PaizFredel LatinAmerica

Latin American Sovereigns: 

Latin American Sovereigns Theresa Paiz Fredel, Director April 2005

The Most Likely Global Growth Outcome is a Soft Landing: 

The Most Likely Global Growth Outcome is a Soft Landing but downside risks are rising

Key Risks to the Benign Global Outlook: 

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: 

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: 

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

Latin American Sovereign Ratings (LTFC) : 

Latin American Sovereign Ratings (LTFC)

External Environment And Prudent PoliciesUnderpinned Upgrades: 

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?: 

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?: 

Favorable External Conditions To Soften Somewhat? Source: IMF Growth of Major Economies (Annual Percentage Change) Prices of Commodity Exports (Index 1997 = 100) Source: Fitch

External Financing Needs Lower But Still Heavy: 

External Financing Needs Lower But Still Heavy Sensitivity to Higher Rates and Bear Mkt Source: Fitch Ratings -50 0 50 100 150 200 1998 1999 2000 2001 2002 2003 2004 2005 2006

Chinese Imports Support Some, Exports Threaten Others: 

Chinese Imports Support Some, Exports Threaten Others Textile and Apparel Exports - 2003 (% of Total Exports) Exports to China 2003

Latam: Growth To Moderate This Year And Next: 

Latam: Growth To Moderate This Year And Next Source: IMF and Fitch Source: Fitch Latin American GDP Growth (%)

Latam: Investment Remains Low: 

Latam: Investment Remains Low Current Account Balances/GDP (2004 and 2005) Investment/GDP (2004) (%)

Latam: More Fiscal Reforms Needed: 

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

Institutional Inadequacies Also Deter Investment: 

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 3.0 3.5 4.0 4.5 5.0 5.5 6.0 E. Asia Europe Cent Asia Latam

Lots Of Elections In 2006 So Reforms Largely On Hold: 

Lots Of Elections In 2006 So Reforms Largely On Hold