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Latin America: Situation and Prospects Fernando Losada, Ph.D. Director Americas Economic Research February 2004 MAIN REGIONAL TRENDS The pace of economic activity is increasing in virtually all Latin American countries, following stagnation or recessions in most of them during 2001-02 and even 1H03 (Brazil). Given the latest news out of the Asian and US economies, we are more confident that 2004 will be a relatively good year in the region, with GDP growth of at least 3.5% following 1% growth in 2003 and 0% growth in 2002. Inflation, interest rates and bond yields are down, and currencies have stabilized or even strengthened, in virtually all Latin American countries, following the adoption of mainly restrictive fiscal, monetary and wage policies. Dramatic turnarounds in the balance of payments have also been accomplished. Despite political transitions in most countries, such that opposition candidates and parties are now in office, there has been no major increase in nationalism or populism except in Argentina and Venezuela. 2 MAIN REGIONAL TRENDS The region’s main disadvantages remain mostly unchanged: excessive dependence on commodity or low-value-added production and exports; overindebtedness of most governments and undercapitalisation of most companies; and low domestic savings rates which are insufficient to underwrite investment and growth, thus keeping economies hostage to volatile foreign capital inflows. There have been some major improvements, however: most countries have made the transition to market-based exchange rate regimes; most governments have reduced their operating deficits and put in place fiscal responsibility rules; most central banks have become independent and have achieved low inflation rates; most banking systems have been strengthened by the arrival of well-capitalised US and European banks. One recent disadvantage is the demise of several traditional political parties and a propensity of citizens to split their votes, such that the region now has mostly weak governments. 3 SOVEREIGN CREDIT INDEX Early warning models of FX and debt problems tend to overpredict crises, need to be updated for regime changes and are as good as the forecasts that go into them. Nevertheless, we have developed two models of our own with more limited objectives. The SCI is an econometric model consisting of a singleequation regression estimated over a cross-section sample of more than 60 countries, using a small set of political, economic and financial indicators, to explain the sovereign credit ratings assigned by the leading agencies. The explanatory variables (per capita GDP, net external debt/exports, the fiscal balance, access to capital markets, and extent of political risk) are able to explain more than 90% of the sovereign credit ratings. To anticipate likely credit rating changes in the next 6-12 months, we use ABN AMRO forecasts as inputs in the estimated equation. 4 SOVEREIGN CREDIT INDEX S&P Actual rating Moody's Fitch Forward-looking SCI rating Argentina SD Caa1 DDD CCC/Caa2 Upgrade Downgrade Upgrade Brazil B+* B2 B+ BB-/Ba3 Upgrade Upgrade Upgrade Colombia BB Ba2** BB** BB/Ba2 No change No change No change BBB- Baa2* BBB- BBB/Baa2 Upgrade No change Upgrade B- Caa1 B- CCC+/Caa1 Mexico Venezuela Potential rating change as per SCI S&P Moody's Fitch Downgrade No change Downgrade Note: The asterisk (*) denotes that the rating has a positive outlook, two stars (**) denote a negative outlook. Source: ABN AMRO, as of February 4 2004 5 SUMMARY OF RATING SIGNALS OBTAINED Upgrade Downgrade No change Total Latin America 15 5 10 30 EMEA 6 11 10 27 Emerging Asia 2 5 8 15 Total 23 21 28 72 Source: ABN AMRO, as of February 4 2004 6 SOVEREIGN LIQUIDITY RISK INDEX Creditworthiness on an international scale is determined not only by long-term structural factors but also by short-term liquidity considerations. Our measure of sovereign liquidity risk has successfully signaled the vulnerability of various countries to cash-flow problems, though not all countries ranking poorly have ended up facing a liquidity crisis. Indicators such as the debt-service ratio and the importcoverage ratio do not have predictive power, because too much depends on a country’s choice of exchange-rate regime and on its ability to attract capital inflows Our favorite indicator of near-term sovereign default risk links the amount of a country’s liabilities to commercial and investment banks located in the BIS-reporting area falling due within the next 12 months, to all of the country’s liquid external assets held in that universe of banks. 7 SOVEREIGN LIQUIDITY RISK INDEX Maturities within 1yr Ris k indic ato r abo ve 150% Hungary 7.7 Assets Difference Maturities as %of assets 31-Mar-03 31-Dec-02 30-Sep-02 3.7 4.0 208.0 135.3 171.9 Ris k indic ato r abo ve 100% South Korea 38.1 Turkey 19.8 Indonesia 13.1 30.4 15.9 12.4 7.7 4.0 0.8 125.2 124.9 106.1 122.5 92.5 112.5 114.9 98.5 113.2 Ris k indic ato r abo ve 50% Romania 2.0 Brazil 23.3 2.2 44.6 -0.2 -21.3 90.8 52.3 95.4 57.3 69.8 55.6 Ris k indic ato r be lo w 50% Argentina 11.7 South Africa 9.8 Mexico 23.5 Colombia 3.0 Venezuela 3.7 25.9 21.7 58.1 8.9 29.1 -14.2 -11.9 -34.5 -5.8 -25.4 45.2 45.1 40.6 34.4 12.7 53.1 43.7 44.9 45.3 13.7 59.5 46.6 44.7 48.0 13.2 Source: BIS, ABN AMRO 8 RELIANCE ON SHORT-TERM DEBT FROM BANKS (%)* Africa &Middle East Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Mar-03 51.1 55.4 53.3 52.5 51.3 49.6 46.9 47.6 Emerging Asia 61.3 54.3 46.7 45.3 44.7 46.1 48.8 51.9 Emerging Europe 45.0 45.5 40.5 38.2 41.8 41.9 39.3 40.4 Latin America Argentina Brazil Mexico Venezuela 53.7 56.3 63.0 44.7 28.4 54.8 57.3 64.3 43.6 39.4 51.2 54.3 56.3 44.5 40.6 48.2 52.5 54.1 38.2 33.4 48.4 56.2 49.6 35.1 35.9 45.9 51.0 47.1 37.1 32.6 43.4 46.9 43.6 35.5 32.0 43.6 45.6 43.1 36.3 29.6 * Liabilities of up to 1 year to BIS-reporting banks, as % of total liabilities. Source: BIS, ABN AMRO 9 SOVEREIGN AND CORPORATE DEBT SPREADS (bp) 900 800 700 600 500 400 300 EMBI+ Chase High Yield BB 10 2/1/04 1/1/04 12/1/03 11/1/03 10/1/03 9/1/03 8/1/03 7/1/03 6/1/03 5/1/03 4/1/03 3/1/03 2/1/03 1/1/03 200 EMERGING MARKETS BOND ISSUANCE ($bn) Total Currency USD EUR JPY Other Region Latin America EMEA Emerging Asia Issuer Sovereign Corporate Bank 2004 1Q* 28.4 17.8 5.0 0.3 5.2 9.2 9.8 8.8 14.3 6.5 7.6 2003 4Q 29.1 20.6 1.6 0.5 6.4 10.1 5.1 10.5 8.5 12.3 8.3 * year to February 17. 11 3Q 24.1 18.1 4.7 0.4 0.9 7.9 7.8 2.3 8.9 8.4 6.8 2Q 30.1 20.3 8.1 1.2 0.5 9.6 11.8 2.8 16.9 7.4 5.8 1Q* 16.1 10.1 4.6 0.4 1.0 6.4 6.1 2.4 11.4 3.2 1.5 2002 1Q* 11.1 10.0 1.0 0.1 0.0 7.0 2.4 1.6 7.5 2.9 0.7 EMERGING MARKETS SYNDICATED LOANS ($bn) Total Currency USD EUR JPY Other Region Latin America EMEA Emerging Asia Issuer Sovereign Corporate Bank 2004 1Q* 5.6 3.8 1.7 0.0 0.0 0.0 4.3 1.3 0.6 4.5 0.5 2003 4Q 22.6 16.2 5.6 0.1 0.7 5.5 12.1 5.1 1.5 15.5 5.6 * year to February 17. 12 3Q 26.4 23.7 2.5 0.0 0.1 2.8 12.3 11.3 1.1 20.6 4.5 2Q 21.7 15.9 4.6 0.6 0.6 8.6 7.1 6.0 2.7 14.1 4.8 1Q* 3.3 3.1 0.1 0.0 0.1 0.3 2.2 0.8 0.4 2.8 0.2 2002 1Q* 4.4 4.4 0.1 0.0 0.0 1.1 2.4 0.9 0.0 3.5 0.9 SOVEREIGN DEBT COUPON AND REDEMPTION PAYMENTS ($bn) Feb/Mar 04 2Q04 3Q04 4Q04 Jan-05 Latin America 3.3 6.4 5.1 3.8 1.4 EMEA 5.2 3.0 2.8 3.6 1.2 Emerging Asia 0.3 0.6 1.0 0.7 0.2 Total 8.8 10.0 8.9 8.1 2.8 13 ARGENTINA: CURRENT SITUATION Economic situation The economy has recuperated more and faster than expected, driven mainly by higher exports, lower imports and some recovery of consumption. Inflationary pressures have been surprisingly benign and transitory. The policy mix consists of restrictive fiscal and wage policies and a very loose monetary policy. Bank deposits have been growing but bank lending has not. Utility prices remain frozen. Political situation President Kirchner has adopted a nationalistic posture in his dealing with multinational companies, foreign creditors and the multilateral institutions in an attempt to enhance his popularity and thus build a political base with which to govern. So far, the strategy is working. 14 ARGENTINA: BOND SPREADS & LOCAL INTEREST RATES 120 7,500 7,000 100 6,500 80 6,000 60 5,500 40 5,000 20 4,500 3-mo domestic rate (% pa) Argentina EMBI+ sovereign spread (bp over UST, rhs) Source: JP Morgan, Bloomberg, ABN AMRO 15 5-Sep 15-Aug 25-Jul 4-Jul 13-Jun 23-May 2-May 11-Apr 21-Mar 28-Feb 7-Feb 17-Jan 27-Dec 6-Dec 15-Nov 25-Oct 4-Oct 13-Sep 23-Aug 2-Aug 12-Jul 21-Jun 31-May 10-May 19-Apr 29-Mar 8-Mar 15-Feb 4,000 25-Jan 0 ARGENTINA: PUBLIC DEBT (% of GDP) 160 140 120 100 80 60 40 20 0 1998 1999 2000 2001 Domestic External Source: Ministerio de Economía, ABN AMRO 16 2002 2003F ARGENTINA: PRIMARY FISCAL BALANCES (% of GDP) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1998 1999 2000 2001 Source: Ministerio de Economía, ABN AMRO 17 2002 2003E 2004F ARGENTINA: NEAR-TERM OUTLOOK Economic outlook Unless the business climate improves meaningfully, a shortfall of new investment will probably put a ceiling on the economic recovery during 2005. Negotiations with foreign creditors, as well as with banks, pension funds and multinational companies operating in Argentina, are likely to be protracted and to leave deep scars. The government will maintain an interventionist, paternalistic attitude. Political outlook President Kirchner will use his increased political support to get some necessary reforms passed (e.g., revenue sharing rules), but he is unlikely to stage a Lula-style turnaround in his cool attitude toward big business, the IMF and the US. He is a nationalist and interventionist at heart. 18 ARGENTINA: MAIN ECONOMIC INDICATORS 2002 2003E 2004F -10.9 18.0 41.0 8.4 14.3 3.7 5.5 13.5 9.0 -1.8 16.5 7.8 -1.2 15.4 7.0 -1.0 12.5 4.0 0.0 175.0 10.2 3.36 1.0 190.0 14.1 2.93 1.2 205.0 15.5 3.15 Real GDP (% yoy) Unemployment (%) Consumer prices (Dec, %) Government budget (% of GDP) Foreign trade balance (US$bn) Current account (% of GDP) Foreign direct investment (US$bn) External debt (US$bn) International reserves (US$bn) Exchange rate (Dec, /US$) 19 ARGENTINA: LONGER-TERM ISSUES Can the rule of law be restored, such that new investors will have some confidence that their contracts will be honored? Is it possible to rebuild the financial system, or will bank credit and capital markets financing be unavailable for many years to come? Will there be the kind of fiscal discipline and effort necessary to service the government’s financial obligations after a debt restructuring? 20 BRAZIL: CURRENT SITUATION Economic situation The economy was in a mild recession in 1H03 because of the impact of previous political uncertainty, and highly restrictive fiscal and monetary policies, on domestic consumption and investment. However, as was to be expected, inflationary pressures have abated, the currency has regained some strength and stabilized, and the foreign trade and current accounts of the balance of payments have improved markedly. Economic activity has been accelerating since 4Q03 - we expect GDP to grow by more than 4% in 2004. Political situation Despite an increase in unemployment and an erosion of real wages because of high inflation late last year and early this year, the government’s approval ratings remain high and President Lula has established a strong, multi-party congressional coalition that controls the House and Senate, allowing the government to pass needed legislation. It remains to be seen, however, how costly for Lula is the recent corruption scandal. 21 Brazil EMBI+ (bp over UST) Source: JP Morgan, Bloomberg, ABN AMRO 22 1-yr domestic rate (% pa, rhs) Sep-03 Jul-03 Jun-03 May-03 Apr-03 Mar-03 Feb-03 Dec-02 Nov-02 Oct-02 Sep-02 Aug-02 Jun-02 May-02 Apr-02 Mar-02 Feb-02 Dec-01 Nov-01 Oct-01 Sep-01 Aug-01 Jun-01 May-01 Apr-01 Mar-01 Feb-01 Dec-00 Nov-00 Oct-00 Sep-00 Aug-00 Jun-00 May-00 Apr-00 Mar-00 Feb-00 Dec-99 BRAZIL: BOND SPREADS & LOCAL INTEREST RATES 2,800 35 2,300 30 1,800 25 1,300 20 800 15 300 10 BRAZIL: NET PUBLIC DEBT (% of GDP) 65 60 55 50 45 40 35 30 Dec-98 Dec-99 Dec-00 Dec-01 Mar-02 Jun-02 Source: Banco Central do Brasil, ABN AMRO 23 Sep-02 Dec-02 Mar-03 Jun-03 BRAZIL: PRIMARY FISCAL BALANCES (% of GDP) 5.0 4.0 3.0 2.0 1.0 0.0 Dec-98 Dec-99 Dec-00 Dec-01 Mar-02 Jun-02 Source: Banco Central do Brasil, ABN AMRO 24 Sep-02 Dec-02 Mar-03 Jun-03 Current account balance Source: Banco Central do Brasil, ABN AMRO 25 FDI inflows Jul-03 May-03 Mar-03 Jan-03 Nov-02 Sep-02 Jul-02 May-02 Mar-02 Jan-02 Nov-01 Set-01 Jul-01 Mai-01 Mar-01 Jan-01 Nov-00 Set-00 Jul-00 Mai-00 Mar-00 Jan-00 Nov-99 Set-99 Jul-99 Mai-99 Mar-99 Jan-99 Nov-98 Set-98 Jul-98 Mai-98 Mar-98 Jan-98 BRAZIL: CURRENT ACCOUNT AND FDI (US$bn) 40 30 20 10 0 -10 -20 -30 -40 BRAZIL: OUTLOOK Economic outlook Economic activity should rebound in the months ahead, now that fiscal and monetary policy have been relaxed. In anticipation, the financial markets have staged a strong rally. We expect inflation to stay under good control, the currency to remain stable, and the balance of payments to continue strong. Political outlook Congress should approve the pension reform for civil servants and key items in the tax reform (eg, the renewal of the financial transactions tax and the DRU, preventing the earmarking of certain government revenues) before year’s end. Passage of a new bankruptcy law and a new law on the financial system granting autonomy to the central bank are likely to be approved before mid-2004. 26 BRAZIL: MAIN ECONOMIC INDICATORS 2002 2003E 2004F Real GDP (% yoy) Unemployment (%) Consumer prices (Dec, %) Overnight interest rate (Dec, %) 1.5 11.7 12.5 25.0 0.1 12.0 9.3 16.5 3.8 10.0 5.5 15.0 Government budget (% of GDP) Foreign trade balance (US$bn) Current account (% of GDP) -10.3 13.1 -1.7 -5.2 24.8 0.4 -2.4 22.3 0.2 Foreign direct investment (US$bn) External debt (US$bn) International reserves (US$bn) Exchange rate (Dec, /US$) 16.6 205.0 37.8 3.54 10.0 208.0 49.3 2.89 12.0 209.0 59.9 3.20 27 BRAZIL: LONGER-TERM ISSUES Will domestic interest rates and the sovereign risk premium come down below previous floors, such that Brazil can experience a burst of investmentand export-led growth, and government debt dynamics can improve substantially? Can the authorities overcome nationalistic impulses and accept a deal with the US on free trade, even if it is a less ambitious, and thus more limited, agreement (a “lite” FTA)? Can the government target its spending better, improving on the delivery of social services and income support to the poorest of the poor? 28 COLOMBIA: CURRENT SITUATION Economic situation The pace of economic growth has been faster than expected, and inflationary pressures have been moderate. Although original IMF fiscal targets will not be met, Washington will be accommodating of the country’s needs. The recession cum exchange controls in Venezuela are constraining export earnings growth. Political situation President Uribe’s popularity remains high, based on the people’s support for his democratic security policy. The administration has recovered well from the blow of the referendum defeat. While Uribe appears to have full support from the White House, the backing for his policies on the part of the US Congress (and of many European countries) is not so strong. 29 COLOMBIA: BOND SPREADS & LOCAL INT. RATES 12 1100 1000 11 900 10 800 9 700 600 8 500 7 400 300 1/ 4/ 0 2/ 2 1/ 0 3/ 2 1/ 3/ 02 28 / 4/ 02 26 / 5/ 02 24 / 6/ 02 21 / 7/ 02 19 / 8/ 02 16 / 9/ 02 13 10 /02 /1 1/ 11 02 /8 / 12 02 /6 /0 1/ 2 3/ 1/ 03 31 / 2/ 03 28 / 3/ 03 28 / 4/ 03 25 / 5/ 03 23 / 6/ 03 20 / 7/ 03 18 / 8/ 03 15 / 9/ 03 12 /0 3 6 3-mo domestic deposit rate (% pa) Colombia EMBI+ spread (bp over UST, rhs) Source: JP Morgan, Bloomberg, ABN AMRO 30 COLOMBIA: PUBLIC DEBT (% of GDP) 60 50 40 30 20 10 0 1996 1997 1998 1999 Domestic Source: MHCP, ABN AMRO 31 2000 External 2001 2002 COLOMBIA: PRIMARY FISCAL BALANCES (% of GDP) 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 1996 1997 1998 1999 Source: MHCP, ABN AMRO 32 2000 2001 2002 COLOMBIA: NEAR-TERM OUTLOOK Economic outlook The pace of economic activity growth should remain in the neighborhood of 3% pa, helped by a strong US economic recovery. Concerns about knock-on effect of Venezuela and Ecuador will remain. The failure of the referendum opens the door to renewed concerns regarding the country’s fiscal outlook. Political outlook The government’s bet on Uribe’s tailwind to be enough for ensuring a positive vote in the referendum failed, and the costs will be on the fiscal front and in terms of Uribe’s loss of its aura of invincibility. The referendum defeat gave rise only to a moderate selloff, however, indicating that the market remains confident about Uribe’s ability to retain his political power. 33 COLOMBIA: MAIN ECONOMIC INDICATORS 2002 2003E 2004F Real GDP (% yoy) Unemployment (%) Consumer prices (Dec, %) 1.6 18.0 6.5 3.5 14.7 6.5 3.0 14.0 6.0 Government budget (% of GDP) Foreign trade balance (US$bn) Current account (% of GDP) -3.8 0.7 -1.9 -3.0 1.0 -2.3 -2.8 1.5 -1.5 2.6 42.7 11.0 2867 2.4 44.5 10.8 2780 2.5 47.0 11.0 2930 Foreign direct investment (US$bn) External debt (US$bn) International reserves (US$bn) Exchange rate (Dec, /US$) 34 COLOMBIA: LONGER-TERM ISSUES Is President Uribe’s popularity enough to ensure that progress will continue to take place in the areas of fiscal discipline and structural reform in spite of the referendum fiasco? Is Colombia’s bid to reach a bilateral free trade agreement with the US successful? Does President Uribe persuade the US Congress that his security policy is the best not only for Colombia but also the one that improves hemispheric security? 35 MEXICO: CURRENT SITUATION Economic situation The economy stagnated in the 2 years until 1Q03, but has been showing signs of life since then, although the job market remains depressed, partly because of a loss in international competitiveness. Inflation, interest rates and sovereign spreads are testing all-time lows. The government’s fiscal and monetary policies are conservative and have credibility. The structural reform agenda, however, has made little or no progress. Political situation President Fox has not managed to build a political base within his party and with other parties to advance his legislative agenda (tax, energy and other reforms). He has emerged further weakened from recent mid-term elections. 36 MEXICO: BOND SPREADS & LOCAL INTEREST RATES 10 450 9 400 8 350 7 300 6 250 5 3-mo domestic rate (% pa) Mexico EMBI+ spread (bp over UST, rhs) Source: JP Morgan, Bloomberg, ABN AMRO 37 5-Sep 15-Aug 25-Jul 4-Jul 13-Jun 23-May 2-May 11-Apr 21-Mar 28-Feb 7-Feb 17-Jan 27-Dec 6-Dec 15-Nov 25-Oct 4-Oct 13-Sep 23-Aug 2-Aug 12-Jul 21-Jun 31-May 10-May 19-Apr 29-Mar 8-Mar 15-Feb 25-Jan 200 4-Jan 4 MEXICO: PUBLIC DEBT (% of GDP) 35 30 25 20 15 10 5 0 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 External 2Q01 3Q01 Domestic Source: SHCP, ABN AMRO 38 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 MEXICO: PRIMARY FISCAL BALANCES (% of GDP) 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 1999 2000 2001 Source: SHCP, ABN AMRO 39 2002 2003E MEXICO: NEAR-TERM OUTLOOK Economic outlook The pace of economic activity should pick up in the months ahead in reflection of the strong US economic recovery, but there are reasons for concern about the continuing impact of China on Mexico’s previously privileged position vis-à-vis the US market. Absent a sharp decline in world oil prices, the currency should remain fairly stable, given low inflation and conservative monetary and fiscal policies. Political outlook Political negotiations about a tax reform may make progress, but the outlook for other reform initiatives remains murky, especially when it comes to the energy sector. The PRI is making a comeback and the leftist PRD has an appealing candidate for the 2006 presidential elections (Mexico City Mayor López Obrador). 40 MEXICO: MAIN ECONOMIC INDICATORS 2002 2004F 0.9 2.7 5.7 1.2 3.0 4.0 3.2 2.8 3.5 -2.9 -8.0 -2.8 -2.2 -6.0 -2.7 -1.8 -8.0 -2.8 12.6 190.0 46.1 10.4 13.5 197.0 56.1 11.2 14.0 200.0 59.0 11.8 Real GDP (% yoy) Unemployment (%) Consumer prices (Dec, %) Government budget (% of GDP) Foreign trade balance (US$bn) Current account (% of GDP) Foreign direct investment (US$bn) External debt (US$bn) International reserves (US$bn) Exchange rate (Dec, /US$) 2003E 41 MEXICO: LONGER-TERM ISSUES Is President Fox able to reach a domestic political accord such that progress can take place on his structural reform agenda? Does the US start to pay more attention to Mexico’s aspirations within NAFTA, broadening the relationship beyond commerce? Can Mexico move up the value-added chain and thus offset the loss of assembly jobs to China and other Asian countries? This would require a great leap forward in terms of educational and on-the-job training reforms. 42 VENEZUELA: CURRENT SITUATION Economic situation The oil industry recovered quickly, though not fully, from the labor strike and dismissals earlier this year, but the non-oil economy remains in a recession aggravated by the imposition of exchange controls. Monetary and fiscal policies have been loose but banks are not granting credit. The government demonstrated its willingness to keep servicing the public debt, and has regained partial access to the capital markets. Political situation President Hugo Chávez has lost popularity but refuses to resign, managing to delay a referendum that could end up in his removal. Gross domestic private investment remains depressed and capital repatriation has been delayed because of political uncertainty. 43 VENEZUELA: BOND SPREADS & LOCAL INTEREST RATES 70 1500 65 1400 60 1300 55 50 1200 45 1100 40 1000 35 900 30 3-month promissory note borrowing rate (% pa) Venezuela EMBI+ spread (bp over UST, rhs) Source: JP Morgan, Bloomberg, ABN AMRO 44 10-Oct 12-Sep 15-Aug 18-Jul 20-Jun 23-May 25-Apr 28-Mar 28-Feb 31-Jan 3-Jan 6-Dec 8-Nov 11-Oct 13-Sep 16-Aug 19-Jul 21-Jun 24-May 26-Apr 29-Mar 700 1-Mar 20 1-Feb 800 4-Jan 25 VENEZUELA: PUBLIC DEBT (% of GDP) 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 Domestic External Source: Ministerio de Finanzas, Standard & Poor’s, ABN AMRO 45 2000 2001 2002 VENEZUELA: OIL AND INTERNATIONAL RESERVES 20 33 19 31 18 29 17 16 27 15 25 14 13 23 12 21 11 International reserves incl. FIEM ($bn) Ven crude basket price ($/bbl, rhs) Source: Banco Central de Venezuela, Bloomberg, ABN AMRO 46 12-Sep 29-Aug 15-Aug 1-Aug 18-Jul 4-Jul 20-Jun 6-Jun 23-May 9-May 25-Apr 11-Apr 28-Mar 14-Mar 28-Feb 14-Feb 31-Jan 17-Jan 3-Jan 20-Dec 6-Dec 22-Nov 8-Nov 25-Oct 11-Oct 27-Sep 13-Sep 30-Aug 16-Aug 19 2-Aug 10 VENEZUELA: PRIMARY FISCAL BALANCES (% of GDP) 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 1999 2000 2001 2002 Source: Ministerio de Finanzas, Standard & Poor’s, ABN AMRO 47 2003F 2004F VENEZUELA: NEAR-TERM OUTLOOK Economic outlook The non-oil economy is likely to touch bottom soon and some pick-up in consumption will take place, but investment spending will probably be minimal. The exchange control regime is likely to be liberalized gradually in the months ahead. The economy remains vulnerable to a softening of world oil prices. We assume that business conditions will improve in 2H04, once political uncertainty is resolved. Political outlook A referendum to remove President Chávez is likely to take place by mid-2004. Depending on the timing Vice President Rangel may end up taking over temporarily until new elections are held, say, before the end of 2004. 48 VENEZUELA: MAIN ECONOMIC INDICATORS 2002 2003E 2004F Real GDP (% yoy) Unemployment (%) Consumer prices (Dec, %) -8.0 17.5 31.2 -10.0 17.0 27.1 6.0 16.0 35.0 Government budget (% of GDP) Foreign trade balance (US$bn) Current account (% of GDP) -3.6 12.0 7.6 -5.0 15.0 13.0 -3.5 14.0 9.0 2.5 35.3 11.0 1,389 0.0 37.3 21.3 1,600 1.0 38.0 25.0 2,200 Foreign direct investment (US$bn) External debt (US$bn) International reserves (US$bn) Exchange rate (Dec, /US$) 49 VENEZUELA: LONGER-TERM ISSUES Can new political leadership emerge and bring the country together again? This would require for the political opposition to Chávez to stand united, at least initially. Will the oil industry recuperate its production fully and attract renewed foreign investment? How much capital will be repatriated and be put to work in Venezuela if a new government takes office? 50 The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Copyright 2003 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). All rights reserved. This material was prepared by the ABN AMRO affiliate named on the cover or inside cover page. 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