Ministry of Finance

1
Ministry of Finance
Ministry of Finance Brazil A New Development
Cycle Minister Guido Mantega Belo Horizonte,
April 2006
2
Consolidating Conditions for Growth

• Macroeconomic soundness
• Reduction of external vulnerability
• Inflation under control
• Fiscal adjustment strengthening
• Social improvements
• Institutional reforms
• Increase of potential growth and reduction of
  macroeconomic volatility
• Short term perspectives

3
Reduction of External Vulnerability
4
Trade Balance (US billion, 12-month cumulative
basis)
Source MDIC/SECEX. Prepared by MF/SPE.
5
Exports by Markets
(1)Includes Puerto Rico. Source
MDIC/SECEX. Prepared by MF/SPE.
6
Growth rate of exports on a 12-month cumulative
basis Brazil and World ()
Sources BCB and MDIC/SECEX. Prepared by
MF/SPE.
7
Current Account, Foreign Direct Investment and
External Financing Requirement (US billion,
12-month cum. basis)
Note External Financing Requirement - (Current
Account Foreign Direct Investment) Source
BCB. Prepared by MF/SPE
8
International Reserves (US billion)
() The net adjusted reserves in US consider the
parities of the previous month to calculate
assets in other currencies. This concept has not
been used since the total amortization of the
outstanding debt with the IMF took place in
December, 2005. Source BCB. Prepared by MF/SPE.
9
Net external debt / exports
()December/2005 preliminary data. Source
BCB. Prepared by MF/SPE.
10
Gross External Debt / GDP ()
() December/2005 preliminary data Source
BCB. Prepared by MF/SPE.
11
Reduction of external debt withimprovement in
composition

• Reduction of Contractual Debt
• Prepayment to the IMF and Paris Club
• End of Restructured Debt
• Exchange and repurchase of Bradies
• New Bonds
• Issuances in Reais and entry in Asia
• Extension of the Average Maturity of the Federal
  External Public Debt (FEPD), according to the
  Annual Borrowing Plan
• FEPD repurchase program with maturity as of 2010.

12
Inflation under control
13
Consumer Price Index (IPCA) and Inflation
Targets (12-month cum.)
Sources IBGE and BCB. Prepared by MF/SPE.
14
IPCA Administered Prices and Full Index (yearly)
Sources IBGE and BCB. Prepared by MF/SPE
15
Fiscal Adjustment Strengthening
16
Public Sector Primary Surplus (12-month cum., as
of GDP)
Source BCB. Prepared by MF/SPE.
17
Net Debt of the Public Sector (as of GDP)
GDP measured by IPCA
GDP measured by IGP-DI
Source BCB. Prepared by MF/SPE.
18
Central Government() - Social Security
Expenses() and Other Current Expenses (as of
GDP)
()Includes Central Bank ()General Social
Security Regime (civil workers) Source
MPOG/SOF. Prepared by MF/SPE
19
Measures to Control the Social Security Deficit
The performance of social security revenue has
limited the rate of growth of the social security
deficit
Source MPS/SPS. Prepared by MF/SPE.
20
Measures to Control the Social Security Deficit

• Management measures
• Census / New registry of beneficiaries.
• Receita Federal do Brasil the merging of the
  Federal Revenue Service and the Social Security
  Revenue Service.
• Investment in new technologies and revision of
  procedures.

21
Public Debt Share by Index
2006 forecast based on the Annual Borrowing
Plan. Sources BCB and MF/STN. Prepared by
MF/SPE.
22
EMBI Brazilian and Other Emerging Market Risks
(excl. Brazil and Argentina)
Source JP Morgan. Prepared by MF/SPE.
23
Ratings
24
Social Improvements
25
Income Transfer Programs - Bolsa Família (R
million - current prices)
Source IBGE (PNAD 2004). Prepared by MF/SPE
26
Poverty Rate ()
Source FGV (PNAD 2004). Prepared by MF/SPE
27
Income Distribution ()
Source FGV (PNAD 2004). Prepared by MF/SPE
28
Institutional Reforms
29
Public Pension System Reform

• Ceiling imposed on state and municipal public
  servants salaries.
• Floor established for social security
  contributions (can not be less than 11)
• Inactive servants and pensioners will pay social
  security contributions
• New conditions for retirement
• increase in minimum age and time of contribution
• term of effective public service, in the career,
  and holding a post

30
Social Security Deficit ( of GDP) public
servants
()Federal and State governments Source
MPS/SPS. Prepared by MF/SPE.
31
Tax Reform

• Aims to promote productive investment and
  long-term savings, and to eliminate tax
  distortions, building a more efficient,
  transparent and less costly tax system.
• Measures focus on
• Enhancement of economic efficiency through the
  elimination of cumulative taxation.
• Promotion of investment through the reduction of
  the tax burden on capital goods.
• Incentives to long-term savings, through tax
  rates that decrease over time.
• Elimination of tax distortions in the financial
  market and in foreign trade.

32

• Judiciary Reform
• Improving the structure of the Judiciary branch,
  and reinforcing Supreme Court jurisprudence in
  the appeals system
• Constitutional Amendment 45
• The National Council of Justice (CNJ), branch of
  the Brazilian Judicial System with competence
  over the whole national territory has one of the
  main competences to look after the autonomy of
  the Judiciary and the observance of the
  Magistracy Statute, and to issue rules and
  recommendations towards that objective.
• Súmula vinculante legal instrument that
  impose lower courts to follow the Supreme Court
  decisions (staris decisie).
•  
• Infra Constitutional Reforms
• A huge infra constitutional reform is under way.
  An example is the Reform of the Civil Process
  Code which rationalizes the execution procedures
  and the system of appeals, and reinforces
  alternative mechanisms of conflict resolution
  such as mediation.

33
Other Microeconomic Reforms

• Bankruptcy Law
• Payroll Deductible Loans
• Computers, Research Development, and Innovation
  
• National Civil Aviation Agency
• Real Estate Legal Framework Enhancement
• New Small Business Law (bill in Congress)
• New Unified Tax Regime (federal, state and
  municipal)
• Simplification of other business (red tape)
  obligations
• Public Debt Bonds tax exemption for foreign
  investors
• Public Debt profile quality improvement
• Financial cost reduction of Public Debt

34
Measures under consideration by the National
Congress

• Opening of the Reinsurance market
• Brazilian Antitrust System (Market Competition
  Policy)
• Credit Protection Database (Positive Credit
  Registry)
• International Standardizing of Brazilian
  Accounting Rules
• Judiciary Reform (second step) Civil and Labor
  Proceedings Improvement Projects (including
  Appeals System)

35
Increase of Potential Growth and Reduction of
Macroeconomic Volatility
36
Unique Economic Environment
The 2003-2005 period has been the longest period
of economic growth since 1981. During this
period, we have obtained a current account
surplus, GDP growth and declining inflation.
Sources BCB and IBGE Prepared
by MF/SPE
37
Labor Market

• The accelerated economic growth in 2004 brought
  about important recovery in the labor market,
  which was maintained in 2005.
• Most new jobs were formal (signed employment
  document).
• Steady decrease in the rate of unemployment.

38
Unemployment Rate6 biggest metropolitan areas
() (seasonally adjusted)
Source PME/ IBGE. Elaboração MF/SPE.
39
Formal Employement Admissions minus Layoffs
accumulated over 12 months (1.000)
Source CAGED/MTE. Prepared by MF/SPE 12
months accumulated until february.
40
Employment 6 largest metropolitan areas
Source IBGE. Prepared by MF/SPE.
41
Average Wage and Total Payroll
Fonte PME/ IBGE. Elaboração MF/SPE.
42
Short Term Perspectives
43
Monetary Policy
Sources BMF and BCB. Prepared
by MF/SPE.
44
Change in Inventories()
Source IBGE. Prepared by MF/SPE
45
Business Confidence Index and Consumer Confidence
Index

• The political crisis worsened the drop in
  consumer and business confidence during 2005.

Source CNI. Prepared by MF/SPE
46
Level of Activity
Expansion of the Product Gap
Industrial Production and Use of Installed
Capacity
 
Sources IBGE and CNI. Prepared by MF/SPE.
47
GDP Growth (4 quarter moving average)
 
Source IBGE
48
Investment Rate (12 months average)
Source IBGE. Prepared by MF/SPE.
49
Credit operations to individuals (R million,
deflated and seasonally adjusted)
Source BCB. Prepared by MF/SPE
50
DEFAULT RATE Credit operations with
non-earmarked resources
Source BCB. Prepared by MF/SPE.
51
Capital Markets Primary Issue (R million
current values)
()Includes promissory notes, CRIs (real estate
receivables certificates), and quotas of credit
rights investment funds, among others. Source
CVM. Prepared by MF/SPE.
52
Why will there be stronger growth in 2006?

• Adjusted inventories rapid reaction of
  production.
• Higher Product Gap short term recovery
  without inflationary pressure.
• Increase in agricultural production
• Declining inflation maintaining the
  purchasing power of salaries, less restrictive
  monetary policy, and thus expansion of credit.
• Increase in real labor income and labor
  productivity higher domestic demand.
• Firms profitability and reduction in the relative
  cost of investment expansion and
  modernizing of productive capacity.
• Sustaining of external demand

53
(No Transcript)