Brazil

May 5, 2010 MORGAN STANLEY BLUE PAPER

MORGAN STANLEY RESEARCH GLOBAL

Economics

Marcelo Carvalho 

+55 11 3048-6272 +55 11 3048-6195

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Giuliana Pardelli 

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Strategy

Guilherme Paiva, CFA 

+1 (212) -761-8295

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Equities

Subhojit Daripa, CFA 

+55 11 3048 6112

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Carlos De Alba 

+1 (212) 761 4927 +1 (212) 761 4542

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Javier Martinez de Olcoz Cerdan 

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Brazil Infrastructure Paving the Way

Emerging economies have shown remarkable, resilient growth in recent years. Indeed, Morgan Stanley expects strong secular forces to continue driving outperformance in emerging vs. developed economies for some time to come. For Brazil, low infrastructure investment could become the bottleneck to growth. Other necessary steps include improving the business environment, rethinking fiscal spending priorities, reforming the tax burden, and improving the current fiscal framework. Brazil must double its infrastructure investment rate to live up to the expectations for a BRIC member. Overall investment-to-GDP ratio averaged 17% in the past 5 years, vs. China’s 44%, India’s 38%, and Russia’s 24%. To grow at 5% per year in the next decade, infrastructure investment must double from the 2.1% of GDP average in recent years. We believe Brazil will rise to the occasion and, over time, achieve our base case of infrastructure spending at 4% of GDP. Scheduled projects include: 2014 World Cup, 2016 Olympics, pre-salt oil reserves, and government-backed Growth Acceleration Program. We highlight two ways for investors to participate in infrastructure investment: 1) our analysts’ top 10 picks (Cosan, Cosan Ltd., OSX, Lupatech, Gerdau, Usiminas, CCR, ALL, Tractebel, CPFL) and 2) a basket of 20 related plays (bbg ticker: <MSBZINFR>).

Nicolai Sebrell, CFA 

+55 11 3048 6133

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