1 Brazil: Economic Opportunities and Challenges Jorge Arbache University of Brasilia and Brazilian Development Bank - BNDES 11th Brazil-Taiwan Joint Business Councils Meeting April 5, 2013 Disclaimer: This presentation does not necessarily represent the views of BNDES and its Board of Directors

2 1. Context: Increasingly complex world  Political challenges facing uncertain and complex economic scenarios  Crisis in the Euro zone  Slow recovery in the US and slowdown in China  Slowdown in emerging economies  Geopolitical risks in oil countries  Capital market distortions and uncertainties associated to highly heterodox policies, e.g. QEs  Protectionism on the rise  Risk aversion on the rise  Slowdown in trade, capital flow and FDI

3 2. Output growth – 2013 (YoY) IMF’s Brazil growth forecast in 2014: 4.0%

Brazil: Economic indicators 2013 (YoY) 4 Source: Citi Research projections

3. Where did recent growth come from? 5 Source: IBGE Decomposition of GDP growth

6 Falling income inequality is boosting consumption Growth rate of per capita income (%) – average Source: IBGE

7 Falling unemployment Unemployment rate -- record lows There is a shortage of labor in several areas

8 Brazilian population (millions) Based on PNAD (IBGE) data An increasing middle class is feeding the domestic market Brazil: Seventh largest domestic market

9 4. Where will future growth come from? Growth will be geared by domestic demand, but also by: –Increasing competitiveness –Investments

10 Competitiveness is on the move 23 new Innovation Institutes 43 new Technological Centers Sectorial Innovation Funds 4 million people in vocational training per year Science without Borders – 100,000+ scholarships abroad in engineering and other tech. areas MNCs state-of-the-art innovation labs PISA-OECD – “Brazil, a successful reformer” –“The federal government has launched a major effort to improve education, increasing spending in classrooms and on teacher salaries and providing extra help for poorer families in order to get children into classrooms. By setting quality targets and leaving schools free to choose how best to achieve them, its National Education Plan has transformed the country into a laboratory of best education practices.” OECD

Other policies that will enhance competitiveness Electricity tax cut and new regulatory framework Payroll tax cuts Temporary and targeted business tax cuts Huge investments in public services Concessions and PPPs – ports, railways, roads, airports Active exchange rate policy SELIC down by 500 b.p. 11

Well regulated financial sector -- banking system not exposed to toxic assets New sources of savings and long-term funding –New long-term funding instruments, secondary market, buy out markets –New public pension fund (FUNPRESP) and rapid expansion of private pension funds –FDI has been picking up – US$ 65.3 billion in 2012 (5% of total) 12

13 Growth Acceleration Program 2 - PAC 2 Electric Energy Ports Airports Highways/Railways Urban Mobility 2014 World Cup 2016 Olympic Games

14 Investment perspectives are firm Investment outlook Source: BNDES

5. Is future growth sustainable? 15 Source: National Treasury Sound fiscal conditions and room to maneuver Net public debt excludes assets and liabilities of Petrobras and Eletrobras

Sound external vulnerability indicators (% GDP) 16 Source: Central Bank of Brazil

17 Rising investment rate (%) Investment will keep growing at a stronger pace than GDP Source: IBGE. *Projections - Finance Ministry

Social inclusion will keep enlarging the domestic market 18 Source: FGV Poverty rate – (%) share of population

19 6. Risks China slowdown Stagnation in the US, Europe and Japan Protectionism, uncertainties and market distortions created by unconventional policies International credit tightening

20 7. The way forward – challenges and reform agenda Accelerate labor productivity Increase savings and investments Improve competitiveness in manufacturing Tackle infrastructure bottlenecks Accelerate the knowledge-based economy

Diversify sources of long-term funding Foster innovation Fiscal reform - ICMS (VAT) Pension reform Labor legislation reform Diversify exports and reduce dependency on commodities 21

8. Conclusions Domestic market will enlarge further Investments and increasing competitiveness will also drive growth Expanding investment opportunities in several areas 22

A bumpy road ahead: poor international environment and uncertainties But plenty of room for policy activism at the Government disposal Government is aware of the need to address a reform agenda to foster competitiveness and to foment sustained growth 23

Thank You 24