1 Reactions to the Sub-Prime Turmoil Carlos Hamilton V. Araújo IADB, May 2008 Reactions to the Sub-Prime Turmoil Carlos Hamilton V. Araújo IADB, May 2008

2  I. Asset Prices  II. Banking System  III. Macroeconomic Developments  IV. Conclusion Outline

3 I.Asset Prices

4 Jun =100 USD/BRLUSD/CNYUSD/JPYUSD/EUR Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 US Dollar Spike Source: Bloomberg

5 Sovereign Spread and Risk Aversion Index Sources: JP Morgan Chase and Merrill Lynch basis points Embi+Br Risk Aversion Index Jun 07 Jul 07 Sep 07 Oct 07 Nov 07 Dec 07 Feb 08 Mar Ago 07 Apr 08 Jan 08 May 08

6 MexbolMervalIbovespaIPSAIBVC Jun =100 Ibovespa x Latin American Stock Exchanges Source: Bloomberg

7  Almost all IPOs, even those that had already been announced, were postponed  The cost of the international financing became prohibitive, even in case of well ranked corporations  There are reasons to believe that “this time is different” Other Comments

8 II. Banking Sector

9  Mainly in the second half of the 90s, the Brazilian banking system passed through a huge clean-up process  In the last couple of years, the Congress approved some laws enhancing the protection of the creditors  The above improvements contributed decisively to strengthen the prospect for the system Some Previous Developments

10 Assets Distribution

11 Past Due Loans

12 Profitability

13 Cost of Deposits

14 * Registered at the Central Bank Credit Information System Expansion of the Credit

15 III. Macroeconomic Developments

16 Trade Balance 12-month accumulated exports imports US$ billion 12-month surplus: US$36.4 bi Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Feb 08

17 Net FDI US$ billion FDI Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Feb 08

18 International Reserves US$ billion Apr 03: 15.9 end-of-2004: Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Mar 08 Mar 25: US$194.3 bi

19 Net External Debt US$ billion 1Q03: Q04: Q07: Q 02 3Q 02 1Q 03 3Q 03 1Q 04 3Q 04 1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 4Q 07

20 External Sustainability Indicators * Record low since the start of the series in 1970; 2008 – estimates. net external debt/GDPnet external debt/exports de 3.1 para -0.1* % de 32.7 para –1.4%* (Feb)

21 Interest Payments/Exports Ratio * Record low since the start of the series in % from 35.6% to 9.5%*

22 IPCA Expectations and Target central target 12-month IPCA expectations upper limit lower limit % p.a. Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Dec

23 IPCA (12-month trailing basis ) market consensus % Feb 08: 4.61% 2008: 4.44%* Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Inflation Convergence to Targets *March 20

24 Jan % avg Jun/ % avg. Jul/ % avg % avg % Consolidated Public Sector Primary Surplus % of GDP Jan 94 Jan 95 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08

25 Source: BCB Debt/GDP % of GDP Q market expectations (annual data) 1Q 02 – 2Q 07 (quarterly data) Q 02 1Q 03 1Q 04 1Q 05 1Q 06 1Q

26 US$ billlion Accumulated Reduction in FX-Linked Domestic Debt as of Jan Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jan Jul 07

27 III. Conclusions

28  Asset Prices  Similarly to what was seen in the last two decades or so, the Brazilian assets depreciated in response to the break out of the sub-prime financial turmoil  However, differently from the old pattern, the depreciation was relatively modest and they fastly recovered and on balance have not been hardly affected so far  Banking Sector  The Brazilian bank sector was healthy enough to overcome the problems caused by the international liquidity crunch without sacrificing the recent cicle of credit expansion  Macroeconomic Developments  Afer almost a decade of Inflation Targetting, flotation and generation of primary surplus (privatisation, bank reform), “this time is different”  From my perspective, since there has been a strong enhancement in the fundamentals, this is largely the best explanation for the fact that so far Brazil has not suffered a lot as a consequence of the sub-prime crisis Conclusion