A political outlook presented by Gabriel Petrus, Political Risk Analyst of Barral M Jorge & Associates.

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Brazil 2016
Political outlook
Economic perspectives &
Opportunties during the crisis
March 2016

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Topics
2
2015 background 4
2016 forecast 7
14
Political background 12
Politics
Economics
Infrastructure
Agenda for Growth
Political outlook
Infrastructure background
Investment opportunities
19
20
23
Conclusions 26

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ECONOMICS

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2015: economic background
4
.
GDP
 Recession and shrinking economy: Brazil’s Gross Domestic Product contracted 3.8% in 2015.
 Brazil continues to be a large economy with huge potential.
 The Brazilian economy still figures among the 10 largest in the world, ranking 7 in the
International Monetary Fund’s GDP comparison list (2015).
Source: IMF, World Economic Outlook
As a reflex of the economic situation
the country has been facing since 2014,
recent forecasts released by the
International Monetary Fund (IMF)
show a shift in the ranking, with Brazil
falling one position in 2015.
GDP in USD trillion
World GDP Forecasts for the
end of 2015

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2015: economic background
5
.
Deficit, inflation and high interest rate
 On 2015, inflation hit record level of 10.71%: the highest since 2002 (IBGE);
 Central Bank’s last meeting kept annual interest rate at 14.25%.
*Data refers to the period Jan-Aug. 2015.
Sources: Economist Intelligence Unit; Reuters; Haver Analytics; Goldman Sachs; Central Bank of Brazil; Valor.
Budget balance as % of GDP Central Bank interest rate and inflation

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2015: economic background
6
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Wages and jobs
 Unemployment, which has long been falling and dipped below 5% for most of 2014, increased
to 8.9% in November 2015.
Sources: National Accounts; IBGE; Central Bank of Brazil; The Economist.
Average real wages and GDP Unemployment rate and Gov. spending

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2016: economic forecasts
7
GDP Forecasts 2016/2017
FOCUS BULLETIN
2016: - 3.54% (contraction)
2017: 1.00%
IMF
2016: -3.5% (contraction)
2017: 0.00%
MORGAN STANLEY
2016: - 4.3 % (contraction)
2017: + 0.6 %

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2016: economic forecasts
8
 Industrial output
 Consumer Price Index (IPCA)
FOCUS BULLETIN
2016: - 4.45% (contraction)
2017: 0.50 %
REUTERS
2016: - 3.47% (contraction)
2017: 1.80%
FOCUS BULLETIN
2016: 7.46 %
2017: 6.50 %
2018: 6.50%
REUTERS
2016: 7.00%
2017: 5.40%

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2016: economic forecasts
9
Fiscal performance
 Fiscal constraints at the federal and state levels will continue in 2016
 Budgetary gap 2015/2016 – austerity measures were not enough to balance public accounts :
government is looking for other revenue sources (high risk of tax increases)
Labor market
 According to the International Labor Organization (ILO), the unemployment rate will reach
7.7% in 2016 and 7.6% in 2017.

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2016: economic forecasts
10
Currency
2015 background
 By the end of 2015, Brazilian real (BRL) figured as the most devaluated currency worldwide
when compared to the US dollar (USD);
 Devaluation went up to 33.87% (Jan-Dez 2015), surpassing the Argentinian peso (-33.34%), the
Colombian peso (-28.61%), and the South African rand (-23.38%), according to Bloomberg;
 International slumping commodity prices and the dependence of Brazilian economy on China
were among the chief driving forces behind Brazil’s recession;
2016 currency rally
 The Brazilian real BRL has surged nearly 10 % since the beginning of March as investors see a
potential change in government as the best solution to the worst economic recession in over 30
years.
 Other related factors : (i) lower interest rates by the end of 2016; (ii) exports expantion; (iv)
foreign direct investment raising; and (iv) infrastructure package.

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POLITICS

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2015: political background
12
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Getting to the roots of the crisis
 Lava Jato / Petrobras corruption probe have undermined the capacity of the government to
maintain its political legitimacy.
 Political deadlock: no government majority to pass economic reforms coupled with a non-
cooperative opposition;
 Fractured ruling coalition: PT – PMDB unstable relations. Budgetary constrains related to the fiscal
crisis have frustrated allies in the the office: figurative power and lack of autonomy.
 Finance Minister Levy’s economic plan has motivated disagreements between President Rousseff
and her political party.

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2015: political background
13
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Rousseff’s top 5 five political mistakes
 Rousseff was slow to recognize the severity of the Car Wash operation.
 Changing the Minister of Justice weakened the government.
 Rousseff distanced herself from PT.
 Rousseff failed to understand PMDB
 Rousseff aligned herself to Lula

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2016: political outlook
14
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CURRENT SCENARIO
• About 3.6m people joined dmeonstrations against President Rousseff on March 13th, the largest
seen in Brazil.
• The protests have considerably increased the political pressure over Congress, especially on
lawmakers that were still neutral.
• Lava Jato has pulled down Rousseff’s protection wall in the Senate as investigations are now
targeting PMDB top lawmakers, who now prefer to oppose Rousseff in order to lower the political
pressure that could also target them. PMDB likely to withdraw the ruling coalition.
• The lower house speaker will restart the impeachment process this week, after the Supreme Court
publishes the final proceeding.
2. Rousseff’s resignation;
3. Electoral Court probe against Rousseff and Temer.
BASIC SCENARIO: impeachment process is likely to start
ALTERNATIVES

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2016: political outlook
15
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IMPEACHMENT PROCESS
 The impeachment committee will be installed this week in the lower house. Its president and
rapporteur will be elected.
 The committee will have 15 congressional sessions to draft a final report on the “I” request, which
is expected to be concluded around mid-April. Next step is the vote by the floor, which will pose
great risk for Rousseff.
 In order to block the process, Rousseff’s ruling coalition will need 172 votes in the floor (1/3 of the
lower house).
 Abstentions might affect the final result.
 If the floor of the lower house approves the impeachment request, the process goes to the Senate,
which might accept the impeachment request by a simple majority (41 out of 81 senators).
 Once it is accepted, Rousseff will be judged by the Senate. 2/3 of the votes (54 ) are required to
impeach the President.

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2016: political outlook
16
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POSSIBLE POST-ROUSSEFF SCENARIOS
VP Michel Temer takes office:
- PT will oppose the economic reform agenda
- Lava Jato probe might target Temer and
other PMDB lawmakers
New elections are called:
- Political party fragmentation
- Lack of new political leaders to address
population’s worries
Semi-presidential system is set
- Constitutional Reform required
- Social unrest and political instability would
increase
Risk factors to be neutralized in
Q2/2016: the political situation is
likely to improve in the second half of
the year affected by municipal
elections;

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INFRASTRUCTURE

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Infrastructure background
Brazilian Development Bank (BNDES)
 In March 2016, the government announced it
would make it easier for infrastructure projects to
secure financing.
 BNDES will simplify the emission of
debentures/infrastructure bonds
 Estimate: between R$ 6 billion to R$ 10 billion of
debentures will be emitted
Percentage of Investment
Financed by BNDES
Ports
70%
Airports
40%
Railways
80%
Highways
70%
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Infrastructure Investment Opportunities
The Logistics Investment Program (PIL)
 One of the world’s largest infrastructure programs.
 Investment opportunities for:
 Airports
 Highways
 Ports
 Railways
 Upcoming auctions within PIL in 2016
 Ports
 Airports
Other auctions
 Energy sector (April)
 Thermoelectric (biomass and coal)
 Thermoelectric (natural gas)
 Wind
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Infrastructure Investment Opportunities
Port Auctions
 Six areas in the state of Pará
 Satarém (1 for grains, 1 for fertilizers)
 Outeiro (3 for grains)
 Vila do Conde (1 for grains)
Airport Auctions
 Predicted for June 2016
 Fortaleza, Salvador, Florianópolis and Porto Alegre
 Previous projects by foreign firms have included:
Internacional Airpot of
Rio de Janeiro, Galeão
Antonio Carlos Jobim
•Changi Airports
International
(Singapore)
Tancredo Neves Confins
Internacional Airport
•Flughafen Zürich AG
•Munich Airport
International
Beteiligungs GMBH
(Germany)
Guarulhos International
Airport
•ACSA (South Africa)
Viracopos Airport
•Egis Group (France)
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AGENDA FOR GROWTH

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Agenda for growth
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ICMS reform;
PIS/COFINS unification.
STRUCTURAL REFORMS
PUBLIC EXPENDITURE REFORMS
TAX REFORM
Pension reform
Government Spending Limit (Annual Budget Law)
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Agenda for growth
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Plan for Exports to be implemented;
The government is discussing the creation of a line of credit in public banks that consists of
financing working capital of exporting companies
Portal Único/ Single Window
Authorized Economic Operator (OEA)
Working capital and rural credit - R$ 10 bi;
Length-of-Service Guarantee Fund (FGTS) and housing credit - R$ 10 bi;
Infrastructure
• Capital lines at the BNDES R$ 5 bi;
• Manage FGTS assets in order to enact funds for infrastructure - R$ 22 bi;
• Re-finance capital goods (Program on Investment Sustainability - PSI, FINAME) with
noadditional costs to the National Treasury, improving the liquidity of the companies - R$ 15
bi;
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TRADE
CREDIT RELEASE
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Agenda for growth
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Boosting innovation and R&D;
Signing of the legal framework of science, technology and innovation
Improving business environment in Brazil (cutting red-tape measures);
Corruption probes are improving public-private transparency and accountability;
Incentives for building and purchasing assets in Brazil;
Committee of Social and Economic Development;
Brazilian Chief of Staff Minister, Jaques Wagner, introduced to president Rousseff a list
with 92 names of business leaders that shall be part of the Committee, which is also
known as “Conselhão”.
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Conclusions
26
 In spite of the economic downturn, Brazilian economy will recover after 2017;
 A complex economy and a large domestic market will be the engine for the
economic recovery;
 Industrial exports will contribute more substantially to the economy after 2017;
 Political instability will delay much-needed reforms.

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