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March 28, 2004

LAC-7 Macroeconomic Outlook. March 28, 2004. OUTLINE. Post-Adjustment Latin America: Back in Vogue with International Investors LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004 Risks Ahead: the Specter of Fed Tightening The Banking Sector: Introduction to Seminar. OUTLINE.

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March 28, 2004

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  1. LAC-7 Macroeconomic Outlook March 28, 2004

  2. OUTLINE • Post-Adjustment Latin America: Back in Vogue with International Investors • LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004 • Risks Ahead: the Specter of Fed Tightening • The Banking Sector: Introduction to Seminar

  3. OUTLINE • Post-Adjustment Latin America: Back in Vogue with International Investors • LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004 • Risks Ahead: the Specter of Fed Tightening • The Banking Sector: Introduction to Seminar

  4. Emerging Markets Spreads & Domestic Interest Rates Emerging Markets Spreads Spreads & Domestic Interest Rates (EMBI+ adj. for Argentina, in bp) (domestic lending rates, June 1998=100) Russian Crisis Russian Crisis 155 1400 1400 135 1200 1200 115 1000 Spread ENRON effect 1000 EMBI+ adj. for Argentina 95 EMBI+ adj. for Argentina 800 Domestic lending rates 800 75 600 600 55 400 400 Pre- Russian Crisis Spread Interest Rates 200 35 200 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela

  5. LAC-7 Total Capital Flows (4 quarters, millions of US dollars and in % of GDP) Russian Crisis 100000 6% Post-Adjustment Period 5% 80000 4% % GDP (LAC-7 average) 3% 60000 2% 1% 40000 0% -1% 20000 -2% 0 -3% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 1997-III 1998-III 1999-III 2000-III 2003-III 2001-III 2002-III Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

  6. External &Domestic Deleveraging (real bank credit, Set-98=10) 270 99 250 Domestic bank credit 230 94 Cummulative financial flows Real Domestic Bank Credit (set 98=100) 210 89 190 Cumulative Financial Flows 84 170 79 150 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 LAC-7: External & Domestic Deleveraging External Deleveraging (Financial flows in billions of real US dollars, cumulative since 1990) 290 Russian Crisis 240 190 140 90 40 -10 Ene-92 Ene-98 Ene-02 Ene-04 Ene-90 Ene-94 Ene-96 Ene-00

  7. LAC-7: Exchange Rate & International Reserves Nominal & Real Exchange Rate Stock of International Reserves (vis-à-vis US dollar) (millions of US dollars) Post-Adjustment Period Post-Adjustment Period 195000 210 185000 190 +8% 175000 170 165000 Nominal exchange rate 150 +16% 155000 130 145000 110 135000 Real exchange rate 125000 90 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Dic-03 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-99 Jun-00 Jun-03 Jun-98 Jun-01 Jun-02 Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  8. LAC-7: Current Account Adjustment (4 quarters, millions of US dollars and % of GDP) Post-Adjustment Period Russian Crisis 2000 3% 2% 0 1% -2000 0% -4000 -1% -6000 -2% -8000 -3% % GDP (LAC-7 average) -10000 -4% -12000 -5% -14000 -6% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III 2003-III Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

  9. LAC-7: Asset Prices (Local stock market indices & bond prices, in US dollars, Oct. 2002=100) 155 255 Post-Adjustment Period 235 145 Bond Price Indices* 215 135 195 Local Stock Market index (US$) 125 175 Bond Price index 155 115 135 Stock Market Indices* 105 115 95 95 Jul-02 Jul-03 Ene-02 Mar-02 Ene-03 Mar-03 May-02 May-03 Sep-02 Nov-02 Sep-03 Nov-03 *Includes: Argentina, Brazil, Colombia, Mexico, Peru & Venezuela

  10. LAC-7: Business Cycle and Financial Flows (GDP and financial flows, last four quarters) Post-Adjustment Period Russian Crisis 8% 2% 7% 1% Financial Flows 6% 5% 0% GDP 4% 3% -1% Financial Flows (% GDP) GDP (yoy % change) 2% -2% 1% -1% -3% -2% -3% -4% Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03

  11. Adjustment Period LAC-7 excluding Venezuela LAC-7 LAC-7: Labour Market (s.a. unemployment, simple average) 13 Post-Adjustment Period 12 11 10 9 8 7 6 5 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Dic-03 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Includes: Argentina, Brazil, Chile, Colombia, Mexico,Peru and Venezuela

  12. OUTLINE • Post-Adjustment Latin America: Back in Vogue with International Investors • LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004 • Risks Ahead: the Specter of Fed Tightening • The Banking Sector: Introduction to Seminar

  13. International Financial Conditions for EMs (US HY corporate bonds, bps over US Treasuries, and EMBI+ adjusted for Argentina) ENRON effect 1200 1000 EMBI+ (adjusted for Argentina) 1100 900 1000 800 900 700 800 EMBI+ Adjusted for Argentina 600 High Yield Bonds 700 500 US HY Corporate spread 600 400 500 Pre Asian Crisis Spread 300 400 300 200 Jul-01 Jul-02 Jul-03 Ene-04 Sep-03 Nov-03 Ene-03 Ene-02 Mar-02 Mar-03 Sep-02 Nov-02 Sep-01 Nov-01 May-02 May-03

  14. LAC-7 Capital Flows (4 quarters, millions of US dollars) Financial Flows Total Capital Flows Russian Crisis Russian Crisis 50000 100000 40000 30000 80000 20000 IIF Forecasts 10000 60000 IIF Forecasts 0 -10000 40000 -20000 -30000 20000 -40000 -50000 0 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 2004-I 1997-I 2000-I 2003-I 1999-II 2002-II 1998-III 2001-III 2004-III 1997-IV 2000-IV 2003-IV Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  15. Commodity Prices (1997.II=100) Oil Pices Non Oil Commodity Prices 190 100 170 95 150 90 Food 130 Primary Commodities & Food Oil 85 110 80 90 75 70 Non oil primary commodities 50 70 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Source: IMF

  16. Euro Area G-3 Growth Forecasts (GDP growth forecasts weighted by GDP and LAC exports) 4.0 Weigted by GDP Weigted by LAC Exports 3.5 USA 3.0 2.5 Japan 2.0 1.5 1.0 0.5 2003 2004 0.0 0 1 2 3 4 5 2001 2002 2003 2004 Source: LatinFocus Consensus Forecasts

  17. LAC-7 Growth Forecasts (GDP yoy variation in %) LAC-7 Per Country 5.0 Venezuela 4.0 Rebound Countries Argentina 3.0 Chile 2.0 Peru 1.0 Brazil 0.0 Colombia -1.0 Mexico -2.0 2002 2003 2004 3 4 5 6 7 Source: Latin Focus Consensus Forecasts

  18. LAC-7 Investment Forecasts (Investment yoy variation in %) LAC-7 Per Country 10 Argentina 8 Rebound Countries 6 Venezuela 4 Colombia 2 Chile 0 -2 Brazil -4 Mexico -6 -8 Peru -10 3 8 13 18 2002 2003 2004 Source: Latin Focus Consensus Forecasts

  19. LAC-7 Unemployment Forecasts (Unemployment rate in %) LAC-7 Per Country 11.8 11.6 Argentina 11.4 Colombia 11.2 Venezuela 11.0 Brazil 10.8 Peru 10.6 Chile 2003 2004 10.4 Mexico 10.2 0 5 10 15 2002 2003 2004 Source: Latin Focus Consensus Forecasts

  20. OUTLINE • Post-Adjustment Latin America: Back in Vogue with International Investors • LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004 • Risks Ahead: the Specter of Fed Tightening • The Banking Sector: Introduction to Seminar

  21. Emerging Markets and the FED (EMBI+ and FED Funds Rate) The impact of the Fed Funds rate on Emerging Markets spreads during periods of Fed tightening: per 100 bp increase in the Fed Funds rate EM spreads increase 150 bp* FED tightening period: Dec 1993 - June 1995 1800 7 FED Funds Rate Russian Crisis 1600 6 1400 5 1200 4 EMBÎ+ FED Funds Rate 1000 3 800 2 600 1 EMBI+ Spread 400 Lowest rate in 45 years 200 0 Dic-93 Dic-94 Dic-95 Dic-96 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Dic-03 *Source: UBS estimations

  22. “keep rates low for a considerable period” to “be patient in removing its current policy accommodation” Fed’s Open Market Committee January Statement • The Fed’s Open Market Committee (FOMC) meeting took place January 27th-28th and the minutes were made public on January 28th • The FOMC changed the wording of its previous statement from:

  23. Current Jan-09 Variation Argentina 5845 5268 +577 Brazil 537 396 +141 Perú 361 255 +106 Venezuela 643 570 +73 Colombia 434 361 +73 Mexico 205 178 +27 Chile 94 83 +11 EMBI 349 304 +45 Current Jan-09 Variation Argentina 68 74 -8% Brazil 381 404 -6% Peru 426 449 -5% Venezuela 378 391 -3% Colombia 213 219 -3% Mexico 284 286 -1% Chile 164 165 -1% EMBI 252 261 -4% LAC-7: Sell-Off After Fed Statement EMBI Spreads EMBI Bond Prices (Sovereign spread, b.p.) (23-10-2003 = 100, US$) Fed Statement 400 111 390 380 109 370 Fed Statement 360 107 Jan-09 350 Jan-09 EMBI+ adj. for Argentina 105 340 330 103 320 101 310 300 99 23/10/03 30/10/03 06/11/03 13/11/03 20/11/03 27/11/03 04/12/03 11/12/03 18/12/03 25/12/03 01/01/04 08/01/04 15/01/04 22/01/04 29/01/04 23/10/03 06/11/03 20/11/03 04/12/03 18/12/03 01/01/04 15/01/04 29/01/04 Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

  24. Current Jan- 09 Depreciation Chile 595 558 +7% Mexico 11 11 +4% Brazil 3 3 +3% Argentina 3 3 +3% Peru 3 3 +1% Venezuela* 3027 2890 +5% Colombia 2751 2768 -1% * Parallel Market Exchange Rate LAC-7: Sell-Off After Fed Statement Nominal Exchange Rates Stock Markets (23-10-2003 = 100, domestic currency per dollar) (23-10-2003 = 100, local currency) Fed Statement Fed Statement 101.0 129 Current Jan-09 Variation Jan-09 126 100.5 Brasil 192 -11% 215 Peru 195 -7% 210 123 Argentina 214 -4% 224 100.0 120 Chile 141 -2% 144 Mexico 158 +6% 149 99.5 117 Venezuela 353 +8% 325 Colombia 169 +13% 150 99.0 114 111 98.5 108 98.0 105 97.5 102 Jan-09 99 97.0 23/10/03 06/11/03 20/11/03 04/12/03 18/12/03 01/01/04 15/01/04 29/01/04 18/12/03 06/11/03 15/01/04 29/01/04 23/10/03 20/11/03 04/12/03 01/01/04 Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

  25. OUTLINE • Post-Adjustment Latin America: Back in Vogue with International Investors • LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004 • Risks Ahead: the Specter of Fed Tightening • The Banking Sector: Introduction to Seminar

  26. Banking Sector: Stylized Facts • Public Sector Banks, PSB. Their share is large in LAC, although it decreased in the second half of the 1990s. • Bank Privatization: • Before 1995: Bolivia, Chile, Ecuador, Peru, Brazil and Mexico. • After 1995: Argentina and Nicaragua. • Foreign Banks. Their share increased in the 1990s, especially in Argentina Mexico and Peru • Why the Change in Banking Structure? Partly as a result of crises that hit the region • Argentina 1995: 32 banks closed & 37 merged. • Colombia 1998-99: 4 banks closed & 3 merged. • Mexico 1995-96: massive foreign bank entry

  27. Is Bank Privatization a Good Thing? • Public Sector Banks, PSB. They tend to have weaker balance sheets and profitability than their private sector counterparts • Thus, PBS may increase the probability that an external shock will lead to a crisis. However, a poorly implemented privatization process may make the situation even worse • Foreign Banks, Procyclical? There is a lively debate about this. The recent experience in Chile suggests that they may exacerbate capital outflows in times of crisis.

  28. Public Sector Banks Around the World 100 1970 90 1985 80 1995 70 60 Share of PSB Assets (%) 50 40 30 20 10 0 Industrial Sub-Saharan Latin America East Asia and Developing East and Central Middle East and South Asia Countries Africa Pacific Countries Europe North Africa Source: IDB calculations based on data from La Porta et al. (2001)

  29. Costa Rica Brazil 2000 Argentina 1995 Colombia Chile El Salvador Guatemala Nicaragua 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% Public Sector Commercial Banks Share of PSB assets (%) Source: IDB calculations based on bank superintendence data

  30. Foreign-Owned Banks Mexico Peru 2002 Argentina 1995 Chile Brazil Colombia Bolivia Costa Rica Guatemala El Salvador 0 10 20 30 40 50 60 70 80 Source: Own calculations based on superintendence data * For Argentina 2001 Share of Foreign Owned banks

  31. COMMERCIAL BANKS: Relationships Between Public and Private Banks

  32. CHILEAN BANKS: Foreign / Total Assets % % 7 7 6 6 Foreign 5 5 4 4 System 3 3 2 2 1 1 Domestic 0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Caballero, Cowan and Kearns (2003)

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