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

2. 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. 3 I. The 2002 Confidence Crisis

4. 4 Sudden Stop Capital Inflows(*) (US$ billion) (*) FDI, medium and long term loans (excluding loans to the Central Bank) 61.7 52.8 24.8 2000 2001 2002 US$ 8.9 billion GAP US$ 28.0 billion GAP

5. 5 Basis Points 30/Oct633 500 1,000 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. 6 Nominal Exchange Rate (R$/US$) R$/US$ 30/Oct2.85 2.2 2.5 2.8 3.1 3.4 3.7 4.0 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03

7. 7 Real Effective Exchange Rate Basket of 15 currencies deflator: IPCA 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60 3.80 4.00 Jun 89 Dec 90 Jun 92 Dec 93 Jun 95 Dec 96 Jun 98 Dec 99 Jun 01 Dec 02 Sep 03 2.92 R$/US$

8. 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. 9 II. Challenges and Accomplishments: a. External Adjustment

10. 10 Current Account Deficit US$ billion 33,4 25,3 24,2 23,2 7,7 -3,9 0 5 10 15 20 25 30 35 40 19981999200020012002 Jan-Sep 2003

11. 11 Private External Debt: Rollover Rate 6-Month Moving Average 20 40 60 80 100 120 140 160 Jun 01Oct 01Feb 02Jun 02Oct 02Feb 03Jun 03 Sep 03 158.3 %

12. 12 Trade Balance -10 -5 0 5 10 15 20 25 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Sep 03 US$ billion Sep23.1 12-Month, Accumulated

13. 13 Trade Balance US$ billion 12-Month, Accumulated 45 50 55 60 65 70 Jan 96Feb 97Mar 98Apr 99May 00Jun 01Jul 02Sep 03 Imports Exports 69.6 46.6

14. 14 Industrial Output and Imports Seasonally Adjusted Data, 1996=100 Industrial Output Imports of intermediate products 90 95 100 105 110 115 120 Jan 98Jul 98Jan 99Jul 99Jan 00Jul 00Jan 01Jul 01Jan 02Jul 02Jan 03Aug 03 95 105 115 125 135 145 155 165

15. 15 Trade Balance - Volume Indices 1996 = 100 12-Month, Moving Average 95 105 115 125 135 145 155 165 175 185 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. 16 Trade Balance - Price Indices 1996 = 100 12-Month, Moving Average 75 80 85 90 95 100 105 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. 17 Terms of Trade Export Prices / Import Prices Export Prices / Import Prices 1996 = 100 85 90 95 100 105 110 Jun 94May 95Apr 96Mar 97Feb 98Jan 99Dec 99Nov 00Oct 01Sep 02Sep 03 91.4

18. 18 * BC forecast Net Foreign Direct Investment US$ billion 28.9 28.6 32.8 22.5 16.6 10.0 0 5 10 15 20 25 30 35 199819992000200120022003*

19. 19 Total External Debt US$ billion 217.1* 225.6 120 140 160 180 200 220 240 1990199119921993199419951996199719981999200020012002 7M2003 *Estimated data

20. 20 Current Account + Debt Amortizations US$ billion -10 0 10 20 30 40 50 60 70 80 90 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 27.6 24.0 -3.6

21. 21 Exports/Total External Debt 22.9 21.3 25.4 27.7 28.6 31.8 0 5 10 15 20 25 30 35 199819992000200120021H2003 %

22. 22 BoP - Uses and Sources US$ billion 20012002 2003 2003 YearYearJan-Sep Uses-58.4-38.8-15.6 Current account -23.2-7.73.9 Medium and long term amortizations -35.2-31.1-19.5 Sources58.438.815.6 Foreign Direct Investment 22.516.66.5 Portfolio investments 2.21.81.5 Medium and long-term disbursements 34.618.616.5 Bonds, notes and commercial papers 17.06.28.2 Trade credit 3.31.30.8 Loans14.311.17.5 Brazilian investments abroad -4.6-5.1-2.8 Loans to the Monetary authority (IMF) 6.611.511.1 Short-term and other 0.3-4.6-4.3 Reserve assets -3.3-0.3-13.2 Of which: bank deposits 0.04.3-1.6 Capital account 0.00.40.3 Year -28.4 -1.2 -27.1 28.4 10.0 2.1 24.0 11.4 1.8 10.8 -5.5 5.2 2.0 -9.4 -0.8 0.0

23. 23 II. Challenges and Accomplishments: b. Disinflation

24. 24 Selic and Swap Rates 15 17 19 21 23 25 27 29 31 33 Jan 00Oct 00Jul 01Apr 02Jan 03Oct 03 % Selic Swap 360 17.8% 18.9%

25. 25 Real Interest Rates 8 9 10 11 12 13 14 15 16 17 18 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 % p.a. 10 12 14 16 18 20 22 24 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 Real Selic Rate Real 360-day Rate

26. 26 IPCA and IPCA-15 Inflation IPCA-15IPCA 0.78% -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 Jan 02 Mar 02 May 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 Sep 03 %

27. 27 IPCA, Tradable, Non-tradable and Regulated Prices 4 6 8 10 12 14 16 18 20 22 24 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. 28 IPCA, Tradable, Non-tradable and Regulated Prices 0 5 10 15 20 25 30 35 40 45 50 Mar 02Jun 02Sep 02Dec 02Mar 03Jun 03Sep 03 IPCATradableNon-TradableRegulated 3-month Moving Average, Annual %

29. 29 IPCA: % of Items with Price Increases Sep63.5% Average63.4% Jan85.9% % 50 55 60 65 70 75 80 85 90 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03

30. 30 IPCA: Market Expectations - 2003 9.69% 9.5 10.0 10.5 11.0 11.5 12.0 12.5 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 %

31. 31 IPCA: Market Expectations – 2003 relative frequency (%) 0 10 20 30 40 50 60 70 80 90 7-8%8-9%9-10%10-11%11-12%12-13% 19-Aug15-Sep20-Oct

32. 32 Inflation Expectations 12 Months Ahead IPCA 4 6 8 10 12 14 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 % 6.14%

33. 33 IPCA: Market Expectations – 2004 6.0% Median 6.0 6.5 7.0 7.5 8.0 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 %

34. 34 IPCA: Market Expectations – 2004 relative frequency (%) 0 10 20 30 40 50 60 70 3-4%4-5%5-6%6-7%7-8%8-9%9-10%10-11%11-12%12-13% 19-Aug15-Sep20-Oct

35. 35 IPCA: 12-month Accumulated Change % p.y. % p.y. 6.00 Nov 2004 15.14 0 2 4 6 8 10 12 14 16 18 20 Jan 99 Oct 99 Jul 00 Apr 01 Jan 02 Oct 02 Jul 03 Apr 04

36. 36 II. Challenges and Accomplishments: c. Fiscal Sustainability

37. 37 Primary Surplus 12-Month, Accumulated % of GDP Target for 2003: 4.25% -2 0 1 2 3 4 5 6 7 Jul 94Oct 95Jan 97Apr 98Jul 99Oct 00Jan 02Apr 03

38. 38 Net Public Sector Debt - % of GDP Sep 02 62.5% % of GDP 45 50 55 60 65 Oct 00Mar 01Aug 01Jan 02Jun 02Nov 02Apr 03Oct 03 57.7%

39. 39 Net Public Sector Debt and Real Exchange RateNPSD R$/US$ % of GDP 25 30 35 40 45 50 55 60 65 Jan 91Aug 92Mar 94Oct 95May 97Dec 98Jul 00Feb 02Sep 03 1.0 1.4 1.8 2.2 2.6 3.0 3.4 3.8

40. 40 Total Tax Burden – Federal and Sub-National Governments25 27 29 31 33 35 37 19911992199319941995199619971998199920002001 % of GDP 35.9% 2002

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

42. 42 Domestic Public Debt FX Debt/Total Debt 28 30 32 34 36 38 40 42 1 2 3 4 5 6 7 8 9 10 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. 43 FX Debt Rollover Rate 0 10 20 30 40 50 60 70 80 90 100 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. 44 FX Indexed Debt 61.2 60 62 64 66 68 70 72 74 76 78 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. 45 III. Recovering Economic Activity

46. 46 Real Wage in Manufacturing 98 99 100 101 102 103 104 105 106 107 108 jan 02 mar 02 mai 02 jul 02 set 02 nov 02 jan 03 mar 03 mai 03 jul 03 1992=100 Seasonally Adjusted

47. 47 Interest Rate Household Loans 68 72 76 80 84 88 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Sep 03 % p.a. 87.3%

48. 48 360-days Swap Rate and Car-loan Rate 37 39 41 43 45 47 49 51 53 55 57 Jan 02Mar 02May 02Jul 02Sep 02Nov 02Jan 03Mar 03May 03Jul 03Sep 03 18 20 22 24 26 28 30 32 360-days Swap rate Car-loan Rate % p.a.

49. 49 Durable Goods Output 1992=100 Seasonally Adjusted, 3-month Moving Average 155 160 165 170 175 180 185 jan 02 mar 02 mai 02 jul 02 set 02 nov 02 jan 03 mar 03 mai 03 ago 03

50. 50 Car Sales 100 110 120 130 140 150 160 170 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Sep 03 Seasonally Adjusted 1993=100 Domestic Sales Source: Anfavea

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