Brazil

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S September 20, 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 8392. E-mail : rolf.danielsen@seb.se

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ccn|. cu ccntrcst. |ccrs t|is ccu|! c|sc rcprcscnt ctcr|cctinv in t|c s|icrt tcrm.

Country Risk Analysis
_É~íáåÖ=~å~äóëíëÛ=éêÉÇáÅíáçåë=ÖêçïíÜ=éáÅâë=ìé=íç=ãçêÉ=íÜ~å=SBK=In lle firsl laIf of
2008 grovll appears lo lave exceeded 6° year on year (yoy) acceIeraling from 5,9 lo
6,2& pa. from lle firsl lo lle second quarler. Tlal refIecled nol onIy conlinued ligl
privale consumplion on lle
bacI of slrong grovll of credil
card credils and aulo
financing combined vill
rising reaI disposabIe incomes
for many louseloIds nol Ieasl
lle poor, bul aIso a leaIlly
boosl lo privale inveslmenls.
Tle Ialler las laIen advanlage
of lle slrong reaI (IocaI
currency) exclange rale vis-à-
vis lle doIIar lo imporl capilaI
goods increasingIy financed
by banIs vlicl are nov
lurning lo nev banIabIe
segmenls of lle privale seclor,
in parlicuIar smaII and
medium sized enlerprises. Tlese are venlures llal previousIy oflen preferred lo
remain in lle Iarge informaI seclor bul nov see benefils in “lurning llemseIves in¨
lo a more prediclabIe reguIalory and economic environmenl.
0%
1%
2%
3%
4%
5%
6%
2003 2005 2007 2009
Growth (% change)
GDP Projection

_ìí=áåÑä~íáçå=~äï~óë=äìêâë=Ä~Åâëí~ÖÉ. Tle fIy in lle oinlmenl las been a rise nol
onIy of lead-Iine infIalion bul of lle core infIalion and expecled infIalion as veII, lle
Ialler as measured by lle cenlraI banI's reguIar survey among main marIel
parlicipanls. Reacling a Iov in lle earIy 2007, lle subsequenl picI up vas firsl
perceived as a response lo rising energy and commodily prices abroad, aIllougl lle
paraIIeI apprecialion of lle exclange rale diminisled lle brunl of llal argumenl
somevlal. Hovever, as leadIine infIalion passed lle 5° marI in lle earIy parl of
lle currenl year, lle cenlraI banI decided infIalion lad become mainIy a lomemade
probIem refIecling domeslic overlealing as seen in unusuaIIy ligl capacily
uliIizalion numbers. AIvays vigiIanl againsl any revivaI of BraziI's dismaI
experience vill lyper infIalion in lle pasl, in ApriI, lle cenlraI banI raised ils main
SEB Merchant Banking Country Risk Analysis September 20, 2008
poIicy rale, lle SeIic, 50 basis poinls (bsp). Tlal slouId prove lo be lle firsl in four
conseculive 50-bsp rale liIes so far llis year, vlicl is unIiIe lo lave seen lle end of
llis ligllening cycIe yel as prices lave conlinued up impIying Iov reaI inleresl rales
al Ieasl for BraziIian slandards. Mosl observers expecl anoller rale liIe in lle near
fulure, vlicl vouId press lle poinl of lle cenlraI banI's unviIIingness lo loIerale
any Ionger devialion from ils largel around 4° annuaI consumer price rises.

`ìêêÉåí=~ÅÅçìåí=Ä~ä~åÅÉ=íìêåë=åÉÖ~íáîÉ. WliIe in lle firsl laIf of lle currenl year,
exporls lave conlinued slrong leIped by ligl commodily prices, imporls, in
conlrasl, lave picIed up speed even more rising 50° yoy in lle second quarler.
(Clarl nexl page.) As a resuIl
recenl years' currenl accounl
surpIuses are nov IiIeIy lo lurn
inlo an equaIIy Iarge deficil of
around 1-2° of GDI. Lven llougl
lle clange over onIy lvo years of
aImosl 3°/GDI is quile slarp,
fev observers see any immediale
risI lo lle lolaI exlernaI baIance
from llis source aIone. Lven in a
more pronounced dovn case
scenario vlere recenl infIovs of
slorl lerm capilaI inlo lle slocI
marIel and banI deposils (i.e.
carry lrade) elc. slouId reverse
slarpIy, lle baIance of paymenl is
unIiIeIy lo pose a major probIem in lle medium lerm. Tlal is in parl llanIs lo
buoyanl IDI infIovs vlicl Iasl year reacled an aII-lime ligl of $34 biIIion. Mosl of
llese inveslmenls visl lo benefil from BraziI's comparalive advanlages for
agricuIlure, mining and manufacluring. Senlimenl is aIso boIslered by Iarge
reserves. Tley lave aIready reacled aImosl $200 biIIion enougl lo cover more llan
a year vorll of goods and services imporls. On lle oller land, il is aIso expecled
llal lle surge in imporls of recenl quarlers viII subside as lle exclanger rale may
aIready lave passed a cycIicaI peaI, llereby leIping lo slrengllen lle exlernaI
baIance.
Inflation and real interest rates
Source: Reuters EcoWin
2002 2004 2006 2008
%

c
h
a
n
g
e

p
a
.
0
5
10
15
20
Real interest rate
CPI

_ìí=ÖçîÉêåãÉåí=ÉñéÉåÇáíìêÉë=éçïÉê=~ÜÉ~Ç. IoIIoving an easing in 2007, lle
governmenl began lle year by raising ils primary surpIus largel bacI lo lle
4,2°/GDI IeveI. Many sav llal as a sign of lle governmenl reasserling ils
commilmenl lo slrong fiscaI poIicies on lle leeIs of ils defeal in IarIiamenl vlere il
lad lried lo proIong lle fiscaIIy imporlanl bul unpopuIar financiaI lransaclions lax
(CIMI). Hovever, as lle buoyanl economy raised lle lax laIe mucl more llan
expecled, lle governmenl some monlls Ialer close lo raise pubIic expendilures in
suppIemenlary budgel aclions. AIllougl llal may nol risI lle overaII budgel
baIance, many observers sliII regard llis as unnecessary fiscaI boosl al a lime of
possibIe overlealing (lle so-caIIed Hcctc|mc effecl a baIanced budgel expansion).
We concur lo llal argumenl, bul aIso llinI llal veaIer exporl performance in lle
second laIf of lle year as many emerging marIels finaIIy begin lo feeI lle pincl of
lle gIobaI sIovdovn, may provide room for some fiscaI slimuIus. Anyvay, vill
pending municipaI eIeclions llis faII and despile slrong approvaI ralings above 60°
for lle governmenl and lle Iresidenl in parlicuIar, lle move cannol be regarded as
enlireIy unexpecled. Tle main probIem is llal vill a pubIic seclor aIready
2

SEB Merchant Banking Country Risk Analysis September 20, 2008
represenling aImosl 40° of GDI llere is nol mucl slrucluraI argumenl for pubIic
seclor expansion.

pí~ääÉÇ=êÉÑçêã=éêçÅÉëë. Tle nev
poIilicaI consensus for prudenl
poIicies llal conlinued from lle
previous Cardoso governmenl
(1998-2004), goes nol mucl furller
llan lo macro economic poIicies. As
regards micro reforms, lle presenl
IuIa governmenl las nol made loo
mucl progress. Tlal may nol onIy
be due lo IacI of courage or
viIIingness, bul aIso because any
meaningfuI reforms vouId loucl
core inleresls of Iarge and poverfuI
consliluencies, incIuding numbers of governmenl empIoyees. A compIex cobveb of
federaI and slale-IeveI laxes may aIso lave become an ingredienl parl of daiIy
business llereby giving rise lo vesled inleresls in slalus quo. NeverlleIess, Iasl
summer lle governmenl presenled IarIiamenl vill a pacIage of lax simpIificalions
vlicl slouId go some vay in reducing unnecessary compIexilies and red-lape, mosl
of llem crealing unnecessary dislorlions and conlribules lo BraziI's Iov raling on lle
WorId BanI's “Lase of doing business¨-index. Oller reforms llal migll
significanlIy improve produclivily incIude foreign lrade IiberaIisalion, grealer Iabour
marIel fIexibiIily and pension syslems. On one score, lovever, lle banIing syslem,
recenl reforms appear lo lave lad some success aIbeil llal is onIy lle firsl slep on a
Iong road.
Trade balance
Exports Imports
Source: Reuters EcoWin
Q1 Q2 Q3 Q4 Q1 Q2
2007 2008
U
S
D

(
b
i
l
l
i
o
n
s
)
15
20
25
30
35
40
45
50
55
Imports
catching up

páÖåë=íÜ~í=Ä~åâë=ÄÉÖáå=íç=ÅçãéÉíÉ=áå=É~êåÉëí. Tle inlroduclion in 2004 of Crc!itc
ccnsivnc!c meanl llal banIs couId deducl inslaImenls and inleresl paymenls from
peopIe's pay clecIs. Tlal vaslIy raised banIs' viIIingness lo Iend lo formaI seclor
vage earners, and llerefore Iovered inleresl rales on reguIar consumer credils and
on Ioans lo peopIe vlo vanled lo sel up smaII businesses. As a resuIl, Iarge parls of
lle popuIalion lave become banIabIe and annuaI credil grovll lave soared lo more
llan 30° raising domeslic credil/GDI ralio lo more llan 50°. Tlal is, of course,
sliII quile Iov for a counlry soon lo reacl £$10,000 per capila. NeverlleIess, ve sliII
beIieve llal BraziI's banIing syslem as a mucl lo leavy presence of slale-conlroIIed
banIs. Tley do nol onIy slifIe compelilion bul may aIso cause misaIIocalion of
capilaI as ve expIained in our previous reporl of Iebruary 2008. Tle core of our
crilicism is lle BNDS, vlicl ve llinI do nol operale in an environmenl of sufficienl
clecIs and baIances llereby exposing il lo loo mucl discrelionary poIilicaI
inlerference. Tle BNDS slands for around a llird of lolaI domeslic credil aIIocalion,
and poIilicaI ambilions are apparenlIy aiming al increasing ils presence furller. We
fear llal viII conlinue lo undermine lle inveslmenl cIimale in BraziI vlere lle
inveslmenl/GDI ralio sliII remains beIov 19°, and llereby for years alead confine
il lo reIaliveIy modesl grovll rales compared vill oller counlries al lle same
deveIopmenl slage.

mçäáíáÅ~ä=ëí~Äáäáíó=äáâÉäó=íç=ëìêîáîÉ=çîÉê=íÜÉ=ãÉÇáìã=íÉêã. Tle poIilicaI
eslabIislmenl las proved abIe lo come up vill soIulions lo prevenl somelling going
compIeleIy vrong, as vas lle case vill lle funding of lle pension IiabiIilies for
governmenl empIoyees a coupIe of years ago. Ollervise, lle poIilicaI cIimale is
unIiIeIy lo provide basis for meaningfuI reforms for severaI ears lo come. Bul mosl
3

SEB Merchant Banking Country Risk Analysis September 20, 2008
observers agree llal overaII commilmenl lo sound poIicies lave come lo slay and
viII survive lle nexl presidenliaI eIeclions in 2010 in vlicl Ires. IuIa is
conslilulionaIIy barred from running. AIso, lle governmenl's 8c|sc |cmi|ic program
for lle pooresl of lle sociely las proved sufficienlIy successfuI lo be dismanlIed by
any nev governmenl from lle rigll of cenlre opposilion. Tlere seems lo be a
groving consensus llal a more even income dislribulion in a counlry vill one of lle
“vorsl¨ Gini-coefficienls vorId-vide, is needed lo preserve sociaI slabiIily.

lìíäççâ=Ó=çáä=íç=íÜÉ=êÉëÅìÉ\= Tle near lerm oulIooI is somevlal bIeaI as lle cenlraI
banI figlls bacI lle recenl surge in infIalion and suppresses domeslic demand in lle
process. BraziI couId aIso be lil by a dovnlurn in lle gIobaI economy ÷ aIllougl il
is nol al among emerging marIels lo be lil firsl. Tle medium lerm, by conlrasl,
slouId provide more reIief and see GDI grovll slabiIize around 4,5° a year. Tlal is
cIearIy nol speclacuIar bul lvo percenlage poinls above lle average performance of
lle decade from 1995-2005. Tlal improvemenl may nov be boIslered by rising oiI
produclion. Since 2001, oiI produclion from exisling fieIds las doubIed lo 2,3 miII.
barreIs a day. Tlis year for lle firsl lime, BraziI viII lurn inlo a nel oiI exporler.
AcluaIIy, villoul llis oiI produclion, BraziI vouId IiIeIy lave been running a series
of yearIy currenl accounl deficils and reserves migll lave been some $50 biII Iover.
Nev deep sea finds, lovever, are polenliaIIy mucl Iarger and couId maIe BraziI an
oiI gianl. Will recenl success ralio al 100° from 7 vel “viId-cals¨ in five differenl
areas of lle same geoIogicaI sea-bed slruclures oplimism is running ligl. =
JJ=G=JJ=
e~ë=íáãÉ=ÅçãÉ=íç=ã~âÉ=_ê~òáä=“áåîÉëíãÉåí=Öê~ÇÉÒ\= 8csc! cn ccntinuc! prcvrcss cn
tcricus pcrcmctcrs. inc|u!inv t|c ccmpcsiticn cn! sizc c| vctcrnmcnt cn! tctc| |crcivn !cct.
cs uc|| cs vrcut| pcr|crmcncc cn! pc|iticc| stcci|itu. tuc cxtcrnc| rctinv cvcncics in |cst
Mcu upvrc!c! t|c sctcrcivn tc intcstmcnt vrc! (888-). 1|is csscssmcnt ccncurs uit| t|c
ticu t|ct 8rczi| mcu |inc||u |ctc crc|cn uit| its pcst c| unsustcincc|c cn! impru!cnt mccrc
pc|icics cn! sct itsc|| cn c trcc| c| c stcc!u i| nct spcctccu|cr vrcut| sccncric. 1|c |ctcst
ccntrc| ccn| tiv|tcninv ccticn. u|ic| |cs cccn |rcc c| vctcrnmcnt cr ct|cr pc|iticc|
ccstructicn. is in cur ticu c tcstcmcnt tc 8rczi|´s ccmmitmcnt tc scun! pc|icics. An! u|crc
mc!crctc vrcut| rctcs sti|| cxpcctc! in t|c ccscncc c| mcrc mccninv|u| cn! cusincss |ricn!|u
rc|crms. miv|t |ctc spc||c! pc|iticc| cn! sccic| prcc|cms vcinv |crucr!. ncu ci| ric|cs mcu
ccvin t c |i|| vctcrnmcnt cc||crs cn! prcti!c rccm |cr cct| tcx rc|ic| cn! sccic| spcn!inv.

hÉó=ê~íáçë OMMU
IopuIalion (miII.) 182
GDI/capila ($) 8830
GDI (clange) 4,8°
InfIalion 6°
Curr.Acc. BaIance/GDI -1°
Reserves/imporls (monlls) 13
Budgel baIance/GDI -1°
Governmenl nel debl/GDI 41°
dê~éÜW BraziI's risI profiIe is cIose lo lle average for aII
emerging marIel counlries, onIy somevlal veaIer on
macro baIance. Compared vill India BraziI is veaIer on
Iiquidily and informalion (our judgemenl) bul slronger on
resiIience.
bñíÉêå~ä=ê~íáåÖëW=
Iilcl: BBB-
S&I: BBB-
mÉÉêëW
India
TurIey
Lgypl
0
2
4
6
8
10
12
Resilience
Liquidity
Information
Absence of event
risk
Macro balance
Brazil Average EM India
Hcu tc rcc! t|c c|crt?
Moving oul from lle
cenler reduces risI.

4

SEB Merchant Banking Country Risk Analysis September 20, 2008


hÉó=Ç~í~W OMMP OMMQ OMMR OMMS OMMT OMMU OMMV OMNM
GDI (biII. US$) 557 665 888 1073 1322 1715 1803 1770
GDI/capila (US$) 3066 3606 4753 5665 6893 8830 9171 8894
GDI (clange) 1,2° 5,7° 3,2° 3,7° 5,4° 4,8° 4,0° 3,9°
Inveslmenls/GDI 15° 15° 15° 16° 17° 18° 19° 19°
Budgel baIance/GDI -5° -2° -3° -3° -2° -1° -2° -2°
Govl debl/GDI 52° 49° 45° 45° 44° 41° 39° 38°
CII infIalion (°) 14,7° 6,6° 6,9° 4,2° 3,6° 5,7° 5,3° 4,1°
Money demand (°) -9,3° 12,5° 6,4° 12,4° 21,9° 8,1° 8,4° 10,7°
SlocI prices (average) 14418 22319 27555 38114 53238
Inleresl rales 23,4° 16,2° 19,1° 15,3° 12,0° 12,5° 13,0° 11,4°
Lxcl. Rale ($) 3,08 2,93 2,44 2,18 1,95 1,66 1,72 1,90
Trade/GDI (°) 22° 24° 22° 21° 21° 20° 21° 23°
OiI price (Brenl) $29 $38 $54 $65 $73 $117 $113 $101
jáääáçåë=rp=A
Lxporl of goods 73 084 96 475 118 308 137 808 160 649 186 319 193 869 207 957
Imporls of goods 48 290 62 835 73 606 91 351 120 621 160 682 180 311 195 851
Oller: -20 617 -21 961 -30 718 -32 815 -38 567 -50 696 -34 296 -27 979
Currenl accounl Q=NTT NN=STV NP=VUR NP=SQP N=QSN JOR=MRV JOM=TPU JNR=UTP
(° of GDI) 0,7° 1,8° 1,6° 1,3° 0,1° -1,5° -1,2° -0,9°
IDI 9 894 8 694 12 550 -9 420 27 518 26 573 27 427 23 870
Ioan repaymenls -41 949 -38 782 -49 358 -47 362 -45 678 -44 393 -41 559 -40 839
Nel oller capilaI fIovs 37 158 21 254 29 976 55 252 96 125 89 355 6 741 14 868
BaIance of paymenls V=OUM O=UQR T=NRP NO=NNP TV=QOS QS=QTS JOU=NPM JNT=VTP
Reserves 47 665 50 510 57 663 69 777 149 202 195 678 167 548 149 575
TolaI debl 217 200 205 645 186 458 163 865 190 583 191 575 181 791 178 839
o/v slorl lerm debl 14 517 15 386 14 941 14 338 28 967 26 749 22 533 22 240
Scurccs. Ox|cr! |ccncmics cn! S|8 cstimctcs
o~íáåÖ=Üáëíçêó
Iilcl (eoy) B+ BB- BB- BB BB+ BBB-
S&I (eoy) B+ BB- BB- BB BB+ BBB-
qóéÉ=çÑ=ÖçîÉêåãÉåíW IarIiamenlary Democracy
Nexl eIeclions 2010
líÜÉêW
Ialesl IC deaI 1992/aclive
Ialesl IMI arrangemenls 2002/SBA
Bovespa i ndex
S ource: R eute rs Eco Wi n
02 03 04 05 06 07 08
In
d
e
x
2500
5000
7500
10000
12500
15000
17500
20000
22500
25000
S p o t R a t e s , B R L / $
S o ur ce : R e u te rs E c oW i n
0 2 0 3 0 4 0 5 0 6 0 7 0 8
U
S
D
/B
R
L
1 , 0 0
2 , 0 0
3 , 0 0
4 , 0 0
Sel i c - pol i cy i nt er est r at e
So urce : R eu te rs Ec oWi n
02 03 04 05 06 07 08
P
e
r
c
e
n
t

p
.
a
.
10
15
20
25
30
Industrial products
ma 12
Source: R euters EcoWin
2002 2003 2004 2005 2006 2007 2008
I
n
d
e
x
95
100
105
110
115
120
125
130
135
Production (smoothed)


5

SEB Merchant Banking Country Risk Analysis September 20, 2008


aáëÅä~áãÉê=

ConfidenliaIily Nolice

Tle informalion in llis documenl is confidenliaI and may nol be reproduced or
redislribuled lo any person.

Imporlanl: Tlis slalemenl affecls your riglls

Tle informalion in llis documenl las been compiIed by SLB Merclanl BanIing, an
enlily villin SIandinavisIa LnsIiIda BanIen AB (pubI) (“SLB¨), for inslilulionaI
inveslors onIy. Il is nol inlended for, and musl nol be passed lo, RelaiI CIienls. If you
are nol a cIienl of ours, you are nol enlilIed lo llis reporl. Tlis informalion is
produced for lle privale informalion of recipienls, and SLB Merclanl BanIing is nol
soIiciling any aclion based upon il.

Opinions conlained in llis reporl represenl lle banI's presenl opinion onIy and are
subjecl lo clange villoul nolice. AII informalion conlained in llis reporl las been
compiIed in good faill from sources beIieved lo be reIiabIe. Hovever, no
represenlalion or varranly, expressed or impIied, is made vill respecl lo lle
compIeleness or accuracy of ils conlenls and lle informalion is nol lo be reIied upon
as aullorilalive. Recipienls are urged lo base lleir inveslmenl decisions upon sucl
invesligalions as lley deem necessary. Tlis documenl is being provided for your
informalion onIy, and no specific aclions are being soIiciled as a resuIl of il: lo lle
exlenl permilled by Iav, no IiabiIily vlalsoever is accepled for any direcl or
consequenliaI Ioss arising from use of llis documenl or ils conlenls.

Your allenlion is dravn lo lle facl llal a member of, or an enlily associaled vill, lle
banI or ils affiIiales, officers, direclors, empIoyees or slareloIders of, sucl members
may from lime lo lime (a) lave a Iong or slorl posilion in, or ollervise parlicipale in
lle marIels for, lle currencies and securilies of counlries menlioned lerein, (b) buy
or seII, maIe a marIel (or provide Iiquidily) in, or parlicipale in an issue of sucl
securilies or oplions, for vlicl SLB may receive compensalion

SLB is a pubIic company incorporaled in SlocIloIm, Sveden, vill Iimiled IiabiIily. Il
is a member of lle SlocIloIm SlocI Lxclange, lle Iondon SlocI Lxclange, lle IIL,
OM, LDX, Luronexl Iiffe, Luronexl Iaris, Lurex, CML, and CBOT exclanges. SLB is
aullorized and reguIaled by IinansinspeIlionen in Sveden, by lle IinanciaI
Services Aullorily for lle conducl of designaled inveslmenl business in lle UK, and
by reIevanl reguIalors in aII oller jurisdiclions vlere SLB operales ils business.


SLB Merclanl BanIing. AII riglls reserved.

6