THE BRAZILIAN ECONOMY

The Center for Latin American IssuesThe George Washington University

Washington, February 10, 2006

Otaviano Canuto

World Bank - Executive Director forBrazil, Colombia, Dominican Republic,Ecuador, Haiti, Panama, Philippines,Suriname and Trinidad & Tobago

Brazil’s economy under President Luiz Inácio Lula da Silva has been more stable than many pundits foresaw when President Lula took office three years ago, even to the point that the country has been able to repay its IMF loan early. To what does the Brazilian economy owe its good fortune?

Inflation 1976/2005 - CPI* – Monthly (%)Inflation 1976/2005 - CPI* – Monthly (%)

Macro stability: a remarkable journeyReal Ex-post Interest Rate: a long, prudent transition

Real Ex-post Interest Rate: a long, prudent transition

* Consumer Price Index - IPC (FIPE) Source: IPEA. Until October 2005

25% drop in Real Interest Rates (premium on NTN-C*)

25% drop in Real Interest Rates (premium on NTN-C*)

Source: National Treasury

* Average rate of NTN-C auctions 3

Turning point

Lower real interest rates have a major impact on investment decisions; many more projects are now affordable on a market basis than in the 1990s.

Expected Inflation - CPIExpected Inflation - CPI

Source: Focus/Central Bank.

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

%

Real Interest Rate (Selic x IPC Fipe) Real Interest Rate (Selic x IGP-DI)

4.80

5.75

4.40

5.54

4.00

4.20

4.40

4.60

4.80

5.00

5.20

5.40

5.60

5.80

6.00

2005 2006 2007 2008 2009

% p

.y.

1/31/2005

11/18/2005

5% Line

+1%

-1%

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Nov-

76

Nov-

77

Nov-

78

Nov-

79

Nov-

80

Nov-

81

Nov-

82

Nov-

83

Nov-

84

Nov-

85

Nov-

86

Nov-

87

Nov-

88

Nov-

89

Nov-

90

Nov-

91

Nov-

92

Nov-

93

Nov-

94

Nov-

95

Nov-

96

Nov-

97

Nov-

98

Nov-

99

Nov-

00

Nov-

01

Nov-

02

Nov-

03

Nov-

04

Nov-

05

%

Pré-fixação da correção monetária e

câmbio

Plano Cruzado

Plano Bresser

Plano Verão

Plano Collor I

Plano Collor II

Plano Real

7%

8%

9%

10%

11%

12%

13%

14%

Dec-

00

Apr

-01

Aug

-01

Dec-

01

Apr

-02

Aug

-02

Dec-

02

Apr

-03

Aug

-03

Dec-

03

Apr

-04

Aug

-04

Dec-

04

Apr

-05

Aug

-05

Dec-

05

(% a

.a.)

8.45%

For the first time in 25 years, the external debt is not a concern in BrazilFor the first time in 25 years, the external debt is not a concern in Brazil

-

20,0

40,0

60,0

80,0

100,0

120,0

140,0

1985 1988 1993 1997 2001 2005

Exports Foreign Debt (Public Sector)

US$ billion

Total External Debt/Exports

0%

100%

200%

300%

400%

500%

1985 1988 1993 1997 2001 2005

For most of the last 25 years, the government

external debt was a multiple of exports. Now

the ratio is below one (close to 0,8)

Total external debt/export ratio

dropped by two thirds, from an average of 4 to

historical lows of 1,4

Current indicators are the result of a clear strategy

External Adjustment

Cautious Monetary Stance

Prudent Fiscal Policy

Sustainable Economic Growth Helps Improve Social Conditions Sustainable Economic Growth Helps Improve Social Conditions

the main pillar of the economic policy

macro stability at the core of

economic policies

robust export growth and strong external accounts

Lead to...

Stable inflationary expectations

Lower long-term interest rates

Improved debt dynamics

Greater fiscal flexibility

More credit,more jobs

5

Fiscal Commitment: the main pillar of the economic policy

Federal Revenue Service Receipts as % GDPFederal Revenue Service Receipts as % GDP

Public Sector Nominal Deficit % GDP (in 12 months)

Public Sector Nominal Deficit % GDP (in 12 months)Primary Balance by Government LevelPrimary Balance by Government Level

Source: Central BankSource: Central Bank

Source: Central Bank

Public Sector Primary Balance (in 12 months)Public Sector Primary Balance (in 12 months)

Source: Internal Revenue Service – SRF/MoF

6

11,7%

12,3%

13,9%14,2%

14,8%

16,2%

15,4%

16,1%

10%

11%

12%

13%

14%

15%

16%

17%

1997 1998 1999 2000 2001 2002 2003 2004

0.27

-0.09

-0.95

0.01

3.233.46 3.64

3.894.25

4.614.92

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec-

95

Dec-

96

Dec-

97

Dec-

98

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Nov-

05

% G

DP

0.50.4

-0.3

0.6

2.4

1.9 1.8

2.42.5

3.0 3.0

0.1

0.7

1.1

0.6

-0.2

0.6

1.2

0.80.90.7

0.9

-0.4

0.1

-0.1

0.2

0.9 0.8 0.9 1.0

-0.7-0.5

-0.2

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec-

95

Dec-

96

Dec-

97

Dec-

98

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Nov-

05

% G

DP

Central Government State-owned enterprises States and Municipalities

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan-

97

Jun-

97

Nov

-97

Apr

-98

Sep

-98

Feb

-99

Jul-9

9

Dec

-99

May

-00

Oct

-00

Mar

-01

Aug

-01

Jan-

02

Jun-

02

Nov

-02

Apr

-03

Sep

-03

Feb

-04

Jul-0

4

Dec

-04

May

-05

Oct

-05

% G

DP

3.27%

Trade Balance (US$ billion - 12 months accumulated)

Trade Balance (US$ billion - 12 months accumulated)

Source: MDIC - SECEX

Robust export growth and strong external accounts

Net Reserves – Excluding IMFNet Reserves – Excluding IMF

Source: Central Bank

External Accounts in US$ billion –20 year perpective

External Accounts in US$ billion –20 year perpective

7

50.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Nov

-02

Feb

-03

May

-03

Aug

-03

Nov

-03

Feb

-04

May

-04

Aug

-04

Nov

-04

Feb

-05

May

-05

Aug

-05

Nov

-05

US

$ B

illio

n

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Dec-

99

Apr-

00

Aug-0

0

Dec-

00

Apr-

01

Aug-0

1

Dec-

01

Apr-

02

Aug-0

2

Dec-

02

Apr-

03

Aug-0

3

Dec-

03

Apr-

04

Aug-0

4

Dec-

04

Apr-

05

Aug-0

5

Dec-

05

Imp. e E

xp. -

US

$ B

n

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Tra

de B

ala

nce

- U

S$ B

n

Trade Balance Import Export

(40,0)

(20,0)

-

20,0

40,0

60,0

80,0

100,0

120,0

1985 1988 1993 1997 2001 2005

Exports Trade Balance Current Account

Source: Central Bank

Current Account (12 months accumulated)Current Account (12 months accumulated)

14.9

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Jan-0

1

Mar-

01

May-0

1

Jul-01

Sep-0

1

Nov-0

1

Jan-0

2

Mar-

02

May-0

2

Jul-02

Sep-0

2

Nov-0

2

Jan-0

3

Mar-

03

May-0

3

Jul-03

Sep-0

3

Nov-0

3

Jan-0

4

Mar-

04

May-0

4

Jul-04

Sep-0

4

Nov-0

4

Jan-0

5

Mar-

05

May-0

5

Jul-05

Sep-0

5

Nov-0

5

US

$ B

ilhões

Exports Price by Product Class (1996=100)Exports Price by Product Class (1996=100)

External Sector Evolution - limited downside risk

Source: Funcex (Ipeadata)

8

Oil and Other Commodities - Price EvolutionOil and Other Commodities - Price Evolution

Source:Funcex

0,0%

50,0%

100,0%

150,0%

200,0%

250,0%

300,0%

350,0%

400,0%

jan-90 jan-95 jan-00 jan-05

LivestockFatsFoodstuffMetalsPETROLEUM:UK BRENT

Increases in export volume explain a large

part of the trade balance;

The improvement in the external

performance is not just a “commodity prices”

play;

Current commodities prices, especially

agricultural prices, are close to 1990's levels,

rather than in any historical peak;

Also, the volatility of the agricultural prices

is smaller than that of minerals and,

especially, of oil.

0

20

40

60

80

100

120

140

1995 03 1998 12 2002 09

Basic Manufactured Semi-manufactured

2005 12

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Prim. Semi. Manuf. Total Prim. Semi. Manuf. Total

Price Volume

Volume-led growth of exportsVolume-led growth of exports

Sep 02 – Aug 04 Sep 04 – Aug 05

Brazilian exports by destination (as a % of total exports)Brazilian exports by destination (as a % of total exports)

Brazilian exports by type (as a % of total exports)Brazilian exports by type (as a % of total exports)

9

Broad-based exports: balanced growth across markets and products

2000 2001 2002 2003 200412-months percentage

change 1

Contribution (p.p) Growth

Latin America 23.4% 21.0% 16.3% 17.7% 20.4% 31.6% 5.2 of which Mercosul 14.0% 10.9% 5.5% 7.8% 9.2% 32.6% 2.4Asia 11.5% 11.9% 14.6% 16.0% 15.1% 24.7% 3.7 of which China 2.0% 3.3% 4.2% 6.2% 5.6% 21.4% 1.3 of which J apan 4.5% 3.4% 3.5% 3.2% 2.9% 25.3% 0.7Canada 1.0% 1.0% 1.3% 1.3% 1.2% 51.1% 0.4USA 24.3% 24.7% 25.7% 23.1% 21.1% 12.7% 4.7European Union 16.8% 25.5% 25.0% 24.8% 25.0% 14.6% 5.5Others 13.0% 15.9% 17.0% 17.1% 17.1% 39.8% 4.7

Total exports (US$bn) 55.0 58.2 60.4 73.1 96.5 116.6 2 -

% growth 14.7% 5.7% 3.7% 21.1% 32.0% 24,0% 3-

Source: MDIC/ SECEX1This contribution reflect December 04/ November 05 exports in terms of December 03/ November 04 exports2 Total in December 04/ November 053 Total growth in December 04/ November 05

1999 2000 2001 2002 2003 2004 November/041 November/051

Primary products 24.6% 22.8% 26.4% 28.1% 29.0% 29.6% 29.9% 29.0%

Intermediary goods 16.6% 15.4% 14.2% 14.9% 15.0% 13.9% 14.1% 13.5%

Manufactured products 56.9% 59.0% 56.5% 54.7% 54.3% 54.9% 54.4% 55.4%

Special operations 1.8% 2.7% 3.0% 2.4% 1.8% 1.6% 1.6% 2.1%

Total (US$ mn) 48.0 55.1 58.2 60.4 73.1 96.5 94.0 116.6

% growth (6.1)% 14.7% 5.7% 3.7% 21.1% 32.0% 31.4% 24.0%

Source: MDIC/ SECEX1 Total in 12 months

GDP level (seasonally adjusted)GDP level (seasonally adjusted)

Source: IBGE* II Quarter 2005

Savings & Gross Capital Formation (% GDP)

Savings & Gross Capital Formation (% GDP)

10

More production, more savings, more credit, more jobs

Job Creation (Net hiring in the formal sector)

Job Creation (Net hiring in the formal sector)

Source: Ministry of Labor – Caged* 12-months accumulated until Nov/05.

Credit to the private sector (Jan 2004=100)

Credit to the private sector (Jan 2004=100)

100

102

104

106

108

110

112

114

116

2000 I 2000III

2001 I 2001III

2002 I 2002III

2003 I 2003III

2004 I 2004III

2005 I 2005III

Source: IBGE

24.3%

16.8%

20.4%

19.5%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

2000 2001 2002 2003 2004 2005 IQ 2005 IIQ 2005 IIIQ

Savings/GDP

Gross Capital Formation/GDP

Source: Central Bank

175.8

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

Feb

-02

May

-02

Aug

-02

Nov

-02

Feb

-03

May

-03

Aug

-03

Nov

-03

Feb

-04

May

-04

Aug

-04

Nov

-04

Feb

-05

May

-05

Aug

-05

Nov

-05

1,188.6

-700

-180

340

860

1380

1900

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*

Net A

dm

ittance

- T

housa

nd

… leading to a profitable, attractive private sector

Primary and Secondary Issues of StocksPrimary and Secondary Issues of Stocks

Net Foreign Direct Investment (as % of GDP)

Net Foreign Direct Investment (as % of GDP)

Source:CVM

Private Bonds Registers and IssuancesPrivate Bonds Registers and Issuances

2000

2001

2002

2003

2004

2005

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

Primary

Secundary

-1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004

RussiaIndiaMexicoChinaBRASIL

15.2 14.6

41.5

8.7

5.3

9.6

47

97

47

25

5952

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005

0

20

40

60

80

100

120

Volume R$ bn # of Registers

BRAZIL

Profitability of 500 Top Firms (1981-2004)

Profitability of 500 Top Firms (1981-2004)

Source: Conjuntura Econômica - FGV - August 2005

The construction sector grew by 5.7% in 2004 and 2.1% in 2005H1, after years of contraction;

Financing rates dropped from 12 % p.y. to 9 % p.y. on average;

The flow of new loans grew by 60% in 2005, comparing with 2004. A further 50% increase is projected for 2006

Micro reforms to fully reap the benefits of macroeconomic policies

Reform of the housing & construction marketReform of the housing & construction market

Real Interest Rate with room to decline

Business environment (tax system. regulatory framework. judiciary

reform)

New Products: Mortgages. PIPS. securitization.private

equity insurance...

Fiscal Responsibility (macro stability)

Higher GDP growth and more jobs

Higher transparency

Less vulnerability

Real Estate Credit (Jan-04 = 100)* Real Estate Credit (Jan-04 = 100)*

Source: Central Bank*Note: Private sector real state credit reached R$ 28.5 bn in Nov-05

12

104

115

95

100

105

110

115

Feb-0

4

May-

04

Aug-0

4

Nov-

04

Feb-0

5

May-

05

Aug-0

5

Nov-

05

The number of house loans in 2005 was the

largest since 1994

Real estate is the next major market

for the banking sector

… and complement social policies

13

Proportion of the Income for Income Decil (accumulated)

Proportion of the Income for Income Decil (accumulated)

The National Household Survey PNAD 2004 illustrates the progress in social indicators that can be obtained with a 4% annual GDP growth and targeted social policies that preserve fiscal responsibility

Programs such as Bolsa Família, together with more jobs and greater supply of utilities services, have an important impact on social welfare

Only the very top income level saw their income decreasing between 2002 and 2004

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

< 30 < 40 < 50 <60 < 70 < 80

2002

2004

30.0

35.0

40.0

45.0

50.0

55.0

< 70 < 80 <90

2002

2004

3

Decil of population

% of total income

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Up to 10

Up to 20

Up to 30

Up to 40

Up to 50

Up to 60

Up to 70

Up to 80

Up to 90

Up to100

1993 1995 2002 2004

Social indicators on the move

14

Gini index of the labor incomesGini index of the labor incomes

Yearly Average Minimum Wage in US$/month

Yearly Average Minimum Wage in US$/month

A social safety net that avoids extreme poverty

A social safety net that avoids extreme poverty

Aver. of schooling years of 10 y-old (or more) people

Aver. of schooling years of 10 y-old (or more) people

0.600

0.547

0.530

0.540

0.550

0.560

0.570

0.580

0.590

0.600

0.610

1993 1995 1996 1997 1998 1999 2001 2002 2003 2004

5.0

6.6

4.0

4.5

5.0

5.5

6.0

6.5

7.0

1993 1995 1996 1997 1998 1999 2001 2002 2003 2004Source: IBGE

Source: IBGESource: IBGE

Source: IBGE and The World BankSource: IBGE and The World Bank

< US$ 1/day < US$ 2/day Survey dateBRASIL 8,2 22,4 2001CHINA 16,6 46,7 2001ÍNDIA 35,3 80,6 1999-00

RÚSSIA <2 7,5 2002INDONÉSIA 7,5 52,4 2002

MALASIA <2 9,3 1997MÉXICO 9,9 26,3 2000

FILIPINAS 15,5 47,5 2000TAILÂNDIA <2 32,5 2000

% Population living with

Source: IBGE and The World BankSource: IBGE and The World Bank

< US$ 1/day < US$ 2/day Survey dateBRASIL 8,2 22,4 2001CHINA 16,6 46,7 2001ÍNDIA 35,3 80,6 1999-00

RÚSSIA <2 7,5 2002INDONÉSIA 7,5 52,4 2002

MALASIA <2 9,3 1997MÉXICO 9,9 26,3 2000

FILIPINAS 15,5 47,5 2000TAILÂNDIA <2 32,5 2000

% Population living with

0

20

40

60

80

100

120

140

1985 1988 1993 1997 2001 2005

Drop in 1993-1995 reflects the impact of price stabilization in 1994

With Brazil facing presidential elections in October, does the economy face additional risks?

Economic Indicators in the year preceding presidential elections

Economic Indicators in the year preceding presidential elections

INDICATORS 1983 1988 1993 1997 2001 2005

CPI Inflation Rate (% p.y.) 164.01 980.21 2,477.15 5.22 7.67 5.69

SELIC Interest Rate (% p.y.) * na 2,741.20 5,571.91 40.84 19.05 18.05

Net Public Sector Debt/GDP na na 32.56 34.35 52.63 51.01

Exports - US$ bn 21.90 33.79 38.55 52.99 58.22 118.31

Trade Balance - US$ bn 6.47 19.18 13.30 (6.75) 2.65 44.76

Current Account - US$ bn (6.77) 4.18 (0.68) (30.45) (23.21) 15.00

External Debt - Total - US$ bn 93.7 113.5 145.7 200.0 209.9 164.8

External Debt - Public - US$ bn na 91.0 93.2 76.2 92.8 87.6

Total Ext´l Debt / Exports 4.3 3.4 3.6 3.6 3.6 1.4

Minimum Wage (US$) (year average) 62.71 58.20 74.93 108.83 73.82 118.69

Employment - production -FIESP (Jan-2003 = 100). 3 years change (3.70) 11.56 (14.27) (14.81) (15.36) 0.1

Formal Employment - CAGED (3 years cumulated) (Thousand) na na na (436.37) 1,052.67 3.709,41 ***

Real GDP Growth (%) - Brazil -2.93 (0.06) 4.92 3.27 1.31 3.00

GDP Growth - Industrialized Countries 2.80 4.5 1.1 3.2 0.9 4.0

LIBOR (short term interest US$) 9.89 8.13 3.43 5.84 3.73 3.72Sources: Ipeadata, Bacen and SECEX.* year end .** Oct-05. *** Nov-05.

Should an election year always be a year of turbulence?

Net Debt/GDP scenarios based on the FOCUS survey

Net Debt/GDP scenarios based on the FOCUS survey

17

Three years of reduction in the Debt/GDP ratio brighten the fiscal outlook

Net Public Sector Debt / GDPNet Public Sector Debt / GDP

30

37

44

51

58

65

1997 1998 1999 2000 2001 2002 2003 2004

IPCA IGP-DI **

** Data of Central Bank – IGP-DI (wholesale price index)‘modified’

DLSP/PIB

48,00

50,00

52,00

54,00

56,00

58,00

60,00

DLSP/PIB (IGP-DI centrado) DLSP/PIB (Nominal)DLSP/PIB - IPCA

Scenarios are consistent with FOCUS Market

Expectations, which project the primary balance

at 4.25% of GDP and GDP growth at the 3.5% - 4.0%

range

4 - 6 years: deficit zero & overall public sector debt at levels close to those of

Mexico

Source: Central Bank and National Treasury

* According to Market Expectations – Focus

** It’s based on positive supply shock scenery (Reforms and more competition)

*** It´s based on demand shock scenery.

38.5%

36.9%

40.2%

35.0%

37.0%

39.0%

41.0%

43.0%

45.0%

47.0%

49.0%

51.0%

2006 2007 2008 2009 2010 2011

Basic scenario* GDP 4.0% Central Selic

GDP 3.5% Selic Path (-) GDP 4.0% Selic Path (-)**

GDP 3.0% Selic Path (-)*** GDP 4.0% Selic Path (+)***

International Reserves

Market Expectations for 2006-2010Market Expectations for 2006-2010

sample date

2005 2006 2007 2008 2009 2010

31/10/05 5,31 4,60 4,50 4,50 4,50 -

13/01/06 - 4,58 4,50 4,50 4,50 4,50

31/10/05 2,30 2,50 2,65 2,80 2,90 -

13/01/06 - 2,40 2,50 2,65 2,75 2,80

31/10/05 19,15 16,42 14,78 13,50 13,00 -

13/01/06 - 15,91 14,39 13,28 12,40 11,78

31/10/05 3,31 3,50 3,50 3,80 3,50 -

13/01/06 2,40 3,50 3,50 3,90 3,50 -

31/10/05 42,00 35,00 30,90 29,00 28,00 -

13/01/06 - 38,00 33,00 29,90 30,00 35,05

31/10/05 13,00 6,30 3,00 0,40 -0,10 -

13/01/06 15,00 8,00 4,20 1,10 0,00 -

31/10/05 16,00 16,00 17,35 18,00 18,00 -

13/01/06 15,30 15,00 16,10 17,05 18,00 -

Fonte: Pesquisa Focus

Current Account Balance (US$ billion)

Foreign Direct Investment (US$ bilhões)

Trade Balance (US$ billion)

Market Expectations -- Median of the Sample Collected by the Brazilian Central Bank

Exchange Rate Year End (R$/US$)

Central Bank Interest Rate -- % a year

GDP Growth (%)

Inflation (IPCA in %)

20

Federal Public Debt DPF compositionFederal Public Debt DPF composition

Source: MorganMarkets, Broadcast

Floating rate

Fixed rate

Price IndexExchange rate (b)

External Debt (a)

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006*

Floating rate Fixed rate Price Index Others Exchange rate (b) External Debt (a)

For the first time, the selic-linked LFT accounts for less than 50% of the domestic public debt DPMFi

(and just above 40% of DPF)

A steady level of public external debt with improved profile

Source: National Treasury

Average Maturity of Bonds at Issue (includes coupons)

Average Maturity of Bonds at Issue (includes coupons)

The outstanding amount between October and December for 2005 is US$ 15 million for

principal and US$ 353 million for interest.

External Public Debt Profile – New Bonds and Bradies

External Public Debt Profile – New Bonds and Bradies

21

-

2,000

4,000

6,000

8,000

10,000

12,000

20

02

*2

00

3*

20

04

*2

00

5*

20

06

20

07

20

08

20

09

20

10

20

112

01

22

01

32

01

42

01

52

01

62

01

72

01

82

01

92

02

02

02

12

02

22

02

32

02

42

02

52

02

62

02

72

02

82

02

92

03

02

03

12

03

22

03

32

03

42

03

52

03

62

03

72

03

82

03

92

04

0

US

$ M

illio

n

Principal Interest

External Debt – National TreasuryExternal Debt – National Treasury

New

Issuances

Source: National Treasury

Restructured Debt (Bradies)

New Bonds

Contractual Debt

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Nov-

97

Mar-

98

Jul-98

Nov-

98

Mar-

99

Jul-99

Nov-

99

Mar-

00

Jul-00

Nov-

00

Mar-

01

Jul-01

Nov-

01

Mar-

02

Jul-02

Nov-

02

Mar-

03

Jul-03

Nov-

03

Mar-

04

Jul-04

Nov-

04

Mar-

05

Jul-05

Nov-

05

US

$ M

illio

n

“Cleaning Up” of the External Debt

Early payment of IMF and Paris Club

Exchange of C-Bond

Issuance in Reais - BRL 2016

Roll-over of 75% of the maturities in 2006-2007

Lengthening of the Maturity (11 years) and greater access to Asia

-

2,0

4,0

6,0

8,0

10,0

12,0

14,0

2001

2002

2003

2004

2005*

Years

11,9

4,18

Yield of New Bonds – Global and EuroYield of New Bonds – Global and Euro

Lower yields and longer term bonds

Source: National Treasury•* Reopening Issuance •** Real Bond

22

2002

Economic and political outlook for 2006 and 2007

Strong international liquidity and accelerated global growth create an environment which

is still very positive for emerging markets and, in particular, for Brazil. Slowdown in export growth, but trade surplus should remain very high. International

reserves grow significantly, further improving Brazil’s external solvency indicators. The

Real depreciates slightly. Favorable balance of risks and continuity of inflation convergence process. There is a

strong probability of inflation coming in below the annual target for the first time since

the introduction of the inflation-targeting regime. Cycle of monetary easing enables significant decline in nominal interest rates, without

jeopardizing the convergence of inflation to its targets. Real interest rates decline

gradually. Monetary easing, lower inflation and a recovery in the confidence of businessmen and

consumers should provide a fresh impetus to economic growth, making the current cycle

the longest in the past 25 years. Maintenance of primary surplus in line with its target allows for a continued decline in

the net debt/GDP ratio. 2006 presidential election should be a straight race between President Lula and the

PSDB candidate. Opinion polls reveal a preference for low inflation, increasing the

incentive to maintain current economic policy intact.

Pro-growth agenda will be a challenge for the next government

Over the longer term, some measures that could raise Brazil’s potential GDP are:

• Reduction in government spending, to reduce the public sector’s share of the economy and to increase the private sector’s contribution.

• More efficient government spending (e.g. in education).

• Tax reform with a lightening of the tax burden (reducing the advantages of the informal sector), mainly for investment and expanding the tax base.

• Greater trade liberalization in the Brazilian market.

• Expansion of negotiations of bilateral agreements, advances at the WTO, and resumption of negotiations under the FTAA and with the European Union.

• Leverage investments in infrastructure that have major positive externalities (e.g. strengthening of regulatory agencies, advances in the Public-Private Partnerships, resumption of the privatization process, including concessions to operate public services).

• Improving Brazil’s income distribution.

• Continuing the process of improving credit and capital markets.