Latin American Sovereigns

Theresa Paiz Fredel, Director

April 2005

The Most Likely Global Growth Outcome is a Soft Landing

but downside risks are rising

USA Japan Euro Area

-2

-1

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002

2003 2004e 2005f 2006f

Rea

l GD

P G

row

th (

%)

Key Risks to the Benign Global Outlook

> Further spikes in international oil prices

> Greater pressure on core inflation

> Higher interest rates and a sharper slowdown

> Sharp downward property price adjustments and/or rising worries over household debt levels

> A collapse in domestic confidence and demand

> A hard landing in China

> Spill-over for commodity prices and several key emerging markets

> And the biggest risk: A sharp fall in the US Dollar

> Rising inflation in the US and even higher US interest rates

Our Working Assumption is that the Dollar is Stable in 2005

but over the long run, a weaker dollar is to be expected

70

85

100

115

130

145

160

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

Current Balance (RHS) Trade-weighted exchange rate (IMF) (% of GDP)(2000 = 100)

Emerging Markets Tend to be Hit Hard When Sentiment Turns

High Yield and Emerging Market Debt

90

95

100

105

110

115

De

c-03

Jan

-04

Fe

b-0

4

Ma

r-04

Ap

r-04

Ma

y-04

Jun

-04

Jul-0

4

Au

g-0

4

Se

p-0

4

Oct-0

4

No

v-04

De

c-04

Jan

-05

Fe

b-0

5

Ma

r-05

Global HY EMBIG31-Dec-03=100

Latin American Sovereign Ratings (LTFC)

Country Rating Outlook

Chile A Stable

Aruba BBB Negative

Mexico BBB- Stable

Panama BB+ Stable

El Salvador BB+ Stable

Colombia BB Stable

Costa Rica BB Negative

Peru BB Stable

Brazil BB- Stable

Venezuela B+ Stable

Uruguay B+ Stable

Suriname B Stable

Bolivia B- Stable

Ecuador B- Stable

Dominican Republic CCC+ Negative

Argentina DDD n/a

82

83

84

85

86

87

88

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

External Environment And Prudent PoliciesUnderpinned Upgrades

> Chile Upgraded to A in March 05

> Uruguay Upgraded to B+ in March 05

> El Salvador Outlook to Stable in January 05

> Peru Upgraded to BB in Nov 04

> Ecuador Upgraded to B- in Oct 04

> Brazil Upgraded to BB- in Sept 04

> Venezuela Upgraded to B+ in Sept 04

> Colombia Outlook to Stable in May 04

> Exceptions

> Dominican Republic

> Argentina

Latam Sovereign Credit Index (2004)Jan 1998 = 100

BB-

B+

Will The Momentum Continue In 2005?

> “Perfect storm” will likely lose some force> Domestic demand will need to substitute for some

external demand> Local fundamentals more likely to drive credit

improvement> Will reforms be on hold because of elections in

2006 across region?

Favorable External Conditions To Soften Somewhat?

Source: IMF

Growth of Major Economies(Annual Percentage Change)

Prices of Commodity Exports (Index 1997 = 100)

Source: Fitch

0

1

2

3

4

5

6

7

8

9

Euro Area UnitedStates

China Japan

2004 2005 2006

0

50

100

150

200

250

200

020

01

200

220

03

Jan-

04F

eb-0

4M

ar-0

4A

pril-

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

COFFEE COPPER OIL SOYBEANS

External Financing Needs Lower But Still Heavy

Sensitivity to Higher Rates and Bear Mkt

Source: Fitch Ratings

Overall Sensitivity

Ecuador

Uruguay

Turkey

Colombia

Brazil-50

0

50

100

150

200

1998 1999 2000 2001 2002 2003 2004 2005 2006

Current Account Deficit Amortizations

Chinese Imports Support Some, Exports Threaten Others

Textile and Apparel Exports - 2003(% of Total Exports)

Exports to China 2003

0

10

20

30

40

50

60

70

El S

alva

dor

Gua

tem

ala

Cos

ta R

ica

Per

u

Col

ombi

a

Mex

ico 0

1000

2000

3000

4000

5000

6000

7000

Bra

zil

Arg

ent

ina

Chi

le

Mex

ico

Per

u

Cos

ta R

ica

0%

50%

100%

150%

200%

250%

USD Mil. (LHS) % Growth (RHS)

Latam: Growth To Moderate This Year And Next

Source: IMF and Fitch Source: Fitch

Latin American GDP Growth (%)2004 2005 2006

Latin America 5.7 4.2 3.4

Brazil 5.2 3.8 3.5

Mexico 4.2 3.7 3.3

Argentina 9.0 6.3 3.9

Colombia 3.6 3.7 3.4

Venezuela 17.3 7.0 2.0

Peru 4.5 4.3 4

Chile 6.1 5.2 4.6-1

0

1

2

3

4

5

6

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

(f)

20

06

(f)

Latam: Investment Remains Low

Current Account Balances/GDP(2004 and 2005)

Investment/GDP (2004)

(%)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Latam Brazil Mexico Arg

2004 2005

17

18

19

20

21

22

Brazil Mexico Argentina

Latam

World

Latam: More Fiscal Reforms Needed

Large informal economies +

High evasion =

Low tax take

Low tax take +

Heavy interest burden =

Little room for public invest

More than half of savings

rate diff w/Asia due to low

public savings

General Government Debt Medians

Government Taxes and Social Contributions

05

101520253035

Bra

zil

Col

ombi

a

Arg

entin

a

Chi

le

Bol

ivia

Dom

inic

anR

ep.

Pan

ama

Per

u

Cos

taR

ica

Sal

vado

r

Mex

ico

Ven

ezue

la

Ecu

ador

(% G

DP

)

050

100150200250300

Africa LatinAmerica

EmergingAsia

Central &EasternEurope

(% o

f Rev

enue

)

Institutional Inadequacies Also Deter Investment

> Latin America scores low on independence of judiciary, protection of financial assets, and organized crime

> Disincentive for private investment in physical and human capital

Source: World Economic Forum

Public Institutions Index

weaker

3.0

3.5

4.0

4.5

5.0

5.5

6.0

E. Asia Europe Cent Asia Latam

Lots Of Elections In 2006 So Reforms Largely On Hold

Brazil October 2006

Mexico July 2006

Colombia May 2006

Peru April 2006

Venezuela July 2006

Chile December 2005

Argentina April 2007

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