Ministry of Finance. Brazilian Economic OUTLOOK

Transcription

1 of Finance Brazilian Economic OUTLOOK Special Edition Year of 2010

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3 Summary Foreword: A balance of the 2000s Economic Activity Mass Consumer Market Inflation Interest Rates and Credit International Overview Reduction of External Vulnerability Fiscal Policy Main Counter-cyclical Measures Adopted by the Federal Government (2008 to 2010) Tables Glossary

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5 A Balance of the 2000s Deep changes have taken place in Brazil during the first decade of the current century. From a less dynamic economy, with growth rates below the world average, Brazil has joined the group of countries that lead the world economic growth - and will continue to lead it in the coming years. Between 2010 and 2020, according to international analysts, only China and India, among the emerging countries, will overcome Brazil in the contribution to global growth. Moreover, the Brazilian economic success comes along, differently from what happened in the past, with social inclusion and reduction of social and regional disparities. Throughout the 2000s, the Brazilian economy growth has increased from an average of 2.5% to 4.5%, due to the new economic policy focused on job generation, investments and domestic market expansion. From 2007 to 2010, the average annual growth was not over 6% only because of the -0.6% (negative) growth observed in 2009 due to the international crisis. The growth performance has been assured by solid fiscal and monetary fundamentals pursued by the Government. The economic growth combined significant fiscal primary surpluses and an inflation targeting regime. Rather than borrowing to grow, Brazil began to grow with debt reduction. After 2005, inflation rates, measured by the Broad Consumer Price Index (IPCA), began the convergence into the boundary set by the inflation-targeting regime, achieving rates even below the established target. Compared to other countries, the Brazilian inflation rate is one of the least volatile among emerging markets. Temporarily, the international financial crisis halted the economic growth trend. The impacts were particularly severe in the last quarter of 2008 and first quarter of Brazil faced a significant retraction on the international credit lines, followed by a sharp fall in commodity prices. These facts led to a devaluation of the Real compared to the U.S. dollar and the deterioration of the economic activity and employment indicators. When the crisis occurred, Federal Government promptly acted. The measures approved were quite different from traditional recipe used by the country in past experiences. The Government implemented a series of counter-cyclical 5

6 fiscal and monetary measures in order to stimulate the economy, reversing private sector expectations and reestablishing overall confidence. Among fiscal measures, the Government implemented tax cuts to stimulate both sales and production. It also increased transfers to states and municipalities, expanded financial contributions to public banks and temporarily reduced the primary surplus target - from 3.3% to 2.5% of GDP. For monetary policy, there was prompt provision of liquidity in both foreign and domestic currency, foreign international reserves allocation to foreign trade funding, expansion of credit line for the export sector and reductions in banks reserve requirements. Further, the Brazilian Central Bank reduced basic interest rates in order to contribute to the recovery of economic activity. Brazil was one of the last countries to suffer the crisis effects and one of the first to recover from it. The crisis erupted in the core of the advanced economies and its effects were still affecting the U.S., Eurozone and Japan economies in On the other hand, in Brazil, after the negative result of -0.6% in 2009, the economy rejoined the strong growth path and achieved a 7.5% growth in The 2010 growth rate was one of the best performances in the last four decades and it finally leaves behind the international financial crisis, consolidating Brazil as one of the most successful countries in the world. The Brazilian economy is stronger and more dynamic. We left behind the economic growth models that did encompass among their goals price stability and better income distribution. Policies encouraging growth acceleration and job generation, combined with the real appreciation of the minimum wage and the expansion of income transfer programs, have changed the country. The drop in income concentration, as measured by the Gini index, is remarkable. The Brazilian domestic market became more attractive to large national and international companies due to the increase in labor formalization and the development of a new middle class. The country attracted large volumes of foreign direct investment. The inflow of FDI amounted to US$ 48 billion in 2010, more than three times the figures of a decade ago. 6

7 For the coming years, it is expected large investments in infrastructure, such as construction, telecommunications, sanitation and oil exploration and refining. The Brazilian Government considers the expansion of infrastructure investment as a fundamental condition for sustainable development. Thus, it has launched the Growth Acceleration Program (PAC), which invested more than R$ 500 billion between 2007 and 2010 in transportation, energy, sanitation, housing and water resources sectors. In 2010, gross fixed capital formation grew by 21.8% compared to the previous year, almost three times faster than the GDP growth. PAC-2, to be initiated in 2011, will continue to boost investment in order to reach 24% of GDP by The public sector intervention was essential for the strengthening of the Brazilian economy before the crisis and for its recovery after Brazil applied policies to promote correct incentives and to stimulate employment and income directly or indirectly. During the crisis, the Government has assured credit expansion and public banks funding in order to prevent shrinkage of private banks lines and to provide resources to the productive sector. Tax exemption measures for durables goods and construction, among others, stimulated domestic demand and maintained consumer confidence. The expansion of employment, income and hence payroll led to the preservation of the virtuous cycle of growth that has characterized the Brazilian economy in the last decade. Until recently, Brazil was characterized by a poor development of the domestic credit markets. In 2002, the volume of credit non-earmarked and earmarked - represented just 24% of GDP. In 2010, the country reached the volume of 46.6% GDP, the highest historical level, and there is large room to increase in the coming years. Private financial institutions (both domestic and foreign) used to have the largest share on credit market before Due to the international crisis, these institutions discontinued their credit lines, which required Government s extra effort to keep the convenient credit levels in the economic system. Between September 2008 and September 2009, public-bank lending operations were responsible for maintaining the adequate levels of credit for the economy. 7

8 Since the end of 2009, after the crisis, the relative share of public banks on the credit market has declined in favor of private institutions. Investment has grown not only due to the increase of government banks funding. The relative share of the National Bank for the Economic and Social Development (BNDES) in the total credit market, for example, has remained within its historical levels. In 2002, this share reached 24.4% of total loans and, then, started a downward movement that lasted until 2007, when it reached 17.1%. Due to credit restraint in private institutions, the share of BNDES started to increase in response to the international crisis of 2008, reaching 20.7% in In addition to the banking credit expansion - which has doubled its relative share of GDP in seven years, we also observed an exponential growth of companies funding through capital markets. Over the past eight years, there was a tenfold increase in the volume traded on the Brazilian stock exchange. Foreign fund raising for national companies reached record levels in 2010, after suffering the impacts of the crisis in The outlook for economic growth is clearly favorable in the coming years. Throughout the 2000s, there has been a clear movement of fiscal consolidation. From public accounts imbalances and debt default (in 1987), Brazil adopted fiscal responsibility as one of the main pillars of its economic policy. Between 1995 and 2002, the country registered high nominal deficits, which reached -10% and -9.6% of GDP in 1999 and 2002, respectively, leading to higher indebtedness and exchange rate volatility. Since 2003, nominal deficits have declined, reaching only 2% of GDP in The fiscal stimulus policies during the financial crisis increased nominal deficit back to -3.2% in 2009, but it was reduced to -2.6% in 2010 and we estimate for % of GDP. Compared to other G20 countries, Brazil is one of the economies with the smallest increase in the public sector debt as a result of the 2008 crisis. After reaching high levels % of GDP in 2002, public sector net debt decreased progressively to 40.4% of GDP in The downward trend in the debt / GDP was combined with debt profile improvements in terms of maturity and indexation. In 2007, the country achieved investment grade by major international risk rating agencies. 8

9 From 2010 onwards, after the economic recovery, the Federal Government considered it necessary to remove most tax incentives in place and to reduce public sector spending, in accordance to the countercyclical policy applied in recent years. In early 2011, the Federal Government announced the fiscal consolidation program, a reduction of $ 50 billion in expenditures by the Central Government. Cuts are concentrated on current expenditures, on restraints to new spending programs and on a plan to increase public efficiency. The initiative generates fiscal space for the maintenance of investment programs, creating conditions for interest rates reductions and new tax cuts. Nowadays, Brazil experiences one of the best economic and social moments of its history, with important challenges ahead and ample possibility to overcome them. The country is prepared to grow above 5% a year between 2011 and 2014, led by investments and with inflation under control, and continue the process of nominal deficit reduction and indebtedness. That will allow to the convergence of our real interest rates to international levels. In 2011, the new economic model applied since 2003 will continue to adjust itself to the reality of our country, facing new challenges and ensuring sustainable growth. The fast expansion of employment in recent years has absorbed much of the labor force available, leading us to a situation close to full employment. In such circumstances, we will implement a huge professional training program, which, along with the educational policy, will seek to quickly raise the supply of skilled labor. The international trade contraction and the increase in global competition due to the crisis require a comprehensive program to stimulate manufacture exports and trade protection. The manufacturing sector, particularly capital goods the most affected by the crisis and competition - will be subject to strong incentives, tax reduction and the development of new technologies. In order to foster economic growth and industry competitiveness, coordination of both industrial and foreign trade policies is required. All in all, they are key elements to increase the industry s export potential. 9

10 The new economic policy involves declining interest rates (in the appropriate time), in order to encourage productive investments, and improvement in the quality of public spending, by reducing current spending and encouraging expenditure rationalization. There will be, therefore, an evolution of monetary and fiscal policies toward a new stage. Brazil has abandoned short-term view and starts planning long term by adopting domestic savings and capital markets as permanent and secure sources for investments. The challenge for the public and private sectors altogether is to develop long-term mechanisms of funding that provides for the attractiveness of financial instruments. The development of a new financial architecture is essential to implement the large projects` agenda, especially the presalt exploration, the World Cup and the Olympic Games. All these changes work as a result of our dynamic society and a successful set of macroeconomic policies. The Brazilian inclusive development model, based on income redistribution to the poorest segments of the population, let the investors lengthen their investment horizon and allowed the country to face the challenges of the global economy successfully. Brazil, being a democracy that pursues social inclusive policies, gathers the conditions to accelerate economic growth and extirpate poverty. 10

11 Brazilian Economy OUTLOOK Economic Activity

12 Economic Dynamism and Investiments Brazil was one of the G20 economies with fastest growth in 2010, surpassing some traditional developed nations. From an average of 1.7% annual growth between 1998 and 2002, the Brazilian economy began to grow around 4% from 2003 to 2010, and gathered the conditions to achieve an average growth above 5% between 2011 and A key issue to maintain sustainable economic growth with price stability is to boost investment. A long period of low investment levels when the gross fixed capital formation (GFCF) was at an average level of 15% of GDP was left behind in order to achieve, in 2011, investments close to 20% of GDP. By 2014, investments will reach 24% of GDP, enough to sustain annual growth rates above 5.5% without inflationary pressures. 12

13 GDP in 2010: the largest increase in 24 years In 2010, the Brazilian GDP experienced a 7.5% growth, the best performance since Macro-prudential measures along with fiscal consolidation will enable the economy to continue its growth path without mismatches between supply and demand. For the period , it is estimated that the economy shall grow again in a 5% to 6.5% yoy range. Economic Activity GDP Average Growth (% YoY) Average 1.7% PAC PAC Average 4.0% Average 5.9% *2012*2013*2014* Average growth ( ) Average growth ( ) Average growth ( ) Data: % change from preceding year * forecasts PAC is a strategic investment program comprising management and infrastructure actions Source: IBGE Produced by: 13

14 Since 2006, domestic demand has been above GDP Responsible for significant domestic demand growth in recent years, PAC will continue to be the key driver of the country s economic expansion within the period Although net external demand (exports - imports) reduced GDP growth in 2010 over 2009, it contributed to the country s installed capacity expansion, since 22.6% of the imports were comprised of capital goods, with an expansion of 38.0% in this latter period. Economic Activity Composition of GDP Growth (% YoY) * Domestic Demand Net External Demand GDP Growth Rate Data: % change from preceding year * forecasts Source: IBGE Produced by: 14

15 Investments growth three times higher than that of GDP in 2010 Investments expanded 21.8%, far more than the 7.5% GDP growth pace in Household consumption expanded 7.0%, led by a rise on the real total wage income and bank credit for individuals. Exports and imports experienced a 11.5% and 36.2% rise, respectively. Economic Activity Composition of GDP Expansion (% YoY) GDP Gross Fixed Capital Formation Household Consumption Government Spending Exports Imports Data: % change from preceding year Source: IBGE Produced by: 15

16 Household consumption rise in the fourth quarter From the perspective of demand, Gross Fixed Capital Formation was at the forefront to explain growth in However, in the 4Q of the year, household consumption growth pace was higher than that of investments. In the same period, on the supply side, services have maintained their growth pace, whereas industry decelerated rapidly at the end of the year, as a result of inventory adjustments. Economic Activity Composition of Supply and Demand (% quarterly) SUPPLY DEMAND Farming Industry Services Household Government Gross Fixed Exports Imports Consumption Spendig Capital Formation 1Q Q Q Q 2010 Data: % change from preceding quarter seasonally adjusted Source: IBGE Produced by: 16

17 Resumption of investments and savings In 2010, the investment rate one of the key drivers to the supply of goods and services expansion was 18.4% of GDP, higher than the 16.9% rate in For the coming years a strong growth in the domestic savings rate is also expected. In 2010, it represented 16.5% GDP. Economic Activity Investiment and Gross Savings Rate (% of GDP) Gross savings rate Investiment rate Data: % of GDP Source: IBGE Produced by: 17

18 Counter-cyclical policy results The counter-cyclical measures adopted by the government after the 2008 crisis have allowed a continuity on the upward trajectory of household consumption. They have also enabled a rapid resumption of investments, which presently exceed pre-crisis levels. Economic Activity Consumption and Investiments (seasonally adjusted index number) (Average 2006 =100) Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec Gross Fixed Capital Formation Household Consumption Data: seasonally adjusted index number (average 2006 =100) Source: IBGE Produced by: 18

19 Investments are expected to reach 24.1% of GDP in 2014 With the incentives for long-term financing, the private sector is expected to play a key role in longterm investment initiatives. The rapid government actions returned investments to the pre-crisis levels, reaching 18.4% in For the period , at least a 1 percentage point of GDP increase a year on total investments is expected. Economic Activity Gross Fixed Capital Formation - Public and Private (% of GDP) * * * * Total GFCF Public GFCF Private GFCF Data: % of GDP * forecasts Source: Produced by: 19

20 Evolution of Brazilian industrial investment The average invested value growth in 2010 was estimated in R$ 6.34 million per company, which represents a real expansion of 70% over the estimated figure for 2009 (R$ 3.73 million, at 2010 constant prices). Based on a CNI research, in 2011 the Brazilian industrial sector plant to accelerate the pace of investments in production capacity expansion, in order to meet strong domestic market demand. According to industry planning, the average industrial investment value will reach, in 2011, R$ 6.80 million, 7% higher than that of Economic Activity Brazilian Industrial Investiment by Plant - Transformation Industry (R$ million, in 2010 constant prices) 8 Increase higher than 200% * 2010** 2011** Data: R$ million in 2010 constant prices (IPCA) * CNI forecasts ** CNI forecasts for planned investments Source: CNI Produced by: 20

21 Industrial Output Expansion leveraged by Capital Goods Since 2007, PAC and machinery and equipment purchasing incentives have intensified the rapid growth on capital goods output in Brazil (rates above 14% yoy). It is estimated that in 2010 and coming years the growth rates will reach nearly 20% yoy. Economic Activity Industrial Production and Capital Goods Growth Rate (% YoY, yearly acummulated) Capital Goods General Industry Data: % change from preceding year, yearly accumulated Source: IBGE and Produced by: 21

22 Industry faces inventory adjustment and a drop in exports Due to a positive performance in the first quarter, as a result of the issuance of government incentives, industrial manufactured goods output experienced a 10.5% rise in 2010 on a yoy basis. After that, inventory adjustments, along with low external demand, have significantly reduced industrial goods output. In the third quarter, the increase in imports also had a significant impact on industry contraction. The rise of imported industrial goods purchase was primarily a result of the Brazilian currency appreciation and of the strong performance of the Brazilian economy in Economic Activity Industrial Production Index (seasonally adjusted index-number, average 2002 = 100) Jun 07 Aug 07 Oct 07 Dec 07 Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec Feb 09 Apr 09 Jun 09 Aug 09 Oct 09 Dec 09 Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Data: seasonally adjusted indexnumber (average 2002 = 100) Source: IBGE Produced by: 22

23 Industry has grown 28.5% since 2003 The Industrial Production Index is based upon the Annual Survey of Industrial Companies, which covers 63% of the extractive and manufacturing industrial activities. Such index indicates an increase of 28.56% since 2003, and a 10.5% growth rate between 2009 and Economic Activity Industrial Production Index (annual averages, seasonally adjusted index-number) (Average 2002 = 100) Data: annual averages, seasonally adjusted index-number (Average 2002 = 100) Source: IBGE Produced by: 23

24 Industry confidence on the rise in December The Industry Confidence Index (ICI), measured by the Getulio Vargas Foundation, recorded a 1.6% rise in December as opposed to the previous month. The expectation of economic agents in the industry was equivalent to an average of points throughout 2010, the same level of the previous year end. Economic Activity Industry Confidence Index (seasonally adjusted points) Optimistic view Pessimistic view Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Data: seasonally adjusted points Source: FGV Produced by: 24

25 Capacity utilization is stable considering the sector average From 2002 to 2010, a reduction of spare capacity to support demand has been noticed as the industrial installed capacity level of utilization registered a seasonally adjusted expansion of at least 5.4%, considering every comparison basis (CNI, FGV and FIESP). Some sectors, e.g., automotive, leather, pulp/paper and transportation equipment currently work with an installed capacity level around 90%. Economic Activity Installed Capacity Utilization Level - NUCI (%, seasonally adjusted) Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec NUCI - FGV NUCI - FIESP NUCI - CNI Data: % installed capacity utilization, seasonally adjusted Source: CNI, FIESP AND FGV Produced by: 25

26 A new record in vehicle sales Car licensing has continued to grow, reaching 381,600 units in the current year and surpassing the period of tax cuts (IPI Industrial Products Tax). In 2010, even after the end of the IPI tax relief, vehicle sales remained high demonstrating the domestic market strength. In general, the sales were favored by available credit volume, reduction of default and lower financing interest rates. Economic Activity Licensing of New Vehicles (thousand units) IPI reduction From Jan to Mar 09 IPI reduction extended until Jun 09 IPI reduction extended until Sep 09 Government extends IPI reduction until Mar Feb 09 Mar 09 Apr 09 May Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan End of IPI tax relief Feb 10 Mar 10 Apr May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Data: thousand units Source: Anfavea Produced by: 26

27 Vehicle sales double since 2005 Besides being a big automobile producer, Brazil has the fourth largest market for vehicles in the world. More than 15 million vehicles have been licensed in the Brazilian market, with a 105% overall growth between 2005 and The strong domestic demand, coupled with a favorable exchange rate, provided a better condition for the entrance of different imported brands in the country. Even with the increasing share of imported vehicles sales, the inventory level has remained low. Economic Activity Vehicles Production (annual average - thousand units) ,612 1, ,216 2,980 2,820 2, ,644 3,183 3,453 3, Annual production Annual sales Imported cars sales Data: annual average in thousand units Source: Anfavea Produced by: 27

28 Business confidence in the services sector remains high The Services Confidence Index (ICS) measures business confidence on the sector s performance. After three consecutive drops, it recorded a slight increase of 0.3% in December 2010, compared to the previous month (from to points). The annual average was points. According to the Getulio Vargas Foundation (FGV), the results were influenced by the strong domestic demand, despite the perception of the business community of a possible deceleration on the pace of activity in the sector over the next three months. Economic Activity Services Confidence Index (points) Optimistic view Pessimistic view Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Data: points Source: FGV Produced by: 28

29 Consumer confidence at all time high The record levels reached by consumer confidence (ICC) throughout 2010 highlight the domestic market strength. Even with a reduction of 2.1 percentage points from to points between November and December 2010, the annual average reached the unprecedented level of points. Consumers have favorably computed the overall economic situation. However, expectations regarding the economic environment for the coming six months contributed to the downfall of the ICC in December. Economic Activity Consumer Confidence Index (seasonally adjusted points) Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr May 09 Jun 09 Jul Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Optimistic view Pessimistic view Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Data: seasonally adjusted points Source: FGV Produced by: 29

30 Retail sales are accommodated in the fourth quarter From September 2009 onwards, retail sales have shown a strong recovery as a result of countercyclical policies. After the fiscal stimuli have been removed, sales have gone through a downward trend, however, this is not expected to jeopardize the performance of the Brazilian economy in For 2011, 10% growth on sales is expected, according to the PMC Survey. Economic Activity Retail Trade Sales Volume (% YoY, accum.12 m.) Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec PMC (Monthly Survey of Trade) Broad PMC* Data: % change from each 12-month period * Including automobiles, motorcycles, parts and pieces, and construction materials Source: IBGE Produced by: 30

31 Retail sales stabilize in December 2010 Between November and December 2010, total retail sales remained stable, whereas broader retail sales which includes vehicles, motorcycles, parts & pieces and construction supplies experienced a 2.3% rise. The most dynamic sectors were those of vehicles, motorcycles and parts & pieces, whose sales grew 4.7% at the margin, followed by textiles, clothing and shoes (3.4%) and construction supplies (3.2%). On the other hand, hypermarket, food, beverages and tobacco, as well as domestic and personal use products faced a contraction, when compared to the previous month. Economic Activity Real Retail Sales (% YOY, seasonally adjusted) Activity 2010/2009 Broad Retail Sales 10.9 Retail Sales 10.2 Fuels and lubricants 6.2 Other articles of personal and domestic use 8.0 Books, newspapers, magazines and stationery articles 8.4 Hyper/Supermarkets, food, beverages and tabacco 8.8 Textile, clothing and footwear 10.4 Pharmaceutical, medical, orthopedic and perfumery art Automobiles, motorcycles, parts and pieces 11.2 Construction material 14.6 Furniture and home appliances 16.5 Office, computer and communication supplies 22.1 Data: % change from preceding year, seasonally adjusted Source: IBGE Produced by: 31

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33 Brazilian Economy OUTLOOK Mass Consumer Market

34 The new middle class and reduction in poverty The growth model adopted by the Government in the last decade has stimulated labor-intensive sectors, such as services, agriculture, construction and small and medium business. More than 2.5 million new formal jobs were created in The Brazilian economy now figures among the economies that most create jobs in the world, when many countries face serious problems of unemployment. The unemployment rate reached its lowest recorded levels. In all country s regions, the number of formal jobs has increased, especially in sectors such as construction and transformation industries. Besides the creation of jobs, there were real gains in workers income. The Growth Acceleration Program (PAC) and the low income housing program My Home My Life were important for that strong growth, attaching economic development to the pillars of sustainability, responsibility and social inclusion. Faster growth along with strong job generation and social inclusion programs helped to reduce poverty, to create a new middle class and to stimulate investments. Since 2002, about 25 million Brazilians moved up to the middle level of the social pyramid. In 2010, despite of the international crisis, the middle class grew, reaching 103 million Brazilians, and will continue to expand in the coming years, with persistent decrease of lower classes. Income inequality continues to decline as depicted by the progressive decrease in the Gini index. It is a result of the minimum wage valorization and the income transfer policies, both promoted by the Federal Government. Data on the 2009 National Survey of Households (PNAD), conducted by the Brazilian Institute of Geography and Statistics (IBGE), confirmed the downward trend of poverty in Brazil and pointed out to the consolidation of a sustainable and inclusive growth path. 34

35 New middle class will represent 56% of the population in 2014 Since 2002, nearly 25 million Brazilians have moved up to the middle of the social pyramid. In 2010, the C class already accounted for about 103 million Brazilians, and it will continue to expand in coming years. By the end of 2014, the C class will have grown 19%, compared to what it was in Mass Consumer Market Economic Class Evolution (% of population and million of individuals) 8% 13 11% 20 16% 31 37% 66 50% 95 56% % 28% % 15% % 8% * A / B Class C Class D Class E Class Data: millions of individuals and % of population Source: FGV, IBGE and LCA Produced by: 35

36 Income inequality decreases The Gini index, used to measure income inequality, has steadily fallen in recent years. The explanation comes from both the reduction of inequality in labor income, and the policy of strengthening the minimum wage, along with income transfer programs. The latest data released by PNAD, 2009, for example, indicate that pensions linked to minimum wage and targeted transfers (such as Bolsa Familia Program and continuous benefits), all paid by the Federal Government, have positively contributed to reduce the Gini index. Mass Consumer Market Gini Index 0.61 A decrease of 8.5% * Data: index * Last available data Source: IPEA Produced by: 36

37 Sustainable and inclusive growth Even during the crisis, the 2009 PNAD data showed continuity on the trajectory of poverty reduction in Brazil. According to FGV research, the poor class declined to 15.3% of the total population. Evolution of Poverty Levels (%) Mass Consumer Market 30 A decrease of 45.6% 25 Poverty Indicator (Individuals in poverty / total of individuals) * ** Data: millions of individuals and % of population * Individuals in poverty refer to E class individuals whose household monthly income corresponds to BRL , at most, at 2009 prices, according to PNAD microdata ** Last available data Source: FGV Produced by: 37

38 Minimum wage appreciation policy The acceleration of growth in recent years has caused significant expansion of per capita income. The real minimum wage value has had an even larger expansion than that of the per capita income, as a result of targeted policies towards economic growth and social inclusion implemented by the federal government. In 2009, the minimum wage value grew 7.2% in real terms. Mass Consumer Market MInimum Wage Evolution (R$, annual average, Dec 2010 constant prices) Increase of 57.3% Data: R$, annual average at Dec 2010 constant prices Source: IPEA Produced by: 38

39 Expansion of jobs exceeds 15 million within The acceleration of growth in recent years and programs such as PAC and low income housing program My Home My Life have been the key elements to the strong job expansion in recent years. In 2010, it is worth mentioning the 15% formal employment growth in construction and the 8.7% one in manufacturing industry. Mass Consumer Market Net Employment Generation (thousands of jobs) million Formal Jobs , , , , , , , , , Data: thousand of jobs generated in a year, CAGED and RAIS balances Source: of Labour and Employment Produced by: 39

40 Economic growth with increased employment The remarkable growth of formal employment has been widely spread throughout the country. Employment has expanded consistently allowing families to have a better quality of life in their own places. Mass Consumer Market Formal Job Growth by Geographical Region (% yearly acummulated) 7,7 7,5 7,3 7,1 6,9 6,7 6, Metropolitan Areas* Midwest South Southeast Total Northeast North Data: % yearly accumulated * Belem, Fortaleza, Recife, Salvador, Belo Horizonte, Rio de Janeiro, Sao Paulo, Curitiba and Porto Alegre Source: of Labour and Employment Produced by: 40

41 Strong job creation increases the number of contributors to social security The strong economic growth, rested on the pillars of sustainability, social and fiscal responsibility and social inclusion, has allowed the Social Security contributors expansion. Mass Consumer Market Social Security Contributors (% of occupied population) 56 An Increase of 16.8% * * ** Data: % of contributors to social security in any job in the occupied population, by week of reference ** Last available data Source: IBGE Produced by: 41

42 More formal jobs The rise in total amount of jobs has been followed by a simultaneous improvement their quality, with a growth on the rate of formalization. The annual average in 2010 was 51.0%. Mass Consumer Market Rate of Formalization (% formally employed over the occupied population) Jan Feb 50.9 Mar 51.1 Apr 51.1 May Jun 51.0 Jul Aug 51.1 Sep 50.9 Oct 51.3 Nov 51.6 Dec Data: % formally employed over the occupied population Source: IBGE Produced by: 42

43 Unemployment rate is the lowest since it has been recorded The unemployment rate reached minimum levels in the series, giving additional force to the market for domestic consumption. For instance, in the metropolitan region of Porto Alegre (31 municipalities), unemployment reached its lowest rate ever recorded in Brazil. In December, according to the latest IBGE survey, the region recorded 3.0% of unemployment out of the economically active population. Mass Consumer Market Unemployment Rate (% of economically active population)* Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data: % of the economically active population * The unemployment rate considers six metropolitan areas Belo Horionte, Porto Alegre, Recife, Rio de Janeiro, Salvador e Sao Paulo Source: IBGE Produced by: 43

44 Real income gains of workers Along with job expansion, real income gains have contributed to more than 10% total wage income expansion. Such increase brings soundness to the current economic growth cycle. Mass Consumer Market Total Payroll Growth (% YoY at 2010 constant prices) Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q Total real payroll Real average income (all jobs) Occupied population Data: % change from preceding year, at Dec 2010 constant prices Source: IBGE Produced by: 44

45 Participation of all sectors in the country s growth Every economic sector recorded real total wage income growth in The largest total wage income growth has been seen in Construction and Other Services such as Home, as a result of the Government policies, such as the appreciation of the minimum wage and low income housing program My Home My Life. Total Payroll (%) Mass Consumer Market ,2 8,9 7,2 6,8 6,3 4,9 3,4 Construction Other services Business services Public Administration Trade Transformation Industry Householde services Data: % change from preceding year Source: IBGE Produced by: 45

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47 Brazilian Economy OUTLOOK Inflation

48 Inflation under control The world experiences a period of monetary instability, driven by commodity inflation and the crisis in the Middle East and North Africa. The upward movement in commodities prices has been drawn mainly by climate issues, increase on production costs and growing global demand. The increase in international liquidity and the availability of fewer financial investment alternatives are also contributing to this phenomenon. In September 2010, the CRB index (Commodity Research Bureau) surpassed its pre-crisis value. Still, Brazilian inflation rose proportionally less than in the rest of the world, being kept within the target boundaries set for 2010 and After a sharp rise in the last quarter of 2010 and in January and February 2011, the Broad Consumer Price Index (IPCA) will slowdown in March and April, due to a reduction on food prices and the end of the effects of price readjustments of bus fares and school tuition. There still remains some pressure on the services sector, which should diminish with the slowing pace of the Brazilian economy and a cut back on government spending. In 2010, the IPCA was 5.91%, higher than the central target (4.5%), but within the ± 2 percentage point bounds. 48

49 Inflation under control during economic recovery Since 2005, the consumer price index (IPCA) remains within the inflation bounds set by the inflation targeting regime. The Brazilian government achieved both strong economic recovery and stable prices in 2010 even with domestic demand growing 10.3% y/y. By the end of 2011, it is expected to reach 5.6% y/y. Inflation IPCA Inflation Index (% YoY) Decrease of 53% * * IPCA inflation index Inflation target Lower and upper bounds Data: % change from preceding year * Brazilian Central Bank forecasts Source: IBGE and Brazilian Central Bank Produced by: 49

50 High in commodities prices cause a rise in IPCA in the second half of the year The year 2010 stood out as one that saw strong volatility on Food & Beverages. In the beginning of that year, high levels of rainfall caused a sharp increase in food prices, especially in Tubers. Increase in ethanol, sugar, transportation costs and education spending also played significant role onto the IPCA in the first half of the year. After three months of a close-to-zero rate, from September onwards, food has put pressure onto the index, primarily motivated by the impact of higher international commodity prices. Inflation IPCA Inflation Index (% mom) % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 0.37% 0.28% Dec Data: % change from preceding month Source: IBGE Produced by: 50

51 Growing inflation weight In 2010, the IPCA registered a 5.9% rise. Personal expenses, spending on Education and Clothing, as well as a rise on Food prices at the beginning of the current year were largely responsible for greater inflation pressure. Inflation IPCA inflation index (% YoY, accum. 12 m.) Food & Beverage Clothing Personnel expenses Education IPCA Health & Personal Housing Domicile articles Transport Communication Data: % change from preceding year, accumulated in 12 months Source: IBGE Produced by: 51

52 Wage mass growth raises the Food Away From Home Group The agricultural crisis in Russia and the increasing international liquidity have raised food prices since September. The increase on Household Food has seasonal fluctuation (off-season and commodities) and does not reflect demand pressures. The fluctuation on Food away from home primarily reflects total wage income growth. Inflation 5 IPCA and IPCA-15 Inflation Index (% mom) Dec Dec 15-Jan , ,3 19, , , , , , , , Jan 15-Feb Feb 15-Mar Mar 15-Apr Apr 15-May May 15-Jun Jun , , ,3 19, , , , , Jul Jul 15-Aug Aug 15-Sep , , , ,3 Sep 15-Oct Oct 15-Nov Nov 15-Dec Dec , , , , Away from Home Food At Home Food Food and Beverages Data: % change from preceding month Source: IBGE Produced by: 52

53 Excluding food group, IPCA would have been 4.4% in 2010 After three months of negative contribution, Food put pressure on inflation in September However, the other items still show a sustainable pace, compatible with the rhythm of economic growth without demand pressures. Inflation Decomposition of IPCA Inflation (% YoY) Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec IPCA Transportation At Home Food Fuels Remaining Itens Data: % change from preceding year, complementary items Source: IBGE Produced by: 53

54 Regulated prices still in downward trend The breakdown of the IPCA in groups composed of market set prices and administered/monitored prices (with items such as Electricity, Fuel, Telecommunications, Medicine, Transportation, etc.), reveals that the latter continues to experience price decrease since February. Market set prices, though, influenced by Food, continued to grow in October and November. Inflation Decomposition of IPCA Inflation (% YoY, acum. 12 m.) Oct 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul Dec 10 Monitored goods Market price goods IPCA Data: % change from preceding year, accumulated in 12 months Source: Brazilian Central Bank Produced by: 54

55 Inflation of non-tradable goods On the whole, non-tradable goods, which are not subject to international competition, such as services, have kept its upward movement, with a 7.3% variation on an annual basis. Goods that can be imported and exported at reduced costs (tradable goods) showed an increase equivalent to 6.9%. Inflation Decomposition of IPCA Inflation (% YoY, acum. 12 m.) Oct 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec 10 Tradeable goods Non-tradeable goods IPCA Data: % change from preceding year, accumulated in 12 months Source: Brazilian Central Bank Produced by: 55

56 A rise in non-durable goods and a reduction in durables As for the breakdown of the IPCA among the four types of goods, Non-durable goods have influenced inflation the most (8.9%). On the other hand, durable goods showed lower inflation (0.9%). Inflation Decomposition of IPCA Inflation (% YoY, acum.12 m.) Oct 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul Dec 10 Services Non-durable goods Semi-durable goods Durable goods Data: % change from preceding year, accumulated in 12 months Source: Brazilian Central Bank Produced by: 56

57 IGP-M inflation índex rises in 2010 The general price index presented a 0.69% variation in December This result represents a sharp decline if compared to a 1.45% move in the previous month. In 2010, the IGP-M registered an 11.32% rise. Inflation IGP-M Inflation Index (% mom) days 07/ days 08/ days 09/ days 10/ days 11/ days 12/ days 01/ days 02/ days 03/ days 04/ days 05/ days 06/ days 07/ days 08/ days 09/ days 10/ days 11/ days 12/ days 12/2010 IGP-M Data: % change from preceding month Source: FGV Produced by: 57

58 IGP-M inflation índex rises in 2010 The IGP-M rise was due to mostly to Intermediate Goods and Raw Materials - Agricultural, especially because the acceleration of prices of materials and components for manufacturing, and commodities, such as cattle, soybeans, cotton. In contrast, a slight deceleration can be seen in Raw Materials - Minerals. Inflation Contribution to IGP Inflation Index (% mom) Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Gross raw materials minerals Gross raw materials agricultural Intermediate goods Final goods Data: % change from preceding month Source: IBGE Produced by: 58

59 Commodities market index CRB surges again The CRB index is one of the benchmarks for the global commodities market, composed by six categories (CRB Metals, CRB Textile, CRB Industrial Raw Material, CRB Food Products, CRB Fat and Oils and CRB live stock). The increase in international liquidity, along with few alternatives for investments have raised the prices of the main commodities, and, since September 2010, the index reached a value higher than the precrisis values. However, the present impact has been lower in Brazil due to real appreciation. Inflation Spot Market (US$) US$ US$ Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 QE1 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan Jan 11 QE CRB Spot CRB Food Data: US$ * QE1 and QE2 refer to the quantitative easing measures adopted by the Federal Reserve Source: Bloomberg Produced by: 59

60

61 Brazilian Economy OUTLOOK Interest Rates and Credit

62 Dynamic stock market The fast domestic credit expansion did not imply higher financial fragility. An important indicator to assess the credit soundness is the debt position, which is different from the monthly expenditures generated by debt interest rates. The most recent Brazilian household debt inference is only 34.9% of disposable income, whereas in the U.S. it is 179.6%. Therefore, the household debt level in Brazil is significantly lower than that of the U.S. the other G7 countries, which according to data released by the Organization for Economic Cooperation and Development (OECD) exceed 80% of the disposable income. Brazilian credit market soundness was confirmed by the decrease of default rates by two percentage points - from 7.7% to 5.7% - in the last twelve months. It could also be noticed by the higher volume of less costly credit lines and adequate collateral structures to risk exposures. Economic growth, falling unemployment rates and the rising income have contributed to reduce the default levels in the credit market, which indicates the household debt sustainability in terms of favorable conditions in the labor market and better composition of the debt. Among transactions to households, spreads dropped to the lowest levels ever since data started being collected. The decrease was influenced by the expansion of credit to individuals in lower risk portfolios and the need for additional collaterals, such as the payroll loan, the housing credit and the chattel mortgage. The capitalization of the Brazilian Oil Company (Petrobras), with a total amount of R$ billion, has been the world largest fund rising through stock issuance. The operation has provided an additional capital of R$ 45 billion, which is expected to support the company s huge (US$ 224 billion) investment plans up to By September 2010, Petrobras was the world s fourth largest company listed on the stock market, behind Exxon, Petrochina and Apple, while the Brazilian Stock Market (BM&F BOVESPA) became the second largest stock market in the world. 62

63 Interest Rase on the rise Interest rates cycle, which remained stable at 10.75% since July 2010, has been interrupted after a 0.50 pp rise in the Selic rate. The recent rise in futures rates brought real ex-ante interest rates to above 6% yoy again. However, if a longer-term perspective is considered, a pp drop has been registered since Interest Rates and Credit Selic Rate and Real ex-ante Interest Rate (% YoY) Nov 01 Mar 02 Jul 02 Nov 02 Mar 03 Jul 03 Nov 03 Mar 04 Jul 04 Nov 04 Mar 05 Jul 05 Nov 05 Mar 06 Jul 06 Nov 06 Mar 07 Jul 07 Nov 07 Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Feb Selic interest rate target Real ex-ante interest rate Data: % change from each 12-month period, median of expectations, accum. for the next 12 months until February 3 rd, 2010 Sources: Bloomberg and Brazilian Central Bank Produced by: 63

64 January 2012 interest rates curve on the rise As a result of market expectations related to the international scenario conditions as captured at the end of 2010 the interest rate contract curves have pointed to a rise. Interest Rates and Credit Selic rate and real ex-ante interest rate (% YoY) 13,5 13,0 12,5 12,0 11,5 11,0 10,5 10,0 9,5 05 Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb January14 January 13 January 12 January 11 Data: % change from each 12-month period * DI: One-day interbank deposit (future) Source: Bloomberg Produced by: 64

65 Debt interest payments remain at 5.3% of GDP in 2010 A continued process of reducing the Brazilian economy benchmark interest rate (Selic) in the latest years along with a more vigorous increase in economic growth have been the key drivers to explain the declining burden in what regards government interest payments. It is worth mentioning, though, that part of the interest rate expenditures is due to the increase in international reserves. Evolution of Government Interest Payments (% of GDP) Interest Rates and Credit Decrease of 38% Data: % of GDP Sources: Brazilian Central Bank Produced by: 65

66 The largest corporate capital market issuances in history Foreign investor s appetite in what regards Brazilian issuances has increased in 2009 and This performance is a result of both the international scenario, with abundant liquidity, after the injection of resources provided by the FED and the European central bank, and the changes undergone by the Brazilian economy has the strengthening and internationalization process led by Brazilian companies. In 2010, the banks had their issuance share enlarged to nearly US$ 17 billion, aiming at providing companies with the necessary credit support to expand their businesses and investments. For the next coming years, a positive scenario for issuances in foreign currency remains. Interest Rates and Credit Issuances in the international capital markets (US$ billion) * Total Enterprises Republic Banks Data: US$ billion * Amounts accumulated until December 9 th, 2010 Source: Bond Radar Produced by: 66

67 Earmarked and non-earmarked credit volumes on a rise In December, non-earmarked credit portfolio reached R$ trillion, with a 1.5% increase as opposed to November, 2010, and a 17.1% growth, if compared to December Earmarked credit portfolio rose to R$ billion, with a 1.7% rise when compared to November 2009, 27.5% as opposed to the same previous month and a remarkable 359.5% increase if December 2003 is considered. Credit transactions with earmarked and non-earmarked resources (R$ billion and % of GDP) Interest Rates and Credit Increase of 20,6 percentage points of GDP Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 % of GDP Earmarked Resources Non-Earmarked Resources Data: R$ billion, current prices Source: Brazilian Central Bank Produced by: 67

68 Private banks rising credit share State-owned banks have remained at the forefront of credit disbursements since the critical period of the financial crisis. From September 2008 to December 2010, total credit disbursement has risen 81.2% by public banks, 35.4% by domestic private banks and 20.2% by foreign private ones. However, from January 2010 as it is shown in the graphic below public banks credit growth has diminished, as opposed to a rise in domestic and foreign private banks` performance. At the end of 2010, total credit had the following configuration: a 41.9% share by public banks; a 40.7% by domestic private banks and a 17.4% by foreign private ones. Interest Rates and Credit Financial System Credit Transaction Evolution, according to Capital Control (% YoY, accum. 12m) Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 International Financial Crisis Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec Public Financial Institution National Private Financial Institution Foreign Financial Institution Data: % over the same month in the preceding year, accumulated in 12 months Source: Brazilian Central Bank Produced by: 68

69 Long-term credit transactions supported by state-owned banks Long-term credit plays a pivotal role to investment rising. In 2010, from a total of R$ 267 billion of credit with maturities over 5 years, 87% have been financed by state-owned banks, with 59.8% of it coming from BNDES. Long-term credit transactions distribution (% of total) Interest Rates and Credit ITAU 1.74% SANTANDER 2.58% OTHERS 5.27% BRADESCO 3.79% BB 12.02% BNDES 59.82% CEF 14.79% Data: % of total Source: Brazilian Central Bank Produced by: 69

70 BNDES share of total credit Despite the rise in BNDES total credit disbursements in 2010, its share of the total has remained stable within historical pattern levels. In 2006, the bank s market share reached 19.1%. In 2007, it fell to 17.1%, but in 2010 it rose to 20.7%. The average of the last 5 years was 18.9%. Interest Rates and Credit BNDES loan share within the Brazilian financial system (% of total) * Data: % of total * Preliminary results Source: Brazilian Central Bank Produced by: 70

71 BNDES rising credit portfolio up to 2010 Earmarked credit expansion reached its peak in 2010, but it is expected to reduce from 2011 onwards, with BNDES providing capital for infrastructure and innovation ventures. Interest Rates and Credit BNDES total credit (R$ billion) * Disbursements Approvals Data: R$ billion, amount from each 12-month period * Accumulated in 12 months up to July 2010 Source: BNDES Produced by: 71

72 Disbursements led by infrastructure As an essential part of the country s economic development, industrial and infrastructure sectors have led BNDES disbursements in BNDES disbursements per sector (R$ billion) Interest Rates and Credit % % 46.5% 47.7% Industry Infrastructure Farming Retail and Services Disbursements % change from the same period in the preceding year Data: R$ billion and % * Infrastructure refers to the following sectors: energy and gas, water, sewer and waste, transportation (land, sea, air) and telecommunications Source: BNDES Produced by: 72

73 Payroll collateralized credit leads loans to households Within a positive income and job expansion scenario, credit disbursements with payroll collateral have led the expansion of loans to households. The choice for credit related do payroll has shown itself as a wellsucceeded initiative, as it simultaneously widens the access to loans and reduces default associated risks. The fewer the risks, the less the average loan rates charged. Interest Rates and Credit Total credit transactions (R$ billion) and average interest rates (% YoY) Dec Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec Total Household loans, excluding total payroll loans (R$ billion) Total payroll loans - private and public workers (R$ billion) Average interest rate for payroll loan (% YoY) Data: R$ billion and % change from preceding year Source: Brazilian Central Bank Produced by: 73

74 Banking credit to individuals equivalent to half of the total non-earmarked resources Growth in loan transactions to individuals was directly related to the move to less risky and less costly credit lines such as those associated with payroll collaterals. The reduction on average default rates has also contributed to a qualitative improvement of credit. Interest Rates and Credit Credit transactions for households Sep 08 - R$ billion Dec 10 - R$ billion Leasing and Acquisition of Goods 39% Credit Card 6% Mortgages 1% Overdraft 4% Others 14% Credit Unions 4% Personal Credit 32% Leasing and Acquisition of Goods 33.8% Credit Card 5.3% R$ billions Mortgages 1.3% Overdraft 2.9% Others 15.4% Credit Unions 4.5% Personal Credit 36.8% Data: % share * Non-earmarked operation balance, by modality Source: Brazilian Central Bank Produced by: 74

75 Rebound on corporate loans Corporate credit disbursements in 2010 presented a 6.4% increase vis-à-vis Working capital modalities were the highlights. Interest Rates and Credit Credit transactions for corporations (R$ billion) Sep 08 - R$ billion Dec 10 - R$ billion Hot Money 0.02% Working Capital 34% Others 13.98% Rural Financing 1% Import Financing 4% Advances on Exchange Contract and Export Funding 15% Promissory Note Discount 3% Check Credit for Companies 11% Vendor 2% Leasing and Aquisition of Goods 16% Hot Money 0.1% Working Capital 47.6% Others 18.1% Rural Financing 0.6% Import Financing 2.1% Advances on Exchange Contract and Export Funding 6.6% Vendor 1.7% Leasing and Aquisition of Goods 10.5% Promissory Note Discount 3.2% Check Credit for Companies 9.5% Data: % share * Non-earmarked operation balance, by modality Source: Brazilian Central Bank Produced by: 75

76 Loan term widens Due to the economic dynamism, as well as to the better composition of bank liabilities, average terms for loan transactions both for individuals and corporations have widened throughout Since January 2003, loan terms have been extended for more than 200 days for both kinds of customers. Interest Rates and Credit Loan term (calendar days) Jun 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec Corporations Households Data: calendar days Source: Brazilian Central Bank Produced by: 76

77 Fall in household default rates The heating of the economy, the fall in unemployment rates and the rise in income have contributed to reduce default rates. The expansion of loans to individuals via less risky modalities, along with the request for collaterals, like payroll related loans, mortgage and fiduciary duties have also contributed to reduce default rates. Although a rise in corporate default rates have been registered, they are still within historical range. Interest Rates and Credit Default rates (% of total) Jun 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan Jul 09 Jan 10 Jul 10 Dec Corporations Households Data: % of total Source: Brazilian Central Bank Produced by: 77

78 Bank interest rates remain at low levels With the decline in default rates at the end of 2009, along with the positive outlook for credit recovery, average banking interest rates to individuals reached the lowest levels in a time series. In October, interest rates reached 28.6% and 40.4% yoy to corporations and individuals, respectively. Consumer credit cost Interest Rates and Credit Lending Costs Interest Rate Evolution 2010 Category Oct* Nov* Dec* % change from preceding month General credit Credit for households Credit for corporations Household Loans Oct* Nov* Dec* % change from preceding month Loans for durable goods Loans for automobiles Overdraft check Private loans Data: % change from preceding year * Preliminary results Source: Brazilian Central Bank Produced by: 78

79 Interest rates for loan transactions The increase in loan interest rates registered in December can be related to the increase of reserve requirements imposed by Brazilian Central Bank and to the raise of capital requirements on lending transactions to individuals with a payment period longer than 24 months (risk adjustment factor). The average interest rate for loans to individuals had a soft rise. However, an average decrease in corporate interest rates has been observed in the same period. Considered within a longer term perspective, rates have been declining since Interest Rates and Credit Loan interest rates (% YoY) Jun 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec Corporations Households Data: % change from preceding year Source: Brazilian Central Bank Produced by: 79

80 Banking spread on loans to households dropped to historical levels Spreads on loans to individuals have dropped to the lowest level ever. The default trend declining should also be highlighted as it indicates household indebtedness sustainability, due to both positive conditions within the labor market and better indebtedness profile. Interest Rates and Credit Banking spread to households (p.p.) Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 SPREAD Dec 06 Mar 07 Jun 07 Sep 09 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Dec Sep 09 Dec 09 Mar 09 Jun 10 Sep 10 Dec 10 Dec Funding Rate (%) Lending Rate (%) Data: % and percentage points Source: Brazilian Central Bank Produced by: 80

81 Banking spreads for corporations The corporate average bank spread has had a slight increase of 0.5% considering the 16.5% of December Interest Rates and Credit Banking spreads for corporations (percentage points) Mar 05 Jun 05 Sep 05 Dec 05 SPREAD Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 09 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Dec Sep 09 Dec 09 Mar 09 Jun 10 Sep 10 Dec 10 Dec Funding Rate (%) Lending Rate (%) Data: % and percentage points Source: Brazilian Central Bank Produced by: 81

82 Banking industry capital adequacy limits above Basel requirements Brazilian banks, both public and private, follow requirements established by Basel Committee. However, capital adequacy requirements, established by Central Bank, are stricter within Brazilian banking industry, as it demands 11% of total assets weighted by risk levels. Bank leverage ratios restrictions bring soundness to the whole banking system. Basel Index (% of total assets weighted by risk level) Interest Rates and Credit 19.9 Turkey 18.5 Brazil Russia Colombia 17.6 Mexico China Germany 14.4 South korea 14.2 United States 13.9 Chile 13.3 United Kingdom 13.0 South Africa India Greece Australia Portugal Basel Index BCBS (9%) Data: % of total assets weighted by risk level Source: Brazilian Central Bank Produced by: 82

83 Brazilian stock market widens Besides banking credit expansion, corporate stock issuances have also expanded in the stock markets. Brazilian stock market trade (R$ billion) Interest Rates and Credit , , , , Data: R$ billion Source: BM&FBovespa Produced by: 83

84

85 Brazilian Economy OUTLOOK International Overview

86 Brazilian growth above the world average In 2010, Brazil has surpassed obstacles towards a sustainable growth. Between 1980 and 2002 the country s growth was half of the world average. Since 2003, however, the country has been growing higher than world average. Due to major changes, including establishment of a dynamic domestic market, productive investments expansion and investment support programs, Brazil is now prepared to lead the global growth with other major emerging economies like China and India. Compared to other economies, Brazil economy s expansion in 2010 was above the world and the Latin America averages. Even though the crisis effects are cooling down, growth of developed countries was still weak in 2010 and tends to continue, in 2011, below the average growth of emerging countries. 86

87 4.7 Russia Germany United 6.2 Kingdom France França Italy Turkey North 0.1 Africa 3.1 Saudi Arabia Canada 1.8 United States 0.8 Mexico Brazil South Africa Argentina Above 4% Japan 4.5 Indonesia Australia Data: % change from preceding year 2002 Korea China 0.3 India 7.4 Sub-Sahara Africa International Overview Geopolitical changes establish the new winners Source: FMI and The Economist Produced by: 87 World Growth Between 2% and 4% Less than 2%

88 Germany 2.9 Canada United France Kingdom Italy 2.8 United States North Africa Saudi Arabia Brazil South Africa Argentina Above 4% Australia Data: % change from preceding year Indonesia China India 5.0 Sub-Sahara Africa Japan Korea 10.3 Turkey Mexico Russia International Overview A new economic world scenario shaped by the 2008 crisis Source: FMI and The Economist Produced by: 88 World Growth Between 2% and 4% Less than 2%

89 Brazil is one of the fastest growing countries in the world Emerging markets had a positive performance in 2009 due in a certain extent to strong interventions by governments. In 2010, growth in the developed world remained somewhat curbed. For the next coming years, emerging economies growth is expected to continue in the forefront of the world s economic growth. GDP growth Selected countries (% YoY) China India Brazil ** Japan United States Germany Russia Mexico Euro Zone * 2011* Data: % change from the preceding year * The Economist forecasts February 3 rd, 2010 edition ** forecasts Source: IMF and The Economist Produced by: International Overview 89

90 EM foreign reserves on a rise Due to their highly positive economic perspective and foreign trade surpluses, EM have had a remarkable performance in raising their own foreign reserves in recent years. The process of accumulating foreign reserves, leaded by Brazil, has been widespread throughout Latin America, allowing significant reduction on countries external vulnerability. International Reserves (US$ billion) , , , , , , , * Middle East and North of Africa Latin America Developing Europe China Developing Asia Data: US$ billion * In July, 2010 Source: IMF Produced by: International Overview 90

91 Foreign trade with surplus countries Germany, Argentina, China and Japan had commercial surpluses in Trade Balance - Selected Countries (US$ billion) Jul 01 Jan 02 Jul 02 Jan 03 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jan 01 Jul 03 Jan 04 Jul 04 Jan 05 Jul 03 Jan 04 Jul 04 Jan 05 Germany Jul 05 Jan 06 Jul 06 Jan 07 China Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec 10 Jul 09 Jan 10 Jul 10 Dec Jul 01 Jan 02 Jul 02 Jan 03 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec EXP - Japão Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul Dez Jan 01 Jul 03 Jan 04 Jul 04 Jan 05 Argentina Jul 05 Jan 06 Jul 06 Jan 07 Japan Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec Japan Exports Japan Imports Japan Trade Balance China Exports China Imports China Trade Balance Germany Exports Germany Imports Germany Trade Balance Argentina Exports Argentina Imports Argentina Trade Balance Data: US$ billion Source: Bloomberg Produced by: International Overview 91

92 Foreign trade with USA and Euro zone In 2010, the United States had a US$ 38.3 billion trade deficit. The Euro zone had a slight deficit of US$ 500 million. Trade Balance - Selected Countries (US$ billion) Jul 01 Jan 02 Jul 02 Jan 03 Jan 01 Jul 03 Jan 04 Jul 04 Jan 05 United States Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec Jul 01 Jan 02 Jul 02 Jan 03 Jan 01 Jul 03 Jan 04 Jul 04 Jan 05 Euro Zone Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Dec USA Exports USA Imports USA Trade Balance Euro Zone Exports Euro Zone Imports Euro Zone Trade Balance Data: US$ billion Source: Bloomberg Produced by: International Overview 92

93 Brazil had one of the best fiscal results of the G-20 in 2010 Among the G-20, Brazil stood out for its fiscal soundness performance and presented one of the smallest nominal deficits in Fiscal Result - G20 Economies (% of GDP) Saudi Arabia Argentina Indonesia South Korea average -3.9% China Brazil * Mexico Australia Germany Turkey Canada Russia Italy South Africa India Euro Zone Japan France United States England Data: % of GDP * Goverment Forecasts 1 The Economist edition as of February 3 rd, 2011 Source: The Economist Produced by: International Overview 93

94 Exchange rates USD x other currencies The U.S. dollar has been through a depreciation process against other currencies. In Brazil, the strong economic growth, the favorable risk-return on assets denominated in Real (BRL), along with future growth prospects, encouraged capital inflows surge to the country as well as the appreciation of the real (BRL). Denmark Euro Zone United Kingdom Norway South Korea Brazil Canada Mexico Sweden New Zealand Taiwan Singapore Switzerland South Africa Australia Japan Currency Performance in 2010 Currency Performance in 2009 and Denmark -4.7 Euro Zone -4.7 United Kingdom Mexico Singapore Japan South Korea Taiwan Switzerland Sweden Norway Canada New Zealand Brazil South Africa Australia Data: % appreciation of a currency against the US dollar Source: Bloomberg Produced by: International Overview 94

95 High returns related to real The participation of the Brazilian currency in futures & options transactions has widened in 2010, being ranked among the top positions with the highest amount of transactions in the global derivative market, according to BIS. The carry return has reached 20.1% in the latest 12 months, of which 10.9% related to spot yield and 9.2% to interest yield. Ranking of Transactions in Currencies (% acum.12m.) Brazil Australia Sweden New Zealand Switzerland South Africa Taiwan Singapore Japan Mexico Canada South Korea Norway England Euro Zone Spot Yield Interest Yield Data: % accumulated in 12 months to february 1 st, 2010 * The carry return is equal to the return on investment in fixed income securities minus the cost of foreign currency loans Source: Bloomberg Produced by: International Overview 95

96 EM inflation Food international prices have risen throughout Problems related to climate issues, cost production increase, larger world demand, along with investments in the commodities future markets, are some of the reasons for prices increase Emerging Markets Inflation (% YoY) Sep 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan Jul 10 Oct 10 Headline Inflation * Core Inflation Data: % change from preceding year * Headline inflation is more useful for the typical household because it reflects changes in the cost of living, taking into account changes in the price of food and energy. It may not give an accurate picture of how an economy is behaving. Instead, core inflation is less volatile and shows the effects of supply and demand on GDP better Source: Goldman Sachs Global ECS Research Produced by: International Overview 96

97 Less volatility in the Brazilian inflation Brazilian inflation rate is one of the less volatile among all emerging countries. Emerging Markets Inflation (% YoY, average CPI) Russia Turkey Brazil* India Mexico China Data: % change from preceding year, average consumer price index * IPCA ** IMF forecasts Source: FMI and IBGE Produced by: International Overview 97

98

99 Brazilian Economy OUTLOOK Reduction of External Vulnerability