1. 1 Afonso Bevilaqua June 2004 Brazil: Recent Economic Developments

2. 2 I. Economic Activity II. Inflation III. External Sector IV. Fiscal Policy and Debt Management V. Strengthening Resistance to Shocks

3. 3 I. Economic Activity

4. 4 GDP Growth -1.2 -0.9 0.5 1.4 1.6 1Q032Q03 3Q034Q031Q04 % Seasonally Adjusted

5. 5 GDP x Domestic Demand 96 98 100 102 104 106 1Q022Q023Q024Q021Q032Q033Q034Q031Q04 Domestic DemandGDP 2Q03 = 100

6. 6 GDP x Investment Growth -8% -6% -4% -2% 0% 2% 4% 6% GDPInvestment 1Q032Q033Q034Q031Q04

7. 7 Industrial Output Source: IBGE, May 2004 = BCB estimate 85 90 95 100 105 110 Jan 99 Sep 99 May 00 Jan 01 Sep 01 May 02 Jan 03 Sep 03 May 04 s.a., 2002 = 100

8. 8 Industrial Output Source: IBGE Total+6.0+5.1 Capital Goods+21.1+20.1 Intermediate Goods+5.3+3.6 Consumer Goods+4.3+3.6 Durable+23.4+19.0 Semi-Durable e Non-Durable+0.2 % Apr 04 Apr 03 Jan-Apr 04 Jan-Apr 03

9. 9 96 98 100 102 104 106 108 110 tt+1t+2t+3t+4t+5t+6t+7t+8t+9 Jul 95Feb 99Nov 01Jul 03 Compared Economic Recoveries in Brazil Previous Trough = 100 Industrial Output

10. 10 -5 0 5 10 15 20 25 30 35 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Capital Goods Intermediate Goods Durable Goods Non-Durable Goods % Source: IBGE Accumulated growth since June 2003, seasonally adjusted Industrial Output by Categories of Use

11. 11 Real Retail Sales 97 98 99 100 101 102 103 104 105 106 107 108 Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 Apr 04 Seasonally Adjusted, 3-Month Moving Average Average 2003 = 100 Source: IBGE, Banco Central

12. 12 Apr 04 Apr 03 Jan-Apr 04 Jan-Apr 03 Total+10.1+7.2 Furniture & Electronics+33.3+24.5 Fuel and Lubricants+9.6+6.8 Supermarket, Food, Beverage and Tobacco +6.1+3.8 Vehicles & Autoparts+11.8+10.1 Clothing-0.8-0.4 Retail Sales % Source: IBGE, Banco Central

13. 13 Retail Sales -2 2 6 10 14 18 22 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Accumulated growth since June 2003, seasonally adjusted Supermarket Clothing Furniture & Electronics Vehicles & Autoparts % 26 Source: IBGE, Banco Central

14. 14 Real Interest Rates (360-day swap) Source: Bacen 8 12 16 20 24 28 32 36 40 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 % p.a. Avg 01/02 17.6% Avg 97/99 21.4% Avg 00 12.3% Avg 03 13.2% Avg 04 10.1%

15. 15 9 11 13 15 17 19 21 23 25 Jan/02 Mar/02 May/02 Jul/02 Sep/02 Nov/02 Jan/03 Mar/03 May/03 Jul/03 Sep/03 Nov/03 Jan/04 Mar/04 May/04 97 98 99 100 101 102 103 104 105 106 107 Real Interest RateRetail Sales (t+9) Real Interest Rate vs. Retail Sales % p.y. 2003=100

16. 16 Supermarket Sales vs. Total Payroll 99 100 101 102 103 104 105 106 107 108 109 Jan/02 Mar/02 May/02 Jul/02 Sep/02 Nov/02 Jan/03 Mar/03 May/03 Jul/03 Sep/03 Nov/03 Jan/04 Mar/04 May/04 Supermarket Sales (2003=100)Total Payroll (1992=100)

17. 17 Industrial Sales x Industrial Output Source: IBGE, CNI 100 105 110 115 120 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Jun 03 = 100 Industrial Output Industrial Sales

18. 18 -25 -20 -15 -10 -5 0 5 10 Apr 03Jul 03Oct 03Jan 04Apr 04 Insufficient Excessive Balance Quarterly Industrial Survey: Level of Inventories % of Sample Source: FGV

19. 19 Industrial Employment 99.5 100.0 100.5 101.0 101.5 102.0 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 s.a., Jun 2003 = 100 São Paulo (Fiesp)Brazil (CNI)

20. 20 Formal Employment s.a., Jun 2003 = 100 99 100 101 102 103 104 Jun 03 JulAug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Source: Ministry of Labor and Employment 03

21. 21 Industrial Real Wages s.a., Jun 2003 = 100 Source: CNI 99 100 101 102 103 104 105 106 107 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 108

22. 22 Urban Average Real Earnings Source: IBGE Mar 2002 = 100 86 88 90 92 94 96 98 100 102 104 106 108 Mar 02 Aug 02 Jan 03 Jun 03 Nov 03 Apr 04

23. 23 Packing Paper Shipments s.a., Jun 2003 = 100 Source: ABPO 99 103 107 111 115 119 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04

24. 24 Power Consumption: São Paulo Source: São Paulo State Energy Department 98 100 102 104 106 108 110 112 114 116 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 s.a., Jun 2003 = 100

25. 25 Business Confidence -40 -30 -20 -10 0 10 20 30 40 50 60 70 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Future Conditions Current Conditions Net Expectations Source: FGV Industrial Survey

26. 26 In a Nutshell 1 st quarter GDP growth confirms economic rebound. Result is consistent with the 3.5% growth estimate for the year. Industrial output continued to expand in 2004, with positive prospects for the near future due to increasing domestic and external demand. Sales have been outpacing production growth, affecting level of inventories. Credit growth and payroll increase explain sales expansion, still led by durable goods. Unemployment rate affected by increase in labor force. However, formal employment rising.

27. 27 II. Inflation

28. 28 IPCA Inflation Rate % -0.5 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 May 04 Source: IBGE

29. 29 Accumulated in 12 months % IPCA Inflation Rate 4.5 6.0 7.5 9.0 10.5 12.0 13.5 15.0 16.5 18.0 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04

30. 30 Wholesale Industrial Prices % 1.31 0.0 0.5 1.0 1.5 2.0 2.5 IPA 10 IPA M DI IPA 10 IPA M DI IPA 10 IPA M DI IPA 10 IPA M DI IPA 10 IPA M DI Jan 04Feb 04Mar 04Apr 04May 04 Source: FGV

31. 31 Commodities Prices 60 65 70 75 80 85 90 95 100 105 110 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 Food Chicago Commodities Bureau (CRB) Price Index 1995 = 100 Metals Source: CRB

32. 32 -1.5 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 IGP 10 IGP M DI IGP 10 IGP M DI IGP 10 IGP M DI IGP 10 IGP M DI IGP 10 IGP M DI Jan 04Feb 04Mar 04Apr 04May 04 Wholesale Agricultural Prices 2.70 Source: FGV

33. 33 Core Inflation IPCA: 3-Month Moving Average 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 May 04 % Smoothed trimmed meansExclusionNon-Smoothed trimmed means Source: Bacen

34. 34 Market Inflation Expectations: 2004 % p.a. 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 Jun 04 6.8% Source: Bacen

35. 35 Inflation Expectations: 12-Month % 4 5 6 7 8 9 10 11 12 13 14 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 Jun 04 6.1% Source: Bacen

36. 36 III. External Sector

37. 37 Current Account Surplus: 1994/2004 -0.3 - 4.7 0.8 -5 -4 -3 -2 0 1 2 1994199519961997199819992000200120022003 % of GDP *2004: 12-month to April 2004* 1.1

38. 38 Current Account vs. Trade Balance -36,000 -30,000 -24,000 -18,000 -12,000 -6,000 0 6,000 Jan 96 Dec 96 Nov 97 Oct 98 Sep 99 Aug 00 Jul 01 Jun 02 May 03 Apr 04 Current account -8,000 -4,000 0 4,000 8,000 12,000 16,000 20,000 24,000 28,000 Trade balance

39. 39 Trade Balance Source: Ministry of Development, Industry and Foreign Trade 45 50 55 60 65 70 75 80 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 May 04 US$ billion 12-Month, Accumulated 51.9 79.9 Imports Exports

40. 40 Exports and Imports Volume 1996 = 100 Seasonally Adjusted 60 80 100 120 140 160 180 200 220 19961997 1998199920002001200220032004 Exports Imports 215.8 107.4

41. 41 Export and Import Prices 1996 = 100 75 80 85 90 95 100 105 110 199619971998199920002001200220032004 Exports Imports 92.7 86.3

42. 42 Imports Substitution Imported Quantum left scale Industrial Output right scale Dec 1995 = 100 90 95 100 105 110 115 120 125 130 135 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 96 98 100 102 104 106 108 110 112 114 116 118 Dec 1995 = 100

43. 43 Export Growth Diversification Contribution by Country to Exports Growth - last 12 Months - Argentina 19% China 12% Netherlands 8% Germany 4% Italy 4% United States 3% Others 50%

44. 44 Last 12 Months Others 41.2% Germany 4.4% Mexico 3.8% Italy 3.2% United States 21.9% Japan 3.2% Chile 2.7% Netherlands 6.0% China 6.4% Argentina 7.1% Brazilian Exports by Market

45. 45 External Private Debt Rollover 20% 40% 60% 80% 100% 120% 140% 160% Jul 01 Nov 01 Mar 02 Jul 02 Nov 02 Mar 03 Jul 03 Nov 03 Mar 04 6-month moving average Source: Bacen

46. 46 IV. Fiscal Policy and Debt Management

47. 47 Consolidated Public Sector Primary Surplus % of GDP Apr 04 4.23 -2 0 1 2 3 4 5 6 Jul 94 Feb 96 Sep 97 Apr 99 Nov 00 Jun 02 Jan 04 Source: Bacen

48. 48 70 80 90 100 110 200220032004 % % of 1H Fiscal Target Accomplished in the Jan-Apr Period Fiscal Target

49. 49 Debt-to-GDP Ratio 27 36 45 54 63 Jan 91 Apr 92 Jul 93 Oct 94 Jan 96 Apr 97 Jul 98 Oct 99 Jan 01 Apr 02 Jul 03 % of GDP Apr 04 56.6% Source: Bacen Dec 03Jan 04Feb 04Mar 04Apr 04

50. 50 Debt Dynamics 199920002001200220032004 Net debt increase7.4%-0.2%3.2%2.8%3.2%-2.1% 1. Primary surplus-3.0%-3.3%-3.5%-3.3%-4.3%-2.0% 2. Pure interest on the debt8.4%6.8%6.9%7.2%9.3%2.5% 3. Depreciation on domestic debt3.8%0.8%1.5%4.8%-1.5%0.1% 4. Depreciation on foreign debt4.2%0.8%1.5%4.4%-1.6%0.2% 5. Skeletons0.0%0.8%1.5%0.9%0.0% 6. Privatization proceeds-0.9%-1.8%-0.1%-0.2%0.0% 7. Effect of GDP growth-5.2%-4.3%-4.6%-11.0%1.2%-2.9% Memo: Debt dynamics (1+2+7)0.2%-0.8%-1.2%-7.1%6.3%-2.4% Currency (3+4)8.0%1.6%3.0%9.3%-3.1%0.3% Net "skeletons" (5-6)-0.9%-1.0%1.4%0.7%0.0%

51. 51 FX-Linked Debt Rollover Rate % Source: Bacen 0% - 0% - 0% - 0% - 0% - 0 20 40 60 80 100 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 May 04 From January to May, the government did not roll over any FX- linked bond or swap Avg 2003: 61.3%

52. 52 FX-Linked and Fixed Domestic Debt as a Share of the Total Debt Source: Bacen FX-Linked Domestic Debt/Total Debt % 16 21 26 31 36 41 Jan 02 Sep 02 May 03 May 04 16.6 1 5 9 13 17 Jan 02 Sep 02 May 03 May 04 16.4 Fixed Domestic Debt/Total Debt

53. 53 V. Strengthening Resistance to Shocks

54. 54 Net International Reserves Net Reserves Adjusted Net Reserves US$ billion 10 15 20 25 30 35 Jan 99 Aug 99 Mar 00 Oct 00 May 01 Dec 01 Jul 02 Feb 03 Sep 03 Apr 04 Source: Bacen

55. 55 Interest Payments/Exports Ratio % 18 22 26 30 34 38 199619971998199920002001200220032004* * 2004: BCB estimate

56. 56 1.5 2.0 2.5 3.0 3.5 4.0 199619971998199920002001200220032004* Net External Debt/Exports Ratio % * 2004: BCB estimate

57. 57 Net External Debt/GDP Ratio 10 15 20 25 30 35 40 19961997199819992000200120022003 % 2004* * 2004: BCB estimate

58. 58 Impact of a 1% FX change on Debt/GDP ratio 0.17 0.19 0.21 0.23 0.25 0.27 0.29 0.31 0.33 0.35 Jan 00 Sep 00 May 01 Jan 02 Sep 02 May 03 Apr 04 % Source: Bacen

59. 59 Afonso Bevilaqua June 2004 Brazil: Recent Economic Developments