The US dollar closed Thursday, May 20 at R$ 1.68 to US$ 1.00.

The Sao Paulo stock exchange index (BOVESPA) closed at -1.21% on May 20; it is up 78.17% thus far this year.

Macroeconomic

Brazil's first quarter economic performance was better than many analysts expected, declining only one percent compared with the first quarter of 1998. In fact, GDP actually grew one percent when compared with the last quarter of 1998, the first positive quarter-over-quarter result since the middle of last year. A surprising showing by the agriculture sector - which expanded nearly 18 percent over the last quarter of 1998 - helped offset otherwise dismal performance in the industrial and services sectors.

The Central Bank announced that Brazil's primary surplus surpassed R$ 9 billion (or 4.1 percent of GDP) during the first quarter, more than R$ 3 billion above the IMF target.

The Brazilian treasury successfully auctioned R$ 500 million of 180-day fixed rate securities, the longest maturity sold to investor since the Government of Brazil once again began issuing the instruments on March 23. Respected MIT economist Paul Krugman spoke in Sao Paulo, praising the remarkable recovery of the Brazilian economy, but expressing caution that many risks still remained and that the recovery was still "Fragile."

The Senate approved by a wide margin a constitutional amendment that will allow the Congress finally to implement and regulate the 1988 constitutional article 192 concerning the financial system. Congress had been unable to approve the implementing legislation for this section of the constitution because of a notorious but unenforceable limit of 12 percent on annual interest rates. The Chamber also

seated a special committee to review the Government's proposed fiscal responsibility law.

On May 19, the SELIC rate dropped from 27% to 23.5% per annum.

Some of the Government's hard-won advances on social security are in threat of being undermined. The Chamber is trying to sort out its differences with the Cardoso administration over an executive decree imposing a minimum retirement age of 65 for men and 60 for women in the private sector. Public sector retirees also are challenging legality of new contributions.

Various monthly inflation indices released recently show April inflation results of less than 0.5 percent, with some forecasters projecting near zero inflation for May.

II. U.S. Commercial Service Highlights.

Telecommunications.

Lucent Technologies has invested more than US$ 100 million in Brazil over the past two years. According to Art Medeiros, president of Lucent Technologies for Latin America and the Caribbean, a country with 160 million

inhabitants and with just 20 million phone lines installed offers great business opportunities.

Lucent has a factory in Campinas, state of São Paulo, manufacturing equipment for the cellular sector and assembly of radiobase station. By the end of the year it should conclude the installation of another factory for the production of system of optical fiber, for an investment of about US$ 30 million. Lucent executives confirmed the purchase of two Brazilian fixed line companies in Telemar's area: Batik and Zetax. Lucent thus entered this market, since it did not during the band-A privatization. The purchase of the two companies will involve resources above US$ 50 million. The company is supplying telephony equipment in various regions of the country, mainly in the digital cellular area. It supplies services and equipment for Telesp

Cellular, Telefônica and Tele Celular Sul with whom it has contracts that add up to US$ 436 million. In April, it concluded a contract with Embratel-MCI for the supply of a software that will be used in Call Center system (system that allows the transfer of calls). That contract raised

the company business in Brazil to a figure of around US$ 500 million. (Correio Brasiliense, p. 02, May 17, 1999)

Internet.

Charles Herington, President of AOL for Latin America, talked about the company plans for the Brazilian market. According to Herington, in Brazil, AOL should begin to provide access in "some of the ten larger Brazilian cities" in the last quarter of this year. The total investment of AOL and its partner, the Venezuelan group Cisneros, is of the order of US$ 200 million. That investment will be divided over three countries: Brazil, Argentina and Mexico. Herington states that the site will offer exclusive services for Brazil, but he denied that AOL is seeking partners in the country. (Folha de São Paulo, p. 04, May 15, 1999).

Coffee.

Starbucks, the largest specialized coffee chain of United States, started to sell a Brazilian brand among the so called gourmet or specialty coffees. It is the first time that Starbucks markets a coffee identifying in the packing the origin and the producing farm. (Época Magazine, p.98, May 17, 1999).

Electrical Energy Sector.

New Secretary of Energy Benedito Carraro created a Coordinating Committee for Planning of Electrical System Expansion based on Eletrobras Plan for 1999-2008. Its focus will be on new investment (projected at R$ 34 billion or about US$ 20 billion) in transmission lines, which remains under government control.

New Jersey Company Public Service Electricity and Gas just announced a US$ 500 million investment -its second in Brazil—for a 600-megawatt thermoelectrical plant in Curitiba to be operational by year 2002. It has co-ownership with Petrobras. Its first investment of R$ 550 million (about US$ 46 million in 1998) was to assume 31 percent of equity in Rio Grande

Energy in July 1997 in consortium with VBC and Previ Investment Fund (Bank of Brazil).

COPEL - The only Brazilian electrical energy company listed on the New York Stock Exchange (25% of its shares) represents one of the best companies in this sector. For example its 1998 profits of R$ 403.3 million (about US$ 336 million) rose 33.5 percent above those in 1997. According to Brazilian press sources, this significant increase can largely be attributed to expanded agribusiness exports and installation of new automobile factories. Unlike many other Brazilian electrical companies, Copel is active in all energy areas (i.e., generation, transmission, distribution). Its installed capacity of 3,360 megawatts will reach 4540 Megawatts by end of 1999 due to start-up of new plant at Salto Caxias.

Thermoelectric - Two new plants will open near Recife in the State of Pernambuco: one with 240 megawatts by Asea Brown Boveri together with Shell for RS150 million (about US$ 95 million), and the second for US$ 200 million for regasification.

Oil and Gas.

On May 24 the Brazilian oil industry will create a National Organization of

Petroleum (ONP) to stimulate the domestic industry, largely at the initiative of the Rio State Federation of Industries (FIRJAN). (By contrast, the foreign oil companies in Brazil belong to the IBP or Brazilian Institute of Petroleum — which includes eight U.S. exploration and production companies in addition to other multinationals.) The ONP's first task will be to survey the national technological capability in order to be able to advise foreign companies on the availability of domestic goods and services to support investment in this sector.

Petrobras suffered significant first quarter losses of R$ 115.1 billion (US$ 67.7 million), largely due to the devaluation which began early in 1999. About 40 percent of its inputs are imported.

Reportedly for the first time in its history Petrobras is rescinding all contracts to buy and/or rent platforms. To date it has already cancelled three contracts for R$ 901.6 million (about US$ 530 million), citing that the decline in equipment prices for this sector in the foreign market and the reduction in drilling wells.

Computers.

IBM re-structured its Rio-based operations to optimize its new America Integration Process Plan for cost effectiveness and interface among the subsidiaries in the United States, Canada and Latin America. To establish a closer business relationship with its customer base — largely located in Sao Paulo — IBM transferred 300 infrastructure staff to Sao Paulo and

Hortolândia, Campinas, where IBM has its plant. About 1,000 employees remain in Rio de Janeiro with another 1,700 employees now in São Paulo State.

III. List of Trade Events Scheduled for Brazil.