2011 11 01 brazilian economy

Brazil Challenges & Opportunities of an Emerging Country

November, 2011

Visagio 2

Brazil Country Profile

Political System: Democratic presidential republic

Population: 192M, world’s 5th (USA: 312M, world’s 3rd)

Political Capital: Brasília

Financial Capital: São Paulo

Cultural Capital: Rio de Janeiro

Area: 3.3M square miles (larger than contiguous USA)

Language: Portuguese

Religion: 75% roman catholic, world’s largest

Currency: Real (R$ or BRL)

Life Expectancy: 72.5 yrs (world’s 123rd, USA 78.3 yrs)

2010 GDP* (nominal): $ 2.090 trillion (7th)

2010 GDP* (nominal per capita): $10,800 (102nd)

Brazil is the largest economy in Latin America and the 7th in the world (nominal

GDP), being a continental country that is larger than the contiguous USA and the

world’s largest catholic population in the world

Source: http://www.economist.com/content/compare-cabana *https://www.cia.gov/library/publications/the-world-factbook/geos/br.html

Visagio 3

A Quick Snapshot: Bovespa (Stock Market)

The last 16 years were decisive for Brazil’s current position in world’s economy,

while the Brazilian stock market evolution shows a more mature reality for the

country

Brazil’s economy

has reached a

new level

Reaction to crisis

became faster

Elections has

lower impact on

economy

Brazil’s Bovespa Evolution*

How did Brazil

progress?

What are the future

challenges?

Source: *Citi Bank Investment Research !Latin America Equity Strategy: Brazil Fact Book” June, 2011

Visagio 4

Opportunities Challenges

Political

Stability

Commodities

Boom

Mature

Financial

System

Mature

National

Industry

Social Policy

Progress

External Trade

Diversification

Agenda

FUTURE

PAST

PRESENT

The current presentation will be divided in 5 main steps: past, current situation

main pillars, the present situation, the main challenges and opportunities for the

future and the short-term most probable scenario

1

2

3

4

5

Visagio 5


Political

Stability

Commodities

Boom

Mature

Financial

System

Mature

National

Industry

Social Policy

Progress

External Trade

Diversification

Agenda

FUTURE

PAST

PRESENT

The first step in the agenda will quickly focus on Brazil’s past for analysis

contextualization

1

2

3

4

5

Visagio 6

Past: History Timeline

Pedro Alvares Cabral

(1460-1526), Portuguese

explorer discovered Brazil

1500 1550 African slaves were shipped

to Brazil to work at sugar

plantations

1654 23 Jews left Recife and founded "New

Amsterdam" on Manhattan Island. The first

New York City synagogue was created in

lower Manhattan by the founders of the

first synagogue in the New World in

Recife.

Visagio 7


1822 Brazil declared its

independence from Portugal

Slavery was abolished in Brazil

and 4 million slaves were freed

Brazilian monarchy was

overthrown and a republic was

established

1888 - 1889 1964 - 1985 A military dictatorship ruled

over Brazil

Visagio 8


1994 Fernando Henrique Cardoso

elected president after helping

to bring inflation under control

Luiz Inacio Lula da Silva,

popularly known as Lula, wins

presidential elections

2002 2010 Dilma Rousseff, of President

Lula's Workers' Party, wins

second round run-off to

become Brazil's first female

president

Visagio 9


Political

Stability

Commodities

Boom

Mature

Financial

System

Mature

National

Industry

Social Policy

Progress

External Trade

Diversification

Agenda

FUTURE

PAST

PRESENT

The agenda’s second step focus on the 6 main pillars that support the latest Brazil

economy progress, leading to the present scenario

1

2

3

4

5

Visagio 10

Political Stability

The first important pillar that sustains the latest economic progress is concerned to

the political stability that the country has reached, presenting a mature democratic

presidential republic

After “re-democratization” (1989), population impeached 1 president, vice took over

2 presidents in 16 years (1994-2010)

2010 elections results would not jeopardize recent social/economic progresses

Current president, Dilma Rousseff, is the continuation of Lula administration (2002-2010)

Government has the majority in house of representatives

It is hard to change status quo for the worse but also for the

better: structural reforms are necessary!

Mature democracy demands negotiation and power balance for reforms

however…

Visagio 11

Commodities Boom: Dependency

Although Brazil continued diversification of external trade, the country still

depends a lot on Agricultural and Industrial Commodities as much as on Oil and Fuel

Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011

Visagio 12

Commodities Boom: High Prices

However, global commodity and energy prices have been rising during the last 10

years: current prices are reaching levels prior to 2008 crisis


Visagio 13

External Trade Diversification

Besides, the latest governments have focused on external market diversification in

order to lower dependency mainly on USA and Europe, focusing on emerging

markets and Africa

Brazilian External Trade Partners Diversification (2010)


Visagio 14

Mature Financial System

Brazil was awarded 1st place for its high

regulatory standards at the 2009 Financial

Stability Forum' in Basel that "helped it avoid

the worst of the global economic crisis"

At the close of first decade of the 2000s,

Brazil was one of only 4 countries in the

world with a wide spread on lending

We are used to dealing with challenging

environments at our institutions and our

regulations. Everything we have done since

the mid-1990s has tended to take a more

cautious approach.

Alexandre Tombini,

President of Central Bank

MV – 115.08 billion $

10th largest bank in the

world by market value

MV – 74.32billion $

Had acquired Brazilian

operations of J.P.

Morgan Fleming Asset

Management

and American Express

MV – 54.89 billion $

Largest Latin American

bank by assets

Controlled by the

government (major

instrument to reach

middle class)

The 3 Major Groups*

During the last 16 years, Brazil’s central bank gradually conquered political

independency, concentrating its decisions on technical parameters; Brazil’s banking

system is considered one of the most advanced in the world

Source: * http://www.forbes.com/lists/2008/18/biz_2000global08_The-Global-2000-Brazil_10Rank.html

Visagio 15

Mature Financial System

…which stimulates civil construction and creates new job offers for population

with different educational levels

Breakdown in Mortgage Loans in Total Stock of Credit of the Brazilian Financial System*

Government credit stimulation to

overcome economic crisis by internal

economy stimulation

State banks are the main inducers of credit expansion policy mainly to real state

sector…

Source: Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”

Visagio 16

Mature National Industry

With the stable political situation, economy growth and government support, some

national champions are successfully entering international markets **

Largest company in Latin

America by market

capitalization and revenue

12th largest company in the

world in terms of capitalization

One of the world’s top 10

companies investing in research

and development

2nd largest mining company in

the world

World´s largest producer

of iron ore and pellets

Leader in long steel in the

Americas and a leading supplier

of special steel

Leader in mini-mill steel

production and steel recycling

in North America

World's 3rd-largest commercial

aircraft company

Largest global brewer with

nearly 25% global market share

Owner of Budweiser brand

Latin America's biggest power

utility company

10th largest in the world

4th largest clean energy

company in the world

World's 10th largest food

company

Miami/Orlando International

Airport

I-40 Interchange

Seven Oaks Dam

($ 23B)

($ 32B*)

($ 239B) ($ 86B)

($ 16B*)

($ 185B)

($ 18B)

($ 21B)

Source:*All values in parenthesis are market values, except for Odebrecht, BRF and JBS (2010 Revenue) ** http://www.forbes.com/lists/2008/18/biz_2000global08_The-Global-2000-Brazil_10Rank.html

World's largest company in the

beef sector

$ 225m acquisition of U.S.

firm Swift & Company in 2007

($ 34.9 B*)

Visagio 17


Brazil is the World's 2nd largest producer

of ethanol fuel

Brazil is the world's largest exporter

Together, Brazil and the United States lead the

industrial production of ethanol fuel,

accounting together for 87.8% of the world's

production in 2010*

In 2010 Brazil produced 26.2 billion liters (6.92

billion U.S. liquid gallons), representing 30.1%

of the world's total ethanol used as fuel*

Within this internalization process, the agricultural sector growth is highlighted by

sugarcane ethanol business expansion and high international competitiveness level

Source: *http://en.wikipedia.org/wiki/Ethanol_fuel_in_Brazil

Visagio 18


In 2003 Havaianas*

produced sophisticated

models with rubies for the Oscar

nominees. After American

celebrities were spotted by

paparazzi wearing Havaianas

flip-flops, it has definitely

earned the title of the Brazilian

most global fashion brand.

Stern was also the first to create

a worldwide warranty

certificate. One of his main

goals in life was achieved when

important international

gemological institutes revised

the old "semi-precious"

definition of colored stones and

began referring to them since as

"precious colored stones".**

The “Brazilian Fashion” Concept

Top earning model in

2010/2011, with an estimated

$45 million income, Gisele

Bündchen opened the

international market to Brazilian

models: Adriana Lima ($ 8M) and

Alessandra Ambrosio ($ 5M) are

also part of top 10 list: Brazil is

the best represented country.

Government programs and positive economic perspectives are encouraging Brazilian

companies to create and implement innovative ideas on international market,

specially exploring the “Brazilian Fashion” concept

Source: *www.havaianas.com **www.hstern.com

Visagio 19

Social Policy Progress

Short-term income transfer programs have positively impacted the economy by

creating a “middle-class country”; however, long-term educational programs are

still timid, what can represent a huge social expenditure debt in the future

Social Class Breakdown Changes from 2004 to 2010*

Around 33 million

people(around

17% of

population) left

low income class

and entered

middle class in 6

years, mainly

achieved through

income transfer

(short-term

effect)

Source: *Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”

Visagio 20

Agenda

The 6 main progress pillars led the current country’s scenario, while 5 main

parameters are presented below before exploring the future challenges and

opportunities

GDP Growth

Country Rating Progress

Foreign Investments Raise

Formal Jobs Creation

Internal Market Maturity

OpportunitiesChallenges

Political

Stability

Commodities

Boom

Mature

Financial System

Mature

National Industry

Social Policy

Progress

External Trade

Diversification

FUTURE

PAST

PRESENT

1

2

3

4

5

Main Positive Impacts

Visagio 21

GDP Growth

Brazil seems to reach a more sustainable GDP growth with a positive tendency

estimation for the future, while scenario could be better if unlikely tax reforms

were approved

Oil shock,

high

external

debt,

country

default

“the lost decade”

economic

stabilization

economic return &

social progress

very

unlikely

Brazilian Historic Growth: 1960 – 2020 (expectation)*


Visagio 22

Country Rating Progress

Brazil credit ratings are being raised recently by major credit rating agencies, such

as Standard & Poor's, Fitch and Moody's

2008 2011

Description Standard & Poor´s* Fitch** Moody´s***

Rating* BBB- BBB Baa2

Outlook* Positive Stable Positive

*For S&P, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade, sometimes also referred to as "junk" bonds. **For Fitch, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade, sometimes also referred to as "junk" bonds. ***For Moody's, a bond is considered investment grade if its credit rating is Baa3 or higher. Bonds rated Ba1 and below are considered to be speculative grade, sometimes also referred to as "junk" bonds.

BB+

BBB- BBB-

BBB

Fitch

S & P

<2008

Rating Tendency

Visagio 23

Foreign Investment Raise

Besides, foreign direct investment are reaching historical records every year: the

crisis year valley is comparable to the first economic growth cycle level in the 90’s

Foreign Direct Investment 1995 – 2011*

Cycle 1 Economic Stabilization

Cycle 2 Economic Return +

Social Progresses

Crisis valley

value reached

the same

level as

“Cycle 1” top

investments


Visagio 24

Formal Jobs Creation

Brazilian workforce is tending to have more formal jobs, even though legislation is

old and extremely inefficient: 30% of current formal jobs were created between

2004 and 2009

Change in the Percentage of Formal Jobs in Brazilian Workforce

(2004 – 2009)*

Around 30% of

current

formal jobs in

Brazil were

created

during the

period: 13

million jobs


Visagio 25

Internal Market Maturity

Internal market growth and maturity are presented in chart below, where it show

low 2008 crisis impact on household consumption, what was Brazil’s main solution

for the difficult moment

Evolution of Household Consumption & Gross Formation of Fixed Capital*

Companies’ perspectives went down

during 2008 crisis, but rapidly ramped-

up the following semesters

Household Consumption and export

level (10% of GDP) lowered 2008 crisis

impact to Brazilian economy and will

probably do the same in 2011

Income distribution is one of the key

drivers of Brazilian growth in recent

years

Household Consumption is about 60%

of GDP, which indicates its domestic

market-oriented economy, in contrast

with other emerging economies


Visagio 26

Agenda

However, important challenges will limit country’s future development and growth,

being the 6 most important described below and detailed on following slides

Unbalanced Government Fiscal Policy

High Social Security Expenditures

High Interest Rates

Poor Logistics Infrastructure

Poor Education

Unpopular Reforms Need

Corruption

Main Present/Future Challenges


Political

Stability

Commodities

Boom

Mature

Financial System

Mature

National Industry

Social Policy

Progress

External Trade

Diversification

FUTURE

PAST

PRESENT

1

2

3

4

5

Visagio 27

Government Fiscal Policy

Brazil Inflation Rate**

Annual Change on Consumer Price Index

Federal Government Expenditures to GDP 1997 – 2010*

…making it difficult to control

the inflation

Government is spending too much, especially Lula in his later years…

Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011 **http://www.tradingeconomics.com/brazil/inflation-cpi

Visagio 28

Social Security Expenditures

Demographic Growth 1981-2030*

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2005 2006 2007 2008 2009 2010*

Income Transfer Program Expenses vs. GDP Evolution(Baseline 2004 = 1,00)

Income Transfer Program Expenses GDP

Population will start decreasing in 2040

Is Brazil ready to pay this bill?

The government high expenditure is also due to social programs expansion and older

population demanding larger benefits volumes that overcome GDP growth pace


Visagio 29

Interest Rates

BRIC

Brazil: 5%

China: 2%

Russia: -0.15%

India: -3.4%

OTHERS

Euro zone: -1.5 %

USA and UK: -2 %

Australia: 2.5 %

Brazil has the highest real interest rates in the world, by a very fat margin

The interest rates is the main mechanism used by Brazil Central

Bank to fight against inflation rise due to the economy growth and

government expenditures: government is not doing its homework

Source: Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011

Visagio 30

Exchange Rate

Exchange rate are decreasing mainly due to commodities price rise and record

foreign direct investments, creating a more challenging scenario for exporters

R$/US$ Exchange Rate 2003-2011*

However, 2011

crisis will make

companies focus

on domestic

markets, since

developed

economies are

buying less

R$/US$ exchange

rate drop affects

Brazil’s

exportations

negatively.


Visagio 31

Infrastructure

The World Bank and sector specialists believe Brazil needs to invest closer to 5% of

GDP in infrastructure: this is more than 2x what the BNDES is currently projecting for

2010-2013

Brazil Russia India China Roads 105 125 90 53 Ports 123 93 83 67

Air 93 104 71 79 Rail 87 31 23 27

Worst

2nd Worst

Best

BRIC Infrastructure Quality World Ranking*

Brazil and Russia disputes the last position of infrastructure quality between the

BRIC countries, what means a great challenge and also invest opportunity for the

country

Source: *Citi Bank “Corporate Securities Strategy: Brazilian Infrastructure” , September 2010

Visagio 32

Education

Country School Life

Expectancy (in Years) World

Ranking New Zealand 20,3 1

USA 16,0 22 Russia 14,1 56 Brazil 14,0 58 China 11,6 123 India 10,3 150

http://unstats.un.org/unsd/demographic/products/socind/education.htm

Cities CEOs Yearly Earnings São Paulo US$ 620 mil New York US$ 574 mil London US$ 550 mil

Singapore US$ 368 mil Hong Kong US$ 242 mil

http://www.exame.com

The biggest challenge to education progress in Brazil is to overcome political

governance that shares responsibility between cities, states and country levels,

besides a long term strategic plan.

Low education levels and economic growth leads to salaries inflation

Although recent progress is clear, Brazil still has a long way to reach education

excellence, what brings workforce deficit for technical and high education services,

leading to high salaries to few and inflation

Visagio 33

Reforms

World Bank: Brazilian companies spend the most time to calculate and pay its taxes

to the government in the world!

IPI

COFINS

PIS

CIDE

ICMS

ISS

IRPJ

CSLL

8 taxes over goods, services and profit

Transform 8 taxes in one

whole taxation logic

Tax Reform

Tax reform would lead to at least a 0.5% increase in GDP for at least 20 years!

At last, important reforms, such as the tax reform, are on hold due to political

impasse between governmental levels: agreement could lead to at least a 0.5% GDP

increase for the next 20 years

Visagio 34

Corruption

Red Zone

Brazil achieved a higher position in 2010, though it gained the

same points as in 2009

In 2010 Brazil occupied the 69th position* within 178 listed countries in Public

Sector Corruption Ranking prepared by ONG International Transparency

Source: *http://www.band.com.br/noticias/brasil/noticia/?id=100000361377

• Argentina

• Ecuador

• Venezuela

• Brazil

• Italy

• Mexico

• India

• Denmark (9,3 points)

•New Zealand (9,3 points)

• Singapore (9,3 points)

• Canada (8,9 points)

Yellow Zone Green Zone

2010 3.7 points

The same position as

Cuba, Romania,

Montenegro

2009 3.7 points

75th position within 180

countries

0 10

Visagio 35

Agenda

Following the main challenges presented, another group of main future

opportunities are presented

World Cup 2014

Olympic Games 2016

Pre-Salt Oil & Gas

Ethanol

Real Estate

Water Resource & Arable Land

Main Present/Future Opportunities


Political

Stability

Commodities

Boom

Mature

Financial System

Mature

National Industry

Social Policy

Progress

External Trade

Diversification

FUTURE

PAST

PRESENT

1

2

3

4

5

Visagio 36

2014 Soccer World Cup and 2016 Summer Olympic Games

Citigroup estimates that the 2014 World Cup

could generate direct infrastructure

investments in Brazil of 0.5% to 1% of GDP,

with a total of approximately R$16 billion

(approximately US $9 billion).

Infrastructure Investments:

0.5%-1.0% GDP

The 2010 World Cup likely had a total impact

on South Africa’s GDP of 1.25% to 1.5% of GDP

for an economy 1/5 the size of Brazil’s.

Citigroup believes that 1.5% of GDP is a

reasonable higher end estimate for Brazil.

50%: Stadiums & hotels construction/renovation, plus…

Urban Reconstruction

Public Safety

Highway

Airports

IT & Others

Impact: 1.5%-2.0% GDP

Direct infrastructure investments, plus…

Media

Visitors

Operations-Related Spending

Other Indirect Impacts

Brazil will hold the two main sports events in the world: 2014 Soccer World Cup and

2016 Summer Olympic Games in Rio de Janeiro; Soccer World Cup alone should

stimulate a 1.0% GDP investment and a 2.0% GDP return.

Source: Citi Bank “Corporate Securities Strategy: Brazilian Infrastructure” , September 2010

Visagio 37

Pre-Salt Oil & Gas

Besides, Brazil started exploring oil in deep waters, called the Pre-Salt, what will

make Brazil the 7th largest producer in the world

Source: Citigroup Global Markets – Brazil’s Oil and Gas Industry Outlook, May 2011

New Oil Finds and the Pre-Salt

Visagio 38

Ethanol

Sources: BP Energy Outlook, Ethanol Summit: José Goldemberg Lecture

Liquid fuel demand growth will be met by

supply growth from OPEC and Biofuels Potential demand resulting from

present mandates up to 2020/22

210 billion liters

70 billion liters

Current ethanol global supply

140BL/Y

Potential

Repressed

Demand

USA and Brazil are the biggest producers and exporters of Ethanol

(corn and sugarcane), considered the current best biofuel alternative

Still considering energy opportunities, Brazil and USA share an specific one

concerning the ethanol potential market, that is still limited by countries’ mandates

Visagio 39

Real Estate Sector

4,3%

24,3%

28,3%

37,0%

Brazilian Market (*) English Market Eropean Market American Market

Real Estate Credit vs. Total Credit

SM = Minimum Wage

90% of real estate deficit is

concentrated in lower income

social group

Real Estate Deficit per Social Group

Total deficit: 7.2M houses

Compared to other economies,

real estate credit still presents

large growth potential

A special focus is necessary for the Brazilian real estate sector, which credit is still

very timid considering the huge total deficit of 7.2 million houses

Visagio 40

Real Estate Sector

Real estate credit is

expected to reach

11% of GDP

participation in

2014.

3.547 3.927 4.293 4.675 5.076

5,14,5 4,5 4,5

5,7

7,9

11,1

7,5

2,9

4,1

0

2.000

4.000

6.000

8.000

10.000

12.000

2010 Proj. 2011 Proj. 2012 Proj. 2013 Proj. 2014 Proj.

-1,0

1,0

3,0

5,0

7,0

9,0

11,0

PIB Crescimento Real PIB Crédito Imobiliário / PIB

Real Estate Credit GDP

Participation Growth

Government programs are stimulating real estate credit as an economic growth

mechanism, which should reach 11.1% of GDP in 2014 even with the lower GDP

growth expected for the period

Visagio 41

Renewable Water Resource and Arable Land

At last, Brazil is considered by specialists as the world’s land and water banks, what

are considered to be the most strategic resources in the future to attend global

consumption and urbanization growth

Source: www.agorafinancial.com, FAO

http://www.toradv.com.br/en/News%20&%20Events/001%20-%20The%20Miracle%20of%20Cerrado.htm

The World’s Largest Renewable Water Resource

Brazil represents 15% of total proven

renewable water resource, while USA

(2nd) represents 8%

Arable Land Availability

Brazil has as much spare farmland

(over 400 ha) as the next two

countries together: Russia and USA

0

50

100

150

200

250

300

350

400

450

500

In Use Potential

Visagio 42

Amazon Rainforest Issue

Brazil is often accused of levelling the Amazon rainforest to create its farms, but

hardly any of this new land lies in Amazon, most is cerrado**

Source: **http://www.toradv.com.br/en/News%20&%20Events/001%20-%20The%20Miracle%20of%20Cerrado.htm

* million hectares

Total

Area*

Native

Vegetation*

Arable

Land* Other

851 498 338 15

100% 58% 40% 2%

Available 30%

Pasture

Sugar Cane Agriculture

Visagio 43


Political

Stability

Commodities

Boom

Mature

Financial

System

Mature

National

Industry

Social Policy

Progress

External Trade

Diversification

Agenda

FUTURE

PAST

PRESENT

In order to wrap-up the present document, a last statement is presented concerning

the most probable short-term scenario expected by the market

1

2

3

4

5

Visagio 44

5 Fives Cycles for 5 Years

GDP

Inflation

Real Interests Rate

Unemployment

Current Account - GDP

Five 5%

Cycle

… for 5 Years

Market specialists expect a five 5% cycle for the next 5 years in Brazil, while 2011

has been a hard year for the country due to high government expenditure by the

last year of Lula’s government and global 2011 recession

5.8% - 6.5%

3.3%

5.2% - 6.0%

2.0%

7.0%

* All data collected from Brazil Central Bank 2011 Forecasts

Visagio 45

Any Questions?

Thank You!

[email protected]

2011 11 01 brazilian economy

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