Latin American Sovereigns Theresa Paiz Fredel, Director April 2005

The Most Likely Global Growth Outcome is a Soft Landing but downside risks are rising USAJapanEuro Area e2005f 2006f Real GDP Growth (%)

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

Emerging Markets Tend to be Hit Hard When Sentiment Turns High Yield and Emerging Market Debt

Latin American Sovereign Ratings (LTFC) CountryRatingOutlook ChileAStable ArubaBBBNegative MexicoBBB-Stable PanamaBB+Stable El SalvadorBB+Stable ColombiaBBStable Costa RicaBBNegative PeruBBStable BrazilBB-Stable VenezuelaB+Stable UruguayB+Stable SurinameBStable BoliviaB-Stable EcuadorB-Stable Dominican RepublicCCC+Negative ArgentinaDDDn/a

External Environment And Prudent Policies Underpinned 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 Euro AreaUnited States ChinaJapan

External Financing Needs Lower But Still Heavy Sensitivity to Higher Rates and Bear Mkt Source: Fitch Ratings Overall Sensitivity Ecuador Uruguay Turkey Colombia Brazil Current Account Deficit Amortizations

Chinese Imports Support Some, Exports Threaten Others Textile and Apparel Exports (% of Total Exports) Exports to China El Salvador Guatemala Costa Rica Peru Colombia Mexico Brazil Argentina Chile Mexico Peru Costa Rica 0% 50% 100% 150% 200% 250% USD Mil. (LHS)% Growth (RHS)

Latam: Growth To Moderate This Year And Next Source: IMF and FitchSource: Fitch Latin American GDP Growth (%) Latin America Brazil Mexico Argentina Colombia Venezuela Peru Chile (f)2006(f)

Latam: Investment Remains Low Current Account Balances/GDP (2004 and 2005) Investment/GDP (2004) (%) LatamBrazilMexicoArg BrazilMexicoArgentina 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 Brazil Colombia Argentina Chile Bolivia Dominican Rep. Panama Peru Costa Rica Salvador Mexico Venezuela Ecuador (% GDP) AfricaLatin America Emerging Asia Central & Eastern Europe (% of Revenue)

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 E. AsiaEurope Cent AsiaLatam

Lots Of Elections In 2006 So Reforms Largely On Hold BrazilOctober 2006 MexicoJuly 2006 ColombiaMay 2006 PeruApril 2006 VenezuelaJuly 2006 ChileDecember 2005 ArgentinaApril 2007