Economic and financial scenario

Brazil 2017–2018

21st ASUTIL Conference, Rio de Janeiro

June 7, 2017

Murilo PortugalPresident

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

Contents

2

General Overview – Populous and large country

3

Population(million inhabitants in 2016)

Territorial Extension (Km² million)

5th largest and most populous country in the world

17,1

10 9,6 9,68,5

7,7

3,3

Ru

ssia

Can

ada

USA

Ch

ina

Bra

zil

Au

stra

lia

Indi

a

Source: Brazilian Census Bureau (IBGE)

1.374

1.267

324 258

206 202 186 156 142 127 123 103 102 95 95

Ch

ina

Ind

ia

USA

Ind

on

esia

Bra

zil

Pak

ista

n

Nig

eria

Ban

glad

esh

Rus

sia

Jap

an

Mex

ico

Phili

ppin

es

Eth

iop

ia

Vie

tnam

Egyp

t

General Overview: Large middle-income economy

4Source: World Bank and Bloomberg (Considering the average annual exchange rate)

GDP(US$ thousand in 2016)

Per capita income(US$ thousand in 2016)

103.

199

79.2

42

57.4

36

51.8

50

51.1

65

41.9

02

41.2

83

40.0

96

38.9

17

38.1

28

30.5

07

27.5

39

26.6

09

15.6

79

13.5

76

12.5

03

12.3

16

10.7

43

8.92

9 8.

727

8.55

5 8.

113

5.79

2 5.

261

1.72

3

Luxe

mb

our

gSw

itze

rlan

dU

SAA

ust

ralia

Swe

den

Ge

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elgi

um UK

Japa

nFr

ance

Ital

yK

ore

aSp

ain

Uru

guay

Ch

ileA

rgen

tin

aP

olan

dP

eru

Ru

ssia

Bra

zil

Mex

ico

Ch

ina

Co

lom

bia

Sou

th A

fric

aIn

dia

18.6

09.1

67

11.1

43.8

91

4.93

0.89

8

3.38

2.47

8

2.58

3.38

2

2.54

8.30

0

2.18

3.22

2

1.89

1.68

9

1.79

6.20

6

1.29

2.20

7

1.27

1.04

5

1.05

3.64

6

285.

672

273.

513

USA

Ch

ina

Japa

n

Ge

rman

y

UK

Fran

ce

Ind

ia

Ital

y

Bra

zil

Spai

n

Ru

ssia

Mex

ico

Sou

th A

fric

a

Co

lom

bia

GDP – Supply and Demand

5Source: Brazilian Census Bureau (IBGE)

GDP (Supply breakdown in 2016)

GDP(Demand breakdown in 2016)

Diversified economy: efficient agriculture and 2nd most diversified industry among emerging markets

6,2

4,8

3,5

3,5

2,3

-3,9

-4,2

3,9

2,2

2,3

1,5

0,8

-1,1

-0,6

17

,9

6,8

0,8

5,8

-4,2

-13

,9 -10

,2

11

,7

4,8

0,3 2

,4

-1,1

6,3

1,9

2010 2011 2012 2013 2014 2015 2016

% Real Growth

Family Consumption Government Consumption GFCF Net Exports

6,7

5,6

-3,1

8,4

2,8 3,6

-6,6

10

,2

4,1

-0,7

2,2

-1,5

-6,3 -3

,8

5,8

3,5

2,9

2,8

1,0

-2,7

-2,7

2010 2011 2012 2013 2014 2015 2016

% Real Growth

Agriculture, Livestock, & Natural Resources Manufacturing Services

5,5%

21,2%

73,3%

Agriculture, Livestock, & Natural Resources Manufacturing Services

56,6%

17,8%

14,5%

11,0%

Family Consumption Government Consumption

Gross Fixed Capital Formation Net Exports

Balance of Trade: recent adjustment and need for greater openness

6Source: MDIC/Secex, World Development Indicators 2015 e Professor José Alexandre Scheinkman

Balance of Trade(US$ billions)

Degree of openness of the economy(Imp. + Exp. / GDP in 2015)

-50

0

50

100

150

200

250

300

abr/10 abr/11 abr/12 abr/13 abr/14 abr/15 abr/16 abr/17

Trade balance (12m) Exports (12m) Imports (12m)

Brazilian Exports: main partners

7Source: The Atlas of Economic Complexity in 2014 – Harvard University.

Geographically diversified exports and imports (2014)

Brazilian Imports: main partners

8Source: The Atlas of Economic Complexity in 2014 – Harvard University.

Geographically diversified exports and imports (2014)

Brazilian Exports: main products

9Source: The Atlas of Economic Complexity in 2014 – Harvard University.

Rich in Natural Resources (2014)

Brazilian Imports: main products

10Source: The Atlas of Economic Complexity in 2014 – Harvard University.

Machinery, Manufactured goods, Chemicals (2014)

Inequality and Poverty

11Source: 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

Poverty ratio*(% of the population)

33,71

30,83

26,7525,36

22,621,41

18,42

15,93 15,0913,29

2004 2005 2006 2007 2008 2009 2011 2012 2013 2014

Gini Coefficientbetween 0 (perfect equality) and 1 (maximum inequality)

0,5720,570

0,563

0,556

0,5460,543

0,531 0,530 0,527

0,518

2004 2005 2006 2007 2008 2009 2011 2012 2013 2014

Minimum wage and income classes

12Source: IBGE, Bloomberg, Organization for Economic Co-operation and Development (OECD), Tendências Consultoria

Real minimum wage(in 2015 constant prices at US$ PPP)

Increase in the minimum wage and reduction of income inequality

Participation in total income(% of the income mass and number of families in 2014)

% in total income

% of the number of families

24

4 27

6 294

30

5 328 34

5

346 3

75

385

38

6

386

396

0

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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

Contents

13

Total credit and Basel Ratio

14Source: 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.

BaselRegulatory Capital to Risk Weighted Assets (% in 2016)

Total Domestic Credit*(Total Financial Sector % of GDP in 2015)

35

2,5

23

7,0

20

8,3

19

4,6

19

3,4

17

8,1

17

7,3

17

0,7

16

6,9

15

1,4

14

8,6

14

8,0

13

4,8

12

5,1

12

3,3

10

9,5

10

7,0

92

,9

76

,1

73

,2

58

,9

53

,8

52

,9

52

,6

46

,7

41

,1

36

,3

28

,0

Jap

an

US

A

Ne

the

rla

nd

s

Sp

ain

Ch

ina

So

uth

Afr

ica

Au

stra

lia

Ita

ly

Po

rtu

ga

l

Sw

ed

en

Fra

nc

e

Be

lgiu

m

Ge

rma

ny

Au

stri

a

Ch

ile

Ire

lan

d

Bra

zil

Tu

rke

y

Ind

ia

Po

lan

d

Hu

ng

ary

Me

xic

o

Ru

ssia

Co

lom

bia

Ind

on

esi

a

Arg

en

tin

a

Uru

gu

ay

Pe

ru

26

,8

23

,7

22

,4

20

,6

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

Sw

ed

en

Ire

lan

d

Ne

the

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s

UK

Ch

ina

Be

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Ge

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Pa

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Ita

ly

Sp

ain

Ca

na

da

US

A

Po

rtu

ga

l

Ru

ssia

Ind

ia

Uk

rain

e

Long-term Liquidity(Stable Funds Available / S.F. Required)

Short-Term Liquidity(Net Assets / Stressed cash flow)

0,00

0,50

1,00

1,50

2,00

2,50

0,00

200,00

400,00

600,00

800,00

1000,00

dez/13 dez/14 dez/15 dez/16

Ativos líquidos - esq. Fluxo de caixa estressado - esq.

Índice de Liquidez - dir.

1,00

1,02

1,04

1,06

1,08

1,10

1,12

1,14

0,0

1,0

2,0

3,0

4,0

5,0

dez

/1

1

abr/

12

ago

/1

2

dez

/1

2

abr/

13

ago

/1

3

dez

/1

3

abr/

14

ago

/1

4

dez

/1

4

abr/

15

ago

/1

5

dez

/1

5

abr/

16

ago

/1

6

dez

/1

6

R$

tri Recursos estáveis disponíveis (A) - esq.

Recursos estáveis necessários (B) - esq.

Índice de liquidez estrutural (A/B) - dir.

Banking Sector: comfortable liquidity levels

15Source: BCB (Financial Stability Report – REF - Published on Apr-2017 )

Net assets – left

Liquidity Ratio – right

Stressed cash flow – left

Stable funds available (A) – left

Stable funds required (B) – left

Structural liquidity ratio (A/B) - dir

Provisions x non performing loans (% of portfolio)

Banks hold a high level of provisions against defaults and high-risk transactions

Provisions for NPls cover 180% of defaults (arrears > 90 days)

Banking Sector: adequate and secure levels of provisions

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

-

50

100

150

200

250

mar/1

2

mar/1

3

mar/1

4

mar/1

5

mar/1

6

mar/1

7

Carteira Inadimplente - R$ bilhões - lado esquerdo Provisões - R$ bilhões - lado esquerdo

Percentual das Provisões (%) - lado direito Taxa de Inadimplência (%) - lado direito

16Source: BCB

Non performing loans (R$ bi) – left-hand side

Share of provisions (%) – right-hand side Delinquency ratio – right-hand side

Provision (R$ bi) – left-hand side

The 10 largest banks – December 2016

Banking Sector Overview

17

10 Largest BanksTotal Assets

(R$ M)

Total Deposits

(R$ M)

Equity

(R$ M)

Net Profit*

(R$ M)Basel ROE ROA

Number of

Branches

BB 1.436.765 447.949 77.040 6.650 18,4 8,6% 0,5% 5.460

ITAU 1.331.841 369.390 129.935 19.486 19,0 15,0% 1,5% 3.494

CAIXA ECONOMICA FEDERAL 1.256.172 513.098 27.180 3.421 13,5 12,6% 0,3% 3.412

BRADESCO 1.081.375 235.821 101.221 13.663 15,4 13,5% 1,3% 5.335

SANTANDER 705.061 146.963 60.009 6.205 16,3 10,3% 0,9% 2.763

SAFRA 148.391 12.589 9.508 1.736 15,4 18,3% 1,2% 114

BTG PACTUAL 131.993 10.894 17.678 2.794 21,5 15,8% 2,1% 13

VOTORANTIM 103.005 4.578 8.426 463 15,0 5,5% 0,4% 95

CITIBANK 72.024 19.374 8.411 1.193 16,5 14,2% 1,7% 134

BANRISUL 68.235 42.783 6.441 540 16,9 8,4% 0,8% 539

Total 10 largest banks 6.334.863 1.803.439 445.849 56.151 17,2 12,6% 0,9% 21.359

Banking System 7.009.784 1.995.174 521.904 62.301 17,1 11,9% 0,9% 22.899

TOP 10 Market Share 90% 90% 85% 90% 93%

Source: BCB *Annualized

Recent trend towards Crowding Out (% PIB)

18

Government indebtedness vs. Bank credit to the private sector

Source: BCB and Ministry of Finance

60,2

30,0

46,6

25,2

53,2

48,9

20

25

30

35

40

45

50

55

60

65

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

Dívida Líquida do Setor Público (% PIB) Saldo da carteira de crédito (% PIB)Public Sector Net Debt (% of GDP) Bank credit to the private sector (% of GDP)

Deleveraging: Families and Business reducing indebtedness

19

21,7

46,2

42,2

18,6

31,4

23,6

15

20

25

30

35

40

45

50

dez/

05

dez/

06

dez/

07

dez/

08

dez/

09

dez/

10

dez/

11

dez/

12

dez/

13

dez/

14

dez/

15

dez/

16

% a

cum

ula

do

em

12

mes

es

Endividamento das famílias em relação à renda em 12 meses (%)

Endividamento das famílias em relação à renda em 12 meses - ex. habitacional

21,7

46,2

42,2

18,6

31,4

23,6

15

20

25

30

35

40

45

50

de

z/0

5

de

z/0

6

de

z/0

7

de

z/0

8

de

z/0

9

de

z/1

0

de

z/1

1

de

z/1

2

de

z/1

3

de

z/1

4

de

z/1

5

de

z/1

6

% a

cum

ula

do

em

12

mes

es

Endividamento das famílias em relação à renda em 12 meses (%)

Endividamento das famílias em relação à renda em 12 meses - ex. habitacional

22,9

21,7

17,1

21,3

19,1

15

17

19

21

23

25

de

z/0

5

de

z/0

6

de

z/0

7

de

z/0

8

de

z/0

9

de

z/1

0

de

z/1

1

de

z/1

2

de

z/1

3

de

z/1

4

de

z/1

5

de

z/1

6

% c

om

aju

ste

saz

on

al

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.)

Business Indebtedness

(Net Debt/EBITDA)

Endividamento das Empresas

(% por Source de recursos)

Share of family incomes used to service bank debt Ratio of family indebtedness to annual income

Source: BCB and Ministry of Finance

Business Indebtedness

% by source of funds

1,3 1,31,2

1,6 1,5 1,6

1,8

2,32,1

2,5

3,1

2,8

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Free bank lending

Capital Markets

Earmarked bank lending

Foreign funds

Sources of Funds and allocation of Bank Credit

Credit/GDP –Free x Earmarked Funds and Corporate x Consumer Loans (%)

20Source: BCB

(13% of GDP)

(27% of GDP)

(23,5% of GDP)

(24,5% of GDP)

RL - PF809.55726,3%

RL - PJ724.89423,6%

RD - PF767.06724,9%

RD - PJ775.03625,2%

Non-earmarked (RL) x Earmarked (RD) LoansConsumer (PF) x Corporate (PJ) Loans

(R$ Bi)

Credit/GDP

By source of funding

Free Funds (RL) Earmarked (RD)

Share in Total Credit – State owned banks X Brazilian private banks X Foreign private banks in 2016

Credit Market Structure

21Source: BCB

State owned banks56%

Brazilian privately owned banks31%

Foreign private banks13%

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

Contents

22

Market Expectation* - GDP(% Y/Y)

GDP (% Y/Y)

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%

9,2

%8

,5%

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

%

20

17

* 0

,5%

20

18

* 2

,5%

20

19

* 2

,5%

20

06

.IV

20

07

.IV

20

08

.IV

20

09

.IV

20

10

.IV

20

11

.IV

20

12

.IV

20

13

.IV

20

14

.IV

20

15

.IV

20

16

.IV

0,50

2,50

0,0

0,5

1,0

1,5

2,0

2,5

3,0

04

/01

/20

16

29

/01

/20

16

29

/02

/20

16

28

/03

/20

16

25

/04

/20

16

20

/05

/20

16

17

/06

/20

16

14

/07

/20

16

10

/08

/20

16

06

/09

/20

16

04

/10

/20

16

01

/11

/20

16

30

/11

/20

16

27

/12

/20

16

23

/01

/20

17

17

/02

/20

17

20

/03

/20

17

17

/04

/20

17

16

/05

/20

17

2017 2018 2019

Economic Activity: end of recession seems near

23Source: IBGE and BCB (last reported Focus Weekly Market Readout)

Economically Active Population (EAP) and Unemployment Rate

24Source: IBGE - Pnad Contínua (Continuous National Households Sample Survey – methodology as from 2012)

*Annual average - Forecast by Itaú BBA

Unemployment*(% EAP)

Economically Active Population(Thousands)

96.596 97.733 98.855 100.728 102.143

2012 2013 2014 2015 2016

13,913,5

11,3

8,5

6,87,17,4

2018*2017*20162015201420132012

6,4 6

,8 7,2

7,1

7,0

6,8 6,9

6,9

6,8

6,6

6,5

6,5 6

,87

,4 7,9 8,0 8,1 8,3 8

,6 8,7 8,9

8,9 9,0

9,0 9

,51

0,2 1

0,9

11

,21

1,2

11

,31

1,6

11

,81

1,8

11

,81

1,9

12

,0 12

,6 13

,2 13

,7

no

v-d

ez-

jan

de

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n-f

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2014 2015 2016 .

Taxa de desocupação

Pessoas de 14 anos ou mais de idade

na semana de referência (em %)

Industry, Retail Sector, Income and Employment

25

2,1%

-4,5%

-9,6%

-3,8%

-10%

-5%

0%

5%

10%

mar

/13

mar

/14

mar

/15

mar

/16

mar

/17

Produção Física Industrial (PIM-IBGE)

Var. acumulada em 12 meses

7,4%

4,5%

1,0%

-5,8%

-5,3%

-10%

-5%

0%

5%

10%

mar

/12

mar

/13

mar

/14

mar

/15

mar

/16

mar

/17

Vendas no Varejo Restrito (PMC-IBGE)

Var. acumulada em 12 meses

2.1

27

2.1

25

2.1

19

2.0

87

2.0

58

2.0

67

2.0

91

2.1

06

2.0

99

2.1

10

2.1

27

2.1

27

2.1

27

2.1

17

2.1

11

2.1

17

2.0

99

2.0

87

2.0

91

2.0

82

2.0

65

2.0

54

2.0

62

2.0

44

2.0

59

2.0

47

2.0

54

2.0

29

2.0

35

2.0

51

2.0

47

2.0

54

2.0

56

2.0

64

2.0

71

2.0

75 2

.11

0

jan

-fe

v-m

ar

fev-m

ar-

ab

rm

ar-

ab

r-m

ai

ab

r-m

ai-ju

nm

ai-ju

n-ju

lju

n-ju

l-a

go

jul-a

go

-se

ta

go

-se

t-o

ut

set-

ou

t-n

ov

ou

t-n

ov-d

ez

no

v-d

ez-

jan

de

z-ja

n-f

ev

jan

-fe

v-m

ar

fev-m

ar-

ab

rm

ar-

ab

r-m

ai

ab

r-m

ai-ju

nm

ai-ju

n-ju

lju

n-ju

l-a

go

jul-a

go

-se

ta

go

-se

t-o

ut

set-

ou

t-n

ov

ou

t-n

ov-d

ez

no

v-d

ez-

jan

de

z-ja

n-f

ev

jan

-fe

v-m

ar

fev-m

ar-

ab

rm

ar-

ab

r-m

ai

ab

r-m

ai-ju

nm

ai-ju

n-ju

lju

n-ju

l-a

go

jul-a

go

-se

ta

go

-se

t-o

ut

set-

ou

t-n

ov

ou

t-n

ov-d

ez

no

v-d

ez-

jan

de

z-ja

n-f

ev

jan

-fe

v-m

ar

2014 2015 2016 .

Rendimento médio habitual do trabalho (valores reais)

Pessoas de 14 anos ou mais de idade

na semana de referência (em R$)

Source: IBGE

Industrial Production (12m) Core Retail Sector Sales (12m)

Average wageUnemployment RateEmployees aged 14 and over during the reference week

(constant prices at 2017 R$)

Accumulated change in 12 months Accumulated change in 12 months

% Economically Active Population

Market Expectation* - IPCA(% Y/Y)

IPCA - breakdown(% accum. in 12 months)

Inflation: sharp fall in inflation and reanchoring of expectations

26

3,93

4,36

4,25

3,8

4,3

4,8

5,3

5,8

6,3

04/0

1/20

16

05/0

2/20

16

14/0

3/20

16

18/0

4/20

16

23/0

5/20

16

27/0

6/20

16

29/0

7/20

16

01/0

9/20

16

06/1

0/20

16

11/1

1/20

16

16/1

2/20

16

19/0

1/20

17

22/0

2/20

17

30/0

3/20

17

05/0

5/20

17

2017 2018 2019

Source: IBGE and BCB (last reported Focus Weekly Market Readout)

8,23%

7,06%

17,95%

10,67%

6,29%

4,57%

3,15%

3,93%

4,36%

0%

4%

8%

12%

16%

20%

de

z-1

1

ab

r-1

2

ag

o-1

2

de

z-1

2

ab

r-1

3

ag

o-1

3

de

z-1

3

ab

r-1

4

ag

o-1

4

de

z-1

4

ab

r-1

5

ag

o-1

5

de

z-1

5

ab

r-1

6

ag

o-1

6

de

z-1

6

ab

r-1

7

ag

o-1

7

de

z-1

7

ab

r-1

8

ag

o-1

8

de

z-1

8

IPCA - Non-TradablesIPCA - TradablesIPCA - Monitored PricesIPCA Overall Index (forecast after may-2017)

Benchmark interest rate- Selic (P/A %)

Market Expectation* - Selic(P/A % – end of the period)

2017 20182019

8,50

8,0

8,5

9,0

9,5

10,0

10,5

11,0

11,5

12,0

12,5

13,0

04

/05

/20

15

08

/06

/20

15

10

/07

/20

15

13

/08

/20

15

17

/09

/20

15

22

/10

/20

15

26

/11

/20

15

31

/12

/20

15

04

/02

/20

16

11

/03

/20

16

15

/04

/20

16

20

/05

/20

16

24

/06

/20

16

28

/07

/20

16

31

/08

/20

16

05

/10

/20

16

10

/11

/20

16

15

/12

/20

16

18

/01

/20

17

21

/02

/20

17

29

/03

/20

17

04

/05

/20

17

2017 2018 2019

Monetary Policy: fast loosening cycle expected to last

27Source: BCB (last reported Focus Weekly Market Readout)

13,25

11,25

13,75

8,75

10,75

12,50

7,25

11,00

14,25 14,00

13,75

13,0012,25

11,25

10,25

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

2017

Declining current account deficit fully covered by FDI

28Source: BCB

International Reserves(US$ billions)

Current Account and FDI(US$ billions)

-74,

8

-104

,2

-59,

4 -23,

5

-19,

8

69,2

96,9

74,7

78,9

84,7

-150

-100

-50

0

50

100

150

abr/12 abr/13 abr/14 abr/15 abr/16 abr/17B

illi

on

s

Current Account Deficit (12m) Foreign Direct Investment (12m)

Difference

340

345

350

355

360

365

370

375

380

abr/12 abr/13 abr/14 abr/15 abr/16 abr/17

International reserves - cash concept (total) - left

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

Contents

29

Gross Debt and Primary Balance(% of GDP)

61,1

51,3

58,1

71,6

2017*75,0

2018*78,0

3,52

1,69

-2,34

2017*-2,04

2018*-1,80

mar/09 mar/10 mar/11 mar/12 mar/13 mar/14 mar/15 mar/16 mar/17

Dívida Bruta (% PIB) Primário consolidado acum. 12m (% PIB)

Fiscal: Disappointing fiscal outcomes and unsustainable debt trajectory

30Source: National Treasury and Ministry of Finance

Public Sector

Gross Debt

Public Sector

Consolidated primary balance12m

Evolution of Central Government’s Primary Expenditures

31Source: Min. of Finance, SIAFI, IBGE and Mansueto Almeida. *Data from 1991-1996: Giambiagi and Castelar (2012), “Além da

Euforia” Translator’s Note: Book title freely translated as “Beyond the Euphoria”.

+ 8,9 p.p.

(% GDP)

Social security is the main reason for higher Primary Expenditures

32Source: Min. of Finance, SIAFI, IBGE and Mansueto Almeida. *Data from 1991-1996: Giambiagi and Castelar (2012), “Além da

Euforia” Translator’s Note: Book title freely translated as “Beyond the Euphoria”.

8,9

Personnel

Decomposition of growth in primary expenditure, from 1991 to 2015

(p.p. of GDP)

Social Security

(+Assistance)

Benefits

Current

Expenses

(Health and

Education)

Subsidies Other Expenses

Social security deficit has been increasing fast

33Source: Min. of Finance, SIAFI, IBGE

Balance of the Urban and Rural Social

Security System

(R$ Bi)

Urban

If nothing is done, social security expenditures will squeeze all other expenditures against the Ceiling on expenditure

34Source: Min. of Finance, SIAFI, IBGE

Other ExpensesCeiling on primary

expenditures

Evolution of social security expenditures under reform and no reform scenarios

35Source: Min. of Finance, SIAFI, IBGE

Social Security Benefits

(% of GDP)

Actual

Forecast - no reform scenario scenario

Forecast - Social Security Reform

• 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

Business environment and low labor productivity

36

GDP per worker - 1995-2015 (constant prices of 2011 in PPP

Source: World Bank and Insper (Professors Marcos Lisboa and Naércio Menezes)

Labor productivity – international comparisons

37Source: Professors Marcos Lisboa and José Alexandre Scheinkman

Growth in TFP(in relation to the USA rate since 1980)

Product per worker (USA = 1)

• 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

Brazil’s labor market is excessively regulated

38Source: Djankov S, La Porta R, Lopez-de-Silane F, Shleifer A, Botero J. The regulation of labor. National Bureau of Economic Research (2003)

2,4

0

2,3

6

2,3

2

2,2

1

2,1

8

2,0

1

1,9

9

1,8

6

1,8

2

1,7

4

1,6

7

1,6

2

1,5

9

1,5

7

1,5

6

1,5

5

1,5

1

1,4

2

1,2

7

1,2

2

1,0

4

1,0

4

1,0

2

0,9

5

0,9

2

0,9

2

0,7

6

Bra

sil

Port

ugal

Venezuela

Rúss

ia

Esp

anha

Méxic

o

Colô

mbia

Equador

Bolívia

Turq

uia

Peru

Chin

a

Fra

nça

Ale

manha

Chile

Arg

enti

na

Itália

Japão

Uru

guai

Canadá

Irla

nda

Áfr

ica d

o S

ul

Reuni U

nid

o

Din

am

arc

a

EU

A

Aust

ralia

Hong K

ong

Employment Law Index

Excesso de RegulamentaçãoExcessive Regulation

Labor Law Index

• “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.

Rigid labor legislation can induce informality

39

Relationship between labor law rigidity

and higher informality

Source: Institute of Labor Economics (IZA) e Djankov, S., & Ramalho, R. (2009). Employment laws in developing countries.

Journal of Comparative Economics, 37(1), 3-13

Muravyev, A. Employment protection

legislation in transition and emerging

markets, IZA World of Labor (2014)

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

Contents

40

Nominal Exchange Rate(BRL/USD spot rate)

CDS Spread (bps 5Y)

41

Country Risk: improved default risk and appreciation of exchange rate

302

533493

351317

197

266

0

100

200

300

400

500

600

no

v-1

2

fev

-13

ma

i-1

3

ago

-13

no

v-1

3

fev

-14

ma

i-1

4

ago

-14

no

v-1

4

fev

-15

ma

i-1

5

ago

-15

no

v-1

5

fev

-16

ma

i-1

6

ago

-16

no

v-1

6

fev

-17

ma

i-1

7

2,44

2,70

3,29

4,184,15

3,48

3,07

3,37

1,50

2,00

2,50

3,00

3,50

4,00

4,50

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

Source: Bloomberg and BCB

Ibovespa Index(1000 points)

Pre-fixed interest rates(% p.a.)

42

Considerable decline in long term interest rate and appreciation of domestic assets since 2016

13,4

16,8

15,3

9,5

11,24

12,21

8

9

10

11

12

13

14

15

16

17

18

de

z-1

1

mai

-12

ou

t-1

2

mar

-13

ago

-13

jan

-14

jun

-14

no

v-1

4

ab

r-1

5

set-

15

fev-

16

jul-

16

de

z-1

6

mai

-17

Taxa de Juros Jan/21 Taxa de Juros Jan/27

Source: Bloomberg and B3

68

45

62

48

37

69

62

35

40

45

50

55

60

65

70

jan

-12

ma

i-1

2

set-

12

jan

-13

ma

i-1

3

set-

13

jan

-14

ma

i-1

4

set-

14

jan

-15

ma

i-1

5

set-

15

jan

-16

ma

i-1

6

set-

16

jan

-17

ma

i-1

7

+60% desde 2016

Maturity jan-2021 Maturity jan-2027

+60% since 2016

Confidence indicators show considerable recovery since beginning of Temer government

50

60

70

80

90

100

110

120

130

abr/

06

abr/

07

abr/

08

abr/

09

abr/

10

abr/

11

abr/

12

abr/

13

abr/

14

abr/

15

abr/

16

abr/

17

Índices de Confiança (FGV)Base 100 = set/05

INDÚSTRIA CONSUMIDOR SERVIÇOS

+25%

43Source: FGV and CNI

Confidence Indicators

Sept/05 = 100

Manufacturing Consumer Services

Baseline Economic Scenario

44

BCB Focus - Market Readout2011 2012 2013 2014 2015 2016 2017 2018

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

Thank you!