The current global economic crisis, its consequences, impact and the road to recovery

Latin America 2009-2010:

No Paradise without Banks

José Juan Ruiz Chief Economist

División América Banco Santander May- June 2009

• Some facts before opinions

1

Latam 2010: Can you afford to miss 10% of World GDP?Latam 2010: Can you afford to miss 10% of World GDP?

1.1. Latam accounts for 9% World PopulationLatam accounts for 9% World Population: around 600 millions citizens. In 2050 in Latam will live 725 million people, equivalent to 60% OECDE population.

2.2. Latam accounts for 9% World GDPLatam accounts for 9% World GDP: 6.000 bill US $ PPP. This amounts to 40% Developing Asia GDP and to 20% all Emerging Countries GDP.

3.3. Latam GDP per capita is around 10.500 US $ PPP.Latam GDP per capita is around 10.500 US $ PPP. This is twice Developing Asia GDP Per capita and 74% Central and Eastern Europe GDP per capita.

4.4. Latam holds 6.4% of world wealth stock but 15% of world stock of Latam holds 6.4% of world wealth stock but 15% of world stock of natural resources.natural resources. Latam relatively lags in terms of “produced capital”- physical and human capital and in “intangible capital” – institutions, rule of law. - : in both areas Latam has 89% and 94% of world average-.

See annex for sources and definitions

1

In spite of that…Latam a real convergence failed storyIn spite of that…Latam a real convergence failed story

See annex for sources and definitions

34%

28%

25% 26%24% 24%

26%

31%

26%

23% 23%

21% 20%

22%23%

18%

21%

27% 27%

29%

32%

40%

35%

31%

29%

31%30%

31%

10%

15%

20%

25%

30%

35%

40%

45%

1980 1985 1990 1995 2000 2005 2009

Títu

lo d

el e

je

Failed Convergence: GDP Per capita US $ PPP USA=100Latam Brazil Chile Mexico

1Why? : Volatility and Institutional fragility

From 1980 onwards, 22 countries in LA have suffered either a financial sector crisis

or financial system distress and averted crises. In total: 46 episodes of financial

distress in 29 years: 1.6 crisis per year.

Number of Episodes Number of Countries Total4 3 123 3 92 9 181 7 7

Total 22 46

Source : Agustin Carstens, 2004. http://www.iadb.org/res/publications/pubfiles/pubS-192.pdf

1Some Message from Latam to the World?

Source : Agustin Carstens, 2004. http://www.iadb.org/res/publications/pubfiles/pubS-192.pdf

• Banking Crisis are lasting events and extremely costly in fiscal terms and in

GDP/welfare losses

1The impact of Banking Crisis on “economic values” tends to be lasting…

“The banking system will never take you to paradise, but it can bury you in hell in an afternoon.”

Julio Maria Sanguinetti Uruguay President

25%

21%

19,8%

21%

21% 21%

17%18%

15%

17%

19%

21%

23%

25%

27%

1998-2002 2003-2007 2004 2005 2006 2007 2008E 2009E

Argentina: Deposits to GDP

• Where do we stand today?

1Going South…but alive and ready to fight

The global crisis that began in advanced economies has sent severe shocks around the world, posing a test to the economies of Latin America and the Caribbean.

The good news is that during this decade the region has made itself more resilient to external shocks, by strengthening policy frameworks and reducing vulnerabilities in its public finances and financial systems.

These preparations mean that countries are now more able to respond to the external crisis, many for the first time, with active policies to boost output and employment and protect the most vulnerable groups.

This will help contain the damage from the global crisis and speed up the region’s recovery.

World Economic and Financial Surveys Regional Economic Outlook: Western Hemisphere

Stronger Fundamentals Pay OffMay 2009

http://www.imf.org/external/pubs/ft/reo/2009/WHD/eng/wreo0509.htm



1With a pretty sound financial system

.. both in absolute and in relative terms

2003 2006 2008 2003 2006 2008 2003 2006 2008 2003 2006 2008

Argentina 11,9 13,4 12,6 17,7 3,4 2,5 79 130 131 -23 14 14Brasil 9,6 9,9 9,5 4,1 3,5 2,9 172 180 171 21 27 20Chile 7,3 6,8 6,3 1,6 0,8 0,9 131 199 182 17 19 19Colombia 11,6 12,0 12,2 6,8 1,6 4,0 98 154 115 17 20 20Mexico 10,0 13,2 13,7 3,1 2,0 2,5 167 207 184 16 26 13Peru 9,3 9,5 8,7 14,8 4,1 2,2 67 100 147 11 24 31Uruguay 7,2 9,8 8,9 14,3 1,9 0,2 91 219 269 -15 13 10Venezuela 14,3 8,8 8,8 7,7 1,1 2,3 104 229 123 44 32 29

Latam * 9,6 10,2 9,9 4,4 2,8 2,6 157 182 169 18 25 19

China 3,8 5,1 6,1 20,4 7,5 2,5 20 34 115 14 21India 5,7 6,6 6,4 8,8 3,3 2,3 46 59 53 19 13 13Rusia 14,6 12,4 13,2 5,0 2,6 2,5 118 159 140 18 26 12

Polonia 8,3 7,8 8,2 21,2 7,4 4,4 53 58 6 23 22Czeck 5,7 6,0 5,7 4,9 3,6 3,1 77 58 56 24 23 24

Korea 7,0 9,2 8,3 2,6 0,8 1,1 84 175 155 3 15 15Indonesia 10,4 7,9 9,7 6,8 6,1 3,5 112 78 98 27 30 26

USA 9,2 10,5 9,6 1,1 0,8 2,3 140 135 85 15 12 3Japan 3,9 5,3 4,2 5,2 1,5 1,5 30 29 25 -3 9 3

* Weigthed by share on total stock of credit. Countries included are Argentina, Brasil, Chile, Colombia y Mexico

Bank Capital to Assets Non Performing Loans to Total Loans Bank Provisions to Non Performing Loans Return on Equity

IMF, Global Financial Stability Report

http://www.imf.org/external/pubs/ft/GFSR/index.htm

1With Central Banks which deliver credibility and low inflation

2008 Inflation Argentina Brasil Chile Colombia México Peru Venezuela LATAM

Santander 7,2 5,9 7,1 7,7 6,5 6,7 31,9 8,5%Morgan Stanley 7,2 5,9 7,1 7,7 6,5 6,7 31,9 8,5%JP Morgan 7,2 5,9 7,1 7,7 6,5 6,7 31,9 8,5%Goldman 7,2 5,9 7,1 7,7 6,5 6,7 31,9 8,5%

Average 7,2 5,9 7,1 7,7 6,5 6,7 31,9 8,5%

St. Deviation 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0%



Average 6,4 4,2 1,8 4,6 3,9 2,8 34,1 7,8%

St. Deviation 0,5 0,9 0,7 0,4 0,4 0,7 6,4 0,6%



Average 8,5 4,3 2,9 4,3 3,6 2,2 32,9 7,8%

St. Deviation 1,4 0,3 0,8 0,5 0,3 0,3 7,4 1,0%

1Basically sustainaible savings/investment patterns and high levels external assets

2009 Current Account (% GDP) Argentina Brasil Chile Colombia México Peru Venezuela LATAM

santander 0,0 -1,9 -2,4 -3,7 -3,5 -5,4 3,2 -1,8morgan stanley 0,8 -0,2 -3,3 -4,0 -2,5 -6,8 -2,6 -1,6jp morgan -0,1 -1,5 -2,8 -4,0 -2,5 -4,5 -0,5 -1,8goldman 0,9 -2,2 -3,2 -4,9 -2,7 -4,9 -2,1 -2,4

media 0,4 -1,5 -2,9 -4,2 -2,8 -5,4 -0,5 -1,9desv std 0,5 0,9 0,4 0,5 0,5 1,2 2,6 0,3

2010 Current Account (% GDP) Argentina Brasil Chile Colombia México Peru Venezuela LATAM

santander -0,3 -1,7 -1,5 -2,3 -2,9 -4,9 1,3 -1,7morgan stanley 1,1 -0,7 -2,3 -3,9 -2,2 -5,6 4,4 -0,8jp morgan 0,5 -1,2 0,0 -3,4 -2,8 -4,4 0,5 -1,5goldman 2,7 -1,9 -3,9 -3,9 -2,4 -4,6 -2,6 -2,0

media 1,0 -1,4 -1,9 -3,4 -2,6 -4,9 0,9 -1,5desv std 1,3 0,5 1,6 0,8 0,3 0,6 2,9 0,5

ARGENTINA BRASIL CHILE COLOMBIA MEXICO PERÚ URUGUAY VENEZUELA LATAM1993 13,8 30,6 9,6 7,9 25,1 3,9 0,8 9,2 100,91994 14,3 37,1 13,1 8,0 6,3 6,9 1,0 8,1 94,72001 19,4 27,8 14,4 10,1 44,8 8,8 3,1 18,5 147,02002 10,5 16,3 15,4 10,5 50,7 9,7 0,8 14,8 128,62007 46,2 180,3 16,9 21,0 87,2 27,7 4,1 34,3 417,72008 46,4 206,8 23,2 24,0 95,3 31,2 6,3 43,1 476,3

STOCK International Reservesen US$

1Reasonable Public Sector Accounts after strong Public Debt Deleveraging in

2005/2008

2009 Public Balance (% GDP) Argentina Brasil Chile Colombia México Peru Venezuela LATAM

santander 0,2 -1,1 -3,8 -2,2 -1,8 -1,7 -6,5 -2,0%morgan stanley 0,5 -5,0 -4,0 -4,5 -2,1 -1,7 -11,8 -4,3%jp morgan -1,0 -2,7 -4,5 -2,5 -2,5 -1,7 -6,0 -2,9%goldman 0,7 -3,5 -3,0 -3,0 -2,0 -1,7 -4,5 -2,7%

media 0,1 -3,1 -3,8 -3,1 -2,1 -1,7 -7,2 -3,0%desv std 0,8 1,6 0,6 1,0 0,3 0,0 3,2 1,0%

2010 Public Balance (% GDP) Argentina Brasil Chile Colombia México Peru Venezuela LATAM

santander -0,8 -1,7 -2,2 -2,0 -1,0 -0,4 -7,9 -2,2%morgan stanley 0,4 -4,0 -1,0 -4,0 -1,5 -1,5 -6,2 -3,0%jp morgan -1,0 -3,0 -1,0 -2,0 -2,5 0,2 -3,0 -2,4%goldman 0,2 -3,0 0,0 -2,0 -2,2 0,2 -5,6 -2,5%

media -0,3 -2,9 -1,1 -2,5 -1,8 -0,4 -5,7 -2,5%desv std 0,7 0,9 0,9 1,0 0,7 1,0 2,0 0,3%

% GDP ARGENTINA BRASIL CHILE COLOMBIA MÉXICO PERÚ URUGUAY 1990 44.8 14.8 46.5 177.9 ...1995 33.8 ... 17.8 13.9 40.8 49 22.32000 45 29.2 13.6 36.9 23.2 36.4 31.92004 126.4 31.4 10.7 46.4 23 40.1 74.62005 72.8 30.7 7.2 46.6 22.4 36.9 672006 63.6 31.3 5.3 44.9 23.3 29.8 59.3

Source CEPAL. Información revisada al 09/MAR/2009

Public Debt . Percent GDP

Our latest beliefs: Good macro and sounds banks pay dividends

Latin America's middle class

Adiós to poverty, hola to consumption Aug 16th 2007 | SÃO BERNARDO DO CAMPO From The Economist

Faster growth, low inflation, expanding credit and liberal trade are helping to create a new middle classnew middle class

• From Here to Where?

1

Fuente: Pär Österholm and Jeromin Zettelmeyer. “The Efects of External Conditions on Growth in Latin America”. IMF Working Paper, 2007.

Fuente: División America. Ver texto para detalles

Let’s imaging the external shock is partially reversed

Change since Jun 08 Impact % Contribution to GDP decline

World GDP Growth -4,9 -4,9 52%

Country Risk 345 -1,45 15%

Commodities -53% -4,2 44%

Yield Curve 112 1,1 -12%

Total Impact -9,5 100%

External Shocks and Latam GDO Growth.

Fuente: División America

196

200

203

194

199

205

212

195

198

202

185

190

195

200

205

210

215

2006 2007 2008 2009 2010 2011 2012

Recuperacion en V Recuperación en L

Step 1: USA Recovery. Real GDP 1980=100

Fuente: División America y JP Morgan

y = -94.866Ln(x) + 963.92R2 = 0.3186

0

200

400

600

800

1000

1200

31-Dec-2

002

27-may-0

3

16-oct-03

12-mar-0

4

04-Aug-2

004

29-Dec-2

004

20-may-0

5

13-oct-05

10-mar-0

6

31-jul-0

6

21-Dec-2

006

17-may-0

7

10-oct-07

06-mar-0

8

29-jul-0

8

19-Dec-2

008

14-may-0

9

01-oct-09

18-feb-10

08-jul-1

0

25-nov-10

14-abr-1

1

01-sep-11

19-ene-12

07-jun-12

25-oct-12

Riesgo País Recuperacion en V Recuperación en L tendencia

Step 3: Country Risk adjustment


8788

89

92

94

97

99100100

98

102

105

109

100

96 96 9798

y = 6.6517Ln(x) + 84.433R2 = 0.8805

80

85

90

95

100

105

110

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PIB Recuperacion en V Recuperación en L Tendencia PIB

There is Growth in Latam !!


2009 GDP Growth Argentina Brasil Chile Colombia México Peru Venezuela LATAM

Santander 0.0 0.0 0.1 -1.0 -4.2 2.5 3.8 -0.5%Morgan Stanley -4.7 -4.5 -1.4 -1.6 -5.0 0.9 -4.0 -4.0%JP Morgan -3.0 -1.4 -1.5 -0.5 -4.0 3.5 -2.0 -2.0%Goldman -1.2 -1.5 -0.4 -0.3 -3.0 3.0 2.0 -1.1%

Average -2.2 -1.9 -0.8 -0.9 -4.1 2.5 -0.1 -1.9%

St. Deviation 2.1 1.9 0.8 0.6 0.8 1.4 3.6 1.5%

2010 GDP Growth Argentina Brasil Chile Colombia México Peru Venezuela LATAM

Santander 3.5 3.5 3.4 2.2 1.8 3.3 2.6 2.9%Morgan Stanley -0.1 0.5 0.9 0.2 0.2 0.7 -1.0 0.2%JP Morgan 2.0 3.0 3.2 3.0 3.4 4.7 1.5 2.9%Goldman 1.1 3.0 3.0 2.5 1.0 4.5 2.7 2.3%

Average 1.6 2.5 2.6 2.0 1.6 3.3 1.5 2.1%

St. Deviation 1.5 1.4 1.2 1.2 1.4 2.3 1.7 1.3%

In fact, a growing Latam is the central scenario for investors..


This is also our view..

5.9%

5.4% 5.5%

4.8%

0.9%

-4.3%

-2.5%

-1.3%-1.1%

3.9%

2.0%

1.2%1.4%

IV 2007 2008 I II III IV 2009 I II III IV 2010 I II III IV

LATAM: Crecimiento Interanual del PIB LATAM


With Brazil, Mexico and Chile playing a critical role in the next stage

6.1% 6.1% 6.3%6.8%

1.2%

-2.0%-1.3%

-2.8%

-3.5%

5.2%

1.6%1.1%

2.1%

3.4% 3.6%4.2%

3.7%

0.2%

-1.5% -1.7%

-1.0%

1.0%

3.0%

2.0%2.5%

2.9%

3.6%3.3%

2.5%

1.5%

-1.7%

-8.0%

-4.0%

-1.3%

-3.3%

3.9%

2.4%

0.4%0.0%

IV 2007 2008 I II III IV 2009 I II III IV 2010 I II III IV

LATAM: Crecimiento Interanual del PIB BRA CHI MEX

• What about Risks?


No always the worst happens: “No siempre lo peor es cierto”

A quien ya le ha persuadido

la apariencia de un engaño

tarde o nunca el desengaño

pondrá su queja en olvido

y más cuando el de su parte

tan poco hace por creer

que pudo o no pudo ser…

No siempre lo peor es cierto, 1649

Pedro Calderón de la Barca


Low External Financicng Risk: We are not anymore in Kansas!!!

Miles Mill US $ Argentina Brasil Chile Colombia Mexico Peru Uruguay Venezuela Latam

Bo c/C 2,8 -28,0 -4,8 -8,2 -25,1 -6,0 0,5 -6,2 -75,0

Amortization Debt 21,7 66,2 20,2 9,5 40,0 11,2 4,0 9,0 181,8

FDI & Capital outflows 10,0 15,0 5,0 4,0 10,0 2,0 1,0 10,0 57,0

FDI 1,0 20 8 6 15 5 1 0,5 56,5

Multilaterals pre-G-20 2,0 5,0 1,0 3,0 4,0 2,0 1,0 1,0 19,0

Short Term ( 33%) 5,4 21,9 8,2 2,3 11,6 4,2 1,2 1,7 56,6

Long Term 1,6 2,4 0,2 1,6 1,6 0,9 0,5 0,9 9,9

Stock Reserves 08 45,0 187,1 23,2 22,4 89,1 29,1 6,2 19,1 421,1

Use 33% 14,8 61,7 7,6 7,4 29,4 9,6 2,0 6,3 139,0

To G-20 -14,8 -61,7 -7,6 -7,4 -29,4 -9,6 -2,0 -6,3 -139,0

Latam external Financial Needs 2009

Gross Financing needs

FDI& "Normal Multilaterals"

Markets

Reserves & G-20

Gross Financing needs

FDI& "Normal Multilaterals"

Markets


Low External Financing Risk: We are not in Kansas anymore !!!

-10

-2

05

15 15

37

58

Argentina Venezuela Uruguay Chile Peru Colombia Mexico Brasil

Latam 2009: External Financing Risk. Billion US $ US $ -Minus sign: Net financiang needs

We do not see a Credit Crunch

Credito Brasil

TOTAL; 23.4

CONSUMO ; 18.5

EMPRESA; 23.4

0

10

20

30

40

50

60

ene-03

abr-03

jul-03

oct-03

ene-04

abr-04

jul-04

oct-04

ene-05

abr-05

jul-05

oct-05

ene-06

abr-06

jul-06

oct-06

ene-07

abr-07

jul-07

oct-07

ene-08

abr-08

jul-08

oct-08

ene-09

abr-09

jul-09

oct-09

% y

-o-y

Credito- Mexico

TOTAL; 1.0

CONSUMO ; -13.1

EMPRESA; 11.9

y = -0.0121x2 + 30.889x - 19709R2 = 0.486

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

ene-03

abr-03

jul-03

oct-03

ene-04

abr-04

jul-04

oct-04

ene-05

abr-05

jul-05

oct-05

ene-06

abr-06

jul-06

oct-06

ene-07

abr-07

jul-07

oct-07

ene-08

abr-08

jul-08

oct-08

ene-09

abr-09

jul-09

oct-09

Títu

lo d

el e

je

Credito- Chile

y = -0.0077x2 + 19.669x - 12590R2 = 0.7443

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

ene-03

abr-03

jul-03

oct-03

ene-04

abr-04

jul-04

oct-04

ene-05

abr-05

jul-05

oct-05

ene-06

abr-06

jul-06

oct-06

ene-07

abr-07

jul-07

oct-07

ene-08

abr-08

jul-08

oct-08

ene-09

abr-09

jul-09

oct-09

1. No Credit Crunch: el crecimiento del credito se desacelera a elasticidades r/PIB nominal en torno al 1 -1.5.

2. En el muy corto plazo cambia la composicion del Credito: de consumo a Empresas

3. Impacto sobre el crecimiento: + / neutral. El sistema bancario no es una remora

We do not see a Liquidity Crisis

2005 2006 2007 2008 2009 2009 2010

Argentina 44% 48% 53% 62% 72% 68% 66%Brasil 42% 42% 43% 46% 51% 53% 55%Chile 103% 102% 100% 94% 94% 94% 95%Colombia 69% 68% 78% 83% 78% 77% 76%Mexico 49% 55% 59% 64% 62% 61% 65%

Latam 50% 50% 52% 55% 58% 59% 61%

Ratio Liquidez: Credito/Depósitos

Ratio Liquidez: Credito/Depósitos

55%

61%65% 66%

76%

95%

0%

20%

40%

60%

80%

100%

120%

Brasil Latam Mexico Argentina Colombia Chile

We do not see a Credit Crunch.

4,3% 4,2%

3,7% 3,8%

5,9%

7,3%

6,3%

4,5%

126%

123%

119% 119%

90%

70%

80%

100%

60%

70%

80%

90%

100%

110%

120%

130%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2005 2006 2007 2008 2009 2010 2011 2012

tasa

mor

a

Morosidad y ProvisionesTasa Mora Provisiones/Cobertura

We do not see a Profitability Crisis

27.725

22.956

10.112

16.115

29.815

188.687

200.164

205.220

213.278

228.185R² = 0,830

180.000

190.000

200.000

210.000

220.000

230.000

240.000

8.000

13.000

18.000

23.000

28.000

33.000

2008 2009 2010 2011 2012

Latam : Profits & Capital Millones US $ ctes 2008

Beneficios ( eje derecha) Patrimonio neto ( eje izquierda) Polinómica (Beneficios ( eje derecha))

In Latin America POLITICS MATTERS

•High growth with Stability of Prices•It was "Governed" without the pressure of a "Crisis"•Congress accompanied the economic direction established by their presidents•After the 2005-2006 elections : strong partisan fragmentation, "center-left" policies

2003-2008: Virtuous Five Year Period

• Economic situation has deteriorated

• Leaders are under stress.

• Governments face the "Crisis" without too much popularity: hard political economy.

•In scenarios of "Crisis", economic answers subordinated to quality and autonomy of the

institutions

•The imminent electoral appointments exacerbates the intervention risks

Since middle of 2008

The economy faces a high Regulatory Risk. The economy faces a high Regulatory Risk.

The Biggest Risk? To Frustate hopes of the New Emerging Middel ClassThe Biggest Risk? To Frustate hopes of the New Emerging Middel Class

'Latinoamérica perderá entre 1,5 y 2,4 'Latinoamérica perderá entre 1,5 y 2,4 millones de empleos durante el 2009': OITmillones de empleos durante el 2009': OIT

En el 2008 número de desempleados en Latinoamérica fue de 15,7 millones de personas. ''Si estas proyecciones de CEPAL y del FMI se mantienen, entre 1,5 y 2,4 millones de desempleados se incorporaran'' a las filas de desocupación en Latinoamérica,

Jean Maninat, director regional de la OIT.

Latin America's middle class

Adiós to poverty, hola to consumption Aug 16th 2007 | SÃO BERNARDO DO CAMPO From The Economist

Faster growth, low inflation, expanding credit and liberal trade are helping to create a new middle classnew middle class

No Paradise without Banks and …

without Good Central Bankers..

Prudent Fiscal managers…

Experienced societies used to the hardship of adjustments

When austerity does not come easily

By Gideon Rachman Published: May 25 2009 19:12 | Last updated: May 25 2009 19:12

There was a moment, a few months ago, when sensible people in rich countries were considering pulling all their money out of the bank, buying gold ingots and hiding them under the bed. But now that the panic has passed, something less frightening and rather bleaker is beckoning. Welcome to the politics of austerity.

Across the developed world, unemployment, public debt and taxes are rising. When the global economic crisis first hit, it was natural to assume that the poorer and more recent democracies would be most vulnerable to a political backlash. Without the accumulated wealth or the welfare systems to cushion the blow, their populations looked vulnerable. Most countries in central Europe or Latin America only made the transition to democracy in the 1980s, so authoritarian nasties might still be lurking in the shadows.

But perhaps we are looking for trouble in the wrong places. It could be that it will be the richer democracies, such as Britain and the US, that find it most difficult to adapt to the politics of austerity.

We have learnt…

Now it is your turn.

Economy & Finance

The current global economic crisis, its consequences, impact and the road to recovery