Brazilian Agency for Industrial Development - ABDI 1 The Brazilian Economy: Recent Performance and New Challenges Alessandro Teixeira September, 2006

Brazilian Agency for Industrial Development - ABDI 2 The progress in In the last four years the Brazilian economy improved substantially:  Trade surpluses and reduction of the vulnerability to external shocks  Reduction in inflation  Overall improvement in public finance  Reduction of the country risk premium  Gradual growth acceleration, with high job creation  Continuity of institutional reforms

Brazilian Agency for Industrial Development - ABDI 3 Trade Balance Source: MDICPrepared by: MF/SPE. Since Jul/04 the trade surplus has stabilized at 5.5% of GDP

Brazilian Agency for Industrial Development - ABDI 4 Source: MDIC/SECEX, IMF and BCB (Focus ) Prepared by: MF/SPE. (*) Brazil: preliminary data by MF/SPE; World: IMF (World Economic Outlook, april 06). World Trade and Brazilian Exports ( Growth rate acummulated in 12 months – in dollars)

Brazilian Agency for Industrial Development - ABDI 5 Net external debt / exports Source: BCB. Prepared by: MF/SPE External solvency started to improve after the 1999 devaluation. 1,9 3,2 3,6 3,1 2,8 2,7 2,1 1,4 0,9 0,6 2,3 2,0 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4, * (*) forecast : July

Brazilian Agency for Industrial Development - ABDI 6 Consumer Inflation (IPCA) and Inflation Targets (12-month cum.) Sources: IBGE and BCB.Prepared by: MF/SPE. Market expectations for 2006 (3.32%) and 2007 (4.4%) are even lower than the inflation targets set by the Government (4.5%). Dec/ Dec/ Dec/ % dez 02 abr 03 ago 03 dez 03 abr 04 ago 04 dez 04 abr 05 ago 05 dez 05 abr 06 ago 06 dez 06 Aug/ Market forecast: Dec/06=3,32 Dec/

Brazilian Agency for Industrial Development - ABDI 7 Increase in the Public-Sector Primary Surplus (as % of GDP) Source: BCBPrepared by: MF/SPE Average of : 3.5% of GDP Average of : 4.5% of GDP + 1.0% of GDP 4,83 4,59 4,25 3,89 3,64 3,19 4,33 3,46 0,0 1,0 2,0 3,0 4,0 5,0 6, (*) 12 -months (July/06) *

Brazilian Agency for Industrial Development - ABDI 8 Net Debt of the Public Sector (as % of GDP) Note: 2006 – up to July Sources: BCB.Prepared by: MF/SPE. After 9 years of growth the debt/GDP ratio started to fall in ,6 33,3 34,4 41,7 48,748,8 52,6 55,5 57,2 50,3 51,5 51,

Brazilian Agency for Industrial Development - ABDI 9 Sustainable Growth: Employment Formal Employment: job creation– 12 months accumulated (Thousand jobs) Source: MTE/CAGEDPrepared by: MF/SPE. Total job creation will reach 4.6 million in ,248 1,254 1, ,000 1,250 1,500 1, * (*) 12-months (July/06)

Brazilian Agency for Industrial Development - ABDI 10 Source: MF/SPE. Total Payroll in Real Terms The total wage bill has been growing, in real terms, since Additionally, Government transfers have contributed to an increase in the personal disposable income. R$ MillionsVar. %R$ MillionsVar. %R$ MillionsVar. % ,4% ,9% ,0% ,5% ,3% ,2% ,7% ,1% ,5% ,7% ,3% ,6% (1) PME (amplification on PNAD's basis) (2) INSS pensions, unemployment benefit, bolsa-família, FGTS etc. Work Real Revenue 1 Government Transfers 2 Total

Brazilian Agency for Industrial Development - ABDI 11 Income Inequality Reduziu-se a concentração de renda no País Source:: PNAD / IBGE/IPEADATAPrepared by: MF/SPE Income inequality, as measured by the Gini index, is falling. Recent market surveys showed an expansion of the middle class. Gini Index 0,601 0,594 0,602 0,600 0,596 0,589 0,572 0,581 0,57 0,58 0,59 0,60 0,

Brazilian Agency for Industrial Development - ABDI 12 GDP Growth Reduziu-se a concentração de renda no País Source:: IBGE/IPEADATAPrepared by: MF/SPE After the disinflation of the past months, GDP growth is accelerating again. The final rate for 2006 should be between 3.5 and 4.0%. For 2007, the Government expectation is an annual growth rate between 4.5 and 5.5%. dinsinflation of 2003 dinsinflation of GDP growth rate in the past 12 months 3,5% 4,0% 0% 1% 2% 3% 4% 5% 6% Forecast for 2006: GDP growth between 3.5% and 4.0%

Brazilian Agency for Industrial Development - ABDI 13 Institutional Reforms Approved Constitutional Amendments: Social Security Reform (EC 41 / 2003) Tax Reform (EC 42 / 2003) Judicial Reform (EC 45 / 2004)

Brazilian Agency for Industrial Development - ABDI 14 Institutional Reforms Approved Main Laws Approved Payroll Credit (Law ) Rural Insurance (Law ) Housing sector (Law ) Innovation (Law ) Agricultural Bonds (Law ) Public-Private Partnerships (Law ) Bankruptcy (Law )

Brazilian Agency for Industrial Development - ABDI 15 Main Institutional Reforms under analysis (in the Congress or in the Federal Government) Tax Reform (PEC 285 e 293) Micro and Small Enterprises (PLC 123) Credit Report (PL 5870/05) Opening up of the Reinsurance Market (PLC 249) Public Sector Pension Fund (Federal Government employees) Simplified Registration of New Businesses – REDESIM (PL 6529)

Brazilian Agency for Industrial Development - ABDI 16 New Challenges – What are the Goals? 1)Consolidating the new development cycle initiated in 2004: macroeconomic stability with social inclusion 2)Raising the annual GDP growth rate above 5%, while maintaining high job creation 3)Reducing regional inequalities in the country 4)Increasing the openness and the international competitiveness of the Brazilian economy

Brazilian Agency for Industrial Development - ABDI 17 New Challenges – What are the instruments? 1)Macroeconomic Stability Inflation targeting; Fiscal responsibility; and Floating exchange rates 2) Higher investment Tax and credit incentives to reach an investment-GDP ratio of 25% in ) Infrastructure Reducing costs and stimulating the implementation of new projects in the energy and transportation & logistics sectors

Brazilian Agency for Industrial Development - ABDI 18 New Challenges – What are the instruments? 4) Credit and interest rates Reducing the base interest rate Reducing interest-rate spreads; and Increasing credit to GDP ratio to 50% by ) Fiscal Policy Reducing taxes and Government current expenditures, in terms of GDP, while keeping the primary-surplus target at 4.25% of GDP 6) Institutional Reforms Carrying tax reform initiatives further

Brazilian Agency for Industrial Development - ABDI 19 The Investment Challenge Entering a new phase:  Moving from modernization of the existing capacity of production to the increase in the capacity of production Removing the main barriers to investment:  High real interest rates;  Cumulative taxes; and  Imperfect regulation

Brazilian Agency for Industrial Development - ABDI 20 Gross Fixed Capital Formation (1990 = 100, seasonally adjusted) Source: IBGE.Prepared by: MF/SPE Mexican crisis East Asia, Russian and Brazilian crisis Argentine crisis 2002 elections Expansion initiated in the 3rd quarter of 2006

Brazilian Agency for Industrial Development - ABDI 21 The Credit Challenge  Reducing the base real interest rate to 5% p.a.  Reducing interest-rate spreads  Increasing the credit-GDP ratio to 50%, with special emphasis on  Long-term investment  Consumer credit  Agriculture  Housing  Accelerating the growth and development of the domestic capital market

Brazilian Agency for Industrial Development - ABDI 22 Credit Operations (as % of GDP) Source: BCB.Prepared by: MF/SPE Credit operations have been growing markedly, led by the expansion in personal credit. Jul/ jan 02 abr 02 jul 02 out 02 jan 03 abr 03 jul 03 out 03 jan 04 abr 04 jul 04 out 04 jan 05 abr 05 jul 05 out 05 jan 06 abr 06 jul 06 Jan/03 23, % of GDP

Brazilian Agency for Industrial Development - ABDI 23 Capital Markets – Primary Issue (R$ million – current values) (*) Includes promissory notes, CRIs (real estate receivables certificates), and quotas of credit rights investment funds, among others. (**) Up to August Source: CVM.Prepared by: MF/SPE. The value for Jan/Aug 2006 is already higher than the total for 2005.

Brazilian Agency for Industrial Development - ABDI 24 The New Leading Sectors Energy: Oil, Gas, Electric Power, Ethanol and other renewable energy resources Transport Equipment: Automotive, Rail, Naval, and Aeronautical Civil Construction: Infrastructure, Housing and Basic Inputs Innovation and technology: Semiconductors, Software, Pharmaceutical products, Biotechnology, Nanotechnology and Capital Goods

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