Gini Index (RHS)

% o

f popula

tion

index (

0 t

o 1

)

Gini Index and Poverty Headcount Ratio Below Poverty Line

20 Sources: IBGE / FGV

Redistributive Growth Across Income Brackets

Higher Income

Lower Income

Per Capita Income Growth (Per Percentile)

annual average 2001-2012

7,1%

6,4%

5,9%

5,5%

5,2%

4,9%

4,2%

3,6%

2,8%

2,1%

0% 1% 2% 3% 4% 5% 6% 7% 8%

10

20

30

40

50

60

70

80

90

100

21 Source: FGV

Resulting Social Mobility: New Middle Class

49

25 17

47

39 32

66 105

118

13 23 29

0

50

100

150

200

2003 2011 2014*

E D C A/B

mill

ions o

f people

Social Classes

*FGV forecast

22 Source: BCB

Brazil’s Growth of Credit / GDP ratio %

of

GD

P

new methodology since 2007

*May 14

2005-2008: 25.4% (average growth of nominal credit)

2009-2013: 17.1% (average growth of nominal credit)

25,8 26,0 24,6 25,7

28,3 30,9

35,5

40,7

43,9 45,4

49,1

53,9 56,1 56,2

0

10

20

30

40

50

60200

1

200

2

200

3

200

4

200

5

200

6

200

7

20

08

200

9

201

0

201

1

201

2

201

3

201

4*

23 Sources: BCB / IBGE

Access to Financial Services

2000 2010

0 (20%)

>0 to 2 (22%)

>2 to 5 (40%)

>5 to 10 (16%)

>10 (2%)

# of points per 10,000 adults

(% of municipalities)

0 (0%)

>0 to 2 (0%)

>2 to 5 (6%)

>5 to 10 (29%)

>10 (65%)

# of points per 10,000 adults

(% of municipalities)

Geographic Coverage Increased: 82% of municipalities had less than 5 points per

10,000 adults in 2000; in 2010, 94% were above this level.

Bank branches, bank advanced outposts (PAA), credit cooperatives

(headquarters and outposts) and correspondents

Brazil Eco. Policy Timely Reactions to QE, Tapering

• After the GFC and UMP, we knew that there will be ups

and downs in market sentiment so we prepared

ourselves keeping textbook macro policies

– Flex ER as 1st line of defense; accumulated sizeable reserves

– adopting preventive measures during upswing (MaPs for

tightening excessive credit growth);

– keeping strong capital, provisions & liquidity in our financial

system; and cautious reliance on external sources of funding

• Ahead of curve, we took early and sizeable action on

monetary policy to address inflation pressure

• Implemented successful FX auctions program to provide

FX hedge to investors, firms, and liquidity to the market

in a predictable manner

24

25 Source: BCB

Brazil’s International Reserves Worked as a Buffer U

S$ b

illio

n

as of Jul 3rd

12 12 7 7 9 10 10 9 24

32 39 52

60 52

45 36 33 36

38 49 53 54

86

180 194

239

289

352

379 376 380

0

50

100

150

200

250

300

350

400198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4*

26 Source: BCB

Brazil’s Low External Debt Ratios

120,6%

63,4%

38,8%

25,2% 27,9%

14,4%

0

20

40

60

80

100

120

140

short term debt/intl.reserves

debt services/exports external debt/GDP

Dec 03 May 14*

%

*estimate

Brazil’s Development Strategy is Clear

• More investment & capital, physical (infrastructure)

and human (education) to complement strong base of

domestic consumption

• Foster more productivity gains (TFP) & externalities

• Brazil has “low hanging fruits”, i.e. well-identified

infrastructure projects with high return and relatively

low financing cost

27

Investment in Infrastructure is Key

• The need for more investment in infrastructure is

clear

• Externalities from investment in infrastructure are

larger than those coming from “other investments”

(e.g., machinery, equipment, etc.)

Two pillars:

• Public investment: Growth Acceleration

Program(PAC)

• Broad program of concessions

28

Source: Ilos, World Bank

Brazil’s Logistics Costs Can Fall

30

• To support accelerated and sustainable

development:

- Extensive and modern infrastructure network

- Efficient logistics

• New phase:

- Integration between highways, railways,

waterways, ports and airports

- Interaction with supply chains

Brazil’s Concessions Program is Huge

31

• Highway Concessions: 7,000km – Estimated investment: US$ 23 billion

• Railway Concessions: 11,00km – Estimated investment: US$ 49.8 billion

• Ports – Estimated investment: US$ 27.3 billion

• Airport concessions – Two major airports (Galeão (RJ) and Confins (MG)) and 270

regional airports. Estimated investment: US$ 8.2 billion

– Previously: Guarulhos (SP), Campinas (SP), Brasília (DF) and S.

Gonçalo do Amarante (RN) — auctioned before the launch of PIL

Logistics Investment Program (PIL)

Source: EPL

32 Source: Anac

in m

illio

n o

f passengers

(R

PK

)

+188% growth

average growth: 12.5% p.a.

Brazil’s Air Traffic Growing Fast

29,1 32,1 38,7 43,2 47,4 49,9

56,9

70,1

82,1 88,7

8,1 9,1

10,4 10,8

12,3 13,6

12,8

15,4

17,8

18,5

0

20

40

60

80

100

120

20

03

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

domestic international

Domestic and International Flights: Million of passengers

33 Source: Antaq

in m

illio

n to

ns

Growing Cargo Movement in Brazilian Ports

500

550

600

650

700

750

800

850

900

950

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

average: 633.4

average growth:

5.0% p.a. average: 857.6

34 Source: ABCR - Brazilian Association of Highway Concessionaires

in t

housands o

f vehic

les

Growth in Road Traffic is High as Well

0

20

40

60

80

100

120

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

20

11

201

2

201

3

average: 51.6

average: 94.7

51.4% growth

average growth: 7.3% p.a.

Vehicles per Kilometer in Private Toll Roads

35 Source: EPE

Electricity Generation Capacity

*EPE estimates

GW

85 98

119

2

2

3

17

21

23

5

6

7

9

10

14

2

11

17

0

20

40

60

80

100

120

140

160

180

200

2012 2016* 2022*

hydroelectricity nuclear thermal small hydropower plants biomass wind

Source: IEA (World Energy Outlook 2013)

Oil Production m

bpd

0

1

2

3

4

5

6

2012 2025 2035

Deepwater Other

Source: MEC

Investment in Human Capital

• Programs aimed at increasing access to

technical schooling and higher education:

o Technical and professional education:

Pronatec: 5.5 million students in technical and professional

education since 2011 (goal is 8 million by end of 2014)

o Higher education:

Prouni: almost 250,000 undergraduate scholarships in

private institutions for disadvantaged students in 2013

Science without frontiers: 100,000 scholarships abroad up

to 2015 Currently almost four thousand undergraduate and graduate

students in the UK

38 Source: IBGE

form

al em

plo

ym

ent

/ to

tal em

plo

ym

ent

(%)

Formal Employment and Unemployment Rate

4

5

6

7

8

9

10

11

12

55

57

59

61

63

65

67

69a

br

05

abr

06

abr

07

ab

r 0

8

abr

09

abr

10

ab

r 1

1

abr

12

abr

13

ab

r 1

4

formal employment (LHS) unemployment rate (RHS)

% (

seasonally

adju

ste

d)

Apr 14

4.6%

Apr 14

67.6%

Investment in Human Capital

39 Source: IBGE

Quality of Education Has Improved as Well,

Although There is a Long Way Ahead

Number of Schooling Years Have Increased

Conclusions

• Brazil´s economy has strong fundamentals,

kept macro & financial stability, sailed well

through the crisis

• Brazil has clear development strategy that

requires and offers large investment

opportunities to foster “productivity” (TFP)

• Education and infrastructure play a key role in

attracting investments and creating better long-

term growth conditions

• Brazil has long tradition to host FDI in a stable

and conducive macro, social environment

40