Brazil And The International Crisis

Brazil and the International Crisis Henrique de Campos Meirelles June 2009

1

Brazil at the Outset of the Crisis  Declining public debt-to-GDP ratio;  Public sector long in foreign currency, so that FX depreciation reduces debt-to-GDP;

 Fast, domestic demand-led growth;  Low leveraged, fully provisioned banking system;  Banking reserve requirements at BCB: R$ 260 billion (approximately US$ 160 billion);  International reserves: US$ 205 billion;

 BCB's long position in FX futures market: US$ 22 billion. 2

Primary Fiscal Result 5

% of GPD

4 3 2 1 0 -1 Jan 97

Jan 99

Jan 01

Source: Banco Central do Brasil

Jan 03

Jan 05

Jan 07

Apr 09 3

Public Net Debt

% of GDP

54

49 44

39 34 Jan 02

Jan 03

Jan 04

Source: Banco Central do Brasil

Jan 05

Jan 06

Jan 07

Jan 08

Aug 08 4

International Reserves Aug 2008 June 18th 205.1 206.0

US$ billion

200

150

100

50

0

Jan 02

Jan 03

Jan 04

Source: Banco Central do Brasil

Jan 05

Jan 06

Jan 07

Jan 08

Jun 09 5

External Public Net Debt 20 15

% of GDP

10 5 0 -5 -10 -13,1

-15 -20

Jan 02

Jan 03

Jan 04

Source: Banco Central do Brasil

Jan 05

Jan 06

Jan 07

Jan 08

Apr 09 6

Gross Domestic Product (GDP) Average 03-06 3.5%

annual growth %

6 5

Average 07-08 5.4%

Average 99-02 2.1%

4 3 2 1 0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: IBGE

7

Gross Domestic Product (GDP) Agriculture 6.7% Services 65.3%

Industry 28.0%

Source: IBGE

8

Income Distribution: Inequality

Gini coefficient

0,60 0,59 0,58 0,57 0,56 0,55

2001

Source: FGV (CPS)

2002

2003

2004

2005

2006

2007

9

Income Distribution: Middle-Class

% of population

55

50

45

40

35 2001

2002

Source: FGV (CPS)

2003

2004

2005

2006

2007

2008

10

Domestic Demand and Supply change, year-over-year 9.3

9.0

6.8

7.5

%

6.0

4.5 3.0 1.5 0,0

-1.5 -3.0 -4.5 1Q 03

3Q 03

Source: IBGE

1Q 04

3Q 1Q 3Q 1Q 3Q 04 05 05 06 06 domestic demand

1Q 3Q 07 07 GDP

1Q 3Q 08 08 11

Fixed-Capital Investment change, year-over-year 19.7

20 16 12

%

8 4

0 -4 -8 1Q 03

3Q 03

Source: IBGE

1Q 04

3Q 04

1Q 05

3Q 05

1Q 06

3Q 06

1Q 07

3Q 07

1Q 08

3Q 08 12

Inflation IPCA (accumulated in 12 months) 18 16

market consensus

14

12 %

10 8 6

target range

4

2 0 Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Source: IBGE and Banco Central do Brasil

Jan 08

Jan 09

Jan 10 13

External Shock Feedback Loop: Before External Shock

Deterioration of Confidence Currency Depreciation

Pressure on Public Debt/GDP ratio Domestic FX Public Debt

External 14

External Shock Feedback Loop: Now External Shock

Deterioration of Confidence Currency Depreciation

Reduction of Public Debt/GDP ratio

Public Sector is Long in FX

Public Debt in FX

15

Public Net Debt 51.3 54

% of GDP

average 2003-2006 47.9 49 average 2007-2009 40.5

44

39

38.4

34 Jan 02

Jan 03

Jan 04

Source: Banco Central do Brasil

Jan 05

Jan 06

Jan 07

Jan 08

Apr 09 16

Channels of Transmission of Global Financial Crisis to Brazil

External

Credit Domestic

Foreign Trade

Confidence

17

Total Credit (estimated, beginning of September/2008)

External (US$ 97 billion) Domestic with external funding (US$ 47 billion)

Domestic (US$ 620 billion)

Source: BCB

18

Domestic Credit Outstanding Growth Apr 09/Sep 08 12

19.5

20

8

18

4

16

-4

%

12 8

-5.0

0

14 10

11.0

-8

8.3

small and medium

large

6 3.2

4 2

0

total

Source: BCB

public banks

foreign banks

2.2

domestic private banks 19

Initiatives to Inject Liquidity in Domestic Credit Market Recent measures:

 Non-earmarked FX auctions;  Extension of deposit insurance on time deposits from R$ 60,000 to R$ 20 million;

 Increase in credit supply, especially to small and medium-sized banks.

20

Real Payroll and Earnings 3 month moving average 135

real payroll Apr 09/Apr 08: +4.0%

2003 = 100

125

115

105

Real earnings Apr 09/Apr 08: +3.7%

95 Jan 03

Jan 04

Source: IBGE and BCB

Jan 05

Jan 06

Jan 07

Jan 08

Apr 09 21

Unemployment Rate 13

12

%

11 10

2004

2009

9

8.9

8

2005 2006

7

2007 2008

6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: IBGE

22

Auto Sales seasonally adjusted 300 261

thousands

250

271 242

234

200

247

178

150 100 50 0 Jan 08

Apr 08

Source: Fenabrave

Jul 08

Oct 08

Jan 09

May 09 23

Auto Production seasonally adjusted 350 303 294

thousands

300

273

250 198

200

185

253

270

203

150 97

100

50 0 Jan 08 Source: Anfavea

Abr 08

Jul 08

Out 08

Jan 09

May 09 24

Auto Production 180

Apr 09/ Apr 08 Apr 09/ Dec 08

150

163.7

120

%

90

60 26.3

30

40.2

36.6

13.9

0

-8.4

-30 -60

-56.5 United Kingdom

-33.1 -44.6 -47.1

-34.1

Japan

Germany Mexico

United States

-15.8

-18.2

Source: Anfavea and national associations

-46.6 China

Brazil 25

Foreign Direct Investment 4.0

3.8 2.9

3.0 US$ billion

3.4

average per month

3.5

2.5 1.9

2.0 1.5

1.5

1.4

1.6

2.0 1.4

1.3

0.8

1.0 0.5 0.0 02

03

04

05

Source: Banco Central do Brasil

06

07

08

Jan Feb Mar Apr 09 26

Public Net Debt 140

120

114.8 Japan

% of GDP

103.6 100 80.4 80 61.7

57.0

60

78.0 Germany 70.4 United States 66.9 United Kingdom

43.2 40

42.0 38.3

20

03

04

05

Source: IMF and Focus (BCB)

06

07

38.0 Brazil

39.1

08

09

10 27

Brazil and the International Crisis Henrique de Campos Meirelles June 2009

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