April 2003 Prepared for presentation at the XVIII Meeting of the Latin American Network of Central Banks and Finance Ministries Special Focus: Brazil and

April 2003April 2003

Prepared for presentation at the Prepared for presentation at the XVIII Meeting of the Latin American XVIII Meeting of the Latin American Network of Central Banks and Finance Ministries Network of Central Banks and Finance Ministries

Special Focus:Brazil and Argentina

Special Focus:Brazil and Argentina

OUTLINE

i.i. BrazilBrazil

Recent DevelopmentsRecent Developments

Debt DynamicsDebt Dynamics

Liquidity AnalysisLiquidity Analysis

ii.ii. Argentina Argentina


Debt Restructuring, Debt Dynamics and Debt Restructuring, Debt Dynamics and Bank SolvencyBank Solvency

Lula’s Policy Iniciatives

Primary surplus target increased from 3.75% of GDP to 4.25% for 2003

Benchmark interest rate hiked from 25% to 26.5% by the COPOM since the

beggining of Lula’s administration

Revenue raising iniciatives such as the renewal of the CPMF

Macroeconomic policies

Social Security reform in order to reduce the deficit of Public Sector Social

Security System (currently at 4.1% of GDP )

Foster Central Bank autonomy

Structural Reforms

“Zero Hunger” (“Fome Zero”) social plan, cost limited to BRL 2 billion

(0.15% of GDP) in 2003 budget

Employment plans mainly aimed at young people

Social Policies

OUTLINE

i.i. BrazilBrazil







Debt Dynamics: Benchmark Scenario

Assumptions

Domestic real interest rate: 13%

Interest rate on external debt: 11.3% Average real interest rate on public debt: 10.3% (includes monetary base)

Growth rate: 2.5%

Target surplus: 4.25% of GDP

Initial debt ratio in Jan-03: 55.9%

Public Debt Dynamics: Benchmark Scenario

3.95

4.00

4.05

4.10

4.15

4.20

4.25

4.30

Required Target Observed*

*Last 12 months ending in January 2003

Primary Balance

% G

DP

4.08%

4.26% 4.25%

Public Debt Structure January 2003

Fixed

Rate 1%

Others

18%

External or FX indexed Public Debt

39%

Indexed to the Interest Rate

42%

Public Debt Stock: US$ 252.1 billion (55.9% of GDP)

External Financial Conditions and the Exchange Rate

R$

per

dolla

r

basi

s po

ints

exchange rate

EMBI+

Brazil1.7

2.2

2.7

3.2

3.7

4.2

02-E

ne-0

1

09-M

ar-0

1

15-M

ay-0

1

20-J

ul-0

1

21-S

ep-0

1

26-N

ov-0

1

23-E

ne-0

2

25-M

ar-0

2

23-M

ay-0

2

22-J

ul-0

2

16-S

ep-0

2

11-N

ov-0

2

9-E

ne-0

3

10-M

ar-0

3

500

1000

1500

2000

2500

3000

300

800

1300

1800

2300

2-E

ne-0

1

2-M

ar-0

1

2-M

ay-0

1

2-Ju

l-01

2-S

ep-0

1

2-N

ov-0

1

2-E

ne-0

2

2-M

ar-0

2

2-M

ay-0

2

2-Ju

l-02

2-S

ep-0

2

2-N

ov-0

2

2-E

ne-0

3

2-M

ar-0

3

10

15

20

25

30

35

External Financial Conditions and Domestic Interest Rates(C-Bond Spread in b.p. and 360-day Interest Rate Swap in %)

C-B

on

d S

pre

ad

Inte

res

t R

ate

interest rate

C-Bond spread

Public Debt (% of GDP)

Interest Rate

Growth Rate

Incremental Fiscal Effort

Fiscal Impact of:

10% real depreciation 57.3% 10.3% 2.5% +0.1%

1% increase in the domestic interest rate

55.9% 10.8% 2.5% +0.3%

Debt Dynamics: Sensitivity Analysis

1% reduction in the growth rate 55.9% 10.3% 1.5% +0.6%

Public Debt Composition(in % of total, January 2003)

Domestic74%

External26%

Domestic Public Debt by Holder (31st January 2003, % of total)

Banks34%

Investment Funds34%

Other4%

Reserve Requirements

20 %

Non-financial private sector

8%

Banks’ Exposure to the Public Sector Public Bond Holdings, March 2002

0%

50%

100%

150%

200%

250%

300%

350%

In % of Banks’ Assets In % of Banks’ Net Worth

Source: JP Morgan

OUTLINE

i.i. BrazilBrazil







Liquidity Requirements of the Public Sector (Billions of US dollars)

2003

I. FISCAL DEFICIT (est.) 17.8

II. PUBLIC DEBT AMORTIZATIONS* 86.8

Domestic Debt 64.7External Debt 22.1

III. POTENTIAL LIQUIDITY REQUIREMENTS (I +II): 104.6

*Amortizations were converted to dollars at an XR of 3.6 Reales per dollar

Note: Total Available Liquid Funds are International Reserves plus expected disbursements under the IMF agreement

Total Available Liquid Funds of the public sector in % of Potential Liquidity Requirements

60%

Liquid International Resources of the Public Sector (billions of US dollars)

I. International Reserves (January 2003)

III. Total Available Liquid Funds ( I+II)

Note: Under the new IMF agreement there is an agreed floor for reserves of US$ 5 billion

In % of Liquidity Requirements

II. IMF Disbursements under the new agreement (during 2003)

2003

38.8

62.8

24.0

60%

Liquidity Requirements of the Private Sector (billions of US dollars)

2003

EXTERNAL DEBT AMORTIZATIONS 17.0

Medium and Long Term 12.4

Short Term 4.6

Total Liquidity Requirements (billions of US dollars)

Fiscal Deficit (est.) 17.8

Public Debt Amortizations 86.8

III. TOTAL POTENTIAL LIQUIDITY REQUIREMENTS (I +II) 121.6

17.0

Total Available Liquid Funds of the public sector in % of Potential Liquidity Requirements

52%

I. PUBLIC SECTOR BORROWING REQUIREMENTS

II. PRIVATE SECTOR EXTERNAL DEBT AMORTIZATIONS

104.6

2003

OUTLINE

i.i. BrazilBrazil







Nominal Exchange Rate Pesos per Dollar, Free Exchange Rate Market

1.5

2

2.5

3

3.5

4

15-E

ne-0

2

13-F

eb-0

2

07-M

ar-0

2

03-A

br-0

2

25-A

br-0

2

20-M

ay-0

2

11-J

un-0

2

04-J

ul-0

2

29-J

ul-0

2

21-A

go-0

2

12-S

ep-0

2

04-O

ct-0

2

29-O

ct-0

2

22-N

ov-0

2

16-D

ic-0

2

09-E

ne-0

3

31-E

ne-0

3

24-F

eb-0

3

18-M

ar-0

3

Currency Forward Premium1 year NDF

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

02-E

ne-0

1

02-M

ar-0

1

02-M

ay-0

1

02-J

ul-0

1

02-S

ep-0

1

02-N

ov-0

1

02-E

ne-0

2

02-M

ar-0

2

02-M

ay-0

2

02-J

ul-0

2

02-S

ep-0

2

02-N

ov-0

2

02-E

ne-0

3

02-M

ar-0

3

Financial Crisis

Liquid International Reserves of the C.B

6,000

9,000

12,000

15,000

18,000

21,000

24,000

27,000

02-E

ne-0

1

06-F

eb-

01

13-M

ar-

01

17-A

br-0

1

22-M

ay-

01

26-J

un-

01

31-J

ul-0

1

04-S

ep-0

1

09-O

ct-0

1

13-N

ov-0

1

18-D

ic-0

1

22-E

ne-0

2

26-F

eb-

02

02-A

br-0

2

07-M

ay-

02

11-J

un-

02

16-J

ul-0

2

20-A

go-0

2

24-S

ep-0

2

29-O

ct-0

2

03-D

ic-0

2

07-E

ne-0

3

11-F

eb-

03

18-M

ar-

03

IMF disbursement of U$S 4 bn.

Cavallo and De La Rúa resign

Implementation of the “Corralito”

US$ 10,515 million

Repayment to IMF of US$ 1 bn.

US

$ m

illio

ns

Interest Rate Time deposits, 30 days

2%

12%

22%

32%

42%

52%

62%

En

e-01

En

e-01

Mar

-01

Ab

r-01

May

-01

May

-01

Jun-

01

Jul-0

1

Ag

o-01

Se

p-01

Oct

-01

Nov

-01

Dic

-01

En

e-02

Fe

b-0

2

Mar

-02

Ab

r-02

May

-02

Jun-

02

Jul-0

2A

go-

02S

ep-

02

Oct

-02

Nov

-02

Dic

-02

En

e-03

Fe

b-0

3

Total Deposits: Evolution since Implementation of the Corralito

62500

68500

74500

80500

86500

3-D

ic-0

1

23-D

ic-0

1

12-E

ne-0

2

1-F

eb-0

2

21-F

eb-0

2

13-M

ar-0

2

2-A

br-0

2

22-A

br-0

2

12-M

ay-0

2

1-Ju

n-02

21-J

un-0

2

11-J

ul-0

2

31-J

ul-0

2

20-A

go-0

2

9-S

ep-0

2

29-S

ep-0

2

19-O

ct-0

2

8-N

ov-0

2

28-N

ov-0

2

18-D

ic-0

2

7-E

ne-0

3

27-E

ne-0

3

16-F

eb-0

3

8-M

ar-0

3

28-M

ar-0

3

Implementation of the Corralito

- AR$ 23,396 million

+ AR$ 8,443 million

A$

mill

ions

Consumer Price Inflation(Yearly and annualized monthly rates)

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

En

e-01

Mar

-01

May

-01

Jul-0

1

Se

p-01

Nov

-01

En

e-02

Mar

-02

May

-02

Jul-0

2

Se

p-02

Nov

-02

En

e-03

Mar

-03

-50%

0%

50%

100%

150%

200%

250%yearly rate

annualized monthly rate

year

ly r

ate

annu

aliz

ed m

onth

ly r

ate

Industrial Production (s.a. index, 3-month moving average, June 1998=100)

70

74

78

82

86

90

94

98

102

Jun-

98

Oct

-98

Fe

b-9

9

Jun-

99

Oct

-99

Fe

b-0

0

Jun-

00

Oct

-00

Fe

b-0

1

Jun-

01

Oct

-01

Fe

b-0

2

Jun-

02

Oct

-02

Fe

b-0

3

Russian Crisis

Financial Crisis

28

33

38

43

48

53

Feb-

01

Mar

-01

Abr-0

1

May

-01

Jun-

01

Jul-0

1

Ago-

01

Sep-

01

Oct

-01

Nov-

01

Dic

-01

Ene-

02

Feb-

02

Mar

-02

Abr-0

2

May

-02

Jun-

02

Jul-0

2

Ago-

02

Sep-

02

Oct

-02

Nov-

02

Dic

-02

Ene-

03

Feb-

03

Mar

-03

Consumer Confidence Index(Capital Federal)

Source: Universidad Torcuatto Di Tella

Financial Crisis

Macroeconomic Assumptions

Real GDP growth rate of 2% to 3% in 2003 (compared with an expected decline of 11% in 2002).

Consumer Price inflation at 35% yoy in 2003 (implied average inflation rate of 26%).

Argentina’s Letter of Intent with the IMF

Federal Government: Primary surplus of 2.1% of GDP for 2003.

Provinces: Primary surplus of 0.5% of GDP for 2003.

Fiscal Targets

Monetary Targets

Net International Reserves (floor): US$ -3,900 million (gross reserves of US$ 10 bn.)

Net Domestic Assets of CB (upper limit): AR$ 51,415 at end June.

The XR will continue to float but the BCRA will intervene to avoid excessive volatility.

*Quasimonies are estimated at AR$ 7,450

Other Conditions

Gradual elimination of exchange rate controls.

Debt restructuring with the technical assistance of the IMF and the aid of an external advisor.

Financial System Reform (including measures designed to deal with problem banks). A new specialized unit will be created for bank restructuring.

Tax System Reform (including elimination of tax excemptions and preferences, suspension of the remaining competitivity plans, substantial reduction in the regional promotion regimes and other measures)

Reform of intergovernmental relationships.

During the program period no new laws nor judicial instruments that amount to involuntary suspensions of creditor rights will be passed (the Government will implement a program to backup extrajudicial agreements between creditors and debtors).

Independence of BCRA

Argentina’s Letter of Intent with the IMF

Amortization Schedule with Multilaterals (in millions of US$, previous to IMF agreement)

II-03

Multilaterals 2336

o/w IMF 640

World Bank 832

IADB 773

Jan-03 Feb-03 Mar-03

1093 83 3232

1056 0 3081

26 81 118

11 1 33

III-03 IV-03 2003

2479 13829

752 9831

843 2128

793 1684

4606

4303

228

74

OUTLINE

i.i. BrazilBrazil







Federal Public Debt plus Contingent Liabilities (in billions of US$, September 2002)

Federal Government Debt 129.8

Sept 02

Contingent Liabilities

Asymetric indexation*

Compensation to Banks

Amparos*

Bond for restitution of 13% salary & pension cut*

4.9

2.6

4.1

1.5

0.8

(1) does not include federalization of Provincial Debt estimated at US$ 13.6 billion

Federal Government Debt including contingencies (1) 134.7

* = in the process of recognition

13.6

Argentina’s Public Debt and the Equilibrium Real Exchange Rate(% of GDP)

0

20

40

60

80

100

120

140

160

180

2.5 2.0 1.5

167

148

127

Equilibrium Real Exchange Rate

Deb

t (%

GD

P)

Federal Government Debt Structure September 2002

Bonds 41%

Guaranteed loans

17%

Multilaterals 29%

Other 1%

In default: US$ 52.1 billion*

* LMW estimate

BODEN12%

Implied Expected Loss (EL) in Bond Prices

VM VF • (1-EL)

where:

VM is the market value of a risky bond

VF is the discounted present value of the risky bond assuming both coupon and principal are fully paid

where i is the risk free interest rate.

Definition:

Example: Bond which pays constant coupon payments c until its maturity at time T:

VM

c

(1+i)s

s=1 (1+i)T

1EL 1 1

VM

VF

65%

70%

75%

80%

85%

90%

2008 2010 2027

Yield Curve of EL on External Bonds February 2003

Global Bond

Exp

ecte

d L

oss

Weighted average

Argentina’s Public Debt After a Hypothetical 70% Haircut on Defaulted Debt(% of GDP)

0

20

40

60

80

100

120

140

2.5 2 1.5

Deb

t (%

GD

P)


124

11198

Interest Payments on Public Debt After a Hypothetical 70% Haircut on Defaulted Debt(% of GDP)

80

8590

95

100

105110

115

120125

130

2.5 2 1.5

Deb

t (%

GD

P)


7.1%

6.3%

5.4%

Note: Imputed interest rate of 5.6%

1.5 2 2.5

0% 5.4% 6.3% 7.1%

2% 3.3% 4.0% 4.6%

4% 1.4% 1.8% 2.1%

Real Exchange Rate

Gro

wth

Rat

e

Debt Sustainability(required primary surplus in % of GDP, with 70% Haircut on Defaulted Debt)

Redollarization Costs: Alternative ScenariosContingent Liability in % of GDP

Contingent Liability in AR Pesos

Elegible for redollarization (at current XR)*

Elegible for redollarization

(at 1.4 plus CER)

(a) (b) (b-a) (c)

* The XR prevailing in April 1 st (2.98 Pesos per Dollar) was used in these calculations.

"Corralón" 11.5 (in billions of AR$)

16.6 24.6 8.0 2.6%

Bes

t C

ase

"Corralón" 11.537.0 54.9 17.9 6%

Transactional "Corralito”

14.3 (in billions of AR$)

(in billions of AR$)

Inte

rmed

iate

C

ase

13%87.3 129.6 42.3

Dollar deposits(as of Jan 02 before pesific., in billions of US$)

Accumulated "Amparos” (in billions of US$) -3.3

46.7

Wo

rst

Cas

e

1.5 2 2.5

0% 5.8% 6.8% 7.8%

2% 3.6% 4.3% 4.9%

4% 1.5% 1.9% 2.2%

Real Exchange Rate

Gro

wth

Rat

e

Debt Sustainability(required primary surplus in % of GDP, with 70% Haircut on Defaulted Debt, includes redollarization costs under worst case scenario)

Fiscal Revenues under Alternative Recovery Scenarios(in real terms, Feb 01=100)

70

75

80

85

90

95

100

105

110

Jun

-98

Oct

-98

Fe

b-9

9

Jun

-99

Oct

-99

Fe

b-0

0

Jun

-00

Oct

-00

Fe

b-0

1

Jun

-01

Oct

-01

Fe

b-0

2

Jun

-02

Oct

-02

Fe

b-0

3

Jun

-03

Oct

-03

total revenues with full recovery

primary expenditures

total revenues with no recovery

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Primary Surplus under Alternative Recovery Scenarios*(% of GDP)

No recovery of revenues Full recovery of revenues to Feb 2001 levels

* Primary expenditures at current levels

Assets of Argentina’s Financial SystemAugust 2002

Other net assets5%

Reserves6%

Loans32%

Claims on to the public sector

57%

Total assets: ARG$155.800 millions

Documents

April 2003 Prepared for presentation at the XVIII Meeting of the Latin American Network of Central Banks and Finance Ministries Special Focus: Brazil and