Transcript of Conference Call – Guido Mantega, Brazil Ministry of Finance

Operator: Good morning. The Brazil 4Q 2010 GDP Results Conference Call will now begin.

Min. Mantega: Good morning everyone. In 2010, Brazil recorded a 7.5% growth, which confirmed our predictions. It is the biggest growth we’ve seen in GDP since 1986.

This growth really just gives continuity to a cycle that began in 2007 when we had a growth of 6.1% in GDP; in 2008 with 5.1%; in 2009 with 0.6%, however, that was the year of the financial crisis; and in 2010 with 7.5%.

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This is the result of growth in the industry sector, which grew 10.1% in 2010, agriculture at 6.5% and services, which grew 5.4%. The biggest outstanding result that we saw was investment in fixed capital gross formation, in which we recorded a growth of 21.8% in 2010.

The growth in expenses for families was 7.0%, and for the government, it was 3.3%. This shows that the growth of the Brazilian economy in 2010 was quality growth, as investments grew approximately three times the GDP and also three times the consumption of families.

From an international comparison perspective, Brazil’s economy is the third largest in terms of growth among the largest economies in the world and the fifth largest among G20 countries. Despite this growth being quite high, 7.5%, the Brazilian economy actually did face a bit of a downturn, because in the fourth quarter of last year, it grew 0.7%.

Based on this perspective, the Brazilian economy is not very heated and will start the year in 2011 with an average growth rate of around 4.5-5.0%. In the last quarter of 2010, government expenses had a negative result of 0.3%, which shows that removing government incentives has already begun to have its effect. The other variable that is also improving is a better balance between exports and imports.

Throughout 2010, we recorded a growth in imports of 36.2%, while exports grew 11.5%. However, in the fourth quarter, we recorded a growth in exports of 3.6% and a growth in imports of 3.9%, which points to a more balanced growth trend between exports and imports.

This reflects the slowing down of the Brazilian economy, causing a decrease in import growth, as well as an improvement of the international market that is now absorbing more Brazilian exports.

With the fiscal adjustments that were just made reducing government expenses, as well as the credit reduction measures announced by the Central Bank yesterday that increased the basic Brazilian interest rate by half a percent, we are heading towards moderate growth of the Brazilian economy in 2011 – an economy that is more balanced to ensure that no pressures are put on the inflation rate and that is sustainable in the long run.

Moderator:Thank you Minister Mantega. We will now open the call for Q&A. Operator, go ahead.

Operator: Thank you, our first question comes from the line of Jeff Fick with Dow Jones Newswires.  Please go ahead.

Jeff Fick: Good morning Minister Mantega. Thank you for joining us today. I’d like to ask whether you’re concerned that the recent interest rate increases could have too great of an impact on economic growth going forward in 2011. In other words, would the Minister prefer slightly higher inflation in return for stronger economic growth, or does inflation have to be clamped down at any cost to the broader economy?

Min. Mantega:The monetary restriction measures for 2011, which actually began in 2010, will not stop the economy from growing, but what they will do is make the economy grow at a more moderate pace to ensure that the demand is not as high as it was before. Credit this year is expected to grow 12.0 to 13.0%, along with an expansion of the capital market, which will allow Brazilian companies to have the resources needed to make their own investments. In this way, we ensure a decrease in the inflation rate, and at the same time, a continuation of sustainable economic growth.

Operator: And our next question comes from the line of Joe Leahy with Financial Times.

Joe Leahy:Yes, Minister. I wanted to ask how much of last year’s record economic growth was due to the monetary stimulus factor. In other words, was it really a one-off?

Min. Mantega: The growth in 2010 was the result of some monetary stimulus, but mainly it was the result of fiscal stimulus that was actually implemented in 2009.

The Central Bank stimulus was moderated and implemented in 2009 – primarily the reduction of the compulsory deposit that is high in Brazil and reduction in interest rates – and in 2010, there was no monetary stimulus. The Central Bank increased the compulsory deposit and took other restrictive monetary measures.

Perhaps the biggest monetary stimulus of 2010 was the BNDES credit, which is the Brazilian Social and Economic Development Bank, which reached around R$ 150 billion, fully directed for investments. In 2011, we are reducing the resources for BNDES, to stimulate the private sector to finance investments in Brazil.

As far as fiscal stimulus is concerned, it was reduced throughout 2010 and basically eliminated in the beginning of 2011 through fiscal consolidation – such as the R$ 50 billion cut in our budget that we announced very recently.

Operator: And our next question comes from the line of Brian Ellsworth with Reuters.

Brian Ellsworth:Hello, Minister. Is the government sticking to its forecast for GDP growth this year of around 5.5%? A lot of economists would say that is looking pretty optimistic given the fiscal cuts and the interest rate rise.

Min. Mantega:I believe that despite the cuts in public sector expenses, there will still be demand from the private sector. For example, family consumption will continue to rise in 2011 and this will lead to economic growth. We’re talking about a growth in family consumption of 7.0% in 2010, which we forecast will probably be the same in 2011 as jobs and wages continue to expand and demand remains strong. 

Investments will continue to grow in 2011, but not at the same level as 2010, when we were above 20.0%. However, we want to guarantee funding to ensure that investments grow over 10.0% in 2011. And thus, we believe that with these conditions, the Brazilian economy will have a growth rate of 4.5% to 5.0% in 2011.

Operator: And our next question does come from the line of Mimi Whitefield with The Miami Herald.

Mimi Whitefield:What are the main financial topics that are expected to be discussed when President Obama visits in a few weeks?

Min. Mantega:I’m not sure if the agenda with President Obama will cover financial issues, because as far as the financial agenda is concerned, I have been talking directly to the U.S. Secretary of Treasury, Mr. Tim Geithner, who visited Brazil a few weeks ago. The agenda between President Dilma and President Obama will cover cooperation between the countries, common initiatives for sustainable development and issues related to alternative energy and the environment, as a means of building a closer commercial relationship between the two countries.

Operator: And our last question comes from the line of Martha Stickings with Business Monitor International.

Martha Stickings:Good morning, Minister. Obviously over the last few weeks we’ve seen oil prices really shoot up and I was wondering if you could speak to us about what you think the impact of a higher oil price might be on the Brazilian economy and, specifically, growth in 2011?

Min. Mantega:The increase in oil price shouldn’t really have any direct impact on the Brazilian economy because we are self-sufficient in relation to oil and we only import a few oil product derivatives. However, if these prices continue to rise, particularly the Brent barrel of oil, this could mean that Europe and the United States will face some slowdown in their economic growth and this could impact trade with Brazil. We might also see more pressure on inflation rates, which again could impact the Brazilian indexes.

On the other hand, Brazilian oil reserves will become more valuable, which in the future, might prove to be beneficial for Brazil.

Thank you very much.

Moderator:That concludes the Q&A portion of our call. Once again, we thank Minister Mantega for participating in this event. 

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