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February 07
Brazileconomic outlook
Higher global growth leading to higher commodity pricesCommodity Prices
(Jan/05 = 100)
60
70
80
90
100
110
120
130
03
/14
/03
05
/14
/03
07
/14
/03
09
/14
/03
11/1
4/0
3
01
/14
/04
03
/14
/04
05
/14
/04
07
/14
/04
09
/14
/04
11/1
4/0
4
01
/14
/05
03
/14
/05
05
/14
/05
07
/14
/05
09
/14
/05
11/1
4/0
5
01
/14
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03
/14
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05
/14
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07
/14
/06
09
/14
/06
11/1
4/0
6
01
/14
/07
Itaú Index -- w ith oilItaú Index -- w ithout oilCRB spot
China’s leading role on current commodity cycle
Log (CRB metals)
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
01
/95
01
/96
01
/97
01
/98
01
/99
01
/00
01
/01
01
/02
01
/03
01
/04
01
/05
01
/06
actual fitted
Benefiting from this benign scenario
How Brazil has used these larger funds?
Source: Central Bank
How Brazil has used these larger funds?
Source: Central Bank
How Brazil has used these larger funds?
Source: Central Bank
Result: low risk & strong currency
Sources: Central Bank, Bloomberg & Banco Itaú
Source: IBGE
Inflation convergence
Headline and core CPI (% y-o-y)
Falling but still high real rates
Real rates diferential (NTN-C vs. TIPS) & country risk
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
02
/01
/01
02
/04
/01
02
/07
/01
02
/10
/01
02
/01
/02
02
/04
/02
02
/07
/02
02
/10
/02
02
/01
/03
02
/04
/03
02
/07
/03
02
/10
/03
02
/01
/04
02
/04
/04
02
/07
/04
02
/10
/04
02
/01
/05
02
/04
/05
02
/07
/05
02
/10
/05
02
/01
/06
02
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02
/07
/06
02
/10
/06
02
/01
/07
0
500
1000
1500
2000
2500NTN-C 2031 (9,8 a) - TIPS 2032 (8,7 a)EMBI+ BR
% pb
Sources: IMF & IBGE
Growth has been disappointing
Public accounts tell us good stories
Source: Central Bank
PAC: Acceleration Growth Program
• Fiscal accounts– Primary surplus reduction due to public investment
increase (0.5% of GDP)– Payroll expenditure control: inflation plus 1,5%– Minimum wage increase for the next 5 years :
negative impact on social security accounts– Small tax exemptions– Social security reform – Unlikely in this administration
PAC: Acceleration Growth Program
• Increase of regional government borrowing limits to housing, water & sewage investments
• Better regulatory environment– Natural gas– Regulatory agencies– Environment
Institutional Framework
• Congressional autonomy• Judiciary independence
• Rule of law
Investment grade: how far is it?
Baseline scenario
Period Nominal Interest CPI (IPCA) IGP-M Real Real Embi+
exchange rate inflation inflation GDP growth interest Brazil
rate target y-o-y y-o-y y-o-y rate y-o-y (basis
Year Q (BRL/USD) (% p.a.) (%) (%) (%) (%) points)
2006 3 2.17 14.69 3.70 3.28 2.27 12.4 228
2006 4 2.15 13.68 3.14 3.83 2.8 11.8 214
2007 1 2.11 13.00 2.95 3.87 2.2 11.0 188
2007 2 2.10 12.48 3.40 4.06 2.9 9.7 178
2007 3 2.11 11.99 3.66 3.66 3.5 8.8 174
2007 4 2.12 11.55 3.42 3.56 3.6 8.5 172
2008 1 2.13 11.50 3.37 4.06 4.4 8.2 170
2008 2 2.14 11.23 3.69 4.06 4.2 7.6 169
2008 3 2.15 10.93 3.97 4.60 3.7 7.0 167
2008 4 2.16 10.75 3.87 4.04 3.5 7.0 166
Baseline scenario
Period Exports Imports Trade Current Current
in the last in the last balance Account Account
12 months 12 months 12 months Balance Balance
Year Q (US$ billion) (US$ billion) (US$ billion) (US$ billion) (% of GDP)
2006 3 132.3 86.0 46.3
2006 4 137.5 91.4 46.1 13.5 1.5%
2007 1 141.6 96.0 45.6
2007 2 143.9 99.6 44.3
2007 3 149.6 105.6 44.0
2007 4 154.6 109.8 44.8 12.2 1.2%
2008 1 158.5 114.3 44.1
2008 2 158.9 117.8 41.1
2008 3 162.5 124.1 38.3
2008 4 165.7 127.6 38.1 3.6 0.3%
For further information:
Sérgio Ribeiro da Costa Werlang [email protected]
Tomás Málaga [email protected]
