Brazil Macro | February 2021 - FISCAL POLICY ÍTALO FRANCA +55 11 3553-5235

Brazil Macro | February 2021
 FISCAL POLICY

 ÍTALO FRANCA
 italo.franca@santander.com.br
 +55 11 3553-5235

INDEX
INDEX

1. Brief Overview
2. Fiscal on a tightrope & Political aspects
3. Our Fiscal Scenario
4. Fiscal background and risks

 2

Brief Overview
 01

Summary
• Fiscal accounts on a tightrope with the possible reintroduction of the emergency aid.
 Opposite forces to find a balance to not affect the debt sustainability.

• We believe that income transfers will be temporarily resumed in 2021. We explore
 the possible scenarios of the Emergency Aid resumption and ‘waivers’ to fiscal rules
 and counterparty fiscal measures.

• We present our base fiscal Scenario. We still estimate a primary deficit close to 3%
 of GDP in 2021 and project gross debt stability for this year, owing to another
 anticipated return of Treasury funding by BNDES.

• Finally, we explore risks (especially related to debt management) that the Treasury
 will face during the next years. The debt is at a higher level and with a shorter
 maturity, and the Selic rate is set to be increased.

 4

Fiscal accounts on a tightrope with the possible reintroduction of emergency aid
 o An important debate will be the resumption of emergency aid, in our view. We expect that this reintroduction (due to the pandemic) will
 be at least partially balanced (not at the same time) by the approval of fiscal reforms – with possible headwinds in the political debate.

This year we believe Brazil will be walking a tightrope to avoid a further deterioration Gross Debt (% GDP) vs. S&P Rating
in the fiscal consolidation outlook. Although we expect headwinds in the fiscal
 100
debate, the most important aspect will be maintaining debt sustainability, which 92.1
 90 89.3
suffered a significant deterioration in 2020. Any change in this outlook could cause
financial conditions to deteriorate, in our view. 80
 B
 70 B+ B+ Gross Debt
We believe that income transfers will be temporarily resumed in 2021, 68.9
 B+
 60
conditional on the deterioration of the pandemic. We expect this to be done by BB- BB- BB-
 55.5 BB-
extraordinary credit (not included in the spending cap). We project a total amount of 50 BB BB
 BB+ BB+ Rating
BRL30 billion for four months (updated from BRL 25 billion), reaching ~30 million 40 (inverted)
 BBB- BBB
beneficiaries not included in Bolsa Familia. We believe this extension will have as a 30
 27.0 Investment Grade
 2008-2015
counterpart (not at the same time) the approval of fiscal trigger measures to offset 20

 2022e
 1994

 1996

 1998

 2000

 2002

 2004

 2006

 2008

 2010

 2012

 2014

 2016

 2018

 2020
the increase in expenses and avoid affecting the debt trajectory – simultaneously
offsetting the temporary breach in the spending cap, with the possibility of complying Sources: S&P, BCB, Santander.

with the rule by 2024. We believe the government will comply with the spending cap
rule in 2021 (with severe discipline) and in 2022.

 5

Fiscal on a tightrope &
Political aspects 02

Fiscal Scenario – Conditioned in the pandemic
 o Under our baseline scenario, the country would not achieve a 60% herd immunity threshold in 2021.
 o From 2Q21 onward, as the massive vaccination campaign advances, we expect mobility to return to a pace of sequential increases.

 Google Mobility (Jan/20=0) – 28dma Brazil’s Vaccination Plan - 2021

60 100% Population vaccinated (National Plan)
 90% Population vaccinated (National Plan -20%)
50 Population immune (either by infection or vaccine)
 80%
 3Q20=30 70% 73%
40
 1Q21=25 60% 59%
30 2Q21=20
 50% 48%
 3Q21=15 40%
20
 30%
10 20%
 4Q20=18
 4Q21=10 10%
 0
 0%
 19-Jun-20

 03-Aug-20

 30-Jan-21

 14-Jun-21

 12-Sep-21
 05-May-20

 30-Apr-21
 17-Sep-20

 29-Jul-21
 01-Nov-20
 21-Mar-20

 16-Mar-21

 27-Oct-21
 16-Dec-20

 11-Dec-21

 Jun-21

 Dec-21
 May-21
 Jan-21

 Feb-21

 Apr-21

 Aug-21

 Sep-21
 Mar-21

 Oct-21

 Nov-21
 Jul-21
Sources: Google, Santander. Sources: Ministry of Health, Santander.

 7

Fiscal on a tightrope – opposite forces to find a balance
o Measures to mitigate the pandemic effects without fiscal compensations will affect the market.

 Relapse of the Pandemic
 Reintroduction of Emergency Aid
 Popularity Level
 Public Investment
 Weak Employment Conditions
 Regional Issues/Pressures

 Fiscal situation

 Spending cap
 Financial Conditions
 Government Financial Needs
 Rating Agencies
 Centrist Congress
 Economic Team 8

Fiscal on a tightrope – Popularity x Financial conditions
o The relationship between unemployment and the government’s approval ratings should be carefully followed.
o On the other side, the market’s reaction to fiscal measures without compensation is an opposite force

 Unemployment rate and government popularity Market Conditions – The opposite force
100% 6% 6.50 BRL Avg 400
 7% BRL Min
 6.00 350
80% 8% BRL Max
 5.50 Uncertainty Index* (right) 300
 9%
60%
 10% 5.00 250
 11% 4.50 200
40% PEC Emergencial |
 12% Restrict Precatórios
 4.00 (Sep-20) 150
20% Government approval rate (LHS, 3MMA) 13%
 3.50 Renda Brasil 100
 Unemployment rate (RHS, inverted) 14% (Jun-20)

 0% 15% 3.00 50

 Jan-21
 May-19

 May-20
 Sep-19

 Sep-20
 Jan-19

 Jan-20
 Mar-19

 Nov-19

 Mar-20

 Nov-20
 Jul-19

 Jul-20
 Dec-10
 Apr-02

 Apr-15
 Mar-01

 Mar-14
 Jun-04

 Feb-13

 Jun-17
 Aug-06
 Sep-07

 Aug-19
 Sep-20
 May-03

 Jan-12

 May-16
 Nov-09
 Jul-05

 Jul-18
 Oct-08

Sources: IBGE, IBOPE, Poder360, CNT and Santander. Sources: Economic Policy Uncertainty, Bloomberg.

 Jun-20: started the discussion of creating a new permanent welfare program (Renda Brasil)
 Sep-20: Funding Renda Brasil by limiting payments on judicial debts (Precatórios)

 * Economic Policy Uncertainty Index – following the methods in "Measuring Economic Policy Uncertainty" by Baker, Bloom and Davis. 9
 It uses newspaper text archives since 1991 to calculate an uncertainty index over the news.
 They multiplicatively rescale the resulting series to a mean of 100 from Jan-91 to Dec-11.

Fiscal Scenario – Resumption of Emergency Aid (extra-cap stipend)
 o We now see the resumption of the emergency aid, in much smaller size, and partially offset by the approval of fiscal reforms.
 o It will include 30 million beneficiaries from March to June, until the vaccination process advances in the risk groups.
 o It will depend on the Executive power to reintroduce the Aid, and should be compensated by the approval of reforms

 Resumption of Emergency Aid Cadastro Único – Gov. Database
 People Registered in Cadastro Único - Monthly Income Per Capita Intervals
 Expenses in BRL billion - One month As of December 2020
 39.6 ~14 mi families
 Monthly Benefit (BRL)
 (most part included in Bolsa Família)
 150 200 250 300 400 500
 60 9.0 12.0 15.0 18.0 24.0 30.0
Millions of People ***
 ***

 People in the Emergency Aid resumption?
 16.9
 57 8.6 11.4 14.3 **
 17.1 22.8 28.5 10.3
 8.5
 50 7.5 10.0 12.5 15.0 20.0 25.0
 45 6.8 9.0 11.3 13.5 18.0 22.5
 BRL0.0 to BRL89.0 BRL89.01 to BRL178.01 to Above
 30 4.5 6.0** 
 7.5 9.0 12.0 15.0 Extreme Poverty BRL178.0 1/2 Min Wage 1/2 Min Wage
 Poverty Situation
 25 3.8 5.0 6.3 7.5 10.0 12.5 Monthly Income Per Capita

 Sources: The National Treasury, Santander. Sources: Min da Cidadania, Santander.
 * Amount payed in Dec-20 to 56.8 mi people (the peak was 68.2 mi in Aug-20) These intervals could be updated in 2021, last time was in 2018.
 ** Our February Scenario: ~25 BRL in 4 months. We see now at BRL30 billion .
 *** Does not include the Bolsa Familia beneficiaries.
 Recent proposals to increase the benefit amount per month.
 Extraordinary credit (not included in Spending cap) - modality intended to meet urgent and unpredictable expenses, such as in 10
 the event of war, internal commotion or public calamity. It is authorized and opened by provisional measure, and may be
 reopened in the following year, within the limits of its balance.

Background in the political aspect – the room for reforms approval (?)
o The parliament has elected government allies to new leadership positions, fostering market hope for progress in the reformist agenda.
o Return of major parliamentary committees to evaluate reforms.
o There is a risk of paralysis in the agenda composed by 35 priorities (one already approved – Central Bank Autonomy).

 Emergency Aid resumption x Fiscal rules waiver Difficulty to find a consensus in the reform draft

 States that borrowing cannot finance - Allows the Emergency Aid in 2021
 Golden Rule current expenditures. Already needs a (‘waiver for fiscal rules’) – without limit.
 parliament waiver since 2019.
 - Fiscal triggers when mandatory
 expenses/Total > 94% (~ in 2023)
 A 2000 law sets the framework and PEC - Subnational fiscal triggers (~ in 2023)
 procedures for fiscal management and
 LRF – Fiscal the budget process. Introduced the Emergencial - 6 months to create a plan to reduce tax
 Responsibility Law primary balance target. PEC or PLP can (Current draft – preliminary) exemptions (needs more enforcement),
 create a waiver to the law. - A calamity ‘clause’ that could be used
 Can be divided in 2 PECs:
 by congress, easing fiscal rules,
 In 2016, Congress approved a
 constitutional amendment imposing a PEC Calamity (‘clause’) - Ends the floor for spending on
 Spending Cap cap on central government education and health (BRL 120 billion)
 noninterest expenditures. PEC Fiscal (Triggers)
 - Revokes transfers from FAT to BNDES
 and “Lei Kandir” (transfers);
The government needs a waiver in the fiscal rules to reintroduce
the Emergency Aid - Treasury Judicial claims borrowing lines
 for subnational entities.
Sources: Federal Gov., Santander.

 *PEC = Constitutional Amendment
 Sources: National Treasury, IBGE, Santander.

 11

Spending cap - fiscal triggers would allow to comply to the rule in 2023 and 2024
o We expect this extension to have as a counterpart (yet not at the same time) the approval of reforms creating fiscal triggers to offset
 the increase in expenses and avoid a negative impact on the debt trajectory. Likely to comply with the spending cap by 2024.

 Surplus (+) or Insufficiency (-) to comply with the spending cap
 Spending cap 2020 margin
 51.9 2023-26 It ended the year BRL6 bn better than our
 Base Scenario: -130 billion forecast
 34.0 32.2* Inflation effect Triggers: -50 billion
 25.0 25.0 We did not add into 2021 numbers
 20.9
 Due to uncertainties regarding leftovers
 10.0 (restos a pagar) from the ordinary 2020 budget
 in a similar amount.

Fiscal triggers have no -5.0
impact in 2021. -10.0 Inflation Mismatch in 2022
 -14.0 -14.0 -20.0
Feasible to fulfill, yet with According to our inflation forecasts:
risk of partial shutdowns. -25.0 Spending cap 2022 margin will be readjusted
 -35.0
 by +7.0% (IPCA 12m Jun-21)
 Base Scenario -40.0
 The 2022 benefits should increase 3.8%
(BRL billion)
 Fiscal triggers approved** -55.0 (INPC).

 2017 2018 2019 2020 2021e 2022e 2023e 2024e 2025e 2026e
 Sources: National Treasury, IBGE, Santander.

 *Our estimative considering the part of Bolsa Família welfare program (BRL19 bn) was extra-cap (i.e. the beneficiaries received
 the Emergency Aid). The official number was BRL52.2 billion.
 ** The Mandatory Expenses/Total Expenses will be higher than 94% only in 2023 or 2024, according to our estimates. Triggers:
 (i) Real stability of the minimum wage; (ii) Nominal stability of the public servants’ wages; (iii) Hiring freeze in federal public 12
 services; (iv) Ban on the creation of new mandatory expenditure.

Risk in the execution in the extraordinary budget spending
 Usual Sequential Procedure Alternative Sequential Procedure
 Create the resumption of the - Creates an exceptionality for the
1. Provisional Measure Emergency Aid, without funding source. resumption of a calamity period – a
Lasts for 120 days. Conditional on the steps to follow. clause easing fiscal rules (like a
 1. PEC Calamity “button”).
 Starting with const. amendment
2. Law (PLN) The funding for the program, and - A ‘waiver’ to reintroduce the
To create the Extraordinary not subject to the spending cap Emergency Aid in 2021. (Does it limit
budget spending the total amount and the period?)
 Pending since 2020. With conditioned
3. 2021 Budget law expenses (Golden Rule).
 - Contain the fiscal triggers to curb
 mandatory spending.
 2. PEC Fiscal
 The government needs the approval of Const. amendment - Needs 308 votes in Lower House
4. Supplementary Credit this measure to issue debt and be able and 49 in Senate.
Already necessary to comply to the to execute the expenses. The program
Golden Rule (BRL 453 bn in 2021) will be included.
 Creates the reintroduction of the Aid,
 3. Provisional Measure without funding source. This probably
 The primary deficit target must be Lasts for 120 days.
5. Compliance to the changed to include the aid’s budget
 will be voted and changed in Congress

Fiscal Responsibility Law in the Budget Guidelines Law
 4. Law (PLN) The funding for the program, and
 To create the Extraordinary not limited by the spending cap rule
 budget spending (extra-cap)
6. Fiscal At the same time of the previous items,
 the compensation measures must be
compensations evaluated. Needs 308 votes in the
Probably a new draft of PEC Lower House and 49 in the Senate. The scenario pursue a significant operational risk—
emergencial implying in risk of a more intense Fiscal stimulus.
 Constitutional measures are not submitted to
 presidential vetoes. 13
 Source: Santander.

Expected Timeline in 2021
 February March April May June July

 2021 Budget Scheduled until end of March Delay?...

 Gov. Stimulus* Wage Bonus (Abono and Pensions) 60 billion | FGTS 12 billion

 Congress recess
 PEC Calamity** July 16

 PEC Fiscal Debate over Fiscal ‘overhaul’ | Fiscal Triggers Delay?...

 Emergency Aid 4 months – 30 million people – BRL 250 (?) – Provisional measure

 Extraordinary Credit Funding the Aid - Provisional measure - Lasts for 120 days

 2022 Budget Guidelines Deadlines: Executive–April 15, Legislative–July 16

 17-Mar 4-May 16-Jun
 Copom Meetings STDR: 0bps (or 25bps?) STDR: +50bps STDR: +50bps Dec-21: 4.0% p.y.

 Jan-21 | 09-Feb Feb-21 | 11-Mar Mar-21 | 09-Apr Apr-21 | 11-May May-21 | 09-Jun Jun-21 | 08-Jul
 IPCA 12m STDR 4.6% STDR 5.0% STDR 5.2% STDR: 6.0% STDR : 6.8% STDR: 7.0% (year peak)
 2021: +3.6%

 4Q20 | 03-Mar 1Q21 | 01-Jun
 GDP growth STDR: +2.7%QoQ STDR: -0.4%QoQ 2021: +2.9%

 Dec-20 | 26-Feb 1Q21 avg | 16-Apr and 30-Apr 2Q21 avg | 27-May, 30-Jun, 30-Jul
 Unemployment STDR: 13,7% STDR: unemployment 17 mi | 16.8% STDR: Unemployment 18.5 mi | 17.7% (all-time high) Dec-21: 12.1%

 * Government fiscal neutral measures in 2021 - FGTS withdraws and anticipation of wage bonus STDR: Santander Forecast 14
 ** Constitutional Amendment (PEC) that eases fiscal rules (‘Waiver’)
Source: Santander.

The measures developments that would shape the outlook
o Beyond the question of vaccination, we believe certain measures and reforms are necessary to support the reduction of idiosyncratic
 risks. The fiscal agenda contains significant risks in its execution, in our view, so uncertainty will remain.

 Positive Measures That Could Be
 Potential Setbacks
 Implemented
 Budget law for 2021 in compliance with the spending cap
 Possible creation of new mandatory expenses
 rule
 Fiscal adjustment measures
 Permanent increases in the tax burden
 (“PEC Emergencial or fiscal” e.g.)
 Advances in the relevant privatizations process Approval of a new digital tax (CPMF)

 The new tax reform project, or CBS Law Approval of federal measures that imply leniency or
 (Contribution on Goods and Services) moral hazard with subnational fiscal adjustments

 Allocation of revenue not linked to public funds for
 The autonomy of the Central Bank
 other primary expenditures
 The continuity of the modernization of regulatory Paralysis of the reform agenda impacted by political
 frameworks for infrastructure disputes
 A competitive auction for 5G for attracting investors Salary increases for public servants
 Reduction in net revenue or greater transfers to states
 Administrative reform
 and municipalities
 Source: Santander.

 15

Government trade-offs: Pressure to reduce taxes on Fuels (with recent increase)
o The government is studying reducing the PIS/Cofins tax on diesel, in order to avoid a Nationwide trucker strike (similar to 2018).
o The executive said that they will not directly intervene in Petrobras’ fuel pricing policy.
o There is a proposal to change the calculus of the ICMS (states tax) on fuels. Yet it faces strong resistance from state governors and
 has low probability of being approved.

 Diesel Prices (BRL/Liter) Challenges in reducing taxes
 International Prices + Import costs Domestic Prices Diesel: currently fixed at BRL0.352/Liter
3.0 +22% 2018
 International/Domestic = 13.4% strike Each -BRL0.01 reduces federal tax collection in BRL600
2.8 million/year; -BRL0.352/liter = -BRL21 billion/year
 2018 Brazil
2.6 truck drivers' PIS/Cofins tax
 According to Art.14* of the Fiscal Responsibility Law the
2.4 strike on Diesel prices possible reduction must be followed by a compensation
2.2 measure (lowering tax incentives, hiking or creating taxes).
2.0
 If not, they must change the Fiscal Responsibility law or use a
1.8 calamity period to ease the fiscal rules.
1.6
 The Gov. proposed a complementary bill in congress to
1.4 change the way the ICMS state tax is calculated on fuels.
1.2
 Last Update: 02-22-2021

 The bill unifies throughout the country ICMS rates. On
 Jan-17

 Sep-17

 Jan-20
 May-17

 Mar-18
 May-18

 May-19

 May-20
 Jul-17

 Sep-18

 Sep-19

 Sep-20
 Nov-17
 Jan-18

 Nov-18
 Jan-19

 Nov-19

 Nov-20
 Jan-21
 Jul-18

 Jul-19

 Jul-20
 Mar-17

 Mar-19

 Mar-20

 ICMS average in metropolitan regions, they are 14% for diesel
 (States taxes) and 29% for gasoline.
Sources: Bloomberg, Santander.
 It will face strong resistance from state governors and
 has low probability of passing.
 *Granting or expanding a tax incentive or benefit that results in a waiver of revenue
 must be accompanied by an estimate of the budgetary-financial impact in the year 16
 in which it is due to start.

Our Fiscal Scenario
 03

Fiscal Accounts – Public Sector’s Primary Result
 Public Sector's Primary Result in 2020, 2021 and 2022
 Losses of Primary Expansion in Primary Central Government's Public Sector's
 GDP Growth (%)
 Fiscal Scenarios Revenue (BRL bn) Spending (BRL bn) Primary Result (BRL bn) Primary Result (BRL bn)
 2020 2021e 2022e 2020 2021e 2022e 2020 2021e 2022e 2020 2021e 2022e 2020 2021e 2022e
 Base Case Before the Pandemic 2.0 2.5 2.8 - - - - - - -105 -76 -45 -99 -68 -35
 Current Base Case -4.1 2.9 2.3 167 100 85 505 55 20 -745 -255 -190 -703 -250 -185
• Our baseline scenario considers the higher use of tax credit by private companies (ICMS exclusion of PIS/COFINS tax basis). In 2020, it totaled ~BRL170 bn, compared to BRL105 bn in
 2019. We estimate this could reach ~BRL150 billion. A higher use of tax credit remains a risk to the revenue forecasts (beyond the pace of activity recovery). We estimate a real
 increase of 3.8% in tax collection, after a drop of 6.9% in 2020. On the expenses side, the main risk are the extra-cap expenditures. This scenario includes the new emergency aid of
 ~BRL30 billion.
Sources: National Treasury, BCB, Santander.
 Public Sector’s Primary Deficit (% GDP) Public
 PublicSector’s
 Sector'sNominal
 NominalDeficit
 Deficit(%(%
 GDP)
 GDP)
 Public Sector's Primary Deficit (% GDP)

 2020 2020 13.7
 2021e 9.5 2021e
 2022e 2022e

 6.9
 5.6 6.0
 4.9 4.8
 3.1
 1.3 2.2
 0.8 0.4

 Baseline scenario before COVID-19 crisis Current baseline scenario Baseline scenario before COVID-19 crisis Current baseline scenario
 Sources: National Treasury, BCB, IBGE, Santander. 18

Central Government – Revenues and Expenditures
 Central Government's Primary Balance
Fiscal Items (% of GDP) 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
Total Revenue 20.8 21.0 21.0 21.2 22.1 19.8 19.9 20.0 20.5 20.8 21.2 21.4 21.7 22.0 22.3 22.8
Revenues Collected by the Federal Revenue Office 12.8 13.1 12.7 12.9 12.8 12.1 12.2 12.3 12.5 12.7 12.9 13.0 13.1 13.2 13.3 13.5
Net Social Security Revenues 5.8 5.7 5.7 5.6 5.6 5.5 5.3 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.1
Revenues Not Collected by the Federal Revenue Office 2.2 2.2 2.6 2.7 3.7 2.2 2.4 2.4 2.5 2.6 2.7 2.7 2.8 2.9 3.0 3.1
Transfers by Revenue Sharing 3.4 3.6 3.5 3.7 3.9 3.6 3.6 3.6 3.6 3.7 3.8 3.8 3.9 4.0 4.0 4.1
Net Revenue 17.4 17.4 17.5 17.5 18.2 16.2 16.3 16.4 16.8 17.1 17.4 17.6 17.8 18.1 18.3 18.6
Total Expenditure 19.4 19.9 19.4 19.3 19.5 26.3 19.4 18.7 18.4 18.1 17.9 17.7 17.5 17.4 17.2 17.1
Social Security Benefits 7.3 8.1 8.5 8.4 8.5 9.0 8.9 8.6 8.6 8.6 8.6 8.7 8.7 8.7 8.7 8.8
Payroll 4.0 4.1 4.3 4.3 4.2 4.3 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2
Other Mandatory Expenses 4.1 3.4 3.0 2.9 2.6 9.7 2.8 2.7 2.7 2.6 2.5 2.5 2.4 2.4 2.3 2.3
Mandatory Expenses with Cash Control 4.0 4.3 3.7 3.8 4.1 3.3 3.6 3.3 3.2 3.1 3.1 3.0 3.0 3.0 2.9 2.9
Discretionary Expenses 2.1 2.3 1.8 1.8 2.2 1.5 1.4 1.5 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3
Central Government's Primary Balance -2.0 -2.6 -1.9 -1.8 -1.3 -10.0 -3.1 -2.2 -1.5 -1.0 -0.5 -0.1 0.3 0.7 1.1 1.5
Nominal GDP (BRL billion) 5,996 6,269 6,585 7,004 7,407 7,410 7,938 8,441 8,838 9,267 9,717 10,189 10,684 11,202 11,746 12,216
Sources: National Treasury, Brazilian Central Bank, Santander.

➔ Main assumptions for the current baseline scenario: our macro scenario for 2021 and 2022. After 2023: (i) Potential GDP growth = 1.8%; (ii) Neutral real interest
 rate = 3.0%; (iii) Long-term inflation = 3.0%; (iv) Compliance to the spending cap rule adjusted by inflation until 2030 (v) Structural reforms in 2023 to maintain the
 discretionary expenses close to 1.4% of GDP; (vi) Government will need to hire a lower number of public servants due to the digitalization of some public services; (vii)
 Pension reform will maintain the expenses almost stable in relation to GDP growth.

 19

Central Government – Revenues and Expenditures
o According to the National Treasury the total COVID-19 expenses totaled BRL539.4 billion in 2020.
o Considering the ordinary budget the total expenditure last year was almost stable at 19.3% of GDP (Bolsa Família included).

 Central Government’s Accounts (% GDP)
 30% Net Revenues

 Total Expenditure + 2020 War Budget 26.3%
 27%

 Total Expenditure
 24%

 21% 19.9%
 18.8% 20.2% 19.5% 19.3% 18.6%
 19.4%
 18.7%
 16.5% 18.2%
 18%
 17.4%
 16.2% 17.4% 17.1%
 15% 14.8% 16.3% 16.3%

 12%
 2002

 2011

 2020
 2000
 2001

 2003
 2004
 2005
 2006
 2007
 2008
 2009
 2010

 2012
 2013
 2014
 2015
 2016
 2017
 2018
 2019

 2021e
 2022e
 2023e
 2024e
 2025e
 2026e
 2027e
 2028e
 2029e
 2030e
 Sources: National Treasury, Brazilian Central Bank, Santander.

 20

Fiscal Scenario – Base Scenario a tad worst
o The year 2020 represented an unprecedented deterioration in government finances – six years of deficit in one.
o We expect gross debt to remain virtually stable, however, assuming that the BNDES will repay the Treasury BRL100 billion, and
assuming compliance with the spending cap without creating permanent new expenses while failing to curb others.

 Primary Balance - % GDP Gross Debt - % GDP
 2.6 2.9 2.2
1.9 1.7 94.1
 91.2 92.4
 89.3 89.1

 -0.6 -0.9 -1.0
 -1.9 -1.7 -1.6 -1.5
 -2.5 -2.2 75.3 74.3
 -3.1 73.7
 69.8
 65.5

 -9.5 56.3
 51.5

 2021e

 2022e

 2023e

 2024e
 2013

 2014

 2015

 2016

 2017

 2018

 2019

 2020
 2021e
 2022e

 2023e
 2024e
2009
 2010

 2011
 2012

 2013

 2014

 2015

 2016

 2017
 2018

 2019

 2020

Sources: BCB, Santander. Sources: BCB, Santander

 21

Fiscal Scenario - Brazil has the second largest Debt/GDP in EM countries
o Nominal GDP (denominator) accounts slightly shift down the debt numbers (-2p.p.)—yet they do not change the challenging outlook.
o The Gross Debt should reduce after 2027 due to a primary surplus, lower expenses (Pension reform effect and lower necessity to
 increase personal expenses), reduced debt cost in average, and the GDP growth.

 Gross Debt (% GDP) Net Debt - % GDP

 Base Scenario Only Fiscal triggers Scenario
 85 Baseline Scenario before the Covid-19
110 Pre-Covid Scenario
 101.2 103.4 Current Baseline Scenario 77.1
 (peak at 2027)
100 97.9 75
 98.6 66.3
90 89.3 (peak in 2027) 97.1 68.8
 91.7 65 67.3
 63.0
80
 55
70 75.8 56.3 55.8
 55.0
 52.3
 45 40.9
60 44.8
 59.8
50 35 30.5

40
 25
 2010

 2012
 2008

 2014

 2016

 2018

 2020

 2022e

 2024e

 2026e

 2028e

 2030e

 2032e

 2034e

 2008

 2010

 2012

 2014

 2016

 2018

 2020

 2022e

 2024e

 2026e

 2028e

 2030e

 2032e

 2034e
Sources: National Treasury, IBGE, Santander. Sources: National Treasury, IBGE, Santander.

 22

Fiscal Accounts – Trajectories for the Brazilian Government Debt
o Public sector’s primary balance (% GDP) required for the stabilization of the gross public debt-to-GDP ratio at 90%

 Real Interest Rate
 o Current cycle: -1.0% 0.0% 1.0% 2.0% 2.5% 3.0% 4.0% 5.0%
 . Real interest rate (ex-ante): -1.0%,
 . GDP is expected to grow 2.9% in 2021. 1.0% -1.8 -0.9 0.0 0.9 1.3 1.8 2.7 3.6
 . Expected primary deficit (-3.1% of GDP)
 + BNDES payback should maintain the
 Gross/Debt virtually stable. 1.5% -2.2 -1.3 -0.4 0.4 0.9 1.3 2.2 3.1

 GDP Growth
 2.0% -2.6 -1.8 -0.9 0.0 0.4 0.9 1.8 2.6
 o Steady-state:
 According to our hypothesis:
 . Real interest rate at +3.0% 2.5% -3.1 -2.2 -1.3 -0.4 0.0 0.4 1.3 2.2
 . Potential GDP at +1.8%,
 . The primary surplus must reach +0.9% of
 GDP to maintain the gross debt stable. 3.0% -3.5 -2.6 -1.7 -0.9 -0.4 0.0 0.9 1.7
 Sources: BCB, Santander.

 23

Possible Fiscal Measures that could be implemented and its impacts
 Rolling Impact of some fiscal measures (BRL billion)
 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
 Revenues
 Limit on tax deductions (private health) 0 10.0 20.3 30.5 40.8 51.0 61.3 71.6 82.0 92.4
 10% linear drop in tax exemptions / waivers 0 27.0 54.5 82.1 109.6 137.2 164.7 192.2 219.8 247.3
 Changes in Personal Income Tax
 0 6.0 12.1 18.2 24.4 30.5 36.6 42.7 48.8 55.0
 (Aliquot of 35% on earnings > BRL25k per month)
 Profits & Dividends (Aliquot of 15%) 0 25.0 51.8 79.3 107.6 136.8 166.8 197.6 229.4 262.1
 End of JCP payment deduction
 (“Interest on Equity Capital”)
 0 8.0 17.3 26.7 36.5 46.5 56.8 67.4 78.2 89.4
 Exclusive Funds (one-off) 0 10 0 0 0 0 0 0 0 0
 Inheritance/Donation Tax (Aliquot from 8% to 30%) 0 30.0 60.9 92.7 125.5 159.3 194.1 229.9 266.8 304.8

 Expenditures
 Min. Wage De-indexation (social benefits) 0 23.0 46.7 71.1 96.2 122.1 148.8 176.2 204.5 233.7
 Freezing of social security benefits
 0 3.5 7.3 7.3 7.3 7.3 7.3 7.3 7.3 7.3
 (above 3 Min. Wag)
 End of Wage Bonus 'Abono' (for formal workers) 0 17.0 34.5 52.5 71.1 90.3 110.0 130.3 151.2 172.7
 End of Wage Bonus 'Abono' ( above 1 Min. Wage) 0 8.0 16.2 24.7 33.5 42.5 51.7 61.3 71.1 81.3
 Payroll tax exemption 6.4 10.2 10.2 10.2 10.2 10.2 10.2 10.2 10.2 10.2
 Public sector wage ceiling 0 3.2 6.5 9.9 13.4 17.0 20.7 24.5 28.5 32.5
 Extending the grace period for the
 0 12.0 24.4 37.1 50.2 63.7 77.6 91.9 106.7 121.9
 unemployment insurance benefit
 Reduction of public servants’ working hours and
 0 10.0 20.3 30.9 41.8 53.1 64.7 76.6 88.9 101.6
 wages (up to 25%)
 Source: Santander.

 24

Fiscal Risks – size of the fiscal stimulus and leftovers
 o The total size of the War budget totaled BRL524 billion.
 o The leftover (not subjected to the spending cap rule) reached BRL37.9 billion

 2020 War Budget Fiscal Measures (BRL billion) 2021 Leftovers of War Budget (Restos a pagar)

Accumula ted Dec-20 Bud g et E xecuted BRL Billion - Accumulated Jan-21 Feb-21 Budget Executed
Formal Employment program (MP 935) 33.5 51.5 65.0%
 Bem - Employment Program (MP 935) 0.4 0.4 8.1 4.8%
Bolsa Família expansion (MP 929) 0.37 0.37 100.0%
E mer eg ency Aid (M P 937) 293.1 322.0 91.0%
 Emer gency Aid (MP 937) 0.3 0.4 2.3 15.3%
Transfers to regional governments (MP 939) 78.3 79.2 98.8%
Credit for payroll (MP 943) 6.8 6.8 100.0%
 Minis tr y of Health and Other s 1.3 1.5 3.4 43.9%
Energy Sector (MP 950) 0.9 0.9 100.0%
M inis tr y o f Hea lth a nd o ther s 44.9 50.8 82.4% Financing of Turism Infraestructure (MP 963) 0.1 0.1 1.9 6.8%
Guarantees for credit measures (MP 977) 58.1 58.1 100.0%
Financing of Tourism Infrastructure (MP 963) 3.1 5.0 61.6% Vaccine Acquisition 0.1 0.7 22.3 3.1%
Emergency Credit Program - "Maquininhas" 5.0 10.0 50.0%
Vaccine Acquisition 0.0 20.0 0.1% Accumulated Total 2.2 3.0 37.9 8.0%
To ta l 524.1 604.7 86.2%
Updated until 01/05/2021 Updated until 02/22/2021
Sources: National Treasury, Santander. Sources: National Treasury, Santander

 25

Fiscal background and risks
 04

Brazilian debt approaches the level of advanced countries – International Comparison
 o Brazilian government finances registered an unprecedented deterioration in 2020, affected by the government’s measures to
 mitigate the economic and health effects of the pandemic.

 Historical Patterns of General Government Debt (% GDP)
 140 WWI WWII Global Great
 Financial Lock-
 Crisis down
 120

 Advanced economies
 100

 80

 60
 Brazil

 40
 Emerging economies
 20

 0
 1915

 1970
 1880
 1885
 1890
 1895
 1900
 1905
 1910

 1920
 1925
 1930
 1935
 1940
 1945
 1950
 1955
 1960
 1965

 1975
 1980
 1985
 1990
 1995
 2000
 2005
 2010
 2015
 2020
 Source: IMF (Oct 2020), IBRE, Santander. * Brazilian Gross Debt is considered the BCB methodology
 27

Fiscal Risks – elevated financial needs
o Brazil has one of the largest gross debts among emerging countries and has significant financing needs.

 Financing needs in 2021 – (% GDP) Brazil - Domestic debt issue, in % GDP
 Central government debt service, 2021, in % GDP,
 incl. SOEs for Indonesia, Mexico, and South Africa External Domestic
 1.8
 0.4
 1.4 1.6 1.8
 1.2 0.4

 Local currency FX 1.3
 1.9 2.5 0.9

 0.8 0.4
 20.2 0.5 0.2
 17.2 4.3 1.9 0.3
 0.3 17.2 16.9 0.3 0.3 0.2 0.2 0.2 17.2
 15.5 3.3 17.1 0.1
 0.3 0.2
 2.0 14.9 14.3 0.3
 12.2 3.1 13.2
 11.6 11.9 11.0
 2.2 0.0 10.4
 8.9 9.0 8.3 9.0 9.0 9.0 9.4 8.6 8.6
 7.3 7.2 7.7
 6.4 6.2 5.6 0.4
 4.4 3.8 3.8 0.2
 2.9
 1.5

 2006

 2015
 2000
 2001
 2002
 2003
 2004
 2005

 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014

 2016
 2017
 2018
 2019
 2020
 2021e
 RUS
 ZAF

 IDN
 UKR
 BRA

 CHL
 CHN
 COL

 TUR

 POL
 MEX

 ARG

 IND

Sources: IIF, Santander. Sources: IIF, Santander

 28

Fiscal Scenario – The debt is at a higher level and with a shorter maturity
o Although the liquidity cushion of the treasury is BRL870 billion (covering debt rollover up to 1H21), the amount of the year will
 exceed BRL1.34 trillion. An easy in the fiscal framework implies in a significant risk for the government debt management.

 Debt maturity and Primary Deficit Net Borrowing Requirements and Gross Debt
 Net Borrowing Requirements (BRL billion)
 Considering Transfers to the Treasury
 140 Gross Debt (% GDP) 89.3 89.1

 1674 **
 75.3 74.3 75.8 1574
 77 73.7 1453
 63 65.5
 69.8
 1068 *
 17 56.3
 1128
(BRL billion)

 53.7 780
 33 51.5
 655 651
 35 488
 590
 435 366 362 413 477
 329 351 364
 231 247 49
 41
 71 85

 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 Years with primary
 surplus
 Debt Maturity Primary Deficit (Santander Estimates)
We anticipated the Wage and Pension bonus (BRL60 bn) to the 2Q21 – * Transfer of Central Bank to the Treasury (BRL325 billion), allowed by law nº 13,820/2019
 ** BNDES transfer of BRL100 bn to the Treasury
Fiscal Stimulus without annual impact Sources: National Treasury, Santander.
Sources: National Treasury, Santander.

 29

Treasury’s cash position improved in the last few months with larger auctions
 o With debt shortening it is important to keep the level of the liquidity cushion at comfortable levels..

 Cash “Liquidity Cushion” Average cost of Federal Debt - 12 months – (%)
 Public Debt Resources + Unbound / Ordinary Resources Outstanding debt securities (stock) New Issuances (flow) Selic Rate
 Spending Pension
 915 Cap Reform Covid-
 885 872 16 14.2 19 Forecast
 830 14 13.7
 811
 771 12 12.0
 718 721 11.2 9.9
 10 8.7
 9.3
(BRL billion)

 8 8.0 6.9
 7.3
 6 7.0
 6.5 6
 556
 4 4.4

 479
 2
 2
 0

 Sep-12

 Sep-13

 Sep-14

 Sep-15

 Sep-16

 Sep-17

 Sep-18

 Sep-19

 Sep-20

 Sep-21

 Sep-22

 Sep-23

 Sep-24
 Jan-15
 Jan-12

 Jan-13

 Jan-14

 Jan-16

 Jan-17

 Jan-18

 Jan-19

 Jan-20

 Jan-21

 Jan-22

 Jan-23

 Jan-24
 May-21
 May-12

 May-13

 May-14

 May-15

 May-16

 May-17

 May-18

 May-19

 May-20

 May-22

 May-23

 May-24
 Feb-18

 Feb-19

 Feb-20
 Dec-18

 Dec-19

 Dec-20
 Apr-18

 Oct-18

 Apr-19

 Oct-19

 Apr-20

 Oct-20
 Jun-20
 Jun-18
 Aug-18

 Jun-19
 Aug-19

 Aug-20

 Sources: National Treasury, Santander.
 Sources: National Treasury, Santander.

 30

Our Base Scenario...
o For our latest Scenario Review ‘The Persistence Of (Fiscal) Risks’ (sent on February 11, 2021).
o Click on the link: http://bit.ly/Sant-ScenRev-fev21

 M acroeconomic variables Previous Current
 2020E -4.1 -4.1
 GDP (%) 2021E 2.9 2.9
 2022E 2.5 2.3
 2021E 3.0 3.6
 IPCA (%)
 2022E 3.2 3.2
 2021E 2.50 4.00
 Selic Rate (% end of period)
 2022E 4.50 4.50
 2021E 4.60 5.20
 FX Rate - USDBRL (end of period)
 2022E 4.15 5.40
 2021E -0.7 1.2
 Current Account Balance (% of GDP)
 2022E -1.9 0.5
 2021E -3.1 -3.1
 Primary Fiscal Balance (% of GDP)
 2022E -2.3 -2.2
 2021E 91.6 89.1
 Gross Public Debt (% of GDP)
 2022E 93.6 91.2
 Sources: IBGE, FGV, National Treasury, Brazilian Central Bank, Santander.

 31

Brazil Macroeconomic Research Team
Thank you.
Obrigada. Ana Paula Vescovi Mauricio Oreng
 Chief Economist Head of Research & Strategy
 anavescovi@santander.com.br mauricio.oreng@santander.com.br
 +55 (11) 3553-8567 +55 (11) 3553-5404

Nosso propósito é contribuir para que
 Jankiel Santos Ítalo Franca
as pessoas e as empresas prosperem.
 Economist – External Sector Economist – Fiscal Policy
 jankiel.santos@santander.com.br italo.franca@santander.com.br
Nossa cultura se baseia na crença de +55 (11) 3012-5726 +55 (11) 3553-5235
que tudo que fazemos deve ser
 Tomas Urani Daniel Karp Vasquez
 Economist – Global Economics Economist - Inflation
 tomas.urani@santander.com.br daniel.karp@santander.com.br
 +55 (11) 3553-9520 +55 (11) 3553-9828

 Lucas Maynard Felipe Kotinda
 Economist – Economic Activity Economist - Credit
 lucas.maynard.da.silva@santander.com.br felipe.kotinda@santander.com.br
 +55 (11) 3553-7495 +55 (11) 3553-8071

 Raissa Freitas Gilmar Lima Gabriel Couto
 Business Manager Economist – Modeling Economist – Special Projects
 raifreitas@santander.com.br gilmar.lima@santander.com.br gabriel.couto@santander.com.br
 +55 (11) 3553-7424 +55 (11) 3553-6327 +55 (11) 3553-8487

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