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T H E R O L EO F

C A P I T A L M A R K E T SI N B R A Z I L

Roberto Teixeira da CostaNew York, July 26, 2011

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Before the sixties, Capital Markets were

practically inexistent in Brazil : Small rate of savings Commercial banks offered checking account with

nominal interest Inflation fear was not a factor Investors preferred real estate investments Stock exchanges were not relevant, with very few

corporations listed Share offering was not a factor to capitalize

corporations Public and private debt instruments were not used and

did not inspire investors confidence

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In the fifties, DELTEC and IBEC (Rockfeller family), both created by American businessmen, pioneered in creating a distribution system to sell equity securities and mutual funds throughout Brazil on a door-to-door basis. That lasted till the beginning of the sixties . The surge of fixed income securities in the financial markets, associated to the lack of motivation of corporations to go public, made such pioneer efforts to change their focus and to adapt to a new environment where fixed income securities started to prevail.

From that moment on, inflation became a factor for investors in the early sixties. Protection against currency devaluation gradually started to be searched including buying foreign currencies.

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A big effort to foster Capital Market developments was introduced in 1964/65, with deep reforms in the financial markets through specific legislation. That was one of the many measures enforced by the militar regime

• Creation of the Central Bank, with a specialized Capital Markets Department. (1965)

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• Approval of a Capital Market Law, also in 1965, based basically on:

Incentives for investment in new Equity issuesCreation of specialized institutions to operate in

different segments of the financial markets. Investment banks were createdBrokerage houses were restructured, allowing

new entrantsIncentive for dividend paymentsTaxation reduction on dividend distributedConvertible bonds were authorizedGovernment fixed income securities with

monetary correction was made possible

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• Creation of a Capital Market agency within the Central Bank

As consequence:

A new interest for buying shares.

There was a spiral of price increases in the very small and narrow stock market that led to a boom in securities prices.

At the end of the 60’s such extraordinary and uncontrolled boom led to an incredible stock price overvaluation and new issues coming into the market unprepared for such boom.

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Most corporations that went public did not realize the implication of being a listed company.

Situation : lack of transparency and proper regulation led to rampant speculation

The result was a dramatic price correction in the market. That made some new investors into the stock exchanges to loose fortunes. Such process lasted for some years and the stock market as an investment alternative was affected.

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THE NEW PHASE :

RECONSTRUCTION

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In 1976, a new Government considered the Capital Market as

an instrument essential for economic and social

development, approved a reform to attack the 4 leading aspects identified as main factors that

caused the crisis of 1971.

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• I.      A New Corporate Law focused on stronger protection to minority shareholders and also making possible the issuance of new debt instruments to capitalize corporations.

• II.      The creation of an independent Securities Commission to regulate capital markets, new issues, mandatory auditing, brokerage houses, etc. Stimulation of self-regulation by the Stock Exchanges.

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• III.      A solid basis of institutional investors to build strong support for the market to operate. It was made crystal clear that one of the reasons of the market rupture before and after the crisis was the inexistence of institutional investing that could operate on a contra cyclical basis. One of the major initiatives within this segment of Institutional Investors was the regulation of Pension Funds (since a few, such as Banco do Brasil - Previ, already existed, without any legal framework to protect insured participants), which were obliged to invest a minimum of 20% of their assets in equities (1978)

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• IV.      Gradual opening for foreign investors to participate in the market, initially exclusively through institutions and after also by individuals.

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FROM 1976/77

TILL THE NEW CENTURY

35 YEARS ELAPSED

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The main factors affecting Capital Market evolution were:• Strong and unfair competition of Debt Instruments

X Equities due to very high inflationary situation present till mid nineties and high positive interest rates.

• No incentive in most of the period (1995 – 2002) for companies to go public. Prices were not attractive to sell shares.

• Institutional Investors, particularly Pension Funds, became a relevant factor in the market.

• Foreign investors in the nineties gradually started to play an important role.

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IPOs Evolution (from 1995-2002)

Source: BM&FBovespa

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• Some leading Brazilian corporations were listed in NYSE and started to be traded through ADR’s.

• The Securities Commission acted with stronger force in the market in recent years. More resources and support from the MoF.

• Corporate Governance became a factor in the eyes of investors as listed corporations became more attained to create shareholder value.

• Foreign Investment Banks also started to play an important role as mutual fund managers and in the underwriting market (respecting the Chinese Wall).

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• BOVESPA created the New Market, with more disclosure, liquidity and more protection to minority shareholders (see enclosed).

• A big surge in IPO’s were affected later by the financial crisis in 2008 (see chart on next pages)

• New Debt Instruments and a variety of funds became available for investors. Recently the government has been creating incentives for the private sector to sell securities with longer maturities.

• During the first semester of 2011, Brazilian corporations captured R$ 57,8 billion showing an increase of 12,5% compared with the same period in 2010. Issue of fixed securities represented R$ 42 billion where 51% were represented by bonds.

• Stock issues (IPOs and follow on) represented R$ 15,7 billion (9% over 2010).

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Evolution of IPOsCorporate governance as the norm for local companies

IPOs by Listing Segment* Participation of Listing Segments at the Exchange (2010)

• 35% of total listed companies• 66% of market capitalization• 80% of traded value

Source: BM&FBOVESPA. (*)Data from 2004 to 2010.

Novo Mercado73%

Nível 213%

Nível 16%

BDR6%

174 companies

19 24 31 33 37 36 44 43 35 37 393 3 7 10 1420 18 19 18 18

2 27 18

44

92 99 105 112 117

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mar/11

Novo Mercado

Nível 2

Nível 1

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2004 2005 2006 2007 2008 2009 2010 40603

4.3 8.5 15.1 14.5 26.8

22.2

63.2

1.2 4.5

5.4

15.4

55.6

7.5 23.7

11.2

3.9

Follow-On IPO Excluding capitalization with barrels reserves by federal government

30,4

70,1

8,813,9

34,3

45,9

149,2

30,4

70,1

8,813,9

34,3

45,9

149,2

30,4

70,1

8,813,9

34,3

45,9

149,2

30,4

70,1

8,813,9

34,3

45,9

149,2

74,81

Public Offerings in 2009/2010

Recent capital raising activity

• 24 public offerings in 2009 (6 IPOs and 18 Follow-On), raised BRL 46.0 bi• 22 public offerings in 2010 (11 IPOs and 11 Follow-On), raised BRL 69 billion

Source: BM&FBOVESPA.

BRL billion

5,1

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Capital raising activities – Equities(December 2010 - US$ millions)

Taiwan SE Corp.

Indonesia SE

Korea Exchange

Bursa Malaysia

Warsaw SE

National SE India

Shenzhen SE

Shanghai SE

BM&FBOVESPA

Hong Kong Exchanges

0

20,0

00

40,0

00

60,0

00

80,0

00

100,

000

120,

000

BME Spanish Exchanges

Tokyo SE Group

Australian SE

NYSE Euronext (Europe)

Shenzhen SE

London SE Group

Shanghai SE

BM&FBOVESPA

Hong Kong Exchanges

NYSE Euronext (US)

0

50,0

00

100,

000

150,

000

200,

000

250,

000

Source: World Federation of Exchange (WFE). ¹ Members of Emerging Markets Committee - IOSCO.

Ranking WFE

3rdplace

11 IPOs

Ranking WFE

2nd place

Inicial Public Offerings

Other Offerings

Emerging Markets World Markets

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BM&FBOVESPA:

an important Global Player

Number of listed companies: 465 (mar-11)

Market capitalization of the listed companies: R$ 2,5 trillion (USD 1,5 trillion)

LISTED COMPANIES

The world’s 1st largest equity option markets (Mar/2011)*

World’s 4th largest market in terms of capital raising activities (Mar/2011)*

Ranked among the world’s top 6 derivatives exchanges (2010)**

IMPORTANT CAPITAL MARKET

Largest stock and derivatives exchange in Latin America

4th largest listed exchange in the world – UD$ 15,5 billion (Apr/27/11)

Source: * WFE and IOMA; ** FIA

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Novo Mercado creation: reflecting the best corporate governance practices and assuring essential rights to the investors Non-resident Investor: improvement of the regulations (Resolution 2.689/2000) and increase in the promotion of the Brazilian market abroad (BEST) Institutional alliance to generate incentives

– Investment Banks: self-regulation code – exclusive ANBIMA signet for offerings made by companies listed at least in Level 1 (Nível 1)

– Pension Funds: Resolution 2829/2001 – higher allocation limit for shares listed in Novo Mercado, Level 1 and Level 2

– BNDES: possibility of invested companies making their IPO in the Novo Mercado

Macro economic context: currency stability

Fundamental factor

Solution found

Market Anomaly in the 90’s

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Individual Investors(in the Brazilian Stock Exchange)

YEAR INDIVIDUAL INVESTORS

2002 85,249

2003 85,478

2004 116,914

2005 155,183

2006 219,634

2007 456,557

2008 536,557

2009 552,364

2010 610,915

2011 (till May ’11) 607,179

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Individual Investors (in Stock Exchange)

COUNTRY INDIVIDUAL INVESTORS

Brazil Less than 0,5%

USA More than 50%

There is a great gap in the comparison of the financial volume traded in the share market by individual investors in 2010 . In

Brazil they were responsible for 26,4% while in Korea represented 84,7%

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Operational highlights: investor’s participation in Total Volume

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IBOVESPA Evolution(Dec 00 – May 11)

Source: Bovespa

0

10000

20000

30000

40000

50000

60000

70000

80000

dez-00

mai-01out-0

1

mar-02

ago-02

jan-03

jun-03

nov-03

abr-0

4se

t-04fev

-05jul-0

5dez-

05

mai-06out-0

6

mar-07

ago-07

jan-08

jun-08

nov-08

abr-0

9se

t-09fev

-10jul-1

0dez-

10

mai-11

Ibovespa (R$) Ibovespa (US$)

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Stock Exchange Comparison(000.000 of US $- 2005 – Jun 2011)

Source: Bovespa

Exchange

2005 2006 2007 2008 2009 2010 2011 Total

Buenos Aires SE 6.847,7871 5.281,1485 451,9266 6.642,2146 2.755,4344 3.804,8885 1.678,0384 27.461,4382

Colombia SE 7.107,8389 14.999,5591 1.870,4724 20.524,9999 19.168,5209 28.269,0301 14.621,2141 106.561,6353

Lima SE 2.626,6644 5.492,4342 654,8091 6.349,9286 4.591,6037 5.012,0658 3.990,8943 28.718,4001

Santiago SE 19.060,7371 29.691,1723 2.990,1624 36.808,4939 38.106,9955 53.818,2232 31.638,1625 212.113,9469

Mexican Exchange 56.739,93 96.320,19 123.907,67 112.713,22 84.908,98 122.583,95 64.894,12 662.068,0526

Sao Paulo SE 166.486,8929 276.075,5120 36.101,8328 750.250,5301 646.871,2782 868.813,0444 473.364,0426 3.217.963,1331

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Stock Exchange Comparison(000.000 of US $- Jan 2011 – Jun 2011)

Source: Bovespa

Buenos Aires SE

Colombia SE

Lima SE

Santiago SE

Mexican Echange

Sao Paulo SE

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Brazilian Sustainability Index (ISE)(Dec 05 – Apr 11)

Source: Bovespa

1.000

1.200

1.400

1.600

1.800

2.000

2.200

2.400de

z/05

abr/

06

ago/

06

dez/

06

abr/

07

ago/

07

dez/

07

abr/

08

ago/

08

dez/

08

abr/

09

ago/

09

dez/

09

abr/

10

ago/

10

dez/

10

abr/

11

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F I N A L

R E M A R K S

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• Stimulation of domestic voluntary savings.• Continuous enhancement of the rules for foreign

portfolio investment, which grew consistently. • Creation of a financial alternative for Brazilian

corporations to expand.• Private sector was given increased responsibility in

voluntary capital allocation.• Privatization was an important element to increase

the size of the market and supplying investors with more alternatives.

Accomplishments

Capital Markets in Brazil

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• Capital Market was a factor that helped economic stabilization process.

• Strong financial system with local ownership was essential to minimize impact of external crisis.

• Brazilians preserved the capital market and entrepreneurship during difficult times. (Brazil X Argentina: a good example).

• Public ownership in corporations increased the support for a market economy.

• Efficiency and productivity was enhanced by employees ownership of stocks of their corporation when they went public.

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• Ethical behavior for listed corporations was a positive factor. Increased social responsibility: environment protection and minority interests, as well.

• Thus, corporate governance affects positively the different ambient were corporations acts. In comparative terms Brazil ranks in better position compared to BRICs countries (Russia, India and China)

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The Regulatory and Surveillance Authority (CVM) is complemented by the:

• CVM (Brazilian Securities Commission), in its role as a and supervising institution, is fighting to diminish the time lag between market deviations and “punishment – judgment”.

• Self-regulatory role of the stock and futures exchanges

• Growing relevance of the self-regulatory role played by the National Association of Investment Banks:

• Managers of investment funds• Investment banks acting in the public offering of securities

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• Local accounting procedures (Brazilian GAAP) is making progress in terms of convergence to international standards (IFRS).

But…

• High inflation rates increased by interest rates desestimulation for investments in equities.

• Public debt instruments captured a large position of the country’s savings, but still have a short average duration.

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• Volatilityo Swings in the market created discomfort for shareholders. Stock

Exchange volatility continues to fear investors.o Difficulty to attract individual investors to the market. The target

of 5 million individuals in the Stock Exchange looks difficult to accomplish

• Need for additional corporate governance enhancement has yet to be completed.o 1 share 1 voteo Tag along in sale of controlling interest.o More independent Board Members.o More corporations, without controlling shareholders.

Problems to be addressed

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Low savings ratio to GDP

Brazil 17%China 54%

India 34,7%

Russia 25%

USA 11,5%

Korea 31,5%

Source: IMF - 2010

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• There were some inconsistencies in Government policies towards Capital Market development but recently has received more attention from Economic and Financial authorities. The recent cases of Petrobras (capital increase) and VRD (management change) are clear indicators of government strong hand in such leading trading corporations.