Brazil: Investing In Brazil In 1997

I - BACKGROUND ON BRAZIL

Brazil is the only Latin American country that was colonized by the Portuguese. It is also the largest and most populated country in South America. Brazil occupies over half the continent of South America and 40% of Latin America. Brazil has a common border with all South American countries except Ecuador and Chile.

Portugueses is the official language of Brazil, and Roman Catholicism is the major religion. Brazil became independent from Portugal in 1822 and is currently a Federal Republic headed by a president and two chambers of legislature.

The federal capital, for strategic and development reasons, is located in the center of the country and is not close to any active industrial or agricultural area. The main economic activity of the country is concentrated in the South Eastern region of the country, near the cities of Sao Paulo, Rio de Janeiro and Belo Horizonte.

The unit of currency is the "Real" (R$). This currency was introduced on July 1, 1994 through the so-called "Real Plan". Even though the initial rate between the Real and the U.S. dollar was R$1.00 for each US$1.00, being it that such a rate is now R$1,043, the severe inflation rate that prevailed in Brazil's economy for the last decades has been eliminated. Therefore, the new currency has proven to stable, thus economic development has increased as of 1994.

Brazil's population, of approximately 150 million, is multiracial including the initial Portuguese immigrants and their slaves, as well as the later Japanese, Italians, Germans and Swiss which immigrated during the second half of the twentieth century. The labor force in Brazil consists of approximately 64.5 million workers.

II - BRAZIL'S ECONOMY*1

The Brazilian economy expanded rapidly during the period from 1968 to 1980. Gross National Product (GNP) increased at an average rate of 7% per annum. In the eighties, GNP 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 hidroelectric plants, offshore drilling equipment, steel, cement, aluminum, 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 1997

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, porfolio investment, as well as capital investment, have increased tremendously. The 1995 and 1996 calendar years proved to be sucessful 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 1997 is very optimistic, being it that the basic scenario for 1997 does not contain any abrupt changes in the Real Economic Plan. The average GNP forecast*2 for 1997, estimates a growth of approximately 4,0% in 1997 and higher rates for the following years. Inflation is expected to be 10,4% for 1997, as well as the exchange rate will devalue approximately 7,9%, on average.

Huge capital investments are expected in the telecommunications and energy industries. Major automobile manufacturers have announced the creation and development of new industrial plants and factories. Brazil's major steel and mineral government owned company, Companhia Vale do Rio Doce (CVRD), will be privatized in 1997. Additionally, the insurance and financial markets, now more open to foreign investment than in the past, will be receiving foreign financial aid from world leading banks.

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 acquisition 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.

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.

For more information please contact us.

*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.

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