1. 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. 2  I. Asset Prices  II. Banking System  III. Macroeconomic Developments  IV. Conclusion Outline

3. 3 I.Asset Prices

4. 4 Jun 14 2007=100 USD/BRLUSD/CNYUSD/JPYUSD/EUR 78 88 98 108 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. 5 Sovereign Spread and Risk Aversion Index Sources: JP Morgan Chase and Merrill Lynch basis points Embi+Br Risk Aversion Index -2.0 -1.5 -0.5 0.0 0.5 1.0 1.5 Jun 07 Jul 07 Sep 07 Oct 07 Nov 07 Dec 07 Feb 08 Mar 08 130 160 190 220 250 280 310 Ago 07 Apr 08 Jan 08 May 08

6. 6 MexbolMervalIbovespaIPSAIBVC Jun 14 2007=100 Ibovespa x Latin American Stock Exchanges Source: Bloomberg

7. 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. 8 II. Banking Sector

9. 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. 10 Assets Distribution

11. 11 Past Due Loans

12. 12 Profitability

13. 13 Cost of Deposits

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

15. 15 III. Macroeconomic Developments

16. 16 Trade Balance 12-month accumulated exports imports US$ billion 12-month surplus: US$36.4 bi 165.6 129.2 45 55 65 75 85 95 105 115 125 135 145 155 165 175 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Feb 08

17. 17 Net FDI US$ billion FDI -15 -5 5 15 25 35 45 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. 18 International Reserves US$ billion Apr 03: 15.9 end-of-2004: 27.5 0 20 40 60 80 100 120 140 160 180 200 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. 19 Net External Debt US$ billion 1Q03: 165.2 4Q04: 135.7 4Q07: -10.8 -25 0 25 50 75 100 125 150 175 1Q 02 3Q 02 1Q 03 3Q 03 1Q 04 3Q 04 1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 4Q 07

20. 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) -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 000102030405060708 -5 0 5 10 15 20 25 30 35 000102030405060708

21. 21 Interest Payments/Exports Ratio * Record low since the start of the series in 1970. % from 35.6% to 9.5%* 6 10 14 18 22 26 30 34 38 199920002001200220032004200520062007

22. 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 09 0 3 6 9 12 15

23. 23 IPCA (12-month trailing basis ) market consensus % Feb 08: 4.61% 2008: 4.44%* 0 3 6 9 12 15 18 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Inflation Convergence to Targets *March 20

24. 24 Jan 08 4.15% avg. 1994-Jun/95 4.77% avg. Jul/95-1998 -0.08% avg. 1999-2002 2.91% avg. 2003-2007 4.13% Consolidated Public Sector Primary Surplus % of GDP -2 0 1 2 3 4 5 6 7 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. 25 Source: BCB Debt/GDP % of GDP 35.1 56.0 4Q 07 42.8 market expectations (annual data) 1Q 02 – 2Q 07 (quarterly data) 35 37 39 41 43 45 47 49 51 53 55 57 1Q 02 1Q 03 1Q 04 1Q 05 1Q 06 1Q 07 20082012

26. 26 US$ billlion Accumulated Reduction in FX-Linked Domestic Debt as of Jan 2003 -10 0 10 20 30 40 50 60 70 80 90 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jan 08 80.9 Jul 07

27. 27 III. Conclusions

28. 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