Credit Suisse Analysis Brasil 2019-2020

Brazil
Positive scenario for 2019 and 2020
Leonardo Fonseca
leonardo.fonseca@credit-suisse.com
Lucas Vilela
lucas.vilela@credit-suisse.com
5 December, 2018
Important Information: This report represents the views of the Investment Strategy Department of Credit Suisse and has not been prepared in accordance with the
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35 December, 2018
Index
 Summary 5
 Politics 17
 External sector 51
 Inflation 85
 Monetary policy 109
 Economic activity 141
 Fiscal policy 175
 Financial markets 221
 Brazil in numbers 243

65 December, 2018
Overview
 The two main structural problems of the Brazilian
economy are low economic growth and the
deterioration of public accounts:
– GDP growth was close to 2.0% per year on average
between 1980 and 2018, with most of this growth
coming from demographic factors. Labor productivity
grew by only 0.2% per year on average in the same
period. In recent years, the dynamics of productivity
have been even worse.
– Public accounts have been on a path of significant
deterioration in recent years due to the strong growth in
primary expenditures, especially mandatory ones. The
incoming administration will need to implement a strong
fiscal adjustment in order to stabilize gross debt as a
percentage of GDP in the medium term.
Diagnosis: low growth and deteriorated fiscal accounts
Breakdown of GDP growth
(%, pps)
Primary balance of the central government
(% of GDP)
14
15
16
17
18
19
20
21
Source: The Conference Board, National Treasury, Credit Suisse
Net revenues
Total expenditures
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Productivity Demography
1950-1980 1981-2018
Periods
2001-2018
3.4
3.1
0.2
2.0 1.7
0.6

75 December, 2018
Overview
 The incoming administration will have to focus on
the fiscal consolidation process and the productivity
agenda to put the country back on the path of
sustainable development:
– Productivity agenda: The country's low productivity is
explained by a combination of factors. Among the main
measures in this area, we highlight the tax reform, the
opening of Brazilian economy to trade, the
competitiveness of the banking system, privatizations,
and education reform.
– Fiscal consolidation: Mandatory spending accounts for
the majority of primary expenditures, with social
security accounting for most of these expenditures.
Social security reform is necessary, but it will hardly be
enough to solve the country's entire fiscal problem. The
freezing of public-sector wages, the reduction of fiscal
subsidies, and even increasing the tax burden are
additional measures that could be addressed.
Solution: microeconomic and fiscal reforms
Source: National Treasury, World Economic Forum, Credit Suisse
Global competitiveness index for emerging markets
Breakdown of primary expenditures of central government
(%, 2017)
47.8%
22.2%
10.3%
19.7% Social security (INSS) + continuous cash benefit program
Personnel and social charges
Mandatory, ex continuous cash benefit program (BCP)
Discretionary expenditures – all branches
23
25
27
31
32
33
36
38
39
40
49
51
53
56
60
61
66
68
72
80
92
99
100
114
115
127
Malaysia
Qatar
China
Czech Republic
Thailand
Chile
Indonesia
Russian Federation
Poland
India
Bulgaria
Mexico
Turkey
Philippines
Hungary
South Africa
Colombia
Romania
Peru
Brazil
Argentina
Bangladesh
Egypt
Uganda
Pakistan
Venezuela

85 December, 2018
Overview
 Most of the necessary reforms requiring approval by the Brazilian Congress in the coming years need either a
qualified majority or 60% of the members of each house of Congress.
 In the general election of 2018, the party of the president-elect succeeded in becoming one of parties with
the highest number of representatives in the Chamber of Deputies and won four seats in the Senate.
 Congress has become more aligned with the president-elect's ideology, with centrist and right-wing parties
increasing their representation at the expense of leftist parties, which now hold about 30% and 22% of the
seats in the Chamber of Deputies and the Senate, respectively.
 Jair Bolsonaro's strong performance in both the first round and in the runoff and the high influence of his support in
gubernatorial elections indicate that the president-elect will not have low popularity in the beginning of his term.
 The first year of a presidential term is very productive. Congress has approved on average two constitutional
amendments authored by the executive branch in the first year of each presidential term since 1995.
Furthermore, 45% of constitutional amendments approved occurred in the first year of the president's term.
 Congress has been debating some major reforms (e.g., social security) in recent years, which makes the
prospects of approval of these measures more favorable.
 The macroeconomic scenario (e.g., economic activity, employment, and inflation) keeps improving and should
make a positive contribution to the new president's popularity.
Base scenario: benign environment for reforms
Source: Credit Suisse

95 December, 2018
Overview
 Our baseline scenario assumes that the incoming administration will be able to win approval of some major
reforms, particularly the social security and tax reforms. We also expect progress in the concessions and
privatization programs, as well as a reduction of trade barriers.
 We are forecasting:
– Continuity of the economic recovery: We expect GDP growth of 3.0% in 2019 and 2.5% in 2020, driven mostly by the
main components of domestic demand, particularly household consumption and investments.
– Low and stable inflation: Inflation should increase from 3.7% in 2018 to 4.2% in 2019 and 2020. High idle capacity will
allow inflation to remain low for the coming quarters, and the anchoring of expectations regarding fiscal policy should keep
the dynamics of the exchange rate less volatile.
– Gradual normalization of monetary policy: The scenario of low and stable inflation will allow the Central Bank of Brazil to
normalize the interest rate more smoothly, with the Selic basic interest rate reaching 8.0% at the end of 2019 and 9.0% in
2020.
– Lower fiscal imbalances: The approval of social security reform and the use of non-recurring revenues should contribute to
significant improvement in fiscal accounts in the short term.
– Maintenance of a strong external position: High international reserves, low foreign debt, and foreign direct investment
inflows far outstripping the current-account deficit continue to suggest low vulnerability of external accounts.
Base scenario: higher GDP growth and stable inflation

105 December, 2018
Overview
 The main negative risks are:
– Approval of a less robust social security reform, leading to a de-anchoring of market expectations regarding the
sustainability of fiscal accounts.
– Faster and stronger monetary tightening cycle in United States.
– Lower-than-expected growth of the Chinese economy.
– Intensification of the trade war between the United States and China.
 The main positive risks are:
– Faster approval of tax and productivity reforms, leading to renewed appreciation in domestic asset prices.
– Even more significant monetary stimulus, leading to a more substantial acceleration of economic activity and a reduction of
the perception of fiscal risk.
– A larger agenda of privatizations and concessions than that embedded in our base-case scenario, which would foster
short-term growth and productivity.
Risks: non-robust reforms and higher foreign rates

115 December, 2018
Fiscal agenda is main domestic risk for 2019 and 2020
Positive risks
 Faster approval of fiscal and productivity reforms.
 Even more significant monetary stimulus.
 A larger agenda of privatizations and concessions.
Negative risks
 Approval of a less robust social security reform.
 Faster and stronger monetary tightening cycle in United States.
 Lower-than-expected growth of the Chinese economy.
 Intensification of the trade war between the United States and China.
 Further deterioration of fiscal accounts of states and municipalities.
 Contagion due to additional deterioration of fundamentals in some
emerging markets.

125 December, 2018
Rise in global risk aversion would increase inflation
 We estimated our version of the central bank's Dynamic Stochastic General Equilibrium model (SAMBA) in
order to understand the impact of the external risks on our base-case scenario.
 For example, assuming a sharp increase in risk aversion, measured by the VIX reaching the same level
observed during the global financial crisis of 2008, we would see the following: domestic risk aversion would
increase considerably and the exchange rate would depreciate sharply. As a result, year-on-year consumer
inflation would increase considerably, anticipating the monetary tightening cycle.
-10
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
Impulse response function of each variable to shock in VIX external risk aversion
Real exchange rate
(%)
-5
0
5
10
15
20
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
Domestic risk aversion
(points)
0.0
0.5
1.0
1.5
2.0
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
IPCA consumer inflation
(pps, year-on-year change)
Source: Bloomberg, Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse
Median Lower bound Upper bound

135 December, 2018
Central bank would anticipate tightening cycle
 Despite the high idle capacity and the benign dynamics of consumer inflation in recent months, potential
depreciation of the exchange rate in a scenario of a sharp increase in external risk aversion would drive
consumer inflation to levels above the center of the central bank's target and consequently lead the monetary
authority to anticipate the tightening cycle.
 The recent recovery of economic activity would be interrupted, with household consumption being the main
driver of a recession.
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
Impulse response function of each variable to shock in VIX external risk aversion
GDP growth
(pps, quarter-on-quarter change)
Selic domestic interest rate
(pps, per quarter)
Growth in household consumption
Source: Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse

145 December, 2018
Monetary policy in USA is another important risk factor
 Another important risk factor for 2019 and 2020 is the pace of monetary tightening in the USA. The effects
on economic activity and inflation would be similar to those observed in the alternative scenario of a sharp
increase in the external risk aversion.
 For example, an increase of 100bps in the Fed funds rate is compatible with 8% depreciation of the real
exchange rate, causing year-on-year inflation to increase by 40bps in the next few quarters.
Impulse response function of each variable to shock in Fed funds rate
IPCA consumer inflation
(pps, year-on-year change)
Real exchange rate
(%)
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
-2
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9 10 11 12
Quarters

155 December, 2018
Acceleration of economic activity would be reversed
 The central bank would start a tightening cycle to combat the inflationary effects of depreciation of exchange
rate and to keep inflation close to the center of the target.
 The substantial tightening of financial conditions would reverse the recent resumption of economic activity. The
negative effects on domestic demand would drive a decline in household consumption and, consequently, in
GDP in the quarters ahead.
Impulse response function of each variable to shock in Fed funds rate
GDP growth
Selic basic interest rate
(pps, per quarter)
Growth in household consumption
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
1 2 3 4 5 6 7 8 9 10 11 12
Quarters
0.00
0.05
0.10
0.15
0.20
0.25
1 2 3 4 5 6 7 8 9 10 11 12
Quarters

185 December, 2018
Incoming administration to approve economic reforms
 President-elect Jair Bolsonaro will take office on January 1. The incoming administration will likely approve a
pension reform, since it will benefit from:
– Bolsonaro’s high popularity at the beginning of his term, as suggested by the significant number of votes for him in the first
and second rounds of the presidential election and by the strong influence he had on both gubernatorial and legislative
elections.
– The “grace period” seen in all previous first years of presidential terms.
– Two years of debate regarding the need for congressional approval of social security reform makes the environment more
favorable for the next administration.
– The majority of the new Congress favors social security reform, as suggested by some opinion polls.
 The government should also be able to win approval of other important reforms: privatization of state-owned
companies, bilateral trade agreements, central bank autonomy, and microeconomic measures to enhance
labor productivity.
 However, there are risks to the implementation of these agendas. The main risk is the lack of a political
coalition. The fragmented Congress, the incoming administration’s rejection of the traditional way of
negotiating with political parties, and the need for widespread support for approval of constitutional
amendments to enable the reforms portend a challenging scenario for the new administration.

195 December, 2018
Jair Bolsonaro won in 16 of 27 states
 Bolsonaro won in 16 of the 27 states, with strong
performance in the South, Southeast, and Central
West regions.
 Of the six most populous states of the country (i.e.,
São Paulo, Minas Gerais, Rio de Janeiro, Bahia,
Rio Grande do Sul, and Paraná), Bolsonaro won in
five and Haddad only in Bahia.
 Considering all runoffs since Brazil’s
redemocratization in 1985, Bolsonaro’s margin of
victory over Haddad (counting valid votes only) was
the fourth-largest.
Election outcome by state
Runoff results since redemocratization
SC (24.1 | 75.9)
(27.8 | 72.2) RO
(22.8 | 77.2) AC
AM
(49.7 | 50.3)
PR (31.6 | 68.4)
RS (36.8 | 63.2)
(28.4 | 71.6) RR
AP (49.8 | 50.2)
PA
(54.8 | 45.2)
MT
(33.6 | 66.4)
(34.8 | 65.2) MS ES (36.9 | 63.1)
RJ (32.0 | 68.0)
SP (32.0 | 68.0)
MG (41.8 | 58.2)
SE (67.5 | 32.5)
AL (59.9 | 40.1)
PE (66.5 | 33.5)
PB (65.0 | 35.0)
RN (63.4 | 36.6)
BA
(72.7 | 27.3)
CE (71.1 | 28.9)
MA (73.2 | 26.8)
PI (77.0 | 23.0)
DF (30.0 | 70.0)
Jair Bolsonaro carried the state
Fernando Haddad carried the state
State
(Haddad % | Bolsonaro %)
(34.5| 65.5) GO
TO
(51.0 | 49.0)
Source: Superior Electoral Court (TSE), Credit Suisse
53% 47%
61%
39%
61%
39%
56%
44% 52% 48% 55%
45%
1989 2002 2006 2010 2014 2018
Fernando Collor Lula Lula José Serra Lula Geraldo Alckmin Dilma Rousseff José Serra Dilma Rousseff Aécio Neves Jair Bolsonaro Fernando Haddad

205 December, 2018
Bolsonaro’s support was decisive in gubernatorial elections
 In the 2018 elections, Bolsonaro’s party (PSL) won governorships for the first time. The party managed to win
in 3 of the 27 states.
 Furthermore, support for Bolsonaro was decisive in the main gubernatorial races in the country, namely in the
three most populous states: São Paulo, Rio de Janeiro, and Minas Gerais.
 The PSDB remained the party with the highest support among the country’s registered voters, declining from
36% in the previous election to 29% in this one.
Percentage of total voters in states, by governor's partyGovernorships, by party
7%
29%
15%
20%
36%
24%
21%
43%
16%
22%
43%
14%
21%
46%
3%
22%
37%
8%
20%
51%
3%
38%
4%
0%
2018 2014 2010 2006
2002 1998 1994 1991
SP
MG
RJ
ES
PR
SC
RS
MS
MT
GO
DF
BA
PI
MA
CE
RN
PB
PE
AL
SE
RO
AC
AM
PA
RR
AP
TO
PSDB
MDB
PSD
PSB
PCdoB
PP
PSL
PSC
PDT
PT
Novo
PHS
DEM

215 December, 2018
New administration to reduce number of ministries
 President-elect Jair Bolsonaro
announced that he will reduce the
number of ministries from the
current 29. The number of ministries
had already been reduced by
President Temer, from 39 under the
previous administration.
 New ministries will take on
responsibilities currently borne by
other departments, with the Ministry
of Economy and Ministry of Justice
being the main examples of these
new structures. The former will
aggregate the Ministries of Planning
and Industry, while the latter will
incorporate the Ministry of Public
Security.
Source: Federal government, Credit Suisse
New government structure
(already announced)
Ministry of Justice
Ministry of Public Security
Ministry of National Integration
Ministry of Cities
Ministry of Finance
Ministry of Planning, Development, and Management
Ministry of Social Development
Ministry of Culture
Ministry of Sports
Ministry of Transportation, Ports, and Civil Aviation
Office of the Presidential Staff
Office of Institutional Security
Secretariat of Government of the Executive Office of the President
Office of the Secretary-General to the President of Brazil
Ministry of Defense
Ministry of Exterior Relations
Ministry of Education
Ministry of Health
Ministry of Agriculture and Food Supply
Ministry of Tourism
Office of the Federal Attorney General
Ministry of Transparency and Office of Federal Inspector General
Ministry of Science, Technology, Innovation, and Communications
Central Bank of Brazil
Ministry of the Environment
Ministry of Mines and Energy
Ministry of Human Rights
Ministry of Labor
Ministry of Industry, Foreign Trade, and Services
Ministry of Justice
Ministry of Regional Development
Ministry of Economy
Ministry of Citizenship
Ministry of Infrastructure
Office of the Presidential Staff
Office of Institutional Security
Secretariat of Government of the Executive Office of the President
Office of the Secretary-General to the President of Brazil
Ministry of Defense
Ministry of Exterior Relations
Ministry of Education
Ministry of Health
Ministry of Agriculture
Ministry of Tourism
Office of the Federal Attorney General
Ministry of Transparency and Office of Federal Inspector General
Ministry of Science and Technology
Central Bank of Brazil
Ministry of the Environment
Ministry of Mines and Energy
Ministry of Human Rights
Old government structure

225 December, 2018
Proposal to merge Camex would facilitate trade deals
 Currently, the authority that negotiates trade deals in Brazil is the Chamber of Foreign Trade (Camex), a
branch of the Ministry of Industry headed by a council of ministers. In recent years, the lack of consensus
among Camex members and the reduced efforts of past administrations in furthering trade openness hindered
new international negotiations. As a result, Brazil is considered one of the most closed economies in the
world.
 Bolsonaro’s minister of economy has proposed to merge the Camex into the Ministry of Economy in order to
facilitate the voting process and expedite the opening up of the economy.
Mercosur agreements Signing
Congressional
approval in Brazil
Enactment
Mercosur India 2004 2008 2009
Mercosur SACU 2009 2015 2016
Mercosur Egypt 2010 2015 2017
Mercosur Israel 2007 2009 2010
Mercosur Peru 2016 2017 -
Mercosur Palestine 2011 - -
Post-negotiation enactment of a
trade deal can take several years
Source: Ministry of Development, Industry and Foreign Trade (MDIC), Brazilian Confederation of Manufacturers (CNI), Credit Suisse
Signing of deal by
heads of state
Congressional
approval by
member-states of
Mercosur and
measures needed
by counterparty
Enactment into law
by president of
BrazilDevelopment,
Industry,
and Foreign
Trade (MDIC)
Presidential
staff
Economy
Transportation
Agriculture
Planning
Secretary-
general
Council of
Ministers
of Camex
Foreign
affairs

235 December, 2018
Luiz
Henrique
Mandetta
age 54
Paulo
Guedes
age 69
Tereza
Cristina
age 64
Marcos
Pontes
age 55
Onyx
Lorenzoni
age 64
Augusto
Heleno
age 71
Sérgio
Moro
age 46
Summary background of Bolsonaro’s ministers
Few political appointments on team of ministers
Place of
birth
Rio de Janeiro
RJ
Bauru
SP
Campo Grande
MS
Porto Alegre
RS
Curitiba
PR
Maringá
PR
Campo Grande
MS
Ministry Economics Science and TechnologyAgriculture and cattle raising Chief of Staff Institutional Security
Cabinet
Justice Health
Education Economics at UFMG
Master's in economics at
EPGE/FGV
PhD in economics at University of
Chicago
Bachelor's in aeronautical
technology at Academy of the Air
Force
Bachelor's in public administration
at Academy of the Air Force
Aeronautical engineering at
Aeronautics Institute of
Technology (ITA)
Master's in systems engineering
at Naval Postgraduate School,
California
Agricultural engineer at UFV Veterinary medicine at
UFSM
Military Academy of
Agulhas Negras
Officer Training School
(EsAO)
School of Command and
Joint Chiefs of Staff of the
Army (ECEME)
Law at State University of
Maringá
Master's degree in law at
UFPR
Doctorate in law at UFPR
Medicine at Gama Filho
University
Experience
in public
sector
Pilot of Brazilian Air Force
Astronaut at NASA
Federal Deputy (DEM) for MS
(2014–2018)
Secretary of Agricultural
Development, Production,
Industry, Commerce, and
Tourism (Seprotur) of the State
of Mato Grosso do Sul
Leader of the Agriculture Caucus
in the lower house
State assembly member in
RS (1995–2003)
Federal deputy (2003–
2018)
Commander of the
Preparatory School for
Army Cadets (EsPCEx)
Mission Commander of the
UN for the Stabilization of
Haiti (2004/05)
Head of the Department of
Science and Technology of
the Armed Forces
Federal judge
First-instance judge for
cases related to Operation
Car Wash
Assistant to Justice Rosa
Weber for money-for-votes
case known as "Mensalão"
Associate professor at
UFPR
Secretary of Health of the
Municipality of Campo
Grande
Federal Deputy (DEM) for
MS (2011–2018)
Experience
in private
sector
Part-time professor at PUC Rio
Part-time professor at IMPA
Professor at University of Chile
Director, partner, and professor
at IBMEC
Founding partner of Banco
Pactual
Founder of Instituto Millenium
Founding partner of Bozano
Investimentos
UN Ambassador for Industrial
Development
Director of Federation of
Agriculture and Cattle Raising of
Mato Grosso do Sul, of the
Association of Seed Producers
of Mato Grosso do Sul, of the
Association of Cattle Breeders
of Mato Grosso do Sul, and of
the Farmers' Associations of
Sonora, Terenos, and Campo
Grande.
Military physician
Member of finance
committee of Unimed
Campo Grande
Physician of Santa Casa
de Campo Grande
hospital
President of Unimed
Campo Grande

245 December, 2018
Roberto
Campos
Neto
age 49
André Luiz
de Almeida
Mendonça
age 45
Wagner
Rosário
age 43
Gustavo
Bebianno
age 54
Fernando
Azevedo
age 64
Ernesto
Araújo
age 51
Ricardo
Vélez
Rodríguez
age 75
Place of
birth
Santos
SP
Rio de Janeiro
RJ
Juiz de Fora
MG
Rio de Janeiro
RJ
Porto Alegre
RS
Bogotá
Colombia
Ministry Office of the Federal Attorney
General
Office of the Secretary-General
to the Presidentof Brazil
Office of the Federal
Inspector General
Defense Exterior Relations Education Central Bank
Education  Law at Instituição Toledo de Ensino
 Postgraduate specialization in
public law at UnB
 Master's degree at University of
Salamanca
 Doctorate at University of
Salamanca
Law at PUC-RJMilitary Academy of Agulhas
Negras
Officer Training School (EsAO)
Physical education at School of
Physical Education of the Army
Postgraduate specialization
degree in exercise physiology at
Gama Filho University
Master's degree at University of
Salamanca
Military Academy of
Agulhas Negras
Officer Training School
(EsAO)
School of Command and
Joint Chiefs of Staff of the
Army (ECEME)
Language and literature at
UNB
Rio Branco Institute
Humanities at Tihamer
Toth Institute
Theology at Seminário
Conciliar de Bogotá
Master's in philosophy at
PUC-RJ
Ph.D in philosophy at
Universidade Gama Filho
Post doctoral Centre de
Recherches Politiques
Raymond Aron Paris
Economics at UCLA
Postgraduate degree in
economics at UCLA
Experience
in public
sector
Director of the Department of
Public Property and
Administrative Probity of the
Office of the Chief Federal
Prosecutor (2008)
General administrative officer of
the Office of the Federal Attorney
General (2016)
Vice-director of the Office of the
Federal Attorney General (2018)
President of PSL partyMinister of the Ministry of
Transparency and Office of
Federal Inspector General
Captain of the Brazilian Army
General of Eastern
Command
Chief of Staff of the Army
Deputy chief of staff of the
office of the President
President of the Olympic
Public Authority
Advisor in Mercosur
division of Itamaraty
Secretary of the Brazilian
Mission to the European
Union
First-Class Minister of the
Department of the United
States, Canada and Inter-
American Affairs
Experience
in private
sector
Lawyer University professor at
UFJF
Professor Emeritus at
EsAO
Vice-president of
postgraduate
specialization and
research at University of
Medellín
Chief of treasury and
regional and international
markets (2010-2018)
Head of trading at
Santander (2006 -2010)
Trader at Santander
(2003-2006)

255 December, 2018
Tarcísio
Gomes
de Freitas
age 43
Osmar
Terra
age 68
Gustavo
Canuto
age 40
Marcelo
Álvaro
Antônio
age 44
Carlos
Alberto
Santos Cruz
age 66
Bento
Costa
Lima Leite
age 60
Place of
birth
Ministry
Education
Experience
in public
sector
Experience
in private
sector
Crateús
CE
Paranavaí
PR
Porto Alegre
RS
Belo Horizonte
MG
Rio Grande
RS
Rio de Janeiro
RJ
Ministry of Infrastructure Ministry of Regional DevelopmentMinistry of Citizenship and Labor Tourism Secretariat of Government Mining and Energy
Military Academy of Agulhas Negras
Engineering at IME
Postgraduate specialization in project
management at FGV
Computer engineering at Unicamp
Law at Brasília University Center
(UniCEUB)
Medicine at UFRJ
Specialization in perinatal care,
education, and baby development at
UNB
Civil Engineering at University
Center of Belo Horizonte (not
completed)
Civil engineering at PUC
Campinas
Military Academy of Agulhas
Negras
School of Command and Staff
of the Army (ECEME)
Postgraduate specialization
degree in political sciences from
UNB
MBA in public management
from FGV
MBA in international
management
Command and general staff
course
Head of technical section of the
engineering of peacekeeping mission
in Haiti (2005–2006)
Infrastructure auditor and general
coordinator of transportation auditing of
the Office of the Federal Inspector
General (2008–2011)
Director of the National Transportation
Infrastructure Department (2011–
2015)
Secretary of project coordination of the
PPI
Advisor to the Office of the Secretary
of Civil Aviation to the President
(2011-2014)
Chief of staff of the Office of the
Secretary of Civil Aviation to the
President (2014-2016)
Chief of staff of the Ministry of National
Integration (2016-2018)
Minister of Social and Agrarian
Development (2016-2018)
Federal Deputy - MDB (RS) (2001-
2011l, 2015-2019)
Secretary of Health of Rio Grande do
Sul (2003-2010)
Mayor of Santa Rosa (RS) (1993-
1996)
Federal Deputy (MG -PSL)
(2014-2018)
City assembly member of Belo
Horizonte (2013-2015)
President of PSL party in Minas
Gerais
Commander of peace mission
in Haiti (2006–2009)
Commander of peace mission
in Congo (2013–2015)
Special Advisor to Secretary of
Strategic Affairs
Secretary of Public Security
(2017–2018)
Chief of the General Staff of
the Army
Chief of Staff of the Office of
the Navy Commander
Chief of the Naval Fleet
General director of nuclear and
technical development of the
Navy
Systems analyst – IBM (2004-
2010)

265 December, 2018
Economics team to follow a liberal agenda
Name Salim Mattar
Roberto Castello
Branco
Joaquim
Levy
Mansueto
de Almeida
Rubem
Novaes
Pedro
Guimarães
Position
Office of the
Secretary-General
of Privatization and
Demobilization
Petrobras
Brazilian
Development
Bank (BNDES)
Brazilian
Treasury
Banco do Brasil
Caixa Econômica
Federal
Education  Business
administration at
FUMEC
 Doctorate in
economics at
EPGE/FGV
 Post-doctorate in
economics at
University of Chicago
 Master's degree in
economics at
EPGE/FGV
 Doctorate in
economics at
 Undergraduate
degree in economics
at UFC
 Master's degree in
economics at USP
 Doctorate in
economics at
 Doctorate in
economics at
University of
Rochester
Professional
experience
 Chairman of board of
directors of Localiza
 Professor at
EPGE/FGV
 President of IBMEC
 Governor of Central
Bank of Brazil
 Chief economist at
Vale
 National treasury
secretary
 Superintendent
director of BRAM
 Finance minister
 Director of finance at
World Bank
 Researcher at IPEA
 National treasury
secretary
 Professor at FGV
 President of SEBRAE
 Director at BNDES
 Partner at Brasil Plural
investment bank
 Research analyst in
financial sector

275 December, 2018
Economics team to follow a liberal agenda
Name
Position
Special Secretary of
Social Security and
the Brazilian Revenue
Service
Special Secretary of
Foreign Trade and
Foreign Affairs
Institute of Applied
Economic Research
(Ipea)
Secretary of
Productivity
Secretary of Finance Secretary of Planning
Education  Bachelor’s in
economics at Harvard
 Master’s in economics
at Harvard
 Ph.D in economics at
Harvard
 Bachelor’s in political
science at USP
 Ph.D. in sociology of
international relations
at USP
at Universidade
Candido Mendes
 Bachelor’s in
economics at UERJ
at UCLA
 Ph.D. in economics
at UCLA
 Bachelor’s in
Engineering at ITA
 Master’s in
Economics at
University of Michigan
 Ph.D. in economics at
UnB
 Bachelor’s in law at
UFRGS
 Mater’s in Public
Administration at
Columbia University
Professional
experience
 Professor at
EAESP/FGV
 President of Finep
 Federal Deputy
 Director of BRICLab
of University of
Columbia
 Researcher at
Sorbonne University
 Member of the
advisory board of the
World Economic
Forum
 Director of BNDES  General coordinator at
Secretariat of
Economic Policy
 Senior economist at
Ipea
 Secretary of
Administration of the
City of Sao Paulo
 Executive Director of
Instituto Millenium
 Global CEO of LIDE
- Group of Business'
Leaders
 Former Secretary of
Finance of Rio de
Janeiro
 President of Banco do
Estado do Rio de
Janeiro (Banerj)
Marcos Cintra
Carlos Alexandre
da Costa
Paulo UebelMarcos Troyjo
Carlos von
Doellinger
Waldery
Rodrigues Jr.

285 December, 2018
PT and PSL are parties most represented in Chamber
 With 52 deputies, the PSL, the party of president-elect Jair Bolsonaro, will have the second-highest number
of representatives in the Chamber of Deputies. The PT will be the main opposition party, with 56 deputies.
 The two other traditional parties, the PSDB and the MDB, saw a significant reduction in their representation:
the number of PSDB deputies declined from 54 to 29 and the number of MDB deputies, from 66 to 34.
Party representation at Chamber of Deputies
PSOL 10
PT 56
PPL 1
PDT 28
PSB 32
PHS 6
PV 4
PCdoB 9
REDE 1
PPS 8
PROS 8
SD 13
513
deputies
PTB 10
PTC 2
PODE 11 AVANTE
7
PSDC 1
MDB
34
PMN
3
PSD
34
PSDB 29
PR 33
PRB 30
PEN 5
PP 37
PSC 8
NOVO 8
DEM 29
PRP 4
PSL 52

295 December, 2018
MDB will remain largest party in Senate
 Despite losing four seats, the MDB will remain the largest party in the Senate. President-elect Jair
Bolsonaro's PSL will be represented by four senators.
 The PT’s representation declined from 13 to 6 seats. Although it is still the largest leftist party in the Senate, it
is now trailed closely by both Rede and the PDT.
Party representation in Senate
PT 6
PDT 4
PSB 2
PHS 2
REDE 5
PPS 2
PROS 1
SD 1
PTB 3
PTC 1
PODE
5
MDB
12 PSD
7
PSDB 8
PR 2
PRB 1
PP 6
PSC 1
DEM 6
PRP 1
PSL 4
No party affiliation 1
81
senators

305 December, 2018
Twelve parties have not met barrier clause in 2018
 As of 2019, these parties will no longer have access to publicly funded radio and TV advertising time and the
Party Fund. Seven of the twelve parties are represented in Congress, with a total of 21 deputies. Parties may
merge to reach the threshold or representatives could defect to gain access to funds and advertising time in
other parties.
Simulation for the barrier clauses
for upcoming elections Elections
2018 Elections
2022 Elections
2026 Elections
2030
Percentage of valid votes...
... distributed in at least nine of the federated
units of Brazil, with at least the following
percentage of valid votes
Minimum number of deputies, distributed
in at least nine of the federated units
Source: Superior Electoral Court (TSE), Chamber of Deputies, Credit Suisse
1.0 1.0 1.5 2.0
9 11 13 15
1.5 2.0 2.5 3.0
Parties meeting the barrier clause in electoral cycle
based on 2018 results
23 17 13 11
or

315 December, 2018
51
9 9 8 8 7 6 5 3 1 1
-1 -1 -1 -2 -2 -2 -2 -3 -4 -5
-13 -15
-25 -32
4 4 3
2 2
1 1 1 1 1 1
0 0 0 0 0
-1 -1 -1
-2
-3
-4
-6
Representation of PSL in Chamber of Deputies rose to 10%
 Bolsonaro’s party (PSL) saw a strong increase in its representation in both houses of Congress and is now the
second most represented party in the lower chamber. The PSL increased its number of seats in the Chamber
of Deputies from 1 in 2014 to 52 in 2018, and from 0 to 4 seats in the Senate.
 The traditional PT, MDB, and PSDB were among the parties with the highest decline in representation in the
lower chamber.
Change in total Lower House representatives per party between 2014 and 2018
Change in total Senate representatives per party between 2014 and 2018

325 December, 2018
Bolsonaro will need to build a majority in Chamber
 Despite the strong increase in the representation of the PSL in the Chamber of Deputies, Bolsonaro will be
the president with the lowest representation in the lower chamber since the redemocratization. He will need
additional support from other center-right parties in order to have a majority in the lower chamber.
 However, the parties on the left (e.g., PT, PDT, and PSB), which will probably vote against the government’s
proposals regardless of the subject matter, will hold 27% of the seats in the Chamber of Deputies in 2019.
Distribution of parties in the Chamber (Seats)
1994 1998 2002 2006 2010 2014 2018
Main rightwing parties
PSL 0 1 1 0 1 1 52
PP 85 60 49 41 44 38 37
MDB 107 83 75 89 78 66 34
PSD 3 3 4 0 0 36 34
PR 13 12 26 23 41 34 33
PRB 0 0 0 1 8 21 30
PSDB 63 99 70 66 54 54 29
DEM 89 105 84 65 43 21 29
PTB 32 31 26 22 22 25 10
Main leftwing parties
PT 50 59 91 83 86 69 56
PSB 15 18 22 27 35 34 32
PDT 34 25 21 24 27 19 28
Other
Other parties 22 17 44 72 74 95 109
President’s party

335 December, 2018
Distribution of parties in the lower chamber (% Chamber)
10
5
4
3
2
1
0
9
8
7
6
11
Median legislator
Left Center Right
8PPS
56PT
32PSB
28PDT
10PSOL
9PCdoB
1PPL
8PROS
34PSD
34MDB
29PSDB
33 PR
37 PP
30 PRB
29 DEM
52PSL
13SD
11 Podemos
7 Avante
3 PMN
1
DC
2PTC
8 NOVO
5 PATRI
8PSC10PTB
4 PRP6PHS
1REDE 4PV
Neutral center-right
Neutral center-left Haddad coalition
X Meets barrier clauseBolsonaro coalition
X Doesn’t meet barrier clause
Note: Graph extracted from an article by professors Carlos Pereira and Frederico Bertholini for Folha de S. Paulo newspaper in October 2018.
Source: Folha de S. Paulo, Credit Suisse
Higher number of seats for right-wing parties in the Chamber
 PSL’s strong performance led to a rightwards shift on the balance of power in the Chamber.
 Coalition-building with parties around the ideological median will be important for the government. Traditional
parties such as MDB and PSDB will represent the median member of Congress.

345 December, 2018
Right-wing parties gained representation in Senate as well
 Right-wing parties increased their number of seats in the Senate from 11 in 2014 to 18 in 2018, while leftist
parties saw a reduction in the number of seats they control, from 29 in 2014 to 21 in 2018. As a result, the
centrist block continued to hold just over 50% of the total seats in the Senate.
 The composition of both houses reinforces the view that Bolsonaro will need to negotiate with the centrist
block in order to gather sufficient votes to approve structural reforms.
Composition of Chamber of Deputies,
by ideological alignment
Composition of Senate,
by ideological alignment
Sources: Superior Electoral Court (TSE), Congress, Kevin Lucas and David Samuels (2010), Credit Suisse
Left
Center and
right
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1994 1998 2002 2006 2010 2014 2018
Left
Center and
right
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1994 1998 2002 2006 2010 2015 2018

355 December, 2018
Distribution of parties in Senate (Seats)
1994 1998 2002 2006 2010 2014 2018
Main rightwing parties
MDB 20 25 25 19 19 17 12
PSDB 14 13 13 15 11 9 8
PSD 0 0 0 0 1 2 7
PP 6 0 0 1 5 5 6
DEM 19 17 15 13 6 5 6
PODE 0 0 0 0 0 3 5
PSL 0 0 0 0 0 0 4
PTB 4 4 4 7 5 3 3
PR 0 1 1 4 5 5 2
Main leftwing parties
PT 4 7 13 9 13 13 6
PDT 5 5 3 5 4 6 4
PSB 2 3 3 3 5 6 2
Other parties
Other parties 7 6 4 5 7 7 16
PSL will have fewer senators than former presidents’ parties
 The PSL will have only four senators, fewer than those of former presidents' parties at the beginning of their
terms. President-elect Jair Bolsonaro should have the support of some center-right and rightwing parties, such
as the PSD, DEM, and PP.
 Independent parties such as the MDB and the PSDB will play an important role in negotiations for approval of
measures in the Senate.
President’s party

365 December, 2018
Higher fragmentation in both houses of Congress
 Fragmentation has increased considerably in Congress in recent years. In 1999, 80% of deputies were
members of large parties (representing more than 10% of the total), much higher than today’s 20%.
 Medium-sized parties gained seats from more traditional ones, and more small parties managed to elect at
least one representative. The barrier clause is expected to partially reverse this movement.
Percentage of senators in parties, by size range
Percentage of deputies in parties, by size range Number of parties represented in each house
0%
25%
50%
75%
100%
1990 1994 1998 2002 2006 2010 2014 2018
0%
25%
50%
75%
100%
1994 1998 2002 2006 2010 2014 2018
10% of total deputies or more
5 - 10% of total deputies
3 - 5% of total deputies 0 - 3% of total deputies
10% of total senators or more
3 - 5% of total senators
Chamber of Deputies
Senate
Amount of parties
in compliance with
barrier clause
17
18
19
21
22
28
30
23
11
10
11
14
16
17
22
18
1994 1998 2002 2006 2010 2014 2018 2018*

375 December, 2018
Lower number of parties will be required to reach a coalition
 Despite the increase in fragmentation in the Chamber of Deputies, the minimum number of parties needed to
form a coalition of right-wing parties (led by the PSL) will be lower than the minimum number required to form
a left-wing coalition (led by the PT) at the beginning of the past four terms.
 Based on the classification of parties by ideology, we estimate that the minimum size of a coalition required to
approve a constitutional amendment in the lower chamber is 19 parties for the right and to 23 parties for the left.
Minimum number of parties needed to approve a PEC¹
1995 1999 2003 2007 2011 2015 2019
Rightwing coalition
Parties needed to approve a PEC 9 9 9 11 13 17 14
Pivotal party MDB MDB MDB PTB PTB PTB AVANTE
Leftwing coalition
Parties needed to approve a PEC 12 11 13 14 14 18 22
Pivotal party PSDB PSDB PSDB PSDB PSDB PSD PR
Excluding PSDB 13 14 14 14 14 18 21
Pivotal party excluding PSDB PP DEM PP PR PR PSD PR
Median party MDB PSD MDB MDB MDB MDB PSD
¹Counting from the right- or leftmost party, the amount of parties needed to get to a majority
Leftwing coalition
Parties needed to approve a PEC | 22
PSOL
PCdoB
PT
REDE
PDT
PPL
PSB
PHS
PPS
PV
PROS
SD
PTB
PTC
PODE
PSDC
AVANTE
MDB
PMN
PSD
PSDB
PR
Rightwing coalition
Parties needed to approve a PEC | 14
AVANTE
MDB
PMN
PSD
PSDB
PR
PRB
PEN
PP
PSC
NOVO
DEM
PRP
PSL
Rightwing
coalition
Leftwing
coalition
Median
party
PSD

385 December, 2018
Approval of PECs is a lengthy process
 To be enacted into law, a bill for constitution amendment (PEC) needs to be approved by four special
committees and in a floor vote by 60% of representatives in each house, in two rounds of voting.
 For PECs drafted by the executive branch, the average time from submission to enactment is 388 days. The
fastest this process has ever taken is 183 days and the slowest, 1352 days.
Source: Chamber of Deputies, Credit Suisse
Step-by-step process for congressional approval of a PEC
Legal committee in
house of origin
(Chamber of Deputies
or Senate)
Special
committee
Deadline of 40
plenary sessions
First round
of voting in
house of
origin
308 votes needed
in Chamber
49 votes needed
in Senate
Interval of
five sessions
Second round
of voting in
house of
origin
308 votes needed
in Chamber
49 votes needed
in Senate
Legal
committee in
second house
(Chamber or Senate)
Five sessions of debate
If there are amendments, the PEC will
return to the house of origin until the
same text is approved by both houses
of Congress
First round of
voting in
second house
49 votes needed
in Senate
308 votes needed
in Chamber
Interval of
five sessions
Second round
of voting in
second house
49 votes needed
in Senate
308 votes needed
in Chamber
Average time for processing PECs drafted by executive branch: 388 days | standard deviation: 163 days

395 December, 2018
First draft of pension reform met opposition in Congress
 President Michel Temer’s economics team drafted an austere pension reform in 2016. Many members of
Congress were opposed to it, which led to the proposal of a substitute bill.
 The substitute, currently awaiting a floor vote at the Chamber of Deputies, has a much more limited impact
than the original draft.
Main points of Temer’s social security reform and the Substitute proposal
Source: Chamber of Deputies, Secretariat of Social Security, Credit Suisse
Original draft Substitute
Fiscal impact
of the change
Minimum age 65 years 65 years for men, 62 for women High
Transition rule Rapid Gradual High
Calculation method
51% of average salary plus 1% per year of contribution, up
to 100% Minimum of 1 MW
70% of average salary plus 1.5% per each year of contribution,
from 25 to 30 years, or 2% per year, from 30 to 40 years
Low
Retirement benefit
for farm workers
Equal retirement regimes for workers, with tough transition
rule. Change in calculation method established by law.
Slight lower in minimum age for women. Benefit amount
established according to RGPS.
High
Survivor's pension
Cumulative pensions not allowed. Benefit amount was
reduced.
Cumulative payment of pension and retirement benefit allowed
up to 2 MW. Benefit amount was reduced.
High
Continuous Cash
Benefits (BPC)
Increase in minimum age for benefit entitlement, de-
indexation from MW
Lesser increase in minimum age for benefit entitlement. Medium

405 December, 2018
Tax reform proposed by federal deputy Hauly is broad
 The two tax reforms under consideration in the Chamber of Deputies (one proposed by federal deputy Luiz
Carlos Hauly (PSDB) and the other by Centro de Cidadania Fiscal) require a constitutional amendment, as
they make changes to multiple taxes and create new ones.
Main points of the two tax reforms being debated at Chamber of Deputies
Source: Chamber of Deputies, Center for Fiscal Citizenship, Credit Suisse
Tax reform
proposed by
Luiz Carlos
Hauly (PSDB)
States
Creation of value-added tax (VAT) to substitute the Tax on Industrialized Products (IPI), the Contribution to the Social Integration Program (PIS)/Social Security
Financing Contribution (Cofins) (both currently levied by the federal government), the State Tax on the Circulation of Goods and the Provision of Services (ICMS)
(currently levied by the state of origin), and the Municipal Service Tax (ISS) (levied by municipalities).
Levied at destination.
Double taxation prohibited.
Not levied on imported goods
Established at federal level to avoid tax war.
Rate reduced for medications and food.
Selective tax on oil, fuels, and other products established by a supplemental law.
Municipalities
State Motor Vehicle Ownership Tax (IPVA) and Rural Property Tax (ITR) to be levied on municipal level.
No exemptions allowed.
IPTU kept and estate tax may be kept.
Federal
government
Progressive income tax, with new rates established in bill of law. Incorporates the Social Contribution on Net Profit (CSLL).
Regulatory taxes (such as Cide fuels tax) are kept.
Tax on Financial Transactions (IOF) abolished.
Possible creation of a tax equivalent to the Provisional Contribution on Financial Transfers (CPMF).
Keeps total tax burden at 35% of GDP
Creation of new body combining all state tax authorities, under joint competence of states.
Broad sharing of income tax and VAT.
"Simples" regime and education allowance maintained.
Tax reform
proposed by
Centro de
Cidadania
Fiscal
States
VAT combining the following taxes: ICMS, PIS/Cofins, IPI, and ISS.
Levied at destination.
Double taxation prohibited.
Established by states.
Municipalities
Tax on goods and services at point of sale.
Double taxation on VAT prohibited.
Regulatory taxes on federal level.
Transition period of 50 years.

415 December, 2018
First year of a new term is much more effective
 The first year of a new term is usually more active
and productive for debating and implementing
reforms. Benefiting from his “honeymoon period,”
the new president will have more sway over
Congress to win approval of his measures.
 Of the 71 Bills for Constitutional Amendment (PEC)
authored by the executive branch, 38 were
submitted in the first year of the term. Approval of
PECs are even more concentrated in this period:
13 of all 24 executive-originated PECs enacted
were approved in the first year.
Proposed
Enacted by year
of proposition
Enacted by year
of enactment
Sarney 1989 0 0 0
Collor
1990 0 0 0
1991 6 0 0
1992 0 0 0
Itamar Franco
1993 3 0 0
1994 0 0 0
FHC I
1995 16 9 5
1996 5 1 2
1997 3 2 1
1998 3 1 3
FHC II
1999 4 1 2
2000 3 2 1
2001 4 1 1
2002 0 0 2
Lula I
2003 2 2 2
2004 4 0 0
2005 2 0 0
2006 0 0 0
Lula II
2007 5 2 2
2008 2 0 0
2009 1 0 0
2010 0 0 0
Rousseff I
2011 2 2 1
2012 0 0 0
2013 0 0 0
2014 0 0 1
Rousseff II 2015 4 0 0
Temer
2016 2 1 1
2017 0 0 0
2018 0 0 0
PECs authored by executive branch
Average PECs submitted and approved, by year of term
3.8
2.5
1.4
0.6
1.7
0.4 0.4
0.2
45%
15%
30%
33%
First year Second year Third year Fourth year
Proposed PECs Enacted PECs Success rate

425 December, 2018
Most presidents won approval of at least one PEC
 More PECs were drafted and enacted in former president Fernando Henrique Cardoso’s two terms than in
those of all subsequent presidents combined. President Lula won approval of constitutional amendments only
in the first year of both of his terms.
 The average approval time is long due to the increased requirements for approval of such legislation. The
Temer administration managed the fastest approval of a constitutional amendment: 183 days for approval of
the New Fiscal Regime.
President Proposed Enacted during term Overall enacted Average time of approval Rate of approval
FHC I 27 11 13 432 48%
FHC II 11 6 4 394 36%
Lula I 8 2 2 233 25%
Lula II 8 2 2 188 25%
Rousseff I 2 2 2 546 100%
Rousseff II 4 0 0 - 0%
Temer 2 1 1 183 50%
Overview of PECs drafted by executive branch, by administration

435 December, 2018
FHC administration drove major constitutional reforms
 In his eight years in power, FHC spearheaded changes into many parts of the Constitution.
 Some of the most economically significant of those reforms were the relaxation of requirements for investment in the
energy, mining, and oil sectors, removal of earmarking of government revenues, and the pension reform of 1995.
Approved executive-drafted constitutional amendments during FHC administration (1994–2002)
Year
proposed
Directly related
to economy
Removes a
right/privilege
Explanation
2001 Extension of CPMF tax
2000 Integration of military police from former Federal Territory of Rondônia into body of federal employees
2000 Exonerates export revenues from CIDE tax
1999 Extension of removal of constitutional earmarking of federal revenues (DRU)
1998 Reorganization of the Ministry of Defense and the Joint Chiefs of Staff
1997
Granted Federal Appeals Court (STJ) power to adjudge petitions for habeas corpus under certain situations and established that federal government can
create small-claims courts by means of a federal law
1997 Extension of FEF and FSE
1996 Makes provision on the constitutional regime of military personnel
1995 Defines responsibilities of each level of government regarding education and creates development fund
1995 Established ceiling on compensation for public-sector employees; created more flexible regime for some of them
1995 Extension of Fiscal Stabilization Fund (FEF) and Social Emergency Fund (FSE), predecessors of the DRU
1995 Changed social security, increasing time of contribution and reducing amount of benefits
1995 Relaxed rules requiring predominance of Brazilian vessels for maritime trade
1995 Relaxation of oil monopoly
1995 Relaxation of telecommunications monopoly
1995 Relaxation of piped gas monopoly
1995
Makes Brazilian companies equivalent to Brazilian companies with national capital. Also allowed Brazilian companies with foreign capital to
invest in mineral resources and hydropower

445 December, 2018
Since 2002, the pace of reforms has been slower
 President Lula supported a tax reform to make the overall tax system less regressive and a pension reform
reducing expenditures related to the social security reform for public-sector employees (RPPS).
 President Temer approved the New Fiscal Regime, which imposes a spending limit on federal government
spending for the next 10 years.
Approved executive-drafted constitutional amendments since FHC administration (2002–2018)
President in
office
Year
proposed
Directly related
to economy
Removes a
right/privilege
Explanation
Temer 2016
Instituted New Fiscal Regime, which imposes a rule prohibiting real growth in federal government expenditures over
the next ten years
Rousseff 2011 Extends for another 50 years the validity period of the Manaus Free Trade Zone
Rousseff 2011 Extension of removal of constitutional earmarking of federal revenues (DRU)
Lula 2007 Increased delivery of funds by federal government to Municipality Participation Fund (FPM)
Lula 2007 Extension of removal of constitutional earmarking of federal revenues (DRU)
Lula 2003
Tax reform with intention to achieve neutrality by, among other things, simplifying the ICMS, exempting a standard
box of food staples from taxes, increasing the federalization of funds, and extending the Provisional Contribution on
Financial Transfers (CPMF) and the removal of constitutional earmarking of federal revenues (DRU)
Lula 2003
Social security reform. Granted the Federal Supreme Court (STF) power to determine the salary of its judges, which
will serve as the ceiling for public-sector employees and public agents. Changed the Social Security Regime for
Public-Sector Employees (RPPS), reducing benefit amounts

455 December, 2018
Many unpopular measures approved in first year of new term
 Not only is the "honeymoon" the period in which a president’s legislative agenda is the busiest, it is also when
Congress is most open to approval of potentially unpopular measures.
 Most presidents have taken advantage of this period to submit bills for fighting inflation or for fiscal
consolidation.
President Measures Date submitted Date approved Deputies in favor Senators in favor
Collor
Savings confiscated by federal
government
15-Mar-1990 13-Apr-1990 249 55
Lula
Tax reform 30-Apr-2003 31-Dec-2003 346 55
Reform of Social Security Regime for
Public-Sector Employees (RPPS)
30-Apr-2003 31-Dec-2003 357 51
Rousseff
Much lower adjustment in minimum
wage than the usual
10-Feb-2011 25-Feb-2011 361 55
Temer Spending cap 15-Jun-2016 15-Dec-2016 359 53
Unpopular measures approved in first year of presidential term1
Note: In 1990 there were 503 federal deputies and 72 senators, less than the current 513 federal deputies and 81 senators.

465 December, 2018
“Honeymoon” also impacts approval of other laws
 Bills of supplemental law (PLP), which contain implementing regulations for provisions of the Constitution, also
have a high threshold for congressional approval, requiring 50% + 1 of votes in each full house of Congress.
 The average success rate of a PLP is significantly higher in the first term of a new administration. This
“honeymoon” effect is more muted for Provisional Decrees (MP) and bills of ordinary law (PL).
Average success rate of measures authored by executive branch
83%
78%
71%
79%
First year Second year Third year Fourth year
MPs PLPs PECs PLs
39% 36%
26%
45%
15%
30%
54%
33%
31%
33%
33%
39%

475 December, 2018
Popularity has little impact on conversion of decrees into law
 Much of a president's day-to-day governing is achieved through provisional
decrees (MPs), which are issued by the executive branch, take effect immediately,
and remain valid for up to 120 days. If their conversion into law is not approved by
Congress before this period, they expire and are no longer enforceable.
 The success rate of MPs is usually well above 70%, no matter how unpopular
the president is. One notable exception was the 16% success rate of MPs
under the Temer (MDB) administration in 2018.
Success rate of MPs vs. president's approval rating
Legislative process of an MP
Issued by the
executive branch
Valid for up to 120 days
Voting by Congress
Tabled
Enacted as
ordinary law
Rejection
Approval by
simple majority
in both houses
2018
2017
2016
2015
2001
2002
2004
2005
2014
2006
2003
2007
2013 2011
2012
2008
2009
2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Lula II Rousseff I
Lula I FHC II
Rousseff II Temer

485 December, 2018
New Congress favors some social security reform
 The newspaper O Estado de São Paulo polled 510 of the newly elected federal deputies on their preferences
regarding pension reform, minimum retirement age, and unification of the public- and private-sector systems.
 According to the poll, 227 of them favor some social security reform, while 179 were in favor of a minimum
retirement age. These are the highest levels since the beginning of the poll in 2017.
 Although still far from the constitutional majority of 308 votes, the percentage of Congress members in favor
to the reform reached 68% among deputies who have made a decision regarding social security reform.
Stance of elected federal deputies on pension reform in latest poll
Source: Estado de S. Paulo, Credit Suisse
154
179
227
74
79
59
74
44
17
208
208
207
3
3
3
Unification of the public and private pension programs
Minimum age requirement
Some pension reform
Favourable Contrary Undecided Didn't answer Wasn't located

495 December, 2018
Various measures could be approved in short term
 In addition to the social security and tax reforms, the incoming administration will need to win congressional
approval of additional measures to limit increases in public spending and to boost the productivity of the economy.
 Some of these measures are already being discussed by the executive branch or are already being debated in
Congress and will likely be approved within the next months. For example, the regulatory agency act, central
bank autonomy, and enhancements to positive credit reporting are all proposals defended by the executive
branch with high chances of approval early in the next presidential term.
Fiscal adjustments and improvement of business environment being debated by executive branch or Congress
Fiscal adjustments and improvement of business environment Type of legislation
Change in rules for unemployment insurance Bill of law
Review of unemployment benefits for artisanal fishermen Decree or directive
New Fund for Support and Development of K-12 Education (Fundeb) with conditions for efficient use of funds Bill for Constitutional Amendment (PEC)
Review of rules for determining, regionalizing, and adjusting for inflation starting salaries for teachers Bill of law
Reform of National Employment System (Sine) to provide incentives for private intermediation Bill of law
Regulatory Agency Act Bill of law
Enhancement of positive credit reporting Bill of law
Regulatory framework for telecommunications Bill of law
Privatization of Eletrobras Bill of law
Central bank autonomy Bill of supplemental law
Source: Ministry of Planning, Credit Suisse

505 December, 2018
Privatization agenda very likely to advance in next years
 The government has been advocating a broad agenda of privatizations. Although the privatization of some
important assets (e.g., Petrobras, BNDES) is unlikely, the government may succeed in privatizing other assets
(e.g., airports, BR Distribuidora). Not only would the privatizations improve the short-term dynamics of public
accounts, they could also increase the long-term efficiency of the economy.
Government’s main assets and state-owned enterprises
Sector Asset Probability of approval
Infrastructure Various airports High
Communications Telebras High
Communications Postal service High
Infrastructure North-South railroad (FNS) High
Infrastructure Grains railroad (Ferrogrão) High
Other LOTEX High
Oil BR Distribuidora High
Infrastructure Port authorities of various states (MA, SP, ES, RN, BA) High
Infrastructure
Various toll roads (Nova Dutra, BR- 116/ RJ - CRT , BR - 040/MG/RJ - CONCER , BR-153 GO/TO , BR-364/365/MG/GO , BR 364/RO/MT, BR
101 SC , Rodovia de Integração do Sul (RIS) BR-101/290/386/448/RS)
High
Infrastructure Sale of Infraero's stake in concessionaires of Brasília, Confins, Galeão, and Guarulhos airports Medium
Communications Empresa Construtora Brasil – ECB Medium
Infrastructure Four hydropower plants (São Simão, Miranda, Volta Grande e Jaguara) Medium
Infrastructure Eletrobras Medium
Infrastructure West–East Integration Railroad (FIOL) Medium
Finance BNDES Participações Medium
Finance Brazilian Mint Medium
Oil Petrobras refineries Medium
Infrastructure Furnas Low
Infrastructure Transnordestina Low
Finance Caixa Low
Finance Banco do Brasil Low
Finance BNDES Low
Finance Regional banks (Banco do Nordeste, Banco da Amazônia) Low
Mining Various mineral deposits (Carvão de Candiota - RS, Miriri - PE/PB, Bom Jardim - GO , Palmeirópolis - TO) Low
Oil Petrobras Low

525 December, 2018
Current-account deficit to increase to USD25bn in 2019
 Resumption of domestic demand is expected to lower the trade balance and increase remittances of profits
and dividends in the coming years. As a result, the current-account deficit would increase from USD10.9bn
(0.6% of GDP) in 2018 to USD25bn (1.2% of GDP) in 2019 and USD37bn (1.7% of GDP) in 2020.
Breakdown of current-account deficit
(USD billion)
Source: Central Bank of Brazil, Credit Suisse
Travel
Transportation
Interest
Transfers
Other services and income
Profits and dividends
Equipment rentals
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018e 2020e
-5 -7 -8 -8
2 12
24
33
43 45 38
24 25 18
28
17
-7
18
45
64 58 54 491
2
3
1 2
2
1
1
-2 -2 -3
-1
-1 -1 -2 -2 -2 -2 -4 -5 -6 -8 -9 -14 -17 -19 -19
-23
-22 -20 -17 -15 -17 -19-8 -8 -9 -11
-15 -14 -14 -13 -13 -13 -13 -11 -7 -8 -10
-12
-14 -17 -19
-21
-22 -22 -22 -18 -19 -20
-2 -3 -4
-5 -4
-6
-8
-8 -9
-9
-6 -4 -5 -6
-6 -7
-3 -3
-5 -7 -4 -3 -5 -5 -6 -7
-13 -16 -22
-34 -25
-56
-57
-38
-14
-31
-21
-19 -21
-18
-23
-25
-2 -4
-4 -4
-1 -2 -1
-1 -1
-3
-5
-6
-11
-15
-16
-19
-19
-12
-8 -13
-13
-15
-16
4 2 2 1 2 2 2
2
3
3
4 4
4
4 3
3
3
3
4 3
3
3
3
3 3
3
Trade balance

535 December, 2018
IDI to continue to finance current-account deficit
 Despite the higher current-account deficit expected for the next years, inward direct investment (IDI) will
remain sufficiently high to finance it.
 IDI is characterized as a less volatile type of investment and more closely associated with the fundamentals of
the economy. The privatization and infrastructure agenda of the incoming administration could boost IDI in the
coming years. We expect IDI to increase from USD83bn in 2018 to USD90bn in 2019 and 2020.
Balance of inward direct investment and current account
(USD billion, % of GDP)
-2.8
-3.5
-3.9
-4.3
-3.8
-4.2
-1.6
0.7
1.7 1.5
1.2
0.0
-1.8 -1.6
-3.4
-2.9 -3.0 -3.0
-4.2
-3.3
-1.3
-0.5 -0.6
-1.2
-1.7
1.3
2.2
3.3
4.7
5.0
4.2
3.3
1.8
2.7
1.7
1.8
3.2 3.0 1.9
4.0 3.9
3.5
2.8
4.0 4.2
4.3
3.4
4.3
4.4
4.1
-1.5 -1.3
-0.6
0.4
1.3
-0.1
1.7
2.5
4.4
3.3
2.9
3.2
1.2
0.3 0.6
0.9
0.5
-0.2 -0.3
0.9
3.0 2.9
3.8
3.2
2.4
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018e 2020e
Inward Direct Investment (% of GDP)
Current account (% of GDP)
Balance (% of GDP)

545 December, 2018
Imports should keep increasing in 2019
 The trade balance will decline to USD60bn in 2018, after three consecutive years of marked increases. The
substantial 18% yoy increase in imports in the period more than offset the modest growth of 9% yoy in exports.
Resumption of economic activity was the main driver behind the more robust growth in imports this year.
 Imports will likely continue to grow at high rates in 2019 and 2020 despite the more depreciated BRL, as a
result of an acceleration in GDP growth in the next few years. On the other hand, exports are expected to
increase because of the more depreciated level of the local currency.
 Our scenario does not assume a significant impact from the government's agenda of greater trade openness
in 2019 and 2020. More meaningful impacts would occur in the medium and long terms.
Trade balance and growth in exports and imports (USD billion, % year-on-year change)
Source: Ministry of Development, Industry, and Commerce (MDIC), Credit Suisse
15
6
4
21
32
23
16 17
23
-23
32
27
-5 0
-7
-15
-3
18
9 7 4
13
0
-15
2
30
17
24
32
43
-26
42
24
-1
7
-4
-25
-20
10
18
12 8
-1 3
13
25
34
45 46
40
25 25
20
30
19
2
-4
20
48
67
60 57
52
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Exports (%)
Imports (%)
Trade balance (USD billion)

555 December, 2018
Exports to increase to USD256bn in 2019
 Exports will grow for the second straight year, totaling USD238bn in 2018. The higher exports in the year
were driven by basic and manufactured goods, the former influenced by the dynamics of prices and volumes
and the latter, by higher prices.
 We expect higher growth in exports of manufactured and basic goods in 2019 and 2020, due to the more
depreciated BRL and despite the lower GDP growth in Brazil's main trading partners. Total exports are
expected to rise from USD238bn in 2018 to USD256bn in 2019 and USD267bn in 2020.
Source: Ministry of Development, Industry, and Commerce (MDIC), FUNCEX, Credit Suisse
Total exports, by product (USD billion)
62
90
122 113 113 110
87 79
101 118 123 12820
28
36
33 31 29
26 28
31
31 32 36
67
80
92
91 93
80
73 74
80
85
97
100
3
4
5
5 6
6
5 4
5
4
4
4
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Basic Products Semi-manufactured Manufactured Others

565 December, 2018
Exports strongly influenced by higher fuel prices
 The growth in total exports of 9% in 2018 will likely be explained by an increase in both volumes and prices,
the same dynamics observed in 2017. The growth of 4.8% yoy in export prices was significantly driven by an
acceleration in fuel prices in 3Q18 (35.0% yoy).
 Volume increase, on the other hand, was driven by the expansion in capital goods exports (21.8%).
Growth in export prices and volumes1
(% year-on-year change)
Growth in export prices and volumes in 2018, by class of
goods (% year-to-date change)
1Year-to-date change for 2018.
26.3
-13.4
20.5
23.2
-4.9
-3.2
-5.3
-21.6
-6.2
10.1
4.8
-2.6
-10.6
9.5
2.9
-0.3
3.1
-1.8
8.3
3.3
6.8
3.9
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Price Volume
Capital goods
Intermediate
products
Consumption
goods - durables
Consumption goods –
nondurables
Fuels
Price Volumes
-1.9
21.8
3.2
4.0
2.1
-10.9
-4.8
-2.2
35.0
1.1

575 December, 2018
Source: Ministry of Development, Industry, and Commerce (MDIC), Credit Suisse
Total imports, by class of goods (USD billion)
Imports to increase by 12% in 2019
 Imports are expected to post strong growth of 18% in 2018. The positive performance of imports would be
widespread among all main five classes of goods.
 The acceleration of economic activity should continue to boost imports in the coming quarters, despite the
more depreciated local currency. We expect imports to increase from USD178bn in 2018 to USD199bn in
2019 and USD215bn in 2020. We expect the good performance to be widespread among all main groups,
the only exception being fuels in 2019.
12 16 20 21 23 23 20 17 18 20 22 237 11 15 13 12 10 7 4 5 7 9 1018
26
31 32 33 29
23 18 16 25 29 3117
25
36 35 41 39
22
12 18
21 20 22
73
104
125 123
132
127
99
85
94
106
120
128
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Non-durable consumer goods Durable consumer goods Capital goods Fuels Intermediate goods

585 December, 2018
Domestic demand boosted import volumes in 2018
 The growth of 14.0% yoy in import volumes was the strongest since 2010. Despite the more depreciated
exchange rate, resumption of domestic demand boosted purchases of goods abroad. Capital and durable
consumption goods posted the highest growth in volume in 2018. Prices showed an acceleration in the year,
mostly due to the higher prices of fuel.
 We expect further increases in imports in 2019 and 2020, due to stronger growth in domestic demand.
Growth in import prices and volumes¹
(% year-on-year change)
Growth in import prices and volumes in 2018, by class of
goods (% year-to-date change)
21.5
-10.9
3.9
14.3
1.0
-1.2
-2.0
-11.9
-8.9
4.1
6.6
17.8
-17.0
37.0
8.9
-2.3
8.6
-2.5
-15.1
-11.9
5.3
14.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Price Volume
Capital Goods
Intermediate
products
Consumption
goods - durables
Consumption goods
- nondurables
Fuels
0.1
83.8
6.7
5.4
2.2
39.9
1.0
5.1
21.2
3.5
Price Volume
1Year-to-date change for 2018.

595 December, 2018
Commodities represent 67% of all exports
 The share of commodities in total exports increased
from 52.3% in 2000 to 67.1% in 2018. Three of
the main commodities (soybeans, oil, and iron ore)
totaled 37.5% of all exports in 2018.
 The increase of the share of commodities in total
exports is explained partly by the lower
competitiveness of the economy. The low growth in
productivity compared to other economies reduced
Brazil's capacity to compete in global trade,
especially with emerging economies in Asia.
43 56 54 57 55 49 49 56 59
8
9 8 10 6 6 8 11 1046
64 51 51 44
32 29
39 40
23
31
31 22 25
17 13
21 29
82
96
98 103
94
87 85
90
94
202
256
242 242
225
191 185
218
233
2010 2011 2012 2013 2014 2015 2016 2017 2018
Exports (USD billion)¹
Breakdown of exports¹ (USD billion, % of total)
Total
Agricultural commodities
Vehicles
Other
Oil and distillates
Metal commodities
USD bn % of total
Year 2000 2005 2010 2018 2000 2005 2010 2018
Commodities 28.8 69.3 135.8 156.5 52.3 58.4 67.3 67.1
Main commodities 22.5 57.0 121.2 141.8 40.9 48.0 60.1 60.8
Soy complex 4.2 9.4 17.1 38.7 7.6 8.0 8.5 16.6
Oil and distillates 1.9 9.1 23.0 29.4 3.4 7.6 11.4 12.6
Iron ore 3.0 7.3 28.9 19.3 5.5 6.1 14.3 8.3
Steel and metal products 5.9 12.6 13.1 15.8 10.7 10.6 6.5 6.8
Paper and pulp 2.5 3.4 6.8 10.1 4.6 2.9 3.3 4.3
Sugar 1.2 3.9 12.8 7.0 2.2 3.3 6.3 3.0
Chicken 0.8 3.5 6.2 6.1 1.5 3.0 3.1 2.6
Beef 0.8 3.0 4.5 6.1 1.4 2.6 2.2 2.6
Coffee 1.8 2.9 5.7 4.7 3.2 2.4 2.8 2.0
Non-ferrous metals 0.2 0.7 1.9 3.4 0.4 0.6 1.0 1.5
Pork 0.2 1.1 1.2 1.1 0.3 0.9 0.6 0.5
Other commodities 6.3 12.3 14.5 14.7 11.4 10.3 7.2 6.3
Non-commodities 24.3 46.0 56.6 64.6 44.1 38.8 28.1 27.7
Main non commodities 21.3 39.9 48.7 52.2 38.7 33.6 24.1 22.4
Chemicals 3.9 7.0 12.2 13.2 7.0 5.9 6.1 5.6
Auto parts 3.4 6.6 8.4 10.5 6.1 5.6 4.1 4.5
Heavy machinery 3.1 7.0 8.2 9.2 5.6 5.9 4.1 3.9
Automobiles and motorcycles 1.8 4.7 4.6 5.9 3.3 3.9 2.3 2.5
Transportation vehicles 1.0 3.6 3.6 4.3 1.8 3.1 1.8 1.9
Aircraft 3.4 3.2 4.0 3.5 6.2 2.7 2.0 1.5
Electrical and electronics 2.8 5.3 4.8 3.3 5.2 4.5 2.4 1.4
Pharmaceuticals 0.2 0.5 1.3 1.2 0.4 0.4 0.6 0.5
Footwear 1.6 2.0 1.6 1.2 2.9 1.7 0.8 0.5
Ex-commodities and non-
commodities
2.0 3.4 9.4 12.3 3.6 2.9 4.7 5.3
Total 55.0 118.7 201.8 233.4
1Year-to-date value for 2018.

605 December, 2018
China accounts for 27% of Brazil’s exports
 China is Brazil’s main trading partner, accounting for 27% of its exports and 20% of its imports. Trade with the
Asian country has been increasing steadily since 2000. The United States, Argentina, and the European
Union are also important trading partners.
Total exports, by partner (%) Total imports, by partner (%)
Source: MDIC, Credit Suisse
GermanyJapanNetherlandsArgentinaUnited States
46 49 51 49 50 52 54 53 54 54 51 49 50 48 50 49 48 47 43
2
3
4 6 6
6 6 7 8
14 15 17 17 19 18 19 19 22 27
24
24
25 23 21 19 18 16 14
10 10 10 11 10
12 13 13 12 1211
9 4 6 8 8 9 9 9 8 9 9 7 8
6 7 7 8 75 5 5 6 6 4 4 6 5 5 5 5 6 7 6 5 6 4 54 3 3 3 3 3 3 3 3
5 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 2 2
2000 2003 2006 2009 2012 2015 2018
42 42 44 47 53 48 53 59 61
49
62 65 64 68 70 65 61 64 57
2 2 3
4
6
7
9
10 12
12
14 14 15 16 16 18
17
18 2023 23 22
20
18 17
16
15 15
16
15 15 15 15 15 15
17 16 1612 11 10 10 9 8
9 9 8
9
8 7 7 7 6 6 7 6 63 3 2 2 3 3
3 3 3
4
5 4 4 4 4 3 4 3 35 6 5 5 5 5 4 4 4 4
8 9 9 9 8 8 7 7 7 8 7 7 6 6 6 6 7 6 6
2000 2003 2006 2009 2012 2015 2018
ChinaOthers

615 December, 2018
IDI was more widespread among sectors and volumes
 IDI in 2018 was widespread among sectors. The highest
share of IDI went to oil and natural gas (USD4.3bn),
followed by motor vehicles (USD3.0bn) and financial
services (USD2.7bn).
 At the same time, IDI was also more diluted in terms of
size of operations. Operations worth more than USD1.0bn
totaled only USD2.1bn between January and September
2018, much lower than the USD12.1bn in the same period
last year. Less concentrated IDI both in terms of volume
and sectors suggests a less volatile flow of investments.
USD bn¹ % of total
2016 2017 2018 2016 2017 2018¹
Agriculture, cattle raising, and mineral extraction 8.7 5.9 6.3 16.3 9.7 20.4
Oil and natural gas 4.3 3.7 4.3 8.0 6.2 13.7
Extraction of metallic minerals 2.5 1.0 0.7 4.6 1.6 2.4
Agriculture 0.9 0.6 0.2 1.7 0.9 0.5
Other agriculture 1.1 0.6 1.2 2.0 1.0 3.8
Industry 20.2 18.6 11.0 37.9 30.9 35.3
Chemicals 2.2 3.1 1.3 4.1 5.2 4.2
Food products 1.3 2.6 0.5 2.4 4.3 1.7
Motor vehicles and flatbeds 6.6 4.0 3.0 12.3 6.5 9.6
Information technology, electronic products, and optical 0.6 0.5 0.2 1.0 0.8 0.7
Machinery and equipment 1.6 0.8 0.7 2.9 1.3 2.3
Machinery, devices, and electrical material 1.1 0.5 0.2 2.0 0.8 0.7
Rubber and plastic products 0.4 0.4 0.5 0.8 0.6 1.6
Metallurgy 1.4 3.2 0.8 2.7 5.3 2.7
Pharmaceuticals 0.8 0.6 0.3 1.5 1.0 0.8
Pulp and paper 0.3 0.6 1.9 0.6 1.0 6.2
Non-metallic minerals 1.3 0.6 0.7 2.4 0.9 2.3
Other industries 2.8 1.8 0.8 5.3 2.9 2.5
Services 24.2 35.7 13.7 45.4 59.1 43.9
Telecommunications 0.6 0.3 0.1 1.2 0.5 0.3
Commerce, except vehicles 5.7 5.5 2.2 10.7 9.1 7.1
Real estate activities 1.9 1.5 0.6 3.6 2.4 1.9
Electricity and gas 3.0 12.6 1.9 5.6 20.9 6.2
Financial services 2.0 1.6 2.7 3.8 2.7 8.6
Insurance, retirement, and healthcare plans 0.5 0.4 0.2 0.9 0.6 0.7
IT services 0.5 0.7 0.5 1.0 1.2 1.5
Infrastructure works 0.4 0.1 0.3 0.8 0.1 0.9
Financial services 0.8 0.3 0.2 1.5 0.6 0.8
Transportation 0.3 4.2 0.8 0.6 7.0 2.6
Storage and transportation activities 1.5 2.5 1.4 2.9 4.1 4.6
Advertising and market research 0.6 0.4 0.1 1.1 0.7 0.4
Building construction 0.5 0.5 0.5 0.9 0.8 1.6
Non-real estate rents 0.6 0.2 0.1 1.1 0.3 0.4
Architecture and engineering 0.3 0.4 0.2 0.5 0.6 0.6
Vehicle trade and repairs 0.6 0.4 0.1 1.1 0.7 0.4
Other services 4.3 4.1 1.7 8.0 6.9 5.4
Purchase and sale of real estate 0.0 0.0 0.0 0.0 0.0 0.0
Total 53.3 60.3 31.1 100 100 100
Inward direct investments, by sector
(USD billion, % of total)
Inward direct investment, by transaction volume
(USD million, % of total)
5,410
2,811
4,285
3,841
10,850
1,646
12,139
5,211
2,791
4,130
2,990
7,897
5,985
2,080
19.0
28.7
38.5
76.0
16.8
25.7
39.0
48.6
74.1
93.3
100.0
0-10 10 - 20 20 - 50 50 - 100 100 - 500 500 - 1000 1000-
Jan-Sep 2017
Jan-Sep 2018
% of total 2017
% of total 2018

625 December, 2018
Higher number of companies using IDI round-tripping
 IDI statistics in Brazil overestimate foreign investments made in the country because Brazilian companies use
subsidiaries located abroad (in countries with a lower tax burden) to make IDI in Brazil, using financial
transactions known as round-tripping, which result in lower tax payments by the companies. According to the
Central Bank of Brazil, round-tripping of IDI totaled USD16bn in 2015 (or 4% of total IDI), lower than the
USD46bn in 2010 (8% of total). Despite the lower level, more companies engaged in round-tripping in 2015
(1506) than in 2010 (732).
 Foreign companies also use third countries to invest in Brazil. For example, the stock of IDI made by the
Netherlands totaled USD90bn in 2015, much higher than the stock of IDI made by a final controller located in
the Netherlands of USD13bn.
2010 2015
Immediate
investor
Final
controller
Immediate
investor
Final
controller
Netherlands 163 15 90 13
Belgium 4 50 4 40
Luxembourg 30 13 27 11
United States 108 110 69 77
China 1 8 1 9
Italy 5 18 4 11
United Kingdom 16 42 16 22
Germany 14 30 8 12
Switzerland 10 13 11 15
France 29 31 18 21
Bermuda 8 9 3 5
Chile 7 4 7 5
Spain 72 85 39 37
Stock of inward direct investment and round-tripping
(USD billion)
Stock of inward direct investment
(USD billion)
682.3 695.5
731.2
724.8 725.9
568.2
46
36
26
18 18
16
2010 2011 2012 2013 2014 2015
IDI IDI round-tripping

635 December, 2018
Portfolio investments now concentrated in equities
 The sharp deterioration of economic fundamentals in recent years, leading to the loss of investment grade in
December 2015, triggered a strong outflow of bond investments in Brazil and lower bond investments abroad.
As a result, in recent years portfolio investments have become more concentrated in equities, which represent
59% of the total in 2018.
Stock of external liabilities, portfolio investments¹ (% of total)
9 6
11 15
22
27
34
27
39 39 37 38 37 34
30
40
45 43
16
14
21
27
32
36
41
30
33 29
24 21
18
15
9
13
15
16
1
2
2
1
2
6
4
10
11 16
17 19 24
29
34
26
22 24
74 78
66
57
44
31
20
33
17 16
21 22 21 22
27
20 18 18
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Bonds in Brazil
Equities in Brazil
Bonds abroad
Equities abroad

645 December, 2018
Less volatile investments in total external liabilities
 The heavy outflow of portfolio investments in recent years and the resilient high level of inward direct
investments has made the position in external liabilities more concentrated in less volatile investments. For
example, IDI represented 50% of external liabilities in 2018, much higher than the 39% in 2009. On the other
hand, portfolio investments represent just 30% of all external liabilities.
Total stock of external liabilities1 (% of total)
Inward direct
investments
Portfolio
investments
Loans
Corporate loans
and advances
Other
8% 11% 10% 9%
3% 4% 3% 4% 4% 5% 5% 5% 6% 7% 6% 5% 7%
1%
2% 1%
22%
24%
21%
16%
10% 10%
7%
10% 8% 8% 11% 10% 11% 14%
17%
14% 12% 13%
38%
35%
37%
39%
48% 49% 55% 40% 50%
41% 38% 38% 35% 33%
28%
31% 33% 30%
32% 28% 31%
36% 39% 37% 36%
46%
39%
47% 47% 47% 49% 48% 48% 49% 50% 50%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

655 December, 2018
Government's external debt remained stable in 2018
 Brazil's total external debt remained relatively stable at USD538bn
from 2017 to 2018. While the government's external debt
remained relatively stable, the composition of private external debt
changed significantly.
 Companies’ debt increased from USD336bn in 2017 to
USD369bn in 2018, while banks’ liabilities declined from
USD133bn to USD97bn in the period.
 Overall, government external debt remains relatively low compared to
the FX reserves, and total private external debt declined in the period.
24
73
3
1782
5347
Total external debt (USD billion)
Composition of external debt, by holder
(% of total)
General government
Banks
Companies
Monetary authority
Intercompany loans
Companies
Banks
General government
Debt
instruments
Loans
Commercial
credit
Debt
instruments
Loans
Debt
instruments
Loans
65 79 95 106 128
174 208 206 222 228 237
62
66
84 98
105
110
116 119 115 108
132
74 64
103
138
140
130
157 147 137 133 97
63 64
65
69
78
68
75 64 70 72 69
263 278
352
416
455
487
561 540 549 545 538
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

665 December, 2018
495
395
345
280
177
86 84 70 69 77 79 78 81 80 74 71 63
62
41
35
35
24
22 19 13 20 11 9 9 16 14 15 14 16
45
42
36
34
31
26 33
33 33 30 34 49 57 58 61 61 62
2002 2004 2006 2008 2010 2012 2014 2016 2018
Intercompany loans
Short term
Long term
Short-term external debt represents just 11% of total
 Total external debt remained highly concentrated in long-term debt and intercompany loans. Both components
totaled 89% of total external debt. Short-term debt totaled USD59bn in 2018.
 Contrary to the early 2000s, the prospects for external accounts remain favorable. Total external debt, which
reached 600% of FX reserves in 2002, represents only 142% of FX reserves in 2018: 16% is short term,
63% long term, and 62% intercompany loans.
 The high level of FX reserves significantly reduces the country's external vulnerability.
USD billion % of FX reserves
Total external debt by time to maturity¹
187 195 183 151 152 154 162 167 199
269 295 280 295 284 270 266 242
23 20 19
19 20 39 37 31
57
40
33 33
58 51 56 51
59
17 20 19
19 27
47 65 79
95
106
128 174
208
206 222 228 237
228 235 220
188 199
241
263 278
352
416
455
487
561 540 549 545 538
2002 2004 2006 2008 2010 2012 2014 2016 2018
Intercompany loans
Short term
Long term

675 December, 2018
FX reserves strongly reduce external vulnerability
 The level of FX reserves accumulated in previous years make the country much less vulnerable to balance-of-
payment crises and capital outflows.
 The IMF's indicator of the adequate level of international reserves (Assessing Reserve Adequacy – ARA)
points to a more-than-sufficient level of FX reserves in Brazil. The ARA metric evaluates: (i) exports, to reflect
the potential loss from a reduction in external demand and terms of trade; (ii) expanded payment solutions, to
capture the capital flight risk of residents through liquidation of domestic assets; (iii) short-term external debt,
to consider the risk of rolling over this liability; and (iv) other obligations, to capture other channels of capital
loss, especially investments in securities and equities of non-resident investors.
3.01
2.42
2.10 1.92 1.88 1.64 1.57 1.56 1.43 1.29 1.28 1.18 1.15 1.15 1.03 1.03 0.90 0.85 0.81 0.77 0.67 0.63
0.38
Russia
Peru
Thailand
Brazil(2015)
Philippines
Brazil(2018)
Bulgaria
Romania
India
Brazil(2010)
Colombia
Mexico
Indonesia
Malaysia
Poland
Hungary
China
Chile
Ukraine
Turkey
Argentina
SouthAfrica
Pakistan
Reserves compared with Assessing Reserve Adequacy (ARA) index in 2018 (%)
Source: IMF, Credit Suisse
ARA intervals from 1.0 to 1.5 point to adequate international reserves according to the IMF

685 December, 2018
Rating agencies likely to upgrade Brazil in 2019
 Of the main credit rating agencies, S&P and Fitch rate Brazil three notches below investment grade and
Moody’s, two. In their reports, the agencies have been emphasizing the need for approval of structural reforms
to solve the unsustainable path of the public debt.
 Approval of social security reform in 2019 would probably lead S&P and Fitch to increase Brazil’s rating from
BB- to BB.
Brazil’s sovereign credit rating
Source: S&P, Moody’s, Fitch, Credit Suisse
B+
BB-
BB
BBB-
BBB
BBB+
BB+
B2
B1
Ba3
Ba1
Baa3
Baa2
Ba2
B
B+
BB-
BB+
BBB-
BBB
BB
Positive Stable NegativeOutlooks:
Investment grade
Speculative grade
Investment grade
Speculative grade
Investment grade
Speculative grade
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

695 December, 2018
Central bank more discretionary in use of swaps
 The Central Bank of Brazil actively engaged in FX swaps from 2011 to 2016, claiming that this could
smoothen the path of FX and interest rates. The central bank's current policy, however, advocates stronger
but more discretionary FX interventions. For example, after six months of negligible interventions between
November 2017 and April 2018, the central bank injected USD7bn in May and USD37bn in June, the
strongest intervention in history.
 Despite the heavy intervention in 2018, the volume of swaps of USD69bn in October is lower than the peak
of USD115bn in March 2015, a period of active management of FX swaps.
BRL/USD exchange rate and change in central bank's position in swaps (BRL/USD, USD billion)
-40
-30
-20
-10
0
10
20
30
40
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-08 Jul-09 Jan-11 Jul-12 Feb-14 Aug-15 Feb-17
Ilan GoldfajnAlexandre TombiniHenrique Meirelles
Monthly change (RHS) BRL/USD
Oct-18

705 December, 2018
Sharp rise in USD exposure of domestic investors
 At the beginning of the year, domestic investors (banks and domestic institutional investors) reduced their
USD exposure to USD2bn in May, the lowest level observed since August 2012. The strong deterioration of
the financial conditions caused by the truckers' strike reversed this trend, and domestic investors increased
their USD position to USD31bn in October.
 Also in October, foreign investors increased their USD exposure in the period to its highest level since July
2015: USD37bn.
USD position, by type of investor (USD billion)
-40
-20
0
20
40
60
80
100
120
140
Nov-10 Jun-12 Jan-14 Aug-15 Mar-17 Oct-18
Individual and non-financial entities Foreign investors Brazilian institutional investors Banks and other financial entities
Source: B3, Credit Suisse

715 December, 2018
Domestic USD exposure concentrated in swaps
 The strong deterioration of financial conditions
caused by the truckers' strike led the central bank
to increase its stock of swaps by USD44bn to
USD69bn from May to September. The higher
supply of the FX derivative was absorbed by
domestic investors.
 Foreign investors increased their USD exposure
through onshore dollar bonds and future exchange
rate contracts. From May to October, foreign
investors increased their position in onshore dollar
bonds from USD15bn to USD28bn.
 In the event of upward pressure on the BRL/USD
exchange rate, we expect the central bank to
increase its exposure to the USD (e.g., by selling
reverse swaps), thus reducing the exposure of
domestic investors to USD.
-60
-30
0
30
60
90
120
Nov-10 Dec-11 Feb-13 Mar-14 May-15 Jun-16 Aug-17 Oct-18
Swaps Futures FRC
-20
-10
0
10
20
30
40
Nov-10 Dec-11 Feb-13 Mar-14 May-15 Jun-16 Aug-17 Oct-18
Swaps Futures FRC
USD position of domestic investors
(USD billion)
USD position of foreign investors
(USD billion)

725 December, 2018
3.78
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Exchange rate of BRL3.60/USD in 2019
 The exchange rate depreciation from BRL3.29/USD at year-end 2017 to BRL3.78/USD in November is
explained mostly by external factors, such as higher interest rates in the USA and higher risk aversion in
emerging markets. In 2019, we expect the benign effects of domestic factors to offset any negative effects
on the external side. The agenda of reforms to be approved by Congress (e.g., social security and tax reform)
would improve the prospects of the domestic economy in the coming years.
Nominal real effective BRL/USD exchange rate and real rate in relation to USD3 (BRL/USD)
1 Real effective exchange rate: real exchange rate weighted by share of various countries in Brazil's total exports.
2 Real BRL/USD exchange rate: exchange rate less the difference between inflation in Brazil and in the USA.
3 Year to date through October 31.
REER1
RER - USD2
Nominal FX rate
Average 2003 2005 2007 2009 2011 2013 2015 2017 2018
REER 4.73 3.80 3.15 3.04 2.58 3.09 3.83 3.29 3.78
RER - USD 5.10 3.76 2.95 2.83 2.22 2.64 3.58 3.15 3.61
Nominal 3.06 2.41 1.93 1.99 1.67 2.17 3.39 3.20 3.64

735 December, 2018
Few periods of strong inflows of portfolio investments
 The country saw three periods of strong inflows of portfolio investments: May-07 to Sep-08, Oct-09 to Sep-
11, and March-13 to Aug-15. The two first periods were characterized by strong economic growth, healthy
public accounts, and a historically high sovereign credit rating. Approval of important structural reforms (e.g.,
social security reforms in 1998 and 2003) were not sufficient to trigger inflows despite being necessary to
improve the fundamentals of the economy and the country’s credit rating.
Inflow of portfolio investments and Brazil's credit rating (USD billion, cumulative 12 months)
1 Period of strong inflows into fixed income and equities, totaling more than USD20bn.
Equities Fixed income
S&P rating
(RHS)
-40
-30
-20
-10
0
10
20
30
40
50
60
Dec-95 Sep-97 Jun-99 Mar-01 Dec-02 Sep-04 Jun-06 Mar-08 Dec-09 Sep-11 Jun-13 Mar-15 Dec-16 Sep-18
19-Dec-03
 Lula’s social security
reform
 Lula’s tax reform
30-Dec-2005
Brazil anticipates
last payment of
IMF loan
1-Aug-2006
Brazil boosts its external position,
buying USD90bn of FX reserves
in one year
15-Sep-2008
Brazil's external position is strong (FX reserves of
USD207bn), minimizing impact of global financial crisis
17-Nov-11
S&P rates Brazil two notches above investment
grade; government's fiscal austerity (forecast of
primary surplus of 3.5% of GDP) and central
bank autonomy are praised
15-Dec-98
FHC’s social
security reform
BB-
BB
BB+
BBB-
BBB
BBB+
A
A+
AA-
AA
AA+
AAA
NR
D
SD
C
CC
CCC-
CCC
CCC+
B-
B
B+
A-

745 December, 2018
Weak correlation of inflows to Brazil and to peers
 There is a weak correlation between inflows of portfolio investments to Brazil and inflows to other emerging
markets. For example, in two of the three episodes of strong inflows of portfolio investments to Brazil, inflows of
investments to emerging markets decelerated (May 2007 to September 2008 and March 2013 to August 2015).
 Furthermore, periods of high liquidity in emerging economies do not necessarily guarantee inflows to the
country. For example, while fixed-income investments in emerging markets excluding Brazil reached
USD145bn in the 12 months through October 2018, fixed-income investments in Brazil saw an outflow of
USD4bn in the same period.
-20
-10
0
10
20
30
40
50
-60
-40
-20
0
20
40
60
80
Dec-00 Jun-04 Jan-08 Aug-11 Mar-15
-45
-30
-15
0
15
30
45
60
-100
-50
0
50
100
150
200
250
Dec-00 Jun-04 Jan-08 Aug-11 Mar-15
Equities inflows to Brazil and to other emerging
economies (USD billion, cum. 12 months)
Fixed-income inflows to Brazil and to other emerging
economies (USD billion, cum. 12 months)
Equity to emerging
economies ex Brazil
Equity to Brazil (RHS) Fixed income to
emerging economies ex Brazil
Fixed income to
Brazil (RHS)
1Here we considered the following emerging markets: China, India, Indonesia, Malaysia, Philippines, Taiwan, Vietnam, Chile, Mexico, Bulgaria, Czech Republic, Hungary, Poland, Turkey, Ukraine, Lebanon, South Africa.
Source: Institute of International Finance, Credit Suisse
Oct-18 Oct-18

755 December, 2018
0
2
4
6
8
Brazil has high debt and low growth compared to peers
 The IMF expects Brazil’s gross debt as a percentage of GDP to increase 11pps to 97% in 2022, the second
highest for countries with ratings from one notch higher to one lower than Brazil’s (BB-).
 The IMF’s expectation for Brazil's GDP growth in the coming years is also less positive than the forecast for
its peers. Brazil has the lowest forecast for GDP growth in four years (2.2%) among countries with a BB-
rating, the second lowest among countries rated B+, and the lowest among those rated BB+. The reformist
agenda of the new administration could make a positive change in the dynamics for both gross debt and GDP
growth in the next few years.
Gross debt in 2018 and 2022 for countries rated B+,
BB-, or BB+ by S&P (% of GDP)
GDP growth in 2018 and 2022 for countries rated B+,
BB-, or BB+ by S&P (%)
Bolivia
Paraguay
Bahrain Brazil Dominican Rep.
Jordan Vietnam
Argentina Greece
Kenya SenegalNicaragua Suriname
Guatemala
Serbia
Bangladesh Costa Rica GeorgiaFYR MacedoniaFiji
Honduras New GuineaMontenegro Sri Lanka Turkey
Albania
Source: S&P, World Bank, IMF, Credit Suisse
0
20
40
60
80
100
120
B+
2018 2022
BB-
2018 2022
BB+
2018 2022
B+
2018 2022
BB-
2018 2022
BB+
2018 2022

765 December, 2018
Fundamentals of external sector are solid
 Despite the expected unfavorable path for gross debt and GDP growth in the coming years, the fundamentals
of the external sector of the economy are solid. Brazil is expected to have low current account deficits in 2018
and 2022 both compared with its peers and from a historical perspective.
 Its international reserves as a percentage of external debt is the third highest for a country rated B+, BB-, or
BB+. The high level of reserves substantially reduces the risk of the government not being able to pay off its
liabilities in hard currency.
Current account balance in 2018 and 2022 for countries
rated B+, BB-, or BB+ by S&P (% of GDP)
International reserves to external debt ratio in 2018 for
countries rated B+, BB-, or BB+ by S&P (%)
0
20
40
60
80
100
120
140
-10
-5
0
5
10
Bolivia
Paraguay
Jordan Vietnam
Argentina Greece
Guatemala
Serbia
Albania
B+
2018 2022
BB-
2018 2022
BB+
2018 2022 B+ BB- BB+

775 December, 2018
Inflation and GDP per capita close to those of peers
 The lower inflation in Brazil in previous years and the prospects for this level to be maintained over the next
few years has improved the country's standing among peers in terms of inflation.
 The country's GDP per capita is close to the median of countries with a BB- rating and higher than the
median of countries rated B+ or BB+.
 Overall, approval of the reforms proposed by the government would reduce the structural weakness of the
economy (e.g., public accounts, low growth) and consolidate recent improvements (e.g., stable inflation).
0
1
2
3
4
5
6
7
8
0
10
20
30
40
50
60
Inflation in 2018 and 2022 for countries rated B+, BB-,
or BB+ by S&P (%)
GDP per capita in 2018 and 2022 for countries rated B+,
BB-, or BB+ by S&P (USD thousands PPP)
Bolivia
Paraguay
Jordan Vietnam
Argentina Greece
Guatemala
Serbia
Albania
B+
2018 2022
BB-
2018 2022
BB+
2018 2022
B+
2018 2022
BB-
2018 2022
BB+
2018 2022

785 December, 2018
217
128
76
42
21
12 6 2
275
172
106
66
39
22
9 4
1 2 3 4 5 6 7 8
Changes in a country's rating are highly persistent
 When a country has been downgraded, there is a 61% chance it will be downgraded again and a 38% chance
of a third downgrade.
 Following a downgrade, the chances of a country’s rating being upgraded are low. This has happened in only
25% of all episodes.
 Odds are slightly lower for consecutive upgrades: after an upgrade, the country has 56% and 33% chances
of receiving one or two additional upgrades.
Percentage of changes after a downgrade
(%)
Consecutives downgrade and upgrades
(amount of consecutive changes)
Source: Standard and Poor’s (S&P), Credit Suisse
Consecutive increases
Consecutive decreases
Downgrade
Stable
Upgrade
61% 14%
25%

795 December, 2018
Time is not driver of recovery of investment grade
 In a broad set of data on 142 countries, 29 economies lost investment grade. Of these, 45% managed to
regain it. The time to regain the investment grade varies greatly, with countries such as South Korea regaining
it in just one year and two months, but countries such as Indonesia taking more time (19 years).
 Venezuela and Turkey are the countries that lost investment grade the longest time ago without recovering it.
Brazil lost its investment grade three years and two months ago. Although six countries had already won
investment grade in this period, we expect it to take more time for Brazil to regain investment grade.
6,030
704
1,737
8,982
2,171
561
1,030
2,321
1,011
1,172
2,507
3,133
600
2,816
2,376
13,025
2,072
1,139
4,194
1,124
636
3,701
5,725
1,085
1,731
1,163
7,079
2,027
399
Egypt
Bahamas
Isle of Man
Turkey
Croatia
Oman
Azerbaijan
Barbados
Bahrain
Brazil
Cyprus
Greece
South Africa
Libya
Tunisia
Venezuela
Portugal
Slovakia
Colombia
Russia
Guernsey
Uruguay
India
Bulgaria
Hungary
Latvia
Indonesia
Romania
Korea (the Republic of)
Time to regain investment grade (days)
Countries that did
not recover
Countries that
recovered

805 December, 2018
Share of countries rated junk has increased since 1996
 S&P has rated countries more negatively than positively since 1996. The share of countries rated as junk
increased from its lowest level of 34% in 1996 to the peak of 51% in 2016.
 In 2018, the proportion remained relatively stable, with half of the countries being rated investment grade.
Share of countries with and without investment grade¹ (%)
Junk
Grade
50.0
37.8
34.0
35.9
40.0
41.3
41.8
41.0
43.0
43.5
45.0
41.3
43.4
43.6
44.4
44.4
45.0
45.5
47.7
48.1
47.1
49.3
51.1
50.7
50.0
50.0
62.2
66.0
64.1
60.0
58.7
58.2
59.0
57.0
56.5
55.0
58.7
56.6
56.4
55.6
55.6
55.0
54.5
52.3
51.9
52.9
50.7
48.9
49.3
50.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

815 December, 2018
Triple-A ratings on the decline since 2005
 After peaking in 2005, the share of countries with the highest score (AAA) has plunged. In the same year, no
country was rated in the default category. Now, more countries than ever are rated default.
 This more negative view of countries was partially offset by the slightly higher share of countries with the
lowest rating within investment grade (i.e., BBB-).
Share of countries rated AAA, BBB-, and default (%)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
BBB-
AAA
Default

825 December, 2018
1994
1995
2000
2001
2017
2018
Distribution of ratings has become more disperse
 Since 1994, countries ratings’ have become more
disperse. The proportion of countries with mid-scale
ratings has declined, while the number with extreme
ratings (e.g., default rates) has increased.
 This can be seen by the diminishing proportion of
countries rated between A- and BB-. In 2018, the
figure declined to its lowest level ever: 30%.
 For instance, the median rating of the countries
declined from BBB+ in 1997 to BB+ in 2018. 30%
35%
40%
45%
50%
55%
1994 1997 2000 2003 2006 2009 2012 2015 2018
Share of countries with rates between A- and BB- (%)
Distribution of country ratings from 1994 to 2018 (%)
Lower number of countries rated
default than in recent years
NR AA-BBBB+CCC- AAAA+BBB-BCC ABB+B-C AA+A-BBCCC+SD AABBB+BB-CCCD

835 December, 2018
Low external vulnerability in corporate sector
 Brazil's nonfinancial corporate debt totaled 43% of GDP in 2Q18, lower than the median of emerging markets
debt of 49% of GDP.
 The share of the debt denominated in foreign currency totaled 16% of GDP, in line with the median observed in
emerging markets but much lower than in some economies such as Hong Kong, Mexico, Argentina, and Singapore.
 Household debt in foreign currency in Brazil is negligible.
Total nonfinancial corporate debt, by currency, in
emerging economies (% of GDP, 2Q18)
Nonfinancial corporate debt denominated in foreign
currency in emerging markets1 (% of GDP, 2Q18)
0
10
20
30
40
50
60
70
80
Jun-05 Aug-07 Oct-09 Dec-11 Feb-14 Apr-16 Jun-18
1 Not including Hong Kong.
Source: Institute of International Finance, Credit Suisse
0
50
100
150
200
250
HongKong
China
Chile
Turkey
Malaysia
Hungary
RussianFederation
Thailand
Poland
India
Brazil
SouthAfrica
Colombia
Mexico
Indonesia
Argentina
External
Internal
Median

845 December, 2018
IDI of USD 90bn in 2019 and 2020
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Current account -79.0 -76.3 -83.8 -79.8 -101.4 -54.1 -23.2 -5.5 -10.9 -25.3 -36.7
Trade balance 18.5 27.6 17.4 0.4 -6.6 17.7 45.0 64.0 57.7 54.1 49.1
Travel -10.7 -14.7 -15.7 -18.6 -18.7 -11.5 -8.5 -13.2 -12.7 -14.5 -15.5
Transportation -6.1 -8.0 -8.4 -9.4 -8.7 -5.7 -3.7 -5.0 -6.2 -6.4 -6.7
Equipment rentals -13.7 -16.7 -18.7 -19.1 -22.6 -21.5 -19.5 -16.8 -15.3 -17.3 -19.0
Profits and dividends -58.8 -55.8 -47.8 -18.7 -28.4 -15.5 -18.9 -15.8 -17.5 -22.5 -24.5
Interest payments -12.0 -14.4 -16.6 -19.3 -21.4 -22.5 -22.1 -22.8 -18.0 -19.0 -19.5
Others 3.8 5.7 6.0 4.8 5.0 4.9 4.5 4.1 1.0 0.3 -0.6
Capital and financial account 69.7 80.3 82.8 78.3 96.3 50.3 9.1 -1.7 10.9 25.3 35.7
Investments (liabilities) 30.7 37.0 38.8 38.0 40.0 33.8 33.3 74.9 79.4 100.3 115.7
Inward direct investment 88.5 101.2 86.6 69.7 97.2 74.7 77.8 70.7 83.0 90.0 90.0
Total equities 37.7 7.2 5.6 11.1 11.5 9.8 11.0 5.7 -2.1 12.0 15.0
Securities in Brazil 17.5 5.3 11.4 31.0 27.1 16.7 -26.7 -5.1 1.4 -4.0 9.0
Medium- and long-term loans and securities abroad 30.1 47.7 18.7 2.5 21.6 -3.6 -15.7 -5.7 -6.3 -2.4 -10.0
Inflows 60.6 82.1 56.3 60.5 71.2 72.9 55.2 58.7 60.6 62.5 61.0
Amortizations -30.6 -34.5 -37.6 -58.0 -49.6 -76.5 -70.9 -64.3 -66.9 -64.9 -71.0
Short-term loans and securities abroad 27.4 -3.9 -4.1 -0.1 24.9 -6.3 4.4 -5.3 -5.0 -4.5 0.0
Other Brazilian liabilities -170.5 -120.4 -79.4 -76.1 -142.3 -57.6 -17.6 14.6 8.4 9.2 11.7
Investments (assets) -71.8 -35.0 -36.5 -62.2 -79.5 -53.9 -45.4 -62.9 -63.7 -70.0 -75.0
Outward direct investment -26.8 -16.1 -5.2 -14.9 -26.0 -13.5 -12.8 -19.4 -13.4 -19.0 -10.0
Other Brazilian assets -45.1 -18.9 -31.2 -47.3 -53.5 -40.4 -32.6 -43.6 -50.3 -51.0 -65.0
Derivatives 0.1 0.0 0.0 -0.1 1.6 3.4 -1.0 0.7 0.0 0.0 0.0
Errors and omissions 3.6 4.4 4.3 4.6 4.4 2.9 13.5 6.4 0.0 0.0 1.0
Reserve assets -49.1 -58.6 -18.9 5.9 -10.8 -1.6 -9.2 -5.1 -4.8 -5.0 -5.0

865 December, 2018
0
2
4
6
8
10
12
14
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
IPCA inflation of 3.7% in 2018 and 4.2% in 2019
 IPCA inflation is expected to increase from 3.7% in 2018 to 4.2% in 2019 and 2020. The lower inflation of
administered prices in the coming year will be offset by the higher inflation in market prices.
IPCA inflation and central bank's inflation target (%, year-on-year change)
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
100 IPCA 7.7 12.5 9.3 7.6 5.7 3.1 4.5 5.9 4.3 5.9 6.5 5.8 5.9 6.4 10.7 6.3 2.9 3.7 4.2 4.2
26 Monitored 10.1 14.2 14.0 9.2 8.7 4.3 1.5 3.5 4.5 3.2 5.6 3.7 1.5 5.3 18.1 5.5 8.0 6.2 5.2 4.5
74 Market 6.6 11.8 7.2 6.9 4.2 2.6 5.7 7.0 4.2 7.1 6.6 6.5 7.3 6.7 8.5 6.6 1.3 2.9 3.9 4.1
16 Food 9.6 21.6 6.7 2.6 0.6 -0.1 12.4 10.7 0.9 10.7 5.4 10.0 7.6 7.1 12.9 9.4 -4.9 4.2 4.3 4.0
35 Services 4.8 5.5 7.1 6.8 6.8 5.5 5.2 6.4 6.4 7.6 9.0 8.7 8.7 8.3 8.1 6.5 4.5 3.1 4.2 4.4
23 Industrial 5.5 10.5 6.9 10.0 4.2 1.4 2.1 4.0 2.9 3.5 3.6 1.8 5.2 4.3 6.2 4.8 1.0 1.8 3.2 3.8
Lower limit
IPCA
Target
Upper limit

875 December, 2018
IPCA inflation to remain low throughout 2019
 The low inflation of 0.4% in 4Q18 will have a strong base effect through 2019. Inflation in 2Q19 and 3Q19
will remain far below the inflation target of 4.25%.
 Inflation should increase moderately to close to the center of the target only in the last quarter of 2019, when
the base effect will be eliminated.
IPCA inflation (%, year-on-year change and quarter-on-quarter change)
2.0
1.3 1.3
1.9
0.7
1.9
0.7
0.4
1.0
1.3
0.9 0.9
4.0
3.4
3.6
4.2
1Q 2Q 3Q 4Q
Average (2004-17) 2018e 2019e YOY

885 December, 2018
Market prices to increase in 2019 and 2020
 Inflation in market prices was much lower than its historical average in 2017 and 2018. Several factors
explained this dynamic: (i) low food inflation due to the increase in the supply of food items; (ii) a reduction in
demand pressure on services and industrial prices due to the deep recession; (iii) exchange rate appreciation
in 2017; and (iv) low inertia due to the low IPCA inflation in 2017.
 For the coming years, most of these factors will either contribute less to lower inflation or even have the opposite
effect: The depreciation of the BRL/USD rate in 2018 will likely put pressure on costs in 2019, economic slack will
be less favorable than it has been in recent years, and food supply is not likely to increase. As a result, we expect
inflation in market prices to increase from 2.9% in 2018 to 3.9% in 2019 and 4.1% in 2020.
Inflation in market prices and in administered prices
(%, year-on-year change)
Breakdown of IPCA inflation by market prices and
administered prices (%, year-on-year change)
8.7
4.3
1.5
3.5
4.5
3.2
5.6
3.7
1.5
5.3
18.1
5.5
8.0
6.2
5.2
4.5
4.2
2.6
5.7
7.0
4.2
7.1
6.6
6.5
7.3
6.7
8.5
6.6
1.3
2.9
3.9
4.1
2005 2007 2009 2011 2013 2015 2017 2019e
Monitored
Market
2.8
1.3
0.4 1.0 1.3 0.9 1.5 0.9
0.4
1.2
4.4
1.3 2.0 1.6 1.4 1.2
2.9
1.8 4.1
5.1
3.0
5.2
4.8
5.0 5.6
5.2
6.4
5.0
1.0 2.1 2.9 3.0
5.7
3.1
4.5
5.9
4.3
5.9 6.5
5.8 5.9
6.4
10.7
6.3
2.9
3.7
4.2 4.2
2005 2007 2009 2011 2013 2015 2017 2019e
Market
Monitored

895 December, 2018
Market prices inflation to remain below monitored inflation
 Administered prices continued to pressure inflation in 2018 due to supply constraints: (i) inefficient and high-
cost power production; (ii) higher healthcare costs; and (iii) lower global supply of oil, putting upward pressure
on gasoline prices for most of the year. Except for the last supply constraint, all other factors should keep
pressuring inflation in the short term.
 We expect inflation in administered prices to remain higher than in market prices in 2019 and 2020, which
would further widen the price differential in both groups. We forecast inflation in administered prices of 5.2%
in 2019 and 4.5% in 2020.
Inflation in market prices and in administered prices (index number)
100
110
126
143
157
170
177
180
186
195
201
212
220
224
235
278
293
317
336
354
370
100
107
119
128
137
142
146
154
165
172
184
196
209
225
240
260
277
281
289
300
313
100
103.3
105.5
112.2
114.6
119.5
121.6
116.8
112.9 113.3
109.2
108.1
105.2
99.5
98.2
106.8 105.7
112.7
116.4
117.8 118.3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Administered prices index
Market prices index
Ratio of administered price
index to market price index

905 December, 2018
Services inflation to rise to 4.2% in 2019
 Services inflation is expected to increase from 3.1% in 2018 to 4.2% in 2019. The higher inflation in the group
would be explained by more pronounced inflation in food away from home, domestic workers, and rents. These
components should be pressured by the higher adjustment of the minimum wage in 2019, higher past inflation
(e.g., costs linked to IGP inflation will accelerate), and the lower contribution from the slackness of the economy.
4.5
3.8
6.4
1.5
8.4
6.0
3.1 2.9
3.9
1.7
5.7
6.2
4.2 4.4
5.2 5.0
4.6 4.6
Services Food away from home Domestic worker Rent Courses Condominium
Dec-17
Dec-18
Dec-19
Inflation in services (%, year-on-year change)

915 December, 2018
Services inflation reached its lowest level in 17 years in 2018
 Services inflation reached its lowest level (3.0% yoy) in more than 17 years in October 2018. This benign
dynamics of services inflation has been in place since early 2016. The decrease in services inflation is
widespread among its components, with all subgroups showing very low inflation.
 The high inertia of the group and its high weight in the IPCA index suggest that consumer inflation will
increase only gradually in the coming months.
Breakdown of the decline in services inflation
(%, percentage points)
0%
2%
4%
6%
8%
10%
12%
Jul-00 Aug-02 Oct-04 Dec-06 Feb-09 Apr-11 Jun-13 Aug-15 Oct-17 Dec-19
Dynamics of services, underlying services, and services ex
food and minimum wage increase (%, year-on-year change)
IPCA services
Underlying services
Services ex minimum wage and food
Services 2016
Food away from home
Residential rents
Domestic workers
Automobile repair
Labor
Other
Services 2017
Regular courses
Labor
Cell phone
Food away from home
Voluntary vehicle insurance
Other
Services 2018e
6.50
-0.82
-0.42
-0.15
-0.11
-0.08
-0.41
4.51
-0.23
-0.21
-0.18
-0.16
-0.11
-0.41
3.1Dec-19e

925 December, 2018
Inflation in industrial goods to rise to 3.2% in 2019
 Inflation of industrial goods should increase from 1.8% in 2018 to 3.2% in 2019.
 The increase in inflation in industrial goods would be explained by the more depreciated exchange rate and the
resumption of economic activity.
1.0
-0.8
2.9
-4.2
3.2
1.8 1.6
1.1 1.4
10.1
3.2
1.9
2.7 2.5
5.1
Industrials New vehicle Apparel Eletronics Ethanol
Dec-17
Dec-18
Dec-19
Inflation in industrial goods (%, year-on-year change)

935 December, 2018
Widespread deflation in industrial goods in 2018
 In recent years, the industrial group observed some of the most benign dynamics since 2000. The share of
items posting positive inflation reached its lowest level in November 2017 (61%) and remained at this level
throughout the first quarter of 2018.
 We expect industrial inflation to gradually increase to 3.2% in 2019, as the proportion of items with deflation
should decline as a result of the more depreciated exchange rate and higher domestic demand.
50%
60%
70%
80%
90%
100%
110%
120%
130%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Jul-00 Nov-01 Apr-03 Aug-04 Jan-06 Jun-07 Oct-08 Mar-10 Aug-11 Dec-12 May-14 Oct-15 Feb-17 Jul-18
Inflation in industrial goods and proportion of items with year-on-year inflation (%, year-on-year change)
Dec-19e
Industrials
Diffusion (RHS)

945 December, 2018
Inflation in administered prices to drop to 5.2% in 2019
 We project a decline in inflation in administered prices, from 6.2% in 2018 to 5.2% in 2019. Lower inflation in
electricity and gasoline would be the main drivers of this movement.
Intercity
bus fare
Vehicle
registration
Fixed
telephone
LPGWater
tariff
Urban
bus fare
Pharmaceutical
products
Residential
electricity
Healthcare
plan
GasolineAdministered
Inflation in administered prices (%, year-on-year change)
8.0
10.3
13.5
10.4
4.5
4.0
10.5
16.0
-5.4
4.3
6.8
6.2
7.7
11.2
7.5
2.3
6.2
4.4
5.7
-0.2
5.2
5.2
5.2
5.0
10.0
6.1
3.8
5.3
4.1
2.4
-0.5
5.3
5.3
2017
2018e
2019e

955 December, 2018
Distribution of food inflation now less extreme
 Food items showed a distribution with heavy tails in 2017, with many items posting either low inflation (e.g.,
lower than -7.5%) or high inflation (e.g., higher than 7.5%). In 2018, this dispersion was reverted, with a
higher share of items concentrated in intermediate values.
 For example, the number of items with inflation between -5% and 5% increased from 41% in October 2017
to 57% in October 2018.
Distribution of food inflation in 2017 and 2018 (%, year-on-year change)
12.4
3.9
6.5
11.1
22.2
17.0
11.1
15.7
19.0
6.5
0.0
11.1
13.7
15.7
6.5
17.6
<-7.5% -7.5%<X<-5% -5%<X<-2.5% -2.5%<X<0% 0%<X<2.5% 2.5%<X<5% 5%<X<7.5% x>7.5%
Oct-18 Oct-17

965 December, 2018
Balance of risks for inflation in 2019
Bad weather could trigger two negative
impacts on prices: (i) food products,
due to shortages; and (ii) higher
electricity rates (hydropower plants have
been operating at peak capacity.
Therefore, less rain would trigger the
use of more expensive sources, namely
thermal power).
Given the low inflation in
several items, inertia could be
more benign than we
assumed in our scenario.
OilExchange Rate US marketTrade Inertia Fiscal reformWeather
Slower-than-expected
tightening of financial
conditions in the USA and
other developed markets
would lead to an
appreciation of Brazilian
currency.
Fiscal reforms
could contribute to
a more
appreciated local
currency, resulting
in a favorable
pass-through to
domestic prices.
Deterioration in financial
conditions (triggered by absence
of reforms or faster-than-
expected tightening in developed
markets) could depreciate the
Brazilian currency.
Lower supply of oil products
(e.g., sanctions on main
exporters or cuts in oil
production by them) could
raise oil prices from their
currently low level.
A reduction of non-tariff barriers
and import tariffs would increase
the competitiveness of the
economy and reduce inflationary
pressures.

975 December, 2018
Stable share of items with inflation within target range
 The share of items with year-on-year inflation inside of the central bank’s target inflation range (between 3%
and 6%) remained stable at 28% in October 2018 compared with December 2017.
 On the other hand, the number of items with deflation declined to 23% in October, after reaching the highest
level in the data series in April 2018 of 40%. The lower proportion of items with deflation was offset by the
higher share of items with low inflation (i.e., year-on-year inflation between 0% and 3%).
0%
10%
20%
30%
40%
50%
60%
70%
80%
Jul-00 Oct-01 Feb-03 Jun-04 Sep-05 Jan-07 May-08 Aug-09 Dec-10 Apr-12 Jul-13 Nov-14 Mar-16 Jun-17
Percentage of items by level of year-on-year inflation (%)
Deflation
0%< X<3%
3%< X<6%
6%< X<9%
Very high inflation
Oct-18

985 December, 2018
Inflation in food at home of 4.3% in 2019
 Inflation in food at home will likely to remain
relatively stable at 4.3% between 2018 and 2019.
This low level food inflation in historical terms will
contribute to a gradual increase in IPCA inflation.
 The main risk to our scenario is a worse than
expected weather condition at the beginning of the
year due to a strong El Niño phenomenon.
Breakdown of food inflation (%)
Contribution of food to IPCA inflation (pps, %)
2010 2011 2012 2013 2014 2015 2016 20172018e2019e
Non-food Food
2014 2015 2016 2017 2018e 2019e
Food at home Perishables Meats Poultry and eggs and milk and dairy products Baked goods Beverages and infusions Others
7.1
12.9
9.4
-4.9
4.2
4.3
6.0
26.0
3.8
-10.4
17.8
7.2
22.2
12.5
3.0
-2.5
-0.3
4.4
1.7
8.5
12.3
-5.6
7.5
4.4
5.4
10.6
6.5
1.9
4.8
1.6
8.6
9.7
11.3
3.3
-0.7
4.9
3.6
13.7
17.4
-8.1
1.6
3.8
1.8 1.6 0.1 1.6 0.8 1.6 1.2 1.1 2.1 1.6
-0.8
0.7 0.7
2.7 4.3 4.2 4.3 5.7 4.3 4.7 5.3
8.6
4.7
3.7 3.1 3.6
200920082007

995 December, 2018
Lower proportion of food items with deflation in 2018
 The high share of items posting deflation in 2017 was concentrated in food and industrial items, with the
former being strongly affected by the sharp increase in the supply of food items and the latter by the recession
and FX appreciation. In 2018, the percentage of items posting deflation declined in all groups, except the
services group, which is very inertial.
 Despite the lower proportion of items with deflation in 2018, the share of items with high inflation did not
increase. Items with inflation higher than 6% declined from 20% in October 2017 to 17% in October 2018.
46.4
7.5
38.7
8.8
33.534.0
11.9
22.7
8.8
24.1
Food at home Services Industrialized
goods
Administered
prices
IPCA
Oct-17 Oct-18
22.9
28.4
7.6
35.3
20.119.0 17.9
9.2
32.4
16.9
Food at home Services Industrialized
goods
Administered
prices
IPCA
Oct-17 Oct-18
Percentage of items with year-on-year deflation
in each group (%)
Percentage of items with year-on-year inflation
higher than 6% in each group (%)

1005 December, 2018
Inflation expectations remain anchored for coming years
 Inflation expectations in Focus Market Readout are 4.06% for year-end 2019, 4.0% for year-end 2020, and
3.78% for year-end 2021, in line with the center of the inflation targets of 4.25%, 4.0%, and 3.75%, respectively.
However, inflation expectations underestimate IPCA inflation one year ahead, with exceptions in 2017 and 2018.
Market Readout expectations for inflation (%)
1Market Readout of November 30.
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Market Readout, Credit Suisse
2
3
4
5
6
7
8
9
10
11
Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Jul-17 Oct-18
Expectations for: 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
IPCA
Lines ending at a level higher than they
started at indicate that agents have
underestimated IPCA inflation for the year.
The inverse indicates overestimation.

1015 December, 2018
Long-term inflation expectations highly de-anchored
 Inflation expectations can be measured by the implicit inflation embedded in the government bonds (i.e.,
breakeven inflation). One-year breakeven inflation forecasts inflation of 4.4% in October 2019, slightly higher
than the central bank’s inflation target of 4.25% for the next year.
 On the other hand, the five-year forward inflation (5Y5Y breakeven inflation) predicts inflation of 6.1% yoy in
the long run, much higher than the central bank's longest inflation target of 3.75% for 2021.
4
5
6
7
8
9
10
Sep-14 Jun-16 Apr-18 Feb-20 Dec-21 Sep-23
2
4
6
8
10
12
Sep-10 Jun-12 Apr-14 Feb-16 Dec-17 Sep-19
1 We shifted to one and five years ahead the forward breakeven inflation and breakeven 5y5y rates, respectively.
2 Forward breakeven inflation is calculated as the forward rate of inflation implied by fixed-rate (PRE) and inflation-linked bonds (NTN-B), and the breakeven 5y5y is calculated as the five-year forward inflation rate implied by the PRE versus the NTN-B.
Source: Brazilian Statistics Bureau (IBGE), National Treasury, Credit Suisse.
IPCA inflation and one-year forward breakeven inflation1
(%, year-on-year change)
Average IPCA inflation over five years and five-year forward
breakeven 5y5y inflation2 (%, year-on-year change)
Breakeven 1y
IPCA
Breakeven 5y5yIPCA 5y
Oct-19 Oct-23

1025 December, 2018
The relationship of GDP to the change in the unemployment rate and the CUR from 1Q00 to 2Q18 was
estimated using a Vector Autoregressive (VAR) model. This model was adopted to project three scenarios for
the paths of GDP growth, the unemployment rate, and the CUR, based on the median forecast and the
minimum and maximum confidence interval for projecting each variable1,2.
Based on these three scenarios, the CUR and the equilibrium unemployment rate are estimated using a
model that applies a Kalman filter3, which produces three estimates for the equilibrium CUR and three
estimates for the equilibrium unemployment rate.
Three different specifications of the production function are used to estimate potential GDP, resulting
in nine estimates of potential GDP for the economy.
Robust measures for output gap
 The main drawback of statistical filters to estimate the potential output of an economy is the high sensitivity of
such estimates to final observations. To minimize this problem, we used a methodology to estimate potential
GDP by incorporating forecasts for the unemployment rate and the Capacity Utilization Rate (CUR).
Phase
1
2
Phase
3
Phase
In addition, three other estimates are calculated for potential GDP using a Hodrick-Prescott filter for the path
of GDP growth based on the scenarios of phase 1.
𝒀 = 𝑨 𝐊 × 𝑪𝑼𝑹 𝜶 𝑳 × 𝟏 − 𝑼 × 𝑯 𝟏−∝ 𝒀 = 𝐊 × 𝑪𝑼𝑹 𝜶 𝐀 × 𝑳 × 𝟏 − 𝑼 × 𝑯 𝟏−∝
𝒀 = 𝑨 𝐊 × 𝑪𝑼𝑹 𝜶
𝑳 × 𝟏 − 𝑼
𝟏−∝
1 The VAR estimation considers only one lag in variables, due to the low number of snapshots and the fact that this choice produced non-autocorrelated errors. A dummy variable was also used to capture crisis periods.
2 The median scenario estimated by the VAR model does not represent our baseline scenario. Recovery in activity according to this model is much quicker than in our baseline scenario, since the VAR model does not consider
interactions of GDP with other variables (e.g., credit). Despite the simplicity of the VAR, its use in the current context produces consistent and non-arbitrary paths for the GDP, CUR, and unemployment rate.
3 Areosa, M. (2008): “Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate Output Gap,” Central Bank of Brazil Working Paper, Series 172. Source: Credit Suisse

1035 December, 2018
Output gap expected to close in 2019
 The economy has been working with high idle capacity since 2015. The median of the output gap estimates
using several different models reached -3.3% in 4Q16 and has been closing since then. The slackness of the
economy contributed to a reduction in demand pressures on inflation in the period.
 Our models suggest that the output gap will close in 3Q19. As a result, the favorable effect of the demand on
inflation will be much smaller in 2019.
-6
-5
-4
-3
-2
-1
0
1
2
3
4
2000Q1 2001Q4 2003Q3 2005Q2 2007Q1 2008Q4 2010Q3 2012Q2 2014Q1 2015Q4 2017Q3 2019Q2
Median, maximum, and minimum of 13 estimates for output gap1 (%)
1 We estimated potential GDP using three production functions and the Hodrick-Prescott filter. To reduce dependence on the last observations (i.e., forecasts), we considered three different scenarios: a baseline scenario, a negative scenario (based
on the lowest 95 intervals of a VAR forecast of GDP, capacity utilization, and unemployment), and a positive scenario (based on the highest 95 intervals of a VAR forecast of GDP, capacity utilization, and unemployment). For more details on the
filtering procedure, see: Areosa, M. (2008): “Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate Output Gap,” Central Bank of Brazil Working Paper, Series 172.
Median
Maximum
Minimum
2020Q4

1045 December, 2018
Labor market indicates more favorable inflation dynamics
 Another measure of slackness in the economy is calculated as the difference between the non-accelerating
inflation rate of unemployment (NAIRU) and the unemployment rate. We use the same methodology as the
output gap to estimate a range of gaps for the unemployment rate.
 The estimates point to higher slackness in labor market conditions than in capital conditions. This is a result of
the sharp increase in the unemployment rate and a much more gradual recovery in employment.
 The median estimate of the gap in the unemployment rate was -0.9% in 2Q18 and suggests that the gap will
not close until in 2Q20.
Median, maximum, and minimum of six estimates for gap of unemployment rate1 (%)
-5
-4
-3
-2
-1
0
1
2
3
2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1 2018Q1 2020Q1
Median
Maximum
Minimum
2020Q4

1055 December, 2018
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jan-18 May-18 Oct-18 Mar-19 Aug-19
Failure to meet target presupposes sharp FX depreciation
 We built some models to calculate the impact of FX depreciation on IPCA inflation:
– The benchmark Phillips curve estimates a pass-through of 6.9%;
– The Phillips curve, which considers the slackness of the economy, yields 4.4% when idle capacity is high and 7.8% when it is low.
 The models suggest that the central bank would need to see sharp FX depreciation before failing to meet the
inflation target. Considering our forecast of 4.2% for 2019, the FX rate would need to depreciate further by
20%–35% for inflation to reach the upper limit of 5.75% in 2019.
The GMM specification is based on Blachard, Olivier and Jordi Galí (2007): “Real wage rigidities and the new Keynesian model”, Journal of Money and Banking, 35–66. A GMM model was built with restricted coefficients (inertia and expectations
totaling the unit) with instruments provided by lags in the endogenous variables. The second estimate considers the same specification as that presented previously, but with the coefficients dependent on the threshold variable (in this case, the output
gap). The methodology uses the same instruments and the previous equality constraint. For more details, see Carner, Mehmet and Bruce Hansen (2004) “Instrumental variable estimation of a threshold model,” Econometric Theory, 20.
Source: Brazilian Statistics Bureau (IBGE), Central Bank of Brazil, Credit Suisse
Simulation of dynamics of IPCA inflation after BRL
depreciation of 10% (%, year-on-year)
Pass-through of FX depreciation to inflation, level
necessary for non-fulfillment of central bank's target (%)
Dec-19e
Cse
GMM
GMM threshold
below
GMM threshold5.0%
4.9%
4.6%
4.2%
Pass-through
FX depreciation to
reach upper limit
6.9
4.4
7.8
22.5
35.2
19.9
GMM GMM threshold, gap
below -1.6%
GMM threshold, gap
above -1.6%

1065 December, 2018
Median
IPCA
Max.
Min.
0
2
4
6
8
10
12
14
16
18
Aug-00 Mar-03 Oct-05 May-08 Dec-10 Jul-13 Feb-16 Sep-18
Core inflation measures have low predictive power
Median, minimum, and maximum of core inflation
measures and IPCA inflation1 (%, year-on-year change)
Predictive accuracy of core measures to forecast one-year
forward IPCA and mean square of forecast error2
 The median of all the central bank’s core indicators has been showing a much more favorable dynamic for
inflation than the headline indicator in the short term. Statistical tests show that core indicators do not have
good predictive power to forecast IPCA inflation one year ahead. On the other hand, IPCA inflation has good
predictive power to forecast the core measures.
 These results reinforce our view that IPCA inflation will remain close to the central bank’s targets for 2019 and
2020 and will not converge to the median of all core indicators of 3.1%.
1 Core measures built as described in: “Relatório Trimestral de Inflação,” Central Bank of Brazil, June 2018.
2 The predictive accuracy of each core measure to forecast IPCA inflation is calculated by the p-value of the Diebold Mariano test. Values higher than the significance level of 10% suggest that the core has lower forecasting
power than the random walk forecast. The MSE of each core measure is normalized by the MSE calculated using the random walk model.
Predictive accuracy test Prediction error ratio
IPCA EX-food 0.22 1.33
IPCA EX0 0.24 1.06
IPCA EX1 0.12 1.00
IPCA EX2 0.29 1.71
IPCA EX3 0.26 1.48
IPCA DP 0.29 1.39
IPCA MS 0.36 1.21
Random Walk N.A. 1.00

1075 December, 2018
Models point to long-term of 4.1% to 5.2% in 2019
 Inflation in 2017 and 2018 was much more benign than in previous years. The dynamics of inflation in these years
was mostly attributed to the strong supply of food items and the high level of slackness in the economy. As these
factors did not change the economic fundamentals, it is reasonable to expect no change in long-term inflation.
 We built three models used in economic literature to assess long-term inflation (the trend inflation measure of
Beveridge-Nelson)1: the unobservable components (UC) model, the unobservable components model with
stochastic volatility (UCSV), and the autoregressive vector model with coefficients that vary over time (TVVAR).
 Estimates for trend inflation vary between 4.1% and 5.2%, above core inflation and inflation for 2018.2
 Approval of the reforms proposed by the government3 could fundamentally change the long-term level of inflation
in the country, making convergence of inflation to a lower level more sustainable in the long run.
1The Beveridge-Nelson inflation measure is calculated as: 𝜋 𝑡
∗
= lim
ℎ→∞
𝐸𝑡[𝜋 𝑡+ℎ].2 Such measures have better predictive power than the usual core measures; for more details see: Outlook for 2018 and 2019 better but still
uncertain, December 2017. 3 The main reforms that could change the level of inflation in the coming years are social security reform, increase of openness of the economy, agenda of productivity, autonomy of the Central Bank
of Brazil, de-indexation of the economy, and privatization of state-owned companies.
3
4
5
6
7
8
9
Dec-99 Aug-01 May-03 Jan-05 Oct-06 Jun-08 Mar-10 Nov-11 Aug-13 Apr-15 Jan-17
Estimate of average, maximum, and minimum trend inflation (%, year-on-year change)
UCSV
TVVAR p=1
UC
TVVAR p=2
Sep-18

1085 December, 2018
0
1
2
3
4
5
6
7
8
9
10
Brazil’s inflation target converging to its peers’ targets
 The central bank had reduced the inflation target from 4.5% in 2018 to 4.25% in 2019, 4.0% in 2020,
3.75% in 2021. The lower center of the inflation target range is compatible with the average midpoint of
inflation target ranges observed in emerging economies (4.0%) and represents a structural improvement for a
country with a history of high inflation.
 The main risk to meeting the new targets is non-advancement of the fiscal consolidation process. The
maintenance of high fiscal deficits would eventually lead the country to fiscal dominance, preventing the
monetary authority from meeting the lower inflation targets.
Inflation targets of countries over time1 (%)
1 Blue line represents the path of inflation target center of each central bank of each inflation targeting over time
Source: Central Banks, Credit Suisse
Average of
emerging of
4.0%
Average of developed
countries of 2.1%
Australia
Norway
Switzerland
Sweden
Argentina
NewZealand
Canada
UnitedKingdom
Japan
SouthKorea
SouthAfrica
Brazil
Albania
Armenia
Bangladesh
Iceland
Israel
Chile
Russia
Romania
Peru
Mexico
Hungary
CzechRepublic
Colombia
Philippines
Ukraine
Thailand
Indonesia
Ghana
Georgia
Guatemala
India
Poland
DominicanRepublic
Paraguay
Uruguay
Zambia
Serbia
Turkey
Uganda
Trajectory Current
2018: 4.5%
2019: 4.25%
2020: 4%
2021: 3.75%

1105 December, 2018
Selic rate to increase to 8.0% and 9.0% by YE19 and YE20
 The central bank is expected to initiate a gradual tightening cycle in 3Q19 to keep inflation below the center of
the target range in 2019 and 2020.
 The closing of the output gap in 3Q19, the low differential between domestic and foreign interest rates, and
the lower inflation targets in 2019, 2020, and 2021 would require the central bank to remove the expansionist
effect of its monetary policy. We expect the central bank to implement a gradual approach, with increases of
50 basis points at each meeting, starting in September.
Selic interest rate, real Selic rate, and IPCA inflation (%, p.a.)
0
2
4
6
8
10
12
14
16
18
20
Real Selic IPCA Selic
2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 1Q20 4Q20

1115 December, 2018
-12
-10
-8
-6
-4
-2
0
February 2002 to September 2002 (Fraga)
Current monetary easing cycle will be longest since 2000
 The central bank started the current easing cycle on October 2016 with a 25bps cut. The cumulative change
in the Selic rate reached 775pps on March 2018, the third highest since 2000.
 Based on our forecast for the Selic rate in 2019, the current easing cycle will be the longest since 2000. The
number of months would total 35 after the first cut in the Selic rate, three months more than the easing cycle
initiated in September 2005. The current easing cycle was also one of the most gradual. The final level of the
policy rate in the current cycle was achieved only 18 months after the first cut.
Cumulative change in Selic interest rate in easing cycles
(percentage points)
June 2003 to August 2004 (Meirelles)
September 2005 to September 2007 (Meirelles)
January 2009 to July 2009 (Meirelles)
August 2011 to October 2012 (Tombini)
October 2016 to September 2019 (Goldfajn and Campos)
March 2000 to March 2001 (Fraga)
T T+5 T+10 T+15 T+20 T+25 T+30 T+35

1125 December, 2018
Effect of easing cycle to be one of the strongest
 The expansionist effect of monetary policy (calculated as the difference between the real Selic rate and natural
interest rate) reached -3.7 and -3.4pps in September and October, the second strongest of easing cycles
since 2003.1
 Considering best international practices, the normalization of the monetary policy to a non-expansionist level
should be gradual, which suggests that the expansionist effect will last long. For example, a tightening cycle
with 50bps hikes starting in 3Q19 would not eliminate the monetary easing effect until 3Q20.
Difference between the real Selic rate and the natural
interest rate (percentage points)
Easing Cycles Start End
Duration
(Days)
Median
differential
(pp)
Maximum
differential
(pp)
1 18-Jun-2003 15-Sep-2004 455 -0.3 -4.9
2 14-Sep-2005 16-Apr-2008 945 1.1 -1.3
3 21-Jan-2009 28-Apr-2010 462 -0.9 -2.1
4 31-Aug-2011 17-Apr-2013 595 -0.7 -3.4
5 19-Oct-2016 18-Sep-2019 1064 0.1 -3.7
Summary of previous monetary easing cycles2
-8
-6
-4
-2
0
2
4
6
Aug-03 Feb-06 Aug-08 Feb-11 Aug-13 Feb-16 Aug-18
1 Period in which our estimates of natural interest rates start.2 To calculate median and maximum differential we used the values for October 2018.
Source: Bloomberg, Brazilian Association of Financial and Capital Market Entities (Anbima), US Federal Reserve, IpeaData, Central Bank of Brazil, B3, Credit Suisse
Easing Cycles
Oct-18

1135 December, 2018
Monetary easing cycle to continue to fuel economy in 2019
 The low Selic rate will continue to stimulate the economy throughout 2019. Our models—Structural Vector
Autoregressive (SVAR) models and one Vector Autoregressive (VAR) model for Brazil1—indicate that cuts in
the Selic rate had a strong impact on the subsequent quarters. The cumulative effect of keeping the rate low
for a prolonged period will likely accelerate the economy in the coming quarters.
 At same time, monetary policy normalization should start before the emergence of demand pressures on
inflation, taking into account its lagged effect.
Response of output gap to 100bps rise in Selic rate (pps) Response of domestic absorption gap to 100bps rise in
Selic rate (pps)
Quarters
1 2 3 4 5 6 7 8 9 10 11 12
0.05
-0.05
-0.10
-0.15
-0.20
-0.25
0.00
Restricted SVAR
Complete SVAR
VAR
Quarters
0.05
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
0.00
1 2 3 4 5 6 7 8 9 10 11 12
Restricted SVAR
Complete SVAR
VAR
1 The models follow the methodology of Ouliaris, S., Pagam, A.R., and Restrepo, J. (2016), “Quantitative Macroeconomic Modeling with Structural Vector Autoregressions,” Working Paper, IMF. The models relate the variables: output gap, domestic
absorption gap, inflation, interest rate, and real effective exchange rate, and two exogenous variables to capture interactions with the global economy (i.e., global trade gap and Fed funds rate). The output gap and domestic absorption measures were
obtained using the Beveridge-Nelson decomposition and were based on AR (4) models and a time horizon of 12 quarters for the out-of-sample forecast. Domestic absorption is composed of consumption and investments.

1145 December, 2018
Interest rate differential reached the lowest level ever
 The strong monetary easing cycle implemented since 2016 drove the differential of domestic interest rate and
foreign interest rate to the lowest level ever. The difference between the Selic interest rate and the fed fund
rate reduced from 13.9pp in September 2016 to 4.6pp in September 2018. For the 10 year maturity, the
difference declined from 9.6pp to 7.2pp in the same period.
 The same happened with real rates. The differential of the 10 year real interest rates reached the lowest level
of 4.0pp in September 2018 while short-term differential reduced by 8.5pp since December 2016. The
expected continuation of the tightening cycle in US throughout 2019 suggest that the stability of the Selic rate
at the current level is unsustainable in the medium term.
1 Real Fed funds and Selic interest rates are obtained by subtracting the nominal rate by the current inflation. The nominal 10 year were obtained by the term structure of interest rate of each country, and the real 10 year rates
are the TIPS and NTNB interest rates for US and Brazil, respectively.
Source: FRED, National Treasury, Credit Suisse
0
10
20
30
40
50
60
Jan-00 Sep-02 May-05 Jan-08 Sep-10 May-13 Jan-16 Sep-18
0
2
4
6
8
10
12
Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17 Sep-18
Difference between domestic and foreign nominal
interest rate 1 (%, p.a.)
Difference between domestic and foreign real interest
rate 1 (%, p.a.)
Real spot interest rate difference
Real interest rate 10 year yield differenceNominal 10 year interest rate yield difference
Nominal spot interest rate difference

1155 December, 2018
Interest differential is low in comparison to emerging markets
 The reduction of the differential of Selic and Fed funds rates was strong even when compared to the dynamics
of interest rate differentials in emerging markets. For the first time since 2005, the interest rate differential in
Brazil is lower than the one observed for emerging economies.
 The dynamic for the interest rate differential in real terms was also similar. The differential for Brazil strongly
declined from 12.2pp in December 2016 to 1.9pp in September 2018, same level observed in emerging
economies in the month. The low level of the interest rates reduces the attractiveness of foreign investments
and increase capital outflows to economies with higher returns.
1 In emerging economies, Brazil was not included. 2 Real interests rate obtained by subtracting the nominal rate by current inflation of each country. Developed and emerging indexes were calculated using the current GDPs of the countries.
0
4
8
12
16
20
Jan-05 Oct-07 Jul-10 Apr-13 Jan-16
-2
0
2
4
6
8
10
12
14
16
18
Jan-05 Oct-07 Jul-10 Apr-13 Jan-16
Difference between domestic policy rate and Fed funds
in Brazil and emerging economies1 (pp, p.a.)
Difference between real domestic policy rate and real
Fed funds in Brazil and emerging economies2 (pp, p.a.)
Brazil
Emerging Markets
ex-China
Emerging Markets
Emerging Markets
Brazil
Emerging Markets ex-China
Sep-18 Sep-18

1165 December, 2018
Attractiveness of carry trade in Brazil has declined
 For many years, Brazil's high interest rates had attracted foreign investors with low cost of funding to invest in
long-term securities (known as carry trade). One of the main risks embedded in this type of transaction is FX
depreciation. As a result, investors compare the yield with any long-term imbalance in the FX rate.1
 The decline in the basic interest rate in Brazil and the higher rates in other countries, despite the expectation
of a less depreciated BRL, have made the carry trade less attractive since 2016. The country now has the
fourth-highest FX-adjusted carry trade within a sample of 29 countries (vs. second-highest in 2016).
Differential of 10-year US and domestic rates and between real exchange rate and historical average
October 2018 (%)
¹ We used the difference between the real exchange rate and its historical average as the long-term imbalance of a currency. To calculate the uncovered carry trade, we calculated the difference between the yield of ten-year
public securities in the USA vs. other countries. The countries used were Colombia, India, Austria, Belgium, Canada, Switzerland, Chile, Germany, Spain, France, the United Kingdom, Israel, Italy, Japan, Korea, Mexico,
Netherlands, Russia, South Africa, Brazil, Argentina, Australia, Bulgaria, China, Iceland, Ireland, New Zealand, Peru, and Singapore.
Source: © Datastream International Limited. All rights reserved, Bank for International Settlements, Credit Suisse
December 2016 (%)December 2017 (%)
-4
-2
0
2
4
6
8
10
12
14
-50 0 50 100 150
Gainform
interestratedifferential
Gain from potential FX valuation
-4
-2
0
2
4
6
8
10
-50 0 50 100
Gainform
-4
-2
0
2
4
6
8
10
12
14
-40 -20 0 20 40 60
Gainform
Positive expected
return
Positive expected
return
Positive expected
return

1175 December, 2018
Brazilian public debt to continue to pressure interest rate
 The high gross debt of the government and its expected upward trajectory make investments indexed by
domestic interest rates even less attractive. The gross debt increased from an average of 63% between 2011
and 2015 to 80.1% between 2016 and 2018, reverting the strong performance of the fiscal accounts
between 2001 and 2015.
 The strong demand for private savings caused by the high fiscal deficits will continue to pressure interest rates
in the coming years. Additional deterioration regarding the dynamics of fiscal accounts would trigger a strong
exchange-rate depreciation forcing the Central Bank to start a tightening cycle earlier than our expectation.
1 Real interests rate were obtained by subtracting the nominal rate from current inflation of each country. Developed and Emerging indexes were calculated using the current GDPs of the countries in the groups as weight in the index.
2 “Emerging” does not include Brazil. 3 The data for public debt are from the IMF, whose methodology is different from that of the Central Bank of Brazil.
Gross debt and real interest rate of selected countries(1,2,3)
0
20
40
60
80
100
120
-4 -2 0 2 4 6 8 10 12
2016-2018
2001-2005
2006-20102011-2015
Developed
Economies
Emerging ex China
Emerging
Interest rate (%, p.a.)
Grossdebt(%ofGDP)

1185 December, 2018
Central bank has become more sensitive to inflation
 To capture changes in the reaction function of the Central Bank of Brazil, we used a time-varying Taylor rule
for the Selic interest rate. The monetary policy rate set by the central bank is a function of the neutral interest
rate, the deviation of inflation to its target, and the output gap(1,2).
 The results of the estimates suggest that the central bank has become more sensitive to inflation over time
and less sensitive to the output gap.
1 The GDP gap and the neutral interest rate were calculated using the Hodrick-Prescott filter. For more details, see Areosa, M. (2008): “Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate
Output Gap,” Central Bank of Brazil Working Paper, Series 172. ² The model uses a Epanechnikov kernel smoothing nonparametric technique for a linear model and estimates the best fit for each observation, allowing for shifts
to be identified when the institution changes its sensitivity to the parameters. See Epanechnikov, V. A. (2008): “Non-Parametric Estimation of a Multivariate Probability Density” for more details.
𝑺 = 𝑺∗+ ρ(St-1 –S*)+ α(π- π*) + β (GDP*),
where S is the Selic rate, S* is the neutral interest rate, π* is the inflation target, and GDP* is the output gap.
Coefficient of differential between
past Selic rate and natural rate
Coefficient of
output gap
Coefficient of deviation
of inflation to target
0.80
0.85
0.90
0.95
1.00
Sep-03 Jun-07 Mar-11 Dec-14 Sep-18
-0.25
-0.15
-0.05
0.05
0.15
0.25
0.35
0.45
0.10
0.20
0.30
0.40
0.50
0.60
Henrique
Meirelles
Alexandre
Tombini
Ilan
Goldfajn
Henrique
Meirelles
Alexandre
Tombini
Ilan
Goldfajn
Henrique
Meirelles
Alexandre
Tombini
Ilan
Goldfajn

1195 December, 2018
Expansionist cycle driven by both inflation and slackness
 The difference between the Selic rate and the natural interest rate measures how expansionist or
contractionist monetary policy is. A breakdown of this difference shows that the central bank's decision was
based on the low rate of inflation and negative output gap of the economy. This combination of a negative
output gap and inflation below target was observed in only two periods: 4Q03–1Q04 and 3Q17–3Q18.
 A reduction of the output gap in the coming quarters, the current level of inflation close to the central bank's
target for 2019, and the central bank's lower inflation targets for 2021 and 2022 would leave less room for
the monetary policy to remain expansionist.
Breakdown of difference between Selic rate and natural interest rate (percentage points)
-4
-2
0
2
4
6
8
10
12
14
Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18
Output Gap
Difference of IPCA to target
Inertia coefficient

1205 December, 2018
7.3
0
5
10
15
20
3Q03 4Q04 1Q06 2Q07 3Q08 4Q09 1Q11 2Q12 3Q13 4Q14 1Q16 2Q17 3Q18 4Q19e
Taylor rule projects Selic interest rate at 9.4% in 2020
 Under our base case scenario for inflation and output gap, the Taylor Rule equation prescribes the current
level of Selic interest rate at 7.3%, and an increase to 9.4% in the year end 2020. The closing of the output
gap in the end of 3Q19 and inflation close to the Central Bank’s target throughout 2019 should trigger a
tightening cycle in the coming quarters. According to the Taylor rule, the policy rate should increase to:
– 7.8% in 2020, in an alternative scenario in which inflation declines to 3.8% and GDP growth remains close to 2.0%.
– 10.7% in 2020, assuming inflation reaching 4.75% and GDP growth of 3.5%.
1 Potential GDP calculated using a Hodrick-Prescott filter, with expansion of our GDP growth forecast until 2023 to minimize the risk of overestimation at tails. For more details, see Areosa, M. (2008): “Combining Hodrick-Prescott
Filtering with a Production Function Approach to Estimate Output Gap,” Central Bank of Brazil Working Paper, Series 172. The 12-month forward inflation forecast as of 2019 is based on our long-term inflation projections.
Source: Central Bank of Brazil (BCB), Credit Suisse
Scenarios for the Selic interest rate implied by the Taylor rule (%, p.a.)
10.7
9.4
7.9
Taylor rule
(output gap1, inflation
expectation differential)
Selic rate
10.0
8.9
7.8
4Q20e

1215 December, 2018
Term premium remained low in recent years
 The treasury interest rates can be decomposed in market forecast for the future path of short term yield and a
premium for the uncertainty regarding this forecast (term premium). We replicated the Fed’s methodology to
decompose the 10 year yield of the Brazilian treasuries1.
 The dynamics for the model-based market expectations and term premium has changed significantly over the
years. Before 2004, investors required a high term premium given the more volatile monetary policy rate. In recent
years, the term premium and market forecast for interest rates have declined significantly. Even in periods of strong
financial stress, as in 2015, the market forecast remained close to 14% and the term premium at 3%.
Breakdown of ten-year yield in model-based market expectation and term premium2 (%, p.a.)
1 The methodology decomposes the interest rate in the risk neutral measure assuming an affine representation of the factors. For more details see: Adrian, T., Richard Crump, Emanuel Moench:
“Pricing the term structure with linear regressions”, Journal of Financial Economics, Volume 110, Issue 1, October 2013.2 Estimated through October 2018.
26.0
19.2
15.0 17.4
22.9
14.1 15.7 14.1 11.6 11.5 11.4 9.7 11.2 10.2 8.0 10.3 11.9 13.7 11.6
7.8 7.9
15.8
12.8
4.9
12.0
22.4
5.8 1.8
-0.3
0.9 1.0 2.2
3.9
0.8
1.4
1.2
3.4
0.3 2.9 0.1
3.2 2.7
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
10Y premium
10Y market

1225 December, 2018
Term premium model projects Selic rate of 8.0% in ten years
 The model-based market expectations for the Selic rate in ten years has declined sharply since reaching the
peak of 13.7% in December 2015. In October 2018, they were at 8.0%, close to the median expectation of
8.0% in the Market Readout survey for the Selic rate in two years.
 On the other hand, the term premium saw an increase between March 2017 and August 2018, when it
reached the peak of 4.4%. After that, it declined sharply to 2.7% in October, in line with the less uncertain
political scenario.
-3
0
3
6
9
12
15
18
Jan-04 Nov-05 Sep-07 Jul-09 May-11 Mar-13 Jan-15 Nov-16 Sep-18
Breakdown of ten-year treasury yield in market expectations and term premium (%, p.a.)
Model’s forecast
10Y model implied premium

1235 December, 2018
12
13
14
15
16
17
18
19
20
21
22
Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05
10
11
12
13
14
15
16
17
18
19
20
Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09
Tightening cycles of 2004 and 2008 were predicted by FRAs
 Market expectations regarding monetary policy can also be inferred from forward rates (FRA) for years ahead.
For example, the tightening cycles in 2004 and 2008 were predicted by the FRA at the beginning of each
cycle. One week before the tightening cycle of 2004, the forward rates for one and two years were 13.8%
and 13.3%, respectively, close to the Selic rate of 13.75% at the end of the tightening cycle. In 2008, FRAs
of one and two years were only 45 and 43 basis points higher than the end-level Selic rate one week before
the start of the tightening cycle.
Source: B3, Central Bank of Brazil, Credit Suisse
Selic, FRA 1x2 interest rates (%, p.a.) Selic, FRA 2x3 interest rates (%, p.a.)
FRA 1X2
FRA 2X3
Selic
FRA 1X2
FRA 2X3
Selic

1245 December, 2018
Tightening cycle of 2013 was not predicted by markets
 The tightening cycle in 2010 was also anticipated by FRAs, but the cycle in 2013 cycle was not. In 2010, the
FRAs of one and two years were pricing in a Selic rate of 13.0% and 12.9%, in line with the terminal Selic
rate of 12.5%. On the other hand, FRAs did not predict the 2013 tightening cycle, the differences being
493bps and 453bps. The forecasts in the Focus Market Readout did not accurately forecast either tightening
cycles, the forecasts being 150bps and 700bps lower than the terminal Selic rate.
8
9
10
11
12
13
14
Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11
6
8
10
12
14
16
18
Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16
Source: B3, Central Bank of Brazil, Credit Suisse
Selic, FRA 1x2 interest rates (%, p.a.) Selic, FRA 2x3 interest rates (%, p.a.)
FRA 1X2
FRA 2X3
Selic
Focus 2011
Focus 2012
Focus 2015
FRA 1X2
FRA 2X3
Selic
Focus 2016

1255 December, 2018
6
7
8
9
10
11
12
13
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18
Market survey forecasts point to more gradual tightening
 The median expectation in the Focus Market Readout survey projects the Selic rate at 7.75% at year-end
2019 and 8.0% at year-end 2020, lower than our forecast of 8.0% and 9.0% and the FRA 1x2 of 9.1% and
FRA 2x3 of 10.6% for the period.
 Interestingly, the FRA interest rates remained higher than the Market Readout expectation throughout the
year. The market's expectations of 8.0% for the Selic rate and 4.0% for inflation for next years suggest a
median market forecast for the natural interest rate of 4.0%, much lower than our estimates.
Source: B3, Central Bank of Brazil, Credit Suisse.
Selic, FRA 1x2, FRA 2x3 interest rates (%, p.a.)
FRA 1X2
FRA 2X3
Selic
Focus 2019
Focus 2020

1265 December, 2018
Monetary tightening cycles in Brazil are strong and fast
 Previous monetary tightening cycles1 in Brazil were characterized by sharp increases in interest rates. In five of
the past six tightening cycles, the Selic rate increased by more than 350 basis points.
 All tightening cycles lasted no more than 16 months, with the exception of the cycle from April 2013 to
October 2016.
 Of all tightening cycles since 2000, two started with a 25bps increase (2004 and 2013), two with 50bps
(2001 and 2008), one with 75bps (2010), and one with 300bps (2002).
Cumulative change in Selic interest rate in tightening cycles
(percentage points)
0
1
2
3
4
5
6
7
8
9
March 2001 to
January 2002 (Fraga)
October 2002 to May 2003 (Fraga until Jan 2003 and Meirelles)
September 2004 to
August 2005 (Meirelles)
April 2008 to December 2008 (Meirelles)
April 2010 to July 2011 (Meirelles and Tombini)
April 2013 to October 2016 (Tombini)
M M+2 M+4 M+6 M+8 M+10 M+12 M+14 M+16 M+18 M+20 M+22 M+24 M+26 M+28 M+30 M+32 M+34 M+36 M+38 M+40 M+42
¹A monetary tightening cycle is defined as the starting on the month of the first hike and ending on the month before the first reduction in interest rate.

1275 December, 2018
0
3
6
9
12
15
18
T-12 T+7 T+26 T+45 T+64 T+83 T+102 T+121
Prolonged easing cycles require anchored expectations
 The high idle capacity is not a sufficient condition for the central bank to keep interest rates at low levels for a
prolonged period of time. Fiscal and external vulnerabilities need to be solved to sustain a policy rate at low levels.
 Since 2000, there were eight episodes of emerging markets posting strong recessions1. As expected, these
countries implemented strong easing cycles and, in certain cases, for a prolonged period of time. Despite the
high idle capacity, some countries (Argentina, Russia, Turkey, Hungary) had to anticipate the tightening cycle,
most of whom had strong fiscal vulnerabilities.
Policy rate
Start of
recession
Total
contraction
Before
easing
After
easing
Length of
easing
(months)
Argentina 2Q01 -18% 76.1 1.2 13
Argentina 3Q08 -10% 15.9 9.5 52
Brazil2 4Q14 -8% 14.3 6.5 27
Hungary 2Q08 -8% 11.5 5.3 24
Mexico 3Q08 -8% 8.3 3.0 83
Romania 3Q08 -9% 10.3 1.8 107
Russia 2Q08 -11% 13.0 7.8 22
Turkey 1Q08 -13% 16.8 6.5 18
Monetary interest rate before and after episodes of strong recessions (%, p.a.)
1 We did not consider Argentina in 2001 because the scale of the figure. We used 23 emerging market economies. We defined strong recession as episodes of two consecutive contractions in quarterly GDP growth and with a total GDP
contraction of 7%, in line with the strong contraction in Brazil’s GDP from 2Q14 to 4Q16. In the two episodes of deep recessions, Argentina had high fiscal vulnerability and defaulted on its sovereign debt in 2001. The Central Bank of
Hungary stated that the “unorthodox fiscal” measures increased inflation and that the hikes would start in December 2000. Turkey has historically high deficits, combined with IMF loans. 2 Due to the use of the general definition of recession in
this exercise, the start of the recession in Brazil was in 4Q14, not in 2Q14.
Source: BIS, Credit Suisse
Russia
Turkey
Mexico
RomaniaHungary
Brazil
T = start of recession
Argentina

1285 December, 2018
Broader reforms could reduce size of tightening cycle
 One upside risk to our scenario of a 250bps
increase in the Selic rate in coming years is the
possible reduction in the natural interest rate due to
the approval of broad structural reforms.
 Several factors explain the high natural interest in
Brazil: (i) high gross debt; (ii) high primary and
nominal deficits; (iii) low level of private savings; (iv)
low level of openness of the economy; (v) past
history of defaults; and (vi) high inflation. Hence,
addressing some of these factors could reduce the
natural rate.
 Overall, both the micro reforms and the fiscal
consolidation process would reduce the natural
interest rate, diminishing the size of the tightening
cycle necessary to reach the inflation target in the
coming years.
Gross debt in emerging markets in 20181 (% of GDP)
Five-year average inflation in emerging markets (%)
Savings in emerging markets in 2018 (% of GDP)
1 IMF’s gross debt definition, which differs from that of the Central Bank of Brazil.
54.1
32.7
87.3
23.6
23.8
51.2
49.3
67.4
68.9
29.6
53.6
53.5
67.2
27.0
37.3
50.8
37.9
18.7
54.9
41.6
27.8
78.4
58.4
48
12.3
29.9
14.5
24.4
21.0
45.4
21.0
26.6
29.7
32.0
27.8
21.0
12.2
20.9
25.7
20.2
20.1
27.7
15.8
33.5
26.0
18.6
30.9
24
17.2
7.1
5.9
1.0
2.7
2.5
3.7
2.7
7.0
4.7
2.4
3.9
7.6
2.7
3.3
1.8
2.8
7.2
5.5
1.8
8.5
12.3
6.2
Argentina
Bangladesh
Brazil
Bulgaria
Chile
China
Colombia
Hungary
India
Indonesia
Malaysia
Mexico
Pakistan
Peru
Philippines
Poland
Romania
Russia
SouthAfrica
Thailand
Turkey
Ukraine
Vietnam
5.2

1295 December, 2018
Formal autonomy of central bank could be approved
 Congress has been discussing supplemental bill of law No. 32/03, which establishes fixed mandates for the
governors and the chairman of the Central Bank of Brazil that do not coincide with the President’s mandate.
The bill would reduce uncertainty regarding the new governors during the transition to a new administration
and contribute to reduce political pressures on the monetary authority to spur short-term returns (e.g., higher
growth) to the detriment of long-term benefits (e.g., lower inflation, higher growth). The new administration is
in favor of the proposal and could put its proposal forward in the coming quarters.
Benefits of granting formal autonomy to Central Bank of Brazil
Anchoring of inflation
expectations
Formal autonomy of the
monetary authority would
make monetary policy more
robust and, consequently,
would increase the society's
well-being.
Robust
monetary policy
Formal autonomy of the
monetary authority would
make it difficult for the
government to finance
public debt via
seigniorage.
Fiscal adjustment
stimulus
Formal autonomy would reduce uncertainty
regarding the perception that certain
monetary policy decisions were influenced by
the federal government in recent decades.
Even if this has never been the case, such
uncertainty would hinder inflation control.
Such autonomy would anchor inflation
expectations more solidly around the center
of the target range and increase the power
of monetary policy.

1305 December, 2018
Conditions for credit expansion are favorable
 The continuity of more favorable financial conditions
owing to the postponement of the monetary policy
normalization process will likely result in more
significant expansion of non-earmarked bank
lending in the next few quarters. The current
starting point for the credit cycle is favorable:
– Supply conditions: Following the sharp rise in the post-
recession period, the delinquency rate in non-
earmarked bank loans to both individuals and
corporations is at its lowest level of the past few
months. This situation will likely stimulate private banks
to supply credit.
– Demand conditions: Both households and corporations
have gone through a deleveraging process for the past
few years, which makes it easier for both segments to
take out loans.
Dynamics of delinquency in non-earmarked bank loans
(% of stock of credit)
Total
Individuals
Businesses
3
4
5
6
4
5
6
7
8
2
3
4
5
6
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
Average
Average
Average
5.0
5.9
4.0
After the end of the recession in
4Q16, delinquency in corporate
loans peaked, hindering an
acceleration in credit.

1315 December, 2018
Total bank lending to rise 8.8% in 2019 and 2020
 Maintenance of the Selic basic interest rate below its neutral level should keep growth in bank lending on a
positive trend in the coming quarters.
 Growth in total lending should increase from 4.3% in 2018 to 8.8% in 2019 and 2020, a movement that
should be driven by non-earmarked lending, which is more responsive to the effects of monetary policy.
 Earmarked lending should resume, although at a more moderate pace, after three consecutive contractions
between 2016 and 2018.
Growth in bank lending (%, p.a.)
Non-earmarked
Earmarked
Total
-10
-5
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
11.213.7
9.5
5.83.1
-1.1
8.88.8
4.3

1325 December, 2018
Non-earmarked lending should continue to recover
 The main driver of the acceleration in bank lending will be the non-earmarked portfolio, for both households
and businesses.
 Our base-case scenario assumes that the more favorable financial conditions seen in recent months should
continue to contribute to a resumption in non-earmarked lending in the next two years.
 This environment will favor an increase in private institutions' share of the credit market in the next few years.
Growth in non-earmarked lending (%, p.a.)
Individuals
Business Total
-20
-10
0
10
20
30
40
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
12.0
15.0
11.2
10.5
12.5
7.9
11.2
13.7
9.5

1335 December, 2018
Private banks' share in credit market to continue rising
 After many years in which public-sector banks drove the dynamics of bank lending, the last two years saw a
reversal of this process, with private banks increasing their share in total lending, from the low of 43% of the
total in mid-2006 to nearly 48% in September 2018.
 The shrinking of the share of public banks is explained by the repayments of loans from the Brazilian
Development Bank (BNDES) to the National Treasury and the change in the methodology for calculating the
long-term interest rate (TLP), which made subsidized loans less attractive to the corporate segment by making
the TLP higher and closer to the monetary policy rate (Selic).
 The incoming administration has promised to maintain the current restructuring policy, which would boost
private banks' share of total lending in the next few years.
Public
Private
30
35
40
45
50
55
60
65
70
Jan-00 May-01 Sep-02 Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10 Jan-12 May-13 Sep-14 Jan-16 May-17 Sep-18
Share of public and private banks in total bank lending (%)

1345 December, 2018
Public banks preventing resumption of lending
 The central bank has implemented five monetary easing cycles since 2002: cycle 1 from June 2003 to
August 2004 (1000 basis points), cycle 2 from September 2005 to September 2007 (850bps), cycle 3 from
January 2009 to July 2009 (500bps), cycle 4 from August 2011 to October 2012 (525bps), and cycle 5
from October 2016 to March 2018 (775bps).
 Despite the strong decline in the policy rate in the current cycle, recovery in bank lending has been slower
than in other cycles, especially for lending by public-sector banks.
90
100
110
120
130
140
150
80
90
100
110
120
130
140
150
Dynamics of real total bank lending in
easing cycles (100=start of cycle)
Dynamics of real private bank lending
in easing cycles (100=start of cycle)
Dynamics of real public bank lending
in easing cycles (100=start of cycle)
Cycle 1 Cycle 2 Cycle 3 Cycle 4 Cycle 5
T0 T3 T6 T9 T12 T15 T18 T21
90
100
110
120
130
140
T0 T3 T6 T9 T12 T15 T18 T21 T0 T3 T6 T9 T12 T15 T18 T21

1355 December, 2018
Decline in lending rates for individuals has been small
 Despite being one of the strongest monetary easing cycles in recent past, the current cycle has not been
completely transmitted to the lending rates charged on non-earmarked loans to individuals.
 Comparing the current cycle with the last four easing cycles, the pass-through of the decline in the Selic rate
to interest rates charged by banks on the portfolio of individuals was the lowest when we weight each
transaction by its share in total lending.
 The pass-through was much higher in other cycles, reaching a ratio of 4.20 in the cycle implemented from
January 2009 to July 2009, for example.
3.4
2.1
4.2
1.5
1.2
3.3
1.5
2.9
3.5
1.8
Pass-through of Selic cuts to lending rates for
non-earmarked loans to individuals1
(simple average)
Pass-through of Selic cuts to lending rates for
non-earmarked loans to individuals1
(weighted average by share of each segment)
Cycle 1
Cycle 2
Cycle 3
Cycle 4
Cycle 5
1 We divided the magnitude of the decline of interest rate during the easing cycle by the magnitude of the decline of interest rate charged on the portfolio of non-earmarked loans to individuals. For non-earmarked lending to individuals, the
series are reported for the following transactions: overdraft loans (2.9% of the balance of non-earmarked loans to businesses), personal credit (48.8%), auto loans (17.7%).

1365 December, 2018
Pass through in the corporate lines equal to other cycles
 Despite the lower pass-through from the decline in the policy rate to operations for individuals, the pass-
through to corporate segments has been very close to the one observed during other monetary easing cycles.
 For example, weighting the decline in interest rate of each operation by its share in the total non-earmarked
lending for corporates, the pass-through was 89% of the decline in the policy rate, not very different from
what happened during the fourth, the second and the first cycles analyzed.
Pass-through of Selic cuts to interest rates
in non-earmarked lending for corporates1
(simple average)
Pass-through of Selic cuts to interest rates
in non-earmarked lending for corporates1
(average weighted by share of each segment)
0.91
0.92
1.84
0.94
0.89
0.88
1.07
2.29
0.95
0.91
Cycle 1
Cycle 2
Cycle 3
Cycle 4
Cycle 5
1 We divided the magnitude of the decline of interest rate during the easing cycle by the magnitude of the decline of interest rate charged on the portfolio of non-earmarked loans to individuals. For the portfolio of non-earmarked loans to
businesses, the following transactions are reported: discount of receivables (7.6% of the balance of non-earmarked loans to businesses), working capital (40.7%), vendor (0.5%), ACC (8.0%), and external pass-through (4.2%).

1375 December, 2018
Interest rates remain high in some segments of credit
 Despite the recent decline in interest rates charged in
the main segments of the non-earmarked portfolio,
there is still much room for additional declines in
other segments, especially the portfolio of loans to
individuals.
 For example, the lending rate charged on overdraft
loans remains higher than 300% p.a., the highest
level in the data series. Considering that the policy
rate is at its lowest historical level, there is much
room for this lending rate to converge to lower levels
in the coming quarters. Many other segments of the
non-earmarked portfolio have followed the strong
decline in the Selic rate in the last quarters.
 The reduction in risk aversion and the benign
dynamics of delinquency rates also suggest that
lending rates for non-earmarked loans to individuals
should remain on a downward trend in the quarters
ahead.
0
50
100
150
200
250
300
350
Sep-94 Sep-02 Sep-10 Sep-18
Dynamics of interest rates in some credit lines (%, p.a.)
Overdraft loans
Personal loans
Payroll loans
External on-lending
Trade acceptance
and receivables
Auto loans
Financing of suppliers
Export advance (ACC)
Working capital

1385 December, 2018
Credit origination was low at start of current cycle
 Despite the acceleration of credit originations in recent months, the impact of the improvement in bank lending
conditions on the real economy has been lower than in other monetary easing cycles.
 This is explained by the fact that the size of credit originations in the economy at the start of the current easing
cycle was much lower than at the start of previous monetary easing cycles.
 For example, credit originations as percentage of GDP were 2.8% at the start of the current cycle, much
lower than the 5.3% observed in the second cycle, implemented from September 2005 to September 2007.
8.6
9.8
6.8
6.4
5.2
4.9
5.3
4.7
4.3
2.8
Cycle 1
Cycle 2
Cycle 3
Cycle 4
Cycle 5
Ratio of originations of reference loans to GDP at start of
monetary easing cycles
(%, three month moving average)
Ratio of origination of reference loans to total lending at
start of monetary easing cycles
(%, three month moving average)

1395 December, 2018
Credit originations have started to resume
 As a result of the low base of credit originations, the impact of the improvement in credit conditions should
take more time than in previous periods of monetary easing.
 Maintenance of the Selic rate at the current level of 6.5% p.a. for a prolonged period should keep credit
originations as percentage of GDP on an upward trend, reversing the strong decline in this ratio observed
during the recession from 2Q14 to 4Q16.
 Monetary easing should be one of the main drivers of the resumption of economic activity in the coming
quarters.
2
3
4
5
6
Jul-01 May-04 Mar-07 Jan-10 Dec-12 Oct-15 Aug-18
4
5
6
7
8
9
10
11
Jun-00 Jun-03 Jul-06 Jul-09 Aug-12 Aug-15 Sep-18
Dynamics of ratio of originations of reference loans to
GDP (%)
Dynamics of ratio of originations of reference loans to
total stock of loans (%)
Concessions/GDP
Concessions/GDP
3 month moving average
Concessions/GDP
Concessions/GDP
3 month moving average
Sep-18

1425 December, 2018
Truckers' strike reversed positive momentum of indicators
 After the end of recession in 4Q16, the main economic activity indicators (i.e., industrial production, broad real
retail sales, and core real retail sales) started an upward trend, showing robust acceleration until 1Q18.
 However, the tightening of financial conditions due to the high uncertainty regarding the outcome of the
elections and the truckers' strike reversed the trend of industrial production in 2Q18 and 3Q18. Despite these
events, real retail sales continued to see positive momentum.
93
97
101
105
109
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
95
100
105
110
115
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
Dynamics of industrial production
(Index number, seasonally adjusted, Dec-16=100)
Dynamics of retail sales and real revenues from services
(Index number, seasonally adjusted, Dec-16=100)
Total
Manufacturing
Mining
Broad retail sales
Core retail sales
Real revenues from services

1435 December, 2018
Positive dynamics of economic activity in 2019 and 2020
The main risks are:
 Implementation of fiscal agenda
with Social security reform as
primary item on agenda
 Path of interest rates in main
developed economies
 Dynamics of GDP growth of
Brazil’s main trading partners
(e.g., China)
The more robust recovery
of economic activity will be
driven by:
 Greater impact of monetary
easing cycle on economy
 Improvement in balance sheet of
households and businesses, due
to strong deleveraging cycle
 Lower uncertainty regarding
government’s fiscal agenda
 More favorable labor market
conditions
The necessary
adjustments are:
 Increase in economy’s trade
openness
 Measures that improve the
business environment in the
country
 Improvement in quality of
institutions
 Tax reform
 Privatization of state-owned
enterprises
A few restrictions prevent
greater acceleration in
demand:
 Lower government consumption
than in the past
 Lower expansion in exports than
in period of strong growth of
main trading partners
Main risk is the
implementation of
fiscal consolidation
process
More robust
economic
recovery
Increase in long-term
growth requires
reforms in coming
years
Some constraints
prevent greater
acceleration in
demand

1445 December, 2018
Carryover of 0.8% for GDP growth in 2019
 Assuming our forecast of 0.5% qoq for GDP growth in 4Q18, the carryover for GDP growth in 2019 will be
0.8%. In other words, if GDP remains stable during all quarters of 2019, GDP growth in 2019 will be 0.8%.
 GDP growth in 2019 will be much higher than in 2018 in the absence of negative shocks. Assuming the post-
recessions average quarterly GDP growth, GDP growth would reach 3.3% in 2019. Considering the historical
average (1Q96-3Q18) pace of growth, GDP growth would be 2.3% in 2019.
Carryover for GDP growth in 2019 conditioned on GDP growth in 4Q18 (%) Alternative scenarios for GDP growth
in 2019 (%, p.a.)
Post-recessions
average
(1.0% qoq)
Historical
average
(0.6% qoq)
Average from
1Q17-3Q18
(0.4% qoq)
2011–18
average
(0.1% qoq)
3.3
2.3
1.9
1.0
0.1
0.2
0.3
0.3
0.4
0.5
0.6
0.6
0.7
0.8
0.9
0.9
1.0
1.1
1.2
1.2
1.3
1.4
1.5
1.5
1.6
-0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6
GDP growth in 4Q18 (%, qoq)
Credit Suisse forecast

1455 December, 2018
Household consumption to explain higher GDP growth in 2019
 Higher GDP growth in 2019 would be explained mainly by greater expansion in household consumption and in
investments. A sharp improvement in financial conditions driven by an anchoring of expectations regarding the
fiscal consolidation process should maintain the positive outlook for the credit market. Labor market conditions
should also continue to improve in 2019. As a result, domestic demand should lead to acceleration in
economic activity in the coming quarters.
GDP growth on demand side (%, p.a.)
Household consumption Government consumption Gross fixed capital formation Exports Imports
63.4
20.0
15.0
12.6
11.6 Household consumption
Government consumption
Gross fixed capital formation
Exports
Imports
6.2
4.8
3.5
3.5
2.3
-3.2
-3.9
1.4
2.0
2.9
2.6
2010
2012
2014
2016
2018e
2020e
3.9
2.2
2.3
1.5
0.8
-1.4
0.2
-0.9
0.3
0.0
0.0
2010
2012
2014
2016
2018e
2020e
17.9
6.8
0.8
5.8
-4.2
-13.9
-12.1
-2.5
5.0
9.3
5.7
2010
2012
2014
2016
2018e
2020e
11.7
4.8
0.7
1.8
-1.6
6.8
0.9
5.2
6.0
7.5
3.5
2010
2012
2014
2016
2018e
2020e
33.6
9.4
1.1
6.7
-2.3
-14.2
-10.3
5.0
9.8
7.0
5.1
2010
2012
2014
2016
2018e
2020e
7.5
4.0
1.9 3.0
0.5
-3.5 -3.3
1.1 1.4
3.0 2.5
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

1465 December, 2018
Domestic demand to lead acceleration in GDP growth in 2019
 Domestic demand should prompt acceleration in economic activity in 2019 and 2020. Despite the lower
contribution expected from government consumption, solid household consumption growth and an acceleration
in investments should prompt a higher contribution from domestic demand.
 This environment is compatible with an acceleration in imports, which would weigh on the positive momentum
coming from domestic demand. Exports should continue to grow at a reasonable pace but probably not fast
enough to ensure a high contribution from the external sector to GDP growth in 2019 and 2020.
Breakdown of GDP growth by domestic demand and external sector (%, pps, p.a.)
-0.7
-1.5
-2.5
-2.5
-2.2
-1.6
-0.8
-0.6
-0.4
-0.3
-0.2
-0.1
-0.4
-0.3
-0.7
-0.7
-0.3
-0.1
0.4
0.9
1.5
2.7
3.6
3.4
2.8
1.4
0.2
-0.2
-0.2
-0.5
-0.4
-0.4
-0.1
-0.3
-0.2
-0.3
-0.2
-0.1
3.3
6.9
9.9
10.0
8.7
7.2
5.6
4.6
3.6
2.5
2.1
2.0
2.5
3.2
3.7
3.7
3.5
2.2
0.9
0.4
-1.1
-2.2
-3.8
-6.2
-8.1
-8.0
-6.9
-4.7
-2.2
-1.0
1.0
1.1
1.7
1.9
1.8
2.1
2.3
2.8
3.2
3.2
3.2
2.9
2.6
2.6
5.3
7.5 7.5
6.6
5.6
4.8
4.0
3.1
2.2 1.9 1.9 2.2
2.9 3.0 3.0 3.2
2.1
1.2
0.5
-0.7
-1.3
-2.2
-3.5
-4.4 -4.5
-4.1
-3.3
-2.0
-1.0
-0.1
1.1 1.3 1.4 1.4 1.4 1.7
2.2
2.7 3.0 3.0 2.9 2.7 2.5
External sectorDomestic demand
GDP
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18E
1Q19E
2Q19E
3Q19E
4Q19E
1Q20E
2Q20E
3Q20E
4Q20E

1475 December, 2018
Household consumption to accelerate in coming quarters
 Our expectation of an acceleration in household consumption in 2019 and 2020 is due to the following
factors:
– Rise in consumer confidence in a scenario of lower domestic aversion to risk in light of expectation of implementation of
fiscal consolidation agenda.
– Greater expansion in bank lending, due to postponement of monetary tightening cycle.
– Higher growth in wage bill as a result of faster job creation.
Source: Brazilian Statistics Bureau (IBGE), Getulio Vargas Foundation (FGV), Central Bank of Brazil, Credit Suisse
1 The impulse-response functions presented are calculated using a model that co-integrates household consumption, consumer confidence, real expanded wage bill, real interest rate, and total credit as a proportion of GDP.
Response of growth in household consumption to one percentage point change in its drivers1 (%)
Consumer confidence CreditReal interest rateReal wage bill
8
6
4
2
0
-2
0 5 10
1.25
0.75
0.50
0.25
0.00
0 5 10
1.00
4
2
1
-1
0 5 10
3
0
2
0
-2
-5
0 5 10
1
-1
-3
-4
Upper bound
Median
Lower bound Lower bound
Median
Upper bound
Median
Lower bound
Upper bound
Median
Lower bound
Upper bound
Quarters Quarters Quarters Quarters

1485 December, 2018
Deleveraging of households and companies in 2016-2018
 Sharp decline in interest rates from 2016 to 2018 favored a process of household and corporate deleveraging
in the period.
 The debt-service ratio of households declined from a level close to 23% at the end of 2015 to below 20% in
August 2018. In the case of the non-financial private sector, which includes companies and households, the
movement was similar, with a sharp decline in the debt-service ratio in recent quarters.
 Maintenance of the interest rate at a low level for a prolonged period will tend to keep the debt-service ratio of
companies and households at a moderate level.
0
5
10
15
20
25
Mar-05 Feb-07 Jan-09 Dec-10 Nov-12 Oct-14 Sep-16 Aug-18
Debt-service ratio
Interest
payments
Amortization
10
15
20
25
30
35
40
45
Mar-99 May-02 Jul-05 Sep-08 Nov-11 Jan-15 Mar-18
Debt-service ratio
Average from 1999 to 2018
Debt-service ratio of households with amortization and
interest on debt (% of total wage bill)
Debt-service ratio of non-financial private sector
(% of GDP)
Source: Bank of International Settlements (BIS), Central Bank of Brazil, Credit Suisse

1495 December, 2018
Balance sheet of households will spur a rise in lending
 The deleveraging process of companies and households in recent quarters will allow for a swifter expansion of non-
earmarked lending over the next few years.
 Based on our forecast for the Selic interest rate and the extended wage bill, even with strong growth in non-
earmarked lending to individuals, the debt-service ratio of households is expected to remain below the levels seen in
recent years.
 Accordingly, there is room for growth in household consumption in 2019 and 2020 to be driven by an acceleration of
lending.
 Growth in nominal wage bill of 8.3% in
2019.
 We assumed that growth in non-
earmarked lending in each of the
scenarios was uniform for each segment
of non-earmarked lending to individuals
that is part of the calculation of the debt-
service ratio.
 Selic interest rate of 8.0%, compatible
with our baseline scenario.
 The interest rates for each lending segment
were projected using an econometric model
that used the Selic interest rate and its lags
as explicative variables.
Household debt-service ratio
(% of expanded wage bill)
Increase in debt-service ratio
(BRL million)
13,565
16,937
20,341
23,878
27,447
10 15 20 25 30
Growth in non-earmarked lending (%)
Assumptions used in
simulation:
19
20
21
22
23
24
25
Dec-11 Dec-13 Dec-15 Dec-17 Dec-19
10 15 302520
Growth in non-earmarked lending (%)

1505 December, 2018
Unemployment rate to continue to decline in 2019 and 2020
 Labor market conditions will likely continue to improve in 2019 and 2020. The unemployment rate is expected
to decline from 12.1% in 2018 to 11.3% in 2019 and 10.6% in 2020. This downward trend would be driven
by the resumption of economic activity, which would accelerate job creation in the formal sector. Real wages
are expected to accelerate in 2019, after deceleration from 2017 to 2018. The greater increase in real wages
and in the working population will contribute to expansion of the real wage bill. The real wage bill is expected
to grow from 2.2% in 2018 to 4.1% in 2019 and 4.0% in 2020.
15
0
Projections of main variables of labor market (%, p.a.)
Unemployment rate Employed population Labor force Real wages Real wage bill
7.1 6.8
8.5
11.5
12.7
12.1
11.3
10.6
2013 2014 2015 2016 2017 2018e 2019e 2020e
1.4
1.5
0.0
-1.9
0.3
1.5
2.4
1.9
2013
2014
2015
2016
2017
2018e
2019e
2020e
1.2
1.1
1.9
1.4
1.7
0.8
1.5
1.1
3.3
1.1
-0.3
-1.9
2.3
0.7
1.7
2.1
4.7
2.9
-0.1
-3.2
2.6
2.2
4.1
4.0

1515 December, 2018
Higher real wage bill driven by the rise in working population
 The low inflation rate continued to contribute to the growth in real wages in 1H18. However, the deceleration
in nominal wages drove the lower growth in real wages during this period.
 The more positive outlook for the dynamics of the unemployment rate in the coming quarters should contribute
to an acceleration of nominal wages.
Real habitual earnings (%, year-on-year change, percentage points)
8.7
10.5
10.1
9.5
9.7
6.5
5.9
7.6
7.7
10.1
9.5
7.6
6.8
4.8
6.7
8.5
7.3
6.7
5.0
4.5
2.8
4.5
5.1
4.4
5.5
4.5
5.7
6.3
10.0
11.9
11.7
11.4
12.2
8.7
7.5
9.2
8.7
10.2
9.4
7.1
5.9
4.0
4.9
6.6
5.5
6.0
6.4
6.5
4.7
5.7
6.7
5.9
7.9
7.5
7.9
8.4
-6.3
-6.5
-6.0
-5.8
-5.8
-6.3
-6.6
-6.5
-7.6
-8.5
-9.5
-10.4
-10.2
-9.2
-8.7
-7.0
-4.9
-3.5
-2.6
-2.9
-2.8
-3.3
-4.4
-3.7
-4.0
-3.4
-3.7
-4.2
2.2
3.7 3.8 3.4 3.7
0.2
-0.6
1.1
0.1 -2.6
-3.0 -4.0 -1.9
1.4
2.3 2.3
1.5
0.0
1.1 0.6 0.7
1.5 1.1
2.0 2.1
3.4
5.0 5.3 5.2
6.0
2.1
0.8
2.6
1.0
1.6
-0.1
-2.9
-3.9
-4.7
-3.5
-0.4
0.6
2.4
3.8 3.5
1.8
2.3 2.2 2.2
3.8 4.1 4.2 4.1
Nominal wage Nominal wage bill Inflation Real wage Real wage bill
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18e 1Q19e 2Q19e 3Q19e 4Q19e

1525 December, 2018
Investments to increase in upcoming quarters
 Investments will also be an important driver of the acceleration of economic activity in 2019 and 2020. The
following drivers of investments suggest a more favorable scenario in this period:
– An improvement in credit conditions, with a likely expansion in non-earmarked lending to businesses.
– An increase in business confidence in a scenario of lower uncertainty regarding the sustainability of public debt due to the
implementation of a fiscal consolidation process.
– A more appreciated level of local currency, which reduce the price of imported capital goods.
Response of investments to 1 percentage point change in its drivers1 (%)
Source: Brazilian Statistics Bureau (IBGE), Getulio Vargas Foundation (FGV), Central Bank of Brazil, Credit Suisse
Real interest rate Real exchange rateBusiness confidence
3
0
-2
-5
0 5 10
2
1
-1
-3
-4
1.5
1.0
0.5
-0.5
0 5 10
0.0
0.4
0.0
-0.2
-0.8
0 5 10
0.2
-0.4
-0.6
1 The impulse-response functions presented are calculated using a model that co-integrates investments, real interest rate, business confidence, and real exchange rate.
Quarters Quarters Quarters
Upper bound
Median
Lower bound
Upper bound
Lower bound
Median
Upper bound
Lower bound
Median

1535 December, 2018
Sharp decline in domestic savings in recent years
 The sharp increase in government size, with a spike in the nominal deficit from 2012 to 2016, changed the
financial balance of corporations and households, which then had to finance such deficit. The corporate sector,
which posted deficits from 2010 to 2013 due to an increase in investments, have posted surpluses since then
to finance the expansion of public expenditures.
 The high dissavings of the public sector in recent years reduced the total savings of the Brazilian economy as
a percentage of GDP to an all-time low. If the fiscal deficit is not reversed in the next few years, any increase
in investments will need to be financed by a higher current-account deficit (e.g., external savings).
-8
-6
-4
-2
0
2
4
6
8
2000 2002 2004 2006 2008 2010 2012 2014 2016
Financial balance (financial capacity/net financial needs) of
institutional sectors (% of GDP)
Breakdown of savings, by institutional sector (% of GDP)
11.8
12.6
13.2
13.6
14.4
13.8
15.3
16.0
14.5
13.0
10.8
11.4
10.3
11.6
11.9
11.5
10.2
5.3
5.6
5.8
5.7
5.3
4.6
4.8
4.6
4.5
4.6
6.9
6.8
7.2
7.3
6.9
8.3
8.5
-3.4
-4.8
-4.4
-3.5
-1.4
-1.2
-2.8
-2.8
-0.7
-2.1
0.2
0.3
0.6
-0.5
-2.8
-5.6
-5.3
14.0 13.6
15.4
16.4
18.9
18.1 18.4
19.3 19.2
16.4
17.9 18.6 18.0 18.3
16.0
14.2
13.4
2000 2002 2004 2006 2008 2010 2012 2014 2016
Corporate sector
(non-financial + financial)
Households +
non-profits
Government
Rest of the
world
General
government
Households and
non-profits
Non-financial
and financial
companies
Savings

1545 December, 2018
Government consumption should prevent higher GDP growth
 Government consumption has been an important component of domestic demand since 1996. Average
growth in government consumption was 2.6% from 1997 to 2017 and 3.4% in the period before the
recession of 2Q14–4Q16.
 The need to approve a fiscal consolidation process will likely prevent a strong contribution of government
consumption to GDP growth in 2019. However, the fiscal adjustment is not necessarily contractionist, as it
helps to anchor agents’ expectations regarding the sustainability of public debt and allows financial conditions
to remain in expansionist territory.
Dynamics of each component of
domestic demand
(Index number, 100=1Q96)
Dynamics of GDP and financial
conditions indicator
(%, year-on-year change, standardized)
Dynamics of financial conditions
indicator (%, year-on-year change,
standardized)
Source: Brazilian Statistics Bureau (IBGE), Central Bank of Brazil, Credit Suisse
3Q18
80
100
120
140
160
180
200
220
1Q96 3Q00 1Q05 3Q09 1Q14 3Q18
Investments
Household consumption
Government consumption
-3
-2
-1
0
1
2
3Q02 3Q06 3Q10 3Q14 3Q18
Tight
financial
conditions
Easy financial
conditions
FCI
-3
-2
-1
0
1
2
1Q03 2Q06 3Q09 4Q12 1Q16
GDP
FCI T-2

1555 December, 2018
Acceleration of industrial production in 2019 and 2020
 On the supply side of the economy, the sectors that should benefit the most from acceleration in domestic
demand are the industrial and services sectors. Of the industrial sectors, manufacturing should lead this
acceleration in production. In the services sector, the most cyclical segments (e.g., commerce, transportation,
and financial intermediation) should post the highest output growth in the period.
GDP growth on supply side (%, p.a.)
Weights Components 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
100 GDP 7.5 4.0 1.9 3.0 0.5 -3.5 -3.3 1.1 1.4 3.0 2.5
14 Net tax on products 10.8 5.3 3.7 3.7 0.8 -6.0 -5.6 1.5 1.9 4.0 3.0
86 Value added at basic prices 7.0 3.7 1.6 2.9 0.5 -3.2 -2.9 1.0 1.3 2.8 2.4
5 Agriculture 6.7 5.6 -3.1 8.4 2.8 3.3 -5.2 12.5 -0.1 0.9 2.0
2 Mineral extraction 14.9 3.5 -1.9 -3.2 9.1 5.7 -1.2 4.2 0.5 3.3 4.0
10 Manufacturing 9.2 2.2 -2.4 3.0 -4.7 -8.5 -4.8 1.7 2.6 4.8 3.2
4 Construction 13.1 8.2 3.2 4.5 -2.1 -9.0 -10.0 -7.5 -2.0 1.8 3.0
2 Production of electricity, gas, and water 6.3 5.6 0.7 1.6 -1.9 -0.4 6.5 1.0 1.5 3.2 2.5
18 Industry 10.2 4.1 -0.7 2.2 -1.5 -5.8 -4.6 -0.5 1.3 3.7 3.2
11 Commerce 11.1 2.3 2.4 3.4 0.6 -7.3 -6.7 2.1 2.9 4.4 3.1
4 Transportation, storage, and mail 11.2 4.3 2.0 2.6 1.5 -4.3 -5.6 1.2 2.5 4.0 3.1
3 Information services 5.4 6.5 7.0 4.0 5.3 -0.9 -2.1 -1.0 0.1 2.6 2.0
15 Public administration, healthcare, and education 2.2 1.9 1.3 2.2 0.1 0.2 0.3 -0.2 0.3 0.5 0.5
15 Other services 3.3 4.6 3.6 1.6 1.9 -3.7 -1.4 0.7 1.0 2.8 2.1
7 Financial intermediation 9.3 6.2 1.5 1.8 -0.6 -1.2 -3.4 -1.6 0.9 2.8 3.5
8 Real estate and rental activities 4.9 1.9 5.1 5.1 0.7 -0.4 0.2 1.2 3.1 3.2 2.5
63 Services 5.8 3.5 2.9 2.8 1.0 -2.7 -2.3 0.5 1.5 2.7 2.2

1565 December, 2018
Current recovery is the slowest of recent decades
 The Brazilian economy entered a recession on nine occasions since the early 1980s: (i) 1Q81–1Q83, (ii)
3Q87–4Q88, (iii) 3Q89–1Q92, (iv) 2Q95–3Q95, (v) 1Q98–1Q99, (vi) 2Q01–4Q01, (vii) 1Q03–2Q03, (viii)
4Q08–1Q09, and (ix) 2Q14–4Q16.
 The current process of resumption of activity has been one of the slowest since 1980. The only recovery
process that was slower was that of 3Q87–4Q88, since the economy entered another recession in the
following quarters.
 The high uncertainty regarding the adjustment of the public accounts and the gradual deleveraging of
companies and households explain the slow pace of economic recovery.
GDP dynamics in episodes of resumption of activity
(index number = 100 at end of recession)
Recession: 1st 9th occasion2nd 3rd 4th 5th 6th 7th 8th
90
95
100
105
110
115
Q-7 Q-6 Q-5 Q-4 Q-3 Q-2 Q-1 Q Q+1 Q+2 Q+3 Q+4 Q+5 Q+6 Q+7

1575 December, 2018
Stronger recovery only in agricultural sector
 Of the main sectors of economic activity (i.e., agriculture, industry, and services), the recovery in production in
the current process of resumption has occurred satisfactorily only in the agricultural sector.
 The recovery in economic activity in industry and services has been much slower in the current episode of
resumption than in the other episodes analyzed.
Agriculture Industry Services
80
85
90
95
100
105
110
115
120
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
85
90
95
100
105
110
115
120
125
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
90
95
100
105
110
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7

1585 December, 2018
Very slow resumption of construction activity
 Of the sectors of the economy, industry stands out for its weak performance since the end of the recession.
 Construction has performed more unfavorably since the end of the recession in 4Q16. Mineral extraction GDP
has remained relatively stable since the end of the recession of 2Q14–4Q16. Although the manufacturing
industry posted a more substantial resumption of activity at the beginning of the recovery process, there was a
partial reversal due to the impact of the truckers’ strike in 2Q18.
Extraction Manufacturing Construction
80
90
100
110
120
130
140
150
160
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
85
90
95
100
105
110
115
120
125
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
80
85
90
95
100
105
110
115
120
125
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7

1595 December, 2018
Dynamics of industry hinder rise in cyclical services
 An important part of the dynamics of activity in the services sector (i.e., commerce, transportation, and
financial intermediation) is sensitive to the behavior of industrial production.
 The activities of commerce and transportation declined in 2Q18 with the negative impact of the truckers'
strike, after a relatively strong recovery throughout 2017.
 The GDP of financial intermediation services has remained relatively stable since the beginning of the recovery
process, due to the gradual resumption of lending in this period.
Commerce Transportation Financial intermediation
80
85
90
95
100
105
110
115
120
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
85
90
95
100
105
110
115
120
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
85
90
95
100
105
110
115
120
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7

1605 December, 2018
Weak recovery in production in public administration
 The recovery of economic activity in services less sensitive to the economic cycle (i.e., information and
communication, other services, and public administration, health, and education) has also been slower in the
current resumption process than previously.
 The need for a strong adjustment in public accounts both on the federal level and on the state and municipal
levels suggests that the dynamics of production of public administration services, which have a weight of 15%
in GDP, will hinder a more substantial recovery of the Brazilian economy.
Information Other services Public administration
90
95
100
105
110
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
90
95
100
105
110
115
120
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7
70
80
90
100
110
120
130
Q-7 Q-5 Q-3 Q-1 Q+1 Q+3 Q+5 Q+7

1615 December, 2018
GDP growth near 2.0% in recent years
 Brazil's economic growth has declined significantly over the past few decades. GDP growth averaged 6.6%
from 1950 to 1980, making the country one of the fastest growing economies in the period.
 As of 1981, however, the Brazilian economy initiated a path of slow growth. Average GDP growth decelerated
to around 2.0% from 1981 to 2018. This period was marked by nine recessions; the most recent one, from
2Q14 to 4Q16, brought sharp contraction in economic activity.
Breakdown of GDP growth from 1950 to 2018
(%, pps, p.a.)
GDP6.6
Average
1950-1980
Average
1981-2018
2.1
-10
-5
0
5
10
15
Demography
Productivity
Source: The Conference Board, Credit Suisse
1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018e

1625 December, 2018
Demographics have driven GDP growth since 1980
 GDP growth can be broken down into growth in labor productivity, growth in the rate of employment (working
population divided by the total population), and population growth.
 Brazil's economic growth from 1950 to 1980 was explained by both strong growth in labor productivity and by
an expansion of demographics.
 However, nearly all GDP growth since 1981 is explained by demographics. Growth in productivity was close to
zero in this period.
Breakdown of GDP growth Breakdown of GDP growth, by period
(%, pps, p.a.)
3.1
2.0 1.7
3.4
0.2
0.6
1950-1980 1981-2018 2001-2018
Demographics Productivity
𝒀 =
𝒀
𝑷𝑶
×
𝑷𝑶
𝑷𝑶𝑷
× 𝑷𝑶𝑷
162
∆𝒀 = ∆
𝒀
𝑷𝑶
+ ∆
𝑷𝑶
𝑷𝑶𝑷
+ ∆𝑷𝑶𝑷
GDP
Labor
productivity
Demographic factors
GDP
growth
Growth in
productivity
Growth in
employment rate
Population
growth
Rate of employment Population

1635 December, 2018
0
100
200
300
400
500
600
1980 1985 1990 1995 2000 2005 2010 2015
0
200
400
600
800
1,000
1,200
1980 1985 1990 1995 2000 2005 2010 2015
Productivity expanded little for an emerging economy
 Labor productivity is normally measured by two metrics: (i) the ratio of GDP to the total number of employed
workers; and (ii) the ratio of GDP to the total number of hours worked by the workers.
 By both measures, the productivity of Brazilian workers from 1980 to 2018 has been very weak compared
with that of other emerging economies. For example, growth in productivity of Brazilian workers in this period
exceeded only that of countries such as South Africa and Venezuela.
GDP per worker in emerging economies from 1980 to 2018
(1980 = 100)
GDP per hour worked in emerging economies from 1980
to 2018 (1980 = 100)
Chile Colombia HungaryArgentina BrazilBangladesh Bulgaria
Indonesia MexicoMalaysia PolandPeru Philippines
India
Pakistan
TurkeySouth Africa VenezuelaRussia Thailand Ukraine Romania
2018 2018

1645 December, 2018
Rate of employment is high in Brazil
 Brazil is unlikely to maintain the current pace of growth of approximately 2.0% based solely on the dynamics
of the demographic factors. In addition to the expected reduction in population growth over the next few years,
the rate of employment is already at a high level, both by international comparison and historically.
 The recent rise in unemployment suggests that there is some room for an increase in the rate of employment
in the near term. However, it is not very likely that this measure will rise in the coming years at a pace similar
to that of the past few decades. Factors such as the inclusion of women in the workplace, for example, will
probably contribute less over the next few years.
31323436373940414343444545464747474849505356
Pakistan
SouthAfrica
Turkey
Ukraine
Philippines
Bangladesh
India
Romania
Poland
Mexico
Venezuela
Argentina
Chile
Hungary
Indonesia
Colombia
Malaysia
RussianFederation
Bulgaria
Brazil
Peru
Thailand
30
35
40
45
50
55
1950 1957 1964 1971 1978 1985 1992 1999 2006 2013
Ratio of working population to total population in
emerging economies in 2018 (%)
Ratio of working population to total population in Brazil
from 1950 to 2018 (%)
2018

1655 December, 2018
Growth of 3.0% requires sharp rise in productivity
 For annual growth higher than 2.5% in the next few years, Brazil will need to see a sharp rise in labor
productivity.
 Based on the forecast of the Brazilian Statistics Bureau (IBGE) for population growth and the return of the
rate of employment to its historical peak, growth in productivity will need to increase from the 0.2% seen from
1981 to 2018 to 1.5% per year in the next ten years to keep GDP growth at close to 2.5% in this period. To
sustain growth of 4.0% p.a., labor productivity will need to grow at the pace seen from 1950 to 1980.
Simulations for GDP growth under different scenarios for growth in productivity
(%, p.a.)
Prod = 0.5%
Prod = 1.0%
Prod = 2.0%
Prod = 2.5%
Prod = 3.0%
Prod = 0%
Prod = 1.5%
-4
-2
0
2
4
6
8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
4.1 4.0 3.9 3.9 3.8
2.6 2.5 2.4 2.4 2.3
1.1 1.0 0.9 0.9 0.8

1665 December, 2018
Poor allocation of inputs explains low productivity in Brazil
 If we compare a Brazilian worker with the same level of education and the same amount for investment as an
American worker, the Brazilian worker would still deliver less production. This difference occurs due to the lower
capacity of the Brazilian worker to use production inputs, a measure known as total factor productivity (TFP).
 An international comparison of productivity shows that the pace of improvements in physical capital and human
capital in Brazil has not been much different from that of the majority of emerging and developed economies.
On the other hand, the pace of growth in TFP in Brazil has been much lower.
0
5
10
15
20
25
1950 1958 1966 1974 1982 1990 1998 2006 2014
1.0
1.5
2.0
2.5
3.0
3.5
1950 1958 1966 1974 1982 1990 1998 2006 2014
0.0
0.5
1.0
1.5
1950 1958 1966 1974 1982 1990 1998 2006 2014
Source: Penn World Table, Credit Suisse
Stock of capital1
(USD trillion, PPP of 2011)
Human capital
(index)
Total factor productivity
(PPP of 2011, USA=1)
Chile Colombia HungaryArgentina BrazilBangladesh Bulgaria
Indonesia MexicoMalaysia PolandPeru Philippines
India
Pakistan
TurkeySouth Africa VenezuelaRussia Thailand Ukraine Romania
China
1 China was excluded from the stock of capital exhibit to avoid distorting the exhibit’s scale..

1675 December, 2018
Drivers of total factor productivity
Inefficiency in Brazil has many causes
 TFP is understood as the representation of many dimensions of an economy, from trade openness to
institutional soundness. Brazil has weak points in all these dimensions.
Source: World Bank, Heritage Foundation, Global Competitiveness Report, WIPO, UNCTAD, Penn World Table, Credit Suisse
Adoption of technology
 Availability of scientists and engineers
 Availability of recent technologies
 Capacity for innovation
 Capacity of the country to attract talent
 Capacity of the country to retain talent
 Absorption of technology at corporate level
 Cooperation between universities and business in R&D
 Level of inward direct investment
 Total patents
 Training to adopt technology
Ease of doing business
 Ease of starting a business
 Obtaining construction licenses
 Registration of property
 Access to credit
 Freedom of trade
 Level of flexibility of labor market
 Freedom to invest
 Financial freedom
 Level of competition in
domestic market
 Efficiency of financial market
 Financial reliability
Regulation and judiciary
 Protection of minority investors
 Performance of agreements
 Resolution of insolvency
 Property rights
 Government integrity
 Judicial efficiency
 Ethics and corruption
 Level of undue influence
 Security
 Corporate ethics
 Accounting transparency
Size and efficiency of the state
 Government spending
 Fiscal health
 Level of independence of monetary policy
 Government efficiency
 Level of taxation
Quality of education
 Quality of education
 Workforce training
Trade openness
 Exports and imports of goods and services as
share of global trade or GDP

1685 December, 2018
Trade openness is one of the causes of the differences in TFP
 The weight of various factors in the dynamics of TFP was calculated based on panel estimations with
information on 56 countries, from 1995 to 2014, based on the joint estimation1, backward selection2, and
forward selection3 methods. The variables with the highest statistical significance and weight in the
specifications are trade openness and government integrity.
Explanatory variables of TFP for each of the methods adopted
Government efficiency
Workforce training
Total patents
Ease of starting a business
Investment in training to adopt technology
Access to credit
Property rights
Joint estimation Backward selection Forward selection
Resolution of insolvency
Registration of property
Flexibility of labor market
Imports and exports of goods and services in global trade
Government integrity
Significance 0 0.1% 1% 5% 10%
1 Joint estimation: The model is estimated with all variables together; variables that have statistically significant coefficients and the sign in conformity with that suggested by literature are chosen. The model considers a fixed effect for
country and year. 2 Backward selection: Based on the complete estimation, the variables without statistical significance and with the sign opposite to that suggested by the theory were removed one by one, according to the probability
value (p-value). The lower the value, the higher the probability that the coefficient of a given variable will be different from zero. The chosen model is that in which only variables with statistically significant coefficients and the sign in
conformity with that suggested by literature are left. 3 Forward selection: This methodology consisted of building the models based on all possible combinations of the variables contained in six specific groups. The following restrictions
were imposed: (i) one variable per group; and (ii) sign of the coefficients in line with that indicated by literature. The selected model was the one with the highest adherence to the data for all specifications.

1695 December, 2018
Brazilian economy not very open to trade
 One of the factors that explains the low efficiency of the Brazilian economy is the low level of trade openness,
which largely shelters the domestic market from global competition. Brazil has continued to advance very little
in this area over the past few years and even saw a reduction in its openness from 2008 to 2014.
 Brazil also produces few patents, considering its current level of efficiency. However, aside from a few
emerging and developed economies with high production of patents (e.g., China), there is a high
concentration in lower levels of the analyzed patent indicator.
Relationship between average changes from 2008 to
2014 in relative TFP and trade openness
Relationship between average TFP from 2008 to 2014
and patents indicator
-40
2.5
Share of goods on GDP (Distance to frontier)
20
10
0
-10
-20
-30
TotalFactorProductivity(%ofUSA)
0.0-2.5-5.0-7.5-10.0-12.5-15.0
30
100
Patents (Distance to frontier)
110
100
80
60
40
0
90
70
50
20 40 60 80

1705 December, 2018
Country needs to make labor market more flexible
 The Temer administration approved the labor reform in 2017, which will likely increase the flexibility of the
Brazilian labor market over the next few years. However, the country needs to make additional headway in this
regard, in light of its position far below that of countries with greater flexibility.
 Strengthening the judiciary and other oversight bodies with the objective of raising the level of government
integrity will likely contribute to a rise in labor productivity in Brazil.
and government integrity indicator
and labor market flexibility
20
Government Integrity (Distance to frontier)
20
160
120
80
40
140
100
60
30 40 50 60 70 80 90
20
Labor Freedom (Distance to frontier)
40
160
120
100
80
60
40
140
50 60 70 80 90

1715 December, 2018
Improvement in business environment would raise efficiency
 The Brazilian economy also stands out negatively with regard to the World Bank's business environment
indicators. For example, the country has a low score in the resolution of insolvency and registration of
properties.
 An agenda of microeconomic reforms that reduces bureaucracy and improves the business environment would
have a substantial impact on growth in labor productivity over the next few decades.
and insolvency resolution indicator
and registering property indicator
20
Resolving Insolvency (Distance to frontier)
20
160
120
100
80
60
40
140
40 60 80 100
20
100
Registering Property (Distance to frontier)
160
120
80
40
140
100
60
40 50 60 70 80 90

1725 December, 2018
Qualification of labor would increase productivity
 Brazilian labor qualification indicators also suggest that the country needs to advance significantly in this area
to reduce the differences in per capita income compared with developed economies.
 Brazilian workers are less able to use available top-notch technologies because they are less qualified for
these tasks. The increase in qualification courses for these professionals would contribute to a rise in
productivity in the coming years.
Relationship between average relative TFP from 2008 to
2014 and training of labor
Relationship between average relative TFP from 2008 to
2014 and qualification of labor
20
Training of labor (Indicator)
3.5
160
140
100
80
60
40
120
4.0 4.5 5.0 5.5 6.0
20
Qualification of labor (Distance to frontier)
20
160
120
80
40
140
100
60
30 40 50 60 70 80 90 100

1735 December, 2018
Agenda of reforms to accelerate rise in productivity
 The implementation of a wide range of microeconomic reforms is essential to reverse the downtrend in
productivity in recent years and reduce income disparity in Brazil compared with developed economies.
 The range of measures needs to be wide enough to accommodate the high number of factors that explain the
country's low efficiency. The measures with the greatest impact on labor productivity aim: to increase the level
of trade openness, to rise the qualification of labor, to strengthen institutions, and to improve the business
environment in the country.
Simulations of labor productivity in relation to the United States (%)
We assumed in all scenarios that the indicators used as variables to explain TFP converge to the levels of emerging economies with the best classification in each of the indicators: (i) flexibility of the labor market – Bulgaria; (ii) trade openness –
Slovenia; (iii) government integrity – Slovenia; (iv) resolving insolvency – Colombia; (v) registering property – Peru; (vi) training of labor – South Africa; (vii) qualification of labor – South Africa; (viii) patents – India.
24
26
28
30
32
34
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
Labor freedom Trade openess Government integrity Resolving insolvency
Registering property Training of labor Qualification of labor Patents

1765 December, 2018
Most fiscal rules will be met in 2019
 Contrary to recent past, the discussion about public accounts will be more focused on medium-term
sustainability than on short-term dynamics of the fiscal result.
 The social security reform is an essential condition for the fiscal consolidation process and, consequently, the
anchoring of agents' expectations regarding the sustainability of public accounts.
 With respect to the three fiscal rules in effect in Brazil, we expect that, in 2019, the government will not meet
the golden rule only. Accordingly, the government will need to secure Congress approval of an extraordinary
credit to avoid the consequences of failing to meet such rule.
Expectations for fiscal rules in Brazil Main negative risks to fiscal accounts in 2019
1 Congress is discussing the sale of approximately 13bn barrels of oil found in the pre-salt area, which was awarded for Petrobras to explore under the transfer of rights regime.
2018 2019 2020
Golden rule
States that total lending cannot exceed capital
expenditures
Spending cap rule
Establishes that primary expenditures cannot post
real growth over the next 10 years except as
provided by law.
Target for primary balance, difference between
primary revenues and expenditures established by
Budgetary Directives Act (LDO)
Approved social security reform not sufficient to stabilize social security deficit in
medium term
Fiscal measures needed in addition to social security reform to reduce the deficit (e.g.,
adjustment of minimum wage, wage bonus) do not advance
Lawsuits with a negative impact on public accounts (e.g., exclusion of ICMS from
calculation base for PIS and Cofins taxes)
Postponement of oil auctions from transfer of rights (“Cessão Onerosa”) area1
Oil prices continue to see sharp decreases, which not only lowers the royalty and
special participation payments but also contributes to a reduction in the proceeds
received in the oil auctions from the transfer of rights
Fiscal situation of states becomes unsustainable, and federal government grants
new aid package without requiring significant fiscal adjustment in exchange

1775 December, 2018
Fiscal impact of certain processes may be high
 Although our base-case scenario assumes that the primary deficit target will be fulfilled in 2019 and 2020, a
few processes could hinder such scenario:
Main processes with negative impact on public accounts
Source: Office of the Federal Attorney General (AGU), Credit Suisse
 Analysis of the concept
of input for purpose of
deduction of credit from
the PIS/Cofins payable
under the non-
cumulative system
 Proceeding to be
analyzed by the Federal
Appeals Court (STJ)
 Impact of BRL58bn in
first year
 Discussion about the
multiple charging of
ICMS included in the
price of the good or
service on the taxable
base of PIS/Cofins
 Awaiting decision by
Federal Supreme Court
(STF)
 Impact of BRL45.8bn in
first year
 No application of fines to
taxpayers requesting tax
reimbursement, return,
or set-off in bad faith
 Total impact of BRL32bn
 A tax incentive to
exporters via IPI
deductions remained in
effect from 1969 to
1979. The incentive
ceased to be applied and
its reinstatement is
currently being
discussed.
 Impact of BRL13.2bn
 The principle of non-
cumulative payment of
taxes deals with the
government's power to
levy taxes by giving a tax
credit based on the
amount spent on inputs
and goods acquired for
resale.
 Impact of up to
BRL54bn in one year.
Deduction of input
credits from the taxable
base of PIS and Cofins
Exclusion of ICMS levied
from taxable base of PIS
and Cofins
Application of fines for
denial of benefit at
administrative level
Reinstatement of IPI
bonus credit for
exporters
Questioning of non-
cumulative payment of
PIS and Cofins
contributions

1785 December, 2018
Nominal deficit of 6.5% of GDP in 2019
 The reduction in the primary deficit as a percentage of GDP, from 1.7% in 2018 to 1.0% in 2019 and 0.8%
in 2020, will contribute to a decline in the nominal deficit, from 7.0% of GDP in 2018 to 6.5% of GDP in
2019 and 6.6% of GDP in 2020.
 Continuity of low interest rates by historical standards would also contribute to keep the nominal deficit at a
more moderate level. However, Brazil should continue to implement austere fiscal measures for interest rates
to converge from the current levels to the magnitude of other emerging market economies.
Interest rate payments and primary and nominal deficits (% of GDP)
Central government States and municipalities Government-owned companies Payment of interest
2.3 2.7 2.6 2.1 2.2 2.3 1.3 1.2 2.1
1.8 1.4
-0.4 -1.9
-2.5 -1.8 -1.8 -1.0 -0.9
0.9 1.0
0.8
1.1
1.0
0.6 0.5
0.8
0.4 0.3
0.2 0.1 0.1 0.1 0.0 0.0
0.2
0.1 0.2 0.2 0.1
0.1
-0.1
-8.4
-6.6
-7.3
-6.7
-6.0
-5.3 -5.1 -5.0 -5.4
-4.4 -4.7
-5.4 -8.4
-6.5
-6.1
-5.3
-5.5 -5.8
3.5
2.6
1.6
-1.6
-5.2
-2.9
-3.5 -3.6
-2.7
-2.0
-3.2 -3.2
-2.5 -2.3
-3.0
-6.0
-10.2
-9.0
-7.8
-7.0
-6.5 -6.6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Average
Nominal

1795 December, 2018
Deterioration in fiscal accounts in recent years
 The primary balance of the central government initiated a steep downtrend in recent years, with a steady
reduction in net revenues and continued expansion in primary expenditures.
 The primary balance, which posted a surplus greater than 2.0% of GDP until mid-2012, declined significantly
until reaching a deficit of 2.6% of GDP in December 2016.
 Despite the expectation of economic recovery, which would raise primary revenues, the fiscal adjustment will
need to be implemented primarily through cuts in primary expenditures.
Net revenues and total primary expenditures of central government
(% of GDP)
Net revenues
Total expenditures
13
14
15
16
17
18
19
20
21
Dec-97 Nov-99 Oct-01 Sep-03 Aug-05 Jul-07 Jun-09 May-11 Apr-13 Mar-15 Feb-17 Jan-19 Dec-20
The combination of continued expansion in
public expenditures and tax breaks reversed the
generation of primary surpluses. Recession
aggravated the situation of public accounts.
CSe
Source: Brazilian Treasury, Credit Suisse

1805 December, 2018
Central government primary deficit of BRL79bn in 2019
 We expect the central government to meet the
targets of BRL139bn in 2019 and BRL110bn
in 2020.
 Our forecast is compatible with the continuity of
strong contributions from non-recurring
revenues in the next two years. For example,
we expect revenues of BRL66bn from
concessions in 2019 and BRL23bn in 2020.
For 2019, we are assuming that the transfer of
oil rights (onerous assignment) will have an
impact of BRL60bn on fiscal revenues in the
year.
 On the expenditure side, approval of a pension
reform would contribute to a deceleration in
expenditures in 2020. We are also considering
that the next administration should take other
austere measures such as the end of the wage
bonus in 2020.
Breakdown of the primary result (BRL billion)
2015 2016 2017 2018e 2019e 2020e
I. TOTAL REVENUES 1,248 1,315 1,383 1,488 1,627 1,691
I.1. Revenue administered by Brazilian Revenue Service (RFB) 765 820 836 910 973 1,049
I.2. Fiscal incentives 0 0 -1 0 0 0
I.3. Net collections for RGPS (ex intrabudgetary amounts) 350 358 375 390 425 454
I.4. Revenues not administered by RFB 132 137 174 189 229 187
I.4.1. Concessions and permits 6 22 32 24 66 23
I.4.2. Dividends and equity interests 12 3 6 7 8 8
I.4.3. Contribution to Social Security Plan of Public-Sector
Employees
12 12 14 14 15 16
I.4.4. Share of financial compensations 29 23 36 59 58 61
I.4.5. Own revenues (sources 50, 81, and 82) 15 14 13 15 16 17
I.4.6. Contribution to education allowance 19 20 20 22 23 25
I.4.7. Supplemental payment to Severance Pay Fund (FGTS)
(Supplemental Law No. 110/01)
5 6 5 5 5 6
I.4.8. Transactions involving assets 0 1 1 1 0 0
I.4.9. Other revenues 35 37 47 42 38 31
II. Transfers to states and municipalities 205 227 228 248 269 286
III. NET REVENUE (I – II) 1,043 1,088 1,155 1,239 1,358 1,405
IV. TOTAL EXPENDITURES 1,164 1,249 1,279 1,370 1,438 1,469
IV.1. Social security benefits 436 508 557 591 644 698
IV.2. Personnel and social charges 238 258 284 298 318 331
IV.3. Other mandatory expenditures 237 200 185 201 201 170
IV.4. Discretionary expenditures, all branches 253 284 253 280 274 270
V. Sovereign Wealth Fund of Brazil 1 0 0 4 0 0
VI. PRIMARY BALANCE OF CENTRAL GOVERNMENT (III - IV + V) -121 -161 -124 -127 -79 -64

1815 December, 2018
We expect real acceleration in tax revenues in 2019
 We expect strong real growth of 5.4% in primary
revenues in 2019, after expectation of growth of
3.6% in 2018. We expect the following breakdown
of revenues:
– Administered revenues: real growth of 2.9% in 2019
and 3.6% in 2020. This group of revenues is the most
sensitive to economic activity and would benefit from a
scenario of more significant economic growth.
– Net revenues for RGPS: We expect real growth of
5.1% in 2019. The sharper recovery of the labor
market, boosted by an increase in the creation of
formal jobs, will be the main driver of such significant
acceleration.
– Non-administered revenues: growth of 16.6% in 2019.
Our expectation is based on the impact of the auction
of surplus oil barrels under onerous assignment on tax
revenues.
Real growth in primary revenues (% p.a.)
Net Revenues
Revenues
administered by the
Brazilian Revenue
Service
Net revenue for RGPS
(ex intra-branch
expenditures)
Revenues not
administered by the
Brazilian Revenue
Service
-4.1
2.5 3.6
5.4
-0.6
-1.6 -1.5
5.1
2.9 3.6
-5.9
1.2 0.3
5.1
2.6
-4.4
22.1
4.5
16.6
-21.4
2016 2017 2018e 2019e 2020e

1825 December, 2018
Primary expenditures to increase 1.0% in real terms in 2019
 Primary expenditures will increase 1.0% in real
terms in 2019, after real growth of 3.3% in 2018.
The government will be able to meet the spending
limit rule in 20191.
 The primary expenditures for social security will
accelerate in real terms due to a higher increase in
the minimum wage in 2019 and still-high vegetative
growth in such expenditures. Approval of the social
security reform and prospects of a change in the
rule for minimum wage increase would limit a more
substantial growth in these expenditures in 2020.
 Discretionary expenditures will continue to decline in
real terms, in view of the need to fulfill the cap on
spending. This group of expenditures is less
dependent on the approval of laws and, therefore,
more susceptible to short-term fiscal adjustments.
Real growth in primary expenditures (% p.a.)
Social security benefits
Personnel and social
charges
Other mandatory
expenditures
Discretionary
expenditures, all
branches
Total Expenditures
¹ Excluding the expenditures not considered in the calculation of the spending cap,
growth in primary expenditures would be negative in real terms.
-1.1 -1.0
3.3
1.0
-1.8
7.2
6.1
2.4
4.8 4.1
-0.5
6.5
1.1 2.8
0.1
-21.4
-10.5
4.5
-3.5
-18.6
2.8
-14.0
7.0
-5.8 -5.6
2016 2017 2018e 2019e 2020e

1835 December, 2018
Social
Security (INSS)
47.7%
Non-earmarked
Discretionary
9.2%
Earmarked
Discretionary
11.4%
Other mandatory expenditures
9.7%
Personnel
22%
Rigidity of primary expenditures is very high
 The new administration will need to implement a fiscal adjustment that combines an increase in revenues
either by raising taxes or reducing subsidies, and a reduction in primary expenditures.
 However, the primary expenditures of the central government are very rigid, and approximately 48% of them are
social security expenditures. Personnel expenditures represent 22% of the total. Other mandatory expenditures
(i.e., court judgments and requisitions to treasury for payment of judgments) and related discretionary expenditures
are equivalent to 21% of the total. Finally, just 9.2% of primary expenditures are eligible for cuts.
Breakdown of primary expenditures (% of total, rolling 12 months through September 2018)
12.4%
9.6%
43.5%
4.2% 1.3%
2.7% 0.0% 1.0% 1.0% 1.0% 1.0% 0.2% 0.4% 0.3% 0.7% 0.1%
7.9% 1.0%
2.5% 2.2%
7.0%
ExpendituresforGrowth
AccelerationProgram(PAC)
Otherexpendituresof
executivebranch
Legislature,judiciaryandFederal
ProsecutionandDefense
Service(MPF)
FederalDistrict,
constitutionalfund
MinistryofHealth
MinistryofEducation
Subsidies,
subventions,
andProagro
Othermandatoryexpenditures
Extraordinaryreceivables(exPAC)
KandirAct(SupplementalLaws
No.87/96and102/00)
Unemployment
insurance
Socialsecurity
benefits
Wage
bonus
FundforSupportandDevelopment
ofK-12Education(Fundeb)
federalgov'tsupplement
Courtjudgmentsand
court-ordereddebt
instruments(OCC)
speciallegislationand
damagespayments
SupplementalFGTS
(LCNo.110/01)
TaxreliefunderMP540/11,
563/12,and582/12
Active
personnel
Continuouscashbenefit
(LOAS/RMV)
Inactive
personnel
Social benefits 8.2%
Total
100%

1845 December, 2018
Aging population a challenge for economy
 Brazil’s old-age dependency ratio (ratio of individuals aged 65 or above to the population aged 20 to 64 years)
is set to increase from 13.0% in 2015 to 21.5% in 2030 and 48.3% in 2060, with an average increase of
0.8% per year. Compared to OECD countries, it will be the fastest aging of a population seen to date.
 The transition poses a challenge to the sustainability of growth and fiscal accounts, especially those related to
the social security system.
Demographic distribution of population (millions of persons, %)
(10) - 10
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90+
Millions
Men
Women
(10) - 10
Millions
(10) - 10
Millions
Old-age dependency
ratio
2015 2030 2060
21.5% 48.3%13.0%
10 10 10 10 10 10

1855 December, 2018
High pension expenditures due to demographics
 Social security spending accounted for 12.7% of GDP in 20151, 8.6pps higher than expected, given the
relationship between expenditures and the dependency rate across a sample of countries. This is also the
greatest deviation from the trend line among all the countries considered in the sample2.
 In view of the aging population and the current retirement rules, Brazil’s expenditures should reach
unprecedented levels over the next few decades.
Pension expenditures and old-age dependency rate
Source: OECD, Brazilian Statistics Bureau (IBGE), Credit Suisse
¹In the above analysis, the amount of social security expenditures for the RPPS in Brazil were considered constant and equal to 3.6% of GDP; ²The sample is composed of the following countries: Australia, Austria, Belgium,
Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal,
Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States, Argentina, China, India, Indonesia, Russia, Saudi Arabia, and South Africa
0
5
10
15
20
25
0 5 10 15 20 25 30 35 40 45 50
Socialsecurityexpenditures(%ofGDP)
Old-age dependency rate
Brazil 2015
Brazil 2030
Brazil 2060

1865 December, 2018
Current retirement rules are benevolent
Source: Secretariat of Social Security, Credit Suisse
Retirements Type Minimum age Time of contribution
Age
Urban 65 (men); 60 (women) Minimum contribution of 180 months worked.
Farm 60 (men); 55 (women) Minimum contribution of 180 months worked. Proof of farming activity for at least 180 months, even if discontinuous.
Disability
Permanently disabled worker unable to exercise any labor or to be requalified for another profession, according to INSS medical expert. Benefit is paid as long as the
disability persists; expert examination performed every two years¹.
Time of
contribution
Full None
Men: 35 years of contribution and 180 months effectively worked; Women: 30 years of contribution and 180 months
effectively worked.
Proportional 53 (men); 48 (women)
Men: 30 years of contribution and 180 months effectively worked; Women: 25 years of contribution and 180 months
effectively worked.
Progressive,
85/95
None
Men: sum of age and time of contribution = 95 and 180 months effectively worked; Women: sum of age and time of
contribution = 85 and 180 months effectively worked.
Survivor's
pension
Death of insured or, in the event of disappearance, court-declared presumption of death. Deceased must have been insured in INSS system on date of death. Duration of
benefit may vary according to number of contributions of deceased, in addition to other factors.
Allowances / other benefits
Illness
Illness that renders the person temporarily incapable of working. Waiting period of 12 contributions (exempt in the event of an on-the-job accident or illnesses set forth by
law). For employees at a company: leave from work for at least 15 days (calendar days or intermittently over 60 days).
Accident
Existence of permanent side effects that reduce insured's ability to work. This entitlement is analyzed by INSS medical expert at the time of the expert evaluation. The
benefit is paid as a kind of reimbursement due to the accident and therefore does not prevent the person from continuing to work. There is no minimum time of contribution,
since it is only for on-the-job accidents.
Imprisonment Beneficiary must have been an insured on the date of imprisonment.
Maternity pay
Men: Benefit also paid to fathers who carry out the role of mothers, both in cases of adoption by men and in the case of men who become widowers during a child's birth.
Women: 10 months of work for individual contributors, optional contributors, and special insured workers.
Welfare benefits (LOAS/RMV)
Elderly
Minimum age of 65 years. Monthly household income (per capita) less than one-fourth of the minimum wage. Must not be enrolled in any social security system. Must not
receive benefits of any kind, other than medical assistance. Must prove that they do not have the means to support themselves and that they are not being supported by
their family.
Disabled
Monthly household income (per capita) less than one-fourth of the minimum wage. Must not be enrolled in any social security system. Must not receive benefits of any kind,
other than medical assistance. Must prove that they do not have the means to support themselves and that they are not being supported by their family.
¹ Except for those aged 60 years or more.

1875 December, 2018
58.8
368.0
431.9
71.1
105.5
106.5
45.7
5.2
151.9
89.4
26.3
21.5 0.6 11.7
22.8
28.2 0.8
Retirement
due to age
Retirement,
disability
Retirement,
time of
contribution
Survivor’s
pension
Sick pay Others Workers
compensation
LOAS,
elderly
LOAS,
persons with
disability
Lifetime
Monthly
benefit
Payment
(RMV)
 Survivor’s pensions and retirement benefits represent 83.4% of total expenditures in the social security
system. A reduction in the growth of social security expenditures requires changes to the criteria for eligibility
and calculation of the amount of both social security benefits.
Breakdown of social security expenditures in RGPS in 2017
(BRL billion, % of total)
2.2% 9.6%26.1%61.9%
Total
(Rural +
Urban)
Total
(Rural +
Urban)
Greater weight of retirement and survivor’s pensions
Urban Rural

1885 December, 2018
Retirement by time of contribution is the most expensive
 Retirement by time of
contribution yields the
highest average benefit,
of BRL1,931 per month,
and accounts for 28% of
social security
expenditures, despite
representing only 17%
of benefits. On the other
hand, social assistance
benefits (LOAS) are the
lowest payments,
averaging BRL851 per
month, and account for
10% of expenditures
and 14% of benefits.
23.9%
Breakdown of social security expenditures in 2017 ('000, BRL)
Number of benefits('000) Average value of benefits(BRL) Persons
(%)
Expenditures
(%)Non-farm Farm Total Non-farm Farm Total
Total 24,573 29,462 34,097 1,315 837 1,181 100 100
Social security benefits (private-sector employees) 20,001 28,639 29,462 1,420 837 1,232 86 90
Social security 19,210 19,454 28,639 1,433 837 1,237 84 88
Retirements 12,607 10,293 19,454 1,521 837 1,281 57 62
Age 3,929 6,363 10,293 1,120 836 944 30 24
Disability 2,802 461 3,263 1,219 842 1,166 10 9
Time of contribution 5,876 22 5,898 1,934 1,054 1,931 17 28
Survivor's pension 5,261 2,360 7,621 1,271 833 1,136 22 21
Allowances / other benefits 1,285 215 1,500 1,250 864 1,195 4 4
Maternity pay 56 8 64 838 758 829 0 0
Others 0 0 0 695 0 695 0 0
Workers compensation 791 32 823 1,102 750 1,089 2 2
Disability 196 13 209 1,476 831 1,435 1 1
Survivor's pensions 109 4 113 1,256 848 1,242 0 0
Sick pay 126 7 133 1,443 879 1,414 0 0
Allowance in case of accidents 316 8 324 809 459 800 1 1
Additional allowance 45 0 45 215 0 215 0 0
Welfare benefits 4,552 62 4,614 851 851 851 14 10
Welfare benefits (LOAS) 4,483 0 4,483 851 - 851 13 9
Elderly 1,998 0 1,998 852 - 852 6 4
Disabled 2,485 0 2,485 850 - 850 7 5
Monthly lifetime income 69 62 131 850 851 851 0 0
Age 9 10 19 853 853 853 0 0
Disability 59 51 112 850 851 850 0 0
Social security charges of the federal government (EPU) 21 0 21 1,704 15 1,704 0 0

1895 December, 2018
Current rules Government's original proposal Substitute text submitted to Special Committee
Minimum age
Men: age 60 Men: age 65 Men: age 60 to 65 (as of 2028)
Women: age 55 Women: age 65 Women: age 55 to 62 (as of 2032)
Time of
contribution
35 years for men and 30 years for women 25 years for men and women 25 years for men and women
Benefit
calculation:
Joined public sector before 2003: full benefits (equal to
last compensation in full-time position from which person
retired). Adjustment of benefit with parity to
compensation of active employees
51% of average salary for purposes of calculation of
Social Security contribution, plus 1pps of this average for
each year of contribution
Joined public sector before 2003: 100% of average salary since 1994
or since start of contribution.
Joined public sector between 2003 and 2013:
average of highest compensations (80% of
contributions since 1994), with adjustments equal to
those in effect for private-sector regime (RGPS).
Joined public sector between 2003 and 2013: 70% of the average of
all salaries since 1994 plus 1.5pps for each year above 25 years of
contribution, plus another 2pps for each year above 30 years of
contribution and another 2.5pps for each year after 35 years, until
reaching 100% at 40 years of contribution.
Joined public sector as of 2013: average of highest
compensations (80% of contributions since 1994), with
adjustments equal to those in effect for private-sector regime
(RGPS). Benefit subject to cap in effect in private-sector
regime (RGPS).
Joined public sector as of 2013: same rule as for those who joined
public service between 2004 and 2013. The amount will be limited to
the maximum social security benefit (of BRL 5,531/month), if the state
or municipality has created a supplemental pension fund.
Transition rule
Men aged 50 and above and women aged 45 and above
would still retire according to the current rules, but with an
addition period of 50% of the time remaining until the
minimum time of contribution (35 years for men and 30 years
for women). For those who joined between 2003 and 2013,
the benefit would correspond to 100% of the average salary
since 1994 or since the start of contribution.
Increase by 30% of the time remaining for retirement under current rules,
subject to a minimum age of 55 for men and 60 for women, for any
employee who joined the public sector before approval of the reform.
Increase of one year for every two years, for both women and men, as of
2020, until the 30% increase in time remaining for retirement starts to
be counted. In the case of employees who joined the public sector before
2003, full salary and parity would be assured only for those who retire
once they are at least aged 65 (men) or 62 years (women).
States and
municipalities
Employees of states and municipalities would be
subject to the retirement rules of the corresponding
social security system for their respective jurisdictions.
Employees of states and municipalities would be subject
to the same rules as federal government employees.
States and municipalities will have six months from the date of publication of
the constitutional amendment to change their own social security systems.
After this period, the rules of PEC 287/2016 will prevail.
Temer’s pension reform proposal was tough on public sector
23.9%
Comparison of current and proposed retirement rules for public servers
Source: Federal Constitution, PEC 287/2016, Credit Suisse

1905 December, 2018
Parts of reform can be implemented by ordinary law
 President Temer submitted three versions of pension reform to Congress. Parts of them could be proposed in
bills of ordinary law, which do not require a constitutional majority.
Government's original proposal Substitute text submitted to Special Committee Change
General principle
of reform
Unification of different retirement systems (by age, time of contribution,
and Social Security Regimes for Public-Sector Employees (RPPS)) in a
single retirement by age, with more restrictive requirements and little
difference between the different population cohorts.
Unification of different long-term retirement regimes, moving to a less strict transition rule. The new retirement by age
would have less restrictive requirements but would preserve differences between them for population cohorts.
Requirements
for retirement by
age
Minimum age: 65 years for all1 Minimum age: 65 years for men (non-farm) and 62 years for women (non-farm), 60 years for men (farm) and 55
years for women (farm)
According to
the constitution
Minimum time of contribution: 25 years Minimum time of contribution: 15 years
According to
the constitution
Transition rule
Men 50 years of age and above and women 45 years of age and above
would still retire under the current rules, but with an additional period of
50% of the time remaining until the minimum time of contribution.
There is no minimum age for the transition rule.
According to
the constitution
Increase by 30% of the time remaining for retirement under current rules, subject to a minimum age of 55 years for
men and 53 years for women.
Increase of one year for every two years (for women and men) as of January 1, 2020, until the date the beneficiary
fulfills the 30% increase in time remaining for retirement.
Formula for
calculation of
benefit amount
Substitution of social security factor with defined benefit for 51% of
average remuneration and salary on which social security contribution
was levied, accrued with 1pps per year of contribution, subject to the
lower limit of one monthly minimum wage and to upper limit of 100% of
the above-cited average.
Benefit amount: 60% of average salary, added to:
By law
+ 1.0pps per year, if the beneficiary contributes 10 years in addition to the mandatory 15 years.
+ 1.5pps per year, if the beneficiary contributes from 10 to 15 years in addition to the mandatory 15 years.
Thus, the salary average is paid in full with 40 years of contribution.
Survivor's
pension
Prohibits the cumulative receipt of survivor's and retirement pension or
two pensions of this type.
Prohibits the cumulative receipt of two survivor's pensions but allows individuals to receive pension and retirement if
the two benefits, in the aggregate, do not exceed two times the minimum wage.
By law
Pension calculated as 50% of the benefit plus 10pps per dependent.
Pensions would no longer be linked to the minimum wage.
Pension amount calculated as 50% of the benefit plus 10pps per dependent. The maximum benefit amount is
subject to the maximum benefit allowed under the RGPS and the minimum benefit is linked to the minimum wage.
By law
Continuous
Cash Benefit
Program (BCP)
People with disabilities may receive BPC payments at any age. Minimum
age to be entitled to the benefit increased to 70 years in the case of the
elderly.
People with disabilities may receive BPC payments at any age. The elderly will be entitled to the benefit at age 65.
Other rules for BPC eligibility will be regulated by law.
According to
the constitution
The benefit amount would no longer be linked to the minimum wage. Benefit is equal to one monthly minimum wage.
According to
the constitution
1 The minimum age would be adjusted automatically based on the increase in survival expectancy at 65 years. Source: Chamber of Deputies, PEC 287/2016, Federal Constitution, Law 8213/1991, Credit Suisse

1915 December, 2018
Widespread increase in expenditures for benefits
 The rapid aging of the population will put even more pressure on the balance of the social security system.
Benefits that are more directly affected by the aging of population (retirement due to age, time of contribution,
and LOAS for the elderly) will increase the most.
 As a result, retirement benefits will amount to 10.0% of GDP by 2060, compared with 5.1% of GDP in
2017.
Path of social security expenditures, by benefit
(% of GDP)
Retirement due to age
Retirement by time of
contribution
Survivor’s pension
LOAS
Retirement by disability
Workers compensation
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2060

1925 December, 2018
-5.9
-3.9
-5.0
-4.1
-6.0
-5.5
-5.0
-4.5
-4.0
-3.5
Even original bill would not reverse system deficit
 In the scenario without reform, the social security
deficit would reach 5.9% of GDP by 2030. The
first bill proposed by President Michel Temer would
lead to a reduction in the deficit to 3.9% of GDP by
2030, which would represent total savings of
BRL880bn (at 2017 prices) in the period.
 The substitute bill would be less effective. The
deficit would reach 5.0% of GDP by 2030, and the
savings would total BRL380bn, 43% of that of the
original bill.
 In a scenario in which the substitute bill is followed
by a change in legislation to adjust the minimum
wage only for inflation in the coming years the
results would be close to those of the original bill
from 2020 to 2030. This is our base-case scenario
for the medium term.
23.9%
Simulations of social security deficit¹
(% of GDP)
Deficit, current rule
Deficit, original
reform
Deficit, substitute
reform
Deficit, subst. reform
+de-indexation of MW
¹Our simulations assume that the social security reform will be approved in 2019 and that the new rules will come into effect in 2020.
2020 2022 2024 2026 2028 20302018

1935 December, 2018
-12.8
-7.1
-12.4
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
2017 2026 2035 2044 2053
Fully funded system has high implementation cost
 In a scenario in which President Temer’s first
pension reform is passed with an amendment
requiring people born after 2002 (who will join the
labor market by 2020) to retire under a fully funded
system, the deficit would increase by almost 5.0pps
of GDP by 2060 compared with the simulation for
Temer’s original proposal.
 The difference is due to losses in social security
contributions, since new retirees under the fully
funded system would not have contributed to the
pay-as-you-go system. Transition to a fully funded
system will likely require a tax increase.
 This rise in the deficit in the simulation for the fully
funded system occurs because, under the old
system (pay-as-you-go), expenses do not decline
at the same pace as revenues. Expenses will
decline when the number of people leaving the
system exceeds the number of people who are
retiring.
23.9%
Simulations of social security deficit
(% of GDP)
Deficit, current rule
Deficit, original reform
Deficit, original
reform + fully
funded system
2060

1945 December, 2018
Fully funded system would require tax increase
 In the hypothetical scenario of new workers contributing only to a fully funded system, social security
contributions to the previous system would decline sharply to a mere 0.7% of GDP in 2060.
 To keep the social security deficit on the same path as if the first reform bill submitted by President Temer
were approved, the government would need to increase taxes. Considering a tax on wages, the rate would
have to increase each year to offset the loss in revenues, reaching 15.4% of wages by 2060.
Social security revenues in pay-as-you-go system under
different scenarios (% of GDP)
Rate of tax on wages necessary to keep deficit on path
projected for first reform bill (% of wages)
15.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057
0
1
2
3
4
5
6
7
2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057
20602060
Base-case revenues
Revenues under
fully funded system

1955 December, 2018
0
200
400
600
800
1000
1200
1400
1600
1940 1953 1966 1979 1992 2005 2018
50
100
150
200
250
1996 1999 2002 2005 2008 2011 2014 2017
New rule for increase in minimum wage to be set
 The current rule for adjustment of the minimum wage, in effect since 20121, will be applied for the last time in
2019. The rule establishes that the adjustments are based on the rate of INPC inflation for the previous year
added to the highest between GDP growth for two years prior and zero.
 With the end of the rule, the executive branch could send a provisional measure indicating a new adjustment
methodology to the National Congress, where its conversion into ordinary law will be analyzed by both the
Chamber of Deputies and the Senate and will require approval by a simple majority.
 The past few years saw a sharp real increase in the minimum wage, higher than growth rate of GDP per
capita and the average real wage of the formal labor market.
Real minimum wage
(BRL, 2018 prices)
Dynamics in real terms of minimum wage, GDP per
capita, and average wage in formal market (1996=100)
Minimum wage
1 Laws No. 12382/2011 and 13152/2015.
Source: Ministry of Labor, Credit Suisse
GDP per capita
Average wage in formal market

1965 December, 2018
9.5
10.0
10.5
11.0
11.5
12.0
12.5
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
MW rule has strong impact on pension spending
 Changes in the minimum wage rule would have a significant impact on public expenditures, since almost 70%
of social security benefits are linked to it.
 Our base-case scenario assumes that, under the new rule, the minimum wage will be adjusted only for
inflation. This scenario is compatible with fiscal savings with social security expenditures of BRL375bn (at
2017 prices) from 2020 to 2030.
 In the alternative scenario, in which the minimum wage is adjusted for productivity, the impact would be
approximately half of that in the period.
68
16
8
8
Breakdown of benefits by multiples of monthly minimum
wage in 2017 (%)
Social security expenditures under different minimum
wage rules (% of GDP)
Current-rule
≤ 1 minimum
wage
1> x > 2
minimum wage
2> x > 3
minimum wage
> 3 minimum
wage
Breakdown of
benefits by multiples
of monthly
minimum wage
Minimum wage
varies according to
productivity
Minimum wage with
zero real growth

1975 December, 2018
-50%
-30%
-10%
10%
30%
50%
70%
90%
30
60
90
120
150
180
210
-200
-100
-
100
200
14%
16%
18%
20%
22%
Discretionary expenditures not enough to meet EC 95
 Under the current system for social security expenditures and assuming that other expenditures remain
constant in real terms, compliance with Constitutional Amendment (EC) 95/16 would not be possible by
merely reducing discretionary expenditures (except for education and healthcare) as of 2024, when they will
reach zero. Discretionary expenditures are currently at the same level as in 2011 in real terms, which suggests
that additional cuts would be hard to implement.
 To meet the spending cap until 2027, the government will need to reduce mandatory expenditures by at least
1.5% of GDP in addition to discretionary expenditures.
23.9%
Discretionary expenditures in real terms
(BRL billion, % year-on-year real terms)
Total discretionary expenditures after cut needed to
meet EC 95 (%)
Discretionary expenditures of
executive branch (BRL bn, 2017)
Discretionary expenditures (ex education
and health) (BRL bn, 2017) (RHS)
Total expenditures subject
to cap (% of GDP)
Spending cap (% of GDP)
Real growth in discretionary
expenditures (RHS)
2006 2008 2010 2012 2014 2016 2018e 2017 2019e 2021e 2023e 2025e 2027e

1985 December, 2018
-
50
100
150
200
250
300
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
1.51
1.39
1.29
1.44
1.25
1.30
1.35
1.40
1.45
1.50
1.55
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Proposed pension reform not enough to meet EC95
 The approval of a pension reform would not cause enough impact in its early years to delay the breach of the
EC 95/16 cap. Unless other measures are taken, the cap will be breached by 2021.1
 Assuming the approval of the substitutive bill and correction of the minimum wage only by inflation as of 2020,
meeting the spending caps under EC 95 until 2027 would require additional cuts in discretionary expenditures
in 2017.
Simulations of primary expenditures under different
social security reforms (BRL trillion, 2017 prices)
1 Our simulations are based on our fiscal projections for 2018 to 2020 and, as of 2021, assume growth in social security and
LOAS expenditures according to the respective social security reforms and that other expenditures remain constant in real terms.
Current rule
Subst. reform
+ de-indexation of MW
Cap
Substitutive reform
Necessary cut in expenditures to meet EC95 in each
social security scenario (BRL billion, 2017 prices)
Current rule
Subst. reform
Subst. reform + deindexation of MW
Discretionary expenditures (except
health and education), 2017 level

1995 December, 2018
1 Consolidated Optional Single-Rate Tax Regime (Simples Nacional) for micro and small enterprises (SME).
Source: Ministry of Planning, Budgeting, and Management; Ministry of Finance; Credit Suisse
Tax relief programs to account for 4.1% of GDP in 2019
 The next administration will need to implement a
strong fiscal consolidation process in the coming
years. Although a significant part of the adjustment
will likely be implemented through a reduction in
primary expenditures (e.g., pension expenditures),
there is still room for implementation of measures
on the revenue side.
 The loss of tax revenues due to exemptions or
reduced tax rates is widespread. Reversal of tax
incentives, even if partial, is fundamental for the
fiscal adjustment process.
 Tax relief programs will likely account for
BRL306bn in 2019, or 4.1% of GDP.
 Studies on certain tax relief programs are necessary
to quantify their possible benefits, in terms of either
their direct benefits to the society or an increase in
productivity or in the economy's efficiency.
Tax relief projected for 2019 (BRL million, %)
Total %
1 “Simples Nacional”1 87,253 28.4
2 Exempt and non-taxable earnings (individual income tax) 32,134 10.5
3 Free Trade Zone of Manaus and free trade areas 24,727 8.1
4 Nonprofit organizations 24,258 7.9
5 Agriculture and agribusiness 30,233 9.8
7 Payroll tax breaks 9,562 3.1
8 Benefits for workers 12,538 4.1
9 Medication, pharmaceuticals, and medical equipment 9,378 3.1
Public transportation and taxi 2,413 0.8
Total 306,397 100
8,671Retired declarants aged 65 or over 2.8
13,895Retirement due to serious illness or accident 4.5
8,469Indemnity for employment severance 2.8
Other 959 0.3
6 Deductions from taxable earnings (individual income tax) 20,098 6.6
4,596Education expenses 1.5
Medical expenses 15,502 5.1
Medical, dental, and pharmacy benefits for employees 5,645 1.8
10 Other 56,216 18.3

2005 December, 2018
Only certain taxes not subject to one-year waiting period
 Most taxes are legally subject to either a 90-day or a 1-year waiting period, which means that changes to tax
laws come into effect only after 90 days or 1 year, respectively.
 The only taxes not subject to any waiting period are the Importation Tax (II) and Exportation Tax (IE), the Tax
on Financial Transactions (IOF), the War Tax, the Income Tax (IR), and the taxable bases of the State Motor
Vehicle Ownership Tax (IPVA) and the Municipal Property Tax (IPTU).
Source: Brazilian Revenue Service, Credit Suisse
Taxes subject to 90-day or 1-year waiting period
1-year waiting period 90-day waiting period
Imports
Exports
Tax on Industrialized Products (IPI)
Tax on Financial Transactions (IOF)
War Tax
Compulsory loan (public calamity and war)
Cide fuels tax
State Tax on the Circulation of Goods and the Provision of Services (ICMS), fuels
Social Contribution to Healthcare (CSS)
Income Tax (IR)
Taxable base of the State Motor Vehicle Ownership Tax (IPVA)
Taxable base of the Municipal Property Tax (IPTU)

2015 December, 2018
Tax burden in Brazil is high for an emerging country
 According to the database on tax revenues of the Organization for Economic Co-operation and Development
(OECD), the tax burden in Brazil was the third highest among emerging economies in 2016.
 Despite the recent stability, Brazil's tax burden was 32% of GDP in 2016, much higher than the average of
24.6% of GDP among the emerging economies analyzed.
 Despite the increase, the tax burden has not been sufficient to offset the substantial expansion in public
spending in recent years.
5
10
15
20
25
30
35
40
45
50
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Taxes as a percentage of GDP in emerging markets(%)
Source: OECD, Credit Suisse
Chile Hungary Mexico Poland Turkey Argentina Brazil
Colombia Indonesia Malaysia Peru Philippines South Africa Venezuela

2025 December, 2018
Taxes in goods and services are high in Brazil
 Taxes on goods and services totaled 12.7% of GDP, the third highest level among emerging economies. The
high taxes on goods and services make Brazil's tax system highly regressive, given the greater impact on
lower-income segments of the population.
 The tax burden as a proportion of GDP in other sectors is also quite high. The social security contribution is
the third-highest among emerging economies, as is property taxes.
Social security contribution
(% of GDP)
0
2
4
6
8
10
12
14
16
18
1991 1996 2001 2006 2011 2016
Property taxes
(% of GDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1991 1996 2001 2006 2011 2016
Taxes on goods and services
(% of GDP)
2
4
6
8
10
12
14
16
18
1991 1996 2001 2006 2011 2016

2035 December, 2018
Tax on income and profits equal to that of emerging markets
 Taxes on income, profits, and capital gains in Brazil reached 7.2% of GDP in 2016, a level similar to the
average of 6.9% of GDP for this same type of tax in emerging economies.
 Taxes in income, profits, and capital gains of individuals as a percentage of GDP are lower in Brazil than in the
average emerging market, whereas these same taxes charged to companies in Brazil are close to the average
for emerging economies.
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
0
1
2
3
4
5
6
7
8
9
Taxes on income, profits, and capital gains in emerging markets(% of GDP)
Total Individuals Companies
1991 1996 2001 2006 2011 2016 1991 1996 2001 2006 2011 2016 1991 1996 2001 2006 2011 2016

2045 December, 2018
Elasticity of fiscal revenues to output gap at close to 1.2
 We estimated eight versions of a Kalman filter model to measure the elasticity of the revenues of the central
government in real terms to the output gap. The explanatory variables considered in the models were output
gap, the one-period lag of the output gap, the real exchange rate, and the gap between international and
domestic oil prices.
 The estimated elasticities for total revenues ranged from 1.04 to 1.69, with an average elasticity of 1.20. This
means that growth in total real revenues increases by 1.2% for each 1% increase in the output gap measure.
Total revenues Total revenues excluding oil Oil revenues
Elasticities of fiscal revenues to output gap and oil price gap
0.7
0.7
1.1
1.4
1.4
1.7
1.7
1.7
0.8
0.8
0.8
0.8
1.0
1.0
1.3
1.3
Average1.3
Average1.0
1 For more details, please see “Nota metodológica Resultado Fiscal Estrutural” published by the Secretariat of Economic Policy in April 2018.
Source: National Treasury, Brazilian Revenue Service, Credit Suisse
Model 3 1.2
Model 4 1.1
Model 6 1.0
Model 8 1.0
Model 7 1.1
Model 5 1.3
Model 1 1.3
Model 2 1.7
Average1.2

2055 December, 2018
Need for substantial fiscal adjustment in coming years
 After several years of deterioration in public accounts, Brazil will need to implement a significant fiscal
adjustment over the next few years. Even based on favorable assumptions for GDP growth and interest rates,
the fiscal adjustment needs to be substantial. For example, the primary balance would have to rise from its
current level by:
– 4.3pps (from -1.7% to 2.6%): scenario with GDP growth of 2.0% and a real interest rate of 5.0%
1.7 2.1 2.6 3.0 3.4 3.8 4.3 4.7 5.1
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
Primary balance needed to stabilize gross debt at 85%
(% of GDP)
Source: National Treasury, Credit Suisse
Real interest rate
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
GDPgrowth
1.0 0.9 1.3 1.7 2.1 2.6 3.0 3.4 3.8 4.3
1.5 0.4 0.9 1.3 1.7 2.1 2.6 3.0 3.4 3.8
2.0 0.0 0.4 0.9 1.3 1.7 2.1 2.6 3.0 3.4
2.5 -0.4 0.0 0.4 0.9 1.3 1.7 2.1 2.6 3.0
3.0 -0.9 -0.4 0.0 0.4 0.9 1.3 1.7 2.1 2.6
3.5 -1.3 -0.9 -0.4 0.0 0.4 0.9 1.3 1.7 2.1
4.0 -1.7 -1.3 -0.9 -0.4 0.0 0.4 0.9 1.3 1.7
4.5 -2.1 -1.7 -1.3 -0.9 -0.4 0.0 0.4 0.9 1.3
5.0 -2.6 -2.1 -1.7 -1.3 -0.9 -0.4 0.0 0.4 0.9
GDP
growth
of 2.0%
GDP
growth
of 2.5%
GDP
growth
of 3.0%
1.3 1.7 2.1 2.6 3.0 3.4 3.8 4.3 4.7
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
0.9 1.3 1.7 2.1 2.6 3.0 3.4 3.8 4.3
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
Real interest rate
Size of fiscal adjustment needed to stabilize gross debt
(% of GDP)

2065 December, 2018
It will take time for debt-to-GDP ratio to stabilize
 Stabilization of the gross debt at 85% of GDP requires the primary balance to converge to a primary surplus of
1.0% to 2.5% of GDP, depending on the assumptions used for the real interest rate and GDP growth.
 It would take a few years for the primary balance to reach this range. Even based on conservative assumptions
for growth in expenditures and the dynamics of non-recurring revenues and GDP growth of 4.0%, the primary
balance compatible with stabilization of the gross debt as a percentage of GDP would not be reached before
2022.
 Over a ten-year horizon, gross debt as a percentage of GDP would stabilize only in the scenario with GDP
growth remaining higher than 1.5% in this period.
-4
-2
0
2
4
6
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
Elasticity of real growth in recurring revenues to
real GDP growth: 1.2.
Real growth in expenditures: zero, compatible
with Constitutional Amendment ("EC") 95.
Non-recurring revenues: Stable as percentage
of GDP on average from 2012 to 2017.
GDP (4.0%)
GDP (3.5%)
GDP (3.0%)
GDP (2.5%)
GDP (2.0%)
GDP (1.5%)
GDP (1.0%)
Compatible with debt’s stability
Simulations for path of primary balance in coming years (% of GDP)
Primary balance compatible with stabilization of gross debtAssumptions for exogenous variables
in 2019–2028 period

2075 December, 2018
Compliance with EC 95 ensures stability of debt
 If we assume an increase in primary expenditures beyond that permitted by EC 95, it will be much more
difficult to stabilize gross debt as a percentage of GDP over the next ten years.
 Assuming 1% of real growth in primary expenditures, only in scenarios in which GDP growth is greater than
2.0% would the primary balance as a percentage of GDP reach the range compatible with stabilization of
gross debt at 85% of GDP.
 Amending EC 95 would be a mistake. Not only would amending EC 95 enable an increase in spending in a
scenario of a lack of fiscal control, it would lead to a de-anchoring of agents' expectations regarding the path
of fiscal accounts.
Elasticity of real growth in recurring revenues to
real GDP growth: 1.2.
Real growth in expenditures: 1.0%, close to
average growth from 2015 to 2018.
Non-recurring revenues: Stable as percentage
of GDP on average from 2012 to 2017.
Simulations for path of primary balance in coming years (% of GDP)
Primary balance compatible with stabilization of gross debtAssumptions for exogenous variables
in 2019–2028 period
-3
-2
-1
0
1
2
3
4
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
GDP (4.0%)
GDP (3.5%)
GDP (3.0%)
GDP (2.5%)
GDP (2.0%)
GDP (1.5%)
GDP (1.0%)
Compatible with debt’s stability

2085 December, 2018
Recent deterioration in Brazil’s fiscal fundamentals
Average gross debt compared with
average nominal balance of selected
countries in 2013–17 (% of GDP)1
 According to the IMF, from 2008 to 2012 Brazil had a relatively favorable fiscal position compared with that of
the rest of the world. However, since 2013 there has been a gap between Brazil's fiscal statistics and those of
the rest of the world, with a rise in the nominal deficit and in public debt, both as a percentage of GDP.
 Brazil should implement a strong fiscal consolidation package in the coming years. If this does not happen,
Brazil's fiscal position will deteriorate even more compared with that of the rest of the world.
1 We chose the countries based on the IMF's classification of emerging and developed economies, which comprises a total of 62 countries, of which 23 are emerging. The emerging economies sample is composed of the following countries:
Argentina, Bangladesh, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine and Venezuela; whereas the full sample also
considers the following advanced countries: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania,
Luxembourg, Macao SAR, Malta, Netherlands, New Zealand, Norway, Portugal, Puerto Rico, San Marino, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom and United States 2 The
images do not include the following countries, which had more than two standard deviations in any one parameter or whose data was not available in the database: Greece, Ireland, Japan, Macao SAR, Norway, Puerto Rico and Venezuela.
Source: International Monetary Fund (IMF), Credit Suisse
0
20
40
60
80
100
120
-15 -10 -5 0 5 10
Net lending/borrowing requirements
Grossdebt
0
20
40
60
80
100
120
140
-10 -5 0 5 10
Grossdebt
0
20
40
60
80
100
120
140
-10 -5 0 5
Grossdebt

2095 December, 2018
0
20
40
60
80
100
-10 -5 0 5
0
10
20
30
40
50
60
70
80
-8 -6 -4 -2 0 2
0
20
40
60
80
100
-10 -8 -6 -4 -2 0 2
Weak fiscal accounts compared to other emerging markets
 The deterioration in Brazil’s fiscal figures is also significant compared with emerging economies:
– 2008–12: Brazil had a relatively high gross debt as percentage of GDP. However, the nominal deficit was not so different
compared with other emerging economies.
– 2013–17: Gross debt as a percentage of GDP remained high, and the nominal deficit saw strong deterioration in this period.
– 2018–23: If nothing changes, Brazil’s fiscal position will worsen further, and the country will become the emerging
economy with the highest debt and the most deteriorated fiscal accounts in the sample, excluding Venezuela.
average nominal balance of emerging
economies in 2013–17 (% of GDP)1
Grossdebt
Grossdebt
Grossdebt
1 The emerging economies sample is composed of the following countries: Argentina, Bangladesh, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland,
Romania, Russia, South Africa, Thailand, Turkey, Ukraine and Venezuela. The images do not include Venezuela, which had more than two standard deviations in both parameters.

2105 December, 2018
Gross debt is high, even after deducting reserves
 Although Brazil's gross debt is high compared with
that of other countries, it can be argued that the
level of international reserves (USD371bn in 2017)
should be taken into account when analyzing the
public debt, since reserves have had a positive
influence on increases in debt and are highly liquid.
 Although high by historical standards, Brazil's
reserves-to-GDP ratio is not high compared with
that of other emerging economies. For example, in
the sample of countries classified by the IMF as
emerging economies, the average reserves-to-GDP
ratio was 19.1% in 2017, higher than Brazil's
18.1% for the same period.
 Accordingly, Brazil's relative position in terms of
public debt as a percentage of GDP does not
change when we deduct international reserves.
Gross debt compared with international reserves
(% of GDP, 2017)
84.0
75.6
70.2
69.9
67.2
54.2
54.2
52.7
52.6
51.4
49.4
47.8
41.9
37.8
36.9
34.9
32.4
28.9
28.5
25.5
23.9
23.6
17.4
18.1
16.2
14.9
18.3
5.2
14.8
32.1
13.0
8.3
20.8
15.1
26.3
43.1
23.4
19.0
1.4
12.6
12.5
9.9
29.0
46.9
14.1
23.3
65.9
59.4
55.3
51.6
62.0
39.3
22.1
39.6
44.3
30.6
34.3
21.5
(1.2)
14.5
17.9
33.4
19.8
16.4
18.6
(3.5)
(22.9)
9.5
(5.9)
Gross debt Reserves
Gross debt
less reserves
46.1 19.1 27.1
Brazil
Ukraine
India
Hungary
Pakistan
Mexico
Malaysia
South Africa
Argentina
Poland
Colombia
China
Thailand
Philippines
Romania
Venezuela
Bangladesh
Indonesia
Turkey
Peru
Bulgaria
Chile
Russia
Average
Average
Average

2115 December, 2018
New instruments would not make public debt low
 The dynamics of public debt over the next few
years could be positively affected by approval of Bill
of Law No. 9248/2017, submitted by the
government to the National Congress in December
2017, which authorizes the central bank to take
voluntary time deposits from financial institutions.
 Establishment of this new monetary policy
instrument would enable the central bank to reduce
liquidity by encouraging financial institutions to
make interest-bearing deposits with the monetary
authority for a minimum term of one day.
 Even considering the potential impact that
implementation of interest-bearing deposits would
have on the level of public indebtedness as a
percentage of GDP, Brazil's relative position would
still be unfavorable compared with that of other
emerging economies.
Gross debt compared with central bank claims
on central government (% of GDP, 2017)
Gross debt
Central Bank claims
on central government
Gross debt less
CB claims on central
government
Brazil
Ukraine
India
Hungary
Pakistan
Mexico
Malaysia
South Africa
Argentina
Poland
Colombia
China
Thailand
Philippines
Romania
Venezuela
Bangladesh
Indonesia
Turkey
Peru
Bulgaria
Chile
Russia
84.0
75.6
70.2
69.9
67.2
54.2
54.2
52.7
52.6
51.4
49.4
47.8
41.9
37.8
36.9
34.9
32.4
28.9
28.5
25.5
23.9
23.6
17.4 46.1
25.3
13.0
4.1
0.1
8.7
0.0
NA
1.0
16.9
0.0
1.3
1.9
2.3
2.4
0.0
NA
0.6
2.8
0.6
0.4
0.0
0.2
0.2
58.6
62.6
66.1
69.8
58.5
54.2
NA
51.6
35.7
51.4
48.1
45.9
39.5
35.4
36.9
NA
31.9
26.1
27.8
25.1
23.9
23.4
17.23.9 42.4
Average Average Average

2125 December, 2018
Fulfillment of golden rule to be difficult in 2019
 The golden rule prohibits "credit transactions that exceed the amount of capital expenditures, except those
authorized by means of supplemental or special credits with a specific purpose, approved by the legislative
branch by absolute majority."
 After implementing several measures, the government secured a margin of BRL12.5bn for fulfillment of the
golden rule in 2018.
 For 2019, the Brazilian Treasury estimates a shortfall of BRL260.5bn, which will likely be reduced to
BRL109.2bn owing partially to the use of funds from the positive result of the Central Bank of Brazil.
Accordingly, the government will need to secure Congress approval of a supplemental credit to avoid the
consequences of failing to meet such rule.
Sufficiency of golden rule (BRL billion)Measures to balance the margin of the golden rule
in 2018 (BRL billion)
2018 2019
Capital expenditures (I) 891.7 749.4
Investments 38.9 32.7
Financial investments 70.3 71.6
Amortizations 782.4 645.1
Revenues from credit transactions considered (II = a - b) 879.2 1009.9
Revenues from loan transactions in period (a) 923.9 867.2
Change in debt subaccount (b) 44.6 -142.7
Margin of golden rule (III = I - II) 12.5 -260.5
2018
BNDES – early payment 130.0
Sovereign wealth fund 27.5
National Development Fund (FND) 17.4
Telecommunications Inspection Fund (Fistel) 6.7
Proceeds from concessions and permits 13.1
Financial Assets Rehabilitation Program (PESA) 4.4

2135 December, 2018
1 For more information, please see Tinoco, G., Giambiagi, F., Leite, J., Nunes, A., and Provençano F. “A renegociação da dívida do BNDES com o Tesouro Nacional: antecedentes, motivação e desdobramentos,” texts for
discussion 131, October 2018. Despite the decline in the volume of funds received from the Treasury in the past few years, the BNDES will continue to receive contributions via the Workers Support Fund (FAT).
Source: Brazilian Development Bank (BNDES), Credit Suisse
Repayment of funds by BNDES will be swifter
 Thanks to the debt renegotiation between the Brazilian Treasury and the BNDES in 2018, the loans taken out
by the BNDES from the government will be repaid much faster.
 Considering the renegotiated payment flow, BRL26.6bn will be repaid in 2019 and BRL26bn in 2020. For the
other years, the amount repaid will likely be lower, reaching BRL14.2bn in 2039, and the last payment, of
BRL45.6bn, will be made in 2040. By such date, the BNDES will have repaid all loans taken out from the
Brazilian Treasury in the past few years.
0 10 20 30 40 50 60
2019
2024
2029
2034
2039
2044
2049
2054
2059
Flow of BNDES payments to the Treasury1
(current BRL billion)
Balance of BNDES debt to the Treasury1
(current BRL billion)
0
100
200
300
400
500
600
700
2018 2024 2030 2036 2042 2048 2054 2060
Original
Renegotiated
Renegotiated
Original

2145 December, 2018
Gross debt to remain on uptrend in next few years
 Despite the more favorable scenario for economic growth and, consequently, for the dynamics of the fiscal
accounts, the path of gross debt as a percentage of GDP will remain on an uptrend in the next few years.
 Even considering in our base-case scenario the scheduled return of funds by the BNDES to the Brazilian
Treasury, gross debt as a percentage of GDP is expected to increase from 76.3% in 2018 to 78.2% in 2020.
Net debt as a percentage of GDP will likely increase from 54.1% of GDP in 2018 to 59.6% of GDP in 2020.
Paths of gross and net debt (% of GDP)
54.3
50.2
47.9
46.5
44.5
37.6
40.9
38.0
34.5
32.2
30.5
32.6
35.6
46.2
51.6
54.1
57.1
59.6
61.0
56.3 56.1 55.5
56.7 56.0
59.2
51.8 51.3
53.7
51.5
56.3
65.5
70.0
74.0
76.3 76.9
78.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e
Gross debt
Net debt

2155 December, 2018
5,246,734
4,970,476
276,258
Gross debt of general
government (C=D+E)
Internal debt (D) External debt (E)
Most of Brazil's debt is denominated in local currency
 The gross debt of the general government (federal government, states, and municipalities) reached BRL5.3trn
in September 2018, of which the domestic debt accounts for BRL4.97trn and the external debt, for only
BRL276bn.
 Among the main components of domestic debt, the highlights are the securities debt in the market (72% of
total gross debt as of September 2018) and repos of the Central Bank of Brazil (24%).
 Such higher share of domestic debt in total government indebtedness reduces the risk of a swift and sharp
increase in debt in the event of a spike in risk aversion in international markets.
72.1%
24.1%
0.2%
3.0%
0.5%
Total gross debt, domestic and external
(BRL million, Sep-18)
Breakdown of domestic debt
(%, Sep-18)
Bank debt of state governments
Bank debt of municipal governments
Securities debt in market
Central bank repos
Bank debt of federal government

2165 December, 2018
Fiscal situation of states is unfavorable
 The aggregate fiscal result of the states, according to the criterion of committed expenditures, was a primary
deficit of BRL13.9bn in 2017, after a primary deficit of BRL2.8bn in 2016. The sharp increase in personnel
expenditures, social charges, and investments more than offset the recovery of tax revenues.
 Conversely, from the perspective of expenditures paid, the primary balance of states improved in 2017
compared with 2016. The primary result went from a surplus of BRL14.1bn in 2016 to BRL15.8bn in 2017.
This difference between the two criteria is explained by the recording of residual payables.
Primary balance of states, criterion of committed
expenditures1 (BRL million)
Primary balance of states, criterion of expenditures paid1
(BRL million)
1 Both criteria are used by the Brazilian Treasury, which uses a different methodology from that of the Central Bank of Brazil. The central bank's methodology is more similar to the criterion of expenditures paid, since its fiscal
balance calculations do not include, for example, the residual payables recorded.
2015 2016 2017
Levies, fees, and betterment taxes (contributions) 423,418 447,924 477,608
State Tax on the Circulation of Goods and the
Provision of Services (ICMS)
333,188 348,919 372,123
Current transfers 159,860 176,131 172,345
Share of State Participation Fund (FPE) 60,971 69,828 6,679
Other current revenues 90,103 81,490 93,382
Capital transfers 3,669 4,983 4,234
Other capital revenues 3,625 4,429 4,789
Total primary revenue 680,675 714,957 752,358
Personnel and social charges 358,032 377,545 402,933
Other current expenditures 278,485 295,093 314,902
Investments 39,832 36,669 41,654
Other Investments 6,088 8,476 6,741
Primary expenditures 682,437 717,783 766,230
Primary balance -1,762 -2,826 -13,872
2015 2016 2017
Levies, fees, and betterment taxes (contributions) 423,418 447,924 477,608
State Tax on the Circulation of Goods and the
Provision of Services (ICMS)
333,188 348,919 372,123
Current transfers 159,860 176,131 172,345
Share of State Participation Fund (FPE) 60,971 69,828 66,790
Other current revenues 90,103 81,490 93,382
Capital transfers 3,669 4,983 4,234
Other capital revenues 3,625 4,429 4,789
Total primary revenue 680,675 714,957 752,358
Personnel and social charges 350,291 373,041 395,353
Other current expenditures 269,573 286,805 300,657
Investments 38,003 33,772 34,058
Other Investments 6,158 7,252 6,503
Primary expenditures 664,025 700,870 736,571
Primary balance 16,650 14,087 15,787

2175 December, 2018
Sharp increase in residual payments in 2017
 The volume of residual payables recorded by states
increased considerably in 2017, reinforcing the
assessment that most states are still funding
themselves by postponing their payments to suppliers
and civil servants.
 The total amount of residual payables recorded by
states rose from BRL16.9bn in 2016 to BRL29.7bn in
2017. The state that recorded the highest volume of
residual payables in 2017 was Rio de Janeiro:
BRL6.5bn. The state with highest nominal change in
the volume of residual payables recorded was São
Paulo: from BRL-0.5bn in 2016 to BRL5.6bn in
2017.
 Such sharp rise in the volume of residual payables
evidences the scenario of significant deterioration of
the budgetary result of states in the past few years.
Residual payables recorded by states (BRL million)
2015 2016 2017
Acre 86 50 43
Alagoas 8 68 -124
Amazonas -39 363 516
Amapá 555 534 620
Bahia 139 -125 420
Ceará 86 58 293
Federal District 2,169 461 479
Espírito Santo 140 110 202
Goiás 1,721 558 674
Maranhão 545 235 427
Minas Gerais 3,569 4,736 5,975
Mato Grosso do Sul 539 130 1,074
Mato Grosso do Sul 447 973 1,423
Pará -30 49 182
Paraíba 173 362 55
Pernambuco 665 171 297
Piauí 120 220 68
Paraná 486 -289 2,820
Rio de Janeiro 2,594 6,887 6,484
Rio Grande do Norte 255 384 500
Rondônia 319 33 141
Roraima 260 67 799
Rio Grande do Sul 1,962 866 13
Santa Catarina 356 269 600
Sergipe 222 -36 -9
São Paulo 969 -485 5,597
Tocantins 96 265 90
TOTAL 18,412 16,914 29,659

2185 December, 2018
Sharp increase in personnel expenditures in states
 Expenditures for active and inactive personnel in certain states substantially exceeds the cap of 60% of net
current revenues (RCL) established by the Fiscal Responsibility Act. States such as Minas Gerais, Mato
Grosso do Sul, Rio Grande do Norte, and Rio de Janeiro posted personnel expenditures of close to 70% of
RCL or higher in 2017.
 The states with highest growth in personnel expenditures in the recent years were Rio de Janeiro, Maranhão,
Mato Grosso do Sul, and Minas Gerais.
 A successful fiscal consolidation process in states will necessarily need to contemplate a social security reform
to revert the rise in expenditures for inactive personnel.
Personnel expenditures, by state
(% of net current revenues)
Real growth in personnel expenditures from 2011 to
2017 (%)
90%
MG
MS
RN
RJ
RS
MT
SE
AC
PB
RR
PR
BA
SC
AL
PE
GO
PA
MA
AP
CE
TO
DF
AM
RO
ES
PI
SP
80%
70%
60%
50%
40%
30%
20%
10%
0%
Active
Inactive
Cap set by Fiscal Responsibility Act
120%
RJ
MS
RN
MG
RS
MT
SE
AC
PB
RR
PR
BA
SC
AL
PE
GO
PA
MA
AP
CE
TO
DF
AM
RO
ES
PI
SP
100%
80%
60%
40%
20%
0%
-20%
-40%
Active
Inactive
Median = 27.19%

2195 December, 2018
Most states have social security deficit
 According to the Statement of Social Security and Pass-Through Information (DIPR), the social security deficit
of the states totaled BRL94.4bn in 2017, of which BRL70bn referred to the deficit of civil servants and
BRL24.4bn to the deficit of military personnel.
 The states with highest social security deficits in nominal terms are São Paulo, Rio de Janeiro, Minas Gerais,
and Rio Grande do Sul. The social security deficit of the state of Rio de Janeiro was BRL18.3bn in 2017,
indicating that most of its nominal deficit is the result of an imbalance in the social security account.
-3,000
0
3,000
6,000
9,000
12,000
15,000
18,000
21,000
SãoPaulo
RiodeJaneiro
MinasGerais
RioGrandedoSul
Paraná
Bahia
SantaCatarina
DistritoFederal
Pernambuco
Goiás
RioGrandedoNorte
EspíritoSanto
Ceará
Paraíba
Alagoas
MatoGrossodoSul
MatoGrosso
Piauí
Maranhão
Amazonas
Pará
Sergipe
Acre
Tocantins
Rondônia
Roraima
Amapá
Social security deficit of states (BRL million, 2017)
Source: Brazilian Treasury, Secretariat of Social Security, Credit Suisse
Public-sector employees Military police employees

2205 December, 2018
Rio de Janeiro is the state with highest debt/revenue ratio
 Certain states have also reached the cap for debt as a percentage of net current revenues established by the
Fiscal Responsibility Act. The state with the highest ratio of net debt to net current revenues is Rio de Janeiro,
with almost 300% in 2017.
 Other very important states to Brazil's economy, such as Rio Grande do Sul, São Paulo, and Minas Gerais,
have also exceeded the cap established by the Fiscal Responsibility Act for this ratio.
 The high indebtedness of states is a major fiscal risk to the situation of the federal government's fiscal accounts.
Consolidated debt of states (% of net current revenues)
RJ MS RNMGRS MTSEAC PBRR PRBASCAL PEGO PAMAAPCE TO DFAMRO ESPISP
0%
Cap set by Fiscal Responsibility Act
350%
300%
250%
200%
150%
100%
50%
2016 2017

2225 December, 2018
Appreciation of USD against most currencies in 2018
Performance of exchange rate, treasury bonds, equities,
and CDS in 2018 (1)
1 Last date: 30-Nov-2018. The currencies used were based on the dollar exchange rate, interest rate indexes are in local currency, and the MSCI is denominated in LCU for Brazil and China, for developed economies and
emerging economies MSCI is denominated in USD and the CDS in USD. The year-to-date return at the interest rate is calculated as the percentage change of the synthetic price of a bond. To set up the developed and
emerging interest rate, the index for each country was weighted by 2017 GDP. The Emerging Market CDS embeds the China country risk. We considered the following emerging markets: Armenia, Bulgaria, China, Colombia,
India, Mexico, South Africa, and Russia. We considered the following developed economies: Australia, Austria, Belgium, Germany, Hong Kong, Ireland, Iceland, Israel, Italy, Japan, Netherlands, New Zealand, South Korea,
Spain, Switzerland, United Kingdom, United States, Singapore, France, and Canada.
Source: Bloomberg, Credit Suisse.
 The dollar posted the best performance in 2018
within a class of assets that includes currencies,
interest rates, equities, and risks. The currency
performed well, in terms of both overall return and
return normalized by volatility, against the BRL and
the currencies of other emerging economies. The
CDS of emerging economies posted good returns
in the year, in line with the depreciation of
currencies of emerging economies.
 On the other hand, the currencies of emerging
markets and equities in China saw the worst
performances, declining 36.2% and 17.7% year to
date, respectively. In normalized terms, the one-
year treasury rates saw the lowest return in the
year.
Exchange rate 1y Treasury yield 10y Treasury yield MSCI CDS
ReturnReturn/volatility
Brazil China Developed
Countries
Emerging
markets ex-China
-1.2
-1.3
-0.2
-1.8
0.0
2.3
-6.7
-0.9
-0.1
2.0
-1.2
-1.9
0.4
-1.6
-1.1
-2.8
0.4
1.9
1.4
-16.3%
-6.7%
-0.1%
-36.2%
0.0%
0.8%
-0.5%
-1.0%
-2.2%
8.0%
-3.2%
-6.2%
7.0%
-17.7%
-7.4%
-15.7%
40.6%
20.5%
67.3%

2235 December, 2018
3.0
3.2
3.4
3.6
3.8
4.0
4.2
jan-18 fev-18 mar-18 abr-18 mai-18 jun-18 jul-18 ago-18 set-18 out-18 nov-18
BRL/USD
External Factors
Internal Factors
External factors explained most of BRL depreciation in 2018
 The BRL/USD depreciation in 2018 was explained mostly by widespread strengthening of the USD. Several
factors drove the good performance of the USD: strong US growth, higher rates, and higher risk aversion in
emerging markets. On the other hand, domestic factors (e.g., presidential election) drove the higher FX
volatility. Specific external factors also contributed to the higher FX volatility (e.g., crisis in Turkey and
Argentina).
 In November, the BRL/USD exchange rate driven by domestic factors was 3.40 and the rate driven by only
external factors was 3.60. For the next year, the less liquid global financial market should be partially offset by
the more favorable scenario for the domestic economy due to the more positive prospects for the approval of
economic reforms by Congress and cyclical recovery of the economic activity.
1 To break down the exchange rate into external and internal factors, we projected the weekly changes in the BRL/USD exchange rate using 40 currencies of developed and emerging economies in the Ridge regression model.
The external factor is calculated as the forecast model and the domestic factor as the residual of the regression.
We consider the following currencies: EUR, JPY, BGN, CYP, CZK, DKK, EEK, GBP, HUF, LTL, LVL, MTL, PLN, ROL, RON, SEK, SIT, SKK, CHF, ISK, NOK, HRK, RUB, TRL, TRY, AUD, BRL, CAD, CNY, HKD, IDR,
ILS, INR, KRW, MXN, MYR, NZD, PHP, SGD, THB and ZAR
Source: European Central Bank, Credit Suisse
Dynamics of domestic and external-driven exchange rates1 (BRL/USD)
Brazil's Central
Bank intervention
Pre-election Bolsonaro
advantage
Turkey's Central
Bank crisis
Argentina
crisis

2245 December, 2018
FX rate is well balanced in real terms
 Historically, the real exchange rate had already shown strong deviations from the level implied by purchasing
power parity, both adjusted and not adjusted for productivity (e.g., 2002 and 2011). Since 2013, however, the
real exchange rate has not become either overvalued or undervalued by more than 13%.
 In October 2018, the exchange rate did not reflect significant pressures in both real and productivity terms.
The gap between the spot effective exchange rate and its historical mean, suggests that the real exchange
rate is 7.5% appreciated. Theoretically, economies with low productivity, such as Brazil, have a cheaper basket
of goods than high-productivity countries. Controlling also for the economies’ productivity, the real exchange
rate is 4.0% appreciated.
1 Brazil's effective exchange rate is a weighting of the real exchange rates of the BRL against the currencies of its main trading partners. It is common in specialized literature to assume that, according to the Purchasing Power
Parity theory, the effective exchange rate has a mean reversion. 2Country 𝑖’s price level ratio is defined as 𝑃𝑖/(𝑃 𝑈𝑆 ∗ 𝐸) , where 𝑃𝑖 is the price of a basket of goods negotiated in country 𝑖 in national currency units, and 𝐸 is the
exchange rate for 𝑖’s currency against the USD. Purchasing power parity guarantees that the same basket of goods negotiated in two countries and in the same currency will have the same price (in absence of frictions);
otherwise, there would be an arbitrage opportunity. Source: World Bank Group (WBG), Credit Suisse.
Level of overvaluation of real exchange rate1
(%)
Price level ratio versus GDP per capita2
(country/USA)/(2011 USD PPP)
7.5%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1995 1998 2001 2004 2007 2010 2013 2016 2018
Undervalued
Overvalued
0.0
0.4
0.8
1.2
1.6
$0 $200 $400 $600 $800 $1,000 $1,200
PriceLevelRatio
GDP per capita Hundreds
PPP hypothesis
2017 data
Irland
Argentina
Brazil
US

2255 December, 2018
Performance2
Better performance of FX models over longer horizons
 The main theoretical economic models show better performance in forecasting the exchange rate over long
horizons (12 months) than short horizons (3 months).1 Overall, the economic models that consider interest rate
differentials (Brazil vs. United States) and inflation differentials show better performance than the Taylor rule model.
 The uncovered interest rate parity + CDS showed the lowest out-of-sample error for short-term horizons. The
model has 98% of the mean square error of the random walk (RW - MSE) model for forecasting horizons of 3
months.
Model Equation h = 3 months h = 1 year
Uncovered interest rate parity 𝑬𝒕 𝒔 𝒕+𝒉 − 𝒔 𝒕 = 𝜷(𝒊 𝒕+𝒉 − 𝒊∗
𝒕+𝒉) 1.09 0.99
Uncovered interest rate parity + CDS 𝑬𝒕 𝒔 𝒕+𝒉 − 𝒔 𝒕 = 𝜷[𝒊 𝒕+𝒉 − (𝒊∗
𝒕+𝒉
+ ρ)] 0.98 1.08
Inflation model (PPP) 𝑬𝒕 𝒔 𝒕+𝒉 − 𝒔 𝒕 = 𝜷(𝝅 𝒕+𝒉 − 𝝅∗
𝒕+𝒉) 1.23 0.81
Taylor rule model 𝑬𝒕 𝒔 𝒕+𝒉 − 𝒔 𝒕 = 𝜷 𝟎 + 𝜷 𝟏(𝝅 𝒕+𝒉 − 𝝅∗
𝒕+𝒉) + 𝜷 𝟐(𝒚 𝒈𝒂𝒑
𝒕+𝒉 − 𝒚 𝒈𝒂𝒑∗
𝒕+𝒉) 2.23 1.55
Economic model to forecast nominal exchange rate
1 Performance is measured by the ratio of the Mean Square Error (MSE) of the model to the MSE of the random walk model.2 𝑠𝑡 is defined as the BRL/USD exchange rate, 𝑖 𝑡 is the domestic interest rate, 𝑖 𝑡
∗
is the US interest
rate, 𝑦𝑡
𝑔𝑎𝑝
is the Brazilian output gap, 𝑦𝑡
𝑔𝑎𝑝,∗
is the US output gap, 𝜋 𝑡 is the Brazilian inflation rate, 𝜌 is the Brazilian government default risk (CDS), and 𝜋 𝑡
∗
is the US inflation rate. Source: Brazilian Association of Financial and
Capital Market Entities (Anbima), Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse

2265 December, 2018
Economic models suggest stable exchange rate in 2019
 For the short term, the economic models considering the difference between the inflation rates in the USA and
Brazil (inflation model - PPP) and output gap differentials (Taylor Model) point to a depreciation of the BRL/USD
exchange rate. The weighted-average forecast for three months predicts 0.8% depreciation of the BRL/USD rate.
 For one year ahead, the UIRP+CDS and PPP models show depreciation of the BRL against the USD, with the
former predicting depreciation of 0.3% and the latter forecasting 8.0% depreciation. The weighted-average
forecast of the 3 models for 12 months ahead predicts a small depreciation of 2.6% in the BRL/USD rate.
2019 Forecast
appreciate (-) or depreciate (+) in %
Model First quarterly change Annual change
Uncovered interest rate parity -0.1% 0.0%
Uncovered interest rate parity + CDS 0.0% 0.3%
Inflation model (PPP) 2.7% 8.0%
Taylor model 1.4% 0.0%
Economic model to forecast the nominal exchange rate
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse
Weighted by RMSE forecast for BRL/USD 0.8% 2.6%

2275 December, 2018
Electoral uncertainty explains sharp rise in yield curve
 The yield curve showed a significant increase in its long term tenors from June to September 2018, when
10-year rates reached 13.3% p.a. in September. This shift is explained by high uncertainty surrounding the
result of the presidential election.
 After the election result was known, interest rates for all maturities declined substantially to levels close to
those in effect at the start of the year. With the probable start of the monetary tightening cycle and prospects
for approval of important structural reforms throughout the year, the yield curve will likely reduce its slope, as
interest rates for shorter maturities rise and for longer maturities fall.
Minimum1/2/2018
11/30/2018
Maximum
6
7
8
9
10
11
12
13
14
126 252 378 504 630 756 882 1008 1134 1260 1386 1512 1638 1764 1890 2016 2142 2268 2394 2520 2646 2772 2898 3024
Maximum, minimum, first, and last term structure of interest rates in 2018
(%, p.a.)
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Credit Suisse
Business Days

2285 December, 2018
Flattening of yield curve with tightening cycle in 2019
 This spread between the long- and short-term interest rates is the government's opportunity cost to fund in
the long run. Historically, this cost tends to be sensitive to monetary cycles, as short-term interest rates are
highly sensitive to the monetary policy rate: in tightening cycles, short-term interest rates tend to increase,
while in easing cycles they tend to decline.
 As result, the expected normalization of Selic rate in 2019 should pressure the short leg of the slope spread.
Difference between long-term and
short-term yields (%)
Easing cycles
Tightening cycles
FRA 10x1 - FRA 1x1 change between start and end of cycle (pps)
FRA 2x1 - FRA 1x1 change between start and end of cycle (pps)
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
Mar-00 Apr-03 May-06 Jun-09 Jun-12 Jul-15 Aug-18
-2
-1
0
1
2
3
4
5
6
7
8
Jan-17 May-17 Sep-17 Jan-18 Jun-18 Oct-18
-2.1
0.5
5.7
6.0
-20.4
-17.6
-5.4
-3.7
5.2
1.2
-3.3
-1.8
-2.2
-3.4
17.8
11.8
-5.3
-0.9
2.5
3.0
-3.1
0.3
0.4
1.1
5.3
3.4
FRA 10x1 - FRA 1x1
FRA 2x1 - FRA 1x1
FRA 10x1 - FRA 1x1
FRA 2x1 - FRA 1x1

2295 December, 2018
 The slope of the yield curve, calculated as the difference between the long-term and short-term rates,
remained steep in 2018. For example, the difference between 5-year and 1-year rates reached 406 basis
points in September 2018, the highest since 2004. Two factors explain the wide difference: the low historical
level of the monetary policy rate and the high uncertainty regarding the trajectory of fiscal policy.
 However, the differential between long-term and short-term rates was limited to a 1.6 percentage point
change throughout the entire year, the third smallest variation since 2004.
6.0
5.6
3.2
1.8
4.4
3.2
2.9
1.7
1.3
1.5
3.1
2.5
3.3
3.6
1.6
2004 2006 2008 2010 2012 2014 2016 2018
7.0
9.6
6
8
10
12
14
16
18
20
22
24
26
2004 2006 2008 2010 2012 2014 2016 2018
1y Treasury Yield
5y Treasury Yield
Yield curve remained steep throughout 2018
One- and five-year treasury yields
(%, annual rate)
Difference between the maximum slope 5y-1y and the
minimum slope 5y-1y (%, annual rate)

2305 December, 2018
Long-term treasury yields less sensitive to monetary cycles
 The long-term interest rate is less sensitive to monetary cycles and more sensitive to the fundamentals of the
economy, such as the natural interest rate, the path of the gross debt, potential GDP growth, and long-term inflation.
 The tightening cycle to take place in 2019 will probably not produce meaningful changes in the yield of the
10-year treasury bond. On the other hand, approval of reforms that improve the fundamentals of the economy
could substantially change the long-term interest rate.
Ten-year treasury yield
(%)
0
10
20
30
40
50
60
70
80
Mar-00 Apr-03 May-06 Jun-09 Jun-12 Jul-15 Aug-18
Change in yields between the
start and end of cycle (pps)
-0.4
8.7 -36.1 -6.1 1.2 -2.3 -1.7
31.5 -6.1 -0.62 -1.5 -2.4 -0.6
9
10
11
12
13
14
Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18
Easing cycles
Tightening cycles

2315 December, 2018
Four approaches to calculating the real interest rate
 We used four different methods to calculate the real interest rate:
In this case, the real interest
rate is the interest on the
inflation-linked government
bond (NTN-B).
The ex ante real interest rate
is the nominal interest rate for
360 days (in the swap DI
versus PRE contract) minus
the expected rate of inflation
one year ahead (obtained in
Market Readout survey).
The real interest rate is a
composition of the
international real interest rate
plus the Brazilian risk
premiums for exchange rate
and default.
The ex post real interest rate
is the monetary policy rate
(Selic) minus inflation over
the past 12 months.
Ex ante approach Ex post approach
Local government bonds
approach
International arbitrage
approach

2325 December, 2018
Real interest rates increased in 2018
 All measures of real interest rates increased in 2018, except for the ex post real interest rate. The real interest
rate estimated using the international arbitrage approach increased to 6.3% in October, while local
government bond rates increased to 5.1% and ex ante rates to 3.2% in the month. The higher interest rates
were explained mainly by the increase in the federal funds rates and domestic risk aversion.
 On the other hand, the ex post real interest rate remained on a downward trend due to the higher inflation,
reaching its lowest level since 2012 in October 2018 (1.9%). The prospects of higher foreign interest rates
should pressure local domestic rates, particularly the ex post real rate.
Source: Bloomberg, Brazilian Association of Financial and Capital Market Entities (Anbima), US Federal Reserve, IpeaData, Central Bank of Brazil, B3, Brazilian Treasury Secretariat, Credit Suisse
0
2
4
6
8
10
12
14
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Real interest rate (%)
Local government real rate
Ex post
Ex ante
International arbitrage
6.31
5.09
3.21
1.86

2335 December, 2018
Central bank will need to normalize nominal interest rate
 The low level of the ex ante real interest rate
reflects the lowest nominal monetary policy rate
(Selic) ever. The central bank has been keeping the
Selic interest rate at its lowest level in order to
stimulate domestic demand.
 With the reduction of the slackness of the
economy, demand pressures on inflation would
leave less room for the central bank to keep its
monetary policy rate at an expansionist level. As a
result, we expect the central bank to start a
tightening cycle in 3Q19 by increasing the Selic
rate to the natural nominal interest rate (natural real
interest rate plus inflation target).
 We estimate the natural interest rate of the
Brazilian economy using a combination of two
statistical filters with eight real interest rates.1
Seven ways to estimate the natural interest rate
( 𝑟𝑡 = 𝑟𝑡
∗ + 𝛾𝑡 + 𝜏𝑡)
International real
interest rate (𝑟𝑡∗)
Country
risk (𝛾𝑡)
FX risk
(𝜏𝑡)
𝒓t*=𝒓 𝟏,𝒕
𝑭𝒆𝒅 Fed Funds EMBI+
One-year Brazil
dollar bond rate
(FRC)
𝒓t*= 𝒓 𝟐,𝒕
𝑳𝒊𝒃𝒐𝒓 Libor 1y or overnight EMBI+
One-year Brazil
dollar bond rate
(FRC)
𝒓t*= 𝒓 𝟑,𝒕
𝑻𝑰𝑷𝑺 Treasury Inflation-Protected
Securities (TIPS)
Five-year
CDS
Five-year Brazil dollar
bond rate (FRC)
Local interest rate embedded in public bonds
𝒓 𝒕
∗
= 𝒓 𝟓, 𝒕𝑵𝑻𝑵𝑩
𝟓 𝒚𝒆𝒂𝒓𝒔 Five-year real interest rate implied in five-year NTN-B yield
curve
𝒓 𝑡
∗
= 𝒓 𝟓, 𝒕𝑵𝑻𝑵𝑩
𝟐𝟎𝟒𝟓 Real interest rate embedded in 2045 NTN-B
Ex – Post approach
𝒓 𝑡
∗
= 𝒊 𝑺𝒆𝒍𝒊𝒄 − 𝛑 Selic interest rate minus last 12 months inflation
Ex – Ante approach
𝒓 𝑡
∗
= 𝒊 𝑷𝑹𝑬𝒙𝑫𝑰 − 𝐄 𝛑
The interest rate for 360 days (extracted from DIxPRE swap)
minus the expected rate of inflation one-year ahead (obtained
in the Market Readout survey).
1We used the Hodrick-Prescott (HP) and Christiano-Fitzgerald (CF) filters.
Source: Credit Suisse.

2345 December, 2018
Natural real interest rate of 5.3% in 2018
 The natural real interest calculated by both methods has increased slightly in 2018. The median of all
estimates for the natural real interest rates increased from 4.5% in December 2017 to 5.3% in October
2018.
 Of the 16 estimates of the natural interest rate, 11 were higher than 4.5% and 7 higher than 5.5%. The
highest natural interest rates were those estimated using foreign interest rates.
 On the one hand, the expected increase in foreign interest rates should pressure the natural real interest rates
in Brazil in the coming quarters. On the other hand, advancement of structural reforms in 2019 would reduce
the risk premiums attributed to the domestic economy.
3
4
5
6
7
8
9
10
11
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Christiano-Fitzgerald
Hodrick-Prescott
Median estimates of natural interest rate using Christiano-Fitzgerald and Hodrick-Prescott filters (%, annual)
5.6
5.0

2355 December, 2018
Exchange rate premium pressured natural real rates in 2018
 A breakdown of the components used in the international approach to calculate the natural interest rate reinforces
the view that the exchange rate premium was the main factor pressuring natural real rates in 2018. All components
used in the methodology contributed to the increase in the natural interest rate in 2018: (i) exchange rate premium
increased by 55bps; (ii) Fed rates rose by 44bps; and (iii) default premium rose by 18bps.
 In 2019, the Fed Funds is expected to keep increasing due to the tightening cycle in developed markets, but
the exchange rate and default premiums should moderate with the approval of structural reforms.
5.3
3
4
5
6
7
8
9
10
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Oct-18 5
9
18
44
29
41
18
9
20
31
35
58
43
46
58
44
0 1
7
20 21
29
35 35
38
55
0
10
20
30
40
50
60
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
Natural interest rate, EMBI, Fed funds rates, and FRC
(%, pps, annual and semiannual change)
2018 cumulative change in EMBI, Fed funds and FRC (bps)
Fed Funds Rate
Brazil Embi
1y Exchange Coupon (FRC)
Brazil EMBI Fed Funds Rate
1y Exchange Coupon (FRC) Natural Rate (RHS)

2365 December, 2018
Ibovespa posted high return in the period from 2015 to 2018
 Investments in public securities have become less profitable in the past 20 years. The average yield for 5-year
notes was 30% from 1998 to 2004 and 12% from 2015 to 2018. This movement resulted from
improvements in the management of fiscal and monetary policies since 1998, for example with the
implementation of the Fiscal Responsibility Act, inflation targeting, and the cap on spending. The reduction of
the external debt and increase in reserves also contributed to this scenario.
 With the expectation of implementation of economic measures favorable to long-term growth as of 2016,
stocks rose sharply and were the best performers of all assets analyzed from 2015 to 2018. Approval of
structural reforms and maintenance of pro-growth economic policies will likely maintain the prospects for high
returns on this class of asset over the next few years.
-10%
0.1%
-9%
12%
7%
15%
25%
12% 11%
30%
12% 12%
31%
13% 12%
-35%
-4%
1%
1998-2004 2005-2014 2015-2018
BRL Ibovespa 1y Treasury Yield 5y Treasury Yield 10y Treasury Yield CDS
Performance of main asset classes in Brazil1
(average annual rate, %)
1For the Treasury Yield performance was used the average of treasury interest rate for the period.
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Bloomberg, Credit Suisse

2375 December, 2018
Sharp increase in Ibovespa, driven by domestic factors
 The increase in the Ibovespa in 2018 was driven by internal factors1. The index explained by internal factors
saw a strong increase in October, reflecting a positive market outlook for the next few years, after the 2018
electoral process. The Ibovespa driven by only domestic factors was at 96952 points on November 30, much
higher than the 78401 points on January 1.
 Declines in foreign stock markets and other external factors contributed negatively to the performance of the
Ibovespa in 2018. The index with the effects of only external factors was at 74690 points on November 30.
70,000
75,000
80,000
85,000
90,000
95,000
100,000
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18
Ibovespa Index
Internal Factors
External Factors
Dynamics of Ibovespa explained by internal and external factors
(thousands of points)
1 The Ibovespa index is measured in BRL. To break down the exchange rate into external and internal factors, we projected the weekly changes in the Ibovespa using 66 stock market indexes of developed and emerging
countries in the Ridge regression model. The external factor is calculated as the forecast model and the domestic factor as the residual of the regression.
Source: Bloomberg, Credit Suisse

2385 December, 2018
Most stock markets performed poorly in 2018
 Through November 2018, only 28.8% of 70 stock markets had positive returns in local currency terms in the
year. As the USD rose sharply against other currencies, stock market returns in USD were even worse: only
15.7% of the 70 markets posted positive returns in 2018 in USD terms.
 The performance of stock markets in the year was the third lowest since 2001. The Ibovespa increased 13%
in BRL terms in the year but decreased 5.6% in USD terms.
Global stock market indexes in 2018
(2-Jan-2018 = 100; in LCU terms)
37.1
44.3
94.3
94.3
92.9
85.7
81.4
1.4
88.6
75.7
18.6
82.9
77.1
70.0
41.4
70.0
90.0
28.8
31.4
44.3
94.3
90.0
90.0
91.4
1.4
85.7
74.3
14.3
80.0
72.9
37.1
24.3
61.4
91.4
15.7
LCU USD
Percentage of stock market indexes with positive annual
results (%)
2002 2004 2006 2008 2010 2012 2014 2016 2018
SPX Index
IBOV Index
60
70
80
90
100
110
120
130
140

2395 December, 2018
Relative stability of P/E in 2019
 The ratio of the price of a share to the expected earnings (P/E) of the Brazilian stock exchange was relatively
stable in 2018, with two different moments: a reduction in P/E in the pre-election period and a recovery in the
last few months of the year.
 From a historical perspective, the P/E is close to its historical average but at a level still low compared to the
peaks of 2016 and 2017, when the prospects for the approval of reforms were favorable. The progress of the
agenda of reforms and privatizations in Congress and the more significant growth of the economy in 2019 will
likely boost the expectations of higher earnings and returns on the stock exchange.
5
7
9
11
13
15
17
19
21
5
6
7
8
9
10
11
12
13
14
2008 2010 2012 2014 2016 2018
P/E for Ibovespa(1) (%)P/E of most important stock markets of emerging
countries1 (%, by country)
1Twelve-month forward earnings. Source: Bloomberg, Credit Suisse
India
China
Mexico
Brazil
Russia

2405 December, 2018
High volatility of Brazilian assets in 2018
 Within the class of assets consisting of currencies, stocks, and public bonds, Brazilian assets performed poorly
in 2018 compared with other emerging and developed economies.
 The high volatility of prices owing to the presidential election in 2018 led to an even worse return on Brazilian
assets per risk unit.
-40
-30
-20
-10
0
10
20
30
40
0 5 10 15 20 25 30 35
Return
Volatility
Return vs. volatility on investments in currencies, stocks, and public bonds in 2018 (%, year-to-date)1
1Were used in this exercise all assets described previously.
Brazil 10y Treasury Yield
Ibovespa
BRL/USD

2415 December, 2018
Stock market to benefit from positive growth outlook
 Our base-case scenario is compatible with the following:
Despite the more positive performance of the
domestic stock exchange compared with
other classes of assets in recent years,
current valuations are not expensive from a
historical perspective. Furthermore, the
acceleration of economic activity combined
with a more positive outlook for long-term
growth as a result of implementation of a
market-friendly agenda (e.g., privatizations
and microeconomic reforms) should increase
the market's expectations of both GDP
growth and growth in profits in Brazil in the
coming years.
The likely normalization of monetary policy in
the end of 2019 as a result of the higher
inflation, resumption of economic activity, low
differential of domestic and foreign interest
rate, and the lower inflation targets for the
coming years, and the more favorable
prospects for implementation of the fiscal
agenda suggest that the yield curve should
flatten from the current levels.
The equilibrium models for exchange rate
show limited room for strong appreciation of
the BRL in 2019. On the domestic front,
approval of social security reform and
implementation of a more liberal economic
agenda should contribute to appreciation of
the BRL. However, the prospects for
continuation of the monetary tightening cycle
in the USA and of high risk aversion in global
financial markets should limit the short-term
capital inflows into the domestic market.
Fixed income Exchange rate Equity

2445 December, 2018
Brazil in numbers
Economic activity
(1) Average rate, measured by the National Household Sample Survey.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F
Economic Activity
Nominal GDP (BRL bn) 2,720 3,110 3,335 3,885 4,375 4,815 5,330 5,780 5,996 6,267 6,554 6,998 7,525 8,076
Nominal GDP (USD bn) 1,395 1,695 1,675 2,210 2,615 2,465 2,470 2,455 1,798 1,799 2,054 1,912 2,034 2,219
Real GDP growth (%) 6.1 5.1 -0.1 7.5 4.0 1.9 3.0 0.5 -3.5 -3.3 1.1 1.4 3.0 2.5
Supply
Agriculture (%) 3.2 5.8 -3.7 6.7 5.6 -3.1 8.4 2.8 3.3 -5.2 12.5 -0.1 0.9 2.0
Industry (%) 6.2 4.1 -4.7 10.2 4.1 -0.7 2.2 -1.5 -5.8 -4.6 -0.5 1.3 3.7 3.2
Services (%) 5.8 4.8 2.1 5.8 3.5 2.9 2.8 1.0 -2.7 -2.3 0.5 1.5 2.7 2.2
Demand
Household consumption (%) 6.4 6.5 4.5 6.2 4.8 3.5 3.5 2.3 -3.2 -3.9 1.4 2.0 2.9 2.6
Government consumption (%) 4.1 2.0 2.9 3.9 2.2 2.3 1.5 0.8 -1.4 0.2 -0.9 0.3 0.0 0.0
Gross fixed capital formation (%) 12.0 12.3 -2.1 17.9 6.8 0.8 5.8 -4.2 -13.9 -12.1 -2.5 5.0 9.3 5.7
Exports (%) 6.2 0.4 -9.2 11.7 4.8 0.7 1.8 -1.6 6.8 0.9 5.2 6.0 7.5 3.5
Imports (%) 19.6 17.0 -7.6 33.6 9.4 1.1 6.7 -2.3 -14.2 -10.3 5.0 9.8 7.0 5.1
Unemployment - IBGE (% of EAP)(1)
- - - - - 7.4 7.1 6.8 8.5 11.5 12.7 12.1 11.3 10.6
Habitual earnings (%) - - - - - - 3.3 1.1 -0.3 -1.9 2.3 0.7 1.7 2.1
Working Population (%) - - - - - - 1.4 1.5 0.0 -1.9 0.3 1.5 2.4 1.9
Wage bill (%) - - - - - - 4.7 2.9 -0.1 -3.2 2.6 2.2 4.1 4.0
Banking credit (% of GDP) 34.7 39.7 42.6 44.1 46.5 49.2 50.9 52.2 53.7 49.6 47.1 46.6 47.2 47.8
Unmarked lending (% of GDP) 23.1 26.8 27.1 27.2 28.1 29.0 28.3 27.3 27.3 24.9 24.2 25.1 26.6 27.5
Earmarked lending (% of GDP) 11.6 12.9 15.5 16.9 18.4 20.2 22.6 24.9 26.4 24.8 23.0 21.5 20.7 20.3
Source: Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), National Treasury, Credit Suisse

2455 December, 2018
Brazil in numbers
Inflation, fiscal and monetary policies
(2) As of 2009, Petrobras was excluded from the fiscal indicators of the public sector
(3) Amounts refer to new methodology of the Central Bank
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F
Inflation, FX and interest rate
IPCA - IBGE (%) 4.5 5.9 4.3 5.9 6.5 5.8 5.9 6.4 10.7 6.3 2.9 3.7 4.2 4.2
Food at home (%) 12.4 10.7 0.9 10.7 5.4 10.0 7.6 7.1 12.9 9.4 -4.9 4.2 4.3 4.0
Industrial goods (%) 2.1 4.0 2.9 3.5 3.6 1.8 5.2 4.3 6.2 4.8 1.0 1.8 3.2 3.8
Services (%) 5.2 6.4 6.4 7.6 9.0 8.7 8.7 8.3 8.1 6.5 4.5 3.1 4.2 4.4
Administered prices (%) 1.5 3.5 4.5 3.2 5.6 3.7 1.5 5.3 18.1 5.5 8.0 6.2 5.2 4.5
End of period FX (BRL/USD) 1.77 2.34 1.74 1.67 1.88 2.04 2.34 2.66 3.90 3.19 3.31 3.80 3.60 3.68
Average FX (BRL/USD) 1.95 1.84 2.00 1.76 1.67 1.95 2.16 2.35 3.34 3.48 3.19 3.65 3.70 3.64
End-of-period target Selic interest rate(%) 11.25 13.75 8.75 10.75 11.00 7.25 10.00 11.75 14.25 13.75 7.00 6.50 8.00 9.00
Average Selic basic interest rate (%) 11.98 12.38 10.01 9.82 11.67 8.53 8.19 10.89 13.63 14.10 10.16 6.56 6.83 8.88
Fiscal Policy(2)
Nominal balance (% of GDP) -2.7 -2.0 -3.2 -3.2 -2.5 -2.3 -3.0 -6.0 -10.2 -9.0 -7.8 -7.0 -6.5 -6.6
Primary balance (% of GDP) 3.2 3.3 1.9 1.8 2.9 2.2 1.7 -0.6 -1.9 -2.5 -1.7 -1.7 -1.0 -0.8
Central government revenues (% of GDP) 22.7 23.0 22.1 23.6 22.6 22.0 22.1 21.1 20.8 21.0 21.1 21.3 21.6 20.9
Primary expenditures of central gov’t (% of GDP) 16.9 16.2 17.4 18.2 16.8 16.9 17.3 18.1 19.4 20.0 19.5 19.6 19.1 18.2
Gross debt of overall government (% of GDP)(3)
56.7 56.0 59.2 51.8 51.3 53.7 51.5 56.3 65.5 70.0 74.0 76.3 76.9 78.2
Net debt of the public sector(% of GDP) 44.5 37.6 40.9 38.0 34.5 32.2 30.5 32.6 35.6 46.2 51.6 54.1 57.1 59.6

2465 December, 2018
Brazil in numbers
External sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F
Balance of Payments
Current account balance (USD bn) 0.4 -30.6 -26.3 -79.0 -76.3 -83.8 -79.8 -101.4 -54.1 -23.2 -5.5 -10.9 -25.3 -36.7
Current account balance (% of GDP) 0.0 -1.8 -1.6 -3.6 -2.9 -3.4 -3.2 -4.1 -3.0 -1.3 -0.3 -0.6 -1.2 -1.7
Trade balance (USD bn) 38.5 23.8 25.0 18.5 27.6 17.4 0.4 -6.6 17.7 45.0 64.0 57.7 54.1 49.1
Goods exported (USD bn) 160.7 198.4 153.6 201.3 255.5 242.3 241.6 224.1 190.1 184.5 217.2 238.4 256.0 267.0
Goods imported (USD bn) 122.2 174.6 128.7 182.8 227.9 224.9 241.2 230.7 172.4 139.4 153.2 180.7 201.9 217.9
Services and income (USD bn) -42.1 -58.7 -54.6 -100.4 -106.9 -104.1 -83.9 -97.5 -74.5 -71.1 -72.1 -71.2 -82.0 -88.4
Remittances of profits and dividends (USDbn) -22.4 -33.9 -25.2 -58.8 -55.8 -47.8 -18.7 -28.4 -15.5 -18.9 -15.8 -17.5 -22.5 -24.5
International travel and equipment rental (USDbn) -9.0 -13.0 -15.0 -24.4 -31.4 -34.4 -37.6 -41.4 -33.0 -28.0 -30.0 -28.0 -31.8 -34.5
Net interest (USD bn) -7.0 -8.5 -10.4 -12.0 -14.4 -16.6 -19.3 -21.4 -22.5 -22.1 -22.8 -18.0 -19.0 -19.5
Inward direct investment (USD bn) 44.6 50.7 31.5 88.5 101.2 86.6 69.7 97.2 74.7 77.8 70.7 83.0 90.0 90.0
Foreign portfolio investments (USD bn) 47.0 9.5 49.0 55.2 12.4 17.0 42.1 38.6 26.5 -15.6 0.6 -0.7 8.0 24.0
Equities (USD bn) 26.2 -7.6 37.1 37.7 7.2 5.6 11.1 11.5 9.8 11.0 5.7 -2.1 12.0 15.0
Fixed Income (USD) 20.8 17.1 11.9 17.5 5.3 11.4 31.0 27.1 16.7 -26.7 -5.1 1.4 -4.0 9.0
Medium and long-term disbursements (USD bn) -2.3 8.8 6.8 30.1 47.7 18.7 2.5 21.6 -3.6 -15.7 -5.7 -6.3 -2.4 -10.0
Disbursements (USD bn) 34.4 29.4 33.1 60.6 82.1 56.3 60.5 71.2 72.9 55.2 58.7 60.6 62.5 61.0
Amortizations (USD bn) -36.7 -20.6 -26.3 -30.6 -34.5 -37.6 -58.0 -49.6 -76.5 -70.9 -64.3 -66.9 -64.9 -71.0
External debt and international reserves
External debt (USD bn) 241 263 278 352 416 455 487 561 540 549 545 573 588 589
Public (USD bn) 91 89 99 111 110 121 120 136 128 128 133 133 133 133
Private (USD bn) 149 174 179 241 306 334 367 425 413 421 412 440 455 456
External debt (% of GDP) 17.2 15.5 16.6 15.9 15.9 18.5 19.7 22.8 30.1 30.5 26.5 30.0 28.9 26.6
External debt / Goods exported (%) 150 133 181 175 163 188 202 250 284 297 251 240 230 221
Gross international reserves (USD bn) 180 207 239 289 352 379 376 374 369 372 382 387 392 398
Gross international reserves / External debt (%) 75 79 86 82 85 83 77 67 68 68 70 68 67 68

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Credit Suisse Analysis Brasil 2019-2020

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