Brazilian development prospects and challenges

The Danish-Brazilian and the Norwegian-Brazilian Chambers of Commerce

So Paulo, March 19, 2012

Joo Carlos Ferraz

Vice President

Guide

- Development prospects - The social dimension - The economic and investment dimensions

- Development policies and BNDES

- Relations with Denmark and Norway - The way ahead
2

Development prospects

Lights and shadows in the world economy

Increasing diversity, amidst a crisis of long duration

New poles of dynamism but advanced economies will remain in the central stage
Fierce competition in all markets Extremely rapid rhythm of technical change and increasing investments in innovation by countries and corporations Climate change as a source of concern and opportunities. State activism but a role model does not exist.
4

Brazil in a nutshell
Recent development trajectory
Economic & social inclusion Macroeconomic stability Investment ahead of GDP

Current and upcoming challenges

Competences and capabilities Unbalanced growth Permanence of development policies
5

The social dimension

The social dimension

Improvements in income distribution Strong formal job creation Lower income families experiencing Chinese growth Social and economic inclusion

Income inequality is being reduced Gini Index

0.650

0.63

0.630
0.610 0.590

0.60 0.57 0.56 0.52

GINI Index

0.570
0.550 0.530

0.510
0.490 0.470

0.450

High Inflation Hihg Inflation

1981 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: IBGE

Quality change in the labor market

Unemployment Rate (%)
12

11
10 9

2006 2007
8.4 2008 2009 2010 2011

8
7 6 5

7.5
6.8 5.3 4.7

jan feb mar apr may jun jul aug sep oct nov dec
Source: IBGE.

Lower income families experiencing Chinese growth rates

Per capita income growth (per percentile) % (annual average 2001-2009)
Higher Income
100 90

1.5
2.4 3.2

80
70 60 50

3.9 4.5
4.8 5.3

40
30 20

5.8
6.1 6.8
0 1 2 3 4 5 6 7 8
10

10

Lower Income
Source: IBGE and FGV

Emerging consumers and citizens are becoming very relevant

Share of social groups in total national income %
55

56 50

37

39 28 16

11

2003

2009

2014*

Class A/B
Source: IBGE

Class C

Class D/E
11

The economic and investment dimensions

12

Growth trajectory is on
Growth perspectives ahead of world average Domestic market has led the growth Investment growing ahead of GDP Investment frontier is vast

Steadiness of macroeconomic policies

Inflation targeting Stable Fiscal policies: declining public debt Flexible exchange rate and accumulation of reserves
13

Growth ahead of world average

Brazil and the World: GDP Growth Rates ( % )

7,4

7,7 7,5

Brazil

World
3,9 3,7 4,5

4,5 3,1
2,0

3,4

3,5

1966-80

1981-2003

2004-2009

2010

2010-2015

Source: Ipeadata and IBGE. Elaborated by APE/BNDES (*) Forecasts based on IIF /IMF (World) , BACEN FOCUS /BNDES (Brazil)

14

Domestic market is leading economic growth, especially household consumption

Breakdown of GDP Growth (% p.y.)

3,2
12 10 8 6 4 2 0 -2 -4 -6 2005
GFCF

4,0

6,1
0,2 1,1

5,2

-0,3

7,5
1,3 0,9

3,7

0,3 0,7 3,2 2,5 -1,5 0,7 2,7 -1,1 -0,3 -2,2

4,1 0,5 4,1 -2,9 3,3 1,4 -1,1 -0,3

0,5 0,5 2,5 0,5 -0,9

0,6 3,0 1,5 -0,9 -0,2

3,5 2,3 -1,0

2006

2007

2008

2009

2010
Net Exports

3T 2011
GDP
15

HH Consumption

Government Consumption

Source: IBGE

Investment is growing ahead of GDP

Gross Formation of Fixed Capital Annual Variation Rate (%)

21.3

13.9 9.8 6.1 3.2 3.6 1.1 4.0

13.6

9.1 5.7 1.3 2.7 0.4

7.5 5.2 2.7 4.7

-0.3 -5.2 -4.6 -6.7

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*Accumulated reult over the last 4 quarters

GDP
Source: IBGE

GFFC

Corporate plans: wide investment frontier

Sectors US$ billion 2007-2010 2012-2015
257 136 39 18 14 18 13 11 6 2 184 81 41 18 14 23 5 1 341 782
US$/R$ = 1.75

Growth %
32.5 48.5 (25.2) 0.6 19.5 74.0 37.1 8.3 33.3 198.6 23.3 10.6 4.6 33.5 76.8 32.9 61.9 333.9 44.2 35.4

Industry
Oil & Gas Mining Steel Petrochemical Vehicles Electronics Pulp & Paper Textile and Apparel Aviation

341 202 29 18 17 31 18 12 8 5 227 90 42 25 26 30 9 6 491 1058

Infrastructure
Electric Power Telecoms Sanitation Railroads Roads Ports Airports

Housing TOTAL
Source: BNDES

Real interest rates: new equilibrium

Real Interest rate (PreXDI360 Expected Inflation)

25 20 15 10 5 0 jan-02 ago-02 mar-03 out-03 mai-04 dez-04 jul-05 fev-06 set-06 abr-07 nov-07 jun-08 jan-09 ago-09 mar-10 out-10 mai-11 dez-11
Source: Brazilian Central Bank and IBGE

14,7

14,0

12,1 12,9

10,8

9,5

5,1

6,5 4,5

18

Solid fiscal indicators

Consolidated Nominal Deficit and Primary Surplus in Public Sector (% of GDP)
5,2 4,5 3,7 3,5 3,2 3,2 3,3 2,9 3,8
Source: BACEN

* Market expectations at 09/03

3,6

3,6 3,2 2,8 3,3

3,4

3,3 2,7 2,5 2,6

3,1

2,9

2,9

2,0

2,0

2,1 1,8

Consolidated Net Debt in the Public Sector (% GDP) End of Period

60,4
Source: Bacen

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012*

2013*

Nominal Deficit

Primary Surplus

* Market expectations at 09/03

54,8 52,0 50,6 48,4 47,3 45,5 42,1 38,5 39,2 36,5 36,5 35,0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012*

2013*

High external solvency

External Debt and International Reserves
60 50 40 30 20 10 0

53.8

Total external debt/GDP (LHS) International Reserves/debt service (RHS)

6.8 5.5

8 7 6 5

38.4 25.9 26.3

38.8 24.8

1.4 0.4
4 Trim.1970 4 Trim.1974 4 Trim.1978 4 Trim.1982 4 Trim.1986 4 Trim.1990 4 Trim.1994 4 Trim.1998 2 Trim.2001

13.2

12.5

3 2 1

0.8
2 Trim.2002 2 Trim.2003 2 Trim.2004 2 Trim.2005

0.8
2 Trim.2006 2 Trim.2007 2 Trim.2008 2 Trim.2009 2 Trim.2010 2 Trim.2011

Source: Brazilian Central Bank

Development policies and BNDES

21

Development policies in place and becoming permanent policies

Development policies
S&T & Innovation Education- PDE

Infrastructure PAC

Industrial Policy PDP

Health

Housing

22

2004-2011 Industrial Policies

PITCE (2004-2007): Industrial, Technology and Trade Policy Foster technology based sectors The return of Phoenix PDP (2008-2010): Productive Development Policy Innovate and invest to sustain growth Riding favourable winds and the storm PBM (2011-2014): Plano Brasil Maior Innovate to compete; compete to grow Against a hostile environment, aggregate value through innovation
Long term policy but adaptable to face changing challenges Industrial policy: a team player of development policies
23

The strategic role of development financing

Long term financing serves purposes
More and better work opportunities. More and better infrastructure More and better competitive capabilities

As markets are pro-cycle

A development bank is an instrument of systemic stability But Attention!! Scale and scope matters Banks must have adequate resources and instruments
24

Recent high growth rates will tend to recede in the years to come
BNDES: Approvals and Disbursements
180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 35,1 11,7 40 13,8 47,1 19,8 52,3 34 24,1 64,9 49,8 92,2 71,6 96,3 82,3 137,4 168,4 139,7

R$ Billion
Source: BNDES

US$ Billion
Converted to US dollar on disbursement dates

Scale and scope matters

Main provider of long-term financing in Brazil 100% state-owned company under private law Institutional funding 2,500 employees Instruments
Gross Fixed Capital Formation (GFCF) & BNDES disbursements (US$ Billion)
500 450 400 350 300 40 250 200 150 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 30 20 10 0 90 80

GFCF

70 60 50

BNDES disbursement for GFCF (*)

Direct operations
Indirect operations MSME (financing & guarantee)

(*) exc. BNDES Exim; working capital, M&A and Equity Financing.

BNDES contribution to investment & employment

30% 17% 25%

Investments supported by BNDES/ GFCF

24,5% 21,4%

15% 13% 11% 9% 7% 5%

20%

10,8% 9,9%

Exim
15%

Project finance Equity investments Grants

10,1%
10%

10,9%

12,1%

11,4% 4,4%

12,5% 5,3%

13,0% 7,2%

3,5%
5%

3,9%

4,1%

Jobs created or maintained due to BNDES / Total Employment

3% 1%

0%

2003

2004

2005

2006

2007

2008

2009

2010

26

Source: BNDES

Disbursements by business sector (%)

7% 12%

8% 14%

5% 17%

5% 9%

7% 7%

12% 8%

12% 6%

14% 5%

16% 6%

21%

7% 35% 36% 30% 38% 33% 40% 39% 35% 31% 40%

46%

48%

50% 40%

53% 40% 43%

46%

47% 32%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Industry
Source: BNDES

Infrastructure

Farming

Trade and Services

BNDES financing through the banking industry

Disbursements by type of operation (%)

54

54

42

54

55 53

57

59

53

43

56 66

58 46 46 46 45

57 47 43 41 47 44 34

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sep-11

Direct Operation
Source: BNDES

Indirect Operation

BNDES and MSMEs

Share of MSMEs in total disbursement
35,9% 31,8% 30%

40%

35%

Carto BNDES: 95% of townships with active operations

25% 24,8%

24,0% 21,5%

20%

15% 2007 2008 2009 * 2010 * 2011

250.000

N of MSMEs supported in 2011

176.678

235.984

200.000

150.000 109.121 100.000 45.835 57.480

50.000

- 470,000 active cards - 2011: R$ 7.6 bi - 2012: R$ 11. bi (expected)

2010 2011

0 2007 2008 2009

Source: BNDES

29

Disbursements to Finance Exports

US$ billion
Converted to US dollar on the disbursement dates

12,0 10,0 8,3 8,0 6,0 3,9 4,0 2,6 2,0 0,0 2001 2002 2003 2004 2005 2006 2007 2008 2009 4,0 3,9 5,9 6,4 4,2 6,6

11,3

6,7

2010

2011

Apoio Exportao
Source: BNDES

BNDES equity portfolio

US$ Million

Source: BNDES.

31

Relations with Denmark and Norway

32

Denmark + Norway and Brazil: stable trade waiting for opportunities

Brazil-Denmark Trade, in millions of dollars F.O.B.
600 400 200 0 -200 -400 -600 -800 -1,000 2000 -182 -189 -157 -185 121 122 76 107 128 152 220 279 320 258 368 408 413

Brazil is a net importer of Danish products...

-188

-237

-268

-357 -457

-351 -544 -733 -746

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012*
1,200

Brazil-Norway Trade, in millions of dollars F.O.B.

865 944 612 722 970

* Accumulated result over 12 months up to Jan. Source: Ministry of Development, Industry and Foreign Trade

Exports

Imports

Balance

1,000 800 600 444 400 244 200 213 171 281 321 584 651

... and a net exporter to Norwegian markets

0 -200 -206 -400 -600 -800 -1,000 2000 -222 -215 -266 -341 -295 -349 -528 -632 -496 -701 -800 2011 Balance -846 2012*

2001

2002

2003

2004

2005

2006

2007

2008 Exports

2009 Imports

2010

* Accumulated result over 12 months up to Jan. Source: Ministry of Development, Industry and Foreign Trade

Source: BNDES

An avenue to be widened and extended

Based on mutual economic and political interests:

Oil & gas, mining and shipping industries Engineering industries Social economic sustainability Science, Technology and Innovation Foreign and Development Policies

The way ahead

35

Brazilian prospects: we must

Consolidate
Demand driven, policy induced development:
Foreign markets: through trade and investment, provide food, energy and resource security to partner nations Domestic markets: emerging middles classes and infrastructure

Foster
A long-term development strategy based on:
Investments in capacity expansion and innovation

Domestic savings and a strong financing industry

36

Ingredients to ensure sustained development

Macroeconomic policies: Maintain strong fundamentals
Development policies: Permanent and effective policies Savings & financing: efficiency in public expenditures + incentives for domestic savings and for a long-term financing industry Competences: more and better jobs; high-quality education Infrastructure: more and better projects; more complex financing/guarantee/insurance solutions Industry: innovation and competitiveness capabilities

37

Brazilian development prospects and challenges

The Danish-Brazilian and the Norwegian-Brazilian Chambers of Commerce

So Paulo, March 19, 2012

Joo Carlos Ferraz

Vice President