Economic and financial scenario Brazil Murilo Portugal President. 21 st ASUTIL Conference, Rio de Janeiro. June 7, 2017

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Economic and financial scenario Brazil 2017 2018 21 st ASUTIL

1 Economic and financial scenario Brazil st ASUTIL Conference, Rio de Janeiro June 7, 2017 Murilo Portugal President

2 Contents I. Structural aspects of the Brazilian Economy II. Credit Market and Banking Sector III. Recent economic evolution IV. Main challenges and economic reforms V. Short term economic and financial perspectives 2

3 China India USA Indonesia Brazil Pakistan Nigeria Bangladesh Russia Japan Mexico Philippines Ethiopia Vietnam Egypt Russia Canada USA China Brazil Australia India General Overview Populous and large country Population (million inhabitants in 2016) 5 th largest and most populous country in the world Territorial Extension (Km² million) ,1 10 9,6 9,6 8,5 7, ,3 Source: Brazilian Census Bureau (IBGE) 3

4 General Overview: Large middle-income economy GDP (US$ thousand in 2016) Per capita income (US$ thousand in 2016) USA China Japan Germany UK France India Italy Brazil Spain Russia Mexico South Africa Colombia Luxembourg Switzerland USA Australia Sweden Germany Belgium UK Japan France Italy Korea Spain Uruguay Chile Argentina Poland Peru Russia Brazil Mexico China Colombia South Africa India Source: World Bank and Bloomberg (Considering the average annual exchange rate) 4

5 -13,9-6,3-10,2-3,1-0,7-1,5-2,7-6,6-3,8-2,7-4,2-1,1-3,9-1,1-4,2-0,6 6,2 3,9 4,8 2,2 6,8 4,8 3,5 2,3 0,8 0,3 3,5 1,5 5,8 2,4 2,3 0,8 1,9 6,3 6,7 5,6 4,1 3,5 2,2 2,8 1,0 2,9 2,8 3,6 5,8 10,2 8,4 11,7 17,9 GDP Supply and Demand Diversified economy: efficient agriculture and 2 nd most diversified industry among emerging markets GDP (Supply breakdown in 2016) GDP (Demand breakdown in 2016) 5,5% 21,2% 14,5% 11,0% 73,3% Agriculture, Livestock, & Natural Resources Manufacturing Services % Real Growth 56,6% 17,8% Family Consumption Government Consumption Gross Fixed Capital Formation Net Exports % Real Growth Agriculture, Livestock, & Natural Resources Manufacturing Services Family Consumption Government Consumption GFCF Net Exports Source: Brazilian Census Bureau (IBGE) 5

6 Balance of Trade: recent adjustment and need for greater openness Balance of Trade (US$ billions) Degree of openness of the economy (Imp. + Exp. / GDP in 2015) abr/10 abr/11 abr/12 abr/13 abr/14 abr/15 abr/16 abr/17 Trade balance (12m) Exports (12m) Imports (12m) Source: MDIC/Secex, World Development Indicators 2015 e Professor José Alexandre Scheinkman 6

7 Brazilian Exports: main partners Geographically diversified exports and imports (2014) Source: The Atlas of Economic Complexity in 2014 Harvard University. 7

8 Brazilian Imports: main partners Geographically diversified exports and imports (2014) Source: The Atlas of Economic Complexity in 2014 Harvard University. 8

9 Brazilian Exports: main products Rich in Natural Resources (2014) Source: The Atlas of Economic Complexity in 2014 Harvard University. 9

10 Brazilian Imports: main products Machinery, Manufactured goods, Chemicals (2014) Source: The Atlas of Economic Complexity in 2014 Harvard University. 10

11 Inequality and Poverty Gini Coefficient between 0 (perfect equality) and 1 (maximum inequality) Poverty ratio* (% of the population) 0,572 0,570 0,563 0,556 0,546 0,543 0,531 0,530 0,527 0,518 33,71 30,83 26,75 25,36 22,6 21,41 18,42 15,93 15,09 13, Source: Pnad-IBGE, IPEA and consultants until 2014 (last data available) *Poverty (FAO and WHO) defined as insufficient income for a food basket with a minimum of calories (around 2,000 kcal) per individual 11

244 276 294 305 328 345 346 375 385 386 386 396 Minimum wage and income classes Increase in the minimum wage and reduction of income

families in 2014) % in total income 450 400 350 300 250 200 150 % of the number of families 100 50 0 2005 2006 2007 2008 2009 2010

12 Minimum wage and income classes Increase in the minimum wage and reduction of income inequality Real minimum wage (in 2015 constant prices at US$ PPP) Participation in total income (% of the income mass and number of families in 2014) % in total income % of the number of families Source: IBGE, Bloomberg, Organization for Economic Co-operation and Development (OECD), Tendências Consultoria 12

13 Contents I. Structural aspects of the Brazilian Economy II. Credit Market and Banking Sector III. Recent economic evolution IV. Main challenges and economic reforms V. Short term economic and financial perspectives 13

14 Japan USA Netherlands Spain China South Africa Australia Italy Portugal Sweden France Belgium Germany Austria Chile Ireland Brazil Turkey India Poland Hungary Mexico Russia Colombia Indonesia Argentina Uruguay Peru Sweden Ireland Netherlands UK China Belgium Germany Paraguay Colombia Switzerland Brazil Argentina Japan Peru South Africa Mexico Italy Spain Canada USA Portugal Russia India Ukraine 92,9 76,1 73,2 58,9 53,8 52,9 52,6 46,7 41,1 36,3 28,0 237,0 208,3 194,6 193,4 178,1 177,3 170,7 166,9 151,4 148,6 148,0 134,8 125,1 123,3 109,5 107,0 19,2 18,5 18,3 17,9 17,5 16,8 16,8 16,7 16,2 16,0 15,9 15,2 15,0 14,8 14,8 14,2 13,5 13,1 13,0 12,7 20,6 22,4 352,5 23,7 26,8 Total credit and Basel Ratio Total Domestic Credit* (Total Financial Sector % of GDP in 2015) Basel Regulatory Capital to Risk Weighted Assets (% in 2016) Source: World Bank. *The financial sector includes monetary authorities (the central bank) and deposit money banks, as well as other financial institutions, including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits. Examples of other banking institutions are savings and mortgage loan institutions, finance companies, development banks, and building and loan associations. 14

15 dez/11 abr/12 ago/12 dez/12 abr/13 ago/13 dez/13 abr/14 ago/14 dez/14 abr/15 ago/15 dez/15 abr/16 ago/16 dez/16 R$ tri Banking Sector: comfortable liquidity levels Short-Term Liquidity (Net Assets / Stressed cash flow) Long-term Liquidity (Stable Funds Available / S.F. Required) 1000,00 800,00 600,00 2,50 2,00 1,50 5,0 4,0 3,0 Recursos Stable funds estáveis available disponíveis (A) (A) left - esq. Recursos Stable funds estáveis required necessários (B) (B) left- esq. Índice Structural de liquidez liquidity estrutural ratio (A/B) - - dir dir. 1,14 1,12 1,10 1,08 400,00 1,00 200,00 0,50 0,00 0,00 dez/13 dez/14 dez/15 dez/16 Ativos Net assets líquidos left - esq. Fluxo Stressed de caixa cash estressado flow left- esq. Índice Liquidity de Liquidez Ratio right - dir. 2,0 1,0 0,0 1,06 1,04 1,02 1,00 Source: BCB (Financial Stability Report REF - Published on Apr-2017 ) 15

16 mar/12 mar/13 mar/14 mar/15 mar/16 mar/17 Banking Sector: adequate and secure levels of provisions Banks hold a high level of provisions against defaults and high-risk transactions Provisions for NPls cover 180% of defaults (arrears > 90 days) Provisions x non performing loans (% of portfolio) ,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Carteira Inadimplente - R$ bilhões - lado esquerdo Non performing loans (R$ bi) left-hand side Percentual das Provisões (%) - lado direito Share of provisions (%) right-hand side Provisões - R$ bilhões - lado esquerdo Provision (R$ bi) left-hand side Taxa de Inadimplência (%) - lado direito Delinquency ratio right-hand side Source: BCB 16

17 Banking Sector Overview The 10 largest banks December Largest Banks Total Assets (R$ M) Total Deposits (R$ M) Equity (R$ M) Net Profit* (R$ M) Basel ROE ROA Number of Branches BB ,4 8,6% 0,5% ITAU ,0 15,0% 1,5% CAIXA ECONOMICA FEDERAL ,5 12,6% 0,3% BRADESCO ,4 13,5% 1,3% SANTANDER ,3 10,3% 0,9% SAFRA ,4 18,3% 1,2% 114 BTG PACTUAL ,5 15,8% 2,1% 13 VOTORANTIM ,0 5,5% 0,4% 95 CITIBANK ,5 14,2% 1,7% 134 BANRISUL ,9 8,4% 0,8% 539 Total 10 largest banks ,2 12,6% 0,9% Banking System ,1 11,9% 0,9% TOP 10 Market Share 90% 90% 85% 90% 93% Source: BCB *Annualized 17

18 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 jan/15 jan/16 jan/17 Government indebtedness vs. Bank credit to the private sector Recent trend towards Crowding Out (% PIB) , , ,0 53,2 48,9 46,6 Dívida Public Líquida Sector Net do Setor Debt (% Público of GDP) (% PIB) Bank credit to the private sector (% of GDP) Saldo da carteira de crédito (% PIB) Source: BCB and Ministry of Finance 18

Deleveraging: Families and Business reducing indebtedness 25 Share of family incomes used to service bank debt 50 50 Ratio of family indebtedness to annual income 46,2 % com ajuste sazonal 23 21 19

19 Deleveraging: Families and Business reducing indebtedness 25 Share of family incomes used to service bank debt Ratio of family indebtedness to annual income 46,2 % com ajuste sazonal ,1 22,9 21,3 21,7 19,1 % acumulado em 12 meses % acumulado em 12 meses ,7 21, ,6 18,6 31,4 42,2 23, dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 dez/13 dez/14 dez/15 dez/16 dez/05 dez/05 dez/06 dez/06 dez/07 dez/07 dez/08 dez/08 dez/09 dez/09 dez/10 dez/10 dez/11 dez/11 dez/12 dez/12 dez/13 dez/14 dez/15 dez/16 Comprometimento de renda das famílias com o serviço de dívidas junto ao SFN (% dessaz.) Comprometimento de renda das famílias com o serviço de dívidas - ex. habitacional (% dessaz.) Endividamento das das famílias em em relação à à renda em meses (%) Endividamento das das famílias em em relação à à renda em meses -- ex. habitacional 3,5 3,0 Business Indebtedness (Net Debt/EBITDA) 3,1 2,8 Endividamento Business Indebtedness das Empresas (% por % by Source source de of recursos) funds 2,5 2,0 1,5 1,0 1,3 1,3 1,2 1,6 1,5 1,6 1,8 2,3 2,1 2,5 0,5 0,0 Free bank lending Capital Markets Earmarked bank lending Foreign funds Source: BCB and Ministry of Finance 19

Credit/GDP Free x Earmarked Funds and Corporate x Consumer Loans (%) Sources of Funds and allocation of Bank Credit Credit/GDP By source of funding Non-earmarked (RL) x Earmarked (RD) Loans Consumer

20 Credit/GDP Free x Earmarked Funds and Corporate x Consumer Loans (%) Sources of Funds and allocation of Bank Credit Credit/GDP By source of funding Non-earmarked (RL) x Earmarked (RD) Loans Consumer (PF) x Corporate (PJ) Loans (R$ Bi) (23,5% of GDP) (13% of GDP) RD - PJ ,2% RL - PF ,3% (27% of GDP) (24,5% of GDP) RD - PF ,9% RL - PJ ,6% Free Funds (RL) Earmarked (RD) Source: BCB 20

21 Credit Market Structure Share in Total Credit State owned banks X Brazilian private banks X Foreign private banks in 2016 Foreign private banks 13% Brazilian privately owned banks 31% State owned banks 56% Source: BCB 21

22 Contents I. Structural aspects of the Brazilian Economy II. Credit Market and Banking Sector III. Recent economic evolution IV. Main challenges and economic reforms V. Short term economic and financial perspectives 22

23 GDP (% Y/Y) Market Expectation* - GDP (% Y/Y) 9,2% 8,5% 4,8% 5,2% 6,5% 5,9% 6,6% 6,2% 6,3% 7,0% 1,0% -2,4% -2,2% -1,2% 5,3% 6,9% 5,7% 5,2% 4,7% 3,5% 2,6% 1,7% 1,0% 2,5% 2,5% 2,7% 4,0% 2,8% 2,5% 3,5% -0,4% -0,6% -0,3% -1,8% -3,0% -4,5% -5,8% -5,4% -3,6% -2,9% -2,5% 04/01/ /01/ /02/ /03/ * 0,5% 2018* 2,5% 25/04/ * 2,5% 20/05/ /06/ /07/ /08/ /09/ /10/ /11/ /11/ /12/ /01/ /02/ /03/ /04/ /05/2017 Economic Activity: end of recession seems near 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2,50 0, IV 2007.IV 2008.IV 2009.IV 2010.IV 2011.IV 2012.IV 2013.IV 2014.IV 2015.IV 2016.IV Source: IBGE and BCB (last reported Focus Weekly Market Readout) 23

24 Economically Active Population (EAP) and Unemployment Rate Economically Active Population (Thousands) Unemployment* (% EAP) 13,5 13, ,3 7,4 7,1 6,8 8, * 2018* Source: IBGE - Pnad Contínua (Continuous National Households Sample Survey methodology as from 2012) *Annual average - Forecast by Itaú BBA 24

25 jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar 7,1 7,0 6,8 6,9 6,9 6,8 6,6 6,5 6,5 6,87,47,9 8,0 8,1 8,3 8,6 8,7 8,9 8,9 9,0 10,9 11,2 11,2 11,3 11,6 11,8 11,8 11,8 11,9 12,0 12,6 13,2 13,7 Industry, Retail Sector, Income and Employment 10% 5% 0% -5% -10% mar/13 Industrial Production (12m) Produção Física Industrial (PIM-IBGE) 2,1% mar/14-4,5% mar/15-9,6% mar/16 Var. Accumulated acumulada change em 12 in meses 12 months Average wage -3,8% Rendimento médio habitual do trabalho (valores reais) Employees Pessoas aged 14 de and 14 anos over ou during mais the de reference idade week na (constant semana de prices referência at 2017 (em R$) R$) mar/17 6,4 6,87,2 Core Vendas Retail no Varejo Sector Restrito Sales (PMC-IBGE) (12m) 10% 7,4% 4,5% 5% 1,0% 0% -5% -5,3% -5,8% -10% mar/12 mar/13 mar/14 mar/15 mar/16 mar/17 Var. Accumulated acumulada change em 12 in meses 12 months Unemployment Rate Taxa de desocupação Pessoas % Economically de 14 anos Active ou mais Population de idade na semana de referência (em %) 9,0 9,510, Source: IBGE

26 dez-11 abr-12 ago-12 dez-12 abr-13 ago-13 dez-13 abr-14 ago-14 dez-14 abr-15 ago-15 dez-15 abr-16 ago-16 dez-16 abr-17 ago-17 dez-17 abr-18 ago-18 dez-18 04/01/ /02/ /03/ /04/ /05/ /06/ /07/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /05/2017 Inflation: sharp fall in inflation and reanchoring of expectations IPCA - breakdown (% accum. in 12 months) Market Expectation* - IPCA (% Y/Y) 20% 16% IPCA - Non-Tradables IPCA - Tradables IPCA - Monitored Prices IPCA Overall Index (forecast after may-2017) 17,95% 6,3 5,8 5,3 12% 8% 4% 0% 10,67% 8,23% 7,06% 6,29% 4,57% 3,15% 3,93% 4,36% 4,8 4,3 3,8 4,36 4,25 3, Source: IBGE and BCB (last reported Focus Weekly Market Readout) 26

27 /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /10/ /11/ /12/ /01/ /02/ /03/ /05/2017 Monetary Policy: fast loosening cycle expected to last Benchmark interest rate- Selic (P/A %) Market Expectation* - Selic (P/A % end of the period) 13,75 13,25 11,25 8,75 10,75 12,50 11,00 14,25 14,00 13,75 13,00 12,25 11,25 10,25 13,0 12,5 12,0 11,5 11,0 10,5 10,0 9,5 9,0 8, ,50 7,25 8, Source: BCB (last reported Focus Weekly Market Readout) 27

28 -104,2-74,8-59,4-23,5-19,8 Billions 69,2 74,7 78,9 96,9 84,7 Declining current account deficit fully covered by FDI International Reserves (US$ billions) Current Account and FDI (US$ billions) abr/12 abr/13 abr/14 abr/15 abr/16 abr/17 International reserves - cash concept (total) - left abr/12 abr/13 abr/14 abr/15 abr/16 abr/17 Current Account Deficit (12m) Foreign Direct Investment (12m) Difference Source: BCB 28

29 Contents I. Structural aspects of the Brazilian Economy II. Credit Market and Banking Sector III. Recent economic evolution IV. Main challenges and economic reforms V. Short term economic and financial perspectives 29

30 Fiscal: Disappointing fiscal outcomes and unsustainable debt trajectory Gross Debt and Primary Balance (% of GDP) 3,52 1, * 78,0 2017* 75,0 71,6 61,1 58,1 2018* -1, * -2,04 51,3-2,34 mar/09 mar/10 mar/11 mar/12 mar/13 mar/14 mar/15 mar/16 mar/17 Dívida Public Bruta Sector (% PIB) Primário Public Sector consolidado acum. 12m (% PIB) Gross Debt Consolidated primary balance12m Source: National Treasury and Ministry of Finance 30

31 Evolution of Central Government s Primary Expenditures (% GDP) + 8,9 p.p. Source: Min. of Finance, SIAFI, IBGE and Mansueto Almeida. *Data from : Giambiagi and Castelar (2012), Além da Euforia Translator s Note: Book title freely translated as Beyond the Euphoria. 31

32 Social security is the main reason for higher Primary Expenditures Decomposition of growth in primary expenditure, from 1991 to 2015 (p.p. of GDP) 8,9 Personnel Social Security (+Assistance) Benefits Current Expenses (Health and Education) Subsidies Other Expenses Source: Min. of Finance, SIAFI, IBGE and Mansueto Almeida. *Data from : Giambiagi and Castelar (2012), Além da Euforia Translator s Note: Book title freely translated as Beyond the Euphoria. 32

33 Social security deficit has been increasing fast Balance of the Urban and Rural Social Security System (R$ Bi) Urban Source: Min. of Finance, SIAFI, IBGE 33

34 If nothing is done, social security expenditures will squeeze all other expenditures against the Ceiling on expenditure Other Expenses Ceiling on primary expenditures Source: Min. of Finance, SIAFI, IBGE 34

35 Evolution of social security expenditures under reform and no reform scenarios Social Security Benefits (% of GDP) Actual Forecast - no reform scenario scenario Forecast - Social Security Reform Source: Min. of Finance, SIAFI, IBGE 35

36 Business environment and low labor productivity Brazil has had historically low labor productivity and slow growth in total factor productivity - TFP TFP depends on technological advances, better management, quality of inputs, as well as growth in labor productivity Current labor legislation reduces incentives to increase productivity due to legal uncertainty and complexity GDP per worker (constant prices of 2011 in PPP Source: World Bank and Insper (Professors Marcos Lisboa and Naércio Menezes) 36

37 Labor productivity international comparisons Product per worker (USA = 1) Growth in TFP (in relation to the USA rate since 1980) Source: Professors Marcos Lisboa and José Alexandre Scheinkman 37

38 Brasil Portugal Venezuela Rússia Espanha México Colômbia Equador Bolívia Turquia Peru China França Alemanha Chile Argentina Itália Japão Uruguai Canadá Irlanda África do Sul Reuni Unido Dinamarca EUA Australia Hong Kong 1,51 1,42 1,27 1,22 1,04 1,04 1,02 0,95 0,92 0,92 0,76 2,40 2,36 2,32 2,21 2,18 2,01 1,99 1,86 1,82 1,74 1,67 1,62 1,59 1,57 1,56 1,55 Brazil s labor market is excessively regulated In 2003, the National Bureau of Economic Research (NBER) published the labor law rigidity index for 85 countries 1) Rich countries regulate labor less than poor countries 2) Higher regulation levels are associated with informality and high unemployment rates, especially among young people 3) Among the 85 countries analysed, Brazil is the most regulated with negative effects on informality and unemployment Employment Labor Law Law Index Index Excesso Excessive de Regulamentação Regulation Source: Djankov S, La Porta R, Lopez-de-Silane F, Shleifer A, Botero J. The regulation of labor. National Bureau of Economic Research (2003) 38

39 Rigid labor legislation can induce informality In the case of Brazil, the analysis suggests that between 30-40% of the increase in informality can be explained by the increase in labor regulation, including cost of dismissals, through increases in frictional unemployment in the formal sector In a simulation for the Brazilian case, policies that lowered the cost of formal hiring (reduction in hiring and dismissal costs) not only increased formal employment and reduced informality, but also reduced the aggregate unemployment rate. Relationship between labor law rigidity and higher informality Muravyev, A. Employment protection legislation in transition and emerging markets, IZA World of Labor (2014) Source: Institute of Labor Economics (IZA) e Djankov, S., & Ramalho, R. (2009). Employment laws in developing countries. Journal of Comparative Economics, 37(1),

40 Contents I. Structural aspects of the Brazilian Economy II. Credit Market and Banking Sector III. Recent economic evolution IV. Main challenges and economic reforms V. Short term economic and financial perspectives 40

41 nov-12 fev-13 mai-13 ago-13 nov-13 fev-14 mai-14 ago-14 nov-14 fev-15 mai-15 ago-15 nov-15 fev-16 mai-16 ago-16 nov-16 fev-17 mai-17 nov-12 fev-13 mai-13 ago-13 nov-13 fev-14 mai-14 ago-14 nov-14 fev-15 mai-15 ago-15 nov-15 fev-16 mai-16 ago-16 nov-16 fev-17 mai-17 Country Risk: improved default risk and appreciation of exchange rate CDS Spread (bps 5Y) Nominal Exchange Rate (BRL/USD spot rate) ,50 4,184, ,00 3,50 3,00 2,50 2,00 2,44 2,70 3,29 3,48 3,37 3,07 0 1,50 Source: Bloomberg and BCB 41

42 dez-11 mai-12 out-12 mar-13 ago-13 jan-14 jun-14 nov-14 abr-15 set-15 fev-16 jul-16 dez-16 mai-17 jan-12 mai-12 set-12 jan-13 mai-13 set-13 jan-14 mai-14 set-14 jan-15 mai-15 set-15 jan-16 mai-16 set-16 jan-17 mai-17 Considerable decline in long term interest rate and appreciation of domestic assets since 2016 Pre-fixed interest rates (% p.a.) Ibovespa Index (1000 points) ,4 16,8 15,3 12,21 9,5 11, % since % desde Taxa Maturity de Juros jan-2021 Jan/21 Taxa Maturity de Juros jan-2027 Jan/27 Source: Bloomberg and B3 42

43 abr/06 abr/07 abr/08 abr/09 abr/10 abr/11 abr/12 abr/13 abr/14 abr/15 abr/16 abr/17 Confidence indicators show considerable recovery since beginning of Temer government Índices Confidence Confiança Indicators (FGV) Base Sept/ = set/ % INDÚSTRIA Manufacturing CONSUMIDOR Consumer Services SERVIÇOS Source: FGV and CNI 43

44 Baseline Economic Scenario BCB Focus - Market Readout GDP (%) 4,0 1,9 3,0 0,5-3,8-3,6 0,5 2,5 Industrial Production (%) 0,4-2,3 2,1-3,0-8,2-6,6 1,3 2,5 *FEBRABAN Survey - Nominal credit balance - Business Loans (%) 18,9 16,2 13,2 9,5 6,3-9,5 0,8 6,0 *FEBRABAN Survey - Nominal credit balance - Personal Loans (%) 18,6 16,7 16,0 13,3 7,1 3,2 3,2 6,4 Consumer Price Index - IPCA (%) 6,5 5,8 5,9 6,4 10,7 6,3 4,0 4,4 IGP-M (%) 5,1 7,8 5,5 3,7 10,5 7,2 2,1 4,5 Exchange Rate (R$/US$) (end of period) 1,88 2,04 2,34 2,66 3,90 3,26 3,25 3,37 Selic Rate (% p.a.) (end of period) 11,0 7,25 10,00 11,75 14,25 13,75 8,50 8,50 Net Debt of the Public Sector (% GDP) 34,5 32,2 30,5 32,6 35,6 46,2 51,5 55,2 Trade Balance (US$ billion) 27,6 17,4 0,4-6,6 17,7 45,0 56,2 43,1 Current Account (US$ billion) -77,0-74,2-74,8-104,2-59,4-23,5-23,0-37,0 Foreign Direct Investment (US$ billion) 101,2 86,6 69,2 96,9 74,7 78,9 79,0 78,8 44

45 Thank you!

Green Shoots Consumption-led cyclical recovery and needed reforms

Green Shoots Consumption-led cyclical recovery and needed reforms November, 2017 FERNANDO HONORATO BARBOSA Chief Economist, Director fernando.honorato@bradesco.com.br 1 The economy is improving. Families