Brazil Economic Outlook and Investment Opportunities Jorge Arbache University of Brasilia BUSBC Meeting, Brasilia, April 28,

1. Overview 2

Recent economic performance GDP per capita growth (%) Source: Central Bank Note: : our own estimates based on macroeconometric modelling and CGE analyses 3

End of the low hanging fruit growth model: consumption, easy credit, international liquidity, government spending and commodity boom 4

Short term challenges Restore the market confidence Resume growth Fight inflation: ~ 8.25% in the last 12 months Keep fiscal accounts under control: significant deterioration in recent years Keep BoP deficit under control: -4.5% of GDP in the last 12 months 5

Current account balance - % GDP Source: Central Bank CPI (%) – monthly Source: Central Bank 6

2. What the government is doing? 7

Pillars of Mr Levy`s policy Focus on gross public debt Accelerate concessions and PPPs opportunities Increase technical and college-level training Foster increase in labor supply Changes in Federal and State VAT Expansion of the SIMPLES and ‘doing business’ initiatives Focus on international trade Source: MoF 8

Non financial public sector primary and nominal balance - % GDP Source: MoF Government goal 9

3. Challenges ahead 10

Brazil -- combination of a still low unemployment rate (4.9% in the last 12 months) with recession, rising inflation and current account deterioration: trap 11

How to explain the trap? Low unemployment is partly explained by the decelerating working age population, low labor productivity and service sector boom, which is highly labor intensive Exchange rate pass-through Falling savings and investment ratios Poor international competitiveness 12

Medium term challenges Output gap has decreased: 2.3% from 3.4% in the last 15 years (our own estimates Jan/2015); IMF estimates (Apr/2015): 2.5% 13

How to explain the falling potential output? Premature aging and rapid deceleration of the working age population Premature servicification (70% of GDP), which is highly uncompetitive Premature deindustrialization (manufacturing sector 13% of GDP from 35% in the 1980s) Re-primarization of exports Low and falling savings and investment ratios All combined with low and stagnated labor productivity, poor international competitiveness, and secular stagnation in developed countries 14

4. Are there business opportunities? 15

Despite the poor environment and growth prospects in Brazil, there are plenty of opportunities out there in the short and medium terms Demographic changes are creating great opportunities The desperate need to increase efficiency and productivity favors smart initiatives and smart businesses Expansion of concessions, PPPs and privatizations 16

Huge potential for industrialization of comparative advantages e.g. agribusiness, pre-salt, minerals, renewable energy, biodiversity, etc New frontiers of development in the countryside and in fringe states Smart cities projects Regional markets and the still rising middle class 17

Case study: heath sector Brazil has a free, universal health service Public service is widely perceived as poor It is unlikely that public investment in healthcare will improve significantly in the foreseeable future Low and stable supply of beds and large regional infrastructure disparities Hospital sector is highly fragmented  limited capacity to invest Recent legislation change will favor new entrants 18

Note: Total of beds per habitants. Source: WHO 2013 and OECD Supply of beds: Brazil vs. OECD 19

Demographic changes are already impacting the healthcare demand strongly in terms of level, composition and type of care 19% of population above 60 years old in 2030 – it was 11% in

As a result of the growing income and demographic changes, the coverage of private health insurance has increased from 34 to 51 million people between 2004 and 2014 Only 1/4 of total population is covered by private health insurance Source: ANS 21

A substantial share of additional supply of healthcare will have to be provided by the private sector Large room for new investments in infrastructure and market consolidation Hospitals Diagnosis services Retail health clinics 22

4. Risks 23

Limited margin for fiscal maneuver in the short term Pursuing a fiscal adjustment will be politically challenging, but emerging awareness on the need to go forward with the reforms proposed by government Loss of investment grade and access to credit markets Economic slack and political uncertainties globally 24

China`s slowdown and commodity prices FED’s policy move Protectionism and trade policies Exchange rate uncertainties Environmental changes 25

Thank You! 26