1 Inter-American Development Bank Latin American and Caribbean Public Debt Management Specialists Rio de Janeiro – Brazil March 18, 2005 Inter-American Development Bank as an International Issuer: Partner in the Latin American and Caribbean Capital Markets Development First Annual Meeting of

2 Inter-American Development Bank IADB’s Role in the Development of the Capital Markets Contribute through loans and technical assistance to the building of the financial infrastructure, providing institutional support and working with member countries to improve the framework of their capital markets. Direct involvement in bond issuance and derivatives in local currency and in guarantees to bond issues. Next step: Local currency lending? Comprehensive approach to developmental issues?

3 Inter-American Development Bank The IADB as an Issuer:  AAA rating (S&P and Moody’s, Stable Outlook)  Three-pronged funding strategy to achieve volume, investor diversification and cost effectiveness: Large global benchmark issues mostly in USD. Bond issues targeted to strategic markets. MTN transactions targeted to particular segments of demand.

4 Inter-American Development Bank IADB Funding Program Highlights ² C allable transactions are considered to the first call date. From 2000 to 2004, IADB has issued in the following currencies: AUD, BRL, CAD, CHF, COP, EUR, GBP, HKD, HUF, JPY, MXN, NZD, PLN, TWD, ZAR and USD. 1

5 Inter-American Development Bank Investor Distribution of Bond Issues in 2004 By Geographical Distribution By Type of Investor (only USD bonds) Japanese Retail 49% Japanese Institutional 4% Other Asia 19% Europe/Middle East/Africa 9% Americas 19% Asia 72% Pension Funds 4% Banks 18% Fund Managers 24% Gov’t Institutions/Central Banks 52% Insurance Companies 2% Institutional: 51% Retail: 49%

6 Inter-American Development Bank IADB’s Approach to Bond Issuance: International Standards Underwriting: Fully underwritten offers – fixed price re-offer Pricing: Market-based price discovery Investor base: Domestic and international investors Documentation: Global Debt Program Settlement: Local and international settlement agencies Listing: Domestic and international stock exchanges Secondary market liquidity: Performance and tight bid-offer spreads through underwriters’ support and diversification of investors

7 Inter-American Development Bank IADB in Latin American Markets: Partner in Capital Market Development  Aiming to: Introduce best practices Contribute to improved market infrastructure Provide asset diversification to domestic investors Offer high quality investment assets to international demand for the local currency Provide liquidity to the bond and the swap markets

8 Inter-American Development Bank IADB: Introduction of Best Practices  IADB strives to: Introduce regulatory changes to obtain a similar treatment as when issuing in international markets, i.e., disclosure requirements (language, US GAAP) Obtain asset class eligibility for purchase by institutional investors, i.e., pension funds, insurance companies Reduce issuance costs, i.e., stock exchanges, regulatory bodies  Close dialogue with governments, securities commissions, central banks and other market regulators.

9 Inter-American Development Bank IADB: Contribution to Develop and Improve Bond Market Infrastructure Work with international settlement agencies (Euroclear/Clearstream) to add local currency as settlement or denomination currency Work with domestic clearing agencies aiming to: Establish a bridge with international settlement agencies Clear bonds with Global format

10 Inter-American Development Bank IADB: Asset Diversification IADB bonds provide domestic investors with an international AAA rated paper denominated in the local currency. IADB bonds have flexibility in terms of size, maturity and interest rate structure to accommodate the specific requirements of the investors.

11 Inter-American Development Bank IADB: Invest in Developing International Demand IADB bonds provide a AAA asset denominated in local currency for international investors. Through an IADB bond, international investors can allocate currency risks separately from credit risks. IADB bonds can attract international attention to the local currency.

12 Inter-American Development Bank IADB Provides Liquidity to the Bond and Swap Markets New instruments for trading and hedging in the local markets IADB lends mainly in USD, hence issuance in local currency must be swapped to USD IADB has been active in the swap markets, as a by- product of its activities in bond issuance in local currencies.

13 Inter-American Development Bank Challenges Domestic placement: – Opportunities for attractive funding levels are rare for IADB. – Avoidance of crowding-out effect Foreign investors appetite: – Foreign demand is erratic, driven by exchange rate view, i.e., currency play. Pricing/Valuation: – Lack of pricing transparency, in many cases, due to illiquid bond and swap markets Convertibility and Transferability Risk  Resource intensive: Budget limitations

14 Inter-American Development Bank Issue DateCurrencyAmountUSD equiv CouponMaturity 7 Apr 04MXN3,000 m269 m6.59%3 yrs 23 Mar 05MXN500 m45 m9.25%5 yrs 11 May 04BRL550 m94 m0%5 yrs 14 Dec 04 BRL200 m73 mIGPM+6.26% 5 yrs 23 Jun 04COP 120 bn 44 mIPC % (issued at discount) 7 yrs, amort 10 Mar 05COP168 bn73 mIPC %7 yrs, amort IADB Bond Issues in Latin American Currencies

15 Inter-American Development Bank Case Study: Mexico : IADB negotiates with Securities Commission (CNBV), Central Bank (Banxico), local settlement agency (Indeval) and Pension Fund Superintendence (Consar). March 2002: Secretaria de Hacienda issues the “Conditions for the Registration and Authorization for the Public Offer of Bonds issued by Multilaterals”. March 2003: CNBV issues “General Provisions applicable to issuers of Securities” which includes special provisions for the issuance by MDBs. August 2003: Banxico issues a Circular granting repo eligibility to bonds issued by MDBs. October 2003: CNBV authorizes the filing of the Notes and the public offer. January 2005: Pension Funds (Afores) can purchase foreign securities.

16 Inter-American Development Bank Case Study: Mexico

17 Inter-American Development Bank Case Study: Brazil EuroBRL, payable in US Dollars Bonds placed among foreign investors, i.e., US and European investors. April 2004: Zero-coupon bond December 2004: First bond issue linked to inflation index IGPM – educating international investors about the mechanics of the index

18 Inter-American Development Bank Case Study: Colombia Local pension funds can purchase Eurobonds under a private offer April 2004: IADB issues the first Eurobond in COP, placed domestically (inflation linked). April 2004: IADB negotiates the inclusion of COP as denomination currency with Euroclear. February 2005: IADB issues its second Eurobond in COP, placed internationally and domestically (inflation linked).

19 Inter-American Development Bank Case Study: Colombia

20 Inter-American Development Bank Next Step: Local Currency Financing? Based on specific demand from some borrower member countries, IADB is considering the possibility to provide financing in local currency on a case-by-case approach. Requirement: Liquidity in the swap market Bank cannot run foreign exchange risk. Bond issuance is difficult to match with the timing and cash flows of the loan. More flexibility financing via a cross currency swap with counterparty eligible for the Bank.