JPM Brazil 2013

Latin America Equity Research
October 2013
Brazil 101
The 2013 Country Handbook
This is the third edition of our Brazil country guide. This 100+ page Equity Strategy Brazil
handbook is a useful primer and reference guide for new and seasoned Emy Shayo Cherman
AC
investors, both on the securities and real economy sides. We revisit key (55-11) 4950-6684
metrics and some of Brazils history, processes and institutions so as to emy.shayo@jpmorgan.com
have better resources for understanding what is at stake going forward. Bloomberg JPMA SHAYO <GO>
Pedro Martins Junior, CFA
(55-11) 4950-4121
pedro.x.martins@jpmorgan.com
EM, Economic and Policy
Research
Fabio Akira
(55-11) 4950-3634
fabio.akira@jpmorgan.com
Cassiana Fernandez
(55-11) 4950-3369
cassiana.fernandez@jpmorgan.com
Banco J.P. Morgan S.A.
Cover photo: Edifcio Copan (So Paulo, SP). Building Architect: Oscar Niemeyer.
Source: Wikimedia Commons
See page 137 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com
Emy Shayo Cherman Latin America Equity Research
(55-11) 4950-6684 October 2013
emy.shayo@jpmorgan.com
Table of Contents
Overview ...................................................................................4
Area..............................................................................................................................4
Population ....................................................................................................................5
Income Distribution .....................................................................................................7
Economic Distribution of the Population .....................................................................9
Happy People .............................................................................................................10
Health .........................................................................................................................11
Education ...................................................................................................................12
Security ......................................................................................................................14
Corruption ..................................................................................................................15
Tourism ......................................................................................................................16
Competitiveness Indicators ........................................................................................18
Economic Activity ..................................................................20
GDP ...........................................................................................................................20
Investments ............................................................................26
Logistics and Infrastructure Investment Program ......................................................26
Brasil Maior Program ................................................................................................29
PAC............................................................................................................................30
Minha Casa, Minha Vida (MCMV) ...........................................................................30
2014 FIFA World Cup ...............................................................................................32
2016 Olympic Games Rio de Janeiro......................................................................32
Industry ......................................................................................................................33
Consumption ..............................................................................................................34
Labor ..........................................................................................................................37
Inflation ...................................................................................39
History .......................................................................................................................39
Main Inflation Indexes ...............................................................................................41
Central Bank and Monetary Policy ............................................................................44
Exchange Rate Policy ................................................................................................45
External Sector .......................................................................47
Exports .......................................................................................................................48
Imports .......................................................................................................................49
External Accounts ......................................................................................................50
External Debt .............................................................................................................53
Fiscal Policy ............................................................................54
The Annual Budget ....................................................................................................54
Fiscal Indicators .........................................................................................................55
Public Sector Debt .....................................................................................................56
Sovereign Credit Ratings ...........................................................................................57
Tax System ................................................................................................................57
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Credit .......................................................................................61
Brazilian Mortgage System........................................................................................64
BNDES ......................................................................................................................65
Capital Markets .......................................................................66
IPOs ...........................................................................................................................68
Bovespa Indexes ........................................................................................................68
MSCI..........................................................................................................................70
Equity Market Valuation............................................................................................71
Flow of Funds ............................................................................................................72
Pension Funds ............................................................................................................73
Mutual Funds .............................................................................................................74
Political System ......................................................................75
Brazils Main Political Parties ...................................................................................76
Brazils Presidents .....................................................................................................77
Brazils Current Political Situation ............................................................................78
2014 Elections............................................................................................................79
Brazilian Corporates ..............................................................81
Sectors ....................................................................................81
Oil, Gas & Petrochemicals .........................................................................................81
Metals & Mining ........................................................................................................84
Pulp and Paper ...........................................................................................................86
Banks .........................................................................................................................87
Non-Bank Financials .................................................................................................89
Homebuilders .............................................................................................................92
Malls ..........................................................................................................................94
Retail ..........................................................................................................................95
Healthcare ..................................................................................................................97
Food ...........................................................................................................................99
Beverages .................................................................................................................100
Tobacco....................................................................................................................101
Transportation ..........................................................................................................102
Capital Goods ..........................................................................................................107
Agribusiness.............................................................................................................109
Telecommunications ................................................................................................110
Education .................................................................................................................112
Annex 1: Brazil Local Markets Guide September 2013 ..116
Annex 2: Historical Economic Data and Forecasts ...........123
Annex 3: List of Tables and Figures ...................................126
Companies Mentioned .........................................................134
Special thanks to Felipe Albuquerque Maia for his valuable contribution to this
report.
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Table 2: Regional Profile

Overview North
Area 3,869,637.9 km or 45.4%
Area Population 15.9 million or 8.3% (2010)
4.1 people/km
With a total area of 8.5 million square kilometers
GDP R$201.5 billion or 5.3% (2010)
(3.4 million square miles) Brazil is the worlds 5th-
US$7216 per capita (annual)
largest country in the world. It is also the third-largest
Main Extractive/ mining (18.5% of total); agriculture (10%),
country in the Americas, after Canada and the US, and Activities construction (7.1%),, manufacturing (4.8%)
the largest in South America, bordering all the countries States Acre, Amap, Amazonas, Par, Rondnia, Roraima,
of the continent except Chile and Ecuador. Brazil Tocantins
occupies about 40% of South Americas territory. Northeast
Table 1: Top 5 countries in the World by Area Area 1,558,196 km or 18.3%

km Population 53.1 million or 27.8% (2010)
Country Area in square kilometer 34.0 people/km
Russia 17,075,400 GDP R$507 billion or 13.5% (2010)
Canada 9,976,139 US$5432 per capita (annual)
China 9,596,960 Main Utilities (20% of total), construction (17.5%), agriculture
Activities 917.1%), commerce (15.9%), manufacturing (9.3%)
US 9,519,666
States Alagoas, Bahia, Cear, Maranho, Paraba, Pernambuco,
Brazil 8,547,403 Rio Grande do Norte, Sergipe
Source: IBGE.
Midwest
Area 1,606,371.5 km or 18.9%
The country comprises 26 states, the Federal District
and 5,570 municipalities at the start of 2013, 5 more Population 14.1 million or 7.4% (2010)
than in the previous year. Brazil is divided into five 8.75 people/km
main regions: North, Northeast, Midwest, Southeast and GDP R$350 billion or 9.3% (2010)
South. These administrative divisions, set by Instituto US$14,177 per capita (annual)
Brasileiro de Geografia e Estatstica (IBGE), are Main Agriculture (19.1% of total), construction (9.4%), finance
composed of states with similar cultures, economical, Activities (9%), commerce (8.4$), manufacturing (4.7%)
historical and social aspects. States Gois, Mato Grosso, Mato Grosso do Sul, Distrito Federal
Southeast
Figure 1: Brazil Divided by Region
Area 924,511.3 km or 10.9%
Population 80.4 million or 42.1% (2010)
86.91 people/km
GDP R$ 2,088 billion or 55.4% (2010)
US$14,765 per capita (annual)
Main Oil & mining (71.1%); IT services (70%); finance (67%),
North Activities manufacturing (60%), transportation/ storage (59.4%)
States Esprito Santo, Minas Gerais, Rio de Janeiro, So Paulo
Northeast
South
Area 575,315 km or 6.8%
Population 27.4 million or 16.5% (2010)
Midwest
47.6 people/km
Southeast
GDP R$535.7 billion or 16.5% (2009)
US$9,694 per capita (annual)
Main Agriculture (25.5% of total), manufacturing (21%), utilities
South
Activities (20%), commerce (19.5%), transportation and storage (18%)
States Paran, Rio Grande do Sul, Santa Catarina
Source: IBGE, J.P. Morgan.
Source: IBGE; J.P. Morgan.
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Population Figure 4: Life Expectancy at Birth (2011)

Years
Brazil has the 5th-largest population in the world,
with an estimate of 201 million people in 2013. It is
estimated that population growth will peak in 2043 at
about 228.5 million people and will then start to shrink,
with 10 million less people in the population by 2060
(218.2 million).
Figure 2: Population Projections (2000 2060)

Millions of people
Source: World Bank
The expected number of children born per woman in

Brazil is also falling. According to IBGE, Brazils
average fertility rate was 1.87 in 2010, down from 2.39
in 2000 and over 6 in the 1940s, 1950s and 1960s (a
70% decline). The trend suggests stabilization at 1.5
children per woman and the maintenance of this number
in the long term.
Source: IBGE, 2013
Figure 5: Fertility Rate

Brazils population is currently growing at an annual Number of children per woman
rate of 0.9% (2013), with a declining trend. Indeed,
from the 1960s onwards, the growth rate of the
Brazilian population has started to decline, having
slowed from more than 3% per year in 1950-60. The
national statistics institute (IBGE) estimates that the
population growth rate is going to remain positive but in
a declining trend until 2044, and after that will turn
negative.
Source: IBGE.
Figure 3: Population Growth Rate Projection
Millions of People
Age groups and the demographic bonus: The
Brazilian age pyramid used to be a classic one until the
1960s, with a large base and a narrow top. Since then,
the base has been narrowing while the middle has been
widening, a reflection of the population getting older.
This is happening as both the mortality and the fertility
rates have been decreasing.
Figure 6: Population Pyramid (2013)

Source: IBGE, 2013 90 to 99
80 to 89
70 to 79
Life expectancy at birth in Brazil rose more than 12 60 to 69
50 to 59
years since the 1980s, reaching an estimated 74.84 40 to 49
years in 2013. In general, men do not live as long as 30 to 39
20 to 29
women; while men born in 2013 are expected to live 10 to 19
0 to 9
until 71.2 years of age, women are expected to live to -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
78.5 years old. Despite all the developments observed in Men Women
this indicator, Brazil still has a low life expectancy rate

Source: IBGE
relative to developed countries. Hong Kong has the
highest life expectancy in the world, followed by
Switzerland, with Japan in third place.
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Figure 7: Population Pyramid (2025) Figure 10: Dependency Ratio (the "Demographic Bonus") 2011
90 to 99
80 to 89
70 to 79
60 to 69
50 to 59
40 to 49
30 to 39
20 to 29
10 to 19
0 to 9
-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Men Women
Source: IBGE Source: IBGE and UN Department of Economic and Social Affairs
Figure 8: Population Pyramid (2050) The IBGEs new (2013) population estimates indicate
90 to 99
80 to 89 that the dependency ratio is even lower than earlier
70 to 79
60 to 69
thought. Today, the dependency ratio is at 46.07. This
50 to 59
40 to 49
means that there are 46 "dependents" for every 100
30 to 39 people active. The IBGE, on the other hand, estimates
20 to 29
10 to 19 that the so-called demographic bonus will reach its peak
0 to 9
in 2022, when the dependency ratio will hit 43.35. After
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
Men Women
that, it rises and by 2041 there will be more dependents
(people not working) tha active workers in the
Source: IBGE population. This is why time is of the essence for Brazil
to start implementing comprehensive policies that seek
Brazilians getting older: In 1960, for example, 42.7% to revamp the social security system.
of the population was under 14 years old, while this
proportion in 2010 declined to 25.5%. Meanwhile, only Figure 11: Brazil Dependency Ratio Estimates
2.7% of the population was over 65 years old in 1960, % of total population
and that rose to 6.8% in 2010.
Figure 9: Age Distribution of the Population Over Time

% of total
Source: IBGE, 2013
On average, the population density in Brazil is 22.9

inhabitants per square kilometer (2011). With this
Source: IBGE number the country can be considered a sparsely
populated area, given the world average is 51 people per
Dependency ratio/demographic bonus: While the square kilometer. The most populated place in the world
population is getting older, Brazil still has a significant is Macau (China) with more than 18,600 people per
demographic bonus, as the number of people who work square kilometer, followed by Monaco.
far outpace those that do not work (the children and
elderly). This means that the so-called dependency ratio The population in Brazil is more concentrated on the
has been decreasing, which is of great advantage for the coast, which is partly explained by the European
country, as long as the population that is fit to work is colonization (1500s onward) that took place in those
actually working. The Brazilian data compare very areas. In the North region, the country still has
favorably with the world average of 63.3 and the LatAm unoccupied areas, mainly because of the presence of
+ Caribbean average of 62.8 (2011). This is an huge and dense forests, such as the Amazon. Indeed,
important impetus to the economy, as long as those of while the Amazon occupies 18.4% of Brazils total area,
working age have productive jobs. U.N. estimates show it has a population density of only 2.3 inh/km. On the
that the dependency ratio should reach a bottom by other hand, the federal district area (Braslia) has an
2025, when that ratio is expected to start rising. occupation of 462.1 inh/km.
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Population distribution can also be understood as a Income Distribution

reflection of economic development. So Paulo, where
the population density reaches 160 people per square One of Brazils greatest problems is the distribution of
kilometer, accounts for more than one third of the incomes among the population. Brazil ranks poorly in
countrys GDP. international comparisons as one of the countries with
the highest income inequalities in the world. According
Figure 12: Population Density by State to the Gini coefficient, which measures income
distribution in the population and is one of the most
used inequality measures zero means perfect equality
and 100 perfect inequality Brazil has always been
among the worst performers. Indeed, according to a
recent survey from the World Factbook, Brazil is the
17th most unequal country in the world.
Hab/km
0 10 Table 3: Gini Coefficient Selected Country Rankings

10 40
40 70
Rank Country Gini Year
70 100
100 200
1 Lesotho 0.632 1995
200 or more
2 South Africa 0.631 2005

8 Colombia 0.585 2011
15 Chile 0.521 2009
17 Brazil 0.519 2012
Source: IBGE.
25 Mexico 0.483 2008
Urbanization: A movement of migration to urban areas 29 China 0.474 2012
can be observed around the whole world. In 2007 more 34 Peru 0.46 2010
than half of the worlds population was living in cities.
Brazil is no exception to this tendency. Since 1950 the 36 Argentina 0.458 2009
urbanization rate has been rising, and the population 41 U.S. 0.45 2007
living in urban areas has more than doubled. In 2011 52 Russia 0.417 2011
85% of the total Brazilian population was living in
urban areas. The problems caused by this fast and 58 Turkey 0.402 2010
intense flow of people can already be observed in 69 Venezuela 0.39 2011
almost all big cities in the country. The lack of planning 76 Japan 0.376 2008
to receive all these new city dwellers was responsible
for disorderly urban growth, which was not followed by 78 India 0.368 2004
improvements in infrastructure, such as transportation, 112 EU 0.307 2011
sewage, hospitals and schools. The least urbanized 136 Sweden 0.248 2005
region in the country is the Northeast (73.7%), while
Source: CIA World Factbook
Maranho is the state with the lowest urbanization rate:
60.2%. On the other extreme are Rio de Janeiro (97.4%)
and Sao Paulo (96.8%). In the last four decades of the 20th century (1960-2000),
Brazil showed very little evolution in terms of wealth
Figure 13: Urban Population as % of Total distribution. The first signs of improvement started in
the beginning of the 21st century, when the country was
able to align economic growth with inequality
reduction, mostly due to a more stable macro
environment. Over the past ten years, income inequality
measured by the Gini coefficient has declined
continuously. However, the 2012 PNAD survey of the
IBGE indicated that the Gini coefficient remained stable
in 2012 relative to 2011. It is still early to assume that
this stability is the end of a better income distribution,
Source: IBGE.
but certainly something to pay attention to.
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Figure 14: Gini Index Evolution in Brazil Recent Improvement The silver lining is that the fastest income rise is
happening among the poorest, rather than the richest.
Between 2004 and 2012, the real income of the 10%
poorest increased by over 80%, while the income of the
10% richest increased by 37%.
Figure 17: Income Rise per Deciles (CAGR 2004 2012)
Source: CPS/FGV
The IBGE compiles a different set of data for the Gini

coefficient, and it found that even though there has been
evolution in the last few years regarding income
inequality, the indicator stopped improving in 2012
relative to 2011. It is still to soon to know if this is a Source: IBGE, PNAD 2011
trend or a one-off, but it appears that the economic
slowdown is also hitting income distribution. The main poverty reduction programs
Figure 15: Recent Evolution of the Gini Index Stability in 2012 The Bolsa Famlia program: Created in 2003, Bolsa
Famlia is nowadays the largest conditional cash
transfer program in the world, serving 13.9 million
families, or around 52 million people. Families that
qualify must have an income per household member
equal or less than R$140. The amount of the benefit
depends on the income, number and age of children.
The benefit varies from R$32 to R$306. For a person or
family to receive the benefit, the city where they live
Source: PNAD 2012, IBGE must include them in the central registry (Cadastro
nico), a data tool that identifies the poor and
Despite the recent improvement, income inequality determines what benefit they qualify for. No one in
continues to be a sad problem. Looking at the income Brazil receives a benefit without being in the Cadastro
distribution per different classes, one notes that the nico.
richest 10% of the working population concentrates
41.5% of total income in Brazil (2012), while the How the program works: The basic benefit of
poorest 10% had only 1.4%. Worse, the richest 1% had R$70/month is paid to all families with income of up to
12% of the total income in the country, equivalent to the R$70/month per capita, even if they have no children.
income held by almost 40% of the poorest. These families, which are considered to be in extreme
poverty, can get a variable benefit of R$32/month for
Figure 16: Income Distribution (2012) each child until 15 years of age for up to 5 children and
% R$38/month for up to 2 children ages 15 to 17 years
old. Families that have an income below R$140/month
per household member qualify for the Bolsa Familia,
but if they earn between R$70 and R$140/month, they
do not get the basic R$70/month benefit, only the
variable benefits depending on the number and age of
the children in the household.
Source: IBGE, PNAD 2011
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Table 4: Bolsa Famlia Benefits Despite these large numbers, the Bolsa Familia is not
Number of Children Monthly Benefit by Income Segment necessarily a costly program, with disbursements
Until 15 equivalent to 0.5% of GDP in 2012. The program
years old, From 16 to Until R$70 per From R$70 to covers all the regions in Brazil but is concentrated most
pregnant or 17 years old capita R$140 per capita heavily in the poorest territories of the country,
nursing especially the Northeast.
0 0 R$ 70.00 -
1 0 R$ 102.00 R$ 32.00 Brasil Sem Misria: Brazil Without Misery program
2 0 R$ 134.00 R$ 64.00 was created by President Dilma Rousseff in 2012 to
3 0 R$ 166.00 R$ 96.00 identify those Brazilians who are below the poverty line
4 0 R$198.00 R$128.00 (R$70/month) and still not receiving any kind of social
5 0 R$230.00 R$160.00 or economic assistance from the government. The
0 1 R$ 108.00 R$38.00 government calculates that there are 16.2 million
1 1 R$ 140.00 R$ 70.00 Brazilians under the poverty line, of which 48% is in
2 1 R$ 172.00 R$ 102.00 rural areas and 40% is under 14 years old. The objective
3 1 R$ 204.00 R$ 134.00 of the program is first and foremost to find this
4 1 R$236.00 R$166.00 contingent and get them to subscribe to Bolsa Familia.
5 1 R$268.00 R$198.00 Then, the program also seeks to give access to public
0 2 R$ 146.00 R$ 76.00
services in education, health, social assistance, access to
1 2 R$ 178.00 R$ 108.00
utilities, etc. The uniqueness of this program is that,
different from others, the government is actively trying
2 2 R$ 210.00 R$ 140.00
to find these people and not passively awaiting for them
3 2 R$ 242.00 R$ 172.00
to get registered in Bolsa Familia and other social
4 2 R$274.00 R$204.00
programs.
5 2 R$306.00 R$236.00
Source: Ministerio do Desenvolvimento Social e Combate a Fome.
Benefcio de Prestao Continuada program (BPC):
Together with Bolsa Famlia, the BPC is one of the
The Bolsa Famlia Program is a conditional cash most important programs of cash transfer in Brazil. BPC
transfer program, which means that to receive the is responsible for assuring one monthly minimum wage,
benefit the families must fulfill certain conditions to the elderly and disabled, who belong to families with
imposed by the government, such as immunization a per capita income under one quarter of the minimum
monitoring and school attendance. Children between 6 wage per month. Since its implementation in 1996, the
and 15 years of age must be properly enrolled at school program has increased the number of recipients,
and attending at least 85% of the classes. If the family reaching 3.6 million people in March 2012.
disobeys any condition five consecutive times, its
benefit is canceled.
Economic Distribution of the
The volume of benefits disbursed by the federal Population
government to support the Bolsa Famlia programs was In Brazil, it is very common to use a letter to classify a
R$3.4 billion in 2003, R$17.2 billion in 2011 and grew particular economic segment for the population. Class A
to R$21.1 billion in 2012. In real terms, the increase in refers to the richest sectors, while class E refers to the
the Bolsa Familia disbursement was over 15% in 2012, poorest. A household is classified in one or another
the largest rise since 2006. Part of the rise is due to an economic class depending mostly on its total income,
increase since the start of 2011 in the numbers of the presence of some comfort items in the house (such
families benefited, the increase in the nominal value of as number of bathrooms, TVs, refrigerators, etc.), and
the benefit, new types of benefits (a R$32/month the education level of the head of the household.
payment to help on the nutrition of babies from 0 to 6
months and a R$32/month payment for pregnant
women), and the increase from three to five for the
number of children that could qualify for the variable
benefit.
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Table 5: Economic Classes: Household Earnings per Month last 10 years there was an important advance in the
R$ Northeast (from 17% to 23% of the total middle class),
Household Average Gross Income/ and to some extent, the Center West. Almost 90% of the
month in BRL middle class is in urban areas, and the majority has only
Class DE 776 minimal education, even though almost 58% is working.
Class C2 1147
Class C1 1685 Table 7: Composition of the Middle Class by Diverse Criteria
Class B2 2654 2002 2012
Class B1 5241 Race
Class A 9263 White and Yellow 62 49
Source: ABEP 2013 criteria Black 38 51
Region
In the 1980s and 1990s, it was common to say that North 5 6
Brazil was a country of extremes, that people were Northeast 17 23
either rich or poor as the middle class lacked critical Southeast 52 46
mass. Since then, however, the middle class (commonly South 19 16
referred to as Class C) has been growing and today
Center West 7 9
constitutes the majority of the Brazilian population.
Education Level of the Head of the Family
Over the last decade, about 40 million Brazilians
Primary incomplete/ no education 59 51
entered the middle class, which in 2012 compromised
some 104 million people, or about 52% of the Primary complete 11 13
population, up from 38% in 2002. Indeed, if the High School (completed or not) 23 30
Brazilian middle class were a country, it would be the Some college 6 7
12th largest country in the world, just behind Mexico. Occupation Sector
These estimates are from the Strategic Issues Secretary, Agriculture 12 12
an entity from the federal government. However, other Other industrial activities 1 1
studies also show the same evolution. Notably, Marcelo Manufacturing 17 14
Neri, previously at the Center for Social Studies at Construction 7 10
FGV, has done extensive work on the subject and also Commerce 20 19
shows that between 2003 and 2011, 39.6 million Hotels & Restaurants 4 6
Brazilians entered the middle class, almost 60 million Transportation & Communication 6 6
people since 1993. In 2011, according to his
Public Sector 5 5
calculations, there were 100.5 million people in the
Eduaction & Health 10 8
middle class, that is, earning between R$1200 and
Domestic Services 7 8
R$5174 monthly.
Others 11 12
Table 6: Distribution of Economic Classes Formalization
% of total population Formal worker 52 58
Informal worker 48 42
1995 2001 2005 2009 2010 2011
Source: Secretaria de Assuntos Estrategicos
Class AB 8.5% 8.3% 8.3% 10.6% 12.0% 11.8%
Class C 36.5% 38.1% 41.8% 50.5% 53.6% 55.1%
Happy People
Class DE 55.0% 53.6% 49.9% 38.9% 34.4% 33.2%
Source: CPS - FGV
Brazil is four times world champion in terms of
perspectives for happiness. In a scale that ranges from 0
Who is the Brazilian middle class? According to a to 10, Brazilians have rated their future happiness in
government study (Voices of the Middle Class, volume 2015 at 8.6, the highest among 154 countries (the
2), the middle class is becoming more diverse. For survey was conducted in 2010). Denmark is the world
example, while in 2002, 62% of the middle class was champion in current happiness, but still ranks third in
composed by the white population; now, this contingent terms of future happiness. The last place in the ranking
is equally devided between whites and blacks. of future happiness is occupied by Syria. In terms of
Regionally, The Southeast continues to concentrate the present happiness, Brazil ranks 11th. In Brazil, women
vast majority of the middle class (46%), but over the are happier than men in both the future and present
happiness index, but not in the past, which might
10
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underscore some more freedom and respect for Pharmacy," available at any drugstore in Brazil, offering
womens rights over the past few years. very cheap access to essential medicine.
Table 8: Future Happiness Ranking 2015 Figure 18: Number of Beneficiaries of Private Health Insurance
# of people, million
Country Rank Country Rank
Brazil 1 Bangladesh 76
Costa Rica 2 Spain 81
Denmark 11 Turkey 96
Ireland 16 Russia 105
Switzerland 21 Senegal 106
U.K. 26 China 111
South Africa 27 India 119
Argentina 41 Iraq 126
Peru 51 Egypt 136 Source: ANS
Italy 56 Haiti 141

France 61 Greece 145
In Brazil total expenses associated with healthcare
amounted to 9.0% of GDP in 2010, up from 7.2% of
Germany 62 Portugal 146
GDP in 2000. This is almost in line with the global
Indonesia 71 Syria 156
average and the highest for both BRICS and Latin
Source: CPS/ FGV with data from Gallup World Poll American countries. Still, this allocation is still very far
from the expenditure on healthcare in developed
The 2013 World Happiness Report shows that the North markets, and especially those that have universal health
European countries took the first few positions in the systems.
happiness ranking, while the poorest African countries
and conflict zones fared the worst. Brazil was ranked 24 Figure 19: Total Expenditure on Health as % of GDP (2010)
out of 156 countries, with Panama (15), Mexico (16) %
and Venezuela (20) ahead of it in Latin America. The
study shows that happiness in all LatAm countries
increased in the period of 2010-12 relative to 2005-07.
Health
The Brazilian health system is divided in two: public
and private. The public system is known as SUS
Sistema nico de Saude, a universal health system. The
idea that the government has to provide for free health Source: World Health Organization (WHO)
care for all Brazilian citizens was an important item of
the 1988 Constitution, which considered health a Brazils relatively high expenditure on health is only
citizens right. The US is decentralized, with most made possible due to the private sector. Public sector
municipalities running the system with state and federal expenditures on health amounted to 47% of total in
resources. The private system complements the public 2010, while private sector (both insurance and out of
one and can provide services for the SUS through pocket) amounted to 53%, which is high relative to the
specialized clinics, diagnosis labs, private practices, etc. global average (41.1%) and also high relative to upper
The private system is mostly available for those who middle income countries (44.5%). Moreover, the split
pay for it and have access to health insurance. can be considered very low for a public sector that
wishes to offer universal health coverage. In such
The SUS, in theory, reaches 100% of the population. It countries such as Spain, U.K. and Norway, the public
is estimated that 25.1% of the population, or 49.2 sector alone spends between 7 and 9% of GDP on
million people, is covered by private health insurance, health. Still, the public service share of health
but they are also entitled to access to the SUSs health expenditure is likely to increase in the coming years.
services. The government is engaged in developing Constitutional Amendment 29, which was regulated in
projects aiming to facilitate the population's access to 2012, establishes that the Union needs to increase
basic care. An example is a program called Popular expenses with health on a yearly basis on an amount
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(55-11) 4950-6684 October 2013
that is equal or greater than nominal GDP at the prior women are overweight, while 12.5% of men and 16.5%
year. For states, the rule is that 12% of tax revenues of women are obese. One in three children aged 5 to 9
should be invested in health, while in the municipalities years old is also overweight. Among the 20% with top
this amount rises to 15%. Also, in 2H13, Congress income, 61.8% of those over 20 years old are
approved a measure that establishes that 25% of the overweight. Obesity is more present in the South,
revenues coming from oil royalties would be destined to Southeast and Midwest regions, especially in urban
health (the remaining to education). Per capita areas. Estimates are that if the weight of Brazilians
expenditures on health in Brazil amounted to US$1009 continues to increase at the current pace, the proportion
in PPP terms in 2010, which is double the level from 10 of obese people within the population will be 30% in
years back. ten years, the same as in the U.S.
Mais Mdicos program: Following the June 2013 Education

street protests, the government decided to put an
emphasis on improving pubic services. Polls show that Like most countries, the Brazilian education system is
the population considers health and education as the divided into primary, secondary and tertiary (college
greatest problems of the country. and higher). Theoretically, basic education is mandatory
for children between 6 and 14 years old and free for
Figure 20: Poll What Is Brazil's Main Problem? everybody (including adults). The basic level takes 9
% of total years to be fully completed. Secondary education lasts 3
years and is also free but is not mandatory. Higher
education, which includes university study, is free only
in public universities.
Education is recognized as being Brazils main

structural problem. Children do not stay very long at
school, and the quality of education is very poor, thus
continuing to perpetuate a system of workers with very
little skills and, thus, productivity. The illiteracy rate in
Source: Datafolha, June 2013 Brazil in 2012 was 8.7% (13.2 million people), with the
highest level being observed in the Northeast and the
Today in Brazil there are 1.8 doctors for each 10 people, lowest in the South. It is important to note that this was
which is low by international comparisons. Not only the first time in several years that the illiteracy rate
that, but most doctors are concentrated in a few states, failed to decline. On the other hand, functional illiteracy
and municipalities, with many of the poorest and more (those 15 years or older with less than 4 years of
distant areas in the continent lacking health schooling and unable to participate in all activities in
professionals. The Mais Mdicos (more doctors) which reading and writing is needed) fell in 2012 to
program aims to create 10K new jobs for doctors in the 18.3% of the population (27.8 million people), down
regions where they are needed the most. Those that from 20.4% in 2012.
qualify for the posts will immediately receive a R$10K
grant and will have to sign a contract. Brazilian doctors Figure 21: Illiteracy Rate of People 15 years or Older
will have the priority to fill out the posts, but in case % of the population
they don't turn up (they didn't), Brazil is going to bring 2004 2011 2012
doctors from abroad (Cuba being a top source). In Brazil 11.5 8.6 8.7
addition, the program created almost 11.5K new college North 13 10.2 10
medicine seats, and it increases in two years the time it Northeast 22.5 16.9 17.4
takes to graduate so that future doctors must do a two- Southeast 6.6 4.8 4.8
year training at public hospitals. There has been
South 6.3 4.9 4.4
significant controversy surrounding the program in
Brazil. These are mostly focused on the foreign doctors Midwest 9.2 6.3 6.7
(Brazil doesn't have this tradition) and on the two-year Source: IBGE
graduation extension.
Brazilians are getting fatter: According to an IBGE

survey (POF), 50% of Brazilian men and 48% of
12
(55-11) 4950-6684 October 2013
On average, a Brazilian student spends 7.2 years at national level, 63.7% of fifth graders were below
school, which is not even enough to complete the basic adequate levels of learning, 83.1% for ninth graders,
education and is the lowest figure in all of South and, worse, 89.7% for third-year college students.
America. In Latin America overall, mean years of Looking at the Pisa, an international study conducted by
schooling is 7.8, while for high human development the OECD with the aim to evaluate the proficiency of
countries (the category that includes Brazil), the mean is 15-year-olds worldwide in key subjects (reading, math,
8.8 years. and science), Brazil ranked 57 out of 65 countries in
math.
Figure 22: Mean Years of Schooling
years Figure 24: Peformance in the Pisa Math Evaluation (2009)
Source: OECD
Source: HDR UNDP. Note: Data refer to 2010 or the most recent year available. For
Brazil, data are for 2011.
According to the OECD, Brazil spends on average
US$3,067 per student per year from primary to
An overall picture of the level of education of Brazilians tertiary education. This is three times lower than the
is far from being optimistic, even though the data have OECD average and the lowest level from all countries
been on an improving trend. In 2012, over 45% of the surveyed, with the exception of Mexico. However,
population had no instruction or didn't finish primary when it comes to tertiary (college) education, spending
education. Only 25.2% finished secondary education, for each student increases to US$13,137/ year, pretty
and college graduates were 12% of the population, much in line with the OECD average and even
among the worst ratios in the world. The government higher than the G20. As can be seen in the figure
has recently launched the FIES, a program that below, this amount is far from the OECD average
distributes student loans at a subsidized rate for those (US$7,870) ranking Brazil as the worst country within
wishing to go to college. This has been an important the sample.
catalyst for the increase in college attendees over the
past few years, but it is far from ideal. The distortion above can be further explained by
looking at the chart below. As can be seen, Brazil
Figure 23: Education Level of People Aged 25 Years or Older expenses in education are below the OECD average, but
% not far from it. The problem is most likely the fact that
few resources are spent on basic education, while the
bulk is destined for college. It is importnat to mention
that the public universities in Brazil are considered the
best in the country and have a quality level that is
comparable with other countries. However, primary and
secondary education in public schools is of low quality,
and, as seen above, don't prepare students well for the
labor market challenges to come.
Source: PNAD 2012 - IBGE
Poor learning quality: Not only the quantity of people

in school is low, but also the quality is poor. The SAEB/
Prova Brasil is a test that is applied in all schools for
secondary students at the 5th year, 9th year and the third
year of college. The latest result indicated that at the
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(55-11) 4950-6684 October 2013
Figure 25: Expenditures on Education surprisingly, worse than Russia in all items except
% of total GDP police reliability.
Table 9: Brazil and Peer Countries, Ranks on Crime/ Violence

Rank of 144 Business Cost Organized Police
countries of Crime and Crime Reliability
violence
China 62 88 59
Russia 80 111 122
Brazil 124 126 64
Mexico 139 143 126
Source: OECD
Colombia 140 144 73
South Africa 141 113 96
Security
Source: World Competitiveness Report 2013
One of the most talked about subjects in Brazil in
1H2013 was not the widespread protests, but the The figure below registers the number of homicides per
perceived increase in violence in the big cities. Indeed, 100,000 inhabitants. Once more, Brazil figures among
one could say anecdotally that conversations about the countries with the worst statistics. The homicide rate
security surpassed the other favorite subject: the high has been mostly declining, but it is still above 20
cost of living. homicides per 100,000 people, placing the country in
the top 20 by homicide rate.
According to the World Economic Forum (2009), Brazil
figures among the countries with the worst security Figure 26: Homicide Rate per 100,000 People (2011)
indexes in the world. By all indicators, the country is
poorly ranked and below the world average. Within 133
countries, Brazil was ranked 89th in reliability of police
services, 111th in organized crime and 118th in business
costs of crime and violence.
In Rio, where organized crime related to drugs and arms

trafficking has been a key issue over the last few years,
the government has been relatively successful in
implementing the UPPs Pacifying Police Units. This Source: UNODC. Star next to country name indicates data from 2010
is a strategy whereby the police enter the domains of the
drug organization (typically inside the favelas), expel Brazil vs. Mexico: For the first time in 2010, Brazils
the criminals, and install a police unit that will live and murder rate became lower than Mexicos. Mexicos
stay inside the favela for months and even years, until murder rate per 100,000 inhabitants was stuck in single
the community is re-organized in a crime-free digits until 2007. From then on, it started to climb and is
environment. There are already 33 UPPs installed in Rio now higher than Brazil's and the third most violent
(up from 26 last year), and the goal is to attain 40 UPPs among the major LatAm countries, behind Venezuela
until 2014. There are 8.5K military police involved in and Colombia.
the UPPs, or 20% of Rio's police. The program has been
successfully evaluated by specialists and the population Figure 27: Murder Rate per 100,000 inhabitants: Mexico vs.
in general. Still, many are wondering what the next step Brazil
will be.
According to the World Economic Forums Global

Competitiveness Report (2012-13), Brazil ranks 122 out
of 144 countries in terms of business cost of crime and
violence and also in terms of organized crime. Perhaps
surprisingly, the rank on police reliability is 60 out of
144. Still, Brazil is better than its Latin peers Mexico
and Colombia in all of these three aspects, but, Source: UNODC
14
(55-11) 4950-6684 October 2013
No Pretty Comparison: There is nothing to be proud Public Advocacy (Ministrio Pblico) estimates that
of. Between 1980 and 2010, there were 800,000 there is a deficit corresponding to 146K people in jails.
Brazilians that were murdered by a firearm. In 2010, Other than this, there is an ongoing debate in Brazil
there were 38,892 murders. The data from Mapa da about legalizing small amounts of drugs for
Violencia 2013 by Jacobo Waiselfisz shows that consumption by the population, where now even a small
between 2004 and 2007, the 12 most murderous armed amount classifies as drug trafficking.
conflicts around the world generated 169,574 deaths. In
Brazil, where there are no land disputes, religious Corruption
rivalries, or ethnic conflicts, there were 192,804
murders during the same period. The sheer absolute Despite all the noise and assessments regarding
number cannot be justified by a large population. corruption in Brazil, the country doesnt fare that badly
Consider that India has more than 1.2 billion inhabitants in global comparisons, or even within Latin America.
and a murder rate that is lower than in Brazil. The study According to Transparency International, Brazil ranks
also shows data from the World Health Organization, 69 out of 176 countries, with a score of 43 (with 0 most
indicating that Brazil, with a murder rate by firearm of corrupt and 100 the cleanest). Of the main LatAm
20.4 per inhabitant in 2010, ranks 9th among 100 countries, only Chile and Uruguay are ahead of Brazil,
analyzed countries. both with a score of 20. Colombia (94), Argentina (102)
and Mexico (105) are the worst. At the beginning of her
Over time, the Brazilian murder rate per firearm administration, President Dilma took action against
increased from only 7.3 per 100,000 inhabitants in 1980 corruption in the executive branch by taking a zero
to 20.4 per 100,000 inhabitants in 2010, an increase of tolerance approach. Eight Cabinet members were fired
almost 180% in 20 years. Worse still, among people due to corruption, and that contributed to enhancing the
aged 15 and 29 years old, the murder rate per firearm president's popularity. However, broad government
today is 44.2, an increase of 246% in 20 years. The initiatives were not seen after that.
silver lining is that the statistic has somewhat stabilized
Table 10: Global Corruption Perception Rank 2012
in the 21st century. The most violent region in this
metric is the Northeast (Alagoas with a murder rate of Rank Country Rank Country
55.3 is the most violent in the country), while the 1 Denmark 69 South Africa
Southeast is the least violent. 1 Finland 80 China
1 New Zealand 83 Peru
Figure 28: Historical Murder Rate (per Firearm) 4 Sweden 94 Colombia
# of murders per 100,000 inhabitants
5 Singapore 94 India
17 Japan 102 Argentina
17 U.K. 105 Mexico
19 U.S. 133 Russia
20 Chile 150 Paraguay
20 Uruguay 165 Venezuela
54 Turkey 174 North Korea
69 Brazil 174 Somalia
Source: Mapa da Violencia 2013 Source: Transparency International
Other than murder, robbery with a firearm is a huge A relative advancement of the past few years has been
problem in Brazil and most present in the large cities. the Ficha Limpa law. The measure was brought to
Congress via popular request, and it stipulates that only
At the end of 2012 there were 548K people in candidates who have no pending issues with the
Brazilian prisons, or 287.3 per 100,000 inhabitants. Judiciary can run for elected office.
According to the U.S., this is the fourth largest prison
population in the world, behind the U.S., China and Still the 2013 Global Corruption Barometer from
Russia. A quarter of these are in jail due to drug Transparency International shows that the overall
trafficking. There is a huge problem of overcrowding in perception of the political system is one of extreme
jails, which often generates violence and inhumane corruption. 81% of those surveyed felt that political
conditions inside the Brazilian prison system. The parties were corrupt/extremely corrupt, while 72% felt
15
(55-11) 4950-6684 October 2013
that Congress was corrupt or extremely corrupt. The Figure 31: Top 10 travel Destinations in the Americas
police falls into this category for 70% of respondents. # of Arrivals, million
Figure 29: Perception of Corruption/ Extreme Corruption in the

Following Institutions
Source: United Nations World Tourism Organization
The situation of tourism in Brazil has been somewhat

Source: Transparency International, Global Corruption Barometer 2013 stable over the last decade, with the highest amount of
tourists observed in 2012. However, prospects for the
The study also asked respondents on their perception of next few years are very encouraging, considering that
overall corruption over the last two years. Only 18% Brazil is hosting the two top sporting events in the
answered that it decreased, while the remaining said that world: The FIFA World Cup in 2014 and the 2016
it stayed the same or increased. Olympic Games. The data on tourist arrivals in Brazil
likely improved already in 2013, considering the FIFA
Figure 30: Perception of the Level of the Corruption Change Confederation Cup and the World Youth Day (when
Over the Past Two Years Pope Francis came to the country in July 2013).
Figure 32: Tourist Arrivals in Brazil

Million
Source: Transparency International, Global Corruption Barometer 2013
Tourism
Despite all its natural beauty and its huge and Source: Ministrio do Turismo.
diversified territory, Brazil is not among the 30 most

visited countries in the world. One of the reasons for the About half the international travelers that come to
low international demand could be the distance between Brazil are from South America (49.7%) mainly from
Brazil and core tourism centers. In addition, issues such Argentina (almost 30% of total). Europeans represented
as safety and security, lack of infrastructure and skilled 29.1%, coming especially from Italy and Germany, and
labor also contribute to low tourism penetration in the North Americans account for 12.6% of the international
country. In the last few years, one would have to think travelers to Brazil in 2012.
that the strong BRL has been an inhibitor of tourism in
Brazil. Still, even with the low numbers of international Total revenues with tourism in Brazil coming from
tourists in Brazil, the countrys assessment is positive: international travelers amounted to US$6.6 billion in
92% of tourists who come to Brazil leave intending to 2012, the same as in 2011. This corresponds to over
come back (according to Embratur). In 2012, Brazil has 28% of revenues generated by tourism in South
outpaced Argentina as the most visited country in South America, but only 0.6% of the world.
America. It is also the fourth most visited destination in
the Americas.
16
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Figure 33: Revenues from International Travelers in Brazil events are good opportunities to start to boost tourism in
US$ billion the country, and therefore a lot of effort should be done
mainly in terms of infrastructure, safety and security.
Brazil is already running out of time to show the world
its capability of development and organization. The
most competitive countries in terms of tourism are
Switzerland, Germany and Austria.
Table 11: Travel and Tourism Competitiveness Rank

2009 2011 2013
Source: Ministerio do Turismo Switzerland 1 1 1
Germany 3 2 2
Below we see Brazils main regions in terms of tourism.
Austria 2 4 3
Rio de Janeiro is the foreigners favorite destination
while Bahia (on the Northeast cost) is the preferred Spain 6 8 4
destination for domestic tourists, especially during UK 11 7 5
Carnival. So Paulo is the business and financial center US 8 6 6
receiving most of the people who come to Brazil for France 4 3 7
business reasons or commercial events. Among the Canada 5 9 8
most popular destinations are also the Amazon rain Sweden 7 5 9
forest, the Pantanal in the Midwest region and the
Singapore 10 10 10
countrys capital, Brasilia, famous for its complex and
innovative architecture. Brazil 45 52 51
Source: World Economic Forum

Figure 34: Main Travel Destinations
The overall Travel and Tourism Compstitiveness index
is the result of a combination of three subindexes: (1)
regulatory framework, (2) business environment and
infrastructure, and (3) human cultural and natural
resources. Brazils overall classification is marked by
Amaznia
extreme results, sometimes positive but sometimes
extremely negative.
Northeast Coast
Competitive advantages: The country is ranked 1st out
of all the countries for its natural resources and 23rd for
Brasilia
its cultural resources, with many World Heritage sites, a
Pantanal
great proportion of protected land area and the richest
Rio de Janeiro fauna and flora in the world.
So Paulo - Business
Competitive disadvantages: Unfortunately, in terms of
infrastructure Brazil remains underdeveloped, with the
quality of the ground transportation network ranked
129th. Price competitiveness ia also an issue as Brazil is
an expensive country to travel to, ranked 126th.
Source: IBGE; J.P. Morgan.
Brazil is ranked 51st in the overall tourism and

travel competitiveness index out of 140 countries and
7th among American countries, behind the US, Canada,
Barbados, Panama, Mexico and Costa Rica. Brazil has
gained one position since the last assessment, and much
is at stake going forward considering the Soccer World
Cup (2014) and the Olympic Games (2016). These two
17
(55-11) 4950-6684 October 2013
Table 12: T&T Competitiveness Index Breakdown (2013) Table 13: Global Competitiveness Index (GCI) 2013-14
Categories Rank 2012-2013
Rank Country
Comparisons
Overall Index 51
Regulatory framework 82 1 Switzerland 0
Policy rules and regulations 119 2 Singapore 0

Environmental sustainability 30 3 Finland 0
Safety and security 73 4 Germany +2

Health and hygiene 70 5 U.S. +2
Prioritization of travel and tourism 102 6 Sweden -2
Business environment and infrastructure 76 7 Hong Kong SAR +2
Air transport infrastructure 48 8 Netherlands -3
Ground transport infrastructure 129 9 Japan +1
Tourism infrastructure 60 10 United Kingdom -2
ICT infrastructure 55 29 China 0
Price competitiveness in T&T industry 126 34 Chile -1
Human, cultural and natural resources 12 35 Spain +1
Human resources 62 44 Turkey -1
Educational and training 39 53 South Africa -1
Availability of qualified labor 96 55 Mexico -2
Affinity for travel & tourism 83 56 Brazil -8
Natural resources 1 60 India -1
Cultural resources 23 64 Russia +3
Source: World Economic Forum.
61 Peru 0
69 Colombia 0
Competitiveness Indicators Source: World Economic Forum.
Brazil ranked 56th out of 148 countries in the 2013- The overall rank is composed of 3 subindexes (basic
14 World Economic Forum (WEF) Global requirements, efficiency and innovation) and 12 pillars.
Competitiveness Index, a decline of 6 positions Relative to the previous year, Brazil worsened its
relative to the previous year, reversing the improvement ranking on all subindexes, with the worst one being
trend that has been observed since 2007. Switzerland basic requirements, which involved institutions, macro
leads the ranking as the most competitive economy in framework, education, etc. Brazils decline in the
the world, followed by Singapore. Among LatAm ranking was mostly due to deterioration in the macro
countries Chile, occupying the 34th position, is ahead of scenario (75th out of 148 versus 62nd before), higher
Brazil, while Mexico is only one position above Brazil. interest rates, lack of progress on key issues that could
Within the BRICS Brazil is only behind China (29th) shape the country such as functioning of institutions
and South Africa (53rd). (80th), government efficiency (124th), corruption
(114th) and trust in politicians (136th). The quality of
infrastructure, which was already poor (107th), has
deteriorated further to 114th. Education is another well-
known problem, now ranked 121 out of 148 countries.
Finally, Brazil is within the top 5 least competitive
countries when it comes to trade, ranked at 144th.
Looking across the board, it is easy to evaluate that

Brazil's strength in terms of competitiveness has to do
with the private sector, namely the sophistication of the
business community (39th), a large internal market
(7th), and issues related to innovation (36th). On the
other hand, the countrys weakness is mostly
18
(55-11) 4950-6684 October 2013
concentrated on issues that depend on the public sector, Figure 35: The Most Problematic Factors in Doing Business
such as wasteful spending (132nd). Were these not bad %
enough, Brazil is considered the worst in the world in
terms of imports as a percentage of GDP and the second Infrastructure
worst in terms of the burden of government regulation.

Tax Regulations
Another important matter that is still pushing Brazils Tax Rates

overall index down is taxation. Brazil is known as one
Gov. Bureaucracy
of the countries with the most complicated tax systems
in the world. The World Economic Forum shows that Labor Regulations
the effect of taxation incentives to invest and the total
tax rate as a percentage of profits in Brazil were among Corruption
the worst in the world (140).

Worforce Education
Also poorly ranked were items correlated with Policy Instability

bureaucracy, which compromised market efficiency.
For the number of procedures required to start a Access to Financing
business, Brazil was ranked 135th; and for the time or Lack of Innovation
number of days required to start a business, it was
ranked 144th. Poor work ethics
Gov. instability
Table 14: Brazils Classification Breakdown
0 4 8 12 16 20
Indicator Rank/148
Overall Index 2013-2014 56
Overall Index 2012-2013 (out of 144) 48 Regarding the infrastructure pillar, the overall score
Overall Index 2011-2012 (out of 142) 53 actually fell relative to 2012, now ranked at 114th. The
Basic Requirements 79 entire transportation matrix has a score that is below
Institutions 80 100, with rail the best and ports the worst. Electricity
supply worsened, most likely due to the risk of energy
Infrastructure 71
rationing derived from the lack of rain at the turn of the
Macroeconomic Environment 75
year. We would think that the proximity of the soccer
Health and Primary Education 89 World Cup (2014) and the Olympic Games (2016)
Efficient Enhances 44 would enhance the transportation infrastructure, but this
Higher Education and Training 72 has been very slow to happen. In 2H12, a series of
Goods Market Efficiency 123 infrastructure concessions for road, rails and airports are
scheduled, which could lead to an improvement down
Labor Market Efficiency 92
the line. But delays have been a serious issue.
Financial Market Development 50
Technological Readiness 55 Table 15: Infrastructure Pillar Breakdown (2012-13)
Market Size 9
Infrastructure rank/144
Innovation and Sophistication Factors 46
Quality of overall infrastructure 107
Business Sophistication 39
Quality of roads 123
Innovation 55 Quality of railroad infrastructure 100
Quality of port infrastructure 135
Quality of air transport infrastructure 134
The survey also highlights the most problematic factors
in doing business in Brazil. Almost 20% of the Avaliable seat kilometers 7
respondents pointed to inadequate supply of Quality of electricity supply 68
infrastructure as the largest constraint for doing Fixed telephone lines 55
business. In second place came tax regulation (16.8%), Mobile telephone subscriptions 41
followed by the high tax rate (15.1%). Source: World Economic Forum.
19
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Economic Activity overnment started to have a much more preponderant

role in economic management and financing. The
BNDES, for example, was greatly extended, with
GDP annual loans increasing from R$65 billion in 2008 to
more than R$130 billion in every year after 2009. In 1H
Economic policy and GDP performance
2013, BNDES loans were running at R$88 billion, a
65% rise from the previous year. Public sector banks
The performance of economic activity since the end of
also took a larger share of loans for companies and
hyperinflation can be categorized in three periods. The
consumers and today are responsible for the majority of
first one is under the Fernando Henrique Cardoso
the loan stock in Brazil. The government gave itself a
administration (1995-2002). The second period, falls
lot more latitude when dealing with fiscal policy, with
mostly during the Lula administration (2003-08). The
the primary surplus falling from almost 4% of GDP in
post-global economic crisis period would be the third
September 2008 to 2% in June 2013. The autonomy of
phase, falling mostly under the presidency of Dilma
the central bank was questioned more than once, and
Rousseff (2011 onward).
last but not least, the government took a more
interventionist approach, putting regulatory issues at the
In the first period, the country was passing through forefront of economic policy, often causing a great deal
several adjustments in order to stabilize the economy of uncertainty to the business community. The result of
and regain international credibility. As a Finance
this new approach is in the numbers: following the
Minister, even before his first mandate (1995-98), slump of 2009 and the great deal of stimulus injected in
Fernando Henrique Cardoso created and implemented the economy, 2010 was a record year, with growth of
the Real Plan, finally controlling the hyperinflation that
7.5%, only second to China and India within EM. After
had characterized Brazil for the better part of 15 years that, Brazil is growing below potential and below the
prior. His administration also conducted several EM average. Average growth in Brazil since President
structural reforms, including a deep privatization Dilma Rousseff took office is only 1.8%, and since the
initiative of state-owned companies. Cardosos second economic policy changed (2009), 2.7%.
mandate (1998-2002) was marked by several crises,
starting with Russia and culminating in the BRL Figure 36: Brazilian GDP Growth and Economic Policy Cycles
devaluation of January 1999, the energy rationing of % oya
2001 and the great instability caused by uncertainties
related to Luis Incio Lula da Silvas (Lula) election in
2002. It was during this time that fiscal policy was taken
more seriously, and the economic team of the time
implemented the so called macroeconomic tripod that
is in place until now, but mostly in theory: a floating
exchange rate, fiscal responsibility and the inflation-
targeting regime. Average growth during the Cardoso
years was modest, averaging 2.3% per year.
Source: IBGE.
In the second period, with the economy stabilized, the GDP in Context
country had concrete opportunities to grow, also helped
by the great Chinese hunger for commodities. President
Long-term historical GDP: Brazilian data for the last
Lula followed the economic model inherited from
100 years show that the countrys GDP pattern has been
Fernando Henrique Cardoso, even tightening the fiscal
mostly characterized by severe boom and bust cycles.
standards at the start of his administration to increase
This is especially true until the industrialization phase,
credibility. Both monetary and fiscal policy were in
which started in the 1950s. After that period, the
large part well managed until the global economic crisis
country enjoyed a period of growth and stability that
of 2008. The average growth in this second period was
lasted until high inflation took over in the mid-60s.
4.2% per year.
When the military dictatorship took over in 1964, Brazil
embarked on a new development phase, with the
In past editions of this publication, we suggested that development of several base industries (oil, iron ore,
the second growth phase ended in 2010, but with steel, utilities, etc.), at the same time that the
hindsight, it is clear that economic policy changed after urbanization movement accelerated. These were the
the global economic crisis. From 2009 onward, the "miracle" years, with growth peaking at almost 14% in
20
(55-11) 4950-6684 October 2013
1973, when the oil shock hit Brazil. The rise in oil 2013 GDP prospects and beyond Since the downturn
prices from around US$3/bbl to US$12/bbl started the of 2011, Brazil is having difficulty in setting the pace of
GDP downfall, which was accelerated with the second an economic rebound. Growth in 2012 was only 0.9%,
oil shock of 1979. That gave way to an acute external the worst result since 1999 and only better than the
debt crisis in the 1980s, which together with negative result registered in the aftermath of the global
hyperinflation characterized the period as the lost crisis in 2009. While the economy is expected to have a
decade. In the 1990s, the economy stabilized and, better performance in 2013, prospects are fast coming
although growth has been more subdued, the severe down. According to the central bank Focus survey
boom and bust cycles of the past were, to a great extent, (which polls about 100 economists on a weekly basis),
smoothed. expectations for 2013 GDP made in January 2013 were
pointing to 3.3% growth. In August 2013, however,
Figure 37: Brazil Real GDP Since 1904 these were already down to 2.3%. Not only that, but
% oya 2014 prospects have also deteriorated, with the Focus
survey now pointing to growth of 2.3%. J.P. Morgan
forecasts 2013 and 2014 GDP at 2.3%. One cant
discard the possibility that 2014 growth will be lower
than in the current year.
Figure 38: Consensus Expectations for 2013 and 2014 GDP

%, year end
Source: IPEA
According to the IMF, the Brazilian economy is the

seventh largest in the world by nominal GDP (in
USD) and the largest in Latin America. In 2012 the
countrys nominal GDP reached US$2.4 trillion. The
2012 result is 4% lower than in the previous year. This
was partly on the back of a 16% average depreciation of Source: Banco Central do Brasil
the FX in the year and a 6.3% decline in nominal GDP
in BRL, with inflation being the main culprit. In 2011 The underperformance of the economy in 2013 for the
Brazil was the sixth largest economy in the world, a third year in a row is most likely associated with an
position that was taken up by the U.K. in 2012. Still exhaustion of the consumption-driven model that was in
according to IMF projections, Brazil should outpace the place since 2004. While this important pillar of the
U.K. in the following years once more. Brazils share economy started to dwindle, investment, which has
of global GDP in PPP terms is about 2.8%. always been Brazils Achilles heel, is taking a long time
to pick up.
Table 16: Nominal GDP
US$ Billion, estimated Table 17: Real GDP Growth by Demand Components
Country 2012 2013* 2014* % oya
1 United States 15,684.8 16,237.7 17,049.0 2011 2012 2013F 2014F
2 China 8,227.0 9,020.3 9,951.9
3 Japan 5,964.0 5,149.9 5,285.3 GDP at Market Prices 4.7% -4.0% 2.3% 2.3%
4 Germany 3,400.6 3,598.0 3,660.9 Household Consumption 4.1% 3.1% 2.2% 2.0%
5 France 2,608.7 2,739.3 2,789.0
6 United Kingdom 2,440.5 2,422.9 2,503.9 Government Consumption 1.9% 3.2% 1.7% 2.5%
7 Brazil 2,396.0 2,456.7 2,623.9 Gross Fixed Capital Formation 4.7% -4.0% 4.8% 2.0%
8 Russia 2,022.0 2,213.6 2,374.6
Exports 4.5% 0.5% 2.5% 3.0%
9 Italy 2,014.1 2,076.0 2,097.1
10 India 1,824.8 1,972.8 2,128.6 Imports 9.7% 0.2% 8.0% 1.2%
11 Canada 1,819.1 1,843.8 1,900.0
Source: IBGE; J.P. Morgan
12 Australia 1,541.8 1,589.1 1,626.1
13 Spain 1,352.1 1,387.9 1,403.5
14 Mexico 1,177.1 1,275.0 1,336.8
15 Korea 1,155.9 1,258.6 1,337.1
Source: IMF, World Economic Outlook, April 2013. *2013 and 2014 are estimates
21
(55-11) 4950-6684 October 2013
Structural impediments to growth: All in all, the Table 18: Real GDP Growth Supply Side
long-lasting growth slump observed since 3Q11 is % oya
putting into question Brazil's ability to grow. The global 2009 2010 2011 2012
wave that was such a tailwind for Brazil in the past Agriculture -3.1% 6.3% 3.9% -2.3%
decade is becoming a headwind, with the Chinese
Industry -5.6% 10.4% 1.6% -0.8%
economy slowing down and the upcoming U.S. policy
Mineral Extraction -3.2% 13.6% 3.2% -1.1%
normalization making the competition for dollars a lot
Manufacturing -8.7% 10.1% 0.1% -2.5%
fiercer. Not only that, but domestically, the lack of
institution building, the absence of structural reforms, Civil Construction -0.7% 11.6% 3.6% 1.4%
and weak economic policies, together with poor Utilities 0.9% 8.1% 3.8% 3.6%
education standards, a very low investment rate, and Total Services 2.1% 5.5% 2.7% 1.7%
hyperinflated wages have become structural issues Commerce -1.0% 10.9% 3.4% 1.0%
impeding Brazil's ability to grow significantly above the Transportation -3.6% 9.2% 2.8% 0.5%
regional average on a sustainable basis. Indeed, J.P. Information Services 0.8% 3.7% 4.9% 2.9%
Morgan has lowered Brazils long-term GDP outlook Financial Activities 7.8% 10.0% 3.9% 0.5%
(potential GDP) from a range of 3.5-4% to 3-3.5%. Other Services 3.2% 3.7% 2.3% 1.8%
Real Estate Rental 2.6% 1.7% 1.4% 1.3%
Figure 39: Estimated Potential GDP for LatAm Countries
Health & Education 3.0% 2.3% 2.3% 2.8%
% per year
GDP -0.3% 7.5% 2.7% 0.9%
Source: IBGE
More important, on the demand side, growth of fixed

capital formation (investment) was the big drag, falling
by 4%, a large amount considering that the base of
comparison was not extremely high. Part of the issue
that pushed back investment was related to the
introduction of the Euro 5 emission standard, which
Source: J.P. Morgan
postponed the production of trucks, as inventories of the
old models were high. Second, the construction industry
2012 GDP review
was also very weak, after facing very high costs in the
2012 Growth per sector: The weak 0.9% GDP previous year and a large inventory. All in all, weak
performance was mainly a product of negative growth growth, combined with a large dose of government
in both agriculture (-2.3%) and industry (-0.8%). interventionism and change of rules were to blame for
Agriculture was negatively impacted by a drought in the the lack of investment. Consumption, on the other hand,
Midwest, which affected the yields of soy and corn. remained the silver lining of GDP, rising by 3.1%,
Industry was weak across the board, but especially in which is right in line with the 20-year average. Real
terms of manufacturing, which faced strong competition wage gains in 2012 were smaller than in previous years
from imported goods (strong exchange rate) and and credit conditions, especially at private sector banks,
contracting margins on the back of higher labor costs were tighter, despite lower interest rates. On the
and lower sales. The service sector guaranteed a external side, the depreciation of the exchange rate
positive GDP performance, with an expansion of 1.7%, helped to established a balance (exports and imports
which is still weaker than in previous years. The best were almost at 0%), which actually helped GDP a great
performing sub-sector within services was Information deal considering that in the previous two years imports
Services, which gained 2.8% last year. outpaced exports by two or three times.
22
(55-11) 4950-6684 October 2013
Figure 40: Private Consumption Growth establishments like beauty parlors. Industry is
% oya responsible for 23.5% of GDP, with manufacturing
accounting for half of that. Indeed, the auto industry
alone is responsible for about 5% of GDP. Civil
construction is another 5%. Finally, although Brazil is
an important exporter of agricultural commodities, the
sector accounts for only 4.5% of GDP.
Figure 42: GDP Components by Sector (Supply Side)

% of total GDP, 2012
Source: IBGE, J.P. Morgan
GDP Composition: Looking at GDP composition

(weighting), household consumption is the main
component on the demand side. This is not news, as in
the last two decades household consumption has been
responsible for about 60% of GDP. Government
consumption is the second most representative
component, accounting for more than 20% of GDP.
Fixed capital formation in Brazil has been the subject of
important discussions. Investments were 18.1% of GDP Source: IBGE
in 2012, one of the lowest in EM, but unfortunately not
a large deviation from the historical series. On the IBC BR: monthly activity indicator: At the beginning
external side, there is significant yearly variations in of 2011, the central bank of Brazil introduced a new
terms of contributions of exports and imports. Exports economic indicator called IBC-BR. It is an economic
were very weak in the period of the fixed exchange rate activity index that uses supply-side indicators (such as
(1994-99), accounting for about 8% of GDP, while industrial production, retail sales, agricultural crops, tax
imports at the time were hovering around 9.5% of GDP. collection, energy utilization, financial services, among
This relationship reversed when the BRL was devalued others) to mimic the evolution of GDP on a monthly
in January 1999 and the advent of China as a large basis. The index has been useful in giving a picture of
buyer of Brazilian commodities exports recovered and activity trends ahead of the quarterly release, which
rose to a share of 15% of GDP. Since 2010, however, usually comes out only 45 days after the end of the
the appreciation of the exchange rate led imports to quarter. Often the emphasis on the series is on the
outpace exports once more. month-on-month, seasonally adjusted comparison,
especially considering that the series is short and its
Figure 41: GDP Components by Expenditure (Demand Side) main goal is to indicate short-term trends. The problem
% of Total GDP, 2012 that emerged, however, is that often the monthly data
indicated by the IBC-BR was not in line with the GDP
release as the methodology uses a different kind of
seasonal adjustment. Still, it is a useful indicator of
general activity trends.
International comparisons
In recent years, with the exception of 2010, Brazil's
growth rate has been constantly below that of EM.
Source: IBGE Moreover, since 2011, Brazil's growth has been worse
than the LatAm average after several years of
On the supply side, the highlight has been services. overperformance. Not only that, but in 2012, the only
Since 2005 the sector accounts for over 55% of GDP LatAm country that had a weaker performance than
and this share has been on the rise. The largest share of Brazil was Paraguay.
services is health and education, accounting for 14.4%
of GDP, while commerce is ~10%. A category entitled
other services has a 12.4% share and includes
23
(55-11) 4950-6684 October 2013
Figure 43: Economic Growth: Brazil vs. EM vs. G-7 Regional GDP
% oya
Brazils GDP has a particular characteristic: more than
half of it is concentrated in the Southeast region
(55.4%), where So Paulo, Rio de Janeiro and Minas
Gerais are located. Despite occupying only 10.8% of
Brazils territory, the region hosts a great part of the
countrys economic activity. The level of
industrialization in the Southeast can be compared with
that of some developed countries, and the region also
has the most advanced agriculture in Brazil.
Source: IMF Furthermore, it boasts the largest transportation fleet,
the most schools, the best hospitals and medical care,
Relative to that of other Latin America countries, among others.
Brazilian growth has not been that strong either. From
2003 to 2012 Latin American countries have grown on Figure 46: Regional Participation in Brazilian GDP (2010)
%
average 4.8%, while in the same period, the Brazilian
average reached 3.6%. Indeed, Brazil had one of the
worst performances, only ahead of Mexico. In the
period mentioned, the country with the strongest growth
was Argentina (7.2%), followed by Peru (6.5%).
Figure 44: Latin America GDP 10-Year Average

% Average Growth 2003-2012
Source: IBGE.
Conversely, the region responsible for the lowest share

of GDP is the North, where the Amazon rain forest is
located. Although it has the largest territory extension
(if it were a country, it would be the seventh-largest in
the world), it has the lowest population density, which
Source: IMF and J. P. Morgan.
means that a great part of the territory is unoccupied. Its
economic activity is limited, and tourism is an important
Per capita GDP source of the regions income.
Per capita GDP reached R$22,402 in 2012, or
US$11,462. The indicator actually fell by 10% in dollar An interesting trend that is being observed is that the
terms relative to 2011 due to the depreciation of the states that are more underdeveloped are catching up on
BRL in 2012. In 2013, USD GDP per capita is also growth, usually posting double-digit growth rates. This
likely to decline as the rise in real GDP is not going to is the case, for example, in most of the North, which
outpace the devaluation of the currency. was the region that grew the most in 2010 (last data
available). While Brazil grew by 7.5% then, the North
Figure 45: GDP per Capita expanded by almost 10%.
USD and BRL Table 19: Real GDP Growth per Region
%oya
2007 2008 2009 2010
North 3.8% 4.8% -0.3% 9.9%
Northeast 4.8% 5.5% 1.0% 7.2%
Southeast 6.4% 5.5% -1.0% 7.6%
South 6.5% 3.4% -0.6% 7.6%
Midwest 6.8% 6.1% 2.5% 6.2%
Brazil 6.1% 5.2% -0.3% 7.5%
Source: IBGE.
Source: Banco Central do Brasil.
24
(55-11) 4950-6684 October 2013
Government policy reaction to weak GDP: In 2H11,

as the European crisis deepened and economic growth
in Brazil failed to show consistent signs of rebound, the
government of President Dilma Rousseff started to
implement a series of stimulus measures. These were
first aimed at boosting consumption, and then migrated
to tax cuts, subsidies, and investment stimulus. The
summary of these measures are in the table below, but
many of them will be discussed in more details on the
investment session, starting on the next page.
Table 20: Stimulus Measures from Mid-2012 Onward

SECTOR DATE MEASURE R$ bil
Oil Jun-12 Reduction of the CIDE tax to zero for gasoline and diesel 8.8
Capital Goods Jun-12 Government's purchase program for capital goods (PAC Equipamentos) 8.46
Autos Jun-12 Renewal of IPI tax reduction for white line appliances, furniture, PET laminates until end Aug 2012 0.489
Appliances
Construction
Autos Aug-12 Renewal of IPI tax reductions: For white line appliances until end-2013; for furniture, wood panels, laminates and 4.85
Appliances lamps until Dec 2012, for autos until October 2012, for capital goods and construction l until end 2013.
Construction
Capital Goods Aug-12 BNDES interest rate on loans for trucks and capital goods declined until end 2012 from 5.5% to 2.5% (nominal). 0.586
Accelerated depreciation for capital goods (from 48 to 12 months until end 2012).
Utilities Sep-12 Reduction of utility tariff by an average 20% for both individuals and industrials starting in 2013. New rules for the 6/ year
sector.
Manufacturing Sep-12 Payroll tax exemption to 25 more manufacturing sectors, with the likely exemption of auto makers and the steel 12.8 in 2013; 14.1 in
Industry industry. Accelerated depreciation (5 years instead 10) for capital goods acquired between 09/16 and 12/31/2012 2014
Beverages Sep-12 Postponement and partial reversal of the increase for beverages announced on 31 May. 0.463
Autos Oct-12 Renewal of IPI tax reduction for autos until December 2012. 1.2
Construction Dec-12 Payroll tax exemption for construction sector (to 2% tax on revenues). Reduction on Special Tax Regime to 4% 3.5
from 6% of revenues. For the Social Special Tax Regime, the tax is 1% and the maximum unit price is 100K versus
Capital Goods, Dec-12 85K
Renewal of the BNDES PSI program until end of 2013 with new conditions: R$ 100 billion more in funding of which 100
Utilities R$85 billion from BNDES and remaining coming from banks, which can deduct from non-interest bearing reserve
Autos, Dec-12 IPI tax reduction renewed for autos, furniture, appliances. Gradual lift of the tax until elimination by June -13 3.26
Appliances,
Furniture
Retail Dec-12 Payroll tax elimination for retail sector, which will now pay 1% tax on revenues, instead of 20% payroll. Effective on 1.3 for 2013; 2.1
April 2013. for 2014
Manufacture Dec-12 Renewal of the Reintegra program: exporters of manufactured goods receive back 3% of the total exported. 3.26
Exporters
Food Mar-13 Basic food basket tax exemption 5.5 in 2013, 7.2 after
that
Auto Apr-13 IPI VAT tax reduction for vehicles renewal until te end of 2013 2.2
Telecom Apr-13 Tax exemption on smartphones 0.5/ year
Ethanol Apr-13 Tax exemption for ethanol. BNDES credit linked to sugar cane and ethanol production and storage 0.97 in 2013
Chemical Apr-13 Reduction of PIS/ Cofins to 1% from 5.6% to chemical industry 1.1 in 2013, 0.67
yearly after
Capital Goods Jun-13 Import tax reduction of 2% to 227 capital goods that don't have a domestic similar na
Appliances Jun-13 Subsidy for purchase of home appliances and furniture to Minha Casa Minha Vida homeowners. 1.2 billion
and Furniture
Source: J.P. Morgan
25
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Investments ratio, at least in theory. Also, the investment drive is

based on an important infrastructure drive, with large
concessions being sold to the private sector.
In 2012, gross fixed capital formation in Brazil was
18.1% of GDP, matching the weak 2009 result, and Figure 49: Gross Fixed Capital Formation in Brazil
falling considerably from the 19.3% registered in the % of GDP
previous year. On a real basis, investment actually fell
by 4%. Over the last 20 years, investment grew by an
average of 4.5% per year. Therefore, the country is now
below the average since 2008.
Figure 47: Gross Fixed Capital Formation

% oya
Source: IPEA, J.P. Morgan
The low investment ratio can also be observed in the

high levels of capacity at which the economy operates.
Except for the 2008 crisis period, when the countrys
industry went on a sudden stop, utilization has been
operating close to full capacity since 2006, always
above the 80% level, even in periods of low growth.
Source: IBGE
Figure 50: Capacity Utilization (% of Total Installed Capacity)

In general terms, Brazils investment rate is among the %
lowest in the upper middle income countries, and even
compared with developing countries in both LatAm and
the Caribbean.
Figure 48: Gross Capital Formation (% of GDP)
Source: CNI
Logistics and Infrastructure Investment

Program
Source: The World Bank Note: includes inventories
In August 2012, the government started to unveil its
program to improve the logistics and infrastructure of
During the military period, the investment/GDP ratio the country. The main goal of the program is to put in
used to be higher than the current level, mainly due to the hands of the private sector some of the logistics that
industrialization and heavy public sector investment, were in public hands and, until now, were pretty much
which put a burden on Brazils fiscal accounts. The paralyzed. The government came to the conclusion that
macroeconomic instability of the 1980s and part of the it cannot by itself be responsible for all the investment
1990s curbed productive investment from the private in the country due to budgetary constraints, but above
sector at the same time that the public sector capability all, for operational and logistics reasons.
to invest was constrained by fiscal concerns. Today, the
federal government is once more focused on raising
Road and Rail: The program assumes investment of
Brazils investment ratio, but success has not been
R$133 billion in railway and roads, of which R$79.5
achieved yet. The investment drive is focused on the
billion is allocated over the next five years. The private
BNDES, the Brazilian Development Bank, which
sector participation in the rail program will be through
extends loans at subsidized rates to projects in industry
PPPs (public private partnerships), while roads will be
and infrastructure that should push up the investment
through concessions. Financing for roads will be
26
(55-11) 4950-6684 October 2013
provided by the BNDES at a cost of TJLP (currently at logistics program (R$35.6 billion); developments have
5%) plus up to 2.0%, with a maturity of 30 years and a been greatly delayed and are now formally postponed
5-year grace period. For rail, the funding is also for after the electoral period.
provided by the BNDES at a cost of TJLP plus up to
1%, maturity of 35 years and a grace period of five Other than logistics, the other infrastructure initiatives
years. For both rail and road, the leverage ratio is 70%. of the federal government are related to and oil and gas
At the time of this writing, there was only one road that energy (read more on both below). On the latter, it is
has actually been auctioned as planned, out of two key to note that a R$15 billion auction of the Libra pre-
offered. During the month of September 2013, the salt oil field is scheduled for October 2013 and is the
government was once more revising the rules and first of its kind under the production-sharing model that
conditions of the different concessions (including rail was put in place in 2010. Also, the National Oil Agency
and airports) to make them more attractive. Still, this is is planning a new round of concessions (non pre-salt)
no different from recent history. In 1H13, the for November 2013.
government tried to sell some roads but there were no
bidders, as the IRRs of the projects were considered Table 21: Logistics and Infrastructure Program Overview
low. One might say that the infrastructure drive, if Sector R$ billion Targets Auction Dates
successful will be an important positive driver for the
Logistics 242
economy at a time when the macro economy could
Roads 42 7500 Km Sept to Dec-2013
disappoint. On the rail side, a possible change in the
state company that is responsible for the management of Rail 91.1 10,000 Km Nov-13 to Mar-14
railroads (Valec) could postpone the rail concessions for Ports 54.6 159 Dec-13 to Mar-14
2014. 2 International,
Airports 18.7 October 2013
several regional
High Speed Train 35.6 511 Km Delayed
Ports: The government also has a large infrastructure 32,971MW and
investment program for ports (R$54.6 billion), which Energy 148.1 Until YE 2013
23,200 Km
aims to reduce logistics costs through more investments 3 Concession Oct and Nov
Oil & Gas 80
in the sector, higher efficiency on the terminals and Rounds 2013
better infrastructure. Total 470.1
Source: Ministry of Finance
Figure 51: Expected Investment on Ports
R$bn Petrobras Capex Plan: Petrobras has established a
capex plan of US$147.5 billion in E&P alone for the
period between 2013 and 2017. This corresponds to
62.3% of the total US$236.7 billion investment plan of
the company for the period. Of this, US$52.2 billion
will go to pre-salt areas and US$51.4 billion to post-salt.
The capex includes exploration, development with
production, and infrastructure.
Source: J.P. Morgan and Federal Government Table 22: Petrobras Capex 2013-17 Distribution by Area
US$ bil % of total
Airports: The concession of Galeo (Rio de Janeiro) Total Capex 236.7 100
and Confins (Minas Gerais) are expected to take place E&P - Exploration and Production 147.5 62.3%
between October and November 2013. The Downstream 64.8 27.4
methodology will follow one of the concessions from G&E - Gas and Energy 9.9 4.2%
2012, with slight changes that seek to guarantee better
International 5.1 2.2%
quality of the operators. Capex for both of these airports
Biofuel 2.9 1.1%
is at R$11.4 billion. In addition to those, the
Distribution 3.2 1.4%
government is pushing capex on dozens of regional
airports. Engineering, Tech and Materials 2.3 1.0%
Financial, Strategy and Corporate 1.0 0.4
High-speed train: The high-speed train that is Source: Plano Estratgico Petrobras 2013-2017
supposed to link Sao Paulo and Rio is still part of the
27
(55-11) 4950-6684 October 2013
Electricity: According to EPE (Brazilian Government increased speculation that some sort of energy rationing
Energy Research Company), energy demand will was going to be needed. Low reservoirs also made it
increase to 90.2GW-avg in 2021 from the current level mandatory for all thermal plants to be turned on, thus
of around 61GW-avg. Additional capacity to meet this raising the cost of energy, at a time when the
rising demand will come mainly from large government had just implemented a reduction of 18% in
hydroelectric projects in the North region, while there is the price of energy for residential consumers and up to
also a significant forecast expansion on alternative 32% for industry. At the end of the day, rain filled most
sources such as wind, small hydro plats (SHP) and of the reservoirs during the spring months, thus averting
biomass. Due to its higher energy production cost, the emergency measures, but levels remain slightly below
number of thermal projects is expected to grow at a historical averages in some regions. In sum, this is a
lower pace then other sources. JPM estimates that the recurring theme for the next few years.
country should invest roughly R$30 billion in the sector
every year in order to meet the energy supply estimates Figure 53: installed Capacity Breakdown 2011
for upcoming years.
Figure 52: Supply X Demand Scenario for Electricity in Brazil

GW - avg
Source: EPE
Source: EPE
There are four large hydroelectric plants now being
Hydro remains the main source of energy. Although built in the North region, which together add up to a
hydro share of Brazils total capacity is likely to be total investment of R$66.5 billion. These projects are:
reduced to 68% in 2021 from 76% in 2011, it should see
the highest absolute capacity increase in the period Belo Monte: Located in the state of Par, it is the most
(34GW) by 2021. The biggest growth in terms of share controversial power plant because it is located in the
of total capacity is expected to come from wind. Wind reserve of the Xingu Indians, one of the most isolated
installed capacity is planned to increase from 1GW (1% tribes of native Brazilians. In terms of installed capacity
of total capacity) in 2011 to 16GW (9% of total) in (11.2GW), it will be the third largest hydro plant in the
2021. We believe the preference for hydro and wind is world, behind Chinas Three Gorges (20.3GW) and
based on their being the cheapest energy sources and the Itaipu (14GW). The participation of state-owned
many opportunities yet to be explored in both cases. Eletrobras in the project is 50%, with Brazilian pension
funds also having a large participation. Vale has a 9%
Different scenario reduces the risk of another stake in the consortium. The total cost of the project is
blackout as seen in 2001, but concern remains. With currently estimated at more than R$30 billion, and the
reservoirs at levels below the historical averages, BNDES is expected to finance roughly half of that
relying on hydrological conditions seems risky, but the amount.
current scenario is different from the one observed a
decade ago. Thermo and nuclear sources now represent Jirau: Located in the State of Rondnia, this hydro
16% of total capacity versus roughly half of it in 2001. plant is being built in the Rio Madeira and will have an
Also, the subsystems are now better interconnected, installed capacity of 3.75GW. The consortium
which allows the sharing of regional surpluses and responsible for the construction and operation of Jirau is
shortfalls throughout the whole system. Still, risks formed by GDF Suez (40%), Eletrosul (20%), Chesf
remain as 76% of energy needs relies on hydro and, (20%) and Mitsui & Co (20%). The winning consortium
therefore, on rains. During the summer of 2012-13, offered a discount of 21.5% over the initial price,
reservoirs were at very low levels and there was resulting in a tariff of R$71.5/MWh. The current
28
(55-11) 4950-6684 October 2013
estimated cost of the project is around R$16.5 billion, of total Brazilian exports, 59% of manufacturing
and the BNDES will extend a loan of almost R$10 exports and 19% of gross revenues of the economy.
billion for the project. The first of 50 turbines started its These sectors represent 24% of the wage mass. All in
operations last September, and the total plant is all, the government estimates that the payroll tax cuts
expected to be fully commercially operating by 2016. will have a positive impact of 0.44% in the 2013 GDP.
Santo Antonio: Also located in the Rio Madeira IPI, PIS/ Cofins tax cut: The government completely
complex, in the State of Rondnia, Santo Antonio is eliminated the federal taxation (IPI, PIS/ Cofins) for
expected to have installed capacity of 3.15GW. The capital goods. It estimates that the GDP impact on that
winning consortium is made up of Odebrecht, Furnas, is 0.25% in 2013.
Cemig and Light, and they offered a discount of 35% on
the initial offer. The power generated at Santo Antonio PSI Program: The PSI program (Program to Support
is expected to supply the needs of around 11 million Investment) was launched in the scope of the BNDES in
households. The current estimate for the project cost is mid-2009 to stimulate the purchase, sale and export of
R$16 billion, and it is expected to be ready by 2015. capital goods produced in Brazil. The program was
postponed several times and in 2012 received R$54
Teles Pires: With total installed capacity of 1.8GW, billion in additional funding. At the end of 2013, the
this plant is to be built in the state of Mato Grosso. The program was postponed once more for an additional
energy produced by the plant is expected to meet the year, with resources of R$100 billion. Not only the
needs of around 6 million people. The consortium is financing was ample for the PSI, but also interest rates
made up of Neoenergia (50.1%), Eletrobras (24.5%), were very low, verging on the negative in real terms.
Furnas (24.5%) and Odebrecht Energia (0.9%). The For example, in 2H13, rates for the acquisition of
estimated total cost of the project is around R$4 billion, capital goods were 3.5%. Also, in 2013, the PSI
and it should be concluded in 2015. disbursed R$43 billion, almost 50% of total BNDES
disbursements for the period.
Brasil Maior Program
BNDESs special sectoral financing programs: As
The Brazil Maior program (Greater Brazil) was part of the Brasil Maior program, in 2013 the BNDES
launched in August 2011 and focuses on industrial revamped several sector programs, especially for
policy, technology/innovation and external trade pharma, IT, oil and gas, and chemical. The goal is to
initiatives. The final goal is to increase investment increase the productivity of these sectors.
through gains in productivity and growth of value added
mostly in the industrial chain. The action of the program
Corporate Inova plan: The goal is to induce
is based on three main items: 1) reduction of the costs of
innovation at companies, with a budget of over R$28
labor and capital, 2) trade defense, and 3) support for
billion for the years 2013/14. Resources will be
innovation and the internal market. In 2012/13, the
primarily allocated to the following sectors: Energy, oil
incentives of the Brasil Maior program were mostly
and gas, health, defense & aerospace, IT and
aimed at reducing the cost of acquiring capital goods
communications, agroindustry and environmental
through the BNDES and through payroll tax reductions.
sustainability.
Indeed, it is estimated that between 2012 and 2013, tax
reductions will be close to R$95 billion. Below are the
Procurement program: To strengthen and protect the
main initiatives of the Brasil Maior program in 2013.
internal market, the government now gives priority to
the purchase of goods and services that are made in
Payroll tax cut: Starting at the end of 2011, the
Brazil, unless the national product is over 25% more
government announced that it was going to eliminate
expensive than the imported similar version. Since the
the payroll tax for some sectors and substitute it for a
program was announced in 2012, over R$2 billion has
tax of 1% or 2% of gross revenue, depending on the
been purchased in trucks, buses, tractors, ambulances
sector. Indeed, the payroll tax reduction was one of the
and school uniforms.
big economic stimuli that the government granted to the
private sector in 2012. It estimates that the 42 sectors
Special sectoral regimes new auto regime: Parallel
that benefited from the tax cut (among them retail,
to the BNDES, the government has launched special
furniture, plastic, electric material, autoparts, bus,
industrial policy initiatives for some sectors: autos,
capital goods, poultry, pharmaceuticals, pulp & paper,
chemical, defense, IT, oil and gas, and ports. These
appliances, toys, call centers, hotels, etc.) represent 22%
programs basically give tax cuts to industries in the
29
(55-11) 4950-6684 October 2013
sector, as long as they comply with some targets for job popular houses between 2009 and 2010. Energy projects
generation, capex, etc. The most important of those is received 35% of resources, focused mainly on oil and
the new auto regime, called Inovar-Auto. The goal of gas, electricity generation and refining. Logistics
the program is to have companies invest more in the projects received 15.4% of the total PAC amount, with
auto sector in Brazil. This is done through tax benefits. the greatest part directed to highway construction and
Another goal is to reach energy efficiency in the entire repair.
Brazilian auto fleet. For companies to receive a tax cut,
they need to comply with at least three of the following PAC 2: The second phase of the growth acceleration
requisites in Brazil: 1) infrastructure and manufacturing, program was launched in March 2010, and the
2) investment in R&D, 3) spending in engineering, governments original estimates were for investments of
manufacturing technology and supply chain, and 4) around R$955 billion from 2011 to 2014 in 6 different
adherence to stricter environmental standards. The areas: PAC Cidade Melhor (investments in sanitation,
regime stipulates minimum spending of gross revenues paving, urban mobility), PAC Comunidade Cidad
for items 2 and 3 above (0.5% and 1%, respectively, (investments in nurseries, pre-schools, community
starting in 2015). According to the government, since police station and health), PAC Minha Casa, Minha
the announcement of the new auto regime in October Vida (the government housing program), PAC gua e
2012, new announced capex in the sector is at R$7.3 Luz para Todos (water and electricity for all), PAC
billion, coming from the following companies: Audi, Transportes (transportation investments roads,
BMW, Mercedez-Benz, Nissan, Mitsubishi, JAC railroads, ports and airports) and PAC Energia
Motors, Chery, Caoa and, in the truck segment, DAF (investments in oil, natural gas, renewable energy and
Trucks and Metro-Schacman. electricity transmission and generation).
Export Promotion and Trade Defense: The main Table 23: PAC 2 Investment Estimates
government initiative to fuel exports is the Reintegra R$ billion
program, which gives back to exporters 3% of the Program 2011-2014
value of the merchandise sold abroad. In 2012, the PAC Cidade Melhor 57.1
Reintegra generated fiscal losses of R$3.2 billion to the
PAC Comunidade Cidad 23.0
federal government, a value that is expected to be
PAC Minha Casa, Minha Vida 278.2
replicated in 2013. Other than that, the government has
also lowered taxes for capital goods that dont have a PAC gua e Luz para Todos 30.6
similar product in Brazil and is trying to give a faster PAC Transportes 104.5
turnaround on anti-dumping investigations. PAC Energia 461.6
Total 955.0
PAC Source: Federal government.
The Programa de Acelerao do Crescimento PAC

is a federal government program launched in 2007, As of April 2013, the amount disbursed by PAC 2
aiming to accelerate the countrys economic growth totaled R$557.4 billion, or 56.3% of the total expected
through investments in infrastructure, such as housing, until the end of 2014. Of that, R$338.7 billion relates to
transportation, utilities and sanitationSome of the projects that are already concluded. 30% of the total
coordinators of the programs first phase were current amount disbursed comes from the federal budget, while
President Dilma Rousseff (Chief of Staff at the time) 20% is from the private sector. An additional 32%
and current Planning Minister Miriam Belchior. refers to mortgages.
PAC 1: At the time of the launching, the government Minha Casa, Minha Vida (MCMV)
forecast more than R$650 billion in investment between Minha Casa, Minha Vida (Portuguese for my house, my
2007 and 2010. According to PAC 1 final balance life) is a federal government program directed to the
(December 2010) investments executed (but not housing sector. The program is focused on lower
concluded) have totaled R$619 billion, or 93.1% of the income families, and the main idea is to facilitate access
promised amount for the period. The first phase of the to housing by granting mortgage subsidies that include
program was focused on social and urban projects: 49% both cash subsidies and low-interest mortgages. The
of resources were allocated to housing, supporting the MCMV program aims to increase the number of
Minha Casa Minha Vida project, which led to the mortgages, adjusting the loan installment and the initial
approval for the construction of more than one million down payment to the family payment capacity. The
30
(55-11) 4950-6684 October 2013
resources are subsidized by the federal government and Table 24: MCMV Aggregated Data Phase I and II
the FGTS (workers guarantee fund). The goal of the Units Range I Range II Range III Total MCMV
first phase of the program (2009 and 2010) was to grant
Contracted 1,181,553 1,150,485 312,109 2,644,147
mortgages of 1 million properties directed to families
with income below 10 minimum wages per month. Under
268,318 57,240 64,709 390,267
According to Caixa, MCMV reached its goal in terms of Approval
number of units, contracting over 1 million units by the Under
477,521 201,053 97,740 776,314
end of 2010. Of these, 57% were directed to families Construction
with income under 3 minimum wages.
Delivered 435,714 892,192 149,660 1,477,566
Historically, mortgages in Brazil have been pretty low,

Transferred 330,613 798,191 82,457 1,211,261
but it is the credit line that grows the most. Today,
mortgages represent 14% of total outstanding loans, or Transferred/
76% 89% 55% 82%
7.7% of GDP, up from only 1.6% of GDP in March Delivered
2007. Still, mortgages have grown by 34% in the year to Source: Multiplan. Note: Hired means units that the government has authorized
July relative to the same period in 2012, and there are companies to build and commercialize.
no signs of a deceleration yet. To a great extent, MCMV
is helping to fuel mortgages in the country, as is the fact In October 2012, the government changed some of the
that interest rates have fallen. premises of MCMV. First, it increased the limits of the
wages for families to qualify for MCMV, with the upper
Figure 54: Mortgages as a % of GDP limit being R$5,000/month. Second, it also increased
the price ceiling for houses in all regions. For example,
in Sao Paulo, Brasilia and Rio, the maximum price of a
house was raised to 190K from 170K previously (see
table below). Also, the interest charged for mortgages
under MCMV was lowered for those in the upper
income brackets.
Minha Casa Melhor: This program is a parallel one to

Source: Banco Central do Brasil. Minha Casa Minha. It provides subsidies for the
purchase of appliances and furniture for people that
Minha Casa, Minha Vida 2: The second phase of have acquired their houses through MCMV. The
MCMV was officially announced at the end of March subsidy is for ten different products that can be financed
2010 as part of the PAC 2 program. The original goal in up to 48 months with an interest of 0.41% a month
was to build 2 million houses over 2011-14, but that (5% a year), compared with the average of 4% a month
was revised up to 2.6 million. Of these, 62%, or 1.2 without the subsidy. The program was launched in June
million units, are destined for families with income and in less than three months R$612 million in
below R$1,600/month. Another 31% are for families financing were already used up. The government
with income between R$1,600 and R$3,275/month, and allocated a total of R$18.7 billion for this program, and
the remaining 8% are for families with incomes 238K families are making use of it.
between R$3,275 and R$5,000/month. Thus, MCMV2
increased the participation of the lower income segment
vs. the first phase of the program.
31
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Table 25: Summary of Minha Casa Minha Vida 2 Program Figure 55: World Cup Planned Investments
MCMV2
Total Units 2.4 million
Income Brackets
Level 1 up to R$1600
Level 2 R$1600 to R$3275
Level 3 R$3275 to R$5000
Deadline Dec-14
Unit Cost Source: Portal da Transparencia
Sao Paulo, Rio and Brasilia up to R$190K
Cities with over 1 million inhabitants + capitals up to R$170K Macro impact: According to a 2010 report from the
Cities between 250K and 1 million inhabitants up to R$145K government, the economic impact of the World Cup
Cities between 50K and 250K inhabitants up to R$115K will be R$183 billion, of which R$47.5 billion should
Other cities up to R$90K have direct impact. The study indicates that the Word
Financing Cost per household income Cup and activities associated with it should generate an
up to R$1600 4% + TR increase of 0.4% in GDP per year from 2010 until 2019.
R$1600 to R$2455 5% +TR
This effect stems from infrastructure investments, an
increase in tourism (600K international tourists and 3.1
R$2455 to R$3275 6% + TR
million national tourists), job creation (330K permanent
R$3275 to R$5400 7.16% + TR
jobs, 380K temporary), and an overall increase in tax
Source: MRV Engenharia collection. The Ministry of Tourism estimates that the
Confederation Cup, which took place in June 2013,
2014 FIFA World Cup generated an economic impact of R$730 million, with
At a cost estimated at R$25.8 billion, the FIFA Soccer 230K national tourists and 20K from abroad.
World Cup is scheduled to take place between June 12
and July 13, 2014. The preview of the event was the 2016 Olympic Games Rio de Janeiro
Confederation Cup, which happened in June in six out The Summer Olympic Games in 2016 are going to
of the 12 cities that will host the World Cup event. take place only in Rio de Janeiro, thus concentrating
Overall, the Confederation Cup, which is sort of a test expenditures in one city only. Despite all the
for the big event, went relatively well, but some trends investments made for the World Cup, the city will
started to appear. First, urban mobility is still a problem, receive an additional R$12 billion from the public
and the main strategy that the government seems to be sector to finance investments in some strategic areas.
adopting is to declare a city holiday on game days to Initially the government is planning to focus on the
facilitate transportation. Also, the Confederation Cup transportation sector, directing 60% of the available
was tainted by popular protests, several of which argued funding to this area. Accommodations, another critical
that the government spent resources to build state-of- sector, will receive R$2.6 billion, or 20% of the
the-art arenas while basic services such as schools and governments projected total investment.
hospitals are still missing in the great majority of
Brazilian cities. FIFAs General Secretary said that in Table 26: Public Sector Investments Plan Olympic Games
the future the population of host countries must be
Sector Investment %
consulted ahead of time if they wish or not to host the (R$ million)
event.
Accommodations 2,590.50 20.69
Delays continue to be an important issue for some Sport Facilities 1,518.40 12.13
World Cup locations. In Manaus, for example, the entire Security 471.9 3.77
project of urban mobility is being reviewed as it wont Technology 477.5 3.81
be ready for 2014. From the total R$25.8 billion Transportation 7,460.00 59.59
budgeted for the World Cup, 64% was already Total 12,518.30 100
authorized for execution, and only 27% completed.
Source: Portal da Transparncia.
32
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After all investments and expenditures made by the Figure 57: Industrial GDP
private and public sectors, the big question mark is: % oya
How to take advantage and enjoy all the new
infrastructure that is going to be available for the
country after the two big sporting events? If the
intention is to build a legacy, one must consider the use
of the facilities after the event. The country needs to
develop infrastructure projects while considering their
economic viability for the future. In this vein, the Pan
American Games in Rio de Janeiro in 2007 are not a
good example. After the event, some sports facilities Source: IBGE.
were underutilized and abandoned. The event was
initially budgeted at R$500 million, but ended up Industrial activity in Brazil is pretty much concentrated
costing R$3.3 billion, according to the Federal Auditing in the Southeast region, mainly in the state of So
Court (TCU Tribunal de Contas da Unio) Paulo. The region is an industrial center marked by
diversity and production volume. The industry in the
Industry Southeast is technologically more sophisticated than in
the other regions and thus attracts a lot of multinational
Industrial activity in Brazil represented around 22.3% of
companies, mainly because of its more specialized labor
the countrys nominal GDP in 2012. Looking at its
market and its strong consumer market. In the South,
evolution, it can be noted that the share of industrial
industry has an important linkage to agricultural
GDP has been declining over the past few years, with a
production. The region is also an important producer of
peak of almost 26% in 2004.
intermediate goods, complementing Southeast
production. The Northeast industry is more focused on
Figure 56: Share of Industry in Overall GDP
% of total
agribusiness. The region has been evolving lately but
still suffers from the South-Southeast competition. The
industrial activity in the North and Midwest is
unimpressive compared with that of the other regions,
but investment programs are aiming to improve it.
In 2012 industrial production stood in negative territory

for most part of the year, actually falling by -2.6% oya.
In 1H2013, industrial production has been unstable,
with some months strong and others weak, thus
incapable of establishing a firm trend. From January to
Source: IBGE July 2013, industrial production increased by 2%
relative to the same period in 2012. Although somewhat
This decline can be partly attributed to a weakness in of a recovery, nothing to celebrate.
manufacturing activity, whose share was about 63% of
the total industry activity in Brazil in 2004 but in 2012 Figure 58: Industrial Production
represented 50% due to a strong decline. It is not a % oya
coincidence that this turnaround happened at the same
time Chinas penetration in Brazil grew and the BRL
mostly appreciated. Industrial GDP has been falling
since 2010, when it peaked at 10% oya, and in 2012 it
actually posted a negative result (-0.8% oya).
Source: IBGE.
33
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After a tough 2012, many industry categories showed a Figure 60: Industrial Business Confidence
slight recovery, led by durables and capital goods, with Index, Seasonally Adjusted
positive performances of 3.9% and 2.4%, respectively,
in the 12 months to July 2013. On the durables side,
the positive impact mostly came from the auto sector,
which increased 7.9% over the last 12 months pushed
by favorable credit conditions, IPI tax exemptions for
cars and an intensive migration of lower-income
Brazilians to the middle-income class. Even though the
positive credit condition cycle is becoming tighter in
Brazil, the BRL depreciation could boost exports and
Source: FGV
support the auto sector. Excluding autos, durables are
running at 3.9% over the last 12 months. Another
Looking at the actual sector level, the best performers
highlight, especially for 2013, has been the performance
over the last 12 months (until July 2013) were autos,
of capital goods, which fell by over 15% in 2012 but
electric material and shoes. On the other extreme are
recovered in the first half of 2013 led by trucks, which
printing press, HPC and beverage.
were in a rut in 2012 due to the change in the emission
standards, and the BNDES PSI program, which gives
Figure 61: Industrial Production by Sector
subsidies (practically at negative real interest rates) for %, last 12 mo accumulated to July 2013
the purchase of capital goods.
Figure 59: Industrial Production by Category

% oya
Source: IBGE.
Although industry has been getting by in 1H, the

general fear is that a strong deceleration will take hold
in 2H13 based on a few factors: First, the inventories for
vehicles is running at about 36 days, while the norm is
30 days. The situation is especially critical for light
passenger vehicles and less so for trucks. It is important
to point out that the auto sector is directly responsible
for about 10% of industrial production in Brazil, with an
indirect impact (auto parts, etc.) on an additional 5% to Source: IBGE
10%. Second, oil refining, which is an important IP
activity is also having weak results, potentially
damaging the overall readings. Finally, the June protests
Consumption
that took place all over the country, together with BRL Consumption, which has been perhaps the most
volatility and the upcoming October 2014 election compelling story in Brazil over the last few years, is
cycle, are making a dent in business confidence, which starting to show signs of exhaustion. The intensive
we think doesn't bode well for capex going forward. migration of lower-income Brazilians to the middle-
Business confidence is back to levels less seen in 2009, income segments brought to the market more than 30
although not as low as then. Moreover, business million potential consumers who were able to buy
confidence has fallen below 100, which is considered a things that were out of their consumption universe
level of "pessimism" on an index that varies between 0 before, especially as they had access to credit.
and 200.
34
(55-11) 4950-6684 October 2013
Figure 62: Retail Sales important to mention that consumer confidence has
% oya been falling, which is translating into a weak retail sales
reading. Note that in 1H13, retail sales gained only 3%,
compared with 8.6% in 2012.
Figure 64: Consumer Confidence

Index, NSA
Source: IBGE.
Looking at a broader retail sales measure, which

includes autos and construction material, the picture is
somewhat better as the government continued to give Source: FGV
plenty of stimulus to the auto industry, including lower
taxes and special financing conditions at public sector In the table below, one can easily deduct that
banks. In 1H13, broad retail sales expanded 3.7% versus consumption doesnt have the same appeal as it was the
3% for the measure excluding auto. On a 12-month case in the previous year. All categories, with the
basis, retail sales is running at 5.5% while the broader exception of "others" (includes sporting goods, toys,
measure is at 6.4%. jewlery, etc.) have receded in terms of growth rate in
1H13 relative to 2012. It is important to note that
Figure 63: Broad Retail Sales Largely Defined by Auto Sales supermarket sales have taken a dive as food inflation is
12-Month Rolling, % far outpacing the overall CPI. Also, furniture and
appliances are having an important retrenchment as real
wages get compressed and credit stricter. Finally,
despite weak same store-sales data, apparel has not been
all that weak relative to last year.
Figure 65: Retail Sales by Category

2012 accumulated and YTD to June 2013, % oya
Source: IBGE
However, there are signs that the consumption-driven

model is being exhausted. First, many of the tax cuts
that the government granted for the purchase of autos,
appliances, furniture, etc., are starting to expire. Second,
the labor market is already showing signs of
deceleration, especially in terms of real wage growth,
mostly a product of inflation acceleration. Keep in mind
that the minimum wage readjustment in 2013 is likely to
be the lowest of the past few years, less than 1% in real
terms, which should have an impact in the purchasing
power of the population, especially if inflation
Source: IBGE
continues to rise. In addition, the credit market has been
significantly stricter on the supply side; and on the
Despite the drag, Brazil has one of the largest
demand side, the level of indebtness and income
consumer markets in the world, ranked 7th out of
committed to service debt doesnt show much room for
148 countries by the World Economic Forum. The top
expansion (all these indicators will be discussed later in
five markets by size are the US, China, India, Japan and
this report), especially now that the country is
Germany. Brazil has the largest domestic market in
undergoing a hiking interest rate cycle. Finally, it is
Latin America.
35
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Table 27: Ranking of Largest Consumer Markets Brazil Is 7th between 15 and 20 years old is over 70%, while for
Rank Country Rank Country
those between 20 and 29 is above 60%.
1 United States 9 Russia
2 China 10 Italy
The auto market, despite its importance and huge size
in Brazil, is still underpenetrated relative to developed
3 India 11 Mexico
countries, but rising fast. Over the last 9 years, the
4 Japan 15 Turkey
Brazilian fleet expanded by 67% and today is the 7th
5 Germany 21 Argentina
largest in the world.
6 United Kingdom 27 Colombia
7 Brazil 42 Chile Table 29: Brazilian Auto Fleet
8 France 43 Peru Millions
Source: World Economic Forum 2002 2011 % change
United States 229.6 244.7 7%
The household ownership of goods is improving, and
Japan 73.9 75.5 2%
in 2011, 95% of Brazilian households had a color TV,
oven and refrigerator. Electric energy is also almost Germany 48.2 45.9 -5%
universal to all Brazilian households, partially due to a Italy 37.6 42.0 12%
program launched by the Lula administration called France 35.1 38.0 8%
"Light for All," which brought electric energy to the United Kingdom 32.7 35.7 9%
most distant and poorest regions in Brazil. The Brazil 20.7 34.6 67%
penetration of personal computers in Brazil is still low
Mexico 18.4 31.9 73%
at 46.4% in 2012, up from 31.2% in 2009. Still, almost
all who have a computer, also have internet access Source: Anfavea
(40.3%)
After the huge growth of 2010, the Brazilian auto
Table 28: Household Ownership of Some Goods & Services industry continued to perfom well mostly due to
% of total households government incentives. The tax incentive for auto
2011 2012 purchases that ended in 1Q 2010 was restored in 2012
as part of a stimulus program, and gave additional fuel
Auto 40.9% 42.4%
to the industry even though credit conditions were a lot
Motorcycle 19.1% 20.0%
tighter than in 2010. Indeed, the rise in consumer non-
Oven 98.6% 98.7%
performing loans at Brazilian private banks in 2011 and
Water Filter 53.2% 53.1% 2012 were mostly related to 2010 auto loans. All in all,
Radio 83.4% 80.9% auto sales continued to grow and hit an all-time record
Color TV 96.9% 97.2% of 782K in 2012. However, Brazil is still a laggard in
Refrigerator 95.8% 96.7% terms of vehicles per capita. There are 5.7 inhabitants
DVD 75.5% 76.0% per vehicle in Brazil, while in Mexico there are 3.6, and
Freezer 16.4% 16.7% in the US there is almost one vehicle per person.
Laundry Machine 51.0% 55.1%
Computer 42.9% 46.4% Table 30: Inhabitants per Vehicle
Internet Access 36.5% 40.3% 2002 2010 2011
Electric Energy 99.3% 99.5% Brazil 8.4 6.1 5.7
Telephone 89.9% 91.2% Argentina 5.5 4.0 3.7
Mobile only 49.7% 51.4% Mexico 5.5 3.5 3.6
Fixed line only 3.5% 3.0% South Korea 3.4 2.7 2.6
Both 36.7% 36.9% Germany 1.7 1.8 1.8
Source: IBGE - PNAD 2012 Spain 1.7 1.6 1.7
Japan 1.7 1.7 1.7
In terms of digital inclusion, 2012 data show that United Kingdom 1.8 1.7 1.7
49.2% of the population of 10 years or older use the Italy 1.5 1.5 1.4
internet, up from 46.5% in 2011. Although the general France 1.7 1.5 1.4
number is still low, internet usage within the population United States 1.2 1.2 1.2
Source: Anfavea
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Consumption allocation: According to a survey Figure 66: Consumption Allocation by Region (2008)
conducted by IBGE, called Pesquisa do Oramento %
Familiar (POF), the most representative item in the 100%
consumption basket of an average family in Brazil is 80%
24.7 24.1 24.8 25 24.6 23.2
housing. On average 35.9% of total consumption is 19.6 16.5 18.2 19.5 21.9 21.2
60%
destined for housing, which encompasses rent, furniture,
40% 33.6 32.8
appliances, water, gas, electricity and taxes. The second 35.9 37.2 35 37.9
main item is food, composing 19.8% of total 20%

19.8 25.8 24.2 18.3 18.5 17.7
consumption, followed by transportation, responsible 0%
for 19.6% of consumption expenses. These three main Brazil North Northeast Southeast South Midw est
items correspond to 75% of total consumption. Food Housing Transportation Others
Source: POF IBGE.

The consumption breakdown points to some social
weakness that can be observed every day in Brazil. Labor
Expenses for education correspond on average to only
3% of total consumption, while in Mexico, for example, The Brazilian labor market had been extremely
this ratio jumps to 9%. The greatest problem in Brazil is resilient to the global woes until 2011. However,
the magnitude of the expenses associated with primarily weak growth is jeopardizing recent gains. While this
necessity items, composing 75% of an ordinary familys is good news for inflation, it is a potential nightmare for
income and leaving only 25% for other expenses. the Dilma administration considering that a resilient
labor market, with low unemployment and rising real
Table 31: Consumer Spending Breakdown as a % of Total wages, has been one of the pillars of the president's
Household Consumption (2008-09) popularity. To a large extent, government policies until
% elections are likely to be geared to guarantee a strong
Items % labor market. Still, it is questionable if this will be
Food 19.8 possible considering that the data are already turning
around.
Housing 35.9
Clothing 5.5
In Brazil there are two main job surveys: (1) the
Transportation 19.6 household survey is conducted by the IBGE and is a
Hygiene and Personal Care 2.4 general survey that includes anyone over 10 years of
Health Care 7.2 age who has worked in the reference week, independent
Education 3.0 of the activity exercised in 6 metropolitan areas; and (2)
Culture 2.0 the payroll survey, known as CAGED, is released by the
Smoke 0.5
labor ministry and shows how many people were hired
and fired in the formal labor market, that is, those that
Personal Services 1.1
have been registered with the social security institute.
Other 2.9
Source: POF IBGE. The household survey

The unemployment rate in Brazil has improved
Also, it is interesting to note that consumption is significantly, especially during the year of 2010 and into
allocated differently among the regions. The poorer the 2013. Although there are signs of deceleration on the
region, the higher the share of food consumption in the margin, the household survey reading continues to show
total expenditure basket, as resources are scarcer. In the almost record-low unemployment. Still, because of the
North, for example, food consumption represents 25.8% deterioration in the payroll survey, one expects that the
while in the Midwest this percentage is 17.7% of total household data will also be impacted going forward.
household consumption. The latest reading for the unemployment rate was 5.3%
for August 2013.
37
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Figure 67: Unemployment Rate Figure 69: Net Formal Job Creation (Hires Minus Fires)
Non Seasonally Adjusted Thousands
Source: CAGED. Note: As of August 2013

Source: IBGE.
The breakdown below shows that new hires in 2013
An important development in terms of the labor market until July were more concentrated in the services sector,
is the increasing share of formal employees in the which was responsible for more than 44% of total new
workforce. In July 2013 more than 54% of Brazilians job creation. Manufacturing industry had the second-
were registered workers (formal), up from 47% in 2007. best performance, with 25% of total hires, followed by
the agriculture industry, with 17%. The only category
Figure 68: Composition of Labor by Type of Job with negative net hires was commerce, which lost
% 48,170 jobs from January to July 2013. It is key to
notice that a bumper harvest in 2013 was very important
to net job creation, but considering that these are mostly
temporary jobs, gains are unlikely to hold up.
Figure 70: Job Creation by Category 2013

%
Source: IBGE.
CAGED
The CAGED survey records the total number of payroll
additions and subtractions on a monthly basis. This is an
important barometer for the market, once the high
number of net hires is correlated to the good
performance of economic activity. For example, in 2010 Source: CAGED.
more than 2 million new jobs were created, a record
high. But since the start of 2011, net job creation has The labor market in Brazil is starting to deteriorate not
been declining significantly. In the first eight months of only on the job creation side, but also in terms of real
2013, the payroll data are running over 25% below that wages. Since the start of 2013, real wages have been
of the same period in 2012 at 827K new jobs (net of declining, and real earnings results in July were the
firings), indicating an important deterioration in labor lowest in the last 12 months (R$1,848/month against the
market conditions. 12-month average of R$1,865/month).
38
(55-11) 4950-6684 October 2013
Figure 71: Real Wages government expenditures. This happens because a large
% oya, 3mma set of government spending is tied to the national
minimum wage, which is used as an index for minimum
pension benefits (social security) and as an indirect
index for the spending of a number of social programs.
We estimate that about 70% of compensation in Brazil
is also readjusted taking into account the minimum
wage.
Inflation
Source: IBGE.
Minimum wage: Since the implementation of the Real

History
Plan in 1995, the minimum wage has grown 578%. In Inflation performance over the years tells us a lot about
real terms, this is a good evolution, considering that in Brazils history. Until 1994 the countrys economy
the same period inflation rose 229%. suffered periods of extremely high inflation, which were
only overcome by the introduction of the Real Plan and
Figure 72: Minimum Wage Evolution the Brazilian Real (R$), the current currency. Nowadays
R$ per month Brazil works with the inflation-targeting system to keep
inflation under control.
Inflation-targeting system: The inflation-targeting

regime was adopted in 1999, giving to the Central Bank
the responsibility of conducting monetary policy. The
BCB objective is to reach the inflation target. The target
is determined by the National Monetary Council
(CMN), which is composed of the Finance Minister, the
Source: MCM Consultores. Planning Minister and the Governor of the Central
Bank. The IPCA is the inflation index that benchmarks
The minimum wage adjustment happens according to a the process. The CMN sets not only an inflation target
formula. It stipulates that the minimum wage is but also an interval tolerance band for inflation. The
readjusted by the prior-year inflation plus the level of CMN meeting usually takes place in June of each year,
GDP growth from two years back, if positive. This logic and its members set the target for two years after (for
of readjustment should occur at the beginning of every example, in 2013 the target for 2015 was set).
year. At the start of 2011, the government decided to
abide by this rule and make it a law that will be in place
until 2015. Despite several complaints from workers
unions, newly elected President Dilma Rousseff decided
to abide by the minimum wage formula, and the
minimum wage was set at R$545, which only corrected
for inflation, considering that 2009 GDP was negative.
In 2012, on the other hand, the minimum wage had a
real readjustment of 7.5%, which further contributed to
consumption-led growth in that year and also to a spike
in inflation. For 2014, the readjusment will be very
mild, considering that GDP in 2011 was only 0.9%.
What is interesting is that each increase in the minimum

wage immediately triggers a chain of higher
government spending. For 2013, for example, an
increase of R$56 in the minimum wage immediately
translates into an additional R$12.3 billion in
39
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Table 32: Inflation-Targeting System History Figure 74: Consensus Expectations for 2013 and 2014 Inflation
%, year end
Year Target Tolerance Interval IPCA %oya
1999 8.0% 6.0% - 10.0% 8.94
2000 6.0% 4.0% - 8.0% 5.97
2001 4.0% 2.0% - 6.0% 7.67
2002 3.5% 1.5% - 5.5% 12.53
2003 3.25% 1.25% - 5.25% 9.30
4.0% 1.5% - 6.5%
2004 3.75% 1.25% - 6.25% 7.60
5.5% 3.0% - 8.0%
2005 4.5% 2.0% - 7.0% 5.69
2006 4.5% 2.5% - 6.5% 3.14
2007 4.5% 2.5% - 6.5% 4.46 Source: Banco Central do Brasil
2008 4.5% 2.5% - 6.5% 5.90
2009 4.5% 2.5% - 6.5% 4.31 Inflation timeline
2010 4.5% 2.5% - 6.5% 4.91
2011 4.5% 2.5% - 6.5% 6.50 1920: Inflation started to be measured in Brazil.
2012 4.5% 2.5% - 6.5% 5.84
2013 4.5% 2.5% - 6.5% 5.90* 1945: Brazils economy reached considerable stability,
2014 4.5% 2.5% - 6.5% 5.70*
with inflation at 3% a year.
Source: Banco Central do Brasil. Note: In January 2003, adjusted inflation targets of
8.5% for 2003 and 5.5% for 2004 were established. (*) J.P. Morgan forecast.
1960s: Period of economic growth and industrialization
The inflation target system has worked well for Brazil, promoted by President Juscelino Kubitschek. Inflation
but since 2010 the monetary authority has deviated rates increased to 90% a year.
somewhat from trying to reach the center, which was
widely understood to be the Central Bank's goal. 1964-85 (military regime): During the whole military
Instead, the BCB gave itself significant degrees of regime, inflation remained at high levels. The
latitude within the bands. Since 2006 the target has been authorities used to manipulate data in order to keep the
fixed at 4.5% with a tolerance interval of 2.0%, rates low. Hence, data from that period are not reliable.
meaning that inflation can hover between 2.5% and
6.5%. Still, it is widely understood that the Central 1986-94: After the redemocratization Brazil went
Bank objective is to aim at the center of the target through its most turbulent period relative to inflation.
(4.5%) and not elsewhere within the bands. The rate jumped from 72% in 1986 to 1,973% in 1989.
Prices used to rise literally every day. Many economic
Figure 73: Inflation Rate Since 1999 plans were introduced (Bresser, Cruzado, Collor, among
% others), but all attempts were unsuccessful. The middle-
income segment was hardest hit: Wages lost value very
quickly, and in 1990 President Collor confiscated
banks savings.
1994-99: In 1994, then-Finance Minister Fernando

Henrique Cardoso announced the Real Plan, putting in
circulation a new currency and aiming to finally reach
price stabilization. In this period, the inflation rate fell
dramatically, from 916% in 1994 to 22% in 1995, and
Source: IBGE; Banco Central do Brasil.
the country started to rescue its credibility in the
international scenario. The fixed exchange rate was the
Because the monetary authority has introduced over the main anchor of price stability, which over time became
past two years degrees of freedom to deal with inflation extremely costly and unsustainable for the government.
within the band, inflation expectations have also de- The successful introduction of the Real Plan and lower
anchored from the 4.5% center, and today, even for inflation led to the election of President Cardoso in
longer periods, it is at 5% or above. In 2012, inflation November 1994.
ended the year at 5.84%, even though GDP was only
0.9%. J.P. Morgan forecasts for upcoming inflation are 1999-Now: With the floating of the exchange rate in
5.9% in 2013 and 5.7% in 2014. January 1999, inflation fears rose. The government
acted quickly, increasing taxes, cutting spending and,
more importantly, introducing the inflation-targeting
40
(55-11) 4950-6684 October 2013
regime. This regime is in place now and, with the The new basket reflects structural changes in the
exception of the period between 2001 and 2003, the countrys economy; in general, it shows an increase in
targets have been met. Still, as was mentioned before, the weight of consumer durable goods and reduces
the degrees of freedom within the inflation-targeting services weights (mainly education).
regime have increased and the central bank is giving
itself more flexibility within the bands. For example, Table 33: IPCA Weight per Category and Metropolitan Region
inflation in 2012 was 5.84%, and the monetary 2013
policymakers explicitly said that their goal for 2013 is %
to reach inflation below that level. It is also important to Components Wgt (%) Area Wgt (%)
mention that the devaluation of the exchange rate over Food and Beverages 24.6 Belm 4.2
the past year should also add to more pressure on Food away from home 8.5 Belo Horizonte 10.8
inflation.
Commodities 11.5 Braslia 3.4
In Natura 1.9 Curitiba 7.4
Indexation: One of the key problems with rising prices
in Brazil is that the economy is still indexed to inflation Other 2.7 Fortaleza 3.9
to some degree. For example, the formula of minimum Housing 14.3 Goinia 3.7
wage readjustment has a price component, the return of Home Articles 4.5 Porto Alegre 8.9
pension funds is inflation plus 6%, rents are indexed to Apparel 6.6 Recife 4.1
inflation, and so are utility tariffs and a number of other Transport Costs 19.0 Rio de Janeiro 13.7
contracts. One of Brazils key challenges is to de-index Health Care 11.3 Salvador 6.9
the economy.
Personal Expenses 10.6 So Paulo 33.1
Education Costs 4.6
Main Inflation Indexes
Communication 4.6
Brazil is well known for having a myriad of inflation
Source: I BGE and J.P. Morgan calculations
indexes, many times leading to significant confusion.
There are two families of indexes that are the most
INPC: The INPC has the same methodology as the
important: the IGPs, collected by Fundao Getulio
IPCA but takes into account households that earn
Vargas (FGV), and the IPCs, collected by Instituto
between one and six minimum wages monthly (instead
Brasileiro de Geografia e Estatstica (IBGE).
of up to 40 minimum wages). Therefore, the weights for
each category are different than the IPCAs. Food, for
The IPC family (IBGE)
example, has a heavier weight in the INPC calculation
IPCA: The IPCA is today the benchmark consumer than in the IPCA. The INPC closed 2012 with a rise of
price index of Brazil, mostly because it is the inflation 6.20%, pretty similar to the 2.08% registered in 2011. It
index used for inflation-targeting purposes by the was higher than the IPCA (5.84% in 2012) because food
Central Bank. The survey of prices usually takes place prices, which have a higher weight in the INPC, had a
during the calendar month and is released before the vast increase in 2012. This is likely to remain the case
10th of the next month. It takes into account costs for in 2013.
families that earn between one and 40 minimum wages
and that live in 11 metropolitan regions. The IPCA-15 Figure 75: IPCA vs. INPC
has the same methodology as the IPCA, the only oya%
difference being the price collection date, which is the
15th of the reference month, with the prices reflecting
changes since the 15th of the month before. The IPCA
was 5.84% in 2012 while the IPCA-15 was 5.78%.
New weights for the IPCA: In November 2011, IBGE

announced new weights for the IPCA consumption
basket to be used from January 2012 onwards. The
changes conform to best practices for calculating
Source: LCA Consultores
inflation and had been previously scheduled despite
rumors of government intervention on the
methodological change.
41
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The IGP family The IPC (consumer prices) surveys households that
The IGP family is composed of three main indexes: earn between one and 33 minimum wages in 12 major
the IGP-DI, the IGP-M and the IGP-10. All of them capital cities. It classifies products in seven categories
have the same composition, the only differences being (food, housing, clothing, health/personal expenses,
the collection and release dates. The IGP-M has two education/recreation, transportation, others). The IPC-M
previews before the final monthly number is released. It increased by 5.8% from January to December 2012
is the most common FGV index because it is the one (was 6.16% in 2011) and year to date (august 2013) it is
used to readjust contracts for example, rents. In 2012, at 3.38%.
the IGP-M closed the year at 7.82%, up from 5.11% in
2011. Year to date (August) in 2013 it is running at The INCC (construction costs) takes into account
2.15%. construction costs and subdivides the index into labor
costs and materials/services. The INCC-M increased by
Table 34: IGP Price Index Calendar 7.23% in 2012, very similar to the levels observed in the
Index Collection Date Release Date
past few years. However, it is poised to breach this level
IGP-M From the 21st of the previous Around the 30th of each in 2013, considering that in the year to August it was
month to the 20th of the current month, with two earlier already running at 6.71%.
month previews
IGP-10 From the 11th of the previous IPCA vs. IGP-M
Around the 20th of each
month to the 10th of the current
month Over time, the IGP-M and the IPCA tend to
month
IGP-DI
Calendar month
Around the 10th of each converge. Still, major changes between both indexes
month happen at times of commodity price pressure (which is
Source: FGV. stronger in wholesale prices than in retail) and at times
of wide FX variation. Note in the chart below that the
The IGPs have an interesting composition: 60% of IGP-M surpassed by far the IPCA in 1999, 2002, 2008
the index is composed of wholesale prices (IPA), 30% and 2010, times when the BRL and/or commodity
of the index is consumer prices (IPC) and the remaining prices oscillated most.
10% covers construction costs (INCC).
Figure 77: IPCA vs. IGP-M
Figure 76: IGP-M and Its Components % oya
% oya
Source: MCM Consultores.

Source: Bloomberg
IPC-FIPE: Released on a weekly basis, this measures

The IPA (wholesale prices) was until recently the consumer prices in the city of Sao Paulo and is
closest matrix that Brazil had for producer prices (PPI). considered a good gauge for overall CPI. It started to be
It can be classified by origin of the product (agriculture calculated in 1939. In the year to August 2013, it
= 29%, industrial = 71%) or by its destiny (consumption accumulates an increase of 1.99%, lower than the 3.33%
= 34%, production = 66%). It is in the IPA that one can registered by the IPCA. This might be because housing
measure the price pressure emanating from commodity has a greater weight than food in this index, accounting
prices. It is also the IPA that captures changes in the for 30%, versus 22% for food, which had a greater
exchange rate, as many commodities that are part of the increase over the past several months.
index are priced in USD. The IPA-M increased 8.63%
in 2012 up from 4.34% in 2011 mostly due to a
devaluation of the BRL. In the year 2013 to August, it is IPP (IBGE): In April 2011, the IBGE started to release
running at 1% a producer price index, that has the same methodology
of the PPIs of most developed countries. At this point,
the survey is with 23 sectors within the manufacturing
42
(55-11) 4950-6684 October 2013
industry, but in the future it will expand to all economic Figure 79: Food Inflation vs. IPCA
activities. In the year to July 2013, the IPP was up by an
accumulated 2.77% in the year. Over the last 12
months, the index is up by 4.96%.
IC-BR (Central Bank): The IC-BR is an index of the

weighted average of price variations in BRL of
commodities that are relevant to the dynamics of
Brazilian inflation. These include three segments:
Agriculture (beef, cotton, soy oil, wheat, sugar, corn, Source: LCA Consultores
coffee, rice, and pork meat), metals (aluminum, iron

ore, copper, tin, zinc, lead, and nickel), and energy: FX pass-through to pressure goods prices: On the
(Brent, natural gas, copper). As of August 2013, the IC- side of goods, these were mostly very well behaved
BR accumulated an increase of 3.54% in the year and until recently, considering that the strong exchange rate
5.35% in 12 months. kept prices low, especially for durables. Now, however,
the FX depreciation should have an important pass
through on the price of these items. The rough estimate
Recent Inflation Behavior for the pass-through of FX depreciation to inflation in
Brazil currently is around 5%, meaning that for every
Over the past few years, services prices have been the 10% BRL depreciation, the impact on inflation is 50bp
inflation culprit. The emergence of the middle class over the next 12 months.
greatly boosted the demand for services, which of
course don't have an importer similar and, therefore,
Finally, one cannot ignore the fact that government
didnt have a price impact on the back of the currency
price management has been an important item in
appreciation that reigned until mid-2012. In addition,
defining inflation. In the first half of the year, the
constant wage readjustments and higher labor costs in
government established lower prices for electric energy
general added to the pressure. Still, services, although
and the basic food basket. Also, while it allowed for a
high (8.7% in 2012 and 8.6% in 2013 JPM forecast)
slight increase in gasoline prices, it zeroed down on the
have not changed much.
CIDE tax so that consumers would not feel the impact.
More recently, the decline in transportation tariffs in
Figure 78: IPCA Services Stabilizing at a HIgh Level
several Brazilian cities on the back of the June 2013
protests and of some toll roads have also produced a
positive impact on inflation readings. All in all, inflation
would be much higher if it were not for the government-
mandated price declines that took place in 2013.
Table 35: IPCA Weight and Variations

Components Weight (%) 2012 2013f
Source: LCA Consultores IPCA Headline 100.0 5.8% 5.8%
Administered 23.2 3.7% 1.4%
Adding to the pressure on services, food prices have Market-driven 76.8 6.5% 7.2%
been rising ahead of inflation since mid-2010. This Services 35.2 8.7% 8.6%
pressure was more felt from mid-2012 onward due to
Trend Services 8.3 6.3% 6.3%
the break of the harvest, but even a bumper harvest in
2013 didnt allow for food prices to decline. One of the Cyclical services 27.0 9.5% 9.3%
reasons for the increase is that food outside of the house Goods 41.5 4.7% 6.1%
(restaurants, etc.) is rising very significantly. In 2012, it Nondurable Goods 23.6 8.5% 7.5%
was up by 9.13% and YTD to August 2013 it is running Semidurable Goods 8.5 4.8% 4.9%
at 6.29%. The rise in prices for food outside of the Durable Goods 9.5 -3.5% 3.7%
house adds to services pressure. Indeed, excluding this
Source: IBGE and J.P. Morgan calculations.
item and air fares, services would be slightly below 6%
for YTD 2013, while it is currently at 8.6%.
43
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Central Bank and Monetary Policy the hybrid instruments of monetary policy, which are
the now famous macro-prudential measures. These were
The Central Bank in Brazil was created in 1964 and is first used to cool down credit markets at the end of the
the main monetary authority in the country. Since its 2010 boom. The use of these measures was reduced
creation, the Central Bank of Brazil has had more once the economy turned south, and lately changes in
governors than years of existence. Remaining more than the Selic have been the practice.
a year as the governor of the Central Bank was a
challenge due to problems related to economic stability BCB independence/autonomy: The Central Bank in
and publicly perceived credibility. Former Governor
Brazil is not independent from the government and is in
Henrique Meirelles was the one who remained the fact a kind of sub-arm of the Treasury Ministry.
longest in the post: he was governor during the eight However, since the Cardoso years, the central bank
years of Lulas mandate (2003-10).
enjoys de facto operational autonomy, having the
freedom to decide on interest rates without having to
The current central bank governor, is Alexandre answer to political pressure. This autonomy has given
Tombini. He took office in January 2011, right at the credibility to the institution and, therefore, to the
time when President Dilma was inaugurated. He holds a interest rate decisions of the past few years, at least in
Ph.D. in economics from the University of Illinois and the great majority of cases. Having said that, it is
has worked in the Central Bank since 1998. Different important to note that the BCBs autonomy has been
from previous central bankers of recent history, questioned lately as the Central Bank has been more
Tombini made a long carrer in the Central Bank before tolerant with inflation, deviating from the center of the
becoming its governor. In addition, most of the board inflation targeting.
members of the Central Bank are not well-known
market participants, as was the case especially until The COPOM: As mentioned in the inflation section,
2008. Brazil operates under an inflation-targeting system, and
it is the responsibility of the Central Bank to set up an
Table 36: Brazil Central Bank Chairmen since 1985
interest rate that leads to the convergence of inflation to
Central Bank Chairman Period Brazil's President set the targets. Interest rates are set by the Monetary
Antonio Carlos Lemgruber Mar-85 to Aug-85 Policy Committee COPOM which was established
Ferno Bracher Aug-85 to Feb-87 in 1996 with the objective to conduct monetary policy.
Francisco Gros Feb-87 to Apr-87 There are monetary policy meetings every six weeks for
Jos Sarney a total of eight meetings a year. Most times, the
Lcio de Faria Apr-87 to May-87
COPOM has eight voting members who decide on
Fernando Milliet May-87 to Mar-88
interest rates: The Chairman of the Central Bank, the
Elmo Cames Mar-88 to Jun-89 directors of monetary policy, economic policy, special
Valdico Bucchi Jun-89 to Mar-90 studies, norms and regulation, international affairs,
Ibrahim Eris Mar-90 to May-91 surveillance and regulation, and administration. If there
Fernando Collor
Francisco Gros May-91 to Nov-92 is a tie in the vote, it is up to the chairman to break it.
Gustavo Loyola Nov-92 to Mar-93
Figure 80: Selic Rate vs. Inflation yoy
Paulo Cesar Ximenes Mat-93 to Sep-93 %
Itamar Franco
Pedro Malan Sep-93 to Dec-94
Gustavo Franco Dec-94 to Jan-95
Persio Arida Jan-95 to Jun-95
Gustavo Loyola Jun-95 to Aug-97 Fernando Henrique
Gustavo Franco Aug-97 to Mar-99 Cardoso
Armnio Fraga Mar-99 to Jan-03

Henrique Meirelles Jan-03 to Jan-11 Lula
Alexandre Tombini Jan-11 - Dilma Rousseff
Source: Bloomberg
Source: Brazil Central Bank.
The classic rate-setting instrument in Brazil is interest

rates, with the eventual move in reserve requirements.
In 2010 and 2011, the Central Bank made ample use of
44
(55-11) 4950-6684 October 2013
Exchange Rate Policy 2008: The most serious global economic crisis since the
Great Depression of 1929 generated a global confidence
The introduction of the Real Plan in mid-1994 led six crisis. The collective uncertainties led foreign capital to
months later to the introduction of a new currency, the leave Brazil, searching for what it hoped were safer
Real (BRL), in substitution of the Cruzeiro Real. The havens, thereby causing BRL weakness.
new currency was born under a managed pegged regime
of bands. At the time of its introduction, the BRL was
2010/2012 FX war: A world of negative real
equivalent almost to 1 USD, and throughout the years it
interest rates and plenty of liquidity led to very high
depreciated very slightly.
inflows into Brazil, attracted by a strong economic
recovery post the crisis and by high interest rates. The
In January 1999, when the BRL was around 1.2/ currency strengthened and led Finance Minister Guido
USD, the government finally allowed the BRL to Mantega to declare in 2010 that Brazil was in a
float after 4.5 years of a crawling peg regime. The currency war against other nations. The main concern of
Brazilian currency was under attack after the Asia crisis the authorities is avoiding the de-industrialization of the
and the 1998 Russia default. International reserves were country, which would be caused by a lack of
fast being depleted, losing about US$50 billion in the competitiveness of the Brazilian manufacturing industry
period. Thus, the BRL was allowed to float. Since the in light of the strong exchange rate.
introduction of the floating exchange system in 1999,
the economy has passed through different periods,
2013: Government efforts to weaken the currency
leading to significant volatility in the BRL, especially in
started to pay off once it became evident that macro
times of crisis.
data were not rebounding and investor sentiment
towards Brazil soured once more. Chinas woes in 1H
Figure 81: Exchange Rate
R$/US$
and May's announcement that the Fed normalization
was in sight led to currency depreciation. The BRL is
among the three worst performers in the year to mid-
September, and its performance is worse than other
commodity currencies. While on one hand the
government is embracing the devaluation, as it could
enhance Brazils competitiveness, on the other hand, it
fears that currency pass-through will lead to higher
inflation. Theres really no free lunch. Still, note in the
Source: Bloomberg. chart below, that despite the recent devaluation, the real
exchange (trade-weighted) rate remains rather on the
1999: The introduction of the floating exchange regime strong side.
led to a significant depreciation in the BRL, taking it
from R$/US$1.2 in December 1998 to R$/US$2.05 in Figure 82: Real Exchange Rate
January 1999, a depreciation of almost 70% in just one
month.
2002/03: Brazil was facing a severe confidence crisis

triggered by uncertainties regarding the presidential
election. The main running candidates were Luis Incio
Lula da Silva (PT) and Jos Serra (PSDB). The market
was concerned that Lula, the opposition candidate,
would win the elections and make good on the populist Source: Banco Central do Brasil.
themes that marked his previous electoral attempts.
Markets were unsure if Lula would follow the economic J.P. Morgan calculates the long-term (30-year) Real
policies in place during the Cardoso administration and Effective Exchange Rate for most currencies and the
if he would fulfill the commitments with the public BRL appears today as the second most overvalued
debt. In this period the dollar came close to R$/US$4, currency in the world, just behind the Russian Ruble.
the highest value since the implementation of the BRL.
45
(55-11) 4950-6684 October 2013
Figure 83: Real Effective Exchange Rate: Spot Deviation from securities (equity and fixed income). The currency
30-Year Average responded to the measure, but during 2010, appreciation
forces were in place once more, and in October 2010 the
government announced that the IOF tax for foreign
purchases of fixed income instruments would increase
from 2% to 6%. There were other measures adopted, for
example, the increase in the limit of dollars that the
Treasury is allowed to buy in the open market and also
permission granted for the Brazilian Sovereign Wealth
Fund to purchase FX. In 2011, the Central Bank
announced that reserve requirements would rise from
Source: J.P. Morgan, as of September 14, 2013 0% to 60% on USD short positions held by local
institutions. It also imposed a 6% IOF tax on external
Central Banks role in the FX: When the floating corporate bonds and notes with maturities of less than
exchange rate was introduced in 1999, the Central Bank 360 days. In mid-2012, the government aimed on FX
was supposed to intervene only occasionally and in a derivatives, greatly restricting the market. Still, from
limited way. But since 2004 it has done interventions then onward, most of the FX moves were in the
almost daily, acting as a dollar buyer or seller, direction of easing restrictions, albeit timidly.
depending on the FX trend at the time. From 2010 to
2012 the Central Bank has also made ample use of Starting in May 2013, FX controls started to be
regulatory barriers (mostly taxation), aiming to control dismantled one by one as the currency started to
FX inflow into Brazil. However, as the BRL started to depreciate and the government acted to contain abrupt
depreciate in mid-2012, these were mostly dismantled. depreciation. The most important move was the
In August 2013, the central bank introduced a US$50 elimination of the 6% IOF on foreigners' fixed income
billion scheme of daily FX interventions aimed to purchases. All in all, the message is clear: the
provide hedge and to ease the currency volatility. This government remains very vigilant on the level of the
scheme aims to sell US$500 million of swaps daily Brazilian exchange rate and doesnt let the currency
from Monday to Thursday and on Friday, the BCB will float freely, often imposing capital controls and acting
offer a repo line of R$1 billion. The idea is that it will on one side or another on both the derivative and spot
remain in place at least until the end of the year. market to either smooth FX volatility or guide it to
some other level.
FX controls
The strengthening currency led the government to Table 37: Recap of Recent Government Measures to Sustain
implement a series of measures to avoid the over- BRL
appreciation of the FX, starting in October 2009. FX Date Description
controls are not new to Brazil, and they were introduced Reduction from 6% to 0% the IOF charged to foreign
31-Jan-13
in the recent past upon the advent of the Real Plan in investors on real estate funds
IOF on foreignersfixed income flows reduced from 6% to
1994. Then, the objective of capital controls was not to 4-Jun-13
0%
put additional pressure on the pegged exchange rate in a IOF on short dollar derivative positions reduced from 1% to
12-Jun-13
context of a rising current account deficit. The most 0%
commonly used instrument was the IOF (tax on BCB removes reserve requirements on short FX positions
25-Jun- 13
(was 60% on positions above US$3 billion
financial operation), which was increased or lowered End of restrictions for the anticipation of future revenues by
several times during the 1990s depending on whether 4-Jul-13
exporters to finance production.
the government was aiming to attract or dissuade BCB announced the reduction of the FX exposure weight of
foreign portfolio flow. local bank's external subsidiaries in their RWA calculations.
According to the BCB, this change will reduce the capital
11-Jul-13
requirements on external borrowing of local banks, affecting
From 2008 to 2012 the use of the IOF as an FX the local FX markets.
instrument became more common. Objectives differed,
with the 2008 IOF hike aimed at boosting tax revenues, BCB decided to offer US$500 million USD swaps through
daily auctions from Monday to Thursdays, and US$1 billion
which were depleted by the end of the CPMF tax. From 23-Aug-13 repo auction on Fridays at least through December 31st
2009 onward, the clear objective of taxation was to 2013
reduce the volume of exchange rate inflows into Brazil.
In October of that year, the government announced a Source: J.P. Morgan.
2% tax (IOF) on all foreign purchases of Brazilian
46
(55-11) 4950-6684 October 2013
External Sector The positive terms of trade led to the appreciation of the
exchange rate, which boosted imports at a time when
domestic consumption was being fueled by very
Brazil is one of the most closed economies in the generous wage readjustments. All in all, the trade
world. The International Chamber of Commerce found current (exports + imports) increased over the last
that Brazil is the most closed economy of the G-20; and decade, as both imports and exports gained. In 2009, the
among 75 countries researched, Brazil is in the 67th global financial crisis broke the growing trend, and in
position, only ahead of Venezuela in Latin America. 2011, the European and American soft patches led the
Not only that, but the ICC sees Brazil as being more indicator to cool down some.
closed now than at the start of the Dilma administration.
Figure 85: Trade Current (Exports + Imports)
Table 38: Open Markets Index Country Ranks US$ Billion
RANK COUNTRY
1 Hong Kong
2 Singapore
3 Luxembourg
33 Chile
38 United States
43 Peru
47 Turkey Source: MDIC
50 South Afirca
52 Colombia Since Brazil opened its doors to imports in 1990,
54 Mexico deficits in the trade balance were observed just 6 times,
57 China exactly in the years when the crawling peg exchange
59 Russia rate regime was in place. Between 1995 and 1999, when
63 Argentina the Real Plan was in place, the BRL was strong against
67 Brazil the dollar, encouraging imports over exports. Since
70 Venezuela 1999, after the implementation of the floating exchange
75 Ethiopia
rate, trade balance results started to get better, and from
2001 on the balance presented a surplus. The increase in
Source: ICC
commodity prices observed since the end of 2002 was a
very important factor behind the increase in Brazilian
One could argue that Brazil's growth performance exports. However, with the exception of 2011, trade
during the Lula years was mostly a consequence of deficits have been declining since 2007, and in 2013 it
higher commodity prices. The Chinese hunger for is forecast to close at the lowest level since 2002, or
commodities boosted prices and dramatically increased around R$3 billion, down from US$19.5 billion in 2012.
Brazilian exports in the last decade. High commodity
prices were a boom for Brazil, which had very positive
On average (in 1990-2012) Brazil has had a trade
terms of trade, but this now has come to an end and is
surplus of US$15.7 billion, showing that the 2013 result
starting to confront Brazil's external accounts.
is going to be extremely poor. There are important
adverse items in 2013 that are likely causing this abrupt
Figure 84: Terms of Trade vs. Real Effective Exchange Rate
decline in the trade balance, but the main one is a steep
140 170
increase in imports, partly due to hefty oil imports. JPM
130 150 forecast that the trade balance will recover to US$6.2
120 REER billion in 2014, but this is a far cry from the strong data
130 registered in the past two decades, despite a weaker
110 exchange rate.
110
100
90 90
Terms of Trade
80 70
00 02 04 06 08 10 12 14
Source: J.P. Morgan
47
(55-11) 4950-6684 October 2013
Figure 86: Trade Balance Figure 88: Brazils Export Composition by Category (2012)
US$ Billion %
Source: MDIC
Source: MDIC.
Exports
Compared with other countries in Latin America, Brazil In 2013, from January to August, exports reached
is the one with the lowest export share relative to GDP, U$156.6 billion, a 1.3% decline relative to the same
as per World Bank calculations. In Mexico, exports period in 2012. The decline was across all the export
represent 33.6% of GDP, pretty much the same as in categories, but more abrupt in semi-manufactured
Chile. Even in Argentina, this share is higher. The silver products, which fell by almost 6% oya. Commodity
lining is that Brazils GDP ends up being relatively exports fell by 1%, while manufactured products were
insulated from international crises, as we saw in 2008- practically flat. In 2012 Brazil exports reached
09. US$242 billion, a 5.3% decrease from the previous
year. Most of the drop was due to lower results in all
Figure 87: LatAm: Total Exports as a % of GDP (2012) categories in 2012. Commodities exports decreased by
7.4% from 2011, with the same happening with semi-
manufacturers and manufacturers, which were down by
8.3% and 1.7%, respectively.
Traditionally, the top three export products in Brazil are

iron ore, soy, and crude oil, responsible for about 30%
of total exports. The top 10 export products are
responsible for about 50% of total exports and, in
general, at least 7 of them are commodities.
Source: World Bank
Table 39: Main Brazilian Exports

Despite diversification attempts, Brazil is still one of the %of total exports
greatest commodity exporters in the world. Indeed, the
Rank Products 2012% Products 1H13%
participation of commodities in Brazil export basket is
today 47% of total exports. However, these data do not 1 Iron Ore 12.8 Soy "Complex" 15.2
take into account those products that are industrialized 3 Soy "complex" 9.9 Iron Ore 13.0
but have commodities as the main input. If one 2 Crude Oil 8.4 Crude Oil 4.4
considers industrialized products that are mostly made 4 Sugar Cane 4.1 Poultry 3.1
of commodities, the participation of commodities rises 5 Poultry 2.8 Cane Sugar 3.6
to about 60% of total exports. Manufactured goods, 6 Coffee 2.3 Autos 2.2
which were responsible for about 60% of exports in 7 Corn 2.9 Pulp 2.2
2000, declined to 36% in 2012. Semi-manufactured 8 Fuel Oil 2.1 Beef 2.1
products remained practically unchanged in the last two 9 Airplanes 1.9 Drilling Rigs 2.1
decades and are responsible for around 14% of total 10 Pulp 1.9 Coffee 2.0
exports.
Others 51.51 Others 50.1
Source: MDIC.
48
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The same happens when we look to the main export Imports

companies. The great majority of the companies listed
below are commodities exporters. Indeed, only Embraer Since Brazil started to combine strong economic growth
is purely a manufactured products exporter. The other with a strong exchange rate, imports rose. However, as
nine companies have at least one part of their exports the economy started to decelerate, imports stabilized
focused on commodities. What is also interesting to note and in 2012 were mostly flat relative to the previous
is the export concentration around Vale and Petrobras. year at around US$223 billion. In 2013, this trend was
Together, these two companies are responsible for 20% reversed, with imports rising by 8.8% in the year to
of total Brazil exports. August.
Figure 89: Brazilian Imports

Table 40: Top 10 Exports Companies in Brazil (2012)
US$ Billion, 3mma
%
Company 2012
Vale 10.5
Petrobras 9.1
Bunge Alimentos 2.6
Embraer 2.0
Cargill 1.7
ADM do Brasil 1.4
Louis Dreyfus 1.4 Source: MDIC
Samarco Minerao 1.3
JBS 1.1 The driver behind this increase has been oil and fuel
Braskem 1.1 imports, which gained more than 20% in the period as
Source: MDIC.
oil prices gained and domestic production failed to grow
and satisfy the rising fuel needs of the country. Indeed,
Brazils largest trade partner is China, with 17% of oil imports have increased almost US$5 billion YTD to
total export in 2012 and 20% in 1H13. In 2009 China August, reaching US$28.2 billion, or 17.6% of total
overtook the first position from the US, and that situation imports (up from 16 in the same period for 2012). The
still prevails. China is not only holding its first position bulk of imports, however, continues to be raw materials
but also is likely to increase its participation over the and intermediate goods, responsible for 44% of imports
next years. Among Latin American countries, Argentina YTD and growing by about 8%. The good news is that
appears as an important trade partner, taking 8.3% of capital goods imports have also been increasing (about
Brazilian exports in 1H13. 8% YTD), as this is an early sign of a pickup in
investment. It is fascinating to note the sheer size of
Table 41: Destination of Brazilian Exports (2011) imports in Brazil despite all the import barriers that are
% imposed on all sorts of products.
Rank Country 2012 Products 1H13
Figure 90: Imports by Category (2012)
1 China 17.0 China 20.0 %
2 United States 11.0 United States 10.1
3 Argentina 7.4 Argentina 8.3
4 Netherlands 6.2 Netherlands 6.5
5 Japan 3.3 Japan 3.3
6 Germany 3.0 Germany 2.7
7 India 2.3 South Korea 2.0
8 Venezuela 2.1 Italy 1.8
9 Chile 1.9 Chile 1.8
10 Italy 2.0 Venezuela 1.7
Source: MDIC.
Source: MDIC
49
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Brazilian imports are well diversified in terms of country 3% and 3.5%, respectively. Other notable imports are
of origin. China and the US are the main source of medicine (3%). One notable fact is that in 2013,
imports to Brazil (almost 15% of total each), with gasoline is one of the top 10 import items, something
Argentina a far third place (7.3%). Car importer that was not the case in earlier years.
countries are having an important participation in
Brazilian imports. External Accounts
Table 42: Origin of Brazilian Imports Current account: Brazils current account deficit in
%
2012 was 2.41% of GDP, or US$54.2 billion. Since
the start of 2013, CAD has been deteriorating and in
Rank 2012 % of Total 1H13 % of Total
July it reached US$ 77.7 billion or 3.39% of the GDP
1 China 15.3 China 14.9
on a 12-month basis. After a significant period of
2 United States 14.5 United States 14.6 current account surplus (June 2003December 2007),
3 Argentina 7.3 Argentina 7.3 the country started a new cycle of deficit in 2008 as the
4 Germany 6.3 Germany 6.2 world economy decelerated and the BRL appreciated.
5 South Korea 4.1 Nigeria 4.9 The problem is that while FDi was fully financing the
6 Nigeria 3.6 South Korea 4.1 CAD until 2012, it might not be the case anymore in
7 Japan 3.5 India 3.0 2013.
8 Italy 2.8 Japan 2.8
9 Mexico 2.7 Italy 2.8 Figure 92: Current Account
% of GDP
10 France 2.6 France 2.8
Source: MDIC.
In 2012, China overtook the US as the number one

source of Brazilian imports. Chinas participation in
imports in 2012 was 15.4% of total, up from 13.4% in
2011. Despite the rise in Chinese imports, the trade
balance between Brazil of China was US$6.9 billion in
2012 (Brazil exported more to China than it imported),
even though this has declined from a surplus of US$11.5
There are two main triggers that led to an increase in the
billion in 2011.
current account deficit over the last few years. First is
the fact that the trade balance has been shrinking, from
Figure 91: Imports from China
% of Brazil total imports
US$40 billion in 2007 to US$19 billion in 2012 and a
projected US$3.1 billion in 2013. Second, the service
deficit has widened very significantly over the past few
years, rising from around US$13 billion in 2007 to close
to US$41 billion in 2012. In the year to July 2013, the
service account is runing at US$26.2 billion, a 14% rise
from the same period in the prior year.
One of the service account items that increased the most

over the last few years was international travel. A strong
Source: MDIC. BRL combined with higher income led many Brazilians
to travel abroad for the first time. The balance of the
The main Brazilian export products are related to oil/ fuel international travel account, which had surplus until
and autos. In 2012, crude oil accounted for 6% of total 2004, ballooned to a deficit of US$ 15.5 billion in 2012,
imports and this increased to 6.29% in the year to July a 6% increase from the previous year. In the year to July
2013. Diesel also has an important participation of 3% in 2013, it was already running at US$10.5 billion, a 21%
total imports in 2012 and rose to 3.84% in 2013. Natural rise from the same period in 2012. Still, the weaker
gas has a participation of around 1.5% in total imports. BRL should contain some of this flow. Another item
Autos were responsibe for 4.3% of imports in 2012 and that has been significantly impacting the service account
in 2013 YTD amounted to 3.62%, while auto parts were is equipment rent, whose balance deficit increased from
50
(55-11) 4950-6684 October 2013
US$7.8 billion in 2008 to US$18.7 billion in 2012. In those investors do say that FDI is a long-term capex
2013 to July, this account is posting a decline of 9% oya. and, therefore, still worth doing.
Figure 93: Service Account Deficit Rising Figure 94: Annual Brazilian FDI
US$ billion US$ Billion

It is also key to note that, according to the OECD, in

Compared with many EM countries, the sheer size of 2012 Brazil was the third largest receiver of FDI, only
Brazils current account deficit is not extreme. The behind China (US$253 billion) and the U.S. (US$175
problem now, however, is that it will cease to be billion). The estimate is that the total stock of FDI in
financed by FDI and will depend more on short-term Brazil at the end of 2011 stood at 28.7% of GDP.
portfolio flows.
Figure 95: Main FDI Destination by Country (2012)
Table 43: Current Account by Country US$ billion
% of GDP
Country 2011 2012 2013E 2014E
Russia 5.2 3.5 2.5 1.7
China 1.9 2.4 2.2 2.0
Euro Area 0.1 1.3 2.2 2.0
Japan 2.0 1.1 1.5 2.2
Argentina 0.3 1.3 0.6 0.2
Mexico -0.8 -0.8 -1.0 -1.1
Source: OECD
United States -3.0 -2.8 -2.3 -2.2
United Kingdom -1.3 -3.5 -3.2 -3.1 According to Central Bank data, the country sending the
Brazil -2.1 -2.4 -3.5 -3.0 most direct investments to Brazil in 2012 was the U.S.,
Colombia -3.0 -3.3 -3.7 -3.5 responsible for almost 21% of total FDI, followed by
India -4.2 -4.5 -4.1 -3.6 the Netherlands and Luxembourg. Clearly, the last two
Peru -1.9 -3.6 -5.0 -4.7 do not sound like countries that have been investing
heavily in Brazil on their own count. It is important to
South Africa -3.4 -6.3 -5.7 -5.5
note that the reporting of country of origin in terms of
Chile -1.3 -3.8 -6.0 -6.3
FDI can be misleading, as the Central Bank takes into
Turkey -9.7 -6.0 -6.9 -7.3 account only the country where the funds (FX)
Source: J.P. Morgan originated. However, perhaps one country had resources
deposited in a third country and sent the money to
Foreign direct investment: FDI reached US$65.2 billion Brazil from there. One good example is probably China,
in 2012, pretty much the same level as in 2011. In the which appears with only US$195 million in investment,
year to July 2013, FDI is running at 35.2%, a 7.6% even though it is estimated that Chinese companies
decline from the level registered in 2012 during the same invested US$15 billion in Brazil in 2012.
period. Still, one should recognize that FDI has been
surprisingly resilient considering that economic growth
has been weak since 2011 and that government
interventionism should have caused considerable unease
for those willing to invest in Brazil. However, many of
51
(55-11) 4950-6684 October 2013
Figure 96: Participation of Key Countries in Brazilian FDI the remaining for fixed income. Equities saw strong
% of total FDI, 2010 inflows at the start of the year, but after the Fed signaled
the start of the normalization of monetary policy in
May, flows have somewhat dried up, as did capital
market transactions that were going well at the start of
the year. On the fixed income side, most of the
improvement is being observed from June onward,
when the government finally scrapped the 6% IOF tax
for foreigners investing in local fixed income
instruments.
Figure 97: Foreign Portfolio Investment in Brazil

US$ Billion
Looking at a sectoral breakdown for FDI inflows,

services was the largest investment destination in 2012,
with over 50% of the FDI share, an increase from 2011.
Industry followed, with 36.7%. However, in 1H13, the
share of industry FDI has been shrinking by almost 25%
relative to the same period in 2013, while both
agriculture has been rising very significantly (37.5%) and
services gained 13.9%. Source: Banco Central do Brasil.
Table 44: FDI Distribution per Sector International reserves: Brazilian international
reserves reached US$374.1 billion in mid-September
% of Total 2013. The level is US$4.5 billion lower than at the end
% Total % Total 1H13/1H12 of 2012 (US$378.6 billion). In 2012, reserves were up
2012 1H13 % change by 7.6% relative to 2011. It is important to note that
Agriculture, Mineral Extraction 10.8 16.4 37.5% despite the heavy currency intervention that the Central
Oil and Natural Gas Extraction 6.1 10.9 81.6% Bank has conducted in 2012/13 to stem BRL
Mineral Extraction 3.7 3.1 -32.8% depreciation, in most cases, that doesnt have an effect
Industry 36.7 32.9 -24.4%
on reserves as the FX spot market is being left mostly
Metalurgy 8.8 4.6 -62.1%
untouched.
Food 8.4 4.6 -59.8%
Figure 98: Brazil International Reserves
Autos 2.1 4.5 134.1% US$ Billion
Service 51.9 50.2 13.9%
Commerce, ex auto 9.4 10.6 57.7%
Transportation 1.8 5.9 126.6%
Insurances 7.7 5.9 558.2%
Utilities 3.4 5.0 30.5%
Financial Services 8.1 4.3 -62.3%
Real Estate 6.0 3.5 69.8%
Building Construction 1.6 1.7 138.6%
Source: Banco Central do Brasil. Source: Banco Central do Brasi. 2013 as of 17 September
Portfolio investment: Foreign portfolio net flows In the last few years, Brazil became one of the countries
accumulated US$16.5 billion in 2012, a 10% decline with the highest level of nominal international reserves
from the already weak level observed in 2011. Of the in the world. Actually, Brazil has the highest reserves
total, 34% were equity net inflows and 66.1% referred to among LatAm countries in US$. However, looking at
fixed income. The very low level of equities can be the level of reserves as a % of GDP, Brazil is not that
partly attributed to the fact that there were virtually no impressive, with reserves corresponding to only 14% of
capital market transactions taking place (IPOs). 2013 has GDP, lower than Peru and Chile, and almost equal with
shown some recovery, with flows in the year to June at Mexico.
over US$22 billion, of which 28.2% was for equities and
52
(55-11) 4950-6684 October 2013
Figure 99: LatAm International Reserves Table 46: External Debt Stock
% of GDP As of March 2013
External Debt by Debtor US$ Billion % of Total
Public Sector 117.1 36.1%
Banks 34.2 10.5%
Private Sector 207.6 63.9%
Banks 115.2 35.5%
Total External Debt (A) 324.8 69.6%
Short Term 39.6 8.5%
Long Term 285.2 61.1%
Source: J.P. Morgan
Intercompany Loans (B) 141.76 30.4%
Total Debt (C = A + B) 466.530 100%
External Debt
In 2012, total external debt in Brazil reached
US$312.9 billion, or 14% of GDP. Including In February 2008 the Central Bank announced that, for
intercompany loans, the level of external debt reaches the first time in history, Brazil had enough resources to
US$440 billion. Relative to other LatAm countries, we cover its external debt. This means that international
observe a contradictory result: Brazil has, at the same reserves were higher than total public external debt,
time, the highest volume of debt and the lowest external making the country a net external creditor. In recent
debt/GDP ratio. Still, external debt increased by 5% oya months, with the great oscillation of the exchange rate,
in 2012 and 9% if including intercompany loans. In 2013 there have been increasing questions regarding the size
until July, there was not a big change in terms of the of the private sector external debt in Brazil and the
stock of external debt, which was running at US$314 capacity of corporate to pay for it.
billion and US$474.3 billion including intercompany
loans. Figure 100: Private Sector External Debt as a % of Total Gross
External Debt
Table 45: External Debt in Latin America (2012E)
Total External Debt % of Short
as a % of GDP
(US$ Billion) term*
Brazil 312.9 7.4% 14.0%
Mexico 316.18 18.1% 27.8%
Chile 102.62 22.4% 40.3%
Colombia 73.16 12.8% 21.3%
Peru 51.0 12.7% 25.3%
Source: Banco Central do Brasil
Argentina 145.0 11.2% 31.4%
Venezuela 116.43 14.3% 39.0% The problem with this increase, of course, is that the
Source: Moodys and Banco Central do Brasil. Brazil doesnt includes intercompany loans amortization schedule for Brazilian companies over the
next few years will become significantly heavier than it
The profile of the Brazilian external debt has changed was in the recent past. It is worth noting that in 1H13
significantly since the 1980s. Before, the public sector Brazil was responsible for 47.5% of all issuances in
was the greatest debtor (in 1985, for example, it was LatAm, which amounted to US$48.87 billion.
responsible for about 82% of total external debt).
Nowadays, the non-financial public sector accounts for
about 36% of total external debt.
53
(55-11) 4950-6684 October 2013
Figure 101: Corporate External Debt Amortization Schedule The Annual Budget
US$ billion
In the first half of each year, the Ministry of Planning
and Budget prepares a document with the main macro
forecasts that are to guide the budgetary process. It then
presents a version to Congress, which amends it and
puts it to vote. The interesting part of the budgetary
process is that what is approved is not necessarily what
will be implemented. Instead, every two months the
Finance Ministry makes an assessment of how revenues
are coming out in relation to the planned expenditures
Source: J.P. Morgan
and adjusts the budget accordingly. There is an effort in
Congress to make the budget mandatory, but the
problem is that at the time of the budget voting,
Fiscal Policy congressmen include many expenses that are mostly for
pork, that is, things that are purely for vote-getting
This is the Achilles heel of the Brazilian macro story. purposes in the states and cities that the congressmen
Fiscal policy in Brazil lacks a clear institutional represent. Once revenues don't match expenses, these
framework as monetary policy enjoys, giving the are the first items to be cut from the budget. However, it
government significant room for maneuver. The is important to keep in mind that, even today, there is
Brazilian government taxes too much in order to pay for very little flexibility in the budget considering that more
public spending, which in its large majority is geared to than 85% is mandatory spending, leaving very little
the payment of civil servant wages, social security and room for maneuver. The change that needs to take place
interest payments. This is problematic because, without a in the Brazilian budget is that earmarked spending must
revamping of the public administration, only a fraction of be made flexible so that the government can cut
the yearly budget related to discretionary spending can spending in order to actually act on fiscal policy. It is
be used to adjust fiscal policy. The lack of structural important to say that, traditionally, there is very little
reforms to address issues such as social security and the money left for public investment. The total size of the
earmarking of a great deal of budgetary expenses has led 2014 budget is projected at R$2.36 billion.
to a continuous increase in tax collection as a percentage
of GDP. There is a consensus in Brazil that fiscal policy Table 47: Preview of Expenses 2014 budget
needs to be addressed so that interest rates can be % of total budget (preliminary budget version)
structurally lower. However, fiscal policy today is looser Mandatory Expenditures 88.3%
than in the recent past as the government used it to try to Debt Amortization 34.4%
foster growth after a disappointing 2011. Not only the Social Security 19.8%
data are in fast deterioration, but also the government is
Wages and Social Programs 9.5%
making ample room for the use of "accounting creativity"
to change the manner in which the fiscal numbers are Transfers to States and Municipalities 9.1%
calculated, what goes into them and what they reflect. Interest Payments 8.0%
Following the June protests, President Dilma made a Other Financial Expenses 4.4%
commitment to fiscal responsibility, but it is difficult to Other Mandatory Expenses 2.7%
envisage much improvement in a pre-electoral year. Contingency Reserve 0.3%
Discretionary Spending 11.7%
Figure 102: Federal Government Revenues and Outlays
% of GDP, 12 month rolling of which
Health 30.3%
PAC Program (infrastructure) 23.8%
Education 13.4%
Others 12.4%
Brasil Sem Misria (incl Bolsa Familia) 12%
Defense 5.5%
Science, Technology and Innovation 2.6%
Source: MCM Consultores Associados. Source: Ministry of Planning and Budget.
54
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Fiscal Indicators Figure 103: Primary Surplus

% of GDP, 12-month rolling
Fiscal data for Brazil started to be consolidated in a
comprehensive manner in the 1990s. Markets tend to
focus on the primary surplus results, as this is the main
fiscal target that the government pursues. Also, the
primary surplus (revenues minus expenses excluding
interest payments) allows for a better evaluation of how
the government expenses are evolving. However, as of
late, the primary surplus is becoming a less transparent
indicator as the government is constantly allowing for
more and more deductions on what is considered an
expense. For example, some tax cuts promoted in 2012
Nominal deficit: The nominal deficit might be today a
and all investments of the Program for Growth
clearer way to track Brazils fiscal performance as it
Acceleration can be deducted from the primary surplus.
tends to be a better reflection of the overall fiscal status
At the end of the day, it is unclear actually to know what
of the country. The nominal deficit reached its best
the data the government is reporting reflect. Therefore, a
point at the end of 2008, at -1% of GDP. The advent of
focus on the nominal deficit is a must at this stage.
the 2008 crisis led the government to open its coffers
and provoked an increase in the nominal deficit, which
Primary surplus: The primary surplus gained closed 2012 at -2.5% of GDP and as of July 2013 stood
importance in the late 1990s, when Brazil signed a rescue at -3% of GDP.
program with the IMF. The primary surplus became the
main fiscal target, and to this day the government sets its Figure 104: Nominal Deficit
fiscal goals in the annual budget by fixing a primary % of GDP, 12-month rolling
surplus target. In the late 1990s the target was relatively
modest, at around 2-2.5% of GDP, but later it was
increased. In January 2003, when former President Lula
took office, Finance Minister Antonio Palocci
implemented a new round of fiscal correction, further
increasing the primary surplus target to 4.5% of GDP.
Since then, especially in the last couple of years, the
target was brought down and its methodology revised a
number of times. In 2012-13, the government made
ample use of creative accounting to boost the primary
surplus result. Not only that, but state companies had to
do advance dividend payments for the government so as Interest payments: Interest payments have been
to boost the primary surplus, and more deductions came steadily declining in Brazil as interest rates are lowered.
into place. One of the latest innovations is that the federal In the past, interest payments reached almost 10% of
government will not be responsible whether or not states GDP, at a time when part of the debt was linked to the
and municipalities actually comply with the primary exchange rate and it devalued. Today, lower interest
fiscal surplus. The result of all this is that the primary rates and a better debt profile (more fixed-rate debt than
surplus today is 1.91%. The official target is 3.2% of before) have allowed interest payments to hover below
GDP, but the Finance Minister stated that it would 5% since the end of 2012.
achieve 2.1-2.3% of GDP without exluding any items.
The J.P. Morgan forecast for this indicator in both 2013
and 2014 is 1.4% of GDP.
55
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Figure 105: Interest Payments Figure 107: Net Public Sector Debt Split into Internal and
% of GDP, 12-month rolling External Debt
% of GDP

Public Sector Debt

Gross debt: Although the net debt has been on a
Over the past few years there has been a revamping of declining trend, this is not the case for gross debt.
the profile of the Brazilian public sector debt. Perhaps This indicator is simply the stock of outstanding
the worst point was observed in 2002-03, when the debt- government debt of all institutions in the general
to-GDP ratio reached over 60%, as a great deal of the government, with no deductions for the financial assets
debt was denominated in foreign currency at a time when that the government holds (for example, international
the BRL suffered a significant devaluation. Since then, reserves). Gross debt, for example, accounts for the
overall debt has been declining, and now is at around ~R$300 billion debt that was issued for the BNDES but
34% of GDP. doesnt appear on the net calculations because it is
netted out with BNDES assets. Gross debt in Brazil is
Figure 106: Net Public Sector Debt significantly larger than net debt, currently at 58% of
% of GDP, 12 months
GDP, or 18 p.p. higher than net debt.
Figure 108: Net Debt vs. Gross Debt

% of GDP
One of the main reasons behind the decline in the net

public sector debt is that Brazil went from being a net Source: Banco Central do Brasil.
external debtor to a net external creditor. First, the
government bought back a significant amount of external Internal (domestic/local) debt: Even though the level
debt, even taking out of circulation the C bond, which of domestic debt has been pretty much constant
was the Brazilian benchmark debt instrument for most of (hovering around 49-50% of GDP since 2007), there has
the 1990s. Also, higher reserves have netted out the been important changes in its composition:
remaining external debt that Brazil still holds (the level
of reserves is greater than that of external debt), turning The level of floating-rate debt linked to the Selic
Brazil into a net external creditor and contributing to a declined significantly, while fixed-rate and inflation-
reduction in the overall level of net public sector debt. linked debt increased.
This doesnt mean that Brazil doesnt have public sector
external debt; just that it has the matching resources to The level of FX-linked debt was greatly reduced,
retire it if needed. Indeed, as of March 2013, Brazil held which makes Brazil less vulnerable to exchange rate
US$117.1 billion in public sector external debt. variations.
56
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Table 48: Composition of the Stock of Public Debt recognize Brazil as investment grade. But the upgrade
% of Public Debt (after foreign exchange swap) was only fully recognized by the market in April 2008,
when Standard & Poors gave Brazil a BBB- rating,
Limits for 2013 meaning that the country was joining the select group of
Public debt indicators 2002 2012
Min Max countries with investment grade. The last agency to
Public Debt Stock (R$ Billion) 893.3 2,008.0 2100 2240 announce Brazilian investment grade was Moodys, in
Composition (%) September 2009. In March 2011, Fitch Ratings
upgraded Brazil within the investment-grade category,
Prefixed 1.5% 40.0% 41.0% 45.0%
citing that fiscal consolidation combined with healthy
Price Index 8.8% 33.9% 34.0% 37.0%
GDP growth would continue to improve the countrys
Selic 42.4% 21.7% 14.0% 19.0% debt profile. Moody's followed with the move in June
FX 45.8% 4.4% 3.0% 5.0% 2011 and today has Brazil with a positive outlook,
Maturity structure which the agency has put under revision. S&P granted
Average maturity (years) 3.6 3.0 4.1 4.3 Brazil's rating one-notch investment grade in June 2011,
and it currently has a negative outlook for the country.
% expiring in 12 months 34.6% 24.4% 21.0% 25.0%
Rating agencies in general have been uncomfortable
about Brazil's fiscal accounts and especially fiscal
creativity.
The average maturity of the overall domestic debt held
by the public has increased from less than one year at the
Table 49: Brazil Sovereign Ratings
end of 1999 to about 4.6 years by March 2013. Even
though there is significant shorting of maturities around 2007 2008 2009 2010 2011 2012 2013
crisis periods, the overall evolution continues to be one S&P BB+ BBB- BBB- BBB- BBB BBB BBB
of extending maturities, although less so since the 2008 Fitch BB+ BBB- BBB- BBB- BBB BBB BBB
crisis. Note that inflation-linked instruments have longer
Moody's Ba1 Ba1 Baa3 Baa3 Baa2 Baa2 Baa2
maturities, reaching 9.35 years on average and being the
instruments that contributed most to the lengthening of Source: Bloomberg. Note: Shaded Areas are Investment Grade
the average maturity for total debt. Average maturity for

fixed-rate instruments (LTN) is around 3.04 years. Tax System
Brazil is known as one of the countries with the most
Figure 109: Maturity Profile of Brazils Public Sector Local Debt complicated and expensive tax systems in the world.
Months
The main reason for this is that Brazil has many taxes,
of which several are indirect and cascading, functioning
in a system without unified legislation at any
government level. The precarious tax system is blamed
for inhibiting business activity and, consequently,
harming economic and social development.
Table 50: Complexities of the Brazilian Tax System

Main Complexities
Source: Banco Central do Brasil. - Different taxes are levied on the same product
- Six indirect taxes on goods and services. Most countries have one or two
Although the great majority of local Brazilian debt is - Constantly changing legislation
- At the federal level, four taxes and three tax systems
owned by Brazilians, foreigners are increasing their
- At the state level, 27 different legislations (one for each state), different
participation, which reached 15.5% of total outstanding rates and criteria
debt held by the public in July 2013, up from 5% in - Two taxes on business profits
December 2008 and 7.2% in December 2008. Foreigners - High bureaucratic costs
- Disputes with the tax authority
own mostly instruments at the long end of the curve.
Source: "Tax Reform," Brasilia, D.F., February 28, 2008.
Sovereign Credit Ratings Tax collection in Brazil has been rising pretty much
Until 2006 the core rating agencies rated the investments nonstop since 1997/98. At that time, the Brazilian
in Brazilian public debt securities as speculative. In government promoted a fiscal shock in the economy,
2007, the less-known R&I rating agency was the first to trying to counteract the effects of the Asian crisis that
57
(55-11) 4950-6684 October 2013
were fast making their way into Brazil. President Australia and South Korea. Brazil is in last place, with
Cardosos government increased taxes and tried to cut France and Denmark just ahead of it.
spending. However, it was successful only in the first
goal. According to the IBPT, total tax collection in Brazil Tax distribution
increased from 25% of the GDP in the mid-90s to about During the period of the military regime, fiscal policy in
35% in 2008. The sudden stop caused by the 2008 global Brazil was completely centralized. States suffered
financial crisis reduced taxes some, but in 2010 it started limitations on their taxation powers and became highly
to rise at a faster pace than in the decade before. In 2011, dependent on the federal government. With the 1988
taxes were equivalent to 36.02% of GDP, a 1.8 p.p. Constitution came the reformulation of the tax system,
increase from the previous year. The pace slowed aiming to increase the level of fiscal autonomy of the
somewhat in 2012, mostly due to the tax incentives that states and municipalities. The reformulation did not
the government granted, in an attempt to reignite growth. work well. It consolidated public sector imbalances due
At the end of 2012, taxes were 36.27% of GDP. Almost to the disorganized evolution of the process. New taxes
70% of that is collected at the federal level, while states were created and the old ones were revised upward.
collect 24.71% and cities 5.33%.
Nowadays, the country is still under the same fiscal
Figure 110: Total taxation as a % GDP regime, created in 1988, and a tax overhaul has become
% of GDP
a primary necessity. In terms of centralization, almost
70% of taxes is collected at the federal level, while
states collect 24.71% and cities 5.33%.
Figure 112: Tax Burden by Jurisdiction

%
Source: Instituto Brasileiro de Planejamento Tributrio.
Not only are taxes high in Brazil, they are also among the
highest in the world. Indeed, if Brazil were an OECD
country, it would have the 13th largest tax burden among
these countries.
Figure 111: Tax Burden/GDP Ratio by Country (2011)

% of GDP Source: Instituto Brasileiro de Planejamento Tributrio.
Bottom line: The problems surrounding the Brazilian

tax system have been diagnosed for a long time, and
over the last fifteen years different administrations have
tried to approve a tax reform. Because of the political
complexities involved in this endeavor, the government
usually chooses to change taxes in line with its own
interests, promoting bits-and-pieces changes in the
legislation that end up complicating the system even
Source: OECD and Instituto Brasileiro de Planejamento Tributrio.Mexico and Netherlands
data are for 2010. more.
The IBPT also produced a recent study indicating that Recent Developments: In 2012, the government
among 30 countries with the highest tax rate, Brazil is the promoted selected tax cuts, with the aim of boosting
one with the worst return for taxes, that is, what the growth. These included cuts in the IPI (most of them
population gets in terms of public service for the money temporary) and the substitution of the payroll tax by a
it paid the government. The methodology of the study tax on revenue, usually equivalent to 1-2% of gross
takes into account the level of tax collection per GDP revenues. However, these cuts were not across the
and the HDI (human development index) calculated by board, with the government picking and choosing the
the U.N. The #1 in the ranking is the U.S., followed by sectors to be benefited, provoking further confusion
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(55-11) 4950-6684 October 2013
regarding the tax system and questionable results at the Table 51: Main Taxes Charged in Brazil
macro level. At the start of 2013, the government sent to Federal Taxes
Congress an ICMS tax reform proposal that was very Imported Goods Tax (II)
thought through for some time, especially with the Tax on Industrialized Products (IPI)
different states. The ICMS reform would basically end Social Contribution on Net Profit (CSLL)
with the tax wars, where North and Northeast charge a Income Tax (IR)
lower state tax to attract business to their regions. It Financial Transaction Tax (IOF)
would establish a lower tax that would be applicable to
Rural Land Tax (ITR)
all states and far fewer tax brackets, a sort of VAT,
Social Security Tax (INSS)
which is the most common system for tax on
Contribution for Social Security Financing (COFINS)
merchandise. To help with the passage and acceptance
of the bill (which needs to be approved in Congress and Length of Service Guarantee Fund (FGTS)
by all 27 states), the government had put together a Contribution on Economic Domain - Fuel Tax (CIDE)
sizable package to compensate for the tax losses of the Social Integration Program (PIS/PASEP)
states that would see a reduction in revenues. However, State Taxes
the proposal was quickly put in congressional limbo, and On the Circulation of Goods and Services (ICMS)
for now no evolution is likely before the new presidential Vehicle Tax (IPVA)
term starts in January 2014. Last but not least, the Municipality Taxes
Finance Ministry announced in 2H13 that it was ending On Property and Urban Land (IPTU)
the policy of tax cuts as there was no more budget
Services Tax (ISS)
capacity to absorb tax losses, especially at a time when
growth has slowed and revenues falling. Source: Instituto Brasileiro de Planejamento Tributrio.
Figure 113: Federal Tax Collection ICMS: This is the tax on the circulation of goods and
R$ billion, 12 mo, IPCA adjusted services. It is a state tax, and thus there are 27 different
legislations (one for each state). The tax rate varies
depending on where the product is produced and where
it will be consumed. Every manufacturer, distributor,
retailer or provider of almost every type of merchandise
or service pays the state ICMS and passes the cost along
to the consumer. ICMS in Brazil is basically a hidden
tax, meaning that the tax is embedded in the product
price. Therefore, most Brazilians are unaware of how
much the ICMS actually costs them.
Source: LCA Consultores
Main taxes INSS (Social Security): Both employers and employees

are subject to social security contributions. The
An ordinary Brazilian is subjected to several taxes and
employee contribution depends on level of income, and
may not know where all the money is going. The
varies from 8.0% to 11% of the gross wage. There is
complexity of the system makes its comprehension a
also a limit of contribution (R$458, equivalent to wages
difficult task. Perhaps the greatest complication is the
of RA$4159 or more per month). Generally, the
fact that Brazil doesnt have a single VAT tax on
employer contribution is between 26.8% and 28.8% of
consumption. What would be a VAT is divided in three
the monthly salary. To try to stimulate the economy, the
spheres (Union, states, municipalities) and each one
government temporarily eliminated the payroll tax for
having their own legislation and tax rate. The
about three dozen sectors in 2012 and substituted it for a
consumption taxes in Brazil are estimated to be around
tax on gross revenues that varies between 1% and 2%.
75% of total collection, while tax on wealth is less than
The employer of household help (housekeepers,
5% and the remaining 20% are taxes on income.
nannies, etc.), pays a fixed contribution of 12% over the
gross salary of his/ her employees on a monthly basis.
Listed below some of the most known taxes sorted by the
jurisdiction responsible for its collection. A brief
explanation of the taxes with highest participation in the
countrys overall revenues follows.
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Table 52: INSS (Payroll) Contribution by Wage Level (as of Jan Earlier in 2013, the government considered a reduction
2013) of the COFINS for several sectors, but the proposal
Monthly Employee didnt pan out considering the slowdown of the
Wage Range contribution economy and the decline in federal tax revenues.
Until R$ 1247.7 8%
From 1247.8 to R$2079.5 9% Corporate income tax: Companies in general pay 15%
From 2079.6 until R$4159 11% of taxes on profits, plus an additional 10% if profits are
Contribution Limit: 4159
above R$240K per year. Companies that have sales of
Source: Social Security Ministry.
less than R$48 million in a calendar year qualify for the
calculation of income taxes over estimated profits
Personal income tax: All personal income earned in (rather than observed). In this case, rates differ for
Brazil is subject to federal income tax. The country has a different activities, ranging from 8% for cargo
progressive taxation system under which individuals are transportation and 32% for services in general.
taxed up to a maximum of 27.5% of their income.
Brazilian taxpayers must present an annual income tax Social Contribution Tax on Profits: The CSLL is
declaration, to be delivered by the last day of April each imposed on profits at a rate of 9% for most companies.
year. In 2012, the Brazilian IRS received 25.2 million For financial institutions, the CSLL is 15%. The CSLL
income tax returns, which is not much considering that and the income tax together make up for an effective tax
the country has about 200 million inhabitants. on corporate profits of 34%.
Table 53: Income Tax Contribution by Income Level for FY2013 Figure 114: Federal Tax Collection per Type of Tax
% of total federal collection, average per tax 1H13
Monthly Income Tax Ratio Personal Income Tax 2.78
Up to R$ 1710.78 Exempt Corporate Income Tax 12.97
Withholding Income Tax 12.94
From R$ 1710.79 to R$ 2563.91 7.50% Tax on Industrialized Products 4.27
From R$ 2563.92 to R$ 3418.59 15.00% Tobacco 0.44
Beverages 0.33
From R$ 3418.6 to R$ 4271.59 22.50%
Autos 0.31
Above R$ 4271.59 27.50% Others 3.12
Source: Finance Ministry Tax on Financial Operations 2.84
COFINS 17.75
CSLL (on corporate profits) 6.18
FGTS (Length of Service Guarantee Fund): Under the PIS/PASEP 4.69
FGTS employers make a deposit of 8% of a workers Import Tax 3.83
wage in the Caixa Economica Federal. The balance is CIDE (fuel) 0
released when a worker retires or in some special Others 3.58
Total ex social security 70.29
circumstances. For example, if a worker is fired, the Social Security 29.73
FGTS is released and the employer must pay a penalty of Total 100
40% over the FGTS total balance. Also, the FGTS can be Source: LCA Consultores
released in special cases such as the purchase of the first
house, in case of some illnesses (cancer, HIV, among Taxes on security investments: In a nutshell, locals pay
others), among others. Nowadays, the FGTS is one of the 15% capital gains tax on equities and no tax on
most important sources of real estate credit. It is also a dividends. For fixed income investments, the tax rate
key component of the BNDESs yearly financing. depends on how long the investment lasts: for fixed
Recently, the Senate passed legislation stipulating that income investments of under 6 months, the tax is
household workers will have the right to receive the 22.5%, and it falls to 15% for investment of 2 years or
FGTS. The bill is waiting approval in the Lower House. more. Foreigners in general are exempted from capital
gains and dividend taxes in Brazil, unless they come
COFINS: This is a federal tax charged on a companys from countries that do not tax income or tax income
gross receipts and destined to finance social security. The lower than 20%. Foreigners investing in fixed income
current COFINS rate is 7.6%. IN 2004, the government instruments are exempted from capital gains taxes.
implemented a change to this tax, thus making it non- Foreign exchange transactions are usually taxed 0.38%.
cumulative in most cases, that is, the tax is paid only
once during the production process. The rate for the
financial sector is 3%, but the tax could be cumulative.
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Table 54: Taxes on Non-Resident Investments Relative to LatAm countries, at the end of 2012 Brazil
Income Tax had the second-highest credit/GDP ratio, behind only
Government Bonds Exempt Chile, with 77.2% of GDP.
Funds carrying 98% of its portfolio in government bonds Exempt
Funds carrying 85% of its portfolio in infrastructure Exempt Figure 116: LatAm: Credit as a % of GDP by Country (YE2012)
debentures
Private Bonds and Fixed Income Funds 15%
Swaps 10%
Equity Investment Funds 10%
Capital Gains
Stocks or stock indexes in exchanges Exempt
Stocks or stock indexes over the counter 15%
Derivatives in exchanges Exempt
Derivatives over the counter 10%
Dividends
Stocks 0%
Source: J.P. Morgan: Latin American Banks: Creidt and Market Share Bible 10 April
Source: ANBIMA
2013
Credit Credit growth decelerated from 2H11 onward

With the advent of the Europan crisis in 2H11, credit
Note: The Central Bank changed the credit data methodology at the end of 2012, which in
growth started to slowdown considerably in Brazil.
some cases made data available only for the last couple of years. Banks became more reticent to lend at a time of
uncertainty. At the same time, non-performing loans
Credit has been booming in Brazil since 2004, when started to deteriorate, considering the credit boom of
interest rates finally started to come down to more 2010. Taking into account only non-earmarked credit,
mundane levels. There are three key issues that may which is usually the one that most consumers have
explain the historical low level of credit penetration in access to, loan growth was running at 20% in 4Q2010,
Brazil. First, high interest rates acted as inhibitors of and it closed 2012 with a growth rate of 10.2%. In July
credit, since its high cost was not accessible for 2013, loan growth for non-earmarked loans (both for
individuals and companies. Second, banks didnt need to consumers and corporates was growing at 8.2%.
go into the credit business as it was very profitable to
finance the government debt, considering the high rates Figure 117: Non-Earmarked Credit Growth
of return. Finally, it was only in 2004 that it was clear %oya
that Brazils economy had stabilized on a sustainable
path, allowing for more jobs, higher wages and,
therefore, more credit demand and affordability.
In 2004 total credit represented 25% of the GDP, and in

July 2013 this ratio had jumped to over 55.1% of GDP, 4
p.p. higher than in July 2012. The advent of credit has
been a key factor propelling domestic consumption.
Figure 115: Credit as a % of GDP
%
Figure 118: Non-Performing Loans on Non-Earmarked Loans
% of total loans

61
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but public sector banks came to the rescue: The responsible for almost 30% of total credit in Brazil. One
Dilma administration adopted a somewhat belligerent of the key factors that allowed for a sharp expansion of
stance to the financial system starting in April 2012. The this segment was the creation of the payroll loan,
president argued that while interest rates were falling, extended to retirees, civil servants and formal sector
there was no decline in spreads. This happened at a time workers. Banks like payroll loans as they can discount
when the economy was not showing signs of a rebound installment payments straight from the employee/retiree
and credit was seen as a major growth boost. In order to paycheck.
obtain lower spreads, the government adopted a strategy
that relied on public sector banks to greatly increase Figure 121: Total Credit Destination by Debtor
loans at lower rates, thus forcing private sector banks to %, as of July 2013
do the same or risk losing market share.
Figure 119: Banking Spreads

% a.a.
Still, while consumers have the largest share of credit in

Brazil, the growth rate associated with these loans is
Source: Banco Central do Brasil among the smallest when compared with the other
categories. For example, in 1H13, loans to individuals
What happened after that was a spread contraction (as increased by only 9.5% oya. This is a far cry from the
seen in the chart above) and also a large increase in the 45% expansion of loans to the public sector (which
public sector bank loan portfolio. In June 2013 for the account still for only 5.4% of total credit), and a 33.5%
first time, the share of public sector bank loans outpaced oya expansion in mortgages.
that of private sector ones. It is interesting to note that the
expansion of public sector banks started with the BNDES Figure 122: Loan Growth by Type of Debtor (1H13)
in the aftermath of the 2008 crisis, but Banco do Brasil % oya
and Caixa Economica Federal took the leadership of the
process from 2012 onwards. Indeed, in 2012, public
sector banks' loan growth was 26.4% relative to 2011,
and compared with 10.7% for private sector banks. The
trend was magnified in 1H2013, with public sector bank
loans rising by 28.8% oya and private sector by 6.6%
oya.
Figure 120: Share of Total Credit: Public versus Private Sector

Banks
Within credit to individuals, personal credit is by far the
largest segment, responsible for almost 42% of total
non-earmarked credit to consumers in 1H. Two thirds of
these loans are payroll loans. Following personal credit
lines, autos remain strong, with 27.4% of total loans to
individuals, even though the autos category was mostly
responsible for the rise in non-performing loans in 2011
and onward. Credit card expansion and penetration in
Brazil has been a key aspect of the financial system
over the past few years, and today it has a share of
Credit Market Main Aspects: The credit boom that 17.6% of total loans, and rising.
Brazil experienced since 2004 was mostly a product of
an expansion in credit to consumers, who today are
62
(55-11) 4950-6684 October 2013
Figure 123: Consumer Non-Earmarked Credit per Category Figure 125: Household Debt as a % of Gross Income (2010)
%R of total
Source: OECD. For Brazil: Banco Central do Brasil as of December 2010

What is unique about Brazil is that while the level of
Note that mortgages are not in the list below, but this is debt is low (as of Jun 2013 it stood at 44.8% of annual
because they are mostly associated with earmarked loans. wages), debt service is considered high, at 21.5% of
Indeed, mortgage is responsible for almost 67% of total income.
earmarked credit to individuals. While private sector
banks have been expanding their penetration into Figure 126: Household Leverage and Income Committed to
mortgages, most of it is still within the domains of Caixa Service Debt
%of total annual income
Economica Federal, as it offers subsidized loans and
facilities to use the FGTS balance to buy a house. Still,
while mortgages are one of the credit categories that
grow the most, they are still responsible for only 14% of
total credit in Brazil, or 7.7% of GDP.
Figure 124: Mortgages as a % of Total Credit
While mortgages are still a growing business in Brazil,

they are already growing in terms of share of household
indebtness. As of June 2013, household indebtness ex
mortgages was 30.4% (or 14.4 p.p. lower than the total).
Source: Banco Central do Brasil Income commited to service debt ex-mortgages doesn't
have the same variation and stands at 19.96% (versus
In terms of corporate loans (non-earmarked), more than 21.52% total).
50% of the total goes to finance working capital.
Figure 127: Household Leverage and Income Committed to
Consumer leverage: The credit boom of the last few Service Debt Ex-Mortgage
%of total annual income
years brings up questions regarding consumer leverage.
The issue in Brazil is slightly different from other
countries: while in developed markets household debt
stock is very large (over 100% of annual income), in
Brazil it is less than 50%. However, in Brazil, the level
of morgages is small, while in other countries, especially
in Europe and the US, mortgage liabilities make up the
lions share of household debt.
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Brazilian Mortgage System deposits at government-owned CEF, which is the main

vehicle for directed mortgage lending in the country,
Source: J.P. Morgans Brazilian Homebuilders 101 by with a market share of 58% in July 2013, as well as
Adrian E Huerta 1 and Marcelo Motta (2011 edition) and another 22 private and public financial institutions. The
author updates. participating banks comprise the SBPE (Brazilian
Saving and Loan System). The other source of funding
Historically, mortgages in Brazil have always presented a for SFH is employees payments to FGTS.
weak performance. Getting credit to finance a house used
to be a big challenge, and only a few could have their SBPE: Traditionally, the SBPE has encompassed all
own house. Since 2006, and mainly after the public- and private-sector banks except those focused
implementation of Fiduciary duty and programs like the on the rural segment. In 2012 mortgages from SBPE
Minha Casa Minha Vida program, mortgages started to amounted to R$83 billion, representing +3% growth vs
increase and in July 2013 stood at almost 8% of GDP. 2011 but more than 3x the amount disbursed 5 year ago.
Figure 128: Mortgages as % of GDP
% Banks in the SBPE have to devote 65% of savings
deposits, which are remunerated at Tax Referential
(TR) plus 6.17% a year, to mortgages. Of the 65%, 80%
has to be lent at no more than TR + 12% a year and the
remaining 20% can be allocated in mortgages at market
rates. However, banks are allowed to comply with this
requirement through a variety of regulatory facilities. If
banks have a shortfall in their directed lending
requirement, they are penalized with a lower return on
Source: Banco Central do Brasil the shortfall amount (TR flat vs. the TR + 6.17% that
they have to pay on the savings deposit).
Despite the evolution in the last few years, mortgages in
Brazil have been pretty weak if compared with other FGTS: Provides funding through compulsory savings
countries. Brazil figures among the countries with the from employees. Originally conceived as
lowest ratios of mortgages to GDP. unemployment insurance, it is now used for a variety of
purposes, including providing support to workers who
Figure 129: Mortgages as a % of GDP are terminally ill, helping workers purchase a house,
providing financial assistance for employees who are
laid off and, more recently, infrastructure investments.
Employees contribute 8% to 11% of their salary,
depending on the income segment (deposited at Caixa
Economica Federal, the main user of the assets) to the
fund every month. The money at FGTS yields TR + 3%
a year.
Source: IMF, IFS, World Bank, OECD, J.P. Morgan Changes in FGTS: Over the last few years we saw
several changes in how employees can use their FGTS
There are two main sources of funding in Brazil, saving resources. One of the most relevant for the housing
accounts or SBPEs (Sistema Brasileiro de Poupana e market was the increase of the maximum housing price
Emprestimo) and the FGTS (Fundo de Garantia do that can be purchased by withdrawing the FGTS
Tempo de Servio), which is a type of mandatory balance, up to R$500,000 from R$350,000 previously in
pension fund to which all Brazilian employees make 2009. On September 20, 2013, the government
mandatory contributions. announced that the R$500,000 limit will be raised to
SFH: Sistema Financeiro de Habitao (Housing R$750,000 for the states of Sao Paulo, Rio de Janeiro,
Financial System) was created in 1964 to develop the Minas Gerais and the Federal District of Brasilia. For all
mortgage market in Brazil. Its main sources of funding other states, the limit was raised to R$650,000. Another
are savings deposits in the financial system, including positive change for the housing market was the
permission to use the FGTS on consortium bids and
debt amortization.
1
Registered/qualified as a research analyst under NYSE/FINRA rules.
64
(55-11) 4950-6684 October 2013
Figure 130: FGTS + SBPE Total Mortgage Disbursements The BNDES credit expansion is evident when looking
R$ Billion at disbursement data. In 2009, BNDES disbursements
increased by 46% relative to 2008. In 2010, loans
increased even more, reaching R$168 billion (22.5%),
including R$25 billion that the bank invested in the
Petrobras capitalization. In 2011, the level of loans
declined to R$140 billion, but excluding PBR, loans
were almost flat relative to the previous year. 2012 saw
an important contraction in investment, and during 1H
loans were very muted. These accelerated a great deal in
2H as the bank changed and extended the terms of the
PSI program, which gave funding for the purchase of
Source: CBIC and CEF capital goods at negative real interest rates. In 2013, the
bank's goal is to finish the year with loans totaling
BNDES R$190 billion. They are on track for that, but for it to
occur, another R$20 or R$30 billion from the Treasury
Since its creation in 1952, the Banco Nacional do will be needed to replenish the funding needs.
Desenvolvimento Econmico e Social (BNDES) has
performed different strategic roles in propelling the cause Figure 132: BNDES Disbursement
of Brazilian development. In the 1970s, it was a key R$ Billion
enabler of the capital goods industry and an enabler of
the import substitution model. The bank was a lender to
companies at times of distress during the 1980s
successive crises. In the 1990s, the BNDES had a key
role in the privatization process, and now the BNDES is
back to the role it first performed of funding the
countrys industry and infrastructure. Since the 2008-09
global financial crisis, the BNDES has taken center stage
in the Brazilian economy. In the post crisis, the BNDES
Source: BNDES. Note: 2010 includes R$25 billion from Petrobras capitalization
increases its loans by 19.2% CAGR 2007-12, that being
possible by unprecedented Treasury loans to the bank, Of the R$88.3 billion in loans extended in 1H13, 33%
today responsible for over 50% of the banks funding. went to industry, 31% to infrastructure and 20% to
These loans were mostly focused on the so-called commerce. The BNDES also extended 11% of total
national champions, those companies that have a large loans to agriculture (not a traditional endeavor for the
and dominant position in the country and that could also bank, considering that this usually falls under Banco do
expand abroad. What was a post-crisis stimulus is now a Brasil) and 5% in financing for the local governments.
permanent feature of the bank: a large loan portfolio, In our view, BNDES activities should be more centered
responsible for over 20% of total credit in Brazil, or 11% in infrastructure, where the needs are greater. One of the
of GDP. highlights of this vast disbursement amount was the PSI
(Program to Support Investment), which amounted to
Figure 131: BNDES Participation in Credit Rose After 2008 Crisis
R$42.6 billion, or almost 50% of total disbursements for
the semester. Recall that the PSI was created in 2009 as
a loan mechanism with subsidized interest rates to
stimulate the production, acquisition and export of
capital goods for Brazilian companies. What was
supposed to be a temporary program to stimulate capex
is now in place until December 2013. Interest rates
under the program are mostly negative in real terms,
currently at 3.0% (nominal). Although the program is
Source: Banco Central do Brasil. scheduled to expire at the end of the year, another
renewal is likely, considering that investment remains
the Achilles heel of the Brazilian economy.
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Table 55: BNDESs Disbursements per Sector (1H13) The BNDES subsidiary BNDESPar is responsible for
January to June 2013 % Change
the banks capital market operations, and its main
R$ billion % of Total % OYA
attribution has to do with the management of a huge
Industry 29.5 33 93
equity portfolio. As of 1H13, the BNDES equity
Transportation Material 5.8 20 106
portfolio hovered around R$85 billion, with equity
participation in over 170 companies. The sector
Chemical and Petrochemical 4.9 16 228
distribution is very concentrated: 67% of the
Food and Beverage 4.0 14 76
participation is concentrated in oil & gas and mining.
Mechanic 3.6 12 124
Electric energy is responsible for an additional 10.9%.
Pulp and Paper 2.6 9 12
Others 8.6 29 79
Figure 134: BNDES Equity Holding by Sector
Infrastructure 27.3 31 36 % of Total, as of December 2012
Road Transportation 10.2 37 36
Electric Energy 8.3 30 28
Subway, Airport, Port 3.5 13 123
Transportation related activities 2.1 8 23
Rail Transportation 1.1 4 18
Others 2.0 7 8
Commerce & Service 17.7 20 35
Agriculture 9.3 11 111
Public administration - States 4.5 5 676
TOTAL 88.3 100 65%
Source: BNDES
Source: BNDES.
Treasury participation in BNDES funding: Funding

from the Brazilian Treasury is what made possible the Capital Markets
increase of the BNDES after the 2008 crisis. However,
what was supposed to be a countercyclical move, is According to the World Federation of Exchanges, in
today an established feature. It is estimated that total terms of market capitalization, BM&F Bovespa is the
Treasury credit to the BNDES is today hovering at 15th-largest stock exchange in the world and the
R$400 billion, with it being responsible in 2012 for largest in Latin America.
52.6% of the total banks liabilities. However, these
transactions are starting to be scrutiinized for their Figure 135: 15 Largest Stock Exchanges in Terms of Market Cap
US$ Trillion, (as of Aug 2013).
"accounting creativity. Every time that the Treasury
issues debt and gives the proceeds to the BNDES, the
new issuance doesnt enter in the net debt calculations
considering that the BNDES funds are "matched against
the new debt. The Treasury liability only appears on the
gross debt, a concept that rating agencies have been
pointing to more and more when looking at Brazils
fiscal balance.
Figure 133: BNDES Liabilities: Treasury as a % of Total Funding Source: World Federation of Exchanges.
Market cap: The Bovespa market cap reached

US$970 billion in August 2013. Since 2002, the
Bovespa has increased its market value dramatically.
From 2002 to 2007 the Bovespa market cap in USD
grew an average 64% per year, from US$124 billion in
2002 to US$1.4 trillion at the end of 2007. Also
interesting to note is the strong recovery of the Bovespa
Source: BNDES market cap after the global credit crisis. In 2008 the sum
of the market cap of all the companies listed in the stock
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exchange fell by 58% oya, but the recovery was very The largest sector in the Bovespa in terms of index
fast. Indeed, it took less than a year for the Bovespa to weight is Financials, but very closely followed by
regain its pre-crisis value. Still, in the last three years, materials. However, in terms of market cap, financials is
there was a reversal in this trend, and the Bovespa has the largest, followed by consumer staples.
already lost 37% of its value if compared with end-2010.
Still, this is not exclusive to the Bovespa as most Table 57: Bovespa by Sector
exchanges lost market cap on the back of the global
developments of the last few years.
Figure 136: Bovespa Market Cap

US$ billion
Source: Bloomberg, as of September 27, 2013

Source: BM&F Bovespa. * as of August 2013
The Brazilian stock exchange had 364 companies in

In Brazil, 59.7% of the Bovespa market cap is August 2013. The number of companies traded on the
concentrated in only 10 companies. The main highlight is Bovespa has been falling: In 1998, there were almost
Ambev, which by itself represents more than 12% of the 600 companies listed on the Bovespa, but after that, the
Bovespa market cap. The second-largest company is numbers started to decline. This reduction can be
Petrobras, responsible for 11.1%% of the Bovespas total explained mainly due to the increasing number of
market cap. Still, the largest sector in the Bovespa is mergers and acquisitions. Also, less traditional
financials. Note that among the 10 largest companies in companies decided to close capital. The BM&F
the Bovespa, 5 are financial institutions (ITUB4, Bovespa management often mentions that the number of
BBDC4, BBAS3, SANB11, ITSA4). companies listed in Brazil is very low, and this is likely
to increase exponentially in the coming years. However,
Table 56: Brazils 10 Largest Companies by Market Cap (Sep-13) market conditions must be favorable for it to happen,
Market Cap % of Bovespa which was not the case over the past three years.
Company Ticker
(US$ billion) Market Cap
Figure 137: Number of Listed Companies in Selected Exchanges
1 AmBev AMBV4 123.22 12.7%
2 Petrobras PETR4 108.30 11.1%
3 Vale VALE5 84.90 8.7%
4 Itau Unibanco ITUB4 70.96 7.3%
5 Bradesco BBDC4 63.40 6.5%
6 Banco do Brasil BBAS3 34.17 3.5%
7 Santander BR SANB11 24.55 2.5%
8 Telefonica BR VIVT4 24.40 2.5% Source: BM&F, Bovespa, Anbima, Abrapp, WFE (Dec 12)
9 Itausa ITSA4 23.70 2.4%

In the period between 2008 and 20012, an average of
10 Brasil Foods BRFS3 22.36 2.3%
722 M&A transactions were announced yearly, an
Source: Bloomberg and J.P. Morgan., Prices as of September 23, 2013 increase of almost 50% compared with the average
observed between 2003 and 2007. In 2012, Brazil
registered 771 M&A transactions, 25% higher than in
2011. According to PWC, in the first half of 2013 there
were 462 M&A transactions, against 474 in 1H12.
67
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Figure 138: Number of Mergers and Acquisitions in Brazil Bovespa Indexes

Ibovespa: This is the benchmark equity index for
Brazil. The index is composed of a theoretical portfolio,
including now around 67 companies that form the group
of stocks whose negotiability index represents 80% of
total value negotiated in the Bovespa. Ibovespa is a
cumulative index. Basically its number represents the
present value of a portfolio that began on 2 January
1968, with a starting value of 100. The index is
Source: PWC. Note: As of June 2013
rebalanced every four months.
IPOs Figure 140: Bovespa Index Performance
The statistics related to IPOs, indicate that the country is BRL
the most active in Latin America relative to opening of
capital of corporates. Between 1996 and 2003, the
market was pretty much dormant, with four IPOs in the
period. From 2000 to 2013 (by the end of September),
there were 160 IPOs in Brazil, or 59.7% of the Latin
American total. The sector with the most IPOs was real
estate and construction-related companies.
Table 58: Number of IPOs and Size by Year Source: BM&F Bovespa.
Year Number of IPOs Deal Value in US$ million
2000 2 19.5 From January 2006 until May 2008, the index gained
2001 1 0.9 more than 90%, reaching over 73,000 points, the all-
2002 1 126.7
time peak following Brazils upgrade to investment
2003 0 0.0
2004 7 1,466.6 grade. Over the last three years, the index has been
2005 10 2,825.0 suffering and failed to post strong performance, losing
2006 30 8,420.0 18% in 2011 on the back of the European crisis. The
2007 66 32,059.3
2008 4 4,578.1
recovery was mild in 2012, with an increase of only
2009 6 13,062.3 7.4%. The 1H of 2013 was a tough time, with Brazil
2010 12 6,430.4 being the worst performer among major indexes around
2011 11 4,411.8 the world. Other than the global scenario, concerns with
2012 3 2,089.9
2013 7 7,709.1
Brazilian economic policy, especially relative to the
country's growth capacity, led the IBOV to decline,
Source: Dealogic, J.P. Morgan
despite strong flows. However, the market bounced
Taking into all deals (IPOs, follow-ons and convertibles), back from July onward, as the Fed toned down its
there was a total 366 deals in Brazil, or 56% of total for tapering discourse (finally delaying it in September) and
LatAm since 2013. The total value of all deals in LatAm China macro data started to come out stronger than
was US$300 billion in the period, of which over US$200 expected.
billion was in Brazil.
Figure 141: Bovespa Index Performance
Figure 139: Market Value of All Deals in LatAm per Country 2000- BRL
13
US$ million
Source: BM&F Bovespa. Last updated on September 25, 2013

Source: Dealogic, J.P. Morgan
68
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Figure 142: Long-Term Bovespa Index Deflated IBX-50/IBX: The IBX-50 and the IBX are also
benchmark indexes. The companies that compose these
indexes are very similar to those in the Ibovespa. The
main difference is the way the indexes are calculated.
The IBX-50 is composed of 50 companies with highest
liquidity in the Bovespa and the IBX-100 of the 100
most liquid companies. The portfolios have durations of
4 months (Jan-Apr, May-Aug, Sep-Dec) and are
recalculated at the end of each period. Because of the
Source: Bloomberg. As of end of August 2013 different methodology, the performance of the IBX can
greatly vary from that of the Bovespa, even though they
Methodology change: In September 2013, the Bovespa have the same company members in most cases. For
announced that, beginning with the January rebalance, it example, until September 27, 2013, the Ibovespa fell by
will start to move to a new methodology. In the first 11.8% (BRL), while the IBX-50 fell by 2.34% and the
quadrimester of 2014, it will be a blend between old and IBX by 1.3%.
new methodologies, and in the April/May 2014
rebalance, only the new. The point here is mainly to Other indexes: The Bovespa also provides sector-
introduce free float as the main criterion, especially specific indexes. This kind of index provides a
considering that before this change the criterion was segmented view of the stocks, measuring the
mostly trading volume (negotiability index). Also, penny performance of the stocks issued by the representative
stocks (under BRL 1) will be removed from the index, companies of each sector. Today, there is the ITEL
and no company can have a weight of more than 20%. If (telecom index), the IEE (electricity index), INDX
a company declares bankruptcy or something close to it, (industrial sector), ICON (consumer), IMOB (real
it will be removed from the index. estate), and financial (IFNC). Other relevant indexes
have to do more with corporate governance: The IGC
Table 59: Main Bovespa Index Methodological Changes from can only be composed of companies listed on the
2014 Onward Bovespa Level 1 or 2 or on the Novo Mercado segment.
The ITAG is the index composed of companies that
offer at higher than 80% tag-along rights for ordinary
shares (the minimum established by law) and any level
of tag-along for preferred shares. Finally, there are
indexes for medium-cap firms (MLCX), which can
include companies representing 85% of the Bovespa
market cap. The other 15% is included in the small-cap
index (SMLL).
Corporate governance: Since the turn of the century,

there have been important advances in terms of
corporate governance. The main piece of legislation that
greatly improved capital markets in Brazil was the
Corporate Law approved by Congress in 2001. It
established, among other things, that the number of
preferential shares (PN) cannot be more than 50% of
total shares and that PNs should have at least one of the
following advantages: 1) A dividend that is equal to at
least 25% of net income; 2) a dividend at least 10%
higher than the ordinary shares (ON) dividend; 3) in
case of a sale or LBO of the company, tag-along rights
of 80% of the offer price and a dividend equal to that of
the ON shares. The Corporate Law also stipulates the
rules for the composition of the companys board, the
Source: J.P. Morgan gathering of the general and extraordinary assembly,
issues pertaining to offerings and the retirement of
shares in circulation, among other things. While the
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(55-11) 4950-6684 October 2013
Corporate Law is the backbone of equity market rules in As in the Ibovespa, the sector with the largest weighting
Brazil, the CVM (equivalent to the US SEC) is in the MSCI Brazil is financials; but different from the
responsible for the regulatory framework of Brazilian local index, all other sectors come as a far second.
security markets. Today in the Bovespa there are three Materials, for example, the second largest sector, has a
levels of corporate governance (see Table 60): 17% share on the MSCI Brasil, with consumer staples at
16.4%. Below is the share of each Brazilian equity
Table 60: Summary of Corporate Governance Levels for Bovespa sector in the MSCI Brazil, MSCI Emerging Markets and
Companies MSCI LatAm.
Level 1
Free float of 25% Table 61: MSCI Brazil Weighting by Sector
Public offering that prioritizes capital dispersion
Weightings (%) No. of
Quarterly financial releases
Public release of shareholder agreements BRAZIL EM LatAm Companies
Public release of option programs CONSUMER DISCRETIONARY 4.8 0.6 2.8 10
Level 2 Div ersified Consumer Serv ices 1.6 0.2 0.3 3
Everything in Level 1 plus: Specialty Retail 0.5 0.1 0.5 1
One-year unified mandate for the board Household Durables 0.8 0.1 1.0 2
Quarterly financial releases in US GAAP Multiline Retail 1.7 0.2 0.1 3
100% tagalong rights for ON and 70% for PN Media 0.1 0.0 0.0 1
If the company takes itself private, or exits Level 2, it must do a public offering CONSUMER STAPLES 16.4 1.9 9.4 10
for the acquisition of 100% of shares in circulation Bev erages 7.4 0.9 2.7 2
Participation in the Arbitration Court Food Products 4.7 0.5 0.9 3
Right of vote for preferential shareholders (PN) in some issues, such as M&A Personal Products 1.5 0.2 1.0 2
Novo Mercado Food & Staples Retailing 1.7 0.2 0.6 2
Everything in Level 2 plus: Tobacco 1.0 0.1 0.0 1
Only one share class (ON Ordinary) ENERGY 15.7 1.8 9.0 4
FINANCIALS 30.0 3.5 17.3 15
100% tagalong rights
Commercial Banks 23.5 2.7 1.1 7
Board includes at least five members elected by shareholders
Insurance 1.9 0.2 1.4 3
Source: BM&F Bovespa. Div ersified Financial Serv ices 2.4 0.3 1.0 1
Real Estate Management & Dev el 1.7 0.2 0.3 3
MSCI Capital Markets

HEALTH CARE
0.5
0.7
0.1
0.1
0.0
0.4
1
2
The Brazil MSCI index is composed of 79 companies, INDUSTRIALS 4.9 0.6 2.8 8
Road & Rail 0.9 0.1 1.2 2
free float market capitalization weighted. With an 11.6%
Transportation Infrastructure 2.0 0.2 0.7 3
weighting in the MSCI Emerging Markets index, Brazil Aerospace & Defense 1.1 0.1 0.5 1
is the third-largest country in terms of representation, Machinery 0.9 0.1 0.0 2
behind China (19.4%) and South Korea (15.7%). The INFORMATION TECHNOLOGY 2.7 0.3 1.5 2
Softw are 0.5 0.1 1.3 1
weak market performance has led Brazil to lose market IT Serv ices 2.2 0.3 0.0 1
weight in the MSCI EM over the past few years. The MATERIALS 17.0 2.0 9.8 12
peak was in May 2008, when Brazil got the investment- Metals & Mining 14.8 1.7 0.2 7
grade rating from S&P. Then, Brazils participation in Chemicals 0.3 0.0 0.8 1
Paper & Forest Products 1.3 0.2 0.3 3
the MSCI EM reached almost 17%. The level was Containers & Packaging 0.6 0.1 0.0 1
closely reached again at the end of 2010, but since then it TELECOMMUNICATION SERVICES 2.8 0.3 1.6 3
has been mainly downhill. Div ersified Telecommunication 1.9 0.2 0.5 2
Wireless Telecommunication Ser 0.9 0.1 0.0 1
UTILITIES 5.1 0.6 3.0 13
Figure 143: Brazil Weight on the MSCI Emerging Markets Independent Pow er Producers & 1.4 0.2 1.6 4
% of total index Electric Utilities 2.8 0.3 0.6 7
Water Utilities 1.0 0.1 0.0 2
MSCI Brazil 100.0 11.6 57.7 79
Source: MSCI, Datastream and J.P. Morgan
Source: MSCI, Datastream
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Equity Market Valuation Figure 146: MSCI Brazil PE Domestic X Commodity Sectors
Price to earnings: From a 10-year historical

perspective, MSCI Brazil's 12-month forward PE stands
at 9.5x. At the end of September 2013, Brazils PE was
hovering at 10.9x.
Figure 144: MSCI Brazil 10-Year Historical PE

12 mo fwd
Source: Bloomberg, J.P. Morgan
The most expensive sector within the Brazil MSCI is

health care, but it is important to note that the data
series is patchy, especially considering that the most
inflow of companies in the sector within the index
Source: Bloomberg happened in recent years. Other than that, among the
most representative sector, staples has the highest
The Brazilian PE typically trades with a discount to the valuation both on a 5- and 10-year average perspective.
Latin American multiple and almost in line with that of Note that the MSCI classificaltion includes
Emerging Markets. The 10-year average for LatAm and homebuilders within consumer discretionary and
EM 12-month forward PE average now stands at 10.8 shopping malls within financials.
(for both).
Figure 147: MSCI Brazil Average PE (5yr and 10yr) by Sector
Figure 145: MSCI Brazil, LatAm and EM P/E 12 mo fwd
12 mo fwd,

Within LatAm, Brazil trades cheaper than all countries

Price to book value and ROE: At the end of
and in line with Argentina (on a 10-year average)
September 2013, Brazil traded at 1.5x P/BV, which is
mostly because of the high prevalence of commodities
lower than the 1.8x 10-year average. Brazils ROE is
in the index, which have a cheaper valuation than
currently at 14.2%, but the 10-year average is a lot
domestic names. On a 10-year average, Brazil and
higher at 18.6%.
Argentina are both trading at 9.5x 12-month forward
PE. Chile is the most expensive LatAm country at
16.3x, followed by Mexico, Colombia and Peru at
13.6x, 13.2x and 13x, respectively.
71
(55-11) 4950-6684 October 2013
Figure 148: Brazil P/BV versus ROE Figure 150: Foreign Equity Investments in the Bovespa
BRL Billion
Source: Bloomberg
Source: Bloomberg.
Dividend Yield: Brazil's dividend yield was 4% at the

Investor participation in the Bovespa: The profile of
end of September, the highest in LatAm, for which the
investor participation in the Bovespa has changed a lot
average is 3%. The 10-year historical average for
in the last ten years. The main change was regarding
dividend yield is similar to current levels.
financial institutions role in the Bovespa. At the
beginning of the decade, this group was the main
Figure 149: Brazil Dividend Yield
investor in the Brazilian stock exchange, responsible for
more than one third of total volume. Nowadays, the
groups participation is only 7.9%, and it no longer
figures among the 3 main groups of investors in the
Bovespa, which are now individuals, institutional and
foreign investors.
Foreigners are the main group of investors since

2004 (losing the leadership only in 2010). Recently they
Source: Bloomberg
have been increasing their participation month after
month and are responsible for almost 43% of total
Flow of Funds investments in the Bovespa. On the other hand, in the
Our basic theory is that flows are inversely correlated to last four years, individual investors share in the total
risk. This was pretty much the case in recent years, volume has been decreasing significantly and reached
when outflows were the rule mostly due to the attraction 15.6% in 2013, down from 30.5% in 2009. It is
of bonds over equities. Also, in recent months, important to mention the increased participation of local
developed market prospects became more attractive institutional investors, today only second to foreigners
than emerging markets, especially Brazil, considering and responsible for 34.4% of flows in August 2013.
that the latter is suffering serious questions on its
growth models, while the large DMs are starting to Figure 151: Investor Participation in Total Bovespa Volume
recover. In 2013, this was mostly the rule of thumb, %
even though flows are relatively strong at a moment
when the Bovespa is still in negative territory.
The 2013 inconsistency is that flows are strong at R$11

billion in the year to the end of September, but the
iBovespa performance is weak, at -13.8% in the year. It
is true that other indices are showing better
performance, but still, the magnitude of flows is the
largest since 2009, and excluding that year, the largest
ever. Most of it took place in January (on the hope of a Source: BM&F Bovespa.
rebound) and in September, following the risk-on
scenario after the non-tapering Fed.
72
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Bovespa average daily traded volume: Bovespas As of June 2013, closed-end pension funds had
ADTV had been reaching record levels since 2006 (with R$657 billion in assets under management, which is a
the exception of 2009), but since 2010 the average daily decline from the R$668 billion registered at the end of
traded volume has been slightly falling and reached 2012. This amount is equivalent to 14.7% of GDP, the
US$3.7 billion in 2013 (as of August). This means a second lowest in Latin America, only behind Argentina.
decrease of 2.5% compared with 2012 and 4%
compared with 2011. Table 63: Latin America Private Pension Funds
Country AUM (US$ bi) as % of GDP
Figure 152: Bovespa Average Daily Traded Volume
US$ Billion Brazil 33 10.0%
Brazil 296 14.7%
Chile 145 58.5%
Mexico 118 10.0%
Colombia 54 17.0%
Peru 30 16.9%
Uruguay 8 17.8%
Source: BM&F Bovespa. * As of August 2013 Bolivia 6 29.3%
Source: Abrapp
Pension Funds
The Brazilian pension fund system: The pension fund Pension investments in Brazil over the last several years
system in Brazil is basically divided into three areas: (1) have been pretty conservative, with heavy concentration
Public sector: mandatory social security for public in fixed income. This makes perfect sense to us,
sector employees; (2) General regime: mandatory considering that Brazil had some of the worlds highest
social security for formal sector employees; (3) real interest rates for most of the last two decades.
Complementary pension: optional, can be closed Allocations across securities as of June 2013 were
(when the worker is associated with a company that 28.6% in equity and 61.4% in fixed income.
offers a private social security plan) or open (available
Figure 153: Pension Fund Allocation
to anyone who wishes to participate, independent of the %
company for which the person works).
In 2012 there were 471 closed-end pension plans in

Brazil and almost 4 million active participants
contributing to the system. The largest closed-end
pension fund is Previ, which belongs to Banco do
Brasils employees. Its AUM accounts for 24% of the
industrys total, or R$163.8 billion as of December
2012.
Source: Abrapp.
Table 62: Top Ten Brazilian Pension Funds (2012)
AUM in In Brazil there are limitations in terms of security
Fund Name Entity Associated
R$ Bn allocations for pension funds. In 2009, the legislation
1 PREVI Banco do Brasil 163.8 was changed to allow for a higher limit on equity
2 PETROS Petrobras 64.8 investments, with the ceiling raised from 50% to 70%.
3 FUNCEF Caixa Economica Federal 51.6
4 FUNDAO CESP Cesp 21.4 Still, it is interesting to note that the previous 50% limit
5 FUNDAO ITA UNIBANCO Banco Itau 18.1 was never reached, so that the new legislation doesnt
6 VALIA Vale 16.4 really make a material difference. Fixed income
7 SISTEL Telecom Companies 14.1 investments (public sector debt) in general have no
8 FORLUZ Cemig 11.5
9 REAL GRANDEZA Furnas 11.0 ceiling, and funds can opt to invest 100% of AUM in
10 BANESPREV Banco Santander 10.8 these securities. For investment in private debt (notes,
Source: Abrapp. receivables, etc.), the limit is 20%. Real estate
investment is capped at 8%, but investments in real
estate plans fall under another category (structured
73
(55-11) 4950-6684 October 2013
products, which include multi-strategy funds), with a Figure 154: Mutual Funds Total AUM
limit of 10%. For investments outside Brazil the limit is R$ Billion
10%.
As mentioned, changes in legislation so far have been

mostly cosmetic, but pension funds will need to
diversify their investments due to the decline in
Brazilian real interest rates. Until recently, a fixed
income investment, especially those linked to inflation,
were enough for pension funds to meet their actuarial
targets of 6% plus inflation. This is not the case
anymore, and fund managers will need to take more Source: Anbima. Note: As of August 2013
risk. In the medium to long run, equities should benefit
from this move. Until 2013, the returns of pension fund As of August 2013, the share of total AUM invested in
portfolios were higher than the actuarial target, with the fixed income funds was 30%, with an additional 11.7%
exception of 2009. In 2012, the portfolio returns were invested in overnight rates tied to the Selic (DI). The
15.37% versus a maximum actuarial target of 12.57%. second most preferred destination of investors is multi-
However, the tide has turned in 2013 as the rise in strategy funds (mostly hedge funds), accounting for
interest rates combined with a weak equity market 20.4% of total AUM. The equity funds have had a more
brought severe losses to pension funds. The portfolio discreet participation, being responsible for only 8.4%
until 1H2013 was running with a loss of 0.69%. of investments. This level has been declining since
December 2007, when investments in equities reached a
Mutual Funds peak of 15.5%.
As of August 2013, the mutual fund industry had Figure 155: AUM Breakdown by Category
R$2.1 trillion of AUM, with only 2.8% offshore. This %, as of August 2013
amount represents around 47% of the countrys GDP. In
Brazil, there are about 12,000 mutual funds registered,
and more than 11 million accounts.
Table 64: Mutual Fund Industry
Relevant Information - Sep/13

Domestic market R$ 2,189.0 billion of AUM
Number of funds 12.650 funds
Number of accounts 11.1 million of accounts
Off-shore R$ 61.0 billion of AUM and 114 funds
Grand total R$ 2,250.0 billion of AUM
Source: Anbima.
Source: Anbima.
The figure below shows that the fixed income share of

Total AUM has increased steadily since 1994. With the total AUM has decreased significantly over the years. In
exceptions of 2002 and 2008 (both years marked by a 1995, almost 85% of the AUM was allocated in fixed
confidence crisis in Brazil), each year presented double- income funds. The end of the 1990s started a devolution
digit growth from the prior year. In 1994-2012, total process, and new fund categories (such as DI index
AUM average growth was 27% per year. 2013 has not funds, private equity and offshore) began to emerge as
been different, and in the first 8 months of the year, total investment options.
AUM has already increased by 7% in real terms, if
compared with end-2012.
74
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Figure 156: Fixed Income vs. Equity vs. Multi-Strategy governor or mayor in Brazil, the candidates need an
absolute majority, which means they need 50% of the
valid votes plus one vote to carry the election in a single
round. Otherwise the two candidates with the highest
number of votes go to a second round. Still, run-offs for
mayor only take place in localities of over 200,000K
people.
Who votes in Brazil? Voting is considered both a right

and a duty in Brazil. Every citizen between 18 and 70 is
subject to compulsory registration and voting. The new
Source: Anbima. Constitution in 1988 allowed 16- and 17-year-olds to
vote on a voluntary basis. In June 2013, the Brazilian
Comparing mutual fund and pension fund allocations, electorate reached 140.5 million people, with 43.3%
we can say that the pension funds have a more located in the Southeast region, 27.1% in the Northeast,
aggressive strategy in terms of equity investments. 14.8% in the South, 7.3% in the North and 7.2% in the
While 28.6% of pension funds total AUM is allocated Midwest. The majority of Brazilian voters (31.4%)
in equities, only 8.4% of mutual funds AUM is didn't complete primary education (elementary school),
invested in this category. In part, this is because pension while only 4.7% completed college. The data shows an
funds were active participants in the privatizations of improvement in terms of education of Brazilian voters,
the 1990s and thus own important shares of key with more people now having more education than in
Brazilian companies. In addition, mutual funds have a the past, but still greatly lagging other countries.
significant participation in multi-strategy funds, which
may or may not contain a share of equities in their Figure 157: Brazilian Voters Education Level
strategy. Taking into account all equity holdings of
mutual funds (including multry strategy), the ownership
increases to 13.1% of total AUM.
As a basis of comparison, in Mexico mutual and

pension funds have exposure to equities of 18.5% and
22.6%, respectively.
Source: Tribunal Superior Eleitoral
Political System Figure 158: Brazilian Voters Age Distribution

%
The Federal Republic of Brazil is a democratic state,
meaning that its representatives are elected by universal
suffrage, according to the Constitution of 1988. The
executive power is exercised by the president. The
president, governor and mayors are elected to four-year
terms and may be reelected once for a consecutive term.
After a four-year hiatus, the individual could run again.
The legislative power is exercised by the Brazilian
National Congress, composed of two chambers. The
Source: Tribunal Superior Eleitoral.
Chamber of Deputies is the lower house and has 513
members elected for four-year terms, with unlimited
Brazil is famous for having one of the most high-tech
reelections possible. The number of representatives for
and trustworthy electoral systems in the world.
each state is determined by its population, with a
Electronic voting was introduced in 1996, and the
minimum of 8 seats and a maximum of 70 seats. The
country became the first in the world to conduct fully
Federal Senate (upper house) has 81 members elected
electronic elections. The vote count happens quickly,
for eight-year terms, with elections every four years or,
and results are out shortly after the polls are closed. In
alternatively, either one- or two-thirds of the seats. Each
the 2012 mayoral election biometric electoral booths
state elects three senators. To be elected president,
were tested, in which each voter proves his/her identity
75
(55-11) 4950-6684 October 2013
with electronic finger tipping. The Electoral Court Paulo governor. Lindbergh Faria, who was the leader of
expects that in the 2014 elections, 22 million voters the student mobilization in favor of the impeachment of
with use the system. President Collor in 1992, is now an accomplished PT
Senator and virtual candidate for governor of Rio.
Brazils Main Political Parties
PSDB: The Brazilian Social Democracy Party was
PMDB: The Brazilian Democratic Movement Party is founded in 1988 by dissidents from the PMDB and is
the largest political party in Brazil, although it has never considered a centrist political party. The PSDB grew
elected a president in a direct election, with the entire faster than any other party in Brazilian history, electing
population able to cast a vote. It boasts the largest President Fernando Henrique Cardoso just six years
number of representatives in the Senate, the second after the partys creation. PSDB members are called
largest in the Lower House, the largest number of party tucanos because of their mascot, which is a toucan.
affiliates, and the largest number of mayors by far, Currently, PSDB is the main opposition party. The party
giving the party a large grassroots organization. has been shrinking in terms of congressional
Launched in 1980, the PMDB is the successor of the representation (49 federal deputies, 12 senators) but
Brazilian Democratic Movement (MDB), which was the more importantly, in terms of leadership. Still, it has the
official opposition party to the military regime. Since second largest number of mayors (701), although it
the end of the military regime, the PMDB has been part declined 11% relative to the previous mayoral elections
of the governing coalition, always guaranteeing key in 2008. Main representatives: former President
posts in the various administrations. Today, the PMDB Fernando Henrique Cardoso, Senator Acio Neves, So
is the closest and largest ally to President Dilma, and Paulo Governor Geraldo Alckmin and Jos Serra, who
Brazil's Vice President Michel Temer is also the partys has been mayor and governor of So Paulo and ran
president. The PMDB has important representation in twice for president (in 2002 and in 2010).
the current cabinet, with 5 ministerial posts: Mines and
Energy, Tourism, Social Security, Agriculture, and the
PSB: Although the PSB reemerged with the re-
Secretary of Civil Aviation. The main representatives of
democratization of 1985, it became more prominent in
the PMDB are Senate President Renan Calheiros,
2002, with the candidacy of Anthony Garotinho to the
former President Jos Sarney, Vice President Michel
Brazilian presidency. Ideologically, the party is a social
Temer, Minister of Mines and Energy Edison Lobo,
democracy, and until September 2013 was part of
among others
President Dilma's coalition with two cabinet posts:
Ministry of National Integration and the Ports Secretary.
PT: Founded in 1980, the Workers Party is considered However, by the time of this writing, the PSB was
one of the most important left-wing parties in Latin resigning from its cabinet seats so as to launch Eduardo
America and perhaps the world. It was founded in 1980 Campos as a presidential candidate in 2014, although
by a group of left-wing intellectuals and union workers still maintaining stratgegic alliances at the state level. Its
of the industrial So Paulo region (known as ABC) congressional representation is not a highlight (26
whose leader was Luis Incio Lula da Silva. The PT is a representatives in the Lower House and 4 in the Senate),
left-wing party in the ideology spectrum and was but the PSB is the party that had the largest growth in
always an opposition party until Lula was elected the mayoral elections of 2012, winning 40% more
president in October 2002. Still, the party has moved municipalities than it had before, including five state
more to the center in recent years. One of the main capitals. The PSB is also the party that boasts the
strategies of the PT has been of forming very wide second largest number of state governors (6).
coalitions to broaden the party support in Congress and
get members elected in regional elections. Today, there
PSD: This party was founded in 2011 and is a product
are 10 parties that have joined President Dilma's
of the effort of former Sao Paulo mayor Gilberto
coalition, 8 of them with Cabinet representation. The PT
Kassab. Formerly at the DEM, Kassab left the party
has the largest number of representatives in the Lower
because it was morphing and becoming very
House (89) and the second largest in the Senate (12),
anachronistic in the political scene. The PSD was able
tied with the PSDB. It has the third largest number of
to attract 47 federal deputies and 2 senators, becoming
mayors in Brazil, and it won the race for mayor of Sao
an important force in Congress. Moreover, it won 497
Paulo in 2012, a key victory. The PT has been good at
mayoral seats in 2012 in the first election of the party
breeding new leadership, such as Mayor Fernando
after its creation. The PSD integrates the base of support
Haddad (Sao Paulo), Health Minister Alexandre
of President Dilma, but that is not extended to the PT as
Padilha, who could be the party's candidate for Sao
a whole. PSDs Guilherme Afif Domingos was
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(55-11) 4950-6684 October 2013
nominated to the presidents cabinet as Secretary for the Below we describe briefly the most famous, popular and
Micro and Small Company, a post that was created polarizing presidents in Brazils history.
especially to accommodate the PSD. The party has the
ambition to have a candidate for governor in Sao Paulo Getlio Vargas: One of the most popular political
for the 2014 elections, as it already declared that it's figures in Brazils history, Mr. Vargas was the countrys
supporting neither the PT, nor the PSDB candidate. president twice, from 1930 to 1945 and from 1951 until
his suicide in 1954. He is the president who stayed
Brazils Presidents longest in the post: 18 years in all. Vargas assumed the
post initially as a provisional president after the 1930
Since the advent of the republic (1889), Brazil has had revolution against the oligarchic and decentralized
36 presidents, including Dilma Rousseff. The Brazilian confederation of the Old Republic. In 1937 he utilized
republican history is very troubled, and only a few fears of Communism to justify a dictatorial regime.
presidents can be considered fully elected by democratic Under the New State, Mr. Vargas abolished political
vote. parties, imposed censorship and stimulated nationalism.
Table 65: Brazilian Presidents In 1945 he was deposed by the military. In his second
President Period government, when he was finally elected by free and
1 Deodoro da Fonseca Nov 1889 - Nov 1891 secret vote, Vargas pursued a nationalistic policy,
2 Floriano Peixoto Nov 1891 - Nov 1894 turning to the countrys natural resources and away
3 Prudente de Morais Nov 1894 - Nov 1898 from foreign dependency. Petrobras was created in this
4 Campos Sales Nov 1898 - Nov 1902 context. Pressured by political adversaries and the
5 Rodrigues Alves Nov 1902 - Nov 1906 military, who wished his resignation, Vargas shot
6 Afonso Pena Nov 1906 - Jun 1909 himself in August 1954. He is famous as the the father
7 Nilo Peanha Jun 1909 - Nov 1910 of the poor, mainly because of the improvements he
8 Hermes da Fonseca Nov 1910 - Nov 1914 made in the labor laws.
9 Venceslau Brs Nov 1914 - Nov 1918
10 Delfim Moreira Nov 1918 - Jul 1919 Juscelino Kubitschek (JK): JK had a key role in
11 Epitcio Pessoa Jul - 1919 - Nov 1922 Brazils industrialization, and his presidency was
12 Artur Bernardes Nov 1922 - Nov 1926 marked by political optimism. During his government
13 Washington Luis Nov 1926 - Oct 1930 (1956-61), the country went through a period of relative
14 Getlio Vargas Nov 1930 - Oct 1945 economic prosperity and political stability. He launched
15 Jos Linhares Oct 1945 - Jan 1946 the famous Plano de Metas (Goal Plan) in order to
16 Eurico Gaspar Dutra Jan 1946 - Jan 1951 stimulate the diversification and expansion of the
17 Getlio Vargas Jan 1951 - Aug 1954 Brazilian economy. The plan was based on industrial
18 Caf Filho Aug 1954 - Nov 1955 expansion and integration of the national territory. His
19 Carlos Luz Nov 1955 - Nov 1955 main motto was Fifty years of progress in five, and
20 Nereu Ramos Nov 1955 - Jan 1956 the time of his government is known as the Golden
21 Juscelino Kubitschek Jan 1956 - Jan 1961 Age. JKs special achievement was the construction of
22 Jnio Quadros Jan 1961 - Aug 1961 a new capital for Brazil away from the coast, Braslia.
23 Ranieri Mazzilli Aug 1961- Sep 1961 (The plan to move the capital was 100 years old.) But
24 Joo Goulart Sep 1961 - Apr 1964 JK was not free from controversies; his government was
25 Ranieri Mazzilli Apr 1964 - Apr 1964 also marked by accusations of corruption, mainly
26 Castelo Branco Apr 1964 - Mar 1967 involving the construction of Brasilia.
27 Costa e Silva Mar 1967 - Aug 1969
28 Emilio Medici Oct 1969 - Mar 1974 Fernando Collor de Mello: Mr. Collor was Brazils
29 Ernesto Geisel Mar 1974 - Mar 1979 president from 1990 to 1992, and the first president
30 Joo Figueiredo Mar 1979 - Mar 1985 elected by popular vote after the end of the Brazilian
- Tancredo Neves - military regime. His government was marked by the
31 Jos Sarney Mar 1985 - Mar 1990 freezing of the populations banking assets and
32 Fernando Collor Mar 1990 - Dec 1992 corruption accusations that shortened his term. Still, Mr.
33 Itamar Franco Dec 1992 - Jan 1995 Collor was responsible for trade liberalization and the
34 Fernando Henrique Cardoso Jan 1995 - Jan 2003 start of privatization. Despite that, he was unable to curb
35 Luiz Incio Lula da Silva Jan 2003 - Jan 2011 inflation. During his government, more than 920,000
36 Dilma Rousseff Jan 2011 - jobs were lost and annual inflation climbed to more than
Source: J.P. Morgan. 1,200%. In October 1992 he resigned under accusations
77
(55-11) 4950-6684 October 2013
of corruption and influence peddling. After his Figure 159: Popularity: FHC vs Lula vs Dilma
resignation, the impeachment trial continued and Mr. %
Collor was found guilty and disqualified from holding
elective office for eight years (1992-2002). He was
elected senator in the 2006 elections.
Fernando Henrique Cardoso: An accomplished

sociologist, professor and politician, Mr. Cardoso took
command of the country in a difficult period, from 1995
to 2002. He was propelled to the presidential seat
mostly due to the successful implementation of the Real Source: Datafolha.
Plan, which took place under his watch as Finance
Minister. His election was a vote of confidence in the Brazils Current Political Situation
stability of the Brazilian economy and, especially, the
end of inflation. He was the first president since Vargas Dilma Vana Rousseff is the current president of Brazil.
to be reelected (indeed it was he who approved a She is in the third year of her first term and will run for
constitutional amendment allowing reelection). On the reelection in October 2014. Before becoming president,
economic front, he deepened the privatization process she was part of President Lulas cabinet since his
and also conducted Brazil through major crises, election, first as Minister of Mines and Energy and later
including Asia, Russia, the BRL devaluation, the energy as Chief of Staff. She was born in Minas Gerais in 1947
rationing (2001) and the Lula election crisis (2002). and in the mid-60s joined the armed resistance against
During his government important policies were put in the military regime. President Dilma was a member of
place such as the inflation-targeting system and the far-left guerrilla movements until she was caught and
fiscal responsibility law. imprisoned. She stayed in jail for three years (1970-73.)
Sometime after her release, she took a degree in
Luis Incio Lula da Silva: The most popular president economics. In the 1980s she was part of the group that
in Brazils history ran for the post three times revived the PDT (Democratic Workers Party), the party
unsuccessfully before becoming the countrys president of political icons such as former president Joo Goulart
for eight years (2003-10). He is a founding member of and Leonel Brizola. In the early 90s she was the
the Workers Party and currently its most important Secretary of Energy of the state of Rio Grande do Sul,
member. Upon his election, President Lula stuck to the and in 1998 she joined the PT (Workers Party).
economic pillars of the previous administration, President Dilmas presidency is characterized by a very
fostering market confidence and popular support. The wide but not very faithful coalition. Measures in general
emphasis of his administration was on social programs, have a hard time to get through Congress, with a retail
such as Bolsa Famlia and Minha Casa, Minha negotiation for every item, even though there are ten
Vida, which brought him a lot of popularity. On the parties that are members of President Dilma's governing
international relations front, his government was coalition. She was a very popular president until June
marked by polemical but prominent participation, 2013, when her ratings plunged on the back of the June
including controversial statements on Irans nuclear street protests. Some recovery was registered after that.
program. Under his government, the Brazilian economy
performed well and recovered quickly from the Senate: Currently, the government coalition in the
2008/2009 financial crisis. Social indicators also Senate counts 64 representatives, or almost 80% of the
presented significant improvements: income inequality total, enough to pass constitutional amendments (needs
decreased and more than 30 million Brazilians migrated 3/5 support) with a very comfortable margin, at least in
to middle-income segments. After eight years of theory. The PMDB is currently the largest party in the
government and 85% popularity (by polling results at Senate and has held the presidency of the Upper
the time), he was a key figure in helping to elect his Chamber since 2011.
successor, Dilma Rousseff. Despite his popular acclaim,
there was little progress in terms of structural reforms.
78
(55-11) 4950-6684 October 2013
Table 66: Senate Composition presidential contender), it is still likely to support

PMDB 20 President Dilma in Congress.
PSDB 12
PT 12 2014 Elections
PTB 6
PDT 5 On October 2014, Brazilians will go to the polls to elect
PP 5
the president, 27 governors, the entire Lower House,
PR 5
DEM 4 and one-third of the Senate. Although the elections are a
PSB 4 year away, there is a fairly clear view on which
PCdoB 2 candidates might be in the presidential race. For a
PSD 2
PRB 1
complete assessment of the 2014 elections, please refer
PSC 1 to the Brazilian Election Countdown N1: A Guide to
PSOL 1 the 2014 General Elections.
PV 1
TOTAL 81
Likely 2014 presidential candidates: The base-case
Source: Arko Advice, J.P. Morgan. Note: Parties highlighted are the ones that are part of
the government coalition.
scenario is that President Dilma will run for reelection
against two contenders: Eduardo Campos (PSB) and
Table 67: Chamber of Deputies Composition Acio Neves (PSDB). Short profiles of these candidates
PT 89 follow:
PMDB 80
PSDB 49 Acio Neves: Acio Neves is a senator from Minas
PSD 47
PP 37 Gerais since 2011 and the president of the PSDB
PR 36 party since May 2013. Prior to that, he was governor
DEM 28 of Minas Gerais for two consecutive terms, starting
PDT 26
in 2003, and a Lower House representative for four
PSB 26
PTB 18 consecutive terms (1986 to 2002). Mr. Neves is 53
PSC 16 years old and the grandson of Tancredo Neves, a
PCdoB 13 very prominent politician who became extremely
PPS 11
well known after winning the first indirect
PRB 10
PV 10 democratic elections following the military
PMN 3 dictatorship (1985) and dying prior to taking office.
PSOL 3 This political inheritance has served Mr. Acio well.
PTdoB 3
PEN 2
As governor of Minas Gerais he was credited for
PRP 2 having put the state accounts in order and instilling a
PHS 1 management shock. This expression became
PRTB 1 famous, and he indeed modernized the state finances
PSL 1
No Party 1
and administration. In TV appearances so far, Mr.
TOTAL 513 Neves revived the inheritance of Fernando Henrique
Source: Arko Advice, J.P. Morgan. Cardoso, who was responsible for implementing the
Real Plan in 1994, ending years of hyperinflation.
Chamber of Deputies: The situation in the Lower
House is similar to that in the Senate: in theory, the Eduardo Campos: Mr. Campos is in his second
government has 80% of support, or 411 deputies out of mandate as governor of the State of Pernambuco. He
513. However, the parties don't generally vote in block is is the grandson of a famous politician (Miguel
(that is, the whole party voting together). The Arraes), who launched his political career. Mr.
presidency of the Lower House today is also in the Campos was congressman for 3 consecutive terms
hands of the PMDB, which causes some discomfort before becoming governor and is today the most
among PT members considering they have the largest popular Brazilian governor, according to polls.
representation in that chamber. The PSD, which was Eduardo Campos made an effort to balance the
formed in 2012, is already the fourth largest party budget of Pernambuco and is known for enabling
representation in the Lower House. Although the PSB and promoting important infrastructure initiatives to
has broken with the government at the executive level to the state, especially the attraction of several
launch party president Eduardo Campos as a industries to the Suape Port and industrial complex,
including a R$7 billion Fiat plant. Today,
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(55-11) 4950-6684 October 2013
Pernambuco is considered the most dynamic and Table 68: 2014 Elections Calendar
innovation-friendly state in the Northeast. Eduardo
Campos was Minister of Science and Technology All candidates that wish to run in the 2014 elections must be
5-Oct-13
during the Lula administration (2004-05). Mr registered with a political party. All political parties must be
Campos has been saying that his political registered with the Electoral Court.
philosophy is based on inducing and removing the
barriers to private investment and adopting a less The public administration is forbidden to promote free
interventionist approach in the economy, one that 1-Jan-14 distribution of any kind of goods, values or benefits, except in
favors profits and competition. On October 5, 2013, the case of calamity, natural disasters. From this date until the
Mr. Campos received a great boost to his candidacy end of the elections, all polls need to be registered with the
Electoral Court.
as Marina Silva affiliated herself with his PSB party.
Ms. Silva was trying to get her own party, Rede
Sustentabilidade, registered with the Electoral Court Last day for political parties to publish in the official gazette the
in time for her to be able to run for the presidency in 8-Apr-14 method by which they will choose their candidates. Coalitions
also have to be registered. From this date until the end of the
2014, but the Court rejected her registration as the elections, public servants cannot receive wage readjustments
petition fell short of the number of required that are above inflation.
signatures. Marina Silva, who won almost 19.5% of
7-May-14 Last day for Brazilians aged 16 and up to register to vote, if they
the votes in the 2010 presidential elections and is are not otherwise.
currently second in the polls, is therefore going to
June 10 to Party conventions can take place during this period to decide on
support the presidential candidacy of Mr. Campos in June 30, 2010 coalitions and candidates.
2014.
5-Jul-14 Last day for candidates for public office to be registered with the
Electoral calendar: Below are the key dates of the Electoral Court.
2014 general elections. Other than the calendar above,
Brazil will host the Soccer World Cup from June 12 to 6-Jul-14
Electoral propaganda is permitted. Public rallies can take place.
July 13, and the populations awareness of the election
cycle will only occur after that. Electoral Court will make available on the internet all parties
6-Aug-14
and candidates' campaign contributions, as well as the name of
the donors.
19-Aug-14 First day of free electoral program on TV and Radio
2-Oct-14 Last day of the free electoral program on TV and Radio
5-Oct-14 Election Day - First Round.
11-Oct-14 First day of the free electoral program on TV and radio where a
second round will take place.
24-Oct-14 Last day of the free electoral program on TV and radio where a
second round will take place.
26-Oct-14 Election Day - Second Round
1-Jan-15 President-Elect takes office
Source: Tribunal Superior Eleitoral, J.P. Morgan
80
(55-11) 4950-6684 October 2013
past few years, continued to have only 17% of

Brazilian Corporates companies (up from 15% of total in 2009).
Table 69: Corporate Demographics by Sector 2011

Corporate demographics: As of 2011, there were 4.5
million registered, functioning companies in Brazil, # of # of Workers Average Average
employing 39.3 million people of which 83.2% were Companies (% of total) Wage (in Company
TOTAL (#) 4,538,347 39,293,724 2.9 9.8
wage earners, while 16.8% were business owners or
Retail (includes auto repair) 48.3% 29.3% 2.1 10.2
partners. Of the 4.5 million companies, only half
Manufacturing 9.6% 22.6% 3.5 11.5
employed wage earners, with the other half being run
Hotels and Restaurantes 7.0% 5.3% 1.6 9.7
and managed by the partners or owners. Most Administrativ e Activ ities 5.6% 9.9% 2.0 8.2
companies are in retail: Almost 50% of companies Scientific Activ ities 5.2% 3.0% 4.1 8.5
established in Brazil are involved in some sort of Transportation, Storage 4.6% 6.6% 3.2 8.2
commerce activity and 75% of companies in this area Construction 4.3% 8.1% 2.8 8.3
are operating in retail, selling diversified products I.T. and Communications 3.2% 2.6% 5.8 8.3
including food, construction material, electronic Health and Social Serv ices 2.8% 2.4% 2.4 9.7
equipment, etc. Commerce is also the category that has Other Serv ices 2.7% 1.2% 1.8 8.8
the largest number of workers, but not the highest in Education 1.9% 2.4% 2.2 9.4
terms of wage earners. This is easy to imagine, as many Financial Activ ities 1.5% 2.5% 7.7 9.5
stores in Brazil are small and usually operated by the Real Estate Activ ities 1.1% 0.5% 2.9 11.2
owner and his/her family. Arts and Leisure 1.0% 0.5% 1.8 7.5
Agricutlure 0.7% 1.3% 2.1 11.4
Ex tractiv e Industry 0.2% 0.6% 6.4 14.1
A distant second is the manufacturing industry, which is
Water and Sw age 0.2% 0.9% 3.5 8.0
responsible for almost 10% of the total number of
Electricity and Gas 0.0% 0.3% 10.2 8.0
companies in Brazil. The most prominent Public Administration 0.0% 0.1% 6.1 12.7
manufacturing activity in terms of number of companies International Institutions 0.0% 0.0% 12.1 14.7
is apparel (18%), followed by food products (14%) and Source: IBGE Note: M.W. = minimum wage
metal products (10.7%). In terms of employed people,
food manufacturing is by far the one that employs the
most people in the category, over 1.5 million. The
apparel industry employs almost 764K people. It is
Sectors
interesting to note that the auto industry, which is a high
contributor to Brazilian GDP, employs about 500K Oil, Gas & Petrochemicals
people in less than 6,400 companies. By Caio Carvalhal and team (55-11) 4950-3946
caio.carvalhal@jpmorgan.com
Average wages paid in 2011 by Brazilian corporates
were R$1,578/month, equivalent to 2.9 minimum The Oil, Gas and Petrochemical sector supplies demand
wages. for energy and fuels in Brazil. The sector has a
weighting of ~12% of the BMF & Bovespa, while
High percentage of new companies, but also high expectations are for the sector to grow on the back of
percentage of failures. Of the 4.5 million companies IPOs of oil field service companies. The Brazilian O&G
active in 2011, 19.2% (871.8K) were new entrants, market is continuing to benefit from increasing services
while 19% closed their doors (864K). Since 2008, there and equipment demand on the back of the development
were always net additions of companies (more of pre-salt fields. The major oil field services companies
companies opening than failing). From 2008 to 2011 such as Cameron, Baker Hughes, Tenaris and Vallourec
there was a net increase of 19.8% in the number of are investing in the country to increase their production
companies (371K) and 21.1% in the number of workers capacity to attend to Petrobrass needs. The Oil & Gas
(5.7 million). segment contributes to approximately 4% of Brazilian
GDP, but this number is expected to increase with pre-
Regional distribution: Of all companies and branches salt assets development.
that exited in Brazil in 2011, 51% were located in the
Southeast region, while about 20.5% were in the South. The Brazilian energy matrix is centered around
The Northeast region, despite its alleged growth in the hydropower generation and oil consumption. Brazilian
natural gas consumption is one of the lowest among
81
(55-11) 4950-6684 October 2013
several countries in the world. The Brazilian energy Prolific oil basins are concentrated in the southwest
matrix supplies a population of more than 200 million of Brazil. The biggest accumulations found in the
individuals, and is overall self-sufficient. Below, country are concentrated in the Brazilian continental
follows Brazils energy matrix compared with selected platforms of the Campos and Santos basins. The
countries. Campos Basin accounts for ~85% of Brazils oil
production, while the Santos and Sergipe-Alagoas
Figure 160: Brazil's Energy Matrix 2012 Basins contains the most recent discoveries, including
the pre-salt ones.
Figure 161: Simplified Map of Brazilian Basins
Source: BP Statistical Review of World Energy 2013

Cenozoic basins
Continental margin basins

Brazil has three regulatory frameworks for oil and Rifts
gas exploration and production. The Brazilian federal Paleozoic basins
government regulates the oil and gas sector, and is the
owner of all crude oil and natural gas reserves in Brazil. Source: Energy Ministry, J.P. Morgan
Currently, Brazil has three regulatory frameworks:
Petrobrass pre-salt assets are boosting the countrys
Concession model: Oil & Gas companies have the reserve additions. Brazilian proved hydrocarbon
right to explore and produce hydrocarbons reserves reached 18.6bn boe (according to the BP
throughout contracts granted during licensing Statistical Review of World Energy 2013), while oil
rounds. The concession model is valid for onshore and gas daily output averages 2.1mn boepd.
acreage and other non-strategic offshore areas Nevertheless, in 2006, Petrobras discovered a field in a
outside the Pre-Salt Polygon. The ANPs new new oil province called pre-salt located in the Santos
round bids are likely to be conducted under the Basin, with initial 6-8bn boe recoverable resources
concession model, although observing the rule that range in ultra-deep waters, representing the worlds
acreage cannot be part of the pre-salt polygon and largest find since the Kashagan field in Kazakhstan
not considered strategic by the federal government. (~13bn boe in 2000). PBR expects to book over the next
few years at least 8.0bn boe in reserves, with the
Production Sharing Agreement (PSA): Introduced in
declaration of commerciality of the several pre-salt
2010, the PSA model will be put in place for the
discoveries. Brazil is part of the southern vertex of the
first time with the licensing of new strategic pre-salt
so-called Golden Triangle for deepwater exploration,
assets inside the Libra pre-salt polygon. The Libra
comprised of the US Gulf of Mexico, West Africa and
auction is scheduled to take place on October 21,
Brazil.
2013.
Rights cession model. The rights cession model is
applicable only to some specific assets acquired
directly by Petrobras from the federal government
during the companys $69.9bn capitalization process
held in 2010. For the assets acquired in this process,
the federal government will not charge Special
Participation Taxes, and there will be a valuation
revision by 2014.
82
(55-11) 4950-6684 October 2013
Figure 162: Brazil Pre-Salt Polygon Santos Basis highest stake of profit oil to the government, starting at
a minimum of 41.65% (the stake will vary according to
oil prices and wells productivity). The local-content for
developing this area is predefined at 55% in the
development phase through 2021 and then increases to
59%.
Figure 163: Libra's Concession Area
Source: Petrobras
The sectors regulator is the National Petroleum Agency

(ANP) and the National Counsel for Energy Policy
(CNPE), which sets policy guidelines for the sector.
ANP held the 11th bidding round in early 2013 Source: ANP
based on the concession model. The 11th bidding
round for exploratory concessions confirmed the overall Brazils oil production to start increasing in 2014.
expectation of strong demand and diversity of players. The countrys oil production has been stagnant over the
Local players like OGX established partnerships with last three years on the back of: i) large-project start-up
giants Exxon and Total. Petrobras participated in most delays, and ii) declining ratios in already mature fields.
areas, but with less dominant behavior than in previous However, going forward, Petrobras expects a
rounds, and HRT confirmed expectations and did not production ramp-up at the end of 2013, with constant
participate at all, as the company is struggling to cope and stable growth from 2014 on.
with its exploratory programs in Solimes and Namibia.
Total bids surpassed R$2.8bn. In our view, the lack of Figure 164: Brazilian Production Profile
bidding rounds over the last five years determined the
eagerness of the companies in this 11th bidding round.
For service companies the new round represents a series
of opportunities and demand for equipment, likely
Source: BP Statistical Review of World Energy 2013, J.P. Morgan
moving the whole sector for the next years. Of the total
289 blocks offered, about 142 received bids.
Brazils refining capacity is not sufficient to attend
fuel demand. Current refining capacity and fuel
Libra auction is going to be the first Production
demand are almost balanced at ~2mnkbd; however,
Sharing Agreement auction type in Brazil. The
demand for refined products has been increasing higher
regulatory agency (ANP) announced for October 2013
than capacity, forcing Petrobras to import refined
the first auction under the Production Sharing
products from overseas. PBR owns virtually all of the
Agreement (PSA) model. The area to be auctioned,
refining capacity in Brazil. Diesel fuel leads the
denominated Libra, is expected to hold between 8 and
consumption of oil derivatives in Brazil, reaching
12 billion barrels of oil recoverable in place, according
~964kbd and representing 47% of total demand
to the agency. The signing bonuses are set up at R$15
followed by gasoline with demand of 684kbd. Brazil
billion while the areas development is likely to demand
imports both diesel and gasoline. Over last couple of
another US$70 billion at least. Petrobras will be the
years, gasoline consumption has continued to increase
mandatory operator, with a minimum stake of 30%. The
(~15% on average in 2012-11) and has helped to replace
winning consortium will be the one to present the
ethanol demand. Yet, ethanol still serves a fast-growing
83
(55-11) 4950-6684 October 2013
market on the back of consumer preference for flex-fuel remained predominantly state-owned until the 1990s,
cars, which can take 100% ethanol. and in the process had become highly inefficient. It was
then that the Brazilian federal government embarked on
Fuel pricing in Brazil is market-based. Refined a privatization drive that began with the change of
products prices are controlled by Petrobras. Still, control first at Usiminas (1991) and later at Vale (1997).
considering that the government is Petrobrass main After privatization, Vales core focus was moved to
shareholder, the price directive is set by the mining activities, and it sold its holdings in the steel
government, which allows for increases or declines of (Aominas, CSN, CST and Usiminas) and pulp
the set price based, among other things, on the spread businesses.
with international prices and the impact on inflation and
GDP. The price-setting strategy came under a lot of As it stands now, the steel industry in Brazil is 100%
scrutiny from 2012 onward as the gasoline spread held in private hands, and until recently boasted one of
between local prices and international ones varied the lowest-cost productions of steel in the world, which
during the year between 20% and 30% and was getting is not the case anymore. Within the sub-segments, as
steeper as oil prices rose and the BRL devalued. compared with long steel, the flat steel category faces
Moreover, the increase in demand led to more imports, relatively more competition from the presence of a
making an increase in fuel prices even more urgent. greater number of players and the increasing influence
of imports (direct and indirect). Finished steel output
Fuel prices at the pump reflect the refinery gate price, was 26.3 Mt in 2012 (flat steel 59%; long steel
excise and sales taxes and distribution costs; and in the 41%), while consumption was 26.1Mt, and the main
case of the gasoline sold at the pump (75% gasoline- consuming sectors include civil construction,
25% ethanol), they also reflect the cost of ethanol, automotive, capital goods, machines and equipment,
which has a deep seasonality related to crop periods. household and commercial appliances.
Petrobras manages the refinery gate price of gasoline
for blending, diesel and LPG. In order to limit the Figure 165: BZ Main Steel-Consuming Sectors, 2012
impact of long-term oil price moves in domestic Small Packagin
inflation, PBR and the federal government often Other,
Tubes, g, 3.5%
coordinate any price hike with offsetting adjustments to 4.7%
5.6%
excise taxes. Comerci
al Construc
Goods, tion,
Table 70: Brazil's Major Listed Oil, Gas and Petrochemical 31.6%
Companies 6.8%
Company Ticker Rating Mkt Cap (US$ Mn)

Capital Auto
Petrobras PETR4 N 102,194 Goods, Sector,
OGX OGXP3 N 541 22.1% 25.6%
HRT HRTP3 N 156
Braskem BRKM5 OW 5, 272
Source: IABr and J.P. Morgan estimates
Ultrapar UGPA3 OW 13, 366
Source: J.P. Morgan estimates and Bloomberg as of September 11, 2013 On the mining side, Vale continues to gain scale since
privatization and is now the third-largest mining
Metals & Mining company in the world in terms of market
capitalization, and the worlds largest iron ore producer
By Rodolfo de Angele and team (55-11) 4950-3888
and exporter. Along the way, while it made efforts to
rodolfo.r.angele@jpmorgan.com
diversify into other commodities, such as nickel and
copper, among others, it remains predominantly an iron
The Brazilian Metals & Mining industry evolved
ore producer and accounts for 80% of Brazils iron
during the industrial development programs (Brazils
production and 86% of exports.
economic miracle) of presidents Vargas and
Kubitschek during the 1940s and 1950s. During the
mid-twentieth century, strategic state steel production
plants were established by the government, and steel
production became synonymous with the drive toward a
more autonomous development model. The sector
84
(55-11) 4950-6684 October 2013
Figure 166: Vales iron ore output has doubled since 2000 and Figure 168: Brazils Crude Steel Capacity May Reach ~55.5Mt by
accounts for over 80% of Brazils output 2017
Million tonnes Million tons
Source: Company reports and J.P. Morgan estimates

Source: Vale, AME, J.P. Morgan
Brazilian steel consumption growth for the 4-year However, we have witnessed a change in the
period (2009-2012) since the credit crisis decelerated competitive landscape of the Brazilian steel industry,
to 2.4% p.a. vs. the previous 4-year periods (2005- especially on the flat steel side. Imports have already
2008) average of 6.2% p.a. We expect Brazilian steel been the fourth key player in the market only behind
consumption growth to range 1-2x GDP in the CSN, Usiminas and ArcelorMittal. The government
following years. The soccer World Cup in 2014 and the tried to support the steelmakers by implementing higher
Olympic Games in 2016 are expected to create above- import tariffs on selected steel products from Oct12,
normal growth in demand for steel in the medium term which was a successful measure, in our view. However,
(especially for long steel products), even though the now that the tariffs are being cut back to previous
investments so far have lagged expectations. levels, this is negative news for the domestic steel
sector. In addition, with the entry of new players like
Gerdau and potentially CSA in the finished steel
Figure 167: Brazil Is the 9th Major Crude Steel Producer as of market, the competition is likely to get more intense.
2012 Thus, the days of a historically high domestic price
Million tons premium are unlikely to return. Finally, with the global
steel industry continuing in overcapacity (78.1%
South
Korea, Germany Brazil, capacity utilization in Dec12), Brazil is unlikely to
70 , 43 Turkey, 35 remain isolated from its impact. The domestic market is
36 likely to remain oversupplied as competition is likely to
Russia, remain intense and capacity growth (3.5% p.a. during
72 the 4 years until 2017) keeps utilization levels low.
India, 75
United China, According to the IABr (Instituto Ao Brasil), the loss of
States, 709 competitiveness of Brazilian products and excess supply
89
of steel in the international market which exceeded
Japan, Others, 580 million Mt explain the significant drop in Brazil's
107 275 exports. In addition, the impact of direct and indirect
imports of steel in the country has led the industry to
operate at 70% capacity when, historically, the average
Source: WSA (World Steel Association)
capacity utilization has been above 85%. According to
the Institute, considering that many countries are still
suffering the effects of the global economic crisis and
the oversupply of steel in the international market, the
solution for Brazil's steel industry is to focus on growth
in the domestic market. For 2014, apparent consumption
of steel products is estimated at 27 milllion Mt, 3.8%
above 2013's estimate.
85
(55-11) 4950-6684 October 2013
Figure 169: Brazilian Flat-Steel Imports as a % of Apparent of the lowest-price producers globally and leading to
Consumption: Currently at 17% Brazils becoming a significant exporter of eucalyptus
'000 tonnes pulp. Meanwhile, advances in paper production
technology have allowed for broader use of eucalyptus
grade pulp, which began to replace the traditional
softwood type pulp in tissue, printing and writing and
even boxboard paper manufacturing.
The growth in the domestic paper market has been

unsteady and has resulted in oversupply, which in turn
led to a tough pricing environment. As a result, most of
Source: : IBS, SECEX, JPMorgan estimates
the investments have focused on growing pulp rather
than paper capacity. Furthermore, rising land prices
have driven pulp projects further from their traditional
coastal regions.
Table 71: Major Listed Metals and Mining Companies
The past two decades saw significant consolidation in
Company Ticker Rating Mkt Cap (US$ Mn) the sector, in both the pulp and printing and writing
paper segments (the corrugated packaging segment
Vale ON VALE3 OW 81,832 remains quite fragmented). Suzano and Bahia Sul
Vale PN VALE5 OW 81,832 merged. Ripasa was bought out by Suzano and VCP.
Fibria, the worlds largest market pulp producer, was
Bradespar BRAP4 OW 3,992
created through the merger of Aracruz and VCP. Over
MMX MMXM3 N 466 time, Suzano and International Paper emerged as the
MMX Royalty Securities MMXM11 OW 1,281 key domestic players in the P&W paper grades, while
Magnesita MAGG3 N 836
Klabin and Suzano emerged as the leaders of the
domestic boxboard segment.
Gerdau GGBR4 N 13,060
Metalurgica Gerdau GOAU4 OW 5,183 The main drivers in the sector recently have been the
Usiminas USIM5 N 4,768 emergence of Chinese domestic consumption and the
CSN CSNA3 UW 6,345
onset of structural decline in demand in the developed
world.
Source: J.P. Morgan and Bloomberg as of September 26, 2013
Also, a weaker BRL in 2013 has led to lower import

Pulp and Paper competition in the domestic paper segment while
By Lucas Ferreira and team (55-11) 4950-3629 production has remained strong, so companies have
lucas.x.ferreira@jpmorgan.com been focusing on the domestic market through the last
months rather than exports.
Brazil is a unique place for pulp production, owing to
the combination of favorable climate, land and water Going forward, we expect Brazil to increasingly focus
availability and relative political stability, the latter an on pulp production, which takes advantage of favorable
important point given 5- to 7-year investment cycles. As access to raw material. However, we believe paper
a result, Brazil has become a major player in the global production will increasingly be based in China, where
pulp market, representing ~15% of global trade in pulp. access to raw materials is limited but access to capital is
more readily available.
A handful of family-run companies have dominated the
sector in Brazil since the turn of the last century. For many years, Brazil and South America were,
Brazils advantageous climate allowed for rapid tree without a doubt, considered as places providing the best
growth, with eucalyptus plantations reaching maturity in returns in greenfield projects. As mentioned before, the
just 7 years compared with 20-30+ years in traditional region gathers most of the resources needed for pulp
pulp markets (N. America, Europe, etc.). Advances in production. However, the increasing price of land, labor
forestry yields in the 1970s further improved Brazils and energy have made Brazil less competitive. As an
cost competitiveness in pulp production, making it one example, Stora Enso has recently announced a JV with
Guangxi Forestry Group to build a new greenfield BEK
86
(55-11) 4950-6684 October 2013
line in Guangxi, China. According to the company, comparable to that of other banking systems in Latin
returns are similar to those expected in its Uruguay America.
greenfield project. The proximity to the consumers,
currency and cheaper labor are starting to pay off. Figure 171: Deposit Market Share
Figure 170: Hardwood Supply to Grow 37% Between 13E and

20E, 97% of the Expansion to Come from LatAm
HW accumulated capacity growth in the next 8 years in millions of tons
Source: J.P. Morgan and Central Bank as of June 2013
Figure 172: Deposit Market Share

Source: Pulp and Paper Products Council, RISI, Valois, J.P. Morgan
Nonetheless, Brazil and South America should continue

to increase their share in global production. Global
hardwood supply is expected to grow by 12.6 Mt (37%)
in the coming 4 years. Brazil alone should account for
~70% of that global growth (Latin America 97 %).
The growth of Brazilian pulp production has been Source: J.P. Morgan and Central Bank as of June 2013
heavily supported by the National Development Bank
(BNDES), which has a mandate to support sectors in However, public sector banks have over half of the
which Brazil has competitive advantages. Through both banking system today. The Federal Treasury owns
debt and equity, the bank has over R$6.5bn employed in controlling stakes in three major banks that operate in
almost all the important pulp and paper producers and the Brazilian banking system: 1) Banco do Brasil (59%
expects to invest an additional R$26bn in the period of stake), the countrys largest bank, 2) Caixa Economica
2013-15. Federal, which has a roughly 69% share in mortgage
lending but which has been growing in other product
Table 72: LatAm Major Listed Pulp & Paper Companies lines more recently, and 3) the BNDES, a government
Company Ticker Rating Mkt Cap (US$ Million) development bank committed to providing funding for
Klabin KLBN4 OW 4,878
infrastructure and corporate development. These three
banks alone have a 48.5% share of the Brazilian credit
Suzano SUZB5 N 4,582
market, up from just 36.3% in 2008, while all
Fibria FIBR3 OW 6,962
government-owned banks now have a 50.5% share of
Duratex DTEX3 OW 3,478 the lending market. Moreover, we note that public
Copec COPEC N 18,020 banks tend to act contra-cyclically and grow more
CMPC CMPC N 7,525 rapidly than private sector peers during times of slow or
Source: J.P. Morgan estimates and Bloomberg as of Sep 16, 2013. negative economic growth. Through June 13, for
example, public banks loan portfolios rose 29.3% Y-o-
Banks Y, while those of private domestic banks rose 5.2% Y-
o-Y and foreign banks loan portfolios increased 6.8%
By Saul Martinez and team (1-212) 622-3602 Y-o-Y. Caixa Economica Federal is growing the fastest
saul.martinez@jpmorgan.com with 42.0% Y-o-Y loan growth through June 2013,
versus 25.1% at Banco do Brasil, and 6-10% at Itau,
A highly consolidated industry. The five largest banks Bradesco and Santander Brasil, respectively. However,
control around 72% of loans and 78% of deposits, as of the growth of public sector banks more recently has
June 2013. The two figures below demonstrate the loan sparked concerns that they are hastening consumer
and deposit market shares of the top five banks in the indebtedness, potential fiscal issues if capital needs to
country. The level of market concentration is be infused to support growth or absorb losses, and the
87
(55-11) 4950-6684 October 2013
possibly adverse impact of more aggressive pricing and previous years was a falling NIM. In particular, the
supposedly more lax risk standards on private NIM has fallen from a peak of 8.7% in 2005 to only
competitors. 5.5% in 2012 and 4.5% in 1H13. The system ROE is
now the lowest among major Latin American banking
Consolidation in recent years has hastened market systems.
concentration. Since 2008, four sizable mergers have
noticeably increased the level of market concentration. Figure 174: Banking System Return on Equity (ROAE) (2004-
In particular, the mergers of Santander Brasil and ABN 1H13)
Banco Real (August 2008), Itau and Unibanco
(November 2008), Banco do Brasil and Banco Nossa
Caixa (November 2008), and Banco do Brasil and
Banco Votorantim (January 2009) have increased the
collective loan market share of the top five banks in the
country to 75% from 52% at the end of 2007. More
recently, Itau announced the acquisition of Credicard,
the card operations of Citibank.
Source: J.P. Morgan and Central Bank as of June 2013
Foreign banks have a relatively limited presence. With
the exception of Santander Brasil, foreign banks have
On some levels, financial penetration is relatively
not become significant players in the Brazilian banking
low on a global basis. In spite of healthy growth in the
system. In particular, foreign banks control 15.5% of
past decade (see below), there is still room for increased
system loans, based on July 2013 Central Bank data,
financial sector penetration. According to 2011 data
one of the lowest percentages among major Latin
from IPEA, 36% of Brazilian families do not have a
American banking systems. In fact, policymakers in
basic checking account. Of these families, 40.6% would
other major Latin American countries, notably Mexico,
like to have a basic checking account. In addition, many
have cited the limited market share of foreign banks as a
small companies still lack access to consistent and low-
reason why the Brazilian banking system withstood the
cost sources of credit. Moreover, when compared with
financial crisis as well as it did (i.e., when foreign banks
more developed banking systems, the mortgage market
pulled back their lending activity, the impact was not
remains small. Mortgages amount to only 7.7% of GDP,
large enough to exacerbate the negative economic
suggesting ample room for growth in the coming years.
impact of the crisis). However, more recently, the
growth of government banks has generally been seen in
However, penetration levels are now high versus
a less positive light by market participants, as noted
most Latin American financial sectors.
above.
Notwithstanding the relatively low credit penetration
relative to developed and select emerging economies,
Figure 173: Evolution of Market Share: Public, Domestic Private,
and Foreign Banks (2008 July 2013) many market participants point to the substantial growth
in financial sector penetration in the past decade as
evidence that growth will likely slow. Total loans in the
Brazilian banking system have grown 18.2% a year, on
average, from the first half of 2002 to the first half of
2013. This growth has been driven by a multitude of
related factors, including good economic growth, on
average from 2002 to 2010, controlled inflation,
substantial growth in the middle-income sector, rising
disposable income levels, and improved affordability of
credit due to lower rates on loans (which, in turn, result
Source: J.P. Morgan and Central Bank as of July 2013 from greater risk appetites of banks and a mix shift
toward secured consumer credit such as mortgages and
Profitability has declined in recent years due, in part, to payroll loans). Admittedly, some of these factors have
falling net interest margin (NIM). Banking system taken a turn for the worse, as economic growth has
ROEs ranged from 21% to 26% from 2004 to 2007. stagnated since 2011 and inflationary pressure persists
Over the first six months of 2013, however, the banking currently.
system ROE was only 14.3%, a bit higher than the
13.4% in 2012. The major driver of the decline from
88
(55-11) 4950-6684 October 2013
Figure 175: Total Loans to GDP Table 73: Brazils major listed Financials companies
Company Ticker Rating Mkt Cap (US$ Million)
Banco do Brasil BBAS3 OW 30,968
Santander Brasil SANB11 N 24,958
Bradesco BBDC4 OW 54,826
Itau Unibanco ITUB4 OW 67,426
Source: J.P. Morgan estimates and Bloomberg as of September 11, 2013
Source: J.P. Morgan and Central Bank as of December 2012

Non-Bank Financials
The leverage levels of consumers are also high. By Domingos Falavina and team (55-11) 4950-3474
According to Central Bank data, debt service as a domingos.falavina@jpmorgan.com
percentage of income has increased to 21.5%, as of June
2013, up from 16.5%, as of June 2006. This level Acquirer industry overview
appears to be high, on the surface, though it has
stabilized at current levels. We do also note that this Secular growth story. The volume of payment card
figure does not include indebtedness derived from transactions has consistently increased in the past years.
interest-free installment purchases made on credit cards. From 2007 to 2012 the average annual growth rate of
Ultimately, concerns have emerged in recent years the number of transactions reached 17.2%, increasing
about whether Brazilian consumers are overextended, from 3,652 million to 8,061 million. In the same period,
especially in light of historically low unemployment revenues CAGR reached 22.1%, growing from R$262
levels. The higher level of indebtedness does make it billion to R$710 billion.
important for the ongoing lengthening of durations and
declining interest rates (both are functions of growing Figure 176: Credit and Debit Card Revenues and Transactions
importance of longer duration and lower risk products,
like mortgages) to continue in the coming years.
Central Bank is the primary regulator. The National

Monetary Council (Conselho Monetrio Nacional, or
CMN) is the primary regulatory entity in the Brazilian
financial system. The CMN is composed of the Central
Bank president, the finance minister, and the planning
minister. Among its functions, the CMN gives the Source: ABECS and J.P. Morgan estimates. Does not include Retail Stores Revenues
and Transactions.
Central Bank authority to establish reserve requirements
and establishes the general directives regulating the
banking and financial markets. However, the Central Cash and checks substitution has been the main driver
Bank is the primary supervisory entity overseeing the of credit and debit card usage. The percentage of
banking system. Among its primary functions, the transactions accounted for by checks fell to 9.4% in
Central Bank establishes minimum capital and reserve 2011 from 45.9% in 2002. Similarly, credit and debit
requirements, approves mergers and acquisitions of cards accounted for 69.8% of transactions in 2011,
financial institutions and must approve any capital compared with just 28.4% of transactions in 2002.
increases or establishment of branches in Brazil and
abroad. Additionally, the government recently approved Merchant acquirers also enjoyed overall consumption
the Medida Provisria no. 615, that among other things, growth. In the last years, macroeconomic stability,
gave power to the Central Bank to rule the acquiring lower interest rates, credit growth and real wage
and payment means industry. increases all contributed to private consumption
expenditure growth. Notably the number of checking
accounts increased from 77 million in 2002 to 150
million in 2011.
89
(55-11) 4950-6684 October 2013
Figure 177: Checking Account growth and Credit and Debit Figure 178: Brazilian Card Payment Structure (Estimated values
Cards per Account for R$100 Transaction)
CAGR 02-12: 7.7%
150.1
133.628
141.3 Payment Card
125.667 3) Brand Fee
112.13
102.6 (R$0 1
90.2 95.1
87
77.3
1.65 1.72 1.70 1.63 1.65 1.65 1.72
1.60
1.48 1.44
1.32 Issuer Acquirers
1.22
1.05 1.10 1.13 2) Issuer pays acquirer
0.83
0.59
0.71 net of interchange
0.53 0.51
1) Pays Issuer 4) Aquirer pays
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 R$100 h t
Checking Account (million) Credit Card p/ account Debit Card p/ account
Source: ABECS, BACEN and Febraban data. Cardholder Merchant

0) Cardholder buys
good/service
Based on Febrabans 2012 data, 36% of the Brazilian
population still does not have any access to financial Source: BACEN payment cards report and J.P. Morgan estimates.
services. We believe that increased levels of bank usage
should continue supporting card issuance and usage. Competition structure. The acquiring industry in
Brazil is highly concentrated. The largest two players
Industry organization participants and fees. The (Cielo and Redecard) retain over 90% of the market.
Brazilian payment card industry has the following Until July 2010 Redecard was the sole processor of
participants and fees: Mastercard, and Cielo the only processor of Visa. The
duopolistic structure drove a non-competitive
Issuer is the fnancial institution that is responsible environment, and as a result profitability of the two
for setting credit limits and interest rates and incumbent players was materially larger than the market
indentifying and authorizing each card transaction. It average. After being pressured by the Central Bank,
also is responsible for maintaining a direct both acquirers started processing the two main brands,
relationship with the brand (e.g., Visa, Mastercard) in 2009 and early 2010, and competition in the segment
and establishing reward programs. began strongly. Post material price decrease both
acquirers became more rational and price has been
Acquirer is the financial institution responsible resilient. Cielo is currently owned by Banco do Brasil
for capturing and processing credit and debit card and Bradesco, while Redecard is controlled by Itau
transactions. It connects merchants to banks. Unibanco. Santander Brazil, which until 2010 owned a
Brand is the owner of the trademark. It defines the 15% stake in Cielo, decided to divest from the company
general rules and terms of the payment means and create its own acquirer with Getnet. Citibank was in
structure, including the interchange fee (bank the controlling group of Redecard but also completely
remuneration) and net merchant discount rate divested from the company in 2009 and with Elavon
(acquirer remuneration). Examples are Visa and created a competing player. Today Brazil has 4 large
MasterCard. banks retaining over 68.9% of the market, each with a
material stake in one of the 4 acquirers. Redecard and
Cardholder is the financial client, or user of the Cielo are the largest players, and competition is
card. currently not destructive to pricing.
Merchant is the seller of the good or service.
On May 20, 2012, President Dilma enacted the
Provisional Measure 615 allowing overlooking rights on
acquirers to the Central Bank. This provisory measure
was approved by the Senate and the Lower House and is
now an effective law. The Central Bank has still not
issued the new policies governing Brazils electronic
payment structure.
90
(55-11) 4950-6684 October 2013
Insurance Industry Overview million over this time period (2007-11 CAGR of 8%).
We believe there is room to expand on other P&C
Fast growing and GDP resilient. Brazil is a fast segments such as comprehensive homeowners
growing Latin American insurance market. Premium insurance, comprehensive commercial insurance,
distribution in Brazil is 62.3% of life premiums and general risks insurance, engineering risks insurance,
38.7% of non-life premiums. Comparing industry-wide extended warranties among others.
premium growth to GDP growth, we note low correlation
of premiums to overall economic activity. In our view, The figures below are based on SUSEP data and reveal
the still underpenetrated market has been fueling the each categorys premium breakdown:
growth of insurance premiums despite the lower
economic activity. Figure 181: Brazil's Insurance Premium Breakdown (1H13)
Figure 179: Insurance Growth vs. GDP Group by association

Individual 20%
(%) and Other 16%
21%
17% Group Corporate,

15% 14% 64%
Life
12% 12% 16% 14% 24%
14% Auto
12% 59% Health
10% 10% P&C
7.5% 37%
37%
6.1%
5.2% 7% 6%
4.0%
2.7%
0.9% Other, 4%
-0.3% Pension, 76%
Non-
2006 2007 2008 2009 2010 2011 2012 life
19%
Real GDP Nominal GDP Insurance S Life and
ource: IBGE, BCB and J.P. Morgan estimates. Does not consider Healthcare insurance. Premium Bond, 7% Pensio, 37%
Insurance products are still highly underpenetrated

in Brazil. When comparing Brazil globally, we note the Source: SUSEP; ANS and J.P. Morgan Estimates.
penetration of insurance and long-term savings products
remains low. Premium penetration into GDP in Brazil Within life, we also note a high concentration on
grew from 3.2% in 2010 to 3.7% in 2012. Still, despite pension and health products. Based on World Bank
this penetration increase, Brazil still ranks below the 2011 data, the total health expenditures in Brazil
global average. accounted to 8.9% of GDP, of which 54% was privately
funded and 46% was publicly funded.
Figure 180: Insurance Penetration: Premiums as a % of GDP in
2012 For the traditional insurance and pension plan products,
there is very high market share concentration within the
large retail banks. The Bancassurance distribution
model has prevailed in Brazil for these products. Brazil
has 21 private pension providers, but the 4 largest retain
83.8% of the market.
Figure 182: Pension Market Share (1H13)
Source: Sigma Swiss Re 2013 report and J.P. Morgan estimates.
Still concentrated premium distribution. The P&C

segment of Brazil is still highly concentrated in auto
insurance. The large concentration in auto insurance, in
our view, is driven by the record vehicle sales that took
place in Brazil from 2007 to 2011. Based on data from
Anfavea, the total fleet rose from 25.6 million to 34.7 Source: SUSEP and J.P. Morgan estimates based on VGBL premiums. BB Seguridade
market share also includes Mapfre operations.
91
(55-11) 4950-6684 October 2013
Figure 183: Traditional Life (1H13) rates. However, we don't recommend entering the sector
until execution issues faced in the past cease to impact
short-term results. Still, we believe that the worst is
behind, and we should start to see a gradual recovery of
companies operating performance; but to be optimistic
on the sector, we need to see margins improving further
and positive FCF, which has started but at a low pace.
Listed companies downsizing operations: As part of

their strategy to improve profitability, companies are
downsizing their operations, reducing their geographic
Source: SUSEP and J.P. Morgan estimates.
presence to So Paulo, Rio de Janeiro and some main
Figure 184: Brazils major listed Non-bank Financials companies
metropolitan regions and reducing their participation in
Company Ticker Rating Mkt Cap (US$ Million) the lower-income segment where margins are tighter.
However, it is important to note that we continue to see
BB Seguridade BBSE3 OW 43,800
companies exclusively focused on the lower-income
Cielo CIEL3 N 46,089 segment like MRV, Rodobens and Direcional. The
BM&FBovespa BVMF3 OW 25,165 publicly traded companies launched projects that totaled
Porto Seguro PSSA3 N 8,948 R$37bn in 2012, -23% yoy with contracted sales also
CETIP CTIP3 OW 6,078 down 19% yoy to R$35bn. Given the focus on
profitability we believe that the sector could grow by
SulAmerica SULA11 N 5,417
around 10% a year for the next 2-3 years, mostly driven
Source: J.P. Morgan estimates and Bloomberg as of September 26, 2012. by increases in home prices, which have been around
25-30% per year in the past two years and should be
Homebuilders around 10-15% this year.
By Marcelo Motta (55-11) 4950-6712
marcelo.g.motta@jpmorgan.com Sector funding: The main source of funding for
mortgage loans is the SPBE (represented by 65% of
By Adrian Huerta 1 (52-81) 8152-8720 saving accounts balance), which is used mainly for the
adrian.huerta@jpmorgan.com middle- and higher-income segments, and the FGTS
(workers guarantee fund, an 8% mandatory
Sector overview: Currently the sector is composed of 16
contribution from regular employees compensation)
companies with a total market cap of more than US$15bn
and trading volume of almost US$150mn per day on funding used mainly for lower-income segments. In
2012, SBPE + FGTS new disbursements towards
average and having a weight of 7.7% on the Ibovespa.
housing reached R$126bn, vs R$114bn in 2011 and
The sector has its own index within the Bovespa called
only R$10bn in 2005.
IMOBBV.
Companies improved the tone: In addition to concerns
Fundamentals remain strong despite stock
regarding execution and margins, most investors are
performance: The sector has been through a turbulent
still concerned with companies capacity to generate
period in the past years due to weak results combined
sustainable positive free cash flow, since most of the
with an operational contraction and negative FCF. This
cash today is a consequence of the above-mentioned
reflected an exaggerated expansion and lack of controls
downsizing in operations. We believe companies need
as it was the first time companies had an abundance of
to show that their business models work and allow a
capital to grow. Despite this weak performance YTD
some stocks are down more than 30% we believe the positive FCF with healthy margins and ROEs.
Otherwise companies will continue to trade below book
sectors long-term fundamentals remain attractive given
value in some cases. In our coverage universe only
Brazils demographics (projected annual demand of
~1.5mn units per year until 2030 on average) and credit Cyrela and MRV are trading above book at 1.3x and
1.1x, respectively, while Rodobens trades at 0.9x and
availability (mortgage to GDP still shy at 6-7%).
the other names, PDG, Rossi and Gafisa, around 0.5-
Moreover, mortgage rates are not linked to Selic and
should not be impacted by the recent increase in interest 0.6x. (as of mid-September 2013).
Why turnaround could take longer than expected: In

1
Registered/qualified as a research analyst under NYSE/FINRA rules. our view the main risks to the expected turnaround in
92
(55-11) 4950-6684 October 2013
FCF and margin for the discounted companies are further Figure 187: Housing Market by Income Segment
delays on projects under construction and restrictions on
the banks willingness to disburse mortgages impacting
cash collections. Additional delays or tighter credit
conditions will impact the deleveraging process leading
to higher-than-expected financial costs impacting
margins and ROEs.
Outlook for the medium term: We have a cautious

view on the sector with just one OW, on Rodobens. We Source: J.P. Morgan estimates; company data
remain Neutral on the other names, including Cyrela and
MRV on valuation and on the discounted names (PDG, Figure 188: Listed Companies Launches
Rossi and Gafisa) as we believe companies are in a
transition phase, finding their ideal size to maximize
profitability and continue to work to deliver projects that
have weak margins. In addition balance sheets remain
leveraged and FCF neutral to slightly negative despite
the downsizing.
Table 74: Brazils Homebuilders under our coverage

Source: J.P. Morgan estimates; company data
Company Ticker Rating Mkt Cap (US$ Million)
Cyrela CYRE3 N 3,110 Figure 189: SBPE + FGTS Financing
Gafisa GFSA3 N 660
Rossi RSID3 N 574
MRV MVRE3 N 2,032
PDG PDGR3 N 1,408
Rodobens RDNI3 OW 308
Source: J.P. Morgan estimates and Bloomberg, as of Septermber 13, 2013
Figure 185: Sector P/E 12 Months
Source: J.P. Morgan estimates, Central Bank and CEF
Figure 190: Construction Inflation Breakdown
Source: Bloomberg consensus. Note: Including Cyrela, Gafisa, Rossi and MRV
Figure 186: Sector Performance vs. Selic
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(55-11) 4950-6684 October 2013
Malls around 20% is enough to support our positive view. In

addition the combination of stable cash flows with
By Marcelo Motta (55-11) 4950-6712 organic and inorganic growth represents a positive
marcelo.g.motta@jpmorgan.com undercurrent in the macro environment in Brazil. We
By Adrian Huerta 1 (52-81) 8152-8720 see limited impact to our 2013-14 estimates on the back
adrian.huerta@jpmorgan.com of a recent slowdown in domestic demand given the
recent GDP revisions and retail data. Recall that 1H13
A defensive sector with stable results and FCF: The average SSR was at 11% yoy, well above inflation of
shopping mall industry offers exposure to growing retail 6.5%. We continue to see malls gaining market share
consumption in Brazil and to potential appreciation in from traditional retail. Over the last 5 years the sector
property values, on the back of a secular trend of gained 7 p.p. of market share, reaching a participation
compression in cap rates and lower interest rates in the level of 25% on total sales. In addition, revenues linked
long term, despite the short-term volatility in interest to sales performance represented 6% of total mall
rates. Also, it offers inflation protection through its rent revenues last year. The main driver for earnings growth
structure, as retailers are subjected to monthly is the recently opened greenfields and balance sheet
payments, represented by the maximum of a percentage deleveraging.
of sales (around 5-7% of total sales) or a minimal rent
annually adjusted by inflation (IGP-M or IPCA). What could make us more bearish on the sector: The
Therefore, companies benefit from stable and recent slowdown in consumption could last longer than
predictable cash flows, hedging investors against expected, leading to a further deceleration in retail sales
inflation as contracts have a 5- to 10-year tenor. and SSS impacting occupancy cost and SSR causing a
lower-than-expected growth on the top line. The
Sector main numbers: According to ABRASCE maturation of recently opened greenfields could also be
(Brazilian Shopping Mall Association), Brazil ended impacted by slow growth. Interest rates could also
2012 with 457 malls representing a total Gross Leasable increase more than expected, leading to further
Area (GLA) of 11.4mn m2 divided into 84k stores with compression on yields.
total sales of R$120bn (+10.6% vs 2011). Shopping
malls in Brazil have 877k parking spaces. In 2012 Malls Outlook for the medium term: We remain positive on
represented 25% of national retail sales and were visited the sector despite macro-economic volatility as we
by an average of almost 400mn individuals per month. expect aggregated revenues for the companies under our
Over the last 5 years, shopping mall sales had a CAGR coverage to grow 14% in 2013 and 20% in 2014, led by
(2007-12) of 16% while GLA had a CAGR (2007-12) an expansion of own GLA of 15% yoy in 2013 and 5%
of 5%. In 2013 through September the sector already yoy in 2014. We expect the bottom line, measured by
opened 13 malls, and ABRASCE expects another 29 FFO, to grow 8% this year and 25% next year. We also
assets to be opened until December. For 2014 the believe valuation is attractive as the sector remains
association sees another 39 assets being opened. relatively cheap vs international peers when adjusted by
growth expectations, trading at around 14x P/FFO 14e
The sector had a weak performance in 2013 so far with vs around 15x for American and Asian names. Our
stocks down 15-35%, impacted by the increase in preference is for Iguatemi (OW rated) given its
interest rates and the slowdown in consumption in attractive valuation, followed by Aliansce (OW) and BR
Brazil. This resulted in a reduction of around 2p.p. in Malls (OW). We are neutral on Multiplan and Sonae
1H same-store sales (SSS) vs 1H12 to 6.7%. However, Sierra Brasil.
it is important to note that same-store rentals (SSR)
were flat at 10.6% above inflation, showing the sectors Table 75: Brazils Shopping Malls Under Our Coverage
resilience. It is also noteworthy that occupancy and
delinquencies remain flat on a year-over-year Company Ticker Rating Mkt Cap (US$ Million)
comparison. BR Malls BRML3 OW 4,021
Multiplan MULT3 N 4,202
Iguatemi IGTA3 OW 1,760
Recent slowdown in consumption is not enough to be Aliansce ALSC3 OW 1,336
bearish on the sector: Despite the deceleration in Sonae Sierra Brasil SSBR3 N 705
consumption taking place since 1Q12, we remain Source: J.P. Morgan estimates and Bloomberg, as of Sep-13, 2013
optimistic in the sector as we believe earnings growth of
1
Registered/qualified as a research analyst under NYSE/FINRA rules.
94
(55-11) 4950-6684 October 2013
Figure 191: Sector P/FFO 12 Months Figure 195: Real Interest Rates vs P/FFO 12 Months Forward
Source: Bloomberg consensus Source: J.P. Morgan estimates and Central Bank of Brazil
Figure 192: Companys Trailing 12-Month Same-Store Sales and Retail

Same-Store Rents
By Andrea Teixeira and team (212) 622 6735
andrea.f.teixeira@jpmorgan.com
Retail is still a growth sector in Brazil, but should

show a deceleration in the short to medium term.
The retail sector benefits from: (1) income distribution,
with ~30 million new people ascending into the middle-
income segment in recent years, (2) double-digit growth
Source: Company data in credit availability, and (3) formalization of the
economy, that allows retailers to capitalize on the
Figure 193: Shopping Mall Evolution According to ABRASCE reduction of tax evasion by smaller players who are
Data being pushed out of business. Nevertheless, one other
catalyst (real wage growth) is decelerating from high- to
mid-single digits. Also, consumer leverage increased
since 3Q11, and the service of this debt has been
pressuring disposable income post recent rate hikes.
This is limiting sales growth, particularly in some
discretionary categories (apparel for instance).
Figure 196: Decelerating Wage Mass Increase

Source: ABRASCE (Brazilian Shopping Malls Association)
Figure 194: Shopping Mall Penetration Measured by GLA / 1,000

Inhabitants
Source: Sonae Sierra Brasil and JPM Note: Out of scale Source: IBGE
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Figure 197: Consumer Leverage Remains High Figure 198: Food Retail Market Share (2012)
Cencosud, Zaffari, 1.3%
4.0%
Walmart,
10.5%
CBD, 12.7%
Others, 58.8%
Carrefour,
12.8%
Source: BACEN Source: ABRAS
More discretionary categories have a steeper Consolidation of broadline retailers: Largest food
deceleration in a tougher macro scenario. With rising retailer CBD (OW-rated) is also Brazils largest durable
consumer leverage, we start to see disappointments in retailer with 26% market share of electronics and home
sales performance in more discretionary items. After appliance sales in Brazil after the merger of its Globex
several quarters of strong price increases, consumers and Casas Bahia units (Via Varejo). The second-largest
became more price sensitive, and apparel is now the competitor is just a quarter of its size (Maquina de
main underperformer. Indeed, some retailers started to Vendas, which is also a result of the merger of private
show this deceleration. Although electronics and companies Ricardo Eletro and Insinuante). The third
appliances are also historically impacted in this largest is Magazine Luiza, which also grew through the
scenario, this has not happened in an obvious way due acquisition of Lojas do Bau.
to tax-exemption incentives for selected appliances and
deflation in electronics and computers. In addition, the Figure 199: Hardline Market Share
introduction of Minha Casa Melhor this past June a Via Varejo
government incentive to purchase electronics, 26.0%
appliances and furniture at a subsidized low 5% annual
rate is a tailwind for the sector. On the other hand,
personal care (CF&T), pharma and food categories are
Maquina de
resilient in a more bearish environment, and should Vendas
maintain the share of wallet, particularly the lower- 7.1%
ticketed items. Others Magazine
60.5% Luiza
Market fragmented: Top 4 food retailers have 40% 6.4%
share: Large retailers have been gaining market share
due to access to cheaper capital. Also, smaller players Source: Valor Economico and Company data. Note: 2010
have been pressured to professionalize through required
IT systems by Brazils Internal Revenue Service. The E-commerce scale is key: Online sales are
tax evasion crackdown has also limited the concentrated among a few large players, such as B2W
competitiveness of some mom & pop establishments. and CBDs dotcom division, Novapontocom. Scale in
electronics/smartphones is key, as more than 40% of e-
commerce is concentrated in these items. The need for
working capital (consumer financing) is high given that
~85% of sales are on credit cards.
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Figure 200: E-Commerce Market Share (2012) is still in its very early stages at 24% in Brazil. In dental
Magazine NetShoes, care, the disparity is even wider, with the U.S. having a
Luiza, 4.4% 3.3% 60% coverage ratio vs. 8% in Brazil. We believe that
Compra Facil, various factors, such as further consolidation of the
11.8%
Others, 39.3% industry and an increase in formal employment and real
wages should lead to further private health and dental
coverage penetration.
Nova Figure 201: Health Plan Penetration in Brazil Is Much Lower than
Pontocom,
in the U.S.
18.6%
B2W, 22.6%
Source: e-bit and Company data.
Among publicly traded Brazilian retailers, most recent

IPOs were concentrated mainly in apparel. The largest
market capitalization is CBD, which derives c55% of its
sales from food, and the rest mostly from electronics,
home appliances and furniture. There is no major full-
fledged department store chain in Brazil, after the
highly inflationary period in the 80s and early 90s
pushed most of these companies out of business. Source: ANS and U.S. Census Bureau.
However, the closest to a department store is Lojas
Renner (N-rated) after its re-entrance in home Slowing labor market is a short-term headwind:
furnishings (via Camicado acquisition). Corporations are the main sponsors of healthcare plans,
with corporate plans representing nearly 75% of the
Table 76: Brazil's Retail/ Personal Care companies under JPM sector. Thus, as the creation of new jobs slows down,
Coverage the increase in the penetration of private healthcare
Company Ticker Rating
Market Cap. (US$ plans also slows, particularly as consumers disposable
Million) income remains under pressure, not supporting out-of-
B2W BTOW3 N 1,117
pocket expenditure.
CBD PCAR4 OW 11,760
Guararapes GUAR3 N 2,403
Hypermarcas HYPE3 OW 4,911 Figure 202: Job Creation Is Slowing Down
Lojas Americanas LAME4 OW 7,209 LTM Avg. Net Job Additions (000s)
Lojas Renner LREN3 N 3,685
Hering HGTX3 N 2,452
Restoque LLIS3 N 509
Natura NATU3 N 9,337
RaiaDrogasil RADL3 N 2,516
Source: Bloomberg, company reports and J.P. Morgan estimates. Prices as of 09/16/13.
Healthcare
By Andrea Teixeira and team (1-212) 622 6735
andrea.f.teixeira@jpmorgan.com
Increase in private medical coverage should drive

growth: The public healthcare system in Brazil is more Source: MTE/CAGED
developed than in the US, as all the population has
access to it. However, it is overburdened as a result of Healthcare expenditure is still low in Brazil: We
constraints in government budgets, which limited believe there is a lot of room to increase healthcare
investments in the past. People often have to wait expenditure in Brazil. The countrys health expenditure
months for exam results and to get critical is below the worlds average and far from developed
surgery/procedures. On the other hand, while private countries. Moreover, the recent upgrade in Brazilian
medical care plans have 77% penetration in the U.S., it demographics, which resulted in the medium class
97
(55-11) 4950-6684 October 2013
representing about 50% of the population, should drive Figure 205: Brazilian Population Is Aging
higher health expenditure, as such services were not
reachable for part of this population.
Figure 203: Healthcare Expenditure as % of GDP (2011)
Source: IBGE 2013 Projections
Figure 206: Median Age of Brazilian Population
Source: World Bank
Figure 204: Per Capita Healthcare Expenditure (2011)

US$
Source: IBGE 2013 Projections
High fragmentation provides room for further

consolidation in the industry. M&A activity in recent
years has been high in the sector, with all of the
companies making significant acquisition or mergers.
Source: World Bank
However, the industry continues to be highly
fragmented, and we would expect further M&A, though
Aging of the population leads ton increased demand:
not as large as Amil-Medial, DASA-MD1, Fleury-Labs
According to IBGE, the population over 65 is going to
Dor and Odontoprev-Bradesco. Amil is the largest
jump from 7% of the total in 2010 to 13% in 2050,
healthcare plans provider, with ~11% market share (in
while the population less than 15 is declining to 14% of
number of beneficiaries), and Odontoprev is the largest
the total in 2050 vs. 26% in 2010. Older populations
dental care plans provider, with ~35% market share (in
lead to a higher demand of healthcare services, which
number of beneficiaries). Within labs, the largest market
may prove both an opportunity and a risk for healthcare
shares belong to DASA (1st) and Fleury (2nd), which
companies. Current regulation limits price increases for
we estimate at ~13% and ~9%, respectively.
the population above 59 years old, which may turn into
a risk for MCOs, as this population tends to have higher
average MLR. On the other hand, it is a huge High medical inflation is a key short-term theme:
opportunity for labs to leverage on this higher demand. Medical costs, particularly for hospitals, have been
increasing at a faster pace than overall inflation (Figure
207). This has been weighing on healthcare plan
operators margins that are focusing on price increases
and tough negotiations with suppliers, such as
diagnostics labs, to offset the cost pressures through
price increases, as they have limited room for
controlling frequency on regulatory requirements. As a
result, payers, mostly corporate, are facing healthcare
plan price increases in the range of the mid-teens over
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(55-11) 4950-6684 October 2013
the past years, while they also face high salary inflation. government (BNDES) funding to consolidate in this
This movement makes it less likely for companies to industry.
extend employee benefits to segments like dental or
healthcare plan upgrades. On the medical services Weaker currency driving growth in exports. In the
suppliers side, margins are under pressure, coming early 2000s, the main volume driver for the Brazilian
from increasing medical costs and limited bargaining protein industry was higher exports. It ceased for a
power with payers to request price increases. while when the BRL got stronger, but the devaluation of
the BRL from mid-2012 onward increased companyies
Figure 207: Medical Costs Inflation hunger to export.
Var. (%)
Figure 208: Exports Ceased to Gain Importance as % of Total
Production
% of Brazilian protein production exported
Source: IESS
Table 77: Brazils Healthcare companies under our coverage

Source: USDA.
Company Ticker Rating Market Cap. (US$ Million)
Odontoprev ODPV3 N 2,176
Dasa DASA3 UW 1,532
Domestic consumption led by poultry. Brazilian
Fleury FLRY3 N 1,259 poultry consumption has grown at a CAGR of 6% over
Source: Company reports and J.P. Morgan estimates. Prices as of 09/16/13 2001-12 vs. 2% for beef. Per capita poultry
consumption has surpassed that of beef from 2007 to the
Food present by +50kg. The faster growth pace of poultry can
be attributed to lower prices and health trends, both
By Alan Alanis and team (1-212) 622-3697 which are likely to continue.
alan.alanis@jpmorgan.com
Figure 209: Brazilian Protein Consumption Growth Is Led by
A global protein powerhouse. Brazil is the worlds #2 Poultry
beef and #3 poultry producer and consumer. It is also Domestic consumption volumes (Million tons)
the worlds #1 poultry and #3 beef exporter.
Table 78: Brazils Ranking in the Global Protein Industry

Ranking by volumes
Protein Production Consumption Exports
Beef #2 #2 #3
Poultry #3 #3 #1
Pork #4 #5 #4
Source: USDA (2012E).
Source: USDA.
The basic ingredients that led Brazil to leadership
positions in protein are land and water. Precisely this is Focus is to further process protein. Brazilian per
why Brazil is the worlds #4 corn and soy producer and capita protein consumption is already at par with
has the second largest cattle herd. The additional developed market levels. Companies are thus seeking to
ingredient was the ambitious family-run businesses that increase further processing and sell branded value-
took the opportunity of capital markets and/or added products domestically.
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(55-11) 4950-6684 October 2013
Figure 210: Brazils per Capita Protein Consumption Is Already Figure 212: Brazils per Capita Cheese Consumption Still Lags
Above EU and Almost at Par with US Developed Markets
Per capita protein consumption volumes (kg/year) Per capita cheese consumption (kg/year)
Source: USDA.
Source: USDA.
Beef industry threatened by land replacement
trends. Meatpackers dont raise their own cattle. They Table 79: Brazilian Listed Protein Companies
rely on independent ranchers for supply. The outlook is Company Ticker Market Cap ($ bn) Rating
that current cattle land will be reduced by 22% in the Brasil Foods BRFS3 21.9 Neutral
next 20 years, replaced by grains and sugar cane. To JBS JBSS3 9.9 OW
Marfrig MRFG3 1.5 Neutral
avoid falling short of supply, meatpackers must increase Vigor VIGR3 0.5 NA
interaction with their suppliers. This will happen either Minerva BEEF3 0.7 Neutral
via increased feedlot activity or long-term supply Source: Bloomberg, J.P. Morgan, Prices as September 13, 2013
contracts.
Beverages
Figure 211: Brazil Arable Land Use Today and in 2030E
Million hectares By Alan Alanis and team (1-212) 622-3697
2010E 48 84 5 174 101
The worlds #3 beer market. Brazil is the world's third
largest beer market after China and the U.S. with 133
2030E 62 15 7 18 135 103 million hectoliters of estimated beer sold in 2012.
0 340 Figure 213: World Top 8 Beer Markets by Volume, 2012

Annual Crops Sugarcane Permanent Crops Cultiv ated Forests Pastures Stock Million Hectoliters
Source: Brazilian Government Strategic Affairs Secretary.
Growth opportunities within dairy. Brazil is the

worlds 6th largest dairy consumer market by volumes.
Dairy is mostly concentrated in fluid milk. Per capita
cheese consumption below 4kg/year is still far below
developed market levels. Dairy consumption growth
(4% CAGR 2001-12) is expected to continue.
Source: Plato Logic.
Market dominated by Anheuser-Bush-Inbev

subsidiary. AmBev takes ~68% of Brazils beer
volumes and +90% of its profit pool. The company was
started with the merger of two brands, which were later
acquired by Belgiums Interbrew (current ABI), which
currently owns 62% of AmBev shares. Other players
include Heineken, Kirin and non-listed Grupo
Petropolis.
100
(55-11) 4950-6684 October 2013
Figure 214: AmBevs Beer Brazil Market Share Evolution Table 80: Brazilian Listed Beverage Company
Company Local Ticker Market Cap ($ bn) Rating
AmBev AMBV4 116 OW
Source: Bloomberg, J.P. Morgan Prices as of September 13, 2013
Tobacco
By Alan Alanis and team (1-212) 622-3697
Source: Company data
Low smoking incidence: Brazil is among the worlds
top 10 cigarette markets by volumes with annual
A very profitable environment for the leader. Market
consumption around 100 billion sticks. Roughly 17% of
share dominance, a +60% on-premise consumption
Brazils population smokes cigarettes. This figure
culture, and mainly 600ml returnable presentations,
compares low vs. other developed and emerging market
enable AmBev in Brazil to achieve the worlds highest
economies.
EBIT margin across leading brewers.
Figure 217: Global Smoking Incidence
Figure 215: Beer EBIT Margin of Leading Brewer in Top Markets
(09 data)
Brazil 44%
US 34%
Russia 31%
Mexico 27%
Spain 17%
Japan 15%
Germany 11%
China 10%
UK 7%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: IBGE. World Health Organization.
Source: Plato Logic, Company Data, J.P. Morgan Estimates.

Smokers concentrated in very lower classes. Out of
Pricing likely to be the key driver of growth. Since all smokers in Brazil, 42% is concentrated in
2000, Brazils per capita consumption of beer has households earnings less then minimum wage
grown rapidly from 50 liters to the current 68 liters. ($4k/year).
While this is still 10% below that of the US, its likely
Figure 218: Smoking Is Concentrated in Brazils Lower Classes
that metro areas such as Rio and Sao Paulo should
% of Brazils smoking population by income level
already be at U.S. levels. Therefore, all of the growth in
per capita consumption should come from the North and 50% 42%
Northeast regions. Given its current structure, industry 40%
sales growth is expected to be driven by higher pricing. 30% 24%

21%
20% 13%
Figure 216: Brazils per Capita Beer Consumption Is Below 10%
Developed Levels 0%
Brazilian per capita beer consumption (liters); U.K., U.S., Germany Less than 1/2 of the From 1 to 1/2 of the From 1 to 2 Above 2 minimum
minimum wage minimum wage minimum wages wages
Source: IBGE
Market dominated by Souza Cruz, a subsidiary of

British-American-Tobacco (BAT). Souza Cruz was
founded in 1902. BAT acquired a 75% stake in Souza
Cruz in 1914. It is currently Brazils cigarette leader
with ~60% market share, almost 5x as large as the #2
Source: Plato Logic 2012.
player, Philips Morris International. Illicit products
(mainly imports from Paraguay) take ~30% of the
market.
101
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Figure 219: Souza Cruz Cigarette Market Share Evolution Figure 221: Tobacco Represents ~9% of Brazilian Excise Tax
Souza Cruz as % of the Brazilian market by volumes (IPI) Collection
% of total excise tax collection (R$40bn in 2010)
Beverages
6%
Tobbaco
9%
Other
42% Auto
14%
Source: Company data.
Profits grow consistently despite higher taxes and Imports

lower volumes. Souza Cruz has managed to grow both 29%
sales and earnings via prices and efficiencies, despite Source: Brazilian IRS.
lower cigarette volumes. The company is net cash
positive and has historically paid 100% of its net Table 81: Brazilian listed Tobacco Company
income as dividends. Company Local Ticker Market Cap ($ bn) Rating
Souza Cruz CRUZ3 18 OW
Figure 220: Souza Cruzs Cigarette Division Grows Profits Source: Bloomberg, J.P. Morgan As of September 13, 2013
Despite Lower Volumes
Cigarette division 2007=100
Transportation
By Fernando Abdalla and team (55-11) 4950-3463
fernando.abdalla@jpmorgan.com
Highways
Brazil has the fourth-largest highway system in the
world, with over 1.7 million kilometers of roads, of
which only around 10% is paved. Highways are the
Source: Company Data. J.P. Morgan Estimates. main means of transportation in the country, both in
number of passengers and in terms of freight and goods
Government efforts to curb consumption balanced transported. It is estimated that roads represent more
with tax/labor importance. Taxes represent more than than 60% of the Brazilian transportation matrix. While
two thirds of a cigarette pack price in Brazil. 50% of the the Southern and Southeastern regions of Brazil are well
visible space of a pack contains anti-smoking messages, connected by paved highways, the Northern region
and smoking in closed facilities is already prohibited in presents a weaker network, due to the presence of the
Brazil's main states. Such efforts to curb consumption Amazon rain forest.
should continue. Nonetheless, the government also
balances its decision with the importance of revenue The major Brazilian paved highways are operated by
source from the sector. Plus, the tobacco industry private players and therefore have toll stations. The
employed +2.5 million people in 2012. Federal excise highway system of Sao Paulo is the largest statewide
taxes (IPI) from tobacco added ~R$4bn in 2010, 9% of road transportation system in Brazil, with nearly 35k km
total excise tax collection and +50% more than all of roads. Around 33% of this system consists of federal
beverages combined. roads, 12% municipal and 55% state. In the mid-90s,
the government pushed for privatization of state-
controlled paved highways in a bid to generate extra
revenues. Currently the three major toll road
concessionaires that are publicly listed are CCR,
Ecorodovias and Arteris.
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Table 82: Brazil's Major Listed Roads Companies the IRR (real, unlevered) at 5.5%. However, after an
Company Ticker Rating Market Cap (US$ million)
unsuccessful auction in Jan 13, it adopted a pro-market
stance and increased the IRR to 7.2%. Additionally, the
CCR CCRO3 OW 14,286
government introduced new requirements in order to
Ecorodovias ECOR3 N 3,793
accelerate investments: (i) road duplication should be
Arteris ARTR3 N 2,955 completed until the fifth year of the concessions, and
Source: Bloomberg, as of September 12, 2013 (ii) operators will only be allowed to charge toll fares
when 10% of the construction works is completed. The
The growth of toll road companies is tied (in part) to projects will have a concession term of 30 years and
GDP growth, as heavy vehicle traffic is a function of the first auctions should take place at the end of Sep 13.
intensity of economic activity. Traffic in these highways
has typically grown from 1.2x to 1.6x the GDP growth Table 84: Toll Road Package Details
rate, on average, for the three above-mentioned
Highways State CapEx (R$ bn) Length (km) Auction Date
concessionaires. Additionally, given that the toll fares
BR-262 ES/MG 2.10 376.9 18-Sep
are contractually adjusted by inflation once per year
BR-050 GO/MG 3.24 425.8 18-Sep
(IPCA, IGP-M or a basket of indexes), the toll road
BR-101 BA 5.03 772.3 25-Oct
companies are seen as defensive plays in moments of
BR-060/153/262 DF/GO/MG 8.89 1176.5 25-Nov
high inflation.
BR-153 TO/GO 6.72 751.9 25-Nov
Table 83: Road Traffic Growth y/y vs. GDP Growth y/y BR-163/267/262 MS 11.21 1423.3 20-Dec
BR-163 MT 6.20 821.6 20-Dec
Year CCR ARTR ECOR GDP
BR-040 MG/GO/DF 5.13 936.8 02-Dec
2003 1.1% 0.0% 3.7% 1.1% BR-116 MG 3.75 818.7 02-Dec
2004 5.7% 6.2% 4.5% 5.7%
Source: J.P. Morgan and ANTT
2005 3.2% 2.5% -0.4% 3.2%
2006 3.8% 2.0% 8.1% 3.8% Funding for the new toll road concessions will be
2007 5.4% 7.1% 9.2% 5.4% provided mainly by the BNDES at an attractive cost of
2008 5.1% 5.5% 2.7% 5.1% TJLP (currently at 5.0 % p.a.) + up to 2.0% p.a. Loans
2009 -0.2% -0.6% 3.0% -0.2% will have a 30-year maturity and a grace period of five
2010 12.1% 13.6% 12.0% 7.5% years. According to the government, concession
2011 5.4% 12.2%1 9.2% 2.8%
operators will be able to use a leverage ratio of up to
70%.
2012 2.9% 4.1% 3.5% 0.9%
Accumulated 53.8% 65.4% 70.6% 41.1%
Aviation
Source: Company reports and J.P. Morgan. Includes bi-directional effect at Centrovias.
Air travel has been growing rapidly in Brazil. In 2012,
Brazilian airports handled more than 174.2m domestic
The privatization of highways in Brazil started in 1995, passengers (third largest domestic market in the world)
with the Brazilian Toll Roads Concession Program and 18.9m international passengers. Cargo hauled via
and the auction of Ponte Rio-Niteri, currently air reached nearly 1.4mn ton. However, fast traffic
controlled by CCR. At that time, uncertainties regarding growth (CAGR of 10.41% over 2002-12) was not
the macroeconomic environment and the regulatory accompanied by an appropriate increase in investments,
framework led the average of real unlevered IRR of the resulting in overcrowded airport terminals.
projects to reach levels of 17%-18% in BRL. Consequently, the government decided to privatize
Nevertheless, the federal auctions held in October 2007 major Brazilian airports in order to solve capacity
were a landmark for the toll road sector. Average real restriction and boost investments in this segment. The
unlevered IRR in BRL dropped to 8%-9%, reflecting 2014 World Cup and 2016 Olympics in Rio de Janeiro
the consolidated regulatory framework and low barriers are expected to further boost demand.
of entry due to the concession model adopted by the
government, which stimulated competition.
Accordingly, three of the most relevant airports in
Brazil (Guarulhos, Viracopos and Brasilia) were
Regarding future opportunities, last year the federal successfully brought into private hands in 2012. With
government launched the new toll roads package, with the participation of eleven consortiums, the bidding
investments amounting to R$52bn in nine projects,
comprising 7,500km. Initially, the government had set
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process was very competitive and companies presented Table 86: Major Listed Airline Operating in Brazil
3-digit premiums over minimum concessions fees. Company Ticker Rating Market cap (US$ million)
GOL GOLL4 N 1,269
The second round of privatization, which will include
Source: Bloomberg, as September 12, 2013
Galeo (RJ) and Confins (MG) airports, is expected to
take place in 4Q13. For this auction, the government
raised the requirements introducing two new concepts: However, the recent deceleration in the domestic
(i) operators have to manage an airport with annual economy coupled with the major airlines effort to
traffic of at least 35mn passengers, and (ii) airport increase fares (aiming to return to profitable levels) has
operators are required to hold a minimum stake of 25% been pressuring demand. During 1H13, domestic
in the consortium (while Infraero will hold 49% and the demand (RPK) grew by only 0.1% yoy, significantly
concessionaire, the remaining 26%). Additionally, the lower than the annual growth rates witnessed between
government restricted the participation of the winners of 2007 and 2011. As a result, the two major airlines in
previous airport auctions in Brazil. In our view, these Brazil have been guiding for capacity cuts since mid-
new requirements should lower competition and could 2012, aiming to keep load factor at reasonable levels
lead to more attractive returns. and improve yield management.
Figure 222: Domestic RPK Growth yoy

Additionally, the government expects to invest R$7.3bn
in 270 regional airports, in order to boost regional
aviation. These investments aim at strengthening and
restructuring the Brazilian regional aviation network by
improving the quality of airport infrastructure and
service.
Table 85: Airports Included in the Concession Program

Airport Passengers % Change Capacity CapEx Auction Source: ANAC and J.P. Morgan
(mn) - 2012 yoy (mn) - 2012 (R$ bn)
Guarulhos (SP) 32.8 9.3% 31.0 6.2 Feb-12
Viracopos (SP) 8.9 16.5% 14.5 11.5 Feb-12
Moreover, airlines have been negatively impacted by
Braslia (DF) 15.9 3.2% 16.0 3.7 Feb-12
recent depreciation of the BRL in relation to the USD.
Galeo (RJ) 17.5 16.6% 17.0 5.8 Oct-13
As most of the companies costs are dollarized (fuel,
Confins (MG) 10.4 9.5% 10.0 3.6 Oct-13
debt and leases), industry profitability has been
significantly hampered. Nonetheless, the government
Source: Infraero has already expressed its concerns with the airlines
financial situation and should announce a rescue
On the airlines side, TAM (a subsidiary of LATAM) package for the sector in the short term.
and GOL are the two largest airlines in Brazil. In 2012,
the former had 40.8% market share in the domestic Ports
market while the latter had 33.9% (measured in terms of
With 8,500km of sea coast and 34 public ports, the
RPK). Additionally, Azul has been growing fast since
Brazilian port sector handles annually 700mn tons,
its establishment in 2008, reaching 14.5% of market
representing ~90% of the countrys foreign trade.
share last year. Demand for air travel in Brazil has
Comprised of public and private terminals, the sector
increased strongly over the past years, which in our
suffered major changes during the 1990s, when the
view is a reflection of (i) increasing per capita income,
Ports Modernization Law (8.630/93) was enacted and
making air travel affordable for low-income passengers
most of current terminals were conceded to private
and (ii) the major airlines initiative to reduce fares. As
players.
a result, domestic demand (measured by RPK revenue
passenger kilometer) CAGR over 2007-12 reached
As a result of the strong growth from the BRIC
13.4%.
economies over the past years, there was a significant
increase in trade in the Southern hemisphere, with the
Brazilian ports witnessing strong growth in demand for
maritime transportation services. The figure below
shows some of the major ports on the Brazilian coast.
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Figure 223: Main Brazilian Ports The new law also defined that the criteria for selecting
the winners on upcoming auctions will be a
combination of higher investments and lower prices.
Vila do Conde Fortaleza
Manaus Table 88: Major Listed Port Operators in Brazil
Company Ticker Rating Market cap (US$ million)
Suape
Santos Brasil STBP11 OW 1,573
LLX LLXL3 N 0,489
Salvador Source: Bloomberg, as of September 12, 2013
Vitria
The Port of Santos is the main port in the country,
Rio de Janeiro located in the state of So Paulo. Over 50% of Brazilian
Sepetiba
Santos GDP is concentrated in the economic area of operation
Paranagu
So Francisco do Sul of this port, covering mainly the states of So Paulo,
Itaja
Imbituba Minas Gerais, Goias, Mato Grosso and Mato Grosso do
Rio Grande Sul. Approximately 90% of Sao Paulos industrial base
is located less than 200 km from the port.
Source: J.P. Morgan
Despite the increase in investments in the sector since The Santos Port Complex accounts for more than 1/4 of
the port reforms of the 1990s, Brazilian ports remain a the Brazilian trade balance, including cargo products
bottleneck to the economy and present elevated such as sugar, soybeans, containerized cargo, coffee,
operating costs. Among the major issues faced by corn, wheat, salt, citrus pulp, orange juice, paper,
Brazilian ports, we note: (i) poor access, (ii) narrow automobiles, alcohol and other bulk liquids. It is
channels, (iii) insufficient dredging works, (iv) busy currently the busiest port in Latin America.
terminals, and (v) deficient infrastructure.
Figure 224: Brazilian Ports Market Share (TEUs, 2012)
In order to increase investments in the sector, aid in the
debottlenecking process of the Brazilian ports, and
reduce operating inefficiencies, last year the
government announced a port package comprising
investments of R$54bn. Additionally, the government
published a new port regulation (through Provisional
Measure 595), which after a long debate in Congress
was approved in June (Law 12.815/13).
Table 87: Expected Investments (R$ bn) Source: ANTAQ
Region 2014/15 2016/17 Figure 225: Cargo Handling in Port of Santos (mn ton)
Southeast 16.5 12.1
Northeast 6.8 5.2
South 3.4 4.3
North 4.1 1.6
Total 30.8 23.2
Source: EPL
Among the main changes introduced by the New Port

Law, we note: (i) concessions granted after 1993 should
be able to renew the concession prior to the end of the Source: CODESP
original term, in exchange for CapEx deployment (no
need for grants to be paid to the government); (ii)
concessions granted before 1993 will be re-auctioned
once original concession terms expire; (iii) own cargo
and third-party cargo will not be differentiated anymore.
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Railroads Similarly to what happened with other sectors, the

government announced an investment program aiming
Brazil has a railway network of 28.6 thousand km, to build and modernize more than 10,000km of
which in our view is modest, considering the countrys railroads, which will demand R$91.0bn over the next 35
size and commodity-based economy. The recent phase years. These projects will be auctioned under a new
of Brazilian railways began with the privatization regulatory framework in Brazil. Among the main
process during the 1990s, when a new regulatory changes to be made under the new regulatory
framework was established and railroads were granted framework, we note that the railroads will be vertically
to the private sector in order to increase investments and separated, i.e., ownership of tracks will be disassociated
improve their efficiency. from the performance of freight services. Under this
new model, the government (through state-owned
The Brazilian railroad development was not centrally company VALEC) will purchase the entire capacity
coordinated, which resulted in a lack of integration of (mitigating demand risk) and offer the acquired capacity
current stretches and different gauges (large and metric) to third parties interested in providing freight services,
over the network. The railways generally link ensuring open access over the network.
commodity production regions to ports. The major
operators are ALL (OW-rated), MRS, Vale and CSN, However, as concessionaires revenues will be totally
and since privatization, they have continuously dependent on VALECs disbursements, there are
increased investments (refer to Figure 226), mainly in concerns regarding VALECs long-term capacity of
improvement on tracks and acquisitions of rolling stock. ensuring these payments will be made to the
On the other hand, investments from the government concessionaires. Financing for these projects should be
remained very modest until 2007, when the construction made available by BNDES, at an attractive cost of TJLP
of Norte-Sul Railway was resumed. (currently at 5.0 % p.a.) + up to 1.0%. Additionally,
loans will have a 35-year maturity and a grace period of
Figure 226: Investments (R$ bn) five years.
Table 89: Investment Program

Project CapEx (R$ bn) Length (km)
Aailandia - Vila do Conde 3.2 477
Anpolis - Panorama - Dourados 4.1 1,294
Lucas do Rio Verde - Anpolis 8.4 1,920
Rio de Janeiro - Vitria 3.5 634
Source: ANTF
Salvador - Recife 3.5 1,200
Uruau - Corinto - Campos 17.9 1,730
The main products transported are minerals and grains, So Paulo - Rio Grande 24.7 1,800
especially iron ore from Vitoria-Minas Railway and Belo Horizonte - Salvador 11.0 1,651
Carajs Railway both of which are subsidiaries of Maracaju - Eng Bley - Paranagu 2.7 1,012
Vale. Concessionaires production (measured by RTK So Paulo Rail Bypass to be defined 150
revenue ton kilometer) presented a CAGR of 9.4% over Source: EPL
2002-12. In the case of ALL, the main products
transported are agricultural commodities (soy, corn, The first auction is expected to take place at the end of
sugar) and general materials (cement, fertilizers, fuel). October 13. However, we expect delays mainly
resulting from definitions regarding the new regulatory
Figure 227: Production (bn RTK) framework. It is worth noting that these projects are not
attracting significant private interest different from
highways and airports concessions.
Source: ANTF
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Capital Goods distribution business, which will benefit not only from a
higher number of cars but also an increase in travel
The Capital Goods space covers a variety of names tied expenditure.
to the automotive industry (light vehicles and trucks)
and general investment in gross fixed capital and Figure 228: We Forecast Fleet Growing at ~8% CAGR in 2013-18
infrastructure. Brazilian Capital Goods names are
currently at an interesting crossroad: while many
companies have traditionally traded at a premium to
international peers, their profitability is being threatened
by rising labor and input costs, changing government
regulation, and slowing GDP growth.
Table 90: Brazil's Capital Goods Names

Company Ticker Rating Market Cap (US$ million)
Iochpe Maxion MYPK3 OW 1,191
Randon RAPT4 N 1,276
Source: J.P. Morgan
Mills MILS3 OW 1,659
Cosan CSAN3 OW 7,678
Government support has been helpful for light
Autometal AUTM3 N 1,024
vehicles... Recent government measures including (i)
MAHLE Metal Leve LEVE3 N 1,485
the INOVAR-Auto stimulus program, (ii) a revision to
Marcopolo POMO4 N 2,659 the 10-year agreement with Mexico in order to
Weg WEGE3 UW 7,638 import/export cars, and (iii) the extension of the IPI tax
Source: J.P. Morgan estimates and Bloomberg, as of September 13, 2013 rebate have contributed to the short-term health of the
light vehicles market in Brazil.
Automotive industry
Figure 229: Though Government Incentive Has Been Effective in
The automotive industry, which includes light vehicles, 2012, We Expect Diminishing Returns Moving Forward
Cars sold per month R$ per car spent by Government on
trucks and buses, has grown into one of the largest in
Incentives
Latin America, boasting over 25 manufacturers, ~500
auto parts suppliers, and ~4,500 automobile and truck
dealerships. In 2012, it represented almost 20% of
industrial GDP, more than 1 million employees and an
annual top line of US$100 billion. Around US$30
billion is expected to be invested by foreign OEMs in
the automotive industry alone by 2016 in order to
increase Brazilian production capacity to nearly 6
million vehicles from the current 4.3 million. Despite
this optimistic investment pipeline, a few factors are
causing trouble for the industry, including the rise of
foreign competition, increased labor costs, lower
productivity and slowing GDP growth, which could
Source: J.P. Morgan estimates, ANFAVEA
lead to industry overcapacity, although such issue might
be offset with BRL depreciation and Brazils ability to
but competiveness issues remain. In the longer
export to Argentina.
term, we believe competitiveness will continue to weigh
on Brazils automotive industry. In our view, Brazilian
Light vehicles market: The low inhabitant/vehicle
auto parts companies have not been investing enough in
ratio in Brazil (6.5 inhabitants/vehicle, vs 3.6 in Mexico
automation, causing productivity to remain flat or fall
and 1.2 in the US) has resulted in significant pent-up
while labor costs have continued to rise. If this situation
demand for light vehicles in the country. This pent-up
were not to improve (although few players are
demand, alongside higher income as more Brazilians
dedicating part of its CAPEX to automation), we
enter the C class and increase consumption, should
believe Brazil could lose ground to more efficient
drive production and thus fleet growth moving forward.
Fleet growth will be a primary driver for the fuel
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producing countries, such as Mexico, which could act as Figure 232: Brazil GDP Growth vs Truck Registration
regional hubs for automotive production. Yoy growth in truck registration (y axis); GDP growth (x axis)
Figure 230: Rising labor costs, paired with a lack of investment

in automation, leave Brazilian suppliers less efficient than peers
in the US and Europe.
Source: ANFAVEA, IPEA and J.P. Morgan
Outlook. After a tough 2012, truck production and sales

have begun to return in 2013 as a strong agricultural
harvest boosted demand for heavy trucks. However,
Source: Bloomberg, J.P. Morgan estimates
lighter trucks which are more tied to construction and
the movement of non-agricultural goods and are thus
Figure 231: Its Cheaper to Produce Cars in Mexico than in
more closely related to GDP did not exhibit such
Brazil
Auto Parts Manufacturing Cost Index 2012 (US costs = 100) strong growth. In our view, this has led to high
inventories that could weigh on sales moving forward
from this specific product. We think the market will
continue growing on the back of major investments in
infrastructure but expect growth to be more moderate;
we are working with 6% truck production in 2014,
while 4.3% for sales.
Figure 233: Truck Outlook for 2014
Source: Competitive Altenatives, KPMGs guide to international locations 2012 Edition,

Promexico.
Truck and truck trailer arkets
One can expect much wider swings in truck production

and registration from year to year when compared with
light vehicles, as trucks growth both depends on and Source: J.P. Morgan estimates
contributes to GDP growth. A weaker GDP
environment in Brazil would thus weigh on truck
production.
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Buses Table 91: Brazil's Agribusiness Names

Company Ticker Rating Market cap (US$ million)
Brazil is characterized by very low bus penetration, So Martinho SMTO3 OW 1,399
which provides significant upside to bus utilization rates
Cosan CSAN3 OW 7,678
and thus fleet growth in the long term. To meet the
Biosev BSEV3 OW 855
countrys high urbanization levels, bus penetration and
SLC Agrcola SLCE3 N 901
utilization rates need to improve through fleet renewal.
Fleet-renewal and purchase programs such as Caminho Source: J.P. Morgan estimates and Bloomberg, as of September 13, 2013j
da Escola (which will increase demand for new school

buses) should support demand in the medium term. In Weaker BRL will boost earnings for agricultural
the short term, however, the outlook for the industry is exporters of both grains and sugar: The outlook for
more mixed. The potential freezing of bus fares, which the BRL is that the appreciating trend of the past few
stemmed from the widespread protests in 2013, could years is over and a weaker exchange rate is likely in the
reduce demand for new buses on both transit and inter- next few years. A depreciating BRL is a positive for
city bus systems. On the other hand, the 2014 elections agribusiness producers, especially for soy and sugar,
and the consequent upside for school buses and BRTs crops for which the large majority are exported every
should balance this risk. harvest.
Figure 234: Brazil and India Are Behind the Other BRICS in Grains outlook for soy and corn remains weak,
Terms of Buses per Capita which will affect SLC Agricola: In the long term, we
Buses per capita expect a strong demand scenario for grains, driven by a
growing world population, rural to urban migration, and
a shift in diets towards meat as disposable income rises.
Much of this growth will be driven by China, but unlike
demand for industrial inputs like iron ore, we do not
expect demand for grains to slow significantly in a
scenario of slower Chinese GDP growth. In the short
term, the upcoming bumper crops for soy and corn are
expected to put pressure on prices. The JPM
Source: SIAM, J.P. Morgan
commodities team has lowered the outlook for corn and
soy prices multiple times since the beginning of 2013,
Agribusiness driven in part by strong production in South America.
Strong harvests for both grains and sugar have brought Current forecasts for soy are US$13.90/bushel, while
volumes to record levels in recent months, and a corn is forecast at US$6.00/bushel. Demand from China
depreciating BRL has been adding to the story for both will be a key driver of soy in the coming year, while
grains and sugar producers exports. On the other hand, weather in the US and the Brazilian safrinha likely will
increasing global surpluses of both grains and sugar drive corn prices during this time. Global corn stocks
should provide negative pressure on pricing moving are forecast to rise by 29% y/y in 2013/14, largely due
forward, and logistics costs continue to thwart Brazils to a recovery in US production, which should continue
global competitiveness. As we dont see a logistics to pressure prices into 2014.
solution coming on line in the next 3 years, we expect
bottlenecks on Brazils highways and ports to continue
to increase costs and pressure producer margins. We
remain positive on sugar and ethanol and maintain a
more cautious view on grains.
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Figure 235: Short-Term Soy Outlook the country that we view as unlikely and that are not
$/bushel included in our model at this time. These include (i)
increases in the price of gasoline, (ii) stimulus or cheap
financing to support the expansion of ethanol
production, and (iii) financing to producers to increase
crop renewal investment. Furthermore, an improvement
in foreign ethanol policy (reducing import barriers, for
example) would open the market to exports and further
help drive Brazilian ethanol demand.
Telecommunications
By Andre Baggio and team (55-11) 4950-3427
andre.baggio@jpmorgan.com
Source: J.P. Morgan estimates
Historical perspective: The Brazilian
Figure 236: Short-Term Corn Outlook telecommunications sector was opened to private
$/bushel initiative with the enactment of the General Law of
Telecommunications in 1997, which established a new
regulatory structure, allowed competition and
determined the privatization of Telebras, the state-
owned company that was responsible for all telecom
services in the country. In the following years, several
players entered the segment through the acquisition of
Telebras operations as well as the launch of new
operations, mostly in the mobile segment.
During the last eight years, the sector saw an intense

consolidation movement, and four major groups
emerged:
Source: J.P. Morgan estimates
Telefonica Brasil, comprised of mobile operation

Sugar and ethanol capacity utilizations should Vivo, which leads subscriber share in Brazil, the
improve, but we are cautious on pricing. Increased incumbent wireline player Telesp in So Paulo state,
cane supply in 2013/14 to improve operational and the second largest cable-TV player, TVA.
performance. A strong harvest in 2013/14 (+11% y/y)
should immediately lift capacity utilization and boost America Movil, combining Claro's mobile
margins for sugar and ethanol producing companies operation with leading cable player Net Servios as
such as So Martinho and BIOSEV, but it will also well as long-distance incumbent Embratel, now also
place downward pressure on pricing. JPM currently providing corporate data, fixed telephony through
forecasts an 8.9MT global surplus in 2013, driven wireless technologies and DTH paid television.
largely by an increase in sugar production in Brazil
Tim Brazil, controlled by Telecom Italia, being
(+9% in 2013 and +4% in 2014, according to UNICA).
mostly a mobile operation, although it acquired
Both companies have anticipated this drop in price
Intelig, a long-distance operator that owns a large
through hedging strategies, and we expect its effect on
back-bone and provides corporate data as well, and
profitability to be muted for 2H13. We maintain our
AES Atimus, which has an extensive fiber network
current band of 17.5-19.0 c/lb for the remainder of
in SP/RJ and is expected to provided fixed
2013, slightly bullish vs. Bloomberg forward curve of
broadband in the near future.
~17.60 c/lb in March 2014.
Oi, controlled by local families Jereissati/Andrade
Increase in the ethanol mix and gasoline prices were Gutierrez and Portugal Telecom, combines
beneficial for ethanol, but we dont foresee further incumbent wireline operations in all states except for
government intervention. In our view, there are still So Paulo and mobile operations.
steps the government could take to support ethanol in
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Besides these four groups, other players include altnet Figure 238: Broadband Subs as % of Lines in service
GVT, controlled by Vivendi, and niche mobile player
NIHD.
Wireline: incumbents under pressure
We divide wireline history post-privatization into three

distinct phases. In general, the segment is facing
increasingly higher competitive pressure as technology
allows for altnets to challenge incumbents.
Fixed line growth (1998-2004): During this period,

incumbents reported significant growth in lines in Source: J.P. Morgan estimates, Company data.
service (LIS) and revenues, as there was significant
unmet demand for the service. Mobile: slowing growth on high penetration
Broadband adoption (2005-10): Incumbent LIS
There was a strong deceleration in subscriber growth
reached a peak in 2004, and in the following years
from +18% in 2Q12 to +3% in 2Q13, although most of
companies started to lose subscribers to alternate
it could be attributed to prepaid base clean-up initiatives
players (mostly cable companies) or just due to
from carriers. In addition, mobile penetration reached
fixed-to-mobile substitution. Nevertheless, revenue
135% of the population in Jul-13, and most of the
growth remained in positive territory on increasing
growth in revenues is led by higher consumption of data
broadband internet adoption.
and other value-added services.
Intensification of competition (2011-now): As
technology progressed, altnets including cable Figure 239: Mobile subscribers in Brazil, Millions
companies such as Net Servios and wireline
attackers such as GVT started to (1) offer
increasingly higher broadband speeds, above 8mpbs,
which could not be matched by the incumbents
legacy network, and (2) increase their geographical
reach. These developments are keeping incumbents
under intense pressure due to price cuts and higher
investment needed to match competition.
Figure 237: Fixed LIS (millions): Incumbent LIS peaked in 2004
Source: Anatel and J.P. Morgan estimates.
Figure 240: Mobile Subscriber Growth vs Mobile Penetration
Source: Anatel, teleco.com and J.P. Morgan estimates.
Source: Anatel and J.P. Morgan estimates.
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Competition has always been intense, and currently Figure 242: Mobile Revenues as % of Total Revenues
there are five national players, out of which four operate
on a national scale and have similar subscriber shares
(19% to 28%).
Prepaid subs represent 79% of total subscriber mix,

weighing down total ARPU, which we estimate to
average R$19 ($8.4) for Brazil. We see little scope for
ARPU increases given that (1) plan structures with
heavy on-net discounting incentivize subscribers to
adopt multiple SIM cards, (2) growth takes place in
lower income segments of the population, and (3) the
sector is very competitive. Source: J.P. Morgan estimates, Company data.
Figure 241: Mobile Subscriber Share, July 2013 Table 92: T&T Stocks Under Coverage
Company Ticker Rating Mkt Cap (US$ Mn)
Oi OIBR4 N 3,314
Positivo Informtica POSI3 UW 148
Telefonica Brasil VIVT4 OW 25,200
Tim TIMP3 OW 11,046
Totvs TOTS3 OW 2,660
Source: Bloomberg; J.P. Morgan. Prices as of September 26, 2013
Source: Anatel and J.P. Morgan estimates. Education

By Marcelo Santos and team (55-11) 4950-3756
Outlook and views on stocks marcelo.p.santos@jpmorgan.com
We expect wireline environment to remain tough for Historical perspective on for-profit higher education.
incumbent players, and mobile to continue to offer Brazilian legislation was changed at the end of 1996 to
growth led increasingly by data. As such, we favor allow the operation of for-profit private institutions, as
companies with higher share of mobile in their business before only non-profit ones were allowed. The number
mix: of private institutions, which was stagnant prior to the
new legislation, faced a period of strong expansion from
Tim Brazil (TIMP3/OW/YE14 PT R$12) is our top 1998 to 2006, backed by substantial untapped demand
pick, being focused on mobile and having no for higher education in Brazil.
wireline incumbent operation.
Figure 243: Number of Private Higher Education Institutions
Telefonica Brasil (VIVT4/OW/YE14 PT R$53) is
a solid dividend play, yielding 6% 14E, and has a
balanced business mix (~65% mobile / ~35%
wireline).
Oi (OIBR4/N): We recommend investors avoid the
name on high exposure to wireline (~70% of
revenues) and challenging turnaround plan.
NII Holdings (NIHD/UW): Despite its being a pure
mobile, we think investors should wait for a better
entry point in a pure mobile play, given
technological challenges (3G migration) and tough
competitive environment in Brazilian postpaid. Source: INEP and J.P. Morgan estimates. Including for-profit and non-profit institutions.
NIHD has ~46% of revenues in Brazil.
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Starting in 2004, student growth fell to single-digit Figure 245: Cumulative FIES Contracts Signed (Thousands)
rates, and in 2007 a consolidation phase started, led by
large educational groups funded by capital markets:
Anhanguera's IPO in Mar 2007, Kroton and Estcio in
Jul 2007, and SEB in Oct 2007. These groups brought
increased managerial capacity and productivity
standards to the sector, posting strong growth over
smaller players, organically and inorganically.
Figure 244: Enrollments Faced a Strong Growth Period After ' 96

Million higher education enrollments
Source: MEC and J.P. Morgan estimates. Since the reformulation of FIES in Apr-2010.
FIES penetration among institutions is highly uneven,

with larger and more organized groups capturing a
larger share: KROT+AEDU+ESTC amassed ~ 27% of
FIES contracts by 2Q13, above their ~14% on-campus
private student share. We believe this is due to
minimum quality requirements that are not met by many
smaller institutions, as well as the fact that to receive
FIES resources, institutions have to prove that they have
Source: INEP and J.P. Morgan estimates.
paid all taxes and contributions.
Government has been supportive of higher Higher education today Brazil still lags peers
education. Education is set as a priority for the country,
and the government has set a goal of 10m enrollments We see significant room for growth for the sector going
to be met by 2020, up from a stock of 7 million in 2013. forward. Despite substantial growth in enrollments since
Two government programs support private higher 1997, Brazil still significantly lags other countries in
education: PROUNI (scholarships) and FIES (loans). terms of higher education, both in terms of percentage
These programs have been key for the continued growth of population with higher education degrees as well as
of the sector in recent years, particularly FIES. in terms of current enrollment ratios. The labor market
reflects this shortage in supply of skilled personnel with
PROUNI: Introduced in 2004, this program offers a substantial salary premium for those with a degree.
exemption of income and certain sales (PIS/COFINS)
taxes on undergraduate activities for institutions that Figure 246: Population (25y+) with Higher Education (2010)
grant scholarships to low-income students who are
selected by the government based on test scores. The
program lasts for ten years, but could be reviewed in
2014, which is our base case.
FIES: Reformulated in 2010, this program offers

subsidized loans for low-income students at nominal
interest rates of 3.4% (vs 6.3% inflation currently) and a
long amortization period of 3x the course length, after a
grace period of 18 months. Only institutions meeting
certain quality requirements qualify for the program.
Also, part of the delinquency (10-15%) is borne by the
Source: UNESCO and J.P. Morgan estimates.
institutions themselves.
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Figure 247: Gross Enrollment Rates (GER) Figure 249: Enrollment Growth on Higher Education
Source: UNESCO and J.P. Morgan estimates. GER = total enrollments / pop aged 18- Source: INEP and J.P. Morgan estimates.
24y.
We see this segment as much more scalable than

Figure 248: Salary Premium of Graduates vs Unskilled Labor, traditional on-campus education, where there are limits
2010
to how many students can be served per teacher and real
estate area. This is one of the reasons why we favor
Kroton, which is already the largest player in the
segment and should become the indisputable leader
upon the completion of its merger with Anhanguera,
currently awaiting antitrust approval.
Basic education: the quality game
Brazil was able to achieve universal access to basic

education, but growth in enrollments is negative, in line
with demographic trends. However, there are
Source: OECD, IBGE and J.P. Morgan estimates. opportunities for improving quality, which remains low,
especially in the public sector.
Distance learning: opportunities and risks
Traded companies in this segment are mostly content
In 2011, ~15% of total higher education students in providers, and thus have schools rather than students as
Brazil were enrolled in distance learning courses, where their key clients, unlike in the higher education segment
most of the learning is done remotely, either being where the student is served directly.
100% online, or partially online and partially onsite,
with the student being required to attend classes once or Figure 250: Growth y/y in Basic Education Enrollments
twice a week. This segment experienced substantial
growth rates up to 2008, when regulators restricted the
expansion of new sites and courses (students need to be
assigned to a site) to guarantee quality. Companies
under coverage expect regulatory approval to resume
expansion sometime between the end of 2013 and 2014.
Source: INEP and J.P. Morgan estimates.
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(55-11) 4950-6684 October 2013
These companies operate with two key offerings: books High demand for skilled labor, resulting in attractive
and 'learning systems': salary premiums
Consistent government support through programs
Books: The public segment is mostly served through the such as FIES and PROUNI
National Book Program (known as PNLD), which is run
by the federal government and provides most schools Consolidation trend, as larger groups tend to be
with books under a three-year cycle whereby in each more efficient, provide better quality and have more
year a group of grades receives new books and the other access to government programs
grades receive replenishments. Under the PNLD,
Our views on covered stocks, in order of preference,
publishers submit book proposals on a yearly basis,
follow:
which are evaluated for compliance with guidelines,
generating a catalogue for the public teachers to choose
Kroton (KROT3/OW/YE14 PT R$40): (1) the
from. The federal government collects the selections
company should attain substantial scale in distance
and places orders with the publishers. On the private
learning following the merger with Anhanguera,
segment, publishers supply bookstores. Book publishing
which is key to sustain high returns in this field; (2)
has been presenting low growth during the previous
we expect significant merger synergies on the
years. Key traded players in this segment are ABRE11
merger, on cost dilution, cross-selling and
(N) and SLED4 (NC).
employment of best practices. Our view on
Anhanguera (AEDU3/OW/YE14 PT R$18) is the
Learning Systems: These are comprehensive
same as for Kroton.
educational solutions whereby the company provides
textbooks, methodologies, training, the right to use a Estcio (ESTC3/N/YE14 PT R$20): We have a
brand name and other services. Penetration in the positive view on the company, which is delivering
private segment is high at ~45% of students, and growth solid margin improvements and organic growth, but
is solid in high-single digits/low-teens on migration of we have a relative preference for Kroton, as we see
students from public schools to private ones and higher execution risk in Estcio.
migration of schools that employ books to learning
systems. In the public segment, penetration is low at Abril Educao (ABRE3/N/YE14 PT R$39).
less than 5% of students, despite superior academic While we see the company as well positioned in
results from public schools that adopt learning systems. basic education and languages with some of the
This might be explained by the cost of a learning system strongest brands in Brazil, we believe visibility is
being borne by the city or state, while PNLD books are low and execution risk is high as the company
distributed at no cost, which is entirely borne by the attempts to improve the performance of its recently
federal government. ABRE11 (N) is the key traded acquired language school Wise Up. Thus, we
player in this segment, although KROT3 (OW) and recommend investors to favor higher education
SLED4 (NC) also have some exposure. names at the moment.
Table 93: Education Stocks Under Our Coverage
Outlook and views on stocks Mkt Cap (US$
Company Ticker Rating
Mn)
We have a positive view on higher education stocks, Abril Educao ABRE11 N 1,293
given: Anhangurea AEDU3 OW 2,566
Estcio ESTC3 N 2,226
Kroton KROT3 OW 3,778
Low penetration versus peer countries Source: Bloomberg; J.P. Morgan, prices as of September 27, 2013
115
Emy
J.P. Shayo
Morgan Cherman
Securities LLC JPMorgan Latin America
Chase BankEquity Research Emerging Markets Research
AC
(55-11) 4950-6684
Felipe Pianetti (1-212) 834-4043 Sucursal October
Buenos2013
Aires Local Markets Guide
felipe.q.pianetti@jpmorgan.com Carlos J Carranza (5411) 4348-3425
carlos.j.carranza@jpmorgan.com September 2013
J.P. Morgan Securities LLC
Diego W Pereira (1-212) 834-4321
diego.w.pereira@jpmorgan.com
Annex 1: Brazil Local Markets Guide September 2013

(Excerpted from the LMG published on September 18, 2013)
Brazil The effective Selic rate is set in the secured

(collateralized) interbank overnight rate market. The
IPCA is a nationwide index that measures the average
FX: The Br azilian r eal has tr aded under a dir ty cost of a typical basket of goods and services in the 11
floating exchange r ate since J anuar y 1999. The most important state capitals. IBGE, the national bureau
BRL is still in a non-conver tible cur r ency r egime, of economics and statistics, releases monthly readings
and the r egulator y fr amewor k has tur ned mor e of the IPCA.
fluid since 2010. The Br azilian centr al bank
(BCB) buys or sells US dollar s to pr ovide Foreign exchange market
liquidity, tame volatility, or manage inter national
r eser ves Exchange rate regime: The Brazilian real has traded
under a dirty floating exchange rate since January 1999.
Rates: The Brazil local bond market is the largest
in the EM space. Liquidity is deep in floaters, Convertibility: BRL is still a non-convertible currency,
fixed rate, and inflation-linked bonds and the regulatory framework has turned more fluid
since 2010.
Investor base: Locals are the main participants in
the floaters market and the front end of the fixed Intervention policy: Discretionary. The Brazilian
rate curve. Pension funds are the main central bank (BCB) buys or sells US dollars to provide
participants in the linkers market, and liquidity, tame volatility, or manage international
international investors are dominant in the long reserves. Brazilian international reserves stood at
end of fixed rate debt $372bn in August 2013, and the public sector net
external credit position reached $330bn on May 2013.
Monetary policy
Intervention tools: The central bank intervenes in the
The inflation-targeting regime was initiated in 1999 spot, repo, and forward markets and also through
when the central bank abandoned the FX crawling- derivatives (swaps mostly).
peg system. The reference headline CPI index is the
IPCA, and the target and range are set by the National Highlights of the FX market resolution (3568)
Monetary Council (CMN, formed by the minister of Participants: BCB grants different rights to operate in
finance, the central bank governor, and the minister of the FX market for the following entities: commercial
planning) for the calendar year. The Banco Central do banks, investment banks, development banks, savings
Brasil (BCB) has been de facto independent, but not de and loans, and security houses. Banks are allowed to
jure. The BCB governor has minister status and has no perform all transactions available in the FX markets,
predefined mandate. while others face some restrictions.
Transactions: There are no size limits on any legal FX
transaction, which needs to be executed by an
Banco Central do Brasil (BCB)
authorized agent (see above).
Objective Price stability
Accountability: Agents authorized to operate in the FX
Strategy Inflation targeting
market are accountable for the legality of the
Policy instrument name Selic rate transactions carried out through their firms.
Ticker BZSTSETA
Exchange rate: Price is set in the market, by market
Deciding body Governor and seven other members
participants.
Meeting frequency Eight times per year
Inflation target 4.5% (+/-2%) Deposits in BRL offshore: The BCB authorizes, in
some cases, payments of invoices arising from an
Source: J.P. Morgan
external obligation in local currency (through an
authorized agent).
The policy rate is the reference Selic rate (settlement
and custody systemoperated by the BCB), which is
defined by the monetary policy committee (COPOM).
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Spot FX market Brazilian real (BRL)

Spot
The USD/BRL spot market is mostly traded OTC but
Free float Dirty/float nonconvertible
registered at the BM&F (Bolsa de Mercadorias and
Futuros). Once registered, the BM&F becomes the Most actively traded pair USD/BRL
counterparty risk for both sides of the trade. An Units The real is subdivided into 100 centavos;
unsecured interbank spot market also exists, but the Quoted to 4 decimal places (1 pip = 0.0001 BRL)
liquidity is poor. Average daily market volume $2.5 bn
Average transaction size $50 mm
An FX transaction registered as spot settlement must
Average bid/offer spread 5pips
be settled within two business days of the trade date Options
(95% of the cases), but T+1 settlement is also available.
Trade OTC/BM&F
The BCB also allows for trades under the future
settlement category, whereby transactions can be Available maturity Up to 2 years
settled up to 60 days from the trade date. Average daily market volume $500 mm
PTAX rate: The PTAX is the fixing rate for US dollar- Average bid/offer spread* 0.5 vol
linked instrumentsbonds and derivativessettled Fixing PTAX
onshore and offshore, released daily by the CB. The
Most actively traded pair USD/BRL
PTAX is the average of effective rates of transactions in
the interbank FX spot market, weighted by the volume *For the most liquid tenor.
of transactions. Transactions closing at rates that Onshore $ ratesCupom Cambial
diverge most from the market average (outliers) and Trade OTC/BM&F
transactions showing artificial price formation or Available maturity Up to 10 years
contrary to regular and sound market practices are
Average daily market volume $1 bn
excluded from the calculations.
Average bid/offer spread* 10bp
Fixed income market
Fixing PTAX
The Brazil local bond market is the largest in the
EM space. Liquidity is deep in floaters, fixed rate, and *For the most liquid tenor.
inflation-linked bonds. Despite the size and liquidity of Source: J.P. Morgan
the market, the development of the long part of the fixed
FX derivatives market
rate debt market has lagged that of other EM countries
Futures
and Mexico in particular. The duration of the fixed rate
component of domestic debt is of 2.8 years versus 4.8 Trade BM&F
years of the GBI-EM index. Available maturity 2 months
Average daily market volume $15 bn
Despite stable net debt dynamic, international investors Average transaction size $5 mm
restricted access to local market, elevated gross debt Average bid/offer spread* 5pips
compared to peers, and above-target inflation over the Fixing PTAX
past three years has hindered the extension of the local Most actively traded pair USD/BRL
fixed rate curve. Local bonds are not Euroclearable. NDF
Trade OTC
Starting June 2013, the government began to unwind Available maturity up to 2 years
macro prudential / capital controls. The Financial Average daily market volume $1 bn
Transactions Tax (IOF) on fixed income inflows was Average transaction size $10 mm
cut back to 0% (previously 6%) and the IOF on Average bid/offer spread* 15pips
incremental net short $ positions through derivatives
Fixing PTAX
was also cut back to 0% (from 1% previously). In
addition, the government eliminated reserve *For the most liquid tenor.
requirements in short FX positions, as well as ended FX Source: J.P. Morgan
restrictions for advancement of future export revenues
to finance production.
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Debt instruments *See Latam Linkers section for detailed information.

Instrument Type Coupon Maturities Size* % total Auction
2 months to
Interest rates derivatives
LFT Floater - 403 22 Monthly
6 years Underlying asset: The CDI rate uncollateralized
Zero interbank overnight rate is the most common
LTN Fixed rate Up to 5 years 547 30 Weekly
Coupon underlying asset for rates derivatives. The CDI is priced
10% off the Selic rate and while it represents the unsecured
Up to Jan
NTN-F Fixed Rate semiannual
2023
196 11 Biweekly interbank market, its rate trades (historically) slightly
coupon below the Selic rate. The Cetip publishes the CDI in
6% annual yields on a daily basis, under the business 252
NTN-B Linker semiannual Up to 2050 591 33 Biweekly
coupon day count convention. The daily factor is calculated as
6% follows:
Up to 20
NTN-C Linker semiannual 66 4 Off the run
years
coupon Daily factor = (1 + CDI) (1/252)
Total (BRL bn) 1815
DI futures
*In BRL bn, as of May2013, Source: J.P. Morgan and BCB.
Market: Futures Exchange (BM&F) / OTC offshore
Fixed-rate bonds
Type: Zero-coupon interest rate swap (the Brazilian
The LTN and NTN-F bonds represent 30% and 11% of OIS). Participants express their view on the path of the
the total outstanding local bonds, respectively. The interbank rate from the entry date through maturity by
minimum denomination is of BRL1,000 and the day receiving/paying a fixed rate versus the CDI (floating
count convention is 252 business days. The bid-offer rate).
spread is 2-7bp.
Contract size: BRL100,000 future value; quoted on
Bond features yield business 252 convention
LTN NTN-F
Size / % of Total BRL 547bn/ 30% BRL 196bn/ 11% Contract maturities: First four months from the
10% semiannual trading date, then quarterly. The contract expires on the
Cash flow Zero Coupon
coupons first business day of the reference month.
Day Count Bus 252 Bus 252
Amortization Zero Coupon Bullet Fixing: Daily adjustments
Minimum Denomination BRL 1,000 BRL 1,000
IDI Index
Secondary Market
Mechanism OTC and BMF OTC and BMF Market: Futures Exchange (BM&F) / OTC offshore
Bid-offer 2 to 7bp wide 2 to 7bp wide
Trading Basis Discount rate (252) Discount rate (252) Type: European-style interest rate option. Strike levels
are based on the IDI index, which is calculated off the
Custodian Selic Selic daily CDI rate (IDIX3 Index on Bloomberg) as follows.
Clearing Selic Selic
*As of May2013, Source: J.P. Morgan and BCB. Payout: Call / Put option
Inflation-linked bonds* t
There are two types of inflation-adjusted bonds: NTN-B

IDI t = 100,000 (1 + cdiu )
u =1
and NTN-C.
c(IDI T , T ) =# contracts max(0, IDI T K )
NTN-B: IPCA-linked bonds; represent 33% of the total
debt. p(IDI T , T ) =# contracts max(0, K IDI T )
NTN-C: IGPM-linked (PPI) bonds; represent 4% of the Where T is the expiration date, IDIT is the value of the
total debt. IDI index on the expiration date, and K the strike price.
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Supply dynamics Demand dynamics

Primary Market Institutional Investors
The National Treasury (NT) is the only issuer of federal Local markets remain quite segmented. Locals are the
government bonds. Since May 2002, in accordance with main investors in the floaters market and in the front
the Fiscal Responsibility Law, the BCB has been end of the fixed rate curve. Pension funds are the main
forbidden to issue debt. participants in the linkers market, and international
investors are dominant in the long end of fixed rate
The NT strategic financing plan seeks the extension of debt.
the average life of domestic debt and a higher share of
fixed-rate bonds in its composition. As of May 2013, International Investors
the participation of fixed rate bonds stood at 41% of
total domestic debt from 0% in December 2002. As of May 2013, international investors ownership of
local debt was of 9.4% (including repos in the total
stock). Internationals owned BRL 241bn, out of BRL
Auction Mechanisms
2,572bn outstanding. The level participation has shown
LFT and NTN-B: Single price (Dutch auction)
a very gradual pace of increase, currently at 9.4% of
LTN and NTN-F: Multiple prices (Yankee auction)
stock versus 8.5% in January 2011.
Schedule International investors owned 52% of the NTN-F
LTN and NTN-F: Weekly and biweekly, on Thursdays market (BRL103bn out of BRL196bn outstanding).
NTN-B: Biweekly auctions (two days before the
fifteenth day and by the end of the month).
Pension Funds
Asset allocation of private pension funds
The details of the auction (tenor and maturity) are $ bn %
released at the beginning of the reference quarter. The Fixed Income 181 62
size of the offer is announced only on the day of the Equity 82 28
Other 27 9
auction.
As of June 2012. Source: ABRAPP
Participants: Financial institutions registered in the Brazils pension system has long been a consistent
Selic are eligible and can place up to five bids per source of net supply of government bonds. Unlike in
instrument. The auctions can be on a cash basis or on a many Latin American countries that have advanced on
bond swap basis. In the latter, the Treasury accepts privatizing social security, Brazilian pensionersboth
public bonds in exchange for the ones being auctioned. civil servants and private sector workersare covered
by a mandatory, publicly managed, PAYG ( pay-as-
Clearance: Settlement and clearance is done through you-go) pension system. As of 2011 the deficit of the
the Selic (special system for settlement and custody INSS (private sector system) was around 0.8% of GDP,
operated by the BCB) on the subsequent business day while the public sector reached 3.7%; the number of
(T+1). beneficiaries was 29mm and 3.4mm, respectively. This
disparity has finally been addressed with congressional
Apart from primary auctions, the Treasury also holds approval and regulation of a Hybrid system for civil
firm offer and buyback auctions on a regular basis. servants, called Funpresp, in which there is a cap for the
There is no tap system type of auction on the domestic defined benefit (equal to the INSS) and the option of a
market, where the security price is preset by the issuer. capitalization fund for complementary pension. The
private sector already follows this model, with the
Secondary market complementary system covering around 7mm
The daily turnover of local debt is of around $7bn. beneficiaries. It encompasses privately managed, fully
Trading activity takes place mostly in an OTC market, funded (closed-end, sponsored by the employer, or open
but investors can also trade through the SISBEX ended funds), optional regimes that are available to all
(trading platform operated by the BM&F). The workers. Pension funds in Brazil face constraints on
transactions are registered at the Selic. investing externally and, consequently, have made
substantial allocations to local fixed income, equities,
and real estate. Private pension funds outright position
119
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in federal government debt is of 15.7% (June 2012). Registration: Non-resident investment accounts are
Including government exposure through mutual funds required to register with the CVM and the BCB, and to
this ratio is around 50%. nominate a legal representative who is required to
monitor the investors transactions and comply with the
Local Investment Funds tax rules.
As of July 2013, investment funds in Brazil had more Taxation: The Ministry of Finance (MoF) has
than $2.1trn of assets under management (AUM). discretion on the use of the IOF tax on financial
Dedicated fixed income fundsmostly benchmarked transactions. There are two different IOF taxes currently
against the CDIrepresented around 46% of that total. charged on fixed income investors.
Accordingly, the extension of the local fixed rate yield
curve still relies on international investor participation.
On June 2013, the MoF cut to 0% the IOF tax on
Multi-strategy funds represent 20% of AUM
external borrowing longer than 12 months and the
(R$481bn), open ended pension funds represent 13% of
IOF charged in the delta of incremental short $
AUM (R$310billion), and Equity funds total 8%
positions built through derivatives (exporters are
(R$200bn).
exempt).
Clearing and settlement issues The MoF also cut to 0% the IOF charged on 2689
Settlement of transactions occur on the trade date, T+0, accounts on fixed income investments, when the
or T+1. Government bonds and notes are cleared and transaction involves FX settlement (new money
settled through the Selic on a delivery-versus-payment going to Brazil), or when shifting investments
basis (DVP) against same-day bank reserves (secondary (money already in Brazil) from other asset classes
market) or on the trade date plus one business day into fixed income.
(primary market). Both types of settlement are
electronic (or fully dematerialized). All assets are A progressive IOF tax applies to investments
identified through ISIN codes. unwound within 30 days of inception:
Notional*return* (1 n/30) (where n is the
Regulations, taxation, and capital number of days between the investment and the
controls remittance of funds).
Regulation and supervision: BCB (Brazilian Central For detailed information on regulations go to:
Bank) and CVM (securities commission) http://www.andima.com.br/english/publications/arqs/bra
zil_for_foreign_investors.pdf.
Resolution 2689: Defines the rules for any non-resident
investorsindividuals, companies, institutional
investorsinvesting in local equities, fixed income, and
foreign exchange markets (or any instrument or
operating modality available to residents).
International Investors positioning into Public Domestic Debt (BRL bn)

Total Debt NTNF
Total held by the
public (w/o Repo, International International
Date BRL bn) Investors BRLbn % of Stock Outstanding BRLbn Investors BRLbn % of Stock
Dec10 1,578 167 10.6% 254 81 31.9%
Dec11 1,757 186 10.6% 280 84 30.0%
Dec12 1,892 230 12.1% 237 96 40.6%
Jan13 1,813 231 12.7% 180 91 50.4%
Feb13 1,840 233 12.7% 186 95 50.8%
Mar13 1,827 236 12.9% 192 98 51.2%
Apr13 1,827 239 13.1% 194 101 52.2%
May13 1,816 241 13.3% 197 103 52.5%
Source: J.P. Morgan and BCB
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Useful web addresses

Brazilian Security and Exchange Commission CVM
www.cvm.gov.br
Brazilian Association of Security Dealers ANDIMA

www.andima.com.br
Brazils Future and Mercantile Exchange BM&F

www.bmf.com.br
Brazilian Central Bank

www.bcb.gov.br
Brazilian Ministry of Finance

www.fazenda.gov.br
J.P. Morgan Bloomberg page

JBRL <go>
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Annex 2: Historical Economic Data and Forecasts

Table 94: Main Economic Indicator Yearly
Real GDP % Consumer Wholesales Selic Selic Selic real deflated

Exchange rate Exchange rate
change oya prices - IPCA % price - IGP-M % nominal eop nominal by IPCA avg. %
BRL / US$ eop BRL / US$ avg
nsa Dec/Dec nsa Dec/Dec nsa % a.r. avg % a.r. a.r.
1995 4.2 22.4 15.2 53.1 53.4 25.3 0.97 0.92

1996 2.7 9.6 9.2 27.1 38.1 26.0 1.04 1.00
1997 3.3 5.2 7.7 24.7 23.7 17.6 1.12 1.08
1998 0.1 1.7 1.8 28.4 27.5 25.3 1.21 1.16
1999 0.8 8.9 20.1 25.1 29.0 18.5 1.79 1.82
2000 4.4 6.0 10.0 17.3 19.5 13.5 1.95 1.82
2001 1.3 7.7 10.4 17.2 16.5 8.8 2.32 2.35
2002 1.9 12.5 25.3 19.2 18.4 9.2 3.53 2.93
2003 1.2 9.3 8.6 16.5 23.0 13.8 2.89 3.08
2004 5.7 7.6 12.4 17.8 16.4 8.2 2.65 2.93
2005 3.2 5.7 1.2 18.0 19.1 12.7 2.34 2.44
2006 4.0 3.1 3.8 13.3 15.1 11.6 2.14 2.17
2007 5.7 4.5 7.8 11.3 12.0 7.2 1.80 1.94
2008 5.1 6.0 9.8 13.75 12.5 6.2 2.40 1.84
2009 -0.2 4.3 -1.7 8.75 9.9 5.4 1.74 2.00
2010 7.5 5.9 11.3 10.75 10.0 3.9 1.66 1.76
2011 2.7 6.5 5.1 11.00 11.7 4.9 1.86 1.67
2012 0.9 5.8 7.6 7.25 8.5 2.5 2.10 1.99
2013* 2.3 5.9 5.3 9.75 8.39 2.4 2.35 2.21
2014* 2.3 5.7 6.0 9.75 9.75 3.8 2.40 2.42
2015* 3.0 5.5 5.0 9.75 9.75 4.0 2.49 2.49
2016* 3.2 5.0 4.5 9.75 9.75 4.5 2.58 2.58
Source: J.P. Morgan. Note: *J.P. Morgan Forecast, a.r.: annual rate, nsa: none seasonally adjusted, eop: end of the period, avg: average. As of September 30, 2013
123
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Table 95: Main Economic Indicators Quarterly
Real GDP %
Consumer prices Wholesales price Selic nominal Selic nominal Exchange rate Exchange rate
change oya
IPCA % oya nsa IGP-M % oya nsa eop % a.r. avg % a.r. BRL / US$ eop BRL / US$ avg
nsa
04Q1 4.2 6.8 5.9 16.25 16.4 2.91 2.91

04Q2 6.2 5.5 7.3 16.00 16.0 3.10 3.05
04Q3 6.3 6.9 12.0 16.25 16.1 2.86 2.94
04Q4 6.1 7.2 12.2 17.75 17.2 2.66 2.75
05Q1 4.2 7.4 11.5 19.25 18.7 2.67 2.62
05Q2 4.3 7.8 9.0 19.75 19.7 2.36 2.44
05Q3 2.1 6.2 3.7 19.50 19.7 2.21 2.32
05Q4 2.1 6.1 1.9 18.00 18.5 2.34 2.26
06Q1 4.3 5.5 1.1 16.50 17.0 2.17 2.17
06Q2 1.9 4.3 -0.1 15.25 15.6 2.17 2.19
06Q3 4.8 3.8 2.4 14.25 14.4 2.17 2.16
06Q4 4.8 3.1 3.5 13.25 13.42 2.14 2.15
07Q1 5.2 3.0 3.8 12.75 12.92 2.03 2.09
07Q2 6.4 3.3 4.4 12.00 12.33 1.93 1.96
07Q3 6.1 4.0 4.7 11.25 11.42 1.84 1.89
07Q4 6.7 4.3 6.8 11.25 11.25 1.78 1.77
08Q1 6.3 4.6 8.7 11.25 11.25 1.75 1.73
08Q2 6.5 5.6 11.6 12.25 11.92 1.60 1.64
08Q3 7.1 6.3 13.7 13.75 13.25 1.92 1.71
08Q4 1.0 6.2 11.3 13.75 13.75 2.31 2.25
09Q1 -2.7 5.8 7.4 11.25 12.25 2.31 2.33
09Q2 -2.4 5.2 3.5 9.25 9.92 1.97 2.04
09Q3 -1.5 4.4 -0.6 8.75 8.75 1.77 1.84
09Q4 5.3 4.2 -1.5 8.75 8.75 1.74 1.75
10Q1 9.3 4.9 0.5 8.75 8.75 1.78 1.82
10Q2 8.8 5.1 4.1 10.25 9.75 1.79 1.78
10Q3 6.9 4.6 6.9 10.75 10.75 1.70 1.74
10Q4 5.3 5.6 10.1 10.75 10.75 1.66 1.69
11Q1 4.2 6.1 11.2 11.75 11.42 1.63 1.65
11Q2 3.3 6.6 9.7 12.25 12.08 1.56 1.57
11Q3 2.1 7.1 7.9 12.00 12.17 1.85 1.66
11Q4 1.4 6.7 6.0 11.00 11.17 1.86 1.79
12Q1 0.8 5.8 3.7 9.75 10.25 1.82 1.76
12Q2 0.5 5.0 4.4 8.50 8.67 2.01 1.97
12Q3 0.9 5.2 7.5 7.50 7.67 2.03 2.04
12Q4 1.4 5.6 7.4 7.25 7.25 2.08 2.11
13Q1 1.9 6.4 8.1 7.25 7.25 2.02 1.99
13Q2 3.3 6.6 6.6 8.00 7.83 2.21 2.11
13Q3* 2.2 6.2 4.2 9.00 8.83 2.45 2.35
13Q4* 1.8 6.0 5.0 9.75 9.67 2.35 2.38
Source: J.P. Morgan. Note: *J.P. Morgan Forecast, a.r.: annual rate, nsa: none seasonally adjusted, eop: end of the period, avg: average. As of September 30, 2013
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Table 96: Debt and Fiscal Indicators

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F
Debt Stock
Total External Debt (USD bn) 214.3 209.5 210.6 214.9 201.4 169.5 172.6 193.2 198.3 197.8 272.2 336.2
Sovereign External Debt (USD bn) 89.8 92.8 110.3 119.8 114.7 87.6 76.3 70.2 67.3 77.1 75.5 75.4
Private Sector External Debt (USD bn) 124.6 116.8 100.3 95.1 86.7 81.9 96.3 123.0 131.0 120.7 196.6 260.8
Total External Debt (% GDP) 33.2 37.8 41.8 38.9 30.3 19.2 15.8 14.1 12.0 12.4 13.2 14.8
Total External Debt (% of exports) 333.2 310.8 301.1 258.8 185.8 127.1 110.5 105.6 87.3 109.4 122.6 133.7
Sovereign Gross Domestic Debt (USD billion) 302.0 304.9 239.7 341.6 418.4 540.7 555.5 803.4 689.5 1,068.0 1,233.8 1,211.6
Sovereign Gross Domestic Debt (% GDP) 49.9 54.1 57.4 50.8 51.8 58.8 50.1 53.6 52.6 58.5 56.3 54.7
Sovereign Gross External Debt (% GDP) 13.9 16.7 21.9 21.7 17.3 9.9 7.0 5.1 4.1 4.8 3.7 3.3
Total Gross Sovereign or Public Sector Debt (USD bn) 411.8 392.4 399.9 400.7 458.2 606.1 621.6 802.6 936.7 1,008.2 1,238.5 1,319.8
Total Gross Sovereign or Public Sector Debt (% of GDP) 63.8 70.9 79.3 72.5 69.0 68.7 57.1 58.7 56.7 63.3 60.0 58.0
Sovereign Debt Service

External Debt Service (USD bn) 31.4 12.3 15.7 28.2 26.0 47.7 46.2 21.0 6.5 8.6 11.5 9.2
Amortization (USD bn) 17.7 7.3 11.2 22.1 17.1 34.1 21.1 9.3 2.4 4.9 6.5 4.7
Interest (USD bn) 13.7 5.0 4.5 6.1 8.9 13.6 25.1 11.7 4.1 3.7 5.0 4.5
External Debt Service (% GDP) 4.9 2.2 3.1 5.1 3.9 5.4 4.2 1.5 0.4 0.5 0.6 0.4
Amortization (% GDP) 2.7 1.3 2.2 4.0 2.6 3.9 1.9 0.7 0.1 0.3 0.3 0.2
Interest (% GDP) 2.1 0.9 0.9 1.1 1.3 1.5 2.3 0.9 0.2 0.2 0.2 0.2
Domestic Debt Service (% of GDP) 27.7 17.5 20.2 20.6 17.3 20.2 16.7 15.8 14.5 14.7 14.7 14.0
Amortization (% of GDP) 23.2 11.8 13.4 14.3 12.7 14.5 12.2 10.6 9.3 9.6 9.6 8.2
Interest (% of GDP) 4.5 5.8 6.7 6.3 4.6 5.8 4.5 5.2 5.2 5.1 5.1 5.7
Total Sovereign Debt Service (% GDP) 32.6 19.8 23.3 25.7 21.3 25.6 20.9 17.4 14.9 15.2 15.3 14.4
Sovereign External Debt Service (% of exports) 48.8 18.3 22.5 34.0 24.0 35.7 29.6 11.5 2.9 4.7 5.2 3.7
Private Sector External Debt Service

Amortization (USD bn) 21.3 27.9 24.5 22.3 26.1 22.0 23.0 28.5 19.1 27.3 23.2 22.6
Interest (USD bn) 4.2 5.5 6.3 8.2 8.2 8.1 10.1 8.8 9.4 12.0 10.0 11.6
Private Sector External Debt Service (% of GDP) 3.9 6.0 6.1 5.5 5.2 3.4 3.0 2.7 1.7 2.5 1.6 1.5
Total External Debt Service (% of GDP) 8.8 8.2 9.2 10.6 9.1 8.8 7.3 4.3 2.1 3.0 2.2 1.9
Fiscal Finances
Headline Fiscal Balance (% of GDP) -3.4 -3.3 -4.4 -4.5 -2.5 -3.4 -3.5 -2.7 -1.9 -3.3 -2.2 -2.8
Public Sector Borrowing Requirements (% of GDP) -29.3 -16.4 -20.1 -22.8 -17.8 -21.7 -17.7 -14.0 -11.4 -13.2 -12.2 -11.3
Primary Fiscal Balance (% GDP) 3.2 3.4 3.2 2.9 3.4 3.9 3.2 3.4 3.5 2.0 3.1 3.1
Government revenue (% GDP) 32.5 33.8 34.6 30.2 31.9 36.6 36.9 37.3 38.2 33.1 33.3 33.8
Nominal GDP (USD bn) 645.0 553.8 504.4 552.5 663.7 881.7 1,089.4 1,366.6 1,651.6 1,592.7 2,064.5 2,275.9
GDP Per Capita (USD) 3,763.2 3,185.2 2,867.0 3,086.7 3,654.8 4,793.0 5,921.2 7,317.3 8,737.9 8,326.6 10,665.1 11,617.8
Real GDP growth (% oya) 4.3 1.3 2.6 1.1 5.7 3.2 4.0 6.1 5.2 -0.6 7.7 4.5
Source: Central Bank, Finance Ministry and J.P. Morgan as of 1Q13. 1995 2005 data considers federal local debt (and repo operations); 2006 onwards considers general government debt (and repo operations)
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Annex 3: List of Tables and Figures

Tables
Table 1: Top 5 countries in the World by Area............................................................4
Table 2: Regional Profile .............................................................................................4
Table 3: Gini Coefficient Selected Country Rankings ..............................................7
Table 4: Bolsa Famlia Benefits ...................................................................................9
Table 5: Economic Classes: Household Earnings per Month ....................................10
Table 6: Distribution of Economic Classes ................................................................10
Table 7: Composition of the Middle Class by Diverse Criteria .................................10
Table 8: Future Happiness Ranking 2015 ...............................................................11
Table 9: Brazil and Peer Countries, Ranks on Crime/ Violence ................................14
Table 10: Global Corruption Perception Rank 2012 ..................................................15
Table 11: Travel and Tourism Competitiveness Rank ...............................................17
Table 12: T&T Competitiveness Index Breakdown (2013) .......................................18
Table 13: Global Competitiveness Index (GCI) 2013-14 .......................................18
Table 14: Brazils Classification Breakdown ............................................................19
Table 15: Infrastructure Pillar Breakdown (2012-13) ................................................19
Table 16: Nominal GDP ............................................................................................21
Table 17: Real GDP Growth by Demand Components .............................................21
Table 18: Real GDP Growth Supply Side...............................................................22
Table 19: Real GDP Growth per Region ...................................................................24
Table 20: Stimulus Measures from Mid-2012 Onward .............................................25
Table 21: Logistics and Infrastructure Program Overview ........................................27
Table 22: Petrobras Capex 2013-17 Distribution by Area ......................................27
Table 23: PAC 2 Investment Estimates .....................................................................30
Table 24: MCMV Aggregated Data Phase I and II ....................................................31
Table 25: Summary of Minha Casa Minha Vida 2 Program ......................................32
Table 26: Public Sector Investments Plan Olympic Games ....................................32
Table 27: Ranking of Largest Consumer Markets Brazil Is 7th ..............................36
Table 28: Household Ownership of Some Goods & Services ...................................36
Table 29: Brazilian Auto Fleet ...................................................................................36
Table 30: Inhabitants per Vehicle ..............................................................................36
Table 31: Consumer Spending Breakdown as a % of Total Household Consumption
(2008-09) ...................................................................................................................37
Table 32: Inflation-Targeting System History ........................................................40
Table 33: IPCA Weight per Category and Metropolitan Region 2013 ......................41
Table 34: IGP Price Index Calendar ..........................................................................42
Table 35: IPCA Weight and Variations .....................................................................43
Table 36: Brazil Central Bank Chairmen since 1985 .................................................44
Table 37: Recap of Recent Government Measures to Sustain BRL ..........................46
Table 38: Open Markets Index Country Ranks..........................................................47
Table 39: Main Brazilian Exports ..............................................................................48
Table 40: Top 10 Exports Companies in Brazil (2012) .............................................49
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Table 41: Destination of Brazilian Exports (2011) ....................................................49

Table 42: Origin of Brazilian Imports ........................................................................50
Table 43: Current Account by Country......................................................................51
Table 44: FDI Distribution per Sector .......................................................................52
Table 45: External Debt in Latin America (2012E) ...................................................53
Table 46: External Debt Stock ...................................................................................53
Table 47: Preview of Expenses 2014 budget ..........................................................54
Table 48: Composition of the Stock of Public Debt ..................................................57
Table 49: Brazil Sovereign Ratings ...........................................................................57
Table 50: Complexities of the Brazilian Tax System ................................................57
Table 51: Main Taxes Charged in Brazil ...................................................................59
Table 52: INSS (Payroll) Contribution by Wage Level (as of Jan 2013) ..................60
Table 53: Income Tax Contribution by Income Level for FY2013 ...........................60
Table 54: Taxes on Non-Resident Investments .........................................................61
Table 55: BNDESs Disbursements per Sector (1H13) .............................................66
Table 56: Brazils 10 Largest Companies by Market Cap (Sep-13) ..........................67
Table 57: Bovespa by Sector .....................................................................................67
Table 58: Number of IPOs and Size by Year .............................................................68
Table 59: Main Bovespa Index Methodological Changes from 2014 Onward ..........69
Table 60: Summary of Corporate Governance Levels for Bovespa Companies ........70
Table 61: MSCI Brazil Weighting by Sector .............................................................70
Table 62: Top Ten Brazilian Pension Funds (2012) ..................................................73
Table 63: Latin America Private Pension Funds ........................................................73
Table 64: Mutual Fund Industry ................................................................................74
Table 65: Brazilian Presidents ...................................................................................77
Table 66: Senate Composition ...................................................................................79
Table 67: Chamber of Deputies Composition ............................................................79
Table 68: 2014 Elections Calendar ............................................................................80
Table 69: Corporate Demographics by Sector 2011 ...............................................81
Table 70: Brazil's Major Listed Oil, Gas and Petrochemical Companies ..................84
Table 71: Major Listed Metals and Mining Companies ............................................86
Table 72: LatAm Major Listed Pulp & Paper Companies .........................................87
Table 73: Brazils major listed Financials companies ...............................................89
Table 74: Brazils Homebuilders under our coverage ...............................................93
Table 75: Brazils Shopping Malls Under Our Coverage ..........................................94
Table 76: Brazil's Retail/ Personal Care companies under JPM Coverage ................97
Table 77: Brazils Healthcare companies under our coverage ...................................99
Table 78: Brazils Ranking in the Global Protein Industry ........................................99
Table 79: Brazilian Listed Protein Companies ........................................................100
Table 80: Brazilian Listed Beverage Company .......................................................101
Table 81: Brazilian listed Tobacco Company ..........................................................102
Table 82: Brazil's Major Listed Roads Companies ..................................................103
Table 83: Road Traffic Growth y/y vs. GDP Growth y/y ........................................103
Table 84: Toll Road Package Details .......................................................................103
Table 85: Airports Included in the Concession Program .........................................104
Table 86: Major Listed Airline Operating in Brazil .................................................104
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Table 87: Expected Investments (R$ bn) .................................................................105

Table 88: Major Listed Port Operators in Brazil......................................................105
Table 89: Investment Program .................................................................................106
Table 90: Brazil's Capital Goods Names .................................................................107
Table 91: Brazil's Agribusiness Names ...................................................................109
Table 92: T&T Stocks Under Coverage...................................................................112
Table 93: Education Stocks Under Our Coverage ...................................................115
Table 94: Main Economic Indicator Yearly..........................................................123
Table 95: Main Economic Indicators Quarterly ....................................................124
Table 96: Debt and Fiscal Indicators .......................................................................125
Figures
Figure 1: Brazil Divided by Region .............................................................................4
Figure 2: Population Projections (2000 2060) ..........................................................5
Figure 3: Population Growth Rate Projection ..............................................................5
Figure 4: Life Expectancy at Birth (2011) ...................................................................5
Figure 5: Fertility Rate .................................................................................................5
Figure 6: Population Pyramid (2013)...........................................................................5
Figure 9: Age Distribution of the Population Over Time ............................................6
Figure 10: Dependency Ratio (the "Demographic Bonus") 2011 .............................6
Figure 11: Brazil Dependency Ratio Estimates ...........................................................6
Figure 12: Population Density by State .......................................................................7
Figure 13: Urban Population as % of Total .................................................................7
Figure 14: Gini Index Evolution in Brazil Recent Improvement ..............................8
Figure 15: Recent Evolution of the Gini Index Stability in 2012..............................8
Figure 16: Income Distribution (2012) ........................................................................8
Figure 17: Income Rise per Deciles (CAGR 2004 2012) .........................................8
Figure 18: Number of Beneficiaries of Private Health Insurance ..............................11
Figure 19: Total Expenditure on Health as % of GDP (2010) ...................................11
Figure 20: Poll What Is Brazil's Main Problem? ....................................................12
Figure 21: Illiteracy Rate of People 15 years or Older ..............................................12
Figure 22: Mean Years of Schooling .........................................................................13
Figure 23: Education Level of People Aged 25 Years or Older ................................13
Figure 24: Peformance in the Pisa Math Evaluation (2009) ......................................13
Figure 25: Expenditures on Education .......................................................................14
Figure 26: Homicide Rate per 100,000 People (2011)...............................................14
Figure 27: Murder Rate per 100,000 inhabitants: Mexico vs. Brazil .........................14
Figure 28: Historical Murder Rate (per Firearm) .......................................................15
Figure 29: Perception of Corruption/ Extreme Corruption in the Following
Institutions .................................................................................................................16
Figure 30: Perception of the Level of the Corruption Change Over the Past Two
Years ..........................................................................................................................16
Figure 31: Top 10 travel Destinations in the Americas .............................................16
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Figure 32: Tourist Arrivals in Brazil..........................................................................16

Figure 33: Revenues from International Travelers in Brazil ......................................17
Figure 34: Main Travel Destinations .........................................................................17
Figure 35: The Most Problematic Factors in Doing Business....................................19
Figure 36: Brazilian GDP Growth and Economic Policy Cycles ..............................20
Figure 37: Brazil Real GDP Since 1904 ....................................................................21
Figure 38: Consensus Expectations for 2013 and 2014 GDP ....................................21
Figure 39: Estimated Potential GDP for LatAm Countries ........................................22
Figure 40: Private Consumption Growth ...................................................................23
Figure 41: GDP Components by Expenditure (Demand Side) ..................................23
Figure 42: GDP Components by Sector (Supply Side) ..............................................23
Figure 43: Economic Growth: Brazil vs. EM vs. G-7 ................................................24
Figure 44: Latin America GDP 10-Year Average ..................................................24
Figure 45: GDP per Capita ........................................................................................24
Figure 46: Regional Participation in Brazilian GDP (2010) ......................................24
Figure 47: Gross Fixed Capital Formation.................................................................26
Figure 48: Gross Capital Formation (% of GDP) ......................................................26
Figure 49: Gross Fixed Capital Formation in Brazil ..................................................26
Figure 50: Capacity Utilization (% of Total Installed Capacity) ...............................26
Figure 51: Expected Investment on Ports ..................................................................27
Figure 52: Supply X Demand Scenario for Electricity in Brazil ...............................28
Figure 53: installed Capacity Breakdown 2011 ......................................................28
Figure 54: Mortgages as a % of GDP ........................................................................31
Figure 55: World Cup Planned Investments ..............................................................32
Figure 56: Share of Industry in Overall GDP ............................................................33
Figure 57: Industrial GDP ..........................................................................................33
Figure 58: Industrial Production ................................................................................33
Figure 59: Industrial Production by Category ............................................................34
Figure 60: Industrial Business Confidence ................................................................34
Figure 61: Industrial Production by Sector ................................................................34
Figure 62: Retail Sales ...............................................................................................35
Figure 63: Broad Retail Sales Largely Defined by Auto Sales ..................................35
Figure 64: Consumer Confidence ..............................................................................35
Figure 65: Retail Sales by Category ..........................................................................35
Figure 66: Consumption Allocation by Region (2008) ..............................................37
Figure 67: Unemployment Rate .................................................................................38
Figure 68: Composition of Labor by Type of Job......................................................38
Figure 69: Net Formal Job Creation (Hires Minus Fires) ..........................................38
Figure 70: Job Creation by Category 2013 .............................................................38
Figure 71: Real Wages ...............................................................................................39
Figure 72: Minimum Wage Evolution .......................................................................39
Figure 73: Inflation Rate Since 1999 .........................................................................40
Figure 74: Consensus Expectations for 2013 and 2014 Inflation ..............................40
Figure 75: IPCA vs. INPC .........................................................................................41
Figure 76: IGP-M and Its Components ......................................................................42
Figure 77: IPCA vs. IGP-M .......................................................................................42
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Figure 78: IPCA Services Stabilizing at a HIgh Level ...........................................43

Figure 79: Food Inflation vs. IPCA ...........................................................................43
Figure 80: Selic Rate vs. Inflation yoy ......................................................................44
Figure 81: Exchange Rate ..........................................................................................45
Figure 82: Real Exchange Rate ..................................................................................45
Figure 83: Real Effective Exchange Rate: Spot Deviation from 30-Year Average ...46
Figure 84: Terms of Trade vs. Real Effective Exchange Rate ...................................47
Figure 85: Trade Current (Exports + Imports) ...........................................................47
Figure 86: Trade Balance ...........................................................................................48
Figure 87: LatAm: Total Exports as a % of GDP (2012) ...........................................48
Figure 88: Brazils Export Composition by Category (2012) ....................................48
Figure 89: Brazilian Imports ......................................................................................49
Figure 90: Imports by Category (2012) .....................................................................49
Figure 91: Imports from China ..................................................................................50
Figure 92: Current Account .......................................................................................50
Figure 93: Service Account Deficit Rising ................................................................51
Figure 94: Annual Brazilian FDI ...............................................................................51
Figure 95: Main FDI Destination by Country (2012) ................................................51
Figure 96: Participation of Key Countries in Brazilian FDI ......................................52
Figure 97: Foreign Portfolio Investment in Brazil .....................................................52
Figure 98: Brazil International Reserves....................................................................52
Figure 99: LatAm International Reserves ..................................................................53
Figure 100: Private Sector External Debt as a % of Total Gross External Debt ........53
Figure 101: Corporate External Debt Amortization Schedule ...................................54
Figure 102: Federal Government Revenues and Outlays ...........................................54
Figure 103: Primary Surplus ......................................................................................55
Figure 104: Nominal Deficit ......................................................................................55
Figure 105: Interest Payments....................................................................................56
Figure 106: Net Public Sector Debt ...........................................................................56
Figure 107: Net Public Sector Debt Split into Internal and External Debt ................56
Figure 108: Net Debt vs. Gross Debt .........................................................................56
Figure 109: Maturity Profile of Brazils Public Sector Local Debt ...........................57
Figure 110: Total taxation as a % GDP .....................................................................58
Figure 111: Tax Burden/GDP Ratio by Country (2011) ............................................58
Figure 112: Tax Burden by Jurisdiction ....................................................................58
Figure 113: Federal Tax Collection ...........................................................................59
Figure 114: Federal Tax Collection per Type of Tax.................................................60
Figure 115: Credit as a % of GDP .............................................................................61
Figure 116: LatAm: Credit as a % of GDP by Country (YE2012) ............................61
Figure 117: Non-Earmarked Credit Growth ..............................................................61
Figure 118: Non-Performing Loans on Non-Earmarked Loans .................................61
Figure 119: Banking Spreads .....................................................................................62
Figure 120: Share of Total Credit: Public versus Private Sector Banks.....................62
Figure 121: Total Credit Destination by Debtor ........................................................62
Figure 122: Loan Growth by Type of Debtor (1H13) ................................................62
Figure 123: Consumer Non-Earmarked Credit per Category ....................................63
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Figure 124: Mortgages as a % of Total Credit ...........................................................63

Figure 125: Household Debt as a % of Gross Income (2010)....................................63
Figure 126: Household Leverage and Income Committed to Service Debt ...............63
Figure 127: Household Leverage and Income Committed to Service Debt Ex-
Mortgage ....................................................................................................................63
Figure 128: Mortgages as % of GDP .........................................................................64
Figure 129: Mortgages as a % of GDP ......................................................................64
Figure 130: FGTS + SBPE Total Mortgage Disbursements ......................................65
Figure 131: BNDES Participation in Credit Rose After 2008 Crisis .........................65
Figure 132: BNDES Disbursement ............................................................................65
Figure 133: BNDES Liabilities: Treasury as a % of Total Funding ..........................66
Figure 134: BNDES Equity Holding by Sector .........................................................66
Figure 135: 15 Largest Stock Exchanges in Terms of Market Cap ...........................66
Figure 136: Bovespa Market Cap ..............................................................................67
Figure 137: Number of Listed Companies in Selected Exchanges ............................67
Figure 138: Number of Mergers and Acquisitions in Brazil ......................................68
Figure 139: Market Value of All Deals in LatAm per Country 2000-13 ...................68
Figure 140: Bovespa Index Performance ...................................................................68
Figure 141: Bovespa Index Performance ...................................................................68
Figure 142: Long-Term Bovespa Index Deflated ......................................................69
Figure 143: Brazil Weight on the MSCI Emerging Markets .....................................70
Figure 144: MSCI Brazil 10-Year Historical PE .......................................................71
Figure 145: MSCI Brazil, LatAm and EM P/E ..........................................................71
Figure 146: MSCI Brazil PE Domestic X Commodity Sectors .................................71
Figure 147: MSCI Brazil Average PE (5yr and 10yr) by Sector ...............................71
Figure 148: Brazil P/BV versus ROE ........................................................................72
Figure 149: Brazil Dividend Yield.............................................................................72
Figure 150: Foreign Equity Investments in the Bovespa ...........................................72
Figure 151: Investor Participation in Total Bovespa Volume ....................................72
Figure 152: Bovespa Average Daily Traded Volume ................................................73
Figure 153: Pension Fund Allocation ........................................................................73
Figure 154: Mutual Funds Total AUM .....................................................................74
Figure 155: AUM Breakdown by Category ...............................................................74
Figure 156: Fixed Income vs. Equity vs. Multi-Strategy ...........................................75
Figure 157: Brazilian Voters Education Level........................................................75
Figure 158: Brazilian Voters Age Distribution .......................................................75
Figure 159: Popularity: FHC vs Lula vs Dilma .........................................................78
Figure 160: Brazil's Energy Matrix 2012 ...................................................................82
Figure 161: Simplified Map of Brazilian Basins .......................................................82
Figure 162: Brazil Pre-Salt Polygon Santos Basis ..................................................83
Figure 163: Libra's Concession Area .........................................................................83
Figure 164: Brazilian Production Profile ...................................................................83
Figure 165: BZ Main Steel-Consuming Sectors, 2012 ...........................................84
Figure 166: Vales iron ore output has doubled since 2000 and accounts for over 80%
of Brazils output .......................................................................................................85
Figure 167: Brazil Is the 9th Major Crude Steel Producer as of 2012 .......................85
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Figure 168: Brazils Crude Steel Capacity May Reach ~55.5Mt by 2017 .................85
Figure 169: Brazilian Flat-Steel Imports as a % of Apparent Consumption: Currently
at 17% ........................................................................................................................86
Figure 170: Hardwood Supply to Grow 37% Between 13E and 20E, 97% of the
Expansion to Come from LatAm ...............................................................................87
Figure 171: Deposit Market Share .............................................................................87
Figure 172: Deposit Market Share .............................................................................87
Figure 173: Evolution of Market Share: Public, Domestic Private, and Foreign Banks
(2008 July 2013) .....................................................................................................88
Figure 174: Banking System Return on Equity (ROAE) (2004-1H13) .....................88
Figure 175: Total Loans to GDP ................................................................................89
Figure 176: Credit and Debit Card Revenues and Transactions ................................89
Figure 177: Checking Account growth and Credit and Debit Cards per Account .....90
Figure 178: Brazilian Card Payment Structure (Estimated values for R$100
Transaction) ...............................................................................................................90
Figure 179: Insurance Growth vs. GDP .....................................................................91
Figure 180: Insurance Penetration: Premiums as a % of GDP in 2012......................91
Figure 181: Brazil's Insurance Premium Breakdown (1H13) ....................................91
Figure 182: Pension Market Share (1H13) ................................................................91
Figure 183: Traditional Life (1H13) ..........................................................................92
Figure 184: Brazils major listed Non-bank Financials companies ...........................92
Figure 185: Sector P/E 12 Months .............................................................................93
Figure 186: Sector Performance vs. Selic ..................................................................93
Figure 187: Housing Market by Income Segment .....................................................93
Figure 188: Listed Companies Launches..................................................................93
Figure 189: SBPE + FGTS Financing........................................................................93
Figure 190: Construction Inflation Breakdown .........................................................93
Figure 191: Sector P/FFO 12 Months ........................................................................95
Figure 192: Companys Trailing 12-Month Same-Store Sales and Same-Store Rents
...................................................................................................................................95
Figure 193: Shopping Mall Evolution According to ABRASCE Data ......................95
Figure 194: Shopping Mall Penetration Measured by GLA / 1,000 Inhabitants ........95
Figure 195: Real Interest Rates vs P/FFO 12 Months Forward .................................95
Figure 196: Decelerating Wage Mass Increase ..........................................................95
Figure 197: Consumer Leverage Remains High ........................................................96
Figure 198: Food Retail Market Share (2012) ........................................................96
Figure 199: Hardline Market Share ...........................................................................96
Figure 200: E-Commerce Market Share (2012) .........................................................97
Figure 201: Health Plan Penetration in Brazil Is Much Lower than in the U.S. ........97
Figure 202: Job Creation Is Slowing Down ...............................................................97
Figure 203: Healthcare Expenditure as % of GDP (2011) .........................................98
Figure 204: Per Capita Healthcare Expenditure (2011) .............................................98
Figure 205: Brazilian Population Is Aging ................................................................98
Figure 206: Median Age of Brazilian Population ......................................................98
Figure 207: Medical Costs Inflation ..........................................................................99
Figure 208: Exports Ceased to Gain Importance as % of Total Production...............99
Figure 209: Brazilian Protein Consumption Growth Is Led by Poultry .....................99
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Figure 210: Brazils per Capita Protein Consumption Is Already Above EU and
Almost at Par with US .............................................................................................100
Figure 211: Brazil Arable Land Use Today and in 2030E .......................................100
Figure 212: Brazils per Capita Cheese Consumption Still Lags Developed Markets
.................................................................................................................................100
Figure 213: World Top 8 Beer Markets by Volume, 2012 ......................................100
Figure 214: AmBevs Beer Brazil Market Share Evolution ....................................101
Figure 215: Beer EBIT Margin of Leading Brewer in Top Markets (09 data) .......101
Figure 216: Brazils per Capita Beer Consumption Is Below Developed Levels ....101
Figure 217: Global Smoking Incidence ...................................................................101
Figure 218: Smoking Is Concentrated in Brazils Lower Classes ............................101
Figure 219: Souza Cruz Cigarette Market Share Evolution .....................................102
Figure 220: Souza Cruzs Cigarette Division Grows Profits Despite Lower Volumes
.................................................................................................................................102
Figure 221: Tobacco Represents ~9% of Brazilian Excise Tax (IPI) Collection .....102
Figure 222: Domestic RPK Growth yoy ..................................................................104
Figure 223: Main Brazilian Ports .............................................................................105
Figure 224: Brazilian Ports Market Share (TEUs, 2012) .........................................105
Figure 225: Cargo Handling in Port of Santos (mn ton) ..........................................105
Figure 226: Investments (R$ bn) .............................................................................106
Figure 227: Production (bn RTK) ............................................................................106
Figure 228: We Forecast Fleet Growing at ~8% CAGR in 2013-18 .......................107
Figure 229: Though Government Incentive Has Been Effective in 2012, We Expect
Diminishing Returns Moving Forward ....................................................................107
Figure 230: Rising labor costs, paired with a lack of investment in automation, leave
Brazilian suppliers less efficient than peers in the US and Europe. .........................108
Figure 231: Its Cheaper to Produce Cars in Mexico than in Brazil ........................108
Figure 232: Brazil GDP Growth vs Truck Registration ...........................................108
Figure 233: Truck Outlook for 2014 ........................................................................108
Figure 234: Brazil and India Are Behind the Other BRICS in Terms of Buses per
Capita .......................................................................................................................109
Figure 235: Short-Term Soy Outlook ......................................................................110
Figure 236: Short-Term Corn Outlook ....................................................................110
Figure 237: Fixed LIS (millions): Incumbent LIS peaked in 2004 ..........................111
Figure 238: Broadband Subs as % of Lines in service .............................................111
Figure 239: Mobile subscribers in Brazil, Millions .................................................111
Figure 240: Mobile Subscriber Growth vs Mobile Penetration ...............................111
Figure 241: Mobile Subscriber Share, July 2013 .....................................................112
Figure 242: Mobile Revenues as % of Total Revenues ...........................................112
Figure 243: Number of Private Higher Education Institutions ................................112
Figure 244: Enrollments Faced a Strong Growth Period After ' 96 .........................113
Figure 245: Cumulative FIES Contracts Signed (Thousands) .................................113
Figure 246: Population (25y+) with Higher Education (2010) ................................113
Figure 247: Gross Enrollment Rates (GER) ............................................................114
Figure 248: Salary Premium of Graduates vs Unskilled Labor, 2010 .....................114
Figure 249: Enrollment Growth on Higher Education .............................................114
Figure 250: Growth y/y in Basic Education Enrollments ........................................114
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Companies Mentioned
Price JPM JPM
Company Name Ticker 09-Oct-13 Rating Analyst
Abril Educao ABRE11.SA R$32.90 Neutral Marcelo Santos
Aliansce ALSC3.SA R$20.96 Overweight Marcelo Motta
AmBev AMBV4.SA R$83.71 Overweight Alan Alanis
AmBev ADR ABV.N $37.75 Overweight Alan Alanis
Anhanguera AEDU3.SA R$13.40 Overweight Marcelo Santos
Arteris ARTR3.SA R$19.85 Neutral Fernando Abdalla
Autometal AUTM3.SA R$18.54 Neutral Cassio Lucin
B2W Companhia Digital BTOW3.SA R$14.83 Neutral Andrea Teixeira
Banco Bradesco BBDC4.SA R$31.22 Overweight Saul Martinez
Banco Bradesco ADR BBD.N $14.27 Overweight Saul Martinez
Banco do Brasil BBAS3.SA R$26.48 Overweight Saul Martinez
BB Seguridade BBSE3.SA R$22.84 Overweight Domingos Falavina
BIOSEV BSEV3.SA R$8.50 Overweight Cassio Lucin
BM&F Bovespa BVMF3.SA R$12.59 Overweight Kenneth Worthington
BR Malls BRML3.SA R$20.19 Overweight Marcelo Motta
Bradespar BRAP4.SA R$23.48 Overweight Rodolfo Angele
Brasil Foods BRFS3.SA R$54.44 Neutral Alan Alanis
Brasil Foods ADR BRFS.N $24.68 Neutral Alan Alanis
Braskem BRKM5.SA R$18.28 Overweight Caio M Carvalhal
Braskem ADR BAK.P $16.48 Overweight Caio M Carvalhal
CBD PCAR4.SA R$105.20 Overweight Andrea Teixeira
CBD ADR CBD.P $47.95 Overweight Andrea Teixeira
CCR CCRO3.SA R$18.03 Overweight Fernando Abdalla
Cetip CTIP3.SA R$23.44 Overweight Domingos Falavina
Cielo CIEL3.SA R$63.00 Neutral Domingos Falavina
CMPC CAR.SN Ch$1,488.20 Neutral Lucas Ferreira
Copec COP.SN Ch$6,982.30 Neutral Lucas Ferreira
Cosan Ltd. CZZ.N $15.48 Overweight Cassio Lucin
Cosan S.A. CSAN3.SA R$44.67 Overweight Cassio Lucin
CSN SID.N $4.56 Underweight Rodolfo Angele
Cyrela Brazil Realty CYRE3.SA R$17.00 Neutral Marcelo Motta
Duratex DTEX3.SA R$13.50 Overweight Lucas Ferreira
Ecorodovias ECOR3.SA R$15.60 Neutral Fernando Abdalla
Fibria FIBR3.SA R$26.94 Overweight Lucas Ferreira
Fibria ADR FBR.N $12.12 Overweight Lucas Ferreira
Gafisa GFSA3.SA R$3.50 Neutral Marcelo Motta
Gerdau S.A. GGBR4.SA R$17.37 Neutral Rodolfo Angele
GOL GOLL4.SA R$10.18 Neutral Fernando Abdalla
Guararapes Confeccoes GUAR3.SA R$91.50 Neutral Andrea Teixeira
Hering HGTX3.SA R$32.53 Neutral Andrea Teixeira
HRT HRTP3.SA R$0.87 Neutral Caio M Carvalhal
Hypermarcas HYPE3.SA R$18.63 Overweight Andrea Teixeira
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Price JPM
Company Name Ticker 09-Oct-13 Rating JPM Analyst
Iguatemi IGTA3.SA R$24.93 Overweight Marcelo Motta
Iochpe-Maxion MYPK3.SA R$27.30 Overweight Cassio Lucin
Itau Unibanco ITUB4.SA R$31.84 Overweight Saul Martinez
Itau Unibanco ADR ITUB.N $14.45 Overweight Saul Martinez
JBS JBSS3.SA R$7.60 Overweight Alan Alanis
Klabin KLBN4.SA R$11.59 Overweight Lucas Ferreira
Lojas Americanas (Non-Voting) LAME4.SA R$16.95 Overweight Andrea Teixeira
Lojas Americanas (Voting) LAME3.SA R$14.90 Overweight Andrea Teixeira
Lojas Renner LREN3.SA R$65.52 Neutral Andrea Teixeira
Magnesita MAGG3.SA R$6.44 Neutral Rodolfo Angele
MAHLE Metal Leve LEVE3.SA R$26.96 Neutral Cassio Lucin
Marcopolo POMO4.SA R$6.57 Neutral Cassio Lucin
Marfrig MRFG3.SA R$5.61 Neutral Alan Alanis
Metalurgica Gerdau GOAU4.SA R$21.95 Overweight Rodolfo Angele
Mills MILS3.SA R$31.77 Overweight Cassio Lucin
Minerva BEEF3.SA R$9.70 Neutral Alan Alanis
MMX MMXM3.SA R$1.02 Neutral Rodolfo Angele
MMX Royalty Securities MMXM11.SA R$2.98 Overweight Rodolfo Angele
MRV MRVE3.SA R$9.98 Neutral Marcelo Motta
Multiplan MULT3.SA R$53.87 Neutral Marcelo Motta
NATURA NATU3.SA R$48.00 Neutral Andrea Teixeira
OGX OGXP3.SA R$0.21 Underweight Caio M Carvalhal
Oi OIBR4.SA R$3.79 Neutral Andre Baggio
PDG Realty PDGR3.SA R$2.39 Neutral Marcelo Motta
PETROBRAS ON PETR3.SA R$16.83 Neutral Caio M Carvalhal
PETROBRAS ON ADR PBR.P $15.32 Neutral Caio M Carvalhal
PETROBRAS PN PETR4.SA R$18.07 Neutral Caio M Carvalhal
PETROBRAS PN ADR PBRa.P $16.50 Neutral Caio M Carvalhal
Porto Seguro PSSA3.SA R$28.19 Neutral Domingos Falavina
Positivo Informatica POSI3.SA R$3.69 Underweight Andre Baggio
RaiaDrogasil RADL3.SA R$17.29 Neutral Andrea Teixeira
Randon RAPT4.SA R$12.44 Neutral Cassio Lucin
Restoque LLIS3.SA R$6.30 Underweight Andrea Teixeira
Rodobens RDNI3.SA R$14.00 Overweight Marcelo Motta
Rossi Residencial RSID3.SA R$3.35 Neutral Marcelo Motta
Santander Brasil SANB11.SA R$15.45 Neutral Saul Martinez
Santander Brasil ADR BSBR.P $7.03 Neutral Saul Martinez
Sao Martinho SMTO3.SA R$29.29 Overweight Cassio Lucin
SLC Agricola SLCE3.SA R$21.34 Neutral Cassio Lucin
Sonae Sierra Brasil SSBR3.SA R$21.62 Neutral Marcelo Motta
Souza Cruz CRUZ3.SA R$25.63 Overweight Alan Alanis
SulAmerica SULA11.SA R$15.90 Neutral Domingos Falavina
Suzano SUZB5.SA R$8.84 Neutral Lucas Ferreira
Telefonica Brasil VIVT4.SA R$47.96 Overweight Andre Baggio
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Price JPM
Company Name Ticker 09-Oct-13 Rating JPM Analyst
TIM Participacoes TIMP3.SA R$11.63 Overweight Andre Baggio
Totvs TOTS3.SA R$35.81 Overweight Andre Baggio
Ultrapar ADR UGP.N $26.35 Overweight Felipe Dos Santos
Ultrapar S.A. UGPA3.SA R$57.97 Overweight Felipe Dos Santos
Usiminas USIM5.SA R$11.35 Neutral Rodolfo Angele
Vale ON VALE.N $15.07 Overweight Rodolfo Angele
Vale PN VALEp.N $13.78 Overweight Rodolfo Angele
Weg WEGE3.SA R$28.20 Underweight Cassio Lucin
Source: J.P. Morgan
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JPM Brazil 2013

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Latin America Equity Research

Table 2: Regional Profile

Table 1: Top 5 countries in the World by Area Area 1,558,196 km or 18.3%

Source: IBGE; J.P. Morgan.

Population Figure 4: Life Expectancy at Birth (2011)

Figure 2: Population Projections (2000 2060)

The expected number of children born per woman in

Figure 5: Fertility Rate

Figure 6: Population Pyramid (2013)

this indicator, Brazil still has a low life expectancy rate

Figure 9: Age Distribution of the Population Over Time

Source: IBGE, 2013

On average, the population density in Brazil is 22.9

Population distribution can also be understood as a Income Distribution

0 10 Table 3: Gini Coefficient Selected Country Rankings

2 South Africa 0.631 2005

Figure 17: Income Rise per Deciles (CAGR 2004 2012)

The IBGE compiles a different set of data for the Gini

Source: IBGE, PNAD 2011

Italy 56 Haiti 141

Mais Mdicos program: Following the June 2013 Education

Education is recognized as being Brazils main

Brazilians are getting fatter: According to an IBGE

Source: PNAD 2012 - IBGE

Poor learning quality: Not only the quantity of people

Table 9: Brazil and Peer Countries, Ranks on Crime/ Violence

In Rio, where organized crime related to drugs and arms

According to the World Economic Forums Global

Source: Mapa da Violencia 2013 Source: Transparency International

Figure 29: Perception of Corruption/ Extreme Corruption in the

Source: United Nations World Tourism Organization

The situation of tourism in Brazil has been somewhat

Figure 32: Tourist Arrivals in Brazil

Source: Transparency International, Global Corruption Barometer 2013

diversified territory, Brazil is not among the 30 most

Table 11: Travel and Tourism Competitiveness Rank

Source: World Economic Forum

Brazil is ranked 51st in the overall tourism and

Policy rules and regulations 119 2 Singapore 0

Safety and security 73 4 Germany +2

Looking across the board, it is easy to evaluate that

worst in terms of the burden of government regulation.

Another important matter that is still pushing Brazils Tax Rates

the worst in the world (140).

Also poorly ranked were items correlated with Policy Instability

Economic Activity overnment started to have a much more preponderant

Figure 38: Consensus Expectations for 2013 and 2014 GDP

According to the IMF, the Brazilian economy is the

More important, on the demand side, growth of fixed

Figure 42: GDP Components by Sector (Supply Side)

Source: IBGE, J.P. Morgan

GDP Composition: Looking at GDP composition

Figure 44: Latin America GDP 10-Year Average

Conversely, the region responsible for the lowest share

Government policy reaction to weak GDP: In 2H11,

Table 20: Stimulus Measures from Mid-2012 Onward

Telecom Apr-13 Tax exemption on smartphones 0.5/ year

Investments ratio, at least in theory. Also, the investment drive is

Figure 47: Gross Fixed Capital Formation

Source: IPEA, J.P. Morgan

The low investment ratio can also be observed in the

Figure 50: Capacity Utilization (% of Total Installed Capacity)

Figure 48: Gross Capital Formation (% of GDP)

Logistics and Infrastructure Investment