I - BRAZIL'S ECONOMY* (see endnote 1)

The Brazilian economy is the largest in Latin America with a diversified industrial basis, a modern and sound financial framework and a strong and export-oriented agricultural sector.

One of the fastest growing countries in this century -which includes a 7% average GDP growth between 1945 and 1980 Brazil faced a complete erosion of its industrialization model in the 1980,'s and, in recent years, it has had a record of erratic growth largely due to growing fiscal deficits and spiralling inflation. In the eighties, GDP showed very unstable figures, ranging from -4.2% to 6.9%. More recently, the Brazilian economy has been growing at an approximate rate of 3.5%.

Even though Brazil has an economic past of uncertainties, today Brazil presents a well balanced economy in terms of virtual self-sufficiency in agriculture and industrial production, diversified markets and inexpensive labor. It should be stressed, however, that such labor costs, are often increased by as much as 80% of total payroll charges.

As a result of the effort to promote exports, the trade surplus in the five years prior to 1988 averaged 11.7 billion dollars per annum; in 1989, it reached 16.8 billion dollars, in 1990, 12.0 billion dollars; in 1991, 11.0 billion dollars; in 1992, 15.6 billion dollars, in 1993, 13.0 billion dollars, and in 1994 10.9 billion dollars. Manufactured goods account for approximately 55% of Brazil's total exports.

The country has increased hydroelectric production and the domestic production of oil to over 60% of the present consumption rate.

The installed capacity of heavy and basic industries (heavy industrial machinery and equipment, shipbuilding, road building equipment, railway equipment, equipment for hydroelectric plants, offshore drilling equipment, steel, cement, aluminium, pulp, paper, etc.) is significant and provides the infrastructure for the manufacturing of capital goods.

Notwithstanding the fact that capital investments have been somewhat reduced in the last few years, due to the general climate of uncertainty caused by increasing inflation as well as other internal political factors, nowadays a new scenario is visible as a result of economic reform and the Industrial Policy.

II - BRAZIL'S INVESTMENT SCENARIO FOR 1998

Despite the recent stock market crashes throughout the world during the 1997 calendar year, for the above mentioned reasons, Brazil can currently be considered as a serious candidate for investment purposes.

It should be stressed that, since the 1994 calendar year, and through the stock market crises, portfolio investment, as well as capital investment, have increased tremendously. The 1996 and 1997 calendar years proved to be successful for Brazil's Stock and Commodities markets. This in itself is a demonstration of Brazil's investment potential in the near future.

Furthermore, the forecast for 1998 is very optimistic, since the instability of other regions in 1997 did not adversely affect Brazil's economy which acted extremely efficiently when counter balancing speculative action against the Real.

Additionally, the basic scenario for 1998 does not contain any abrupt changes in the Real Economic Plan. The average GNP forecast (see endnote 2) for 1998, estimates a growth of approximately 2,0% to 4,0% in 1998 and higher rates for the following years. Inflation in 1997 was approximately 7,5% on the wholesale price index and 4,8% on consumer price index and is expected to decline for 1998. Real interest rates are expected to be 20,17% for 1998. Return on investments for 1998 is also foreseen as follows: 12,76% on the poupansa (savings accounts), 26,06% on the CDI (Interbank Deposit Certificates) which is an increase when compared to 1997.

Following the trend felt in 1997 huge capital investments are programmed in the telecommunications and energy industries (ie. privatization of the Telebras system). Those major automobile manufacturers established in Brazil in 1997 are maintaining and strengthening their investments while further developing their industrial plants and factories.

The opening of the insurance and financial markets has triggered heavy foreign investment and financial aid from world leading banks (ie. Santander, Nationsbank, HSBC and others).

One of Brazil's State's leading banks (Banespa S.A - São Paulo State Bank) will be totally privatized in 1998. Furthermore the Brazilian insurance market is expecting huge investments (ie. AIG Group, Medicare, Cigma, ING, Aetna).

In terms of privatization procedures, the Privatization Program rendered approximately US$ 17 billion in 1997 to Brazil and is expected to raise more than US$ 32 billion for 1998.

III - INVESTMENT MECHANISMS

Based on Brazilian laws in effect, currently there are basically three options open to foreign investors in Brazil. The choosing between the existing options depends on the investor's profile and on the investment's characteristics (risk, profit margin, cost, etc.).

1) Investors can invest directly in a new local company incorporated in Brazil through a direct equity investment or through the aquisition of shares or quotas of an existing company;

2) Additionally, investors can invest in the various mechanisms of portfolio investments (through an international bank);

3) Finally, investors can make a loan to domestic borrowers (via the signing of the competent loan contract with the local borrower).

It should be stated that the direct participation of foreign investors in a Brazilian company is not usually subject to any restrictions. However, certain limitations are imposed on foreign companies, in areas such as shipping, newspapers and other publication, radio and television, health care, mining activities, banking and alcohol production.

Currently, the Government has a monopoly in certain industries, such as oil, communications and power production. In other areas, protectionist legislation has imposed a market-reserve system limiting the importation of certain items, such as telecommunications and electronic equipment. Nevertheless, as describe above, due to the new industrial policy adopted by the federal government, this scenario is drastically changing, whereas government owned companies are scheduled to be privatized in the near future (ie. Petrobras, Eletropaulo).

ENDNOTES

1. Information obtained from yearly reports published by leading banks and big-six auditing firms in Brazil.

2. Information obtained from the Brazilian Association of Commercial and Multiple Banks (ABBC) for which Amaro, Stuber e Advogados Associados is legal counsel.

The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

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