1

Henrique de Campos Meirelles

Febraban – Lima, March 2004

Brazil:

Recent Economic Developments

2

I. The 2002 Confidence Crisis

II. Economic Policy in 2003/2004:

a. Fiscal Responsibility

b. The External Adjustment

b. Disinflation

d. Improving Public Debt Profile

III. Current Outlook of the Brazilian

Economy

IV. Towards Sustained Economic Growth

3

I. The 2002 Confidence Crisis

4

Sudden Stop

Capital Inflows(*)(US$ billion)

(*) FDI , medium and long term loans (excluding loans to the Central Bank)(*) FDI , medium and long term loans (excluding loans to the Central Bank)

52.8

25.5 23.2

36.9

0

10

20

30

40

50

60

70

2001 2002 2003 2004BCB forecast

5

Monthly IPCA Annualized

% p

.a.

0

5

10

15

20

25

30

35

40

45

Jan 02 Mar 02 Nov 02Sep 02Jul 02May 02

42.9% p.a.

The Inflation Risk: 2002

6

II. The Economic Policy in 2003/2004:

a. Fiscal Responsibility

7

• New Government committed to long-term fiscal sustainability:

- Increase in the consolidated public sector primary surplus to

4.25% of GDP.

- Approval of the social security reform.

- Approval of the tax reform.

- Extension to 2007 of tax on financial transactions and of

delinking of central government revenues.

- Fiscal surplus is no more dependent on extraordinary

revenues.

Fiscal Responsibility

8

Primary Surplus

12-Month, Accumulated

% o

f G

DP 4.19

-2

-1

0

1

2

3

4

5

6

7

Jul

94

Jan

95

Jul

95

Jan

96

Jul

96

Jan

97

Jul

97

Jan

98

Jul

98

Jan

99

Jul

99

Jan

00

Jul

00

Jan

01

Jul

01

Jan

02

Jul

02

Jan

03

Jul

03

Jan

04

9

Net Public Sector Debt 1995-2010%

G

DP

20

25

30

35

40

45

50

55

60

1995 1997 1999 2001 2003 2005 2007 2009 2010

43.7%

Banco Central Estimative

10

II. The Economic Policy in 2003/2004:

b. The External Adjustment

11

Nominal Exchange Rate: 2002/04

Mar 242.93

Source: Bacen

2.2

2,.

2.8

3.1

3.4

3.7

4.0

Mar 02 Jun 02 Set 02 Dez 02 Mar 03 Jun 03 Set 03 Dez 03 Mar 04

Bas

is P

oin

ts

12

Exchange Rate Volatility

Moving Average of 21 days

% p

.a.

0

5

10

15

20

25

Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04

Fonte: Bacen

13

Current AccountU

S$

bil

lio

n

* BCB forecast

-18.4

-23.5

-30.5-33.4

-25.3 -24.2 -23.2

-7.7

4.1

0.2

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

14

Trade Balance U

S$

bil

lio

n

* BCB forecast

-10

-5

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

24

15

Trade BalanceU

S$

bil

lio

n

Feb 0426.1

12-Month, Accumulated

Highest trade balance surplus

ever recorded

-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 Jul 03 Jan 04

16

USD million Part

United States 3,511.9 19.5% 26.6%China 3,447.3 19.2% 317.7%Netherlands 1,449.5 8.1% 51.8%

Germany 610.0 3.4% 24.2%

Mexico 1,030.0 5.7% 60.2%

Iran 576.3 3.2% 196.8%Spain 543.2 3.0% 53.9%South África 431.0 2.4% 142.7%

Chile 634.1 3.5% 50.9%

Russia 1,077.2 6.0% 254.7%

South Corea 642.3 3.6% 110.6%

Others 3,633.8 20.2% 55.9%

Total 17,998.6 100.0% 32.7%

% changeAbsolute change

MarketUSD million Part

Soybean 2,102.6 11.7% 96.1%

Iron ore 407.7 2.3% 13.4%

Autovehicles 887.5 4.9% 50.2%

Soy products 951.9 5.,3% 57.7%

Fuel Oils 744.9 4.1% 285.0%

Chicken 904.0 5.0% 112.2%

Raw Soy Oil 742.3 4.1% 247.8%

Engines 610.3 3.4% 57.4%Cow meat 651.2 3.6% 129.4%

Iron/steel products 550.8 3.1% 64.1%

Others 6,893.6 38.3% 16.5%

Total 17,998.6 100,0% 32.7%

% changeMarketAbsolute change

Canada 411.9 2.3% 72.8%

Petroleum Oil 1,963.3 10.9% 1,238.0%

Raw Sugar 588.5 3.3% 77.3%

Export Growth Diversification

Growth by Market and by Product: 2000/2003

17

Trade BalanceU

S$

bil

lio

n

12-Month, Accumulated

48.7

74.8

45

50

55

60

65

70

75

Jul96

Jan97

Jul97

Jan98

Jul98

Jan99

Jul99

Jan00

Jul00

Jan01

Jul01

Jan02

Jul02

Jan03

Jul03

Jan04

Imports

Exports

18* BC forecast* BC forecast

Net Foreign Direct InvestmentU

S$

bil

lio

n

28.9 28.6

32.8

22.5

16.6

10.1

0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003

13.0

2004*

19

External Debt (Excluding IMF)

US

$ b

illi

on

* BC forecast* BC forecast

US$192.3 bi

120

140

160

180

200

220

240

260

1991 1993 1995 1997 1999 2001 2003

20

Net International Reserves(IMF criteria)

US

$ b

illi

on

Central Bank announces policy of accumulation of

reserves

13

15

17

19

21

23

25

27

29

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Feb 04

21.2

21

II. The Economic Policy in 2003/2004:

c. Disinflation

22

Inflation Rate: IPCA 2002/04

Monthly Rate Annualized

% p

.a.

0

5

10

15

20

25

30

35

40

45

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Feb 04

23

Market Inflation Expectations for 2004IPCA (median)

%

6.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04

24

Inflation expectations

IPCA in the next 12 months

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03

5.5%

4

5

6

7

8

9

10

11

12

13

Mar 04

%

25

II. The Economic Policy in 2003/2004:

d. Improving Public Debt Profile

26

FX Debt Rollover Rate

% of FX Debt Rollover Rate (including swap)Principal + final coupon

%

0

10

20

30

40

50

60

70

80

90

100

Jan03

Feb03

Mar03

Apr03

May03

Jun03

Jul03

Aug03

Sep03

Oct03

Nov03

Dec03

Jan04

Feb04

Mar04

27

Average Tenure Domestic Public Debt

Fonte: Bacen

Average Tenure of Securities Issued

LTN (Fixed Rate Securities)

Mo

nth

s

LFT

6

7

8

9

10

11

12

13

Feb03

Apr03

Jun03

Aug03

Oct03

Dec03

Feb04

0

10

20

30

40

50

60

Feb03

Apr03

Jun03

Aug03

Oct03

Dec03

Feb04

28

19.0

18

20

22

24

26

28

30

32

34

36

38

40

42

Jan02

Mar02

May02

Jul02

Sep02

Nov02

Jan03

Mar03

May03

Jul03

Sep03

Nov03

Feb04

13.6

1

2

3

4

5

6

7

8

9

10

11

12

13

Jan02

Mar02

May02

Jul02

Sep02

Nov02

Jan03

Mar03

May03

Jul03

Sep03

Nov03

Feb04

%

Fonte: Bacen

Public Debt

Debt Indexed to the Exchange Rate / Total Debt Prefixed Debt / Total Debt

29

III. Current Outlook of the Brazilian Economy

30

Brazil Risk: 2003/2004B

asis

Po

int

Mar 25577

350

450

550

650

750

850

950

1,050

1,150

1,250

1,350

1,450

Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04

31

Swap 360-day Rate

15

17

19

21

23

25

27

29

31

33

Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Mar 04

%

32

Real Interest Rate: 1997/2004 Ja

n 9

7

Jun

97

No

v 97

Ap

r 98

Sep

98

Fev

99

Jul 9

9

Dec

99

May

00

Oct

00

Mar

01

Au

g 0

1

Jan

02

Jun

02

No

v 02

Ap

r 03

Sep

03

Feb

048

13

18

23

28

33

38

% p

.a.

Average 00/0215.8%

Average 97/9921.4%

Average 0313.2%

Average 2004 = 9.3%The smaller rate of

pós-PlanoReal period

Fonte: Bacen

33

Real Interest Rate – 2003/2004

9

10

11

12

13

14

15

16

17

Jan03

Feb03

Mar03

Apr03

May03

Jun03

Jul03

Aug03

Sep03

Oct03

Nov03

Dec03

Jan04

Mar04

% p

.a.

9.4%

34

Sao Paulo Stock Exchange IndexB

asis

po

int

Mar 25

21,721

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Feb 02 Jun 02 Oct 02 Feb 03 Jun 03 Oct 03 Feb 04

35

6-Month Moving Average

%

20

40

60

80

100

120

140

160

Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Feb 04

Private External Debt: Rollover Rate

36

Brazil is currently in much better shape to deal with adverse

external shocks, compared to mid-90s and early-00s:

External adjustment

Fiscal adjustment and structural reforms

Resilience to Shocks

37

Interest Payments/Exports

20

24

28

32

36

40

1996 1997 1998 1999 2000 2001 2002 2003 2004*

19.9

%

26.7

36.4

* 2004 - BCB forecast

38

Net External Debt/Exports

2.0

3.6

2.1

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1996 1997 1998 1999 2000 2001 2002 2003 2004*

* 2004 - BCB forecast

39

IV. Towards Sustained Economic Growth

40

110

115

120

125

130

135

Q196

Q396

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q403

1991

= 1

00

Source: IBGESource: IBGE

4Q03 Vs 2Q03: +5.1%

2H03 Vs 1H03: + 2.2%

Quarterly Seasonally Adjusted Industrial Output

Industrial Output: 1996/2003

41

Retail Sales: 2000-2003

Quarterly Seasonally Adjusted Sales

92

93

94

95

96

97

98

99

100

101

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

2000

= 1

00

Source: IBGESource: IBGE

4Q03 Vs 2Q03: +3.4%

2H03 Vs 1H03: + 2.1%

42

Wages in Industry

Seasonally Adjusted Real WageMay 2003 = 100

98

99

100

101

102

103

104

105

106

107

108

May 03 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03

43

GDP Growth

-0.81-0.93

0.11

1.50

1Q03 2Q03

3Q03 4Q03

(%)

Source: IBGESource: IBGE

Seasonally Adjusted

44

GDP x Confidence Shocks

* For 2004, BCB estimate. * For 2004, BCB estimate.

GDP in the Aftermath of very Large FX Shocks (%)

(2004)

-12

-10

-8

-6

-4

-2

0

Brazil(2003)

Indonesia Thailand S. KoreaMalaysia MexicoEcuadorUruguay Russia(1999) (1995)(2002) (1998) (1998)(1998) (1998)(2002)(1998)

Argentina

-0.2

-4.9

-6.2-6.3-6.7

-7.4

-10.8 -10.5-11.0

-13.3

Brazil

+3.5

45

Henrique de Campos Meirelles

Febraban – Lima, March 2004

Brazil:

Recent Economic Developments