Brazil: looking beyond the crisisGesner Oliveira

Luiz CasteliRafael Oliveira

April 11, 2016

Three points...

1• Policy mistakes explain a good part, but not all

Brazilian economic difficulties

2• Investment in infrastructure is a key variable to

resume growth

3• Crisis and opportunity: a silent revolution is

happening in Brazilian infrastructure

2

1. The crisis is not only Dilma´s fault...

Why is Brazil in a recession?...

Macro & international factors• End of the commodity boom and international liquidity• End of the domestic consumption boom• End of ilimited expansion of government expenditures• Macro policy mistakes

Political & institutional crises• Disfunctional political system• Decline of the presidente´s popularity index and government support• Lava Jato operation and its impact upon oil & gas and construction

Specific factors• Argentine crisis and its impact upon the auto industry• Uncertainty caused by intervention in contracts (e.g.electricity)• Other micro policy mistakes

Growth resumption requires a new political and business environment...

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

F

20

17

F

20

18

F

3.39

0.35 0.49

4.38

1.28

3.07

1.22

5.66

3.154.00

6.015.02

-0.24

7.57

3.92

1.76

2.74

0.14

-3.80 -3.50

-0.30

0.60

Dilma

0.20%

Lula

4.0%

FHC

2.2%

Period´s Average

GDP Growth (%)

Source: IBGE; GO Associados forecast

6

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0.3%

8.3%

2.8% 2.7%

5.9%3.1%

-7.1%

10.2%

0.4%

-2.3%

2.1%

-3.0%

-8.3% -8.1%

0.1%

Forecast (F)

Consumption’s weakness and rising unemployment shall bring a 8.1% fall of the industrial product in 2016...

Source: IBGE; (F) GO Associados forecast

Industrial Production (YoY, %)

7

Retail also slowed down and a 3.8% fall is expected in 2016...

Source: IBGE; (F) GO Associados forecast

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

9.2

4.86.2

9.7 9.1

5.9

10.9

6.78.4

4.3

2.2

-4.1 -3.8

Retail Sales(YoY, %)

Forecast

8

In the last 12 months, 1.7 million formal jobs were lost...

Source: Ministry of Labour (MTE)

Jan-00

Jul-00Jan

-01Jul-0

1Jan

-02Jul-0

2Jan

-03Jul-0

3Jan

-04Jul-0

4Jan

-05Jul-0

5Jan

-06Jul-0

6Jan

-07Jul-0

7Jan

-08Jul-0

8Jan

-09Jul-0

9Jan

-10Jul-1

0Jan

-11Jul-1

1Jan

-12Jul-1

2Jan

-13Jul-1

3Jan

-14Jul-1

4Jan

-15Jul-1

5Jan

-16-300

-200

-100

0

100

200

300 Balance of formal jobs in feb/16:Last 12 months: -1.7 million

In the month: -104.6 thousands

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0% 9.50

Unemployment rate (%) - PNAD

Unemployment is growing fast, reaching 9.5% in january...

Source: National Survey by Household Sampling (PNAD)/IBGE

Forecast(Average year )

2016: 11.6%

Job quality is getting worse...

mar/13

may/1

3jul/1

3

sep/13

nov/13

jan/1

4

mar/14

may/1

4jul/1

4

sep/14

nov/14

jan/1

5

mar/15

may/1

5jul/1

5

sep/15

nov/15

jan/1

6-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

-1,319

-615

1,328

Formal Jobs (YoY, in millions) Informal Jobs (YoY, in millions) Self-Employed (YoY, in millions)

Source: National Survey by Household Sampling (PNAD)/IBGE

Thousands of jobs

Deterioration of the fiscal situation is at the heart of the crisis...

Feb-03

Jul-03

Dec-03

May-04Oct-

04

Mar-05

Aug-05Jan

-06Jun-06

Nov-06Apr-0

7

Sep-07

Feb-08

Jul-08

Dec-08

May-09Oct-

09

Mar-10

Aug-10Jan

-11Jun-11

Nov-11Apr-1

2

Sep-12

Feb-13

Jul-13

Dec-13

May-14Oct-

14

Mar-15

Aug-15Jan

-16-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-2.11

Primary Balance (% GDP)

Source: Brazil Central Bank

Forecast2016: -1.7%2017: -1.3%

Government debt is growing fast...

Source: Brazil Central Bank

Dec-06

May-07

Oct-07

Mar-08

Aug-08Jan

-09Jun-09

Nov-09Apr-1

0

Sep-10

Feb-11

Jul-11

Dec-11

May-12

Oct-12

Mar-13

Aug-13Jan

-14Jun-14

Nov-14Apr-1

5

Sep-15

Feb-16

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

36.80

67.60

Net Debt (% GDP) Gross Debt (% GDP)

Forecast:Net Debt

2015: 35.0% of GDP

2016: 42.7% of GDP

2017: 46.6% of GDP

Gross Debt

2015: 66.2% of GDP

2016: 73.8% of GDP

2017: 77.2% of GDP

Inflation decelarated, but shall remain above the upper band in 2016...

Jan-05

Jul-05Jan

-06Jul-0

6Jan

-07Jul-0

7Jan

-08Jul-0

8Jan

-09Jul-0

9Jan

-10Jul-1

0Jan

-11Jul-1

1Jan

-12Jul-1

2Jan

-13Jul-1

3Jan

-14Jul-1

4Jan

-15Jul-1

5Jan

-16Jul-1

60

2

4

6

8

10

12

Ytd Inflation Target Upper Band Lower Band

CPI – (YoY, %)

Upper Band(6.5)

Lower Band (2.5)

Target(4.5)

Forecast (F) CPI2016: 7.32017: 5.5

Source: IBGE / GO Associados forecast (F)

14

Interest rate will remain high, with a downward bias...

Source: Brazil Central Bank / (F) GO Associados forecast

2009 2010 2011 2012 2013 2014 2015 2016F

8.80%

10.80% 11.00%

7.30%

10.00%

11.75%

14.25%13.25%

Selic interest rate (%) – end of period

15

jan/05 dec/05 nov/06 oct/07 sep/08 aug/09 jul/10 jun/11 may/12 apr/13 mar/14 feb/15 jan/16 dez/16 nov/171.50

2.00

2.50

3.00

3.50

4.00

4.50

A new threshold for the exchange rate and its volatility...

Source: Brazil Central Bank / GO Associados forecast

Dec/2016: R$ 4.00/US$Dec/2017: R$ 4.20/US$

Exchange rate R$/US$

Forecast (F)

The external sector has responded fast to the exchange rate change...

2011 2012 2013 2014 2015 2016F-10

0

10

20

30

40

50

0

50

100

150

200

250

300

29.8

19.4

2.3

-4.1

19.7

45.5

Trade Balance(US$ Billlions)

Balance Exports (right axis) Imports (right axis)

Source: Ministry of Development, Industry and Trade. (F) GO Associados forecast16

The good and the bad news...

The bad news...

• A solution to the political crisis is a necessary but not suficient

condition for growth resumption

• Likely tension between popular expectations and fiscal and

monetary discipline

The transition period will be harder than after Collor´s impeachment...

Source: DataFolha poll with 2.779 interviewed in 170 municipalities between April 7th and 8th

16-17 dec 15 24-25 feb 16 17-18 mar16 7-8 april 160

5

10

15

20

25

30

20 20

17

21

19 19

21

19

2724

19

17

4

6 68

6

5

6

7

1st Scenario - with Aécio Neves

Lula (PT) Marina (Rede) Aécio (PSDB)Bolsonaro (PSC) Ciro Gomes (PDT)

16-17 dec 15 24-25 feb 16 17-18 mar16 7-8 april 160

5

10

15

20

25

30

22 2017 22

24 23 23 23

1412 11

9

5

7

6

87

6

7

8

2th Scenario - with Geraldo Alckmin

Lula (PT) Marina (Rede) Alckmin (PSDB)Bolsonaro (PSC) Ciro Gomes (PDT)

24-25 feb 16 17-18 mar16 7-8 april 160

5

10

15

20

25

30

21 17

2223 2422

15 1311

6 7 7

5

7 7

3rd Scenario - with José Serra

Lula (PT) Marina (Rede) Serra (PSDB)Bolsonaro (PSC) Ciro Gomes (PDT)

24-25 feb 16 17-18 mar16 7-8 april 160

5

10

15

20

25

19 17

21

17

17 16

20

1412

8 87

65

4th Scenario - with Sérgio Moro and more than one PSDB´s candidate

Lula (PT) Marina (Rede) Aécio (PSDB)Sérgio Moro (no party) Serra (PSDB)

The good news...

• Political change will generate a positive shock on expectations

• There is less resistance to private participation in investment

• Lava jato operation has accelerated change in business culture

and governance

2. Investment is a key variable to resume growth...

Investment rate in Brazil is low compared to other emerging countries...

ChinaQatar

IndonesiaIndia

Iran

Saudi A

rabia

South Korea

Malasya

Thailan

d

Ecuador

Peru

Average (2

6 countri

es)

United Arab Em

irates

Colombia

Bulgary

Mexico

Uruguay

Chile

South Afri

caBoliv

iaBrazil

Russia

Argentine

Turke

y

Venezuela

Paraguay

Nigeria

05

101520253035404550

24.7

19.0

Source: IMF projections

Investment rate (% GDP) – 2015

Infrastructure investment (% GDP) in Brazil in last two decades has been lower than in other emerging countries...

Brazil India China World

2.20

4.70

8.50

3.80

Source: McKinsey (study for the EXAME anual report of Infrastrcuture 2013-2014)

Brazilian infrastructure lacks quality...

Switz

erland

Hong Kong SA

R

United Arab Em

irates

Finland

Singap

ore

Netherlands

Austria

Icelan

dJapan

France

Panama

Puerto Rico Chile

Mexico

Uruguay

Bolivia

ColombiaBrazil

Libya

0

1

2

3

4

5

6

7 #1 #2 #3 #4 #5 #6 #7 #8 #9 #10

#39 #45 #50#69 #80

#99 #108#120

#144

Source: World Economic Forum (2014)

Infrastructure Ranking (0 to 7)

Brazilian W&S situation does not correspond to the country’s economic development…

$0.00 $10,000.00 $20,000.00 $30,000.00 $40,000.00 $50,000.00 $60,000.0020

40

60

80

100

GDP per capita (US$)

Sew

age

treat

men

t (%

)

BRAIND

RUS

ARG

URU

CHL

CHN

SVN USA

Source: World Bank

Only half of the country has sewage services coverage...

Total water coverage Total sewage coverage Treatment of sewage generated

Water Lost in Distribution0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

83%

50%

41%37%

99%92%

86%

31%

Current Situation PLANSAB (2033)

Source: PLANSAB e SNIS 2014

103 MILLIONS WITHOUT SEWAGE

COLLECTION

121 MILLIONS WITHOUT SEWAGE

TREATMENT

With the current pace of sanitation investments, Brazil would only achieve universalization in 2052...

20142015

20162017

20182019

20202021

20222023

20242025

20262027

20282029

20302031

20322033

20342035

20362037

20382039

20402041

20422043

20442045

20462047

20482049

20502051

20520

50

100

150

200

250

300

350

400

450

PLANSAB Current Investment

Billi

ons (

R$)

Current investment level

More than 80% of Brazil´s roads are unpaved...To

tal R

oad

1,69

1,52

2 km

Paved Roads203,599 km

12.0%

Federal Highways65,930 km

32.4%

State Highways110,842 km

54.4%

Municipal Highways26,827 km

13.2%

Unpaved Roads1.358.829 km

80.4%

Planned highways (physically non-existent)

129,094 km7.6%

Source: (CNT, 2014)

Density of Brazil’s paved road network is very low...

EUA China Argentina Rússia Austrália Canadá Brasil0

50

100

150

200

250

300

350

400

450

500

438.1

359.9

83.254.3 46 41.6

23.9

Source: (CNT, 2014)

Road network density paved – km (highway) / 1,000 km² (territorial area)

62% of Brazilian highways are in fair, poor or very poor conditions...

Great10%

Good28%

Regular38%

Bad17%

Terrible7%

Source: (CNT, 2014)

Brazilian air network lacks density...

Source: SAC

Brazil USA

Population 200 millions 315 millions

Area 8.5 mi km² 9.6 mi km²

Aircraft in service 460 5,190

Cities covered 105 390

Markets covered 450 3,000

32

GDP identity illustrates the importance of investment for the country return to growth in the short term...

)

Positive balance, but not enough to resume

the growth

Falling household purchasing power

Fiscal consolidation

Main source of growth

Program of Investment in Logistics (PIL) is essential for economic recovery...

R$ 69.4 billions

R$ 198.4 bi

Investments announced by the government (PIL 2015-18)

Estimated investments by the government/planned auctions for

2016

• 8 highways (R$ 30.6 bi)• 4 railroads (R$ 30.4 bi)• 4 airports (R$ 6.92 bi)• 5 port areas (R$ 1.5 bi)

Input-output methodology

R$ 212.7 biGDP

R$ 4.1 miJobs

R$ 13.9 biTax revenues

R$ 36 biWages

Crisis and opportunity...

• The tragic situation of the Brazilian infrastructure can also be seen

as a major business opportunity...

• Repressed demand for infrastructure

• Lower barriers for entrants

• Window of opportunity to acquire strategic assets

3. A silent revolution in infrastructure...

Despite the crisis, PPPs have flourished in several states...

Source: Diário Oficial da União – GO Associados elaboration

SP MG SC RJ PR MA ES PA AL MT PE RS MS DF RO Federal AM GO TO PI BA CE RN0

10

20

30

40

50

60

147

2 2 3 1 1 1 1 1 1 3 1

27

23

14

3 7 3 4 2 1 3 2 3 21

12

3 11

10

12

5

7 3 2 33

42 3

1 1 3 2 2 1 2 2

Public Private Partnerships and concessions by federal unit (FU) - 12/06/2014 – 07/04/2016

Contracted partnership Partnership being structured Partnership intention

PPPs have ocurred in diverse sectors...

Source: Diário Oficial da União – GO Associados elaboration

Sanitation

Public Li

ghting

Solid w

aste

Urban transp

ortation

Vehicle st

orage

Parking

Public build

ings

Urbanization

Health

Funeral

Housing

Airports

Environmental

Education

Citizen se

rvice

s

Telecommunica

tion

Highways

Transporte

Hidroviário

Culture

Prisons

Drainage

Customs

Information te

chnology

Logistics

0

10

20

30

40

50

60

70

18

3 4 2 2 1 1 1 1 1 1 2 1 1

22

20 11 7 7 52

4 3 5 23

1 12

1 21

2 1

22

11

56

12

62 1 1 3 2 1 1 1 2 1

Contracted partnership Partnership being structured Partnership intention

Three key ingredients to develop infrastructure...

2. Planning

3. Management1. Regulation

Five ways to cope with the crisis...

Short run plan to cope with the rising deficit and debt

Long run plan to assure fiscal equilibrium through reforms

Change expectations creating a new climate for business (a “Macri effect”)

New political and institutional pact, including measures against corruption and compliance programs and to reduce the regulatory risk

Incentives to increase investment and international trade agreements

Reminding the three points...

1• Policy mistakes explain a good part, but not all

Brazilian economic difficulties

2• Investment in infrastructure is a key variable to

resume growth

3• Crisis and opportunity: a silent revolution is

happening in Brazilian infrastructure projects

40

Thank you!