March 28, 2004 LAC-7 Macroeconomic Outlook

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

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

Jun-97Jun-98Jun-99Jun-00Jun-01Jun-02Jun Interest Rates Spread Spreads & Domestic Interest Rates Russian Crisis Domestic lending rates EMBI+ adj. for Argentina (domestic lending rates, June 1998=100) Jun-97Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03 Emerging Markets Spreads & Domestic Interest Rates Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela EMBI+ adj. for Argentina Russian Crisis Pre- Russian Crisis Spread Emerging Markets Spreads (EMBI+ adj. for Argentina, in bp) ENRON effect

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

Ene-90Ene-92Ene-94Ene-96Ene-98Ene-00Ene-02Ene-04 LAC-7: External & Domestic Deleveraging Russian Crisis External Deleveraging (Financial flows in billions of real US dollars, cumulative since 1990)

LAC-7: Exchange Rate & International Reserves Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela Jun-98 Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 Dic-02 Jun-03 Dic-03 Nominal & Real Exchange Rate (vis-à-vis US dollar) Real exchange rate Nominal exchange rate Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03 Post-Adjustment Period Stock of International Reserves (millions of US dollars) Post-Adjustment Period +16% +8%

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

LAC-7: Asset Prices (Local stock market indices & bond prices, in US dollars, Oct. 2002=100) Local Stock Market index (US$) Bond Price index *Includes: Argentina, Brazil, Colombia, Mexico, Peru & Venezuela Ene-02 Mar-02 May-02 Jul-02 Sep-02Nov-02 Ene-03 Mar-03 May-03 Jul-03 Sep-03Nov Stock Market Indices* Bond Price Indices* Post-Adjustment Period

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

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

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

(US HY corporate bonds, bps over US Treasuries, and EMBI+ adjusted for Argentina) Jul-01 Sep-01Nov-01 Ene-02 Mar-02 May-02 Jul-02 Sep-02Nov-02 Ene-03 Mar-03 May-03 Jul-03 Sep-03Nov-03 Ene EMBI+ Adjusted for Argentina High Yield Bonds ENRON effect EMBI+ (adjusted for Argentina) US HY Corporate spread International Financial Conditions for EMs Pre Asian Crisis Spread

I1998-I1999-I2000-I2001-I2002-I2003-I2004-I I 1997-IV 1998-III 1999-II 2000-I 2000-IV 2001-III 2002-II 2003-I 2003-IV 2004-III LAC-7 Capital Flows (4 quarters, millions of US dollars) Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela Russian Crisis Total Capital Flows Financial Flows Russian Crisis IIF Forecasts

Oct-97Oct-98Oct-99Oct-00Oct-01Oct-02Oct-03 Commodity Prices (1997.II=100) Primary Commodities & Food Oil Food Non oil primary commodities Non Oil Commodity PricesOil Pices Oct-97Oct-98Oct-99Oct-00Oct-01Oct-02Oct-03 Source: IMF

Source: LatinFocus Consensus Forecasts (GDP growth forecasts weighted by GDP and LAC exports) G-3 Growth Forecasts Weigted by GDP Weigted by LAC Exports Japan Euro Area USA

(GDP yoy variation in %) LAC-7 Growth Forecasts Source: Latin Focus Consensus Forecasts Per CountryLAC Mexico Colombia Brazil Peru Chile Argentina Venezuela Rebound Countries

(Investment yoy variation in %) LAC-7 Investment Forecasts Source: Latin Focus Consensus Forecasts Peru Mexico Brazil Chile Colombia Venezuela Argentina Rebound Countries Per CountryLAC-7

(Unemployment rate in %) LAC-7 Unemployment Forecasts Source: Latin Focus Consensus Forecasts Mexico Chile Peru Brazil Venezuela Colombia Argentina Per CountryLAC-7

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

Dic-93Dic-94Dic-95Dic-96Dic-97Dic-98Dic-99Dic-00Dic-01Dic-02Dic EMBÎ+ FED Funds Rate (EMBI+ and FED Funds Rate) Emerging Markets and the FED FED Funds Rate EMBI+ Spread Russian Crisis 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* Lowest rate in 45 years *Source: UBS estimations FED tightening period: Dec June 1995

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

/10/0306/11/0320/11/0304/12/0318/12/0301/01/0415/01/0429/01/ /10/0330/10/0306/11/0313/11/0320/11/0327/11/0304/12/0311/12/0318/12/0325/12/0301/01/0408/01/0415/01/0422/01/0429/01/04 EMBI+ adj. for Argentina Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela LAC-7: Sell-Off After Fed Statement EMBI Spreads EMBI Bond Prices (Sovereign spread, b.p.) ( = 100, US$) CurrentJan-09Variation Argentina Brazil Perú Venezuela Colombia Mexico Chile EMBI CurrentJan-09Variation Argentina6874-8% Brazil % Peru % Venezuela % Colombia % Mexico % Chile % EMBI % Jan-09 Fed Statement

/10/0306/11/0320/11/0304/12/0318/12/0301/01/0415/01/0429/01/04 Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela CurrentJan- 09Depreciation Chile % Mexico11 +4% Brazil33+3% Argentina33+3% Peru33+1% Venezuela* % Colombia % * Parallel Market Exchange Rate /10/0306/11/0320/11/0304/12/0318/12/0301/01/0415/01/0429/01/04 CurrentJan-09Variation Brasil % Peru % Argentina % Chile % Mexico % Venezuela % Colombia % Nominal Exchange Rates Stock Markets ( = 100, domestic currency per dollar) ( = 100, local currency) LAC-7: Sell-Off After Fed Statement Jan-09 Fed Statement

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

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

27 â Public Sector Banks, PSB. They tend to have weaker balance sheets and profitability than their private sector counterparts â 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 â 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. Is Bank Privatization a Good Thing?

Public Sector Banks Around the World Industrial Countries Sub-Saharan Africa Latin America East Asia and Pacific Developing Countries East and Central Europe Middle East and North Africa South Asia Share of PSB Assets (%) Source: IDB calculations based on data from La Porta et al. (2001)

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

30 Foreign-Owned Banks El Salvador Guatemala Costa Rica Bolivia Colombia Brazil Chile Argentina Peru Mexico Share of Foreign Owned banks Source: Own calculations based on superintendence data * For Argentina 2001

31 COMMERCIAL BANKS: Relationships Between Public and Private Banks

32 CHILEAN BANKS: Foreign / Total Assets Domestic Foreign System % % Source: Caballero, Cowan and Kearns (2003)