1 Afonso Sant´Anna Bevilaqua November 2003 Brazil: Recent Economic Developments

2 I. The 2002 Confidence Crisis II. Challenges and Accomplishments: a. External Adjustment b. Disinflation c. Fiscal Sustainability d. Reduction of FX Exposure of Public Sector III. Recovering Economic Activity

3 I. The 2002 Confidence Crisis

4 Sudden Stop Capital Inflows(*) (US$ billion) (*) FDI, medium and long term loans (excluding loans to the Central Bank) US$ 8.9 billion GAP US$ 28.0 billion GAP

5 Basis Points 30/Oct ,000 1,500 2,000 2,500 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Brazil Risk (Embi+) Spread Over Treasury

6 Nominal Exchange Rate (R$/US$) R$/US$ 30/Oct Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03

7 Real Effective Exchange Rate Basket of 15 currencies deflator: IPCA Jun 89 Dec 90 Jun 92 Dec 93 Jun 95 Dec 96 Jun 98 Dec 99 Jun 01 Dec 02 Sep R$/US$

8 GDP x Confidence Shocks GDP Change After Large Exchange Rate Crises (%) Brazil (2002/03*) Argentina (2002) Uruguay (2002) Thayland (1998) Malasya (1998) South Korea (1998) * BC Projection for 2003: 0.6% 1,0 -11,0 -10,8 -10,5 -7,4 -6,7 -4,9 Russia (1998)

9 II. Challenges and Accomplishments: a. External Adjustment

10 Current Account Deficit US$ billion 33,4 25,3 24,2 23,2 7,7 -3, Jan-Sep 2003

11 Private External Debt: Rollover Rate 6-Month Moving Average Jun 01Oct 01Feb 02Jun 02Oct 02Feb 03Jun 03 Sep %

12 Trade Balance Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Sep 03 US$ billion Sep Month, Accumulated

13 Trade Balance US$ billion 12-Month, Accumulated Jan 96Feb 97Mar 98Apr 99May 00Jun 01Jul 02Sep 03 Imports Exports

14 Industrial Output and Imports Seasonally Adjusted Data, 1996=100 Industrial Output Imports of intermediate products Jan 98Jul 98Jan 99Jul 99Jan 00Jul 00Jan 01Jul 01Jan 02Jul 02Jan 03Aug

15 Trade Balance - Volume Indices 1996 = Month, Moving Average Jan 98Apr 98 Jul 98 Oct 98 Jan 99Apr 99 Jul 99 Oct 99 Jan 00Apr 00 Jul 00 Oct 00 Jan 01Apr 01 Jul 01 Oct 01 Jan 02Apr 02 Jul 02 Oct 02 Jan 03Apr 03 Sep 03 Exports Imports

16 Trade Balance - Price Indices 1996 = Month, Moving Average Jan 98Apr 98 Jul 98 Oct 98 Jan 99Apr 99 Jul 99 Oct 99 Jan 00Apr 00 Jul 00 Oct 00 Jan 01Apr 01 Jul 01 Oct 01 Jan 02Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Sep 03 Exports Imports

17 Terms of Trade Export Prices / Import Prices Export Prices / Import Prices 1996 = Jun 94May 95Apr 96Mar 97Feb 98Jan 99Dec 99Nov 00Oct 01Sep 02Sep

18 * BC forecast Net Foreign Direct Investment US$ billion *

19 Total External Debt US$ billion 217.1* M2003 *Estimated data

20 Current Account + Debt Amortizations US$ billion Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Sep 03 Current Account Deficit Curr Acc Def + M/L Term Amortizations Medium and Long Term Amortizations 12-Month, Accumulated

21 Exports/Total External Debt H2003 %

22 BoP - Uses and Sources US$ billion YearYearJan-Sep Uses Current account Medium and long term amortizations Sources Foreign Direct Investment Portfolio investments Medium and long-term disbursements Bonds, notes and commercial papers Trade credit Loans Brazilian investments abroad Loans to the Monetary authority (IMF) Short-term and other Reserve assets Of which: bank deposits Capital account Year

23 II. Challenges and Accomplishments: b. Disinflation

24 Selic and Swap Rates Jan 00Oct 00Jul 01Apr 02Jan 03Oct 03 % Selic Swap % 18.9%

25 Real Interest Rates Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 % p.a Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 Real Selic Rate Real 360-day Rate

26 IPCA and IPCA-15 Inflation IPCA-15IPCA 0.78% Jan 02 Mar 02 May 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 Sep 03 %

27 IPCA, Tradable, Non-tradable and Regulated Prices Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 IPCATradables Non Tradables Regulated % 15.1% 20.2% 8.4% 17.3% 12-month, accumulated change

28 IPCA, Tradable, Non-tradable and Regulated Prices Mar 02Jun 02Sep 02Dec 02Mar 03Jun 03Sep 03 IPCATradableNon-TradableRegulated 3-month Moving Average, Annual %

29 IPCA: % of Items with Price Increases Sep63.5% Average63.4% Jan85.9% % Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03

30 IPCA: Market Expectations % Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 %

31 IPCA: Market Expectations – 2003 relative frequency (%) %8-9%9-10%10-11%11-12%12-13% 19-Aug15-Sep20-Oct

32 Inflation Expectations 12 Months Ahead IPCA Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 % 6.14%

33 IPCA: Market Expectations – % Median Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 %

34 IPCA: Market Expectations – 2004 relative frequency (%) %4-5%5-6%6-7%7-8%8-9%9-10%10-11%11-12%12-13% 19-Aug15-Sep20-Oct

35 IPCA: 12-month Accumulated Change % p.y. % p.y Nov Jan 99 Oct 99 Jul 00 Apr 01 Jan 02 Oct 02 Jul 03 Apr 04

36 II. Challenges and Accomplishments: c. Fiscal Sustainability

37 Primary Surplus 12-Month, Accumulated % of GDP Target for 2003: 4.25% Jul 94Oct 95Jan 97Apr 98Jul 99Oct 00Jan 02Apr 03

38 Net Public Sector Debt - % of GDP Sep % % of GDP Oct 00Mar 01Aug 01Jan 02Jun 02Nov 02Apr 03Oct %

39 Net Public Sector Debt and Real Exchange RateNPSD R$/US$ % of GDP Jan 91Aug 92Mar 94Oct 95May 97Dec 98Jul 00Feb 02Sep

40 Total Tax Burden – Federal and Sub-National Governments % of GDP 35.9% 2002

41 III. Challenges and Accomplishments: d. Reduction of FX Exposure of Public Sector

42 Domestic Public Debt FX Debt/Total Debt Fixed Rate Debt/Total Debt sep 03 26,5% Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03 sep 03 9,0% Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03 % 26

43 FX Debt Rollover Rate Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 % % of FX Debt Rollover Rate (including swap) Principal + final coupon

44 FX Indexed Debt Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 US$ billion FX Debt (Including Swaps) Outstanding – US$ billion

45 III. Recovering Economic Activity

46 Real Wage in Manufacturing jan 02 mar 02 mai 02 jul 02 set 02 nov 02 jan 03 mar 03 mai 03 jul =100 Seasonally Adjusted

47 Interest Rate Household Loans Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Sep 03 % p.a. 87.3%

days Swap Rate and Car-loan Rate Jan 02Mar 02May 02Jul 02Sep 02Nov 02Jan 03Mar 03May 03Jul 03Sep days Swap rate Car-loan Rate % p.a.

49 Durable Goods Output 1992=100 Seasonally Adjusted, 3-month Moving Average jan 02 mar 02 mai 02 jul 02 set 02 nov 02 jan 03 mar 03 mai 03 ago 03

50 Car Sales Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Sep 03 Seasonally Adjusted 1993=100 Domestic Sales Source: Anfavea

51 Afonso Sant´Anna Bevilaqua November 2003 Brazil: Recent Economic Developments