Economic Risk Analysis – ICGR Index

Brazil is the world's eighth largest economy. After almost a decade of strong growth (2002-2013), Brazil
entered into the worst recession in its history in 2015 (-3.8% of GDP) and 2016 (-3.6 Brazil is the world's
eighth biggest economy. After a period of solid development (2002-2013), Brazil went into the worst
recession in its history in 2015 (- 3.8% of GDP) and 2016 (- 3.6%). This monetary emergency was due to
the fall of commodity prices and a drop in consumption and in investment. Notwithstanding, the economy
recuperated in 2017 and the GDP recorded a 1% movement. Budgetary modification and favorable
financial conditions have fostered the recuperation. In 2018, the Brazilian economy affirmed its bounce
back and the nation's GDP increased 1.4%. The economy is believed to continue developing in 2019,
achieving an expected yearly GDP development rate of 2.4% (IMF).

In 2018, inflation developed marginally, achieving 3.7% (contrasted with 3.4% the earlier year) and is
predicted to increment to 4.2% in 2019. Fiscal consolidation is the government’s main objective, but even
though the fiscal deficit is expected to narrow in 2019, the President's promise to reduce the imbalance
to zero this year isn't doable.

The government budget deficit enlisted in 2018 a deficiency of 7.3% which is relied upon to be kept up at
the comparable level in 2019 and 2020. The unemployment rate in Brazil is still high, touching 11.8% in
2018. It recorded a 1% decline from the earlier year. The relentless decline in unemployment throughout
2018 added to an improvement in household consumption. In spite of the fact that unemployment
diminished, the nation keeps on confronting social issues and has probably the most unequal society on
the planet. Despite the fact that Brazil has lifted 28 million individuals out of poverty over the most recent
15 years, 10% of the populace still live in destitution. The nation's most extravagant 5% have a similar
salary as the remaining 95%. There are high differences between the locales, and there has been an
ongoing ascent in the rates of wrongdoing and criminal brutality.

GDP per head

Country GDP Per Capita($)
Brazil 15500
Argentina 20700
Chile 24600

Brazil is the largest country in South America by both size and population, is also the fourth richest country
in the continent in terms of GDP (PPP). The economy of Brazil can be described as an inward-oriented
economy. The country’s economy suffered a major setback in 2013 and entered a recession the next year.
It is currently recovering from the recession, though the country has pretty much re-emerged. The service
sector contributes 67.0% of the GDP and the industrial sector accounts for 27.5%. Agriculture accounts
for a mere 5.5% of the country’s GDP. The GDP per capita of Brazil is marginally less than those of its
neighboring countries.
Real GDP Growth
Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Real GDP growth(%) 1.1 0.8 2.2 2.3 2.4 2.3
Risk Points 6.5 6.0 7.5 7.5 7.5 7.5

Brazil's Real GDP Growth is anticipated to be 2.055 % in Dec 2019 as announced by International Monetary
Fund - World Economic Outlook. Going Ahead, Brazil's Real GDP Growth is anticipated to remain at 2.218
%. Speculators will stay wary until there is more prominent clearness with respect to pension reform
approval.

For sure, in the light of a frail first quarter, the recovery is figure to take longer than previously expected,
yielding GDP development of 1% for 2019. The upswing will be driven by a pick-up in investment and
private consumption as the job markets showcase continuous improvement and credit rises. Brazil's rise
will be capped by a US slowdown in 2020, and resume afterwards. In any case, retail, financial services,
telecommunications and trade will benefit from it. Manufacturing suffered much more during Brazil's
recessions, thus its exhibition during the recovery stage will be weaker than recommended by the normal
development rate of 2.3% that was anticipated for 2019-23.

Annual Inflation Rate

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Consumer price inflation (end-period) 3.7 4 3.8 3.7 3.8 3.8
Risk Points 9.0 8.5 9.0 9.0 9.0 9.0

Higher food and transport costs lifted inflation to 4.9% in April. It is expected that inflation will ease and
vary near the gradually declining focal inflation target. Inflation expectations are now better anchored
than in the past. A Monetary tightening cycle over the medium term will keep inflation near the mid-point
of the target range, excepting intermittent food deficiencies reflecting adverse climatic conditions

Budget Balance as a Percentage of GDP

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Budget Balances -7.1 -5.8 -4.9 -4.5 -4.2 -3.9
Risk Points 4.0 5.0 5.5 5.5 5.5 6.0

Brazil’s fiscal balance has deteriorated dramatically in the past five years. The fiscal deficit rose from 2 per
cent of GDP in 2012 to 10 per cent in 2015. This year it is expected to hover around 6 per cent — nearly 1
percentage points higher than the average of Latin America. The next president will face a fiscal burden
that will probably define his or her term in office.
Current Account as a Percentage of GDP
Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Current-account balance (% of GDP) -0.8 -1 -1.5 -1.8 -2.4 -2.9
Risk Points 11.5 11 11 11 10.5 10.5

In 2018, the nation's current account deficit revealed a minor widening, due to an enormous trade surplus.
FDI (basically in assembling ventures like coke, oil derivatives and biofuels, automotive, and food) cover
more than three times the external deficit. In 2019, in spite of the fact that the current account deficit is
probably going to further break down as monetary action improvement raises imports, the impact ought
to be moderate.

The system is vastly different with regards to the fiscal stance. The country has registered primary fiscal
deficits (before intrigue installments) throughout the previous five years. This unevenness is essentially
ascribed to social security expenses, which have expanded exponentially, achieving a deficit of generally
2.8% of GDP. The new government, which got down to business on January 1, 2019, will concentrate on
a standardized savings change. Nevertheless, regardless of whether the fiscal deficit is relied upon to limit
in 2019, the government's campaign guarantee to lessen the imbalance to zero this year isn't practical.

Foreign Debt as a Percentage of GDP

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Foreign Debt as a Percentage of GDP 30 31 30 30.3 30.6 30.8
Risk Points 7 7 7 7 7 7

Brazil's External Debt achieved 564.4 USD bn in Mar 2019, compared to 559.2 USD bn in the past quarter.
Current Account recorded a surplus of 662.4 USD mn in May 2019. Foreign Direct Investment (FDI)
expanded by 7.1 USD bn in May 2019. Brazil's Direct Investment Abroad expanded by 558.0 USD mn in
May 2019. Its Foreign Portfolio Investment expanded by 8.9 USD bn in Mar 2019. The nation's Nominal
GDP was accounted for at 450.7 USD bn in Mar 2019.

Foreign Debt Service as a Percentage of Exports of Goods and Services

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Foreign Debt as a Percentage of
234 239 229 222 216 212
Exportsof G&S
Risk Points 0 0 0 0 0 0

Brazil's NIIP was - 34 percent of GDP at end-2017, marginally weaker than the 2011-16 normal (around -
30 percent of GDP), for the most part because of valuation impacts. Over the medium term, the NIIP is
anticipated to reinforce progressively to around - 30 percent of GDP, as GDP development and valuation
impacts are relied upon to counterbalance current account deficits (around 1-2 percent). While

FDI accounts for about portion everything being equal, the ascent in external debt since the global
financial crisis (to around 33 percent of GDP and 265 percent of fares) is a source of risk. Brazil's NIIP is
equivalent to that of its neighbours. Transient gross external financing needs are moderate at 7-8 percent
of GDP yearly. The CA deficit required to balance out the NIIP at - 32 percent is 1.1 percent of GDP.

Current Account as a Percentage of Exports of Goods and Services

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Current Account as % of GS -6.1 -8.1 -9.7 -12.8 -17.2 -22
Risk Points 11.5 11.5 11.5 11 10.5 10.5

The CA deficit limited to 0.5 percent of GDP in 2017, inferable from the feeble domestic demand,
especially investment, and solid exports. The CA deficit is expected to widen in 2018 and rise bit by bit to
around 2 percent of GDP in the medium term as private demand recuperates, mostly balanced by the
envisaged fiscal consolidation. Brazil posted a current account deficit of $1.134 billion in February,
narrowing from a deficit of $2.043 billion per year earlier.

Net International Liquidity as Months of Import Cover

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Net International Liquidity as month of
24.2 22.5 21.3 20.1 19.7 19.3
import cover
Risk Points 5 5 5 5 5 5

Brazil has a floating exchange rate. Its gross stores remained extensively consistent in 2017, at $374 billion
at end-2017, proportional to 18.2 percent of GDP and around 160 percent of the IMF's composite hold
ampleness metric. The adaptable exchange rate has been an important safeguard. Reserves are
satisfactory with respect to different criteria counting the IMF's reserve adequacy metric. The experts
ought to hold solid supports, with intercession constrained to tending to cluttered economic
situations.reserve adequacy metric

Exchange Rate Stability

Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Exchange Rate Stability 5.5 0.5 0.8 1.0 1.3 0.5
Risk Points 12.5 12.5 12.5 12.5 12.5 12.5

Other than related instability as the pension reform discussion proceeds (jitters recently debilitated the
Real to R4.1:US$1, prompting national bank mediation, and it has since reinforced marginally), one
anticipate that the Real should vary in accordance with Brazil's terms of trade and global financing
conditions. By end-2023 we anticipate that the Real should trade near R4:US$1. it is anticipated that the
Real should be 10% weaker in real compelling terms in 2019-23 than in 2008-17, when it was unmistakably
exaggerated. Inability to endorse pension reform would prompt an auction where the Real would be more
fragile than currently gauge over the medium term.
Conclusion
Huge trade surpluses will temper the current-account deficit for the time being, however it is relied upon
to widen as financial recuperation lifts imports. Despite the fact that costs for Brazil's commodities exports
will be higher than in 2014-16, the nation won't enjoy terms of trade as positive as those seen during the
2004-11 blast.

A recuperation in household demand and the subsequent ascent in imports will limit the trade surplus
from 2.8% of GDP in 2018 to 1.8% of GDP by 2023. The essential income deficit will average 2.2% of GDP
in 2019-23, reflecting benefit settlements and debt installments, and the administrations deficit will
average 1.9%. These patterns will widen the current-account deficit to 3% of GDP by 2023, up from an

evaluated 0.8% of GDP in 2018. Outside direct investment (FDI) will average 4.8% of GDP in 2019- 23,
owing to sizeable market opportunities.

The economy registered a second year of mild recovery in 2018. Household consumption contributed
positively to GDP, as inflation remained well anchored, the policy rate reached historical minimum, and
the unemployment rate continued to improve (despite remaining high). Moreover, exports benefited
from better terms of trade (oil and manufacturing prices). A relatively higher economic momentum is
expected in 2019, as job market recovery continues (supporting stronger household consumption).
Inflation will remain close to the central bank’s target (4.25% for 2019). Some monetary tightening might
be implemented in the second half of the year, as advanced economies (notably the United States) raise
their policy rates. Huge trade surpluses will temper the current-account deficit for the time being,
however it is relied upon to widen as financial recuperation lifts imports. Despite the fact that costs for
Brazil's commodities exports will be higher than in 2014-16, the nation won't enjoy terms of trade as
positive as those seen during the 2004-11 blast.

A recuperation in household demand and the subsequent ascent in imports will limit the trade surplus
from 2.8% of GDP in 2018 to 1.8% of GDP by 2023. The essential income deficit will average 2.2% of GDP
in 2019-23, reflecting benefit settlements and debt installments, and the administrations deficit will
average 1.9%. These patterns will widen the current-account deficit to 3% of GDP by 2023, up from an

evaluated 0.8% of GDP in 2018. Outside direct investment (FDI) will average 4.8% of GDP in 2019- 23,
owing to sizeable market opportunities.

Downside risks are related to an escalation of the US-China trade war, the latter the main destination of
Brazil’s exports. Moreover, the continuing crisis in Argentina (Brazil’s third-largest export partner) will
continue to hamper the performance of manufacturing exports in 2019. Domestically, a failure to address
the pension system reform this year could jeopardise the stronger economic momentum.
Appendix
Forecast summary
(% unless otherwise indicated)
Year 2018[a] 2019[b] 2020[b] 2021[b] 2022[b] 2023[b]
Real GDP growth 1.1 0.8 2.2 2.3 2.4 2.3
Industrial production growth 0.9 1.7 2.6 2.7 2.7 2.7
Gross fixed investment growth 4.1 0.5 4 4.4 4.4 4.5
Consumer price inflation (av) 3.7 4 3.7 3.8 3.8 3.8
Consumer price inflation (end-period) 3.7 4 3.8 3.7 3.8 3.8
Money market interest rate (av)[c] 6.5 6.4 7.2 8 8 8
Nominal PSBR (% of GDP) 7.1[d] 5.8 4.9 4.9 5.1 5.4
Exports of goods fob (US$ bn) 239 239.3 252.2 270.8 288.5 304.4
Imports of goods fob (US$ bn) -185.4 -192.1 -205.8 -224.8 -245 -263.7
Current-account balance (US$ bn) -14.5 -18.6 -28.6 -37.7 -51.2 -66.6
Current-account balance (% of GDP) -0.8 -1 -1.5 -1.8 -2.4 -2.9
External debt (end-period; US$ bn) 559.8[d] 577.7 596 616.1 636.8 656.5
Exchange rate R:US$ (av) 3.65 3.87 3.86 3.89 3.93 3.98
Exchange rate R:US$ (end-period) 3.87 3.83 3.88 3.9 3.95 4.01
Exchange rate R:¥100 (av) 3.26 3.57 3.6 3.74 3.93 4.05
Exchange rate R:€ (av) 4.13 4.68 4.63 4.71 4.76 4.92