1. March 28, 2004 LAC-7 Macroeconomic Outlook

2. 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

3. 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

4. 200 400 600 800 1000 1200 1400 Jun-97Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03 35 55 75 95 115 135 155 Interest Rates Spread Spreads & Domestic Interest Rates Russian Crisis Domestic lending rates EMBI+ adj. for Argentina (domestic lending rates, June 1998=100) 200 400 600 800 1000 1200 1400 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

5. 0 20000 40000 60000 80000 100000 1997-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

6. -10 40 90 140 190 240 290 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)

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

8. LAC-7: Current Account Adjustment (4 quarters, millions of US dollars and % of GDP) Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela -14000 -12000 -10000 -8000 -6000 -4000 -2000 0 2000 1997-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

9. 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 95 105 115 125 135 145 155 Ene-02 Mar-02 May-02 Jul-02 Sep-02Nov-02 Ene-03 Mar-03 May-03 Jul-03 Sep-03Nov-03 95 115 135 155 175 195 215 235 255 Stock Market Indices* Bond Price Indices* Post-Adjustment Period

10. -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

11. LAC-7: Labour Market (s.a. unemployment, simple average) Includes: Argentina, Brazil, Chile, Colombia, Mexico,Peru and Venezuela Post-Adjustment Period Adjustment Period 5 6 7 8 9 10 11 12 13 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

12. 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

13. (US HY corporate bonds, bps over US Treasuries, and EMBI+ adjusted for Argentina) 300 400 500 600 700 800 900 1000 1100 1200 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-04 200 300 400 500 600 700 800 900 1000 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

14. -50000 -40000 -30000 -20000 -10000 0 10000 20000 30000 40000 50000 1997-I1998-I1999-I2000-I2001-I2002-I2003-I2004-I 0 20000 40000 60000 80000 100000 1997-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

15. 50 70 90 110 130 150 170 190 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 70 75 80 85 90 95 100 Oct-97Oct-98Oct-99Oct-00Oct-01Oct-02Oct-03 Source: IMF

16. Source: LatinFocus Consensus Forecasts (GDP growth forecasts weighted by GDP and LAC exports) G-3 Growth Forecasts 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2001200220032004 Weigted by GDP Weigted by LAC Exports 012345 Japan Euro Area USA 20032004

17. (GDP yoy variation in %) LAC-7 Growth Forecasts Source: Latin Focus Consensus Forecasts -2.0 0.0 1.0 2.0 3.0 4.0 5.0 200220032004 Per CountryLAC-7 34567 Mexico Colombia Brazil Peru Chile Argentina Venezuela Rebound Countries

18. (Investment yoy variation in %) LAC-7 Investment Forecasts Source: Latin Focus Consensus Forecasts -10 -8 -6 -4 -2 0 2 4 6 8 10 200220032004 381318 Peru Mexico Brazil Chile Colombia Venezuela Argentina Rebound Countries Per CountryLAC-7

19. (Unemployment rate in %) LAC-7 Unemployment Forecasts Source: Latin Focus Consensus Forecasts 10.2 10.4 10.6 10.8 11.0 11.2 11.4 11.6 11.8 200220032004 051015 Mexico Chile Peru Brazil Venezuela Colombia Argentina 20032004 Per CountryLAC-7

20. 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

21. 200 400 600 800 1000 1200 1400 1600 1800 Dic-93Dic-94Dic-95Dic-96Dic-97Dic-98Dic-99Dic-00Dic-01Dic-02Dic-03 0 1 2 3 4 5 6 7 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 1993 - June 1995

22. 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

23. 99 101 103 105 107 109 111 23/10/0306/11/0320/11/0304/12/0318/12/0301/01/0415/01/0429/01/04 300 310 320 330 340 350 360 370 380 390 400 23/10/0330/10/0306/11/0313/11/0320/11/0327/11/0304/12/0311/12/0318/12/0325/12/0301/01/0408/01/0415/01/0422/01/0429/01/04 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.) (23-10-2003 = 100, US$) CurrentJan-09Variation Argentina58455268+577 Brazil537396+141 Perú361255+106 Venezuela643570+73 Colombia434361+73 Mexico205178+27 Chile9483+11 EMBI349304+45 CurrentJan-09Variation Argentina6874-8% Brazil381404-6% Peru426449-5% Venezuela378391-3% Colombia213219-3% Mexico284286-1% Chile164165-1% EMBI252261-4% Jan-09 Fed Statement

24. 97.0 97.5 98.0 98.5 99.0 99.5 100.0 100.5 101.0 23/10/0306/11/0320/11/0304/12/0318/12/0301/01/0415/01/0429/01/04 Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela CurrentJan- 09Depreciation Chile595558+7% Mexico11 +4% Brazil33+3% Argentina33+3% Peru33+1% Venezuela*30272890+5% Colombia27512768-1% * Parallel Market Exchange Rate 99 102 105 108 111 114 117 120 123 126 129 23/10/0306/11/0320/11/0304/12/0318/12/0301/01/0415/01/0429/01/04 CurrentJan-09Variation Brasil192 215 -11% Peru195 210 -7% Argentina214 224 -4% Chile141 144 -2% Mexico158 149 +6% Venezuela353 325 +8% Colombia169 150 +13% Nominal Exchange Rates Stock Markets (23-10-2003 = 100, domestic currency per dollar) (23-10-2003 = 100, local currency) LAC-7: Sell-Off After Fed Statement Jan-09 Fed Statement

25. 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. 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 1998-99: 4 banks closed & 3 merged. Õ Mexico 1995-96: massive foreign bank entry Banking Sector: Stylized Facts

27. 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?

28. Public Sector Banks Around the World 0 10 20 30 40 50 60 70 80 90 100 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 (%) 1970 1985 1995 Source: IDB calculations based on data from La Porta et al. (2001)

29. 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 2000 1995 Source: IDB calculations based on bank superintendence data Share of PSB assets (%)

30. 30 Foreign-Owned Banks 01020304050607080 El Salvador Guatemala Costa Rica Bolivia Colombia Brazil Chile Argentina Peru Mexico 2002 1995 Share of Foreign Owned banks Source: Own calculations based on superintendence data * For Argentina 2001

31. 31 COMMERCIAL BANKS: Relationships Between Public and Private Banks

32. 32 CHILEAN BANKS: Foreign / Total Assets 0 1 2 3 4 5 6 7 199419951996199719981999200020012002 0 1 2 3 4 5 6 7 Domestic Foreign System % % Source: Caballero, Cowan and Kearns (2003)