Brazil: A New Major Player Emerges on the World Stage

Brazil: A New Major Player Emerges on the World Stage

Brazil in Context

Strengthening Economic Stability Inflation Under Control: 1984 - Present Inflation Rates (IPCA), Percent 2500 2000 1500 1000 500 0 84 86 88 90 92 94 96 98 00 02 04

Strengthening Economic Stability Inflation Under Control: 1995-2004 Percent Change, Year Ago 40 30 20 10 0 95 96 97 98 99 00 01 02 03 04

Percent 60 50 40 30 20 10 Brazil Average Import Tariff 0 84 86 88 90 92 94 96 98 00 02 04

Top 10 Leading Economies in 2050 Rank 1 2 3 4 5 6 7 8 9 10 Country China USA India Japan Brazil Russia United Kingdom Germany France Italy

General Overview Brazil in the World Today Countries with area > 4 million km² Countries with population > 100 million Bangladesh Russia Nigeria Australia Canada France Pakistan USA Brazil China India Japan Mexico Spain Netherlands Indonesia Germany Italy South Korea United Kingdom Countries with GDP > US$ 500 billion

General Overview Brazil in the World Today Almost 60 million consumers - 7 th in the world GDP (Purchasing Power Parity) of US$1.45 trillion - 10 th in the world Top exporter of coffee, orange juice, sugar, soybeans, beef, poultry, tobacco and iron ore 4 th aircraft maker; 8 th steel and software producer; 8 th largest cell phone market

Strengthening Economic Stability Consistent Fiscal Policy Inflation under control Declining Public Debt/ GDP Growing GDP Growing Industrial Output

Percent 30 Brazil Foreign Trade As a Percent of GDP 25 20 15 10 5 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Foreign Trade (US$ Million) 2004 2003 VAR. % Exports 96,475 73,084 32.0 Imports 62,779 48,291 30.0 Surplus 33,696 24,793 35.9 Trade Flow 159,254 121,375 31.2

Percent 30 25 Brazil Exports by Destination 2004 Basics Semimanufactureds Manufactureds 20 42 15 11 74 22 10 27 5 0 47 18 8 51 86 91 62 32 57 16 3 4 14 14 12 23 11 5 24 54 61 31 European Union USA Asia Aladi w/o Mercosur Mercosur Africa Middle East Eastern Europe Others

Mercosur: Trade Negotiations & Regional Integration around the World In negotiation or implementation: FTAA Mercosur-European Union Mercosur-Andean Countries Mercosur-SACU (South African Custom Union) Mercosur-India Mercosur-Mexico In analysis: Mercosur-China Mercosur-Canada

Brazil Infrastructure 1.7 million km of roads 3 rd in the world 31,000 km of railways 11 th in the world 67 airports with annual flow of 75 million people 54 ports with capacity for more than 500 million tons/year 200 million tons expansion up to 2007

Infrastructure Demand and IIRSA (Initiative for Infrastructure Integration of South America) Transportation, energy and communications Connection among national markets Integration of industries and services within the continent Financial support from: BNDES (Brazilian Bank for Economic and Social Development) CAF (Corporación Andina de Fomento)

Public-Private Partnerships PPP Contract Characteristics Long term contracts (max. 45 years) Possibility of complementing user fees with public funds Remuneration of the private partner based on performance standards achieved in service delivery Public payment guarantee based on private trust fund mechanism (elimination of political risk)

The Building of a New Country Investment Opportunities Alternative Fuels Biodiesel (B100) Reduces carbon emissions (CO) by 48% Reduces Sulfur Oxide (SOx) by 100% (prevention of acid rain) Reduces black smoke & particles emission that cause breathing disorders by 47% Carbon credits Flex fuel Gasoline + Alcohol (Ethanol) Clean Development Mechanism

Technology: Invaluable Tool for Development in Brazil The New Industrial Plan: Focus on Innovation and Technological Development Strategic Options Semiconductors Software Medical & pharmaceutical products Capital goods Bearers of Great Potential Biotechnology Nanotechnology Biomass

Foreign Direct Investments What Brazil Has to Offer Large and growing market Vast natural resources Competitive and efficient production base Qualified and motivated labor force

Brazil: Outlook The market is finally catching on that the economic recovery is robust despite higher world interest rates The Lula administration has kept to the fiscal straight and narrow despite pressure to ease restraints External accounts have bettered even optimistic expectations Inflation under control although higher than target Lula administration trying to restart reform effort S&P and Moody s finally upgraded Brazil and maintain a split rating at BB- / B1 We view Brazil as a solid BB / Ba2 credit and remain positive on Brazil s prospects

Brazil Leads the Market for Worse or Better Index 1600 1400 1200 1000 800 600 400 200 Lehman Brothers Index Components Sovereign Stripped Spread International Brazil Russia Turkey U.S. High Yield - Average Spread 0 1/2/2003 6/15/2003 11/26/2003 5/8/2003 10/19/2004 4/1/2005

Why Are Primary Surpluses Leading to Recovery? Percent 6 Primary Surplus % GDP (L) Percent 30 4 20 2 10 0 Real SELIC Interest Rate (R) 0-2 1/1/1995 1/6/1997 1/13/1999 1/19/2001 1/26/2003 2/1/2005-10

Fiscal Accounts Continue to Improve Public Sector Balance (% of GDP) 6 2-3 Primary Surplus With SOEs Primary Surplus Without SOEs -7-11 -16 Nominal Deficit With SOEs Nominal Deficit Without SOEs -20 2/1/1997 9/14/1998 4/26/2000 12/7/2001 7/20/2003 3/1/2005

Sending the Debt-GDP Ratio on a Downward Slope Net Public Sector Debt Balance (% of GDP) 65 60 55 Forecast Interest Cost = SELIC 50 45 40 Interest Cost = 60% SELIC 1/1/1998 10/14/1999 7/26/2001 5/8/2003 2/17/2005 12/1/2006

Monetary Conditions in Brazil Have Tightened over the Last 9 Months Percent 500 340 12-Month Forward Inflation Expectation (R) IPCA (+3, R) Percent 18 14 9 180 20-140 MCI (L) 5 1-3 -8-300 1/19/2000 1/29/2001 2/10/2002 2/21/2003 3/4/2004 3/16/2005-12

Tight Money Stabilized the USDBRL Factors Affecting Monetary Base Creation and the USDBRL 60000 40000 20000 0-20000 Foreign Exchange Intervention (L) Open Market (L) 4.0 3.6 3.1 2.7 2.3 1.9-40000 USDBRL (R) 1.4-60000 1/1/1997 8/26/1998 4/19/2000 12/13/2001 8/7/2003 4/1/2005 1.0

% Deviation from Average 60 40 The Real BRL Has Recovered Significantly Brazil's Inflation-Adjusted Trade-Weighted Exchange Rate 20 0-20 -40 1/1/1991 10/19/1993 8/7/1996 5/27/1999 3/15/2002 1/1/2005

Export Prices and the Terms of Trade Have Risen but So Have Import Prices Price, 1996=100 120 110 Terms of Trade (P exports/ P imports ) 100 90 80 70 Import Price Export Price 1/1/1994 3/14/1996 5/27/1998 8/7/2000 10/20/2002 1/1/2005

The Terms of Trade Only Explain One- Third of the Trade Surplus Trade Balance at Different Terms of Trade 50000 40000 30000 12-Month Trade Balance With 96 TOT 20000 10000 0 12-Month Trade Balance With 99 TOT -10000-20000 12-Month Trade Balance 1/1/1999 3/14/2000 5/26/2001 8/8/2002 10/20/2003 1/1/2005

The Real Exchange Rate Is Still Weak Compared to Equilibrium % Deviation from Equilibrium 60 40 20 RER 0-20 -40-60 1/1/1997 8/8/1998 3/14/2000 10/20/2001 5/27/2003 1/1/2005

Trade Grows and Vulnerability Falls Percent 35 30 25 20 15 10 5 0-5 -10 Brazil: Measures of Vulnerability Total Trade (12-Month Trailing, R) Current Account Deficit (12 Month Trailing % of Exports, L) 12/31/1995 10/18/1997 8/7/1999 5/25/2001 3/14/2003 12/31/2004 180000 160000 140000 120000 100000 80000 60000 40000 20000 0

Economic Recovery is Underway in Brazil Percent 10 8 6 Real GDP Growth, 4Q/4Q Forecast 4 2 0-2 Q2 1993 Q3 1995 Q4 1997 Q1 2000 Q2 2002 Q3 2004 Q4 2006

Brazil History and Predictions (1) Key Annual Indicators GDP Growth Inflation (IGP-M) Inflation (IPCA) Fiscal Balance (Nominal, % of GDP) Exchange Rate (USD/BRL) Average Interest Rates Trade Balance (USD bn) Exports Y/Y Growth Imports Y/Y growth 2001 1.3 10.4 7.7-5.2 2.3 17.6 2.7 58.2 5.7 55.6-0.5 2002 1.9 25.3 12.5-10.5 3.5 19.5 13.1 60.3 3.6 47.3-14.9 2003-0.2 8.7 9.3-3.7 2.9 23.1 24.8 73.1 21.1 48.3 2.1 2004(e) 5.2 12.4 7.6-2.7 2.66 16.4 33.7 96.5 32.0 62.8 30.1 2005(f) 3.6 6.7 5.6-1.6 2.67 18.1 32.4 110.3 14.3 77.9 24.1 2006(f) 3.4 4.7 4.6-1.0 3.0 15.5 28.7 117.1 6.2 88.4 13.4

Brazil History and Predictions (2) Key Annual Indicators Current Account (USD bn) Current Account (% of GDP) GDP ($bn) External Debt Debt / GDP Debt / Exports Debt Service Ratio 2001-23.2-4.6 510 210 37% 301% 83% 2002-7.8-1.7 456 211 41% 361% 66% 2003 4.0 0.8 488 207 46% 349% 61% 2004(e) 11.7 1.9 606 194 41% 283% 75% 2005(f) 9.8 1.6 628 190 32% 201% 75% 2006(f) 0.9 0.0 634 182 30% 172% 75%

R$ vs US$ Ibovespa Evolution t?chart 14,000 35,000 12,000 30,000 10,000 25,000 Ibovespa (US$) 8,000 6,000 4,000 20,000 15,000 10,000 Ibovespa (R$) 2,000 5,000 0 0 Jan-95 Jul-97 Feb-00 Sep-02 Apr-05 Ibovespa (US$) Ibovespa (R$)

The Brazilian Equity Capital Markets Within Latin America Largest and most liquid equity market accounting for 68% of the total international Latin American equity issuances in 2004 Major Markets International Equity Issuances (US$bn) Country GDP (US$ bn) # of listed companies Market Cap. (US$bn) Average Daily Trading Volume (US$mm) Number of companies with ADR 3.7 0.1 3.8% 3.8 0.5 (Brazil) 492 391 367 418 35 1.0 0.7 (Mexico) 626 327 184 182 24 0.5 0.2 130 (Argentina) 107 51 19 13 39.1% 2.6 (Chile) 72 240 116 49 15 1.9 1995 2004 Brazil Argentina Chile Mexico Others

The Brazilian Equity Capital Markets Within Emerging Markets Major Markets International Equity Issuances (US$bn) Country (China) GDP (US$ bn) # of listed companies 1,410 1,936 Market Cap. (US$bn) Average Daily Trading Volume (US$mm) Number of companies with ADR 1,206 2,917 27 52.4 4.3 6.6 605 685 465 1,922 11 177% (South Korea) (Taiwan) 159 705 457 2,890 7 (India) 599 960 369 1,047 12 30.4 (Brazil) 492 391 367 418 35 18.9 4.1 4.0 4.4 2.9 7.2 1.9 2.6 1995 2004 Brazil Argentina Chile Mexico India China South Korea Taiwan

The Engine Behind the Capital Markets - Macroeconomic Fundamentals Plano Real and Economic Stabilization New FX Policy and Presidential Election Economic Recovery Path Towards Sustainable Growth 3.96 3.15 4.2% 2.10 4.4% 2.70 2.30 5.2% 2.6 1 4.3% 2.7% 3.3% 1.21 1.9% 1.3% 0.8% 0.5% 0.1% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 GDP growth Projected GDP Growth Foreign Exchange Rate (R$ / US$)

Evolution of the Brazilian Capital Markets The strong economic fundamentals and positive perspectives have led to an unprecedented development of the Brazilian Capital Markets Plano Real and Economic Stabilization New FX Policy and Presidential Election Economic Recovery Path Towards Sustainable Growth 2,100 1,900 Lula is elected President 30,000 1,700 Russian Crisis 24,000 1 Brazil Risk (bps) 1,500 1,300 1,100 900 Asian Crisis WTC attack Brazil does not renew IMF credit agreement 18,000 12,000 Ibovespa (R$) 700 6,000 500 300 Emerging Markets Recovery Post-Tequila Crisis Real Devaluation 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Brazil Risk Ibovespa (R$) The Ibovespa is near its historical peak and the country risk near its historical low

d a l l l l l l l Brazil s International Debt Capital Markets Despite the high volatility experienced in the past, Brazil has consistently tapped the international debt market, with a growing number of corporate issuers 25,000 20,000 22,131 2,500 2,000 (US$ mm) 15,000 10,000 5,000 0 74% 12,952 11,769 12,307 48% 42% 54% 7,840 50% 3,951 58% 52% 27% 26% 50% 46% 73% 2000 2001 2002 2003 2004 1Q05 Sovereign Corporates Brazil Risk 1,500 1,000 500 0 Brazil Risk (bps) # of issuers 18 20 15 29 32 12

d a Brazil s Local Debt Capital Markets A sizeable market, with great potential, however heavily dependent on the local interest rate environment 10,000 9,000 9,291 8,845 28 26 (US$ mm) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 # of debentures issuers 27% 49% 6,549 24% 4,270 3,729 23% 8% 2,676 51% 73% 76% 36% 77% 92% 64% 2000 2001 2002 2003 2004 1Q05 Debentures Others Selic (nominal local interest rate) 42 39 25 16 35 10 24 22 20 18 16 14 12 10 Local Interest Rate - Selic (%)

The Brazilian Equity Capital Markets Strong country fundamentals, economic growth and corporate governance have led to a significant boost in the equity market (US$3.5 billion raised in the last 12 months in 13 deals) y US$215mm US$285mm US$240mm US$274mm US$126mm US$150mm US$248mm US$285mm US$408mm US$158mm Ibovespa (R$) US$215mm US$137mm US$377mm US$175mm US$110mm US$209mm PETROQUÍMICA US$65mm US$130mm US$188mm US$280mm 2002 2003 2004 2005 Ibovespa IPO Follow-on

Corporate Governance: A Milestone of the Equity Capital Markets Main requirements (# of companies) 50 40 30 20 10 0 15 15 26 2 3 21 Level I Level II Novo Mercado Tag along rights for ON shares 80% 100% 100% Tag along rights for PN shares na 70% na Tender offer / buyback at economic value Minimum Free Float of 25% Minority shareholder representation on board Financial results in US GAAP or IASC GAAP 1 Selective voting rights for preferential shares na Sign-up to arbitration chamber Annual calendar of events Number of Companies Listed Under Bovespa s Corporate Governance Levels 34 2 3 44 7 7 8 29 30 30 2001 2002 2003 2004 2005 Level I Level II Novo Mercado 47 9

Corporate Governance: A Milestone of the Equity Capital Markets Since the creation of Bovespa s corporate governance levels in 2001, all IPOs were listed either on Level II or on the Novo Mercado IPOs Jan-02 May-02 May-04 Jun-04 Jun-04 Sep-04 Oct-04 Nov-04 Nov-04 Mar-05 US$126mm US$215mm US$248mm US$280mm US$188mm US$285mm US$215mm US$158mm US$137mm US$175mm Higher standards of corporate governance have become a condition sine-qua-non for first-time issuers to access the Brazilian equity capital markets

Growing Trading Volumes and Investor Profile r r g g g g g g g Historical Trading Volume Breakdown by Investor (US$ mm) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 CAGR = 29% 90,622 82,353 17% 68,363 17% 63,338 40,748 20% 30% 32% 28% 12% 36% 32,777 27% 29% 28% 35% 26% 31% 28% 27% 27% 17% 24% 24% 21% 23% 20% 20% 2H02 1H03 2H03 1H04 2H04 1Q05 (% of total offering amount) Recent IPOs - Investor Allocation Breakdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6% 70% 65% 59% 16% 10% 14% 19% 12% 48% 10% 8% 48% 20% 9% 32% 32% 32% 32% 59% 61% 10% 29% Natura Gol ALL CPFL Grend. DASA Porto Seguro Retail Local Institutional Investors Foreign Investors Others Brazil International Retail - Brazil Retail - International

Brazilian Capital Markets Trends Public market financing has become a strong financing instrument reflecting the increasing local and international investor appetite Clear trend towards the development of the local debt market reduction of FX risk exposure at attractive local rates Debt Continuous replacement of bank financing for capital markets instruments International debt issuances focused on attractive rates and longer maturities Increased emphasis on corporate governance Growing participation of retail and foreign investors Equity Growing number of mid and small caps accessing the market Large variety of sectors accessing the market Higher than historical valuations being achieved

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