1

Brazil and the

International Crisis

June 2009

Henrique de Campos Meirelles

2

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.

Brazil at the Outset of the Crisis

3

Primary Fiscal Result

Source: Banco Central do Brasil

% o

f G

PD

-1

0

1

2

3

4

5

Jan

97

Jan

99

Jan

01

Jan

03

Jan

05

Jan

07

Apr

09

4

Public Net Debt

Source: Banco Central do Brasil

34

39

44

49

54

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Aug

08

% o

f G

DP

5

International Reserves

June 18th

206.0

Aug 2008

205.1

Source: Banco Central do Brasil

US

$ b

illi

on

0

50

100

150

200

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jun

09

6

External Public Net Debt

Source: Banco Central do Brasil

-13,1

-20

-15

-10

-5

0

5

10

15

20

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Apr09

% o

f G

DP

7

Gross Domestic Product (GDP)

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Average 03-06

3.5%

Average 99-02

2.1%

Average 07-08

5.4%

an

nu

al g

row

th %

Source: IBGE

8

Agriculture

6.7%

Services

65.3%

Industry

28.0%

Gross Domestic Product (GDP)

Source: IBGE

9

Income Distribution: Inequality

Source: FGV (CPS)

Gin

ico

eff

icie

nt

0,55

0,56

0,57

0,58

0,59

0,60

2001 2002 2003 2004 2005 2006 2007

10

% o

f p

op

ula

tio

n

35

40

45

50

55

2001 2002 2003 2004 2005 2006 2007 2008

Income Distribution: Middle-Class

Source: FGV (CPS)

11

Domestic Demand and Supply%

9.3

domestic demand GDP

change, year-over-year

-4.5

-3.0

-1.5

0,0

1.5

3.0

4.5

6.0

7.5

9.0

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

6.8

Source: IBGE

12

Fixed-Capital Investment

change, year-over-year

Source: IBGE

%%

-8

-4

0

4

8

12

16

20

1Q 03

3Q 03

1Q 04

3Q 04

1Q 05

3Q 05

1Q 06

3Q 06

1Q 07

3Q 07

1Q 08

3Q 08

19.7

13

Inflation

0

2

4

6

8

10

12

14

16

18

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

market

consensus

%

target range

IPCA (accumulated in 12 months)

Source: IBGE and Banco Central do Brasil

14

Deterioration

of Confidence

Currency

Depreciation

FX Public Debt

Domestic

External

Pressure on

Public Debt/GDP ratio

External Shock Feedback Loop: Before

External

Shock

15

External

Shock

Deterioration

of Confidence

Currency

Depreciation

Public Sector is Long in FX

Reduction of

Public Debt/GDP ratio

External Shock Feedback Loop: Now

Public Debt

in FX

16

Public Net Debt

Source: Banco Central do Brasil

average 2007-2009

40.5

34

39

44

49

54

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Apr

09

% o

f G

DP

38.4

51.3

average 2003-2006

47.9

17

Channels of Transmission of Global

Financial Crisis to Brazil

Foreign Trade

Confidence

Credit

External

Domestic

18

Total Credit

(estimated, beginning of September/2008)

Source: BCB

External (US$ 97 billion)

Domestic (US$ 620 billion)

Domestic with external funding (US$ 47 billion)

19Source: BCB

Domestic Credit Outstanding%

-8

-4

0

4

8

12 11.0

-5.0

8.3

19.5

3.22.2

0

2

4

6

8

10

12

14

16

18

20

Growth Apr 09/Sep 08

public

banks

domestic

private banks

foreign

banks

large small and

medium

total

20

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.

Recent measures:

Initiatives to Inject Liquidity

in Domestic Credit Market

21

Real earnings

Apr 09/Apr 08: +3.7%

Real Payroll and Earnings

Source: IBGE and BCB

3 month moving average

95

105

115

125

135

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Apr

09

real payroll

Apr 09/Apr 08: +4.0%

2003 =

100

22

Unemployment Rate

Source: IBGE

8.9

6

7

8

9

10

11

12

13

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004

2005

2006

2007

2008

2009

%

23Source: Fenabrave

Auto Sales

242 247

178

271

234

261

0

50

100

150

200

250

300

Jan

08

Apr

08

Jul

08

Oct

08

Jan

09

May

09

seasonally adjusted

tho

usan

ds

24Source: Anfavea

Auto Production

seasonally adjusted

294270

185203

97

303

253273

198

0

50

100

150

200

250

300

350

Jan

08

Abr

08

Jul

08

Out

08

Jan

09

May

09

tho

usan

ds

25

Auto Production

Source: Anfavea and national associations

%

Apr 09/ Dec 08

Apr 09/ Apr 08

-56.5-47.1 -44.6

-34.1-46.6

13.9

-15.8

26.3

-33.1

-8.4

36.6

-18.2

40.2

163.7

-60

-30

0

30

60

90

120

150

180

United

Kingdom

Japan United

States

Germany Mexico China Brazil

26

Foreign Direct Investment

Source: Banco Central do Brasil

1.4

0.8

1.51.3

1.6

2.9

3.8

1.9 2.0

1.4

3.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

02 03 04 05 06 07 08 Jan

09

Feb Mar Apr

US

$ b

illi

on

average per month

27

Public Net Debt

Source: IMF and Focus (BCB)

61.770.4

43.2

78.0

57.0

103.6

80.4

114.8

66.9

38.339.1

38.042.0

20

40

60

80

100

120

140

03 04 05 06 07 08 09 10

United States

Germany

Japan

United

Kingdom

Brazil

% o

f G

DP

28

Brazil and the

International Crisis

June 2009

Henrique de Campos Meirelles