1. Ministério da Fazenda 1 1 The International Crisis and The Challenges for Brazil Guido Mantega October - 2008

2. Ministério da Fazenda 2 2  The strongest crisis since 1929.  This crisis is deeper than those which occurred in nineties (bil. crises).  The epicenter was in developed countries (tril. crisis).  A systemic crisis– local turmoil is transmitted to all markets and all countries. THE DEPTH OF THE CRISIS

3. Ministério da Fazenda 3 3 CRISIS ARE WORSE IN DEVELOPED COUNTRIES  Slower growth.  Potential growth of domestic markets is negligible.  Less solid macroeconomic fundamentals.  Financial institutions are too leveraged and have junk assets.

4. Ministério da Fazenda 4 4 THE CRISIS HARMS LESS THE EMERGING COUNTRIES  Faster growth.  Potential growth of domestic markets is significant.  Solid macroeconomic fundamentals and higher level of international reserves.  Financial institutions are less leveraged and have less junk assets.

5. Ministério da Fazenda 5 5 FIRST STAGE (From August/2007 to August/2008)  The crisis begin in USA and in Europe. The impact in Brazilian economy is negligible.  Brazilian government is concerned about shocks on commodities prices and about the inflation behavior.  Reduction of International credit and more expensive funding for emerging countries.  Deterioration of the Brazilian current account in emerging countries due to the increase of oil price and to the increase of capital outflows.

6. Ministério da Fazenda 6 6 SECOND STAGE (September/2008 and October/2008)  Financial institutions reveal their weakness in balance sheets and the assets devalue strongly.  The solvency crisis becomes a confidence crisis.  Problems in USA:Fannie Mae, Freddie Mac, Lehman Brothers,  Problem in Europe: Fortis, Dexia, HBOS, Bradford and Bingley  Credit Crunch over the world for short-term operations.  Commodities prices decrease and almost all currencies devaluates with respect to the dollar.

7. Ministério da Fazenda 7 7 SOLUTIONS AND PROJECTIONS  The states must come up with solutions to the problem. All the weapons must be used  Bailout programs in USA and in Europe.  New stage in 2009:  Credit constrained, less leverage and higher interest rates.  World economy will grow slower.

8. Ministério da Fazenda 8 8 SHORT-TERM IMPACTS ON BRAZIL  Credit crunch in the export sector.  More Liquidity constraints to Brazilian firms.  Domestic credit becomes more expensive.  Losses in equity and derivatives.  Increase of uncertainty about the economy performance in 2009.

9. Ministério da Fazenda 9 9 What Does the Brazilian Government Make to Mitigate the Harms of Liquidity Constraints?  The Government issues short-term loans to the bank system (public offers).  Spend international reserves in order to offer funding to the export sector.  Relaxes the reserve requirements for the banking system.  Increases financial resources of BNDES to be used in exports financing.  Anticipate the disbursement for the harvest of 2008/09

10. Ministério da Fazenda 10  Clearinghouses – guarantee the settlement of all registered transactions.  They compulsory register all derivatives operations with the identification of the clearing agent, of the broker and, also of the final beneficial owner.  Risk calculation in real time (based on stress testing) and mark-to-market.  Collateral pledged in the Clearinghouse’s custody account, with segregation between the different clients.  Legal Protection of Pledged Collateral Financial Regulation in Brazil (Risk Management)

11. Ministério da Fazenda 11 BRAZIL – sustainable growth Variation (%) 2nd Quarter 2007 3rd Quarter 2007 4th Quarter 2007 1st Quarter 2008 2nd Quarter 2008 Year to Date – Annualized Basis 4.95.15.45.96.0 Trailing 4 Quarters – Annualized Basis 4.85.15.45.86.0 Year over Year basis 5.45.66.25.96.1 Quarter on Quarter (seasonally adjusted) 1.31.91.80.81.6 Source: IBGEElaborated by: MF/SPE

12. Ministério da Fazenda 12 BIGGET INVESTMENT CYCLE AND MASS CONSUMPTION MARKET Year over Year – Quarterly Basis (% Variation) Source: IBGEElaborated by: MF/SPE

13. Ministério da Fazenda 13 DOWNWARD INFLATION TREND Source: BCBElaborated by: MF/SPE.

14. Ministério da Fazenda 14 BRAZILIAN EXPORT DESTINATION COUNTRIES Source: MDIC.Elaborated by: MF/SPE

15. Ministério da Fazenda 15 FOREIGN DIRECT INVESTMENT (NET) X CURRENT ACCOUNT (US$ billions) */ FOCUS Readout - Market Expectations (10/03/2008). Source: BCBElaborated by: MF/SPE

16. Ministério da Fazenda 16 FOREIGN EXCHANGE TRANSACTIONS (US$ billions) Source: BCBElaborated by: MF/SPE

17. Ministério da Fazenda 17 INTERNATIONAL RESERVES (US$ billions) Source: BCB.Elaborated by: MF/SPE.

18. Ministério da Fazenda 18 EXTERNAL SOLVENCY INCREASE */ Estimation - August/08. Source: BCB. Elaborated by: MF/SPE

19. Ministério da Fazenda 19 PUBLIC SECTOR BORROWIG REQUIREMENTS (% of GDP) Jan–Aug/08: 5.78% Jan-Aug/08: - 0.58% */ Trailing 12 months ending August/08 Source: BCB. Elaborated by: MF/SPE.

20. Ministério da Fazenda 20 */ Forecast – September/08. Source: BCBElaborated by: MF/SPE PUBLIC SECTOR NET DEBT (% of GDP)

21. Ministério da Fazenda 21 Basel Index in Brazil Index Recommended Internationally BASEL INDEX (MINIMAL CAPITAL REQUIREMENTS) (Average Index of the Top 10 banks in Brazil*) */ Weighted Average Index Based on the Total Asset Values. Source: BCB.Elaborated by: MF/SPE

22. Ministério da Fazenda 22 */ Weighted Average Based on the Top 10 Private Banks in Brazil Source: The Bankers - Top 1000 Biggest Banks Ranking in 2008. Elaborated by: MF/SPE PROFITABILITY OF BRAZILIAN BANKS* Return On Assets – ROA (%)

23. Ministério da Fazenda 23 PROFITABILITY RECORDS - PRIVATE SECTOR Source: Conjuntura Econômica (August/08).Elaborated by: MF/SPE

24. Ministério da Fazenda 24 SUSTAINABLE ECONOMIC GROWTH CYCLE  Brazil has the right economic instruments to maintain its current vigorous cycle despite the international financial crisis:  PAC (Growth Acceleration Program) Continuance and Investment Increase  Productivity Gains  Investments in Infrastructure  Even though with a Moderate Reduction of GDP Growth for 2009.

25. Ministério da Fazenda 25 GDP GROWTH Source: IBGE (up to 2007). MF/SPE (projections 2008-10). Elaborated by: MF/SPE

26. Ministério da Fazenda 26