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Introduction 1
Brazil is the fifth largest country in the world in area, and has the 10 largest economy and a
population of 185 million. Brazil has matured both from an economic and political perspective,
and is among the countries offering the greatest market growth potential.

The economic forecast for 2007 is favorable in Brazil. Inflation has fallen to new low levels,
country risk is the lowest in the last 25 years, and the currency is strong and stable. In addition
the Brazilian Government is no longer heavily dependent on foreign borrowing, making Brazil a
very attractive market for foreign investment.

The purpose of this report is to address some of the important, broad questions that may arise in
doing investment in Brazil.

Main drivers

        Brazil has the 10th largest economy and a population of 185 million.
        Many local companies are undervalued.
        Growth potential and consumer market.
        Broad industrial base and infrastructure.
        Abundant agricultural, mineral and energy resources and potential.
        Established transportation networks (railways, highways, ports) and distribution channels
         in most industrialized areas.
        Inflation under control in the last ten years.
        Increasing globalization and international trade with government polices favoring exports
        Significant reduction in the country risk rate in last 2 years.
        Improvements in local capital and debt markets.


        Economic environment still considered volatile as compared to more stable economies
        Fast-changing business conditions.
        Complex tax and labor regulatory environment, with high taxes and social charges on
         payroll, sales and income.
        Multiple taxes with fast changing legislation affecting business plans and increasing risks
         of contingencies.

Economic Environment

The world wide favorable economic conditions in 2005 and 2006 that contributed to high
performance in emerging markets economies was also evident in Brazil. For Brazil this was most
evident by expansion of exports, high commodity prices and enormous liquidity at low interest
rates in the foreign markets. Despite this favorable condition, Brazil grew only at 3.1 percent
while the average growth of some emerging markets was 6%.

Recently Brazil made adjustments to its methodology in calculating GNP and on an adjusted
basis; Brazil grew 3.7 percent in 2006. To calculate growth, Brazil now includes 56 industries
from 43 industries previously included. For example auto making and telecommunications are
now included. The revision since 2003 to 2006 pushed up President Luiz Inacio da Silva’s first
four year term to 3.4 from previously reported rate of 2.6 percent. The main reason for the
change was to reflect the stronger economic pace than previously thought.

Three main challenges need to be considered for continued and even better growth for 2007.

The first is the continued success to maintain a low inflation rate. The inflation rate fell from 7.6%
in 2004 to 3% in 2006, better than the central Bank’s target rate.

The second is the political fiasco of wide spread charges of corruption against key officials in
President Lula’s government in 2006. Although the financial markets have seemed to escape
any negative effects from this political crisis, uncertainty about the immediate future increased
and led to a more cautious attitude by the markets. As a result gross domestic investment closed
down in 2006. With the reelection of President Lula in October this political risk should lessen
into the second half or sooner.

The third problem was the continuing appreciation of the Brazilian real throughout the year,
resulting from short term capital inflows, driven by the interest rate differential in the Brazilian
financial market and by the extraordinary trade (and current account) surplus resulting from the
increase in exports.

Brazil’s indicators of international solvency and liquidity continued to improve in 2006, again as
result of increase in exports (Brazilian exports doubled in the last 5 years. The ratio of the foreign
debt to exports fell to 1.7 against 3.9 in 2002, helped by a decline in Brazil’s foreign debt.

Principal Economic Indicators

                                  2006     2005         2004            2003        2002
GDP (US$ billion                  955      800          602             507         459
Real GDP (% per year)             3.1      2.3          4.9             .5          1.9
General price index               3.8      1..2         12.1            7.7         26.4

In US$ (Billion)
Merchandise exports               137.5    118.3        96.5            73.1        60.4
Merchandise imports               91.4     73.6         62.8            48.2        47.2
Trade Balance                     46.1     44.7         33.7            24.8        13.2
Current account balance           14.4     14.3         11.7            4.1         (7.6)
International reserves            85.0     53.8         52.9            49.3        37.8
Foreign direct investment         14.5     15.1         18.1            10.2        16.5
Total Foreign debt                160.8    168.9        201.4           214.9       210.7

Going Forward (Bloomberg Forecast)

                           2006                       2007                       2008
Real GDP growth            3.1                        3.8                        4.0
Inflation (CPI)            3.0                        3.8                        3.6

1. Information on this section taken from 400 page report, PricewaterhouseCoopers, Doing Deals in Brazil,
for the years 2004, 2005, 2006 and 2007.
[March 28 (Bloomberg) Update 1]

      The higher economic growth last year will improve indicators, such as the proportion of
       debt to GDP, probably leading to an upgrade of Brazil’s sovereign debt rating in the near

      Fitch Ratings on Feb 5 revised the Outlook on Brazil’s long-term foreign and local-
       currency debt rating to positive from stable and affirmed both ratings at BB. Standard &
       Poor’s in November raised credit outlook to positive from stable BB.

      Moody’s Investors Service upgraded Brazil’s foreign-and local-currency debt rating to
       Ba2, two notches below investment grade, from Ba3 in August.

Rate Outlook

      Chief economist with BES Investimentos in San Paulo, Sandra Utsumi said 3.8 percent
       growth forecast for 2007 will likely be raised in the wake of the new Brazilian GDP

      Faster economic growth reinforces the view that the central bank will keep cutting interest
       rates, but at a moderate pace, “Utsumi said. She expects policy makers to lower the
       benchmark overnight rate 12 percent by year-end.

      Central bankers have slashed the benchmark overnight rate 7 percentage points after 14
       consecutive times to a record low of 12.75 percent, from a high of 19.75 percent in
       September 2005.

      President Lula, made the economy the cornerstone of his second four-year term, setting
       a GDP expansion target of 4.5 percent for 2007 and 5 percent annually from 2008
       through 2010.

      To stimulate the economy, the president announced the so-called Accelerate Growth
       program that seeks to generate 504 billion reasis ($243 billion) in investment by public
       and private companies over the next four years.

   Inflation Report

      Brazil’s central bank raised its 2007 economic growth forecast to 4.1 percent from a
       previous estimate of 3.8 in December, according to the bank’s quarterly report on
       inflation. This does not take in account the revised economic growth of 3.7 percent in
       2007 by the statistics agency.

      Policy makers lowered their 2007 forecast to 3.8 percent from an earlier estimate of 3.9
       percent in it is December report.

      The inflation forecast for both this year and next is below the bank’s 4.5 percent target for
       2007 and 2008.
Political System
Federal Republic similar to United States

The federal republic has three independent branches independent branches: executive legislative
and judicial.

The President heads the executive branch. Under the President are a number of executive
departments, the heads of which are appointed and are known collectively as the cabinet. Unlike
those in many parliamentary democracies, its members need not be members of the legislative.
Besides the executive departments, there are a number of independent agencies many of which
are regulatory.

Legislative power is exerted by Congress consisting of a Senate and house of Representatives.
There are 81 senators, three from each state and the federal District of Brasila. The total
membership of the House is 513, the number of representatives from each state depending on its
population. Voting is compulsory at the age of 18 but 16 and 17 year-olds, 70 years or older
and illiterate can opt to vote.
The judicial branch consists of a system of federal, state and local courts throughout the country,
headed by the Federal Supreme Court.

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