1. Emerging markets: is risk aversion dead? David Lubin November 2002

2. Risk appetite collapsed in 2002 Total issuance of bonds, loans and equity by emerging markets (US$bn) 0 50 100 150 200 250 300 JanFebMarAprMayJunJulAugSepOctNovDec 199719981999200020012002

3. ONSCREEN...but risk appetite seems to have re-appeared

4. ONSCREEN On what does risk appetite depend? Real US rates? Lending boom to Latin America Latin American debt crisis “Emerging markets” is born October 2001 “mini- boom”

5. ONSCREEN...or US asset prices?

6. ONSCREEN The fall in net private capital flows is long-lasting Net private direct investment Net private portfolio investment Other net private capital flows Total flows -200 -150 -100 -50 0 50 100 150 200 250 300 199019911992199319941995199619971998199920002001 US$bn

7. ONSCREEN FDI flows are at risk Privatisation as a share of total FDI flows, 1990-1999 36% 6% 42% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Latin AmericaAsiaEurope

8. ONSCREEN FDI flows are at risk (cont’d) Brazil1.11.5Down Mexico1.191.44Down India1.051.35Down Poland1.151.26Down Thailand0.931.21Down Czech1.091.2Down South Korea0.911.12Down Hungary1.021.02Stable Hong Kong0.950.95Stable China1.991.69Up Russia0.990.78Up A T Kearney FDI Confidence IndexSep 02Feb 01Change since Feb 01 The index ranges from 0 (no confidence) to 3 Survey horizon is one to three years

9. ONSCREEN A measure of vulnerability Current account and amortisations (2003) divided by fx reserves (2002) -50% 0% 50% 100% 150% 200% Lebanon Brazil Turkey Colombia Mexico Venezuela South Africa Uruguay Poland Peru Indonesia Philippines South Korea Thailand China Russia

10. ONSCREEN Brazil’s basic problem 0% 10% 20% 30% 40% 50% 60% Thailand Philippines Indonesia South Korea Russia South Africa Mexico Turkey China Poland Venezuela Colombia Peru Brazil Argentina Exports as a share of GDP

11. ONSCREEN Brazil’s current account adjustment is great, but...

12. ONSCREEN...it has depended on a collapse in domestic spending... Current account balance (right scale, US$ mn) Export growth (% y/y) Import growth (% y/y)

13. ONSCREEN...and a weak exchange rate... Brazil's inflation-adjusted exchange rate

14. ONSCREEN...which makes the domestic debt burden grow... Brazil’s domestic debt Floating rate 61% US$-linked 30% Fixed rate 9%

15. ONSCREEN...creating a solvency risk Domestic debtExternal debt % GDP

16. ONSCREEN Options for Brazil if things go wrong Capital controls? To ring-fence domestic interest rates Domestic debt restructuring?Probably not achievable without capital controls... Debt monetisation?Probably not achievable without capital controls... So: can capital controls work?

17. ONSCREEN Is there ‘moral hazard’ in Turkey? Can there be ‘creditor’ moral hazard without ‘debtor’ moral hazard? IMF share of 2003-2006 external amortisations Turkey 24% Brazil 17%

18. ONSCREEN Contagion mechanisms have changed 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 199319941995199619971998199920002001 Latin AmericaEmerging AsiaEMEA Short term external debt divided by fx reserves

19. ONSCREEN Common creditor problems? Turkey28%10% Russia50%6% Ukraine31%15% Romania17%24% South Africa21%9% GermanyFrance Brazil17%24% Mexico41%35% Colombia29%25% Venezuela37%16% Argentina23%27% SpainUSA

20. ONSCREEN Russian creditworthiness has improved massively

21. ONSCREEN Mexican peso isn’t cheap, but ability to pay is strong External debt/exports ratio, right scale Real exchange rate index, 1990=100, left scale

22. David Lubin November 2002 Emerging markets: is risk aversion dead?