Latin America Trade Opportunities and Challenges Confronting the Region

1
BAFT Annual Meeting April 26-29,
2009 Ritz-Carlton Laguna Niguel, CA

• Latin America Trade Opportunities and
  Challenges Confronting the Region
• Antonio Calheiros, Banco Itaú BBA S/A

Bankers Association for Finance and Trade
2
Brazil No decoupling, but resilience
March 2009
3
Brazil GDP to contract, then recover next year.
Selic record low.
Brazilian economy to contract 1, then recover
3.5. BRL / USD to remain around the 2.2-2.5
range. SELIC rate to reach 8.75 by year-end

• The Brazilian economy resynchronized with the
  world economy in the past few years. We expect
  Brazilian GDP to contract 1 in 2009, reflecting
  predicted contractions in all aggregate demand
  components, except government expenditures. We
  estimate world trade collapse will command a
  significant contraction of Brazilian exports.
  Recovery in 2010 by 3.5.
• After many years of continuous, above GDP growth,
  domestic credit concession will suffer a setback,
  reflecting lower credit demand and higher world
  wide cost of capital.
• Lower domestic absorption and, specially lower
  profit remittances will command a reduction in
  current account deficit, from 1.8 of GDP in 2008
  to 1.1 in 2009. Central Bank USD Spot and
  derivative sales, and auctions of trade and clean
  USD credit lines should continue to help cushion
  the shock on the balance of payments
• A lower net public sector debt of only 36 of GDP
  is an important asset in the current environment
  
• We forecast 4.0 IPCA inflation in 2009 and 4.2
  in 2010. We expect the Central Bank to continue
  to decrease interest rates along the year, and
  foresee an year-end SELIC rate of 8.75.
• We forecast a recovery of the Brazilian economy
  in 2010 to 3.5 growth.

4
World GDP 2009 central economies to contract most
We foresee a contraction of 3.5 in advanced
economies GDP, and an expansion of 1.6 EM
economies
Source ItauBBA
5
Brazils economy became synchronized with the
world economy in recent years
Following inflation stabilization in 1994 and BRL
floating in 1999, the Brazilian economy follows
the world economy more closely. GDP growth
collapsed from 6-7 in 3Q 08 to - 1.5 YoY in
4Q.
Brazil GDP growth
World and Brazil GDP growth ()
Currency fluctuation
Inflation control
Source IBGE
Source Ipeadata ItauBBA
6
Industrial production collapsed and capacity
utilization retreated
Brazilian industrial indicators did not escape
the collapse in world manufacturing during 3Q-4Q
08 We expect industrial GDP to decrease 3 in 2009
Industrial Production 3Mo MA SA
Capacity Utilzation
Source CNI Itaú BBA
Source IBGE, Itau BBA
7
Retail sales and labor market indicators have
fallen from peaks
The drop in retail sales, especially on highend
goods, reflects lower confidence levels. The
unemployment rate will continue to climb higher
along 1H 09
Unemployment rate ()
Retail sales, restricted and ample indexes 3 Mo
MA SA
Source IBGE
Source IBGE
8
Household and corporate sectors have relatively
low leverage
Total credit expanded about 16pp of GDP in four
years, but leverage levels are still relatively
low an advantage in the current environment.
New credit concessions have slowed down,
reflecting tighter bank funding conditions
Real daily average credit concessions (R M)
Outstanding Bank Credit ( GDP)
Source BCB Itaú BBA
Source BCB Itaú BBA
9
External sector lower trade balance, but lower
remittances key
Flagging world growth has already hit exports
total foreign capital flows will decrease from
2006-2008 levels dividend remittances will
decrease substantially, following BRL
depreciation and lower profits.
World Imports, Brazilian Exports 12-mo (USD M)
()
Foreign capital stock dividend remittances
Source MDIC Itau BBA
Source ItauBBA BCB
10
External Sector Favorable reserve and debt
position
A negative total external debt and US 200bn in
reserves will help cushion the external shock
Total Net External Debt (US Million)
International Reserves (US bn)
Source BCB
Source BCB
11
Central Bank policies alleviate pressure on
balance of payments
Central bank is carefully using international
reserves to provide trade and other USD credit
lines to help normalize BoP flows CB also freed
up almost R 100bn bn in bank reserve
requirements so far
Reserve Requirements R 99.8 bn freed up
Major Central Bank initiatives on the BOP front
Values in the period October until March 2nd (in
USD bn) Spot USD sales 14.5 Derivatives USD
sales 32.4 Trade credit lines 8.3 Other credit
lines 4.6 Total 59.8 The Central Bank of
Brazil has also signed a stand-by currency swap
agreement with the Federal Reserve System, in the
maximum amount of US 30 bn, valid until October,
2009
Source BCB Itau BBA
Source BCB
12
Fiscal Position net public debt of only 36 GDP
Lower interest rates and successive primary
surpluses over the years have led to lower public
sector debt.
12-mo Public sector primary surplus
Net Public Sector debt / GDP ()
Source BCB
Source BCB
13
Inflation will drop below target in 2009 and 2010
12-month headline inflation stands at 5.9, but
this number reflects a very different past. We
see no significant inflationary pressures ahead,
and forecast headline IPCA inflation of 4.0 in
2009 and 4.2 in 2010.
12-month CPI inflation by components ()
12-month CPI Inflation
Source IBGE Itaú BBA
Source IBGE Itaú BBA
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We believe in total monetary policy easing cycle
of 500bp
We expect the SELIC rate to reach 8.75 by June.
SELIC rate expected path
One year ex-ante real interest rate ()
Source BCB Itaú BBA
Source BCB Itaú BBA
15
Brazil 2009-10 GDP contraction followed by
recovery
Our scenario incorporates significant worldwide
and domestic GDP contraction. We forecast
USD/BRL of 2.35 end 2009, and a real GDP
contraction of 1 in 2009. We see ample room for
monetary easing and foresee SELIC rate at 8.75
year-end The Brazilian economy is well
positioned due to its strong external position.
We see moderate recovery of 3.5 growth in 2010.
GDP forecast
Brazil selected indicators
Sources IBGE, BCB, Itau BBA
16
Argentina 2009 Clouds in the political arena

• The recent exchange of the prestimos
  garantizados seems to have improved sentiment
  for Argentine sovereign bonds. The operation,
  however, does not reduce foreign currency
  amortizations, the major issue regarding the
  countrys external solvency.
• Assuming capital flights stabilizes,
  international reserves should prove sufficient to
  meet public and private amortizations due in
  2009, a year in which we foresee a small trade
  surplus and a mild current account deficit
• Poiltics will bring the largest uncertainties.
  Given the erratic behavior of the government, we
  cannot discard the eventual emergence of a
  decline in its willingness to pay on debt
• With the weakening of its political coalition
  and continued deterioration of the fiscal
  situation, the government desires to bring
  forward congressional elections from October to
  June .
• This action has wrong footed the opposition as
  it has not yet fully reorganized, and allows the
  government to concentrate expenditure of its few
  resources in a shorter period

• If the government succeeds but assuming it loses
  control of the congress, 2H 09 looks problematic.
  Contagion to the financial sector will depend on
  what the government could do during the remaining
  five months that remains in control of congress
• Apart from political issues, the deterioration
  in the current account will pressure the
  currency and interest rates. Capital flight could
  also accelerate.

Source INDEC, IBBA
17
Chile 2009 Strong countercyclical measures to
ensure a good relative performance

• Strong interventions by the Central Bank and
  Finance Ministry have normalized the foreign
  exchange market.
• The government aggressively eased fiscal policy
  while the Central Bank has slashed interest rates
  as inflation has fallen quickly
• Moodys has recently upgraded Chiles foreign
  currency government bond rating to A1, from A2,
  with a positive outlook, to reflect strong
  resilience to adverse external shocks, related to
  the governments foreign asset position and a
  solid balance sheet.
• The countercyclical fiscal effort should produce
  a nominal deficit of around 5 of GDP in 2009
  after a surplus of 8 in 2008.

• The Economy continues to show significant signs
  of deceleration
• With a low expected trade surplus, expectations
  that the government would finance its fiscal
  deficit by selling USD of its copper
  stabilization fund has led to a significant
  appreciation of the CLP
• 2009 is an important poltical year. The recent
  gains of the opposition Alianza could trigger a
  further fiscal easing in 2H 09 if the economy
  does not soon show signs of recovery.

Source BCCh, IBBA
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Financial Systems OverviewBrazil, Chile and
Argentina
March 2009
18
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WELL CAPITALIZAED BANKS AND STATE OWNERSHIP ARE
IMPORTANT STRENGTHS DURING CHALLEGING TIMES ...
Brazilian Banking System Number of Active Banks

Main Players
204
Local Banks
Foreign Banks
State Owned
Dec/08
192
167
164
161
159
153
150
Assets
32
15
25
72
Loans
31
16
35
82

81
Deposits
34
17
30
State Owned
Foreign
Local
estimated
Market Shares
Brazilian Consolidated BIS Ratio
20
Total Assets
Total Loans
Total Deposits
16.2
18
16
22
21
20
14
37
34
38
12
11
45
42
10
41
8
8
6
State Owned
Foreign
Local
Sep 08
2000
2002
2004
2006
2001
2003
2005
2007
Dec/08
19
Source Banco Central do Brasil Design Itau BBA
20
... DESPITE CURRENT CHALLENGES, THE BRAZILIAN
FINANCIAL SYSTEM STILL REPORTS RESILLIENT CREDIT
METRICS ...
Total Outstanding Loans as a of GDP
Monthly Credit Growth
MoM Credit Growth
12 months moving average
Total Loans / GDP
Mortgages / GDP
Feb09 42
Average Total Credit / GDP
Sep through Feb
212
146
252
Average Mortgages / GDP
Feb09 2
68
34
81
Average Outstanding loans mortagages between
Dec/2002 and Dec/2008 Source FED, ECB
Non Performing Loans Past Due More Than 90 Days
as a of Total Portfolio
Total Outstanding Loans BRL billions
2006
2007
earmarked loans
2009
2005
2008
corporates
households
20
Source Brazilian Central Bank Design Itau BBA
21
... THERE IS EVIDENCE THAT THE APPETITE FOR
BRAZILIAN ASSETS IS RETURNING TO NORMAL LEVELS
AFTER THE LEHMAN EVENT IN SEPTEMBER 2008.
Rollover Rates of Foreign Credit Lines
295
292
260
230
216
190
180
153
146
Average 140
146
109
149
127
132
129
115
119
114
93
97
79
77
72
41
49
feb
jan
dec
feb
mar
apr
may
jun
jul
aug
sep
oct
nov
dec
jan
feb
2007
2008
2009
Selected Available Foreign Credit Lines
Brazilian Balance of Payments
USD Bn
211
206
202
200
198
196
195
191
193
182
35
36
Sep08 Feb09
172
37
36
3
Multilateral
Direct Borrowing
57
- 12
47
50
50
Trade
9
Bonds Notes
- 12
21
22
22
23
Total
- 7
57
50
47
50
dec/06
mar/07
jun/07
sep/07
dec/07
mar/08
jun/08
sep/08
dec/08
jan/09
feb/09
Bonds Notes
Trade Finance
Direct Borrowing
Multilaterals
21
Source Brazilian Central Bank Design Itau BBA
22
ARGENTINA LACK OF LONG TERM FUNDING CONSTRAINS
FURTHER DEVELOPMENT OF THE LOCAL BANKING SYSTEM
Argentine Banking System Number of Active Banks

Main Players
Local Banks
Foreign Banks
State Owned
Dec/08
116
113
108
100
96
91
90
89
85
84
Assets
18
22
32
72
Loans
8
11
28
47
65
Deposits
12
16
38
State Owned
Foreign
Local
Market Shares
Consolidated Leverage Ratio (Assets / Equity)

12x
Total Assets
Total Loans
Total Deposits
average 8.3x
9.6x
10x
9.2x
8.9x
8.4x
8.5x
8.2x
8.1x
7.8x
8x
30
34
7.4x
29
7.1x
41
35
43
6x
4x
30
28
29
2x
0
State Owned
Foreign
Local
1999
2001
2003
2005
2007
2000
2002
2004
2006
2008
Dec/08
22
Source BCRA Design Itau BBA
23
CHILE HIGHLY COMPETITIVE ENVIROMENT RESULTS IN
THE HIGHEST CREDIT TO GDP RATIO IN LATIN AMERICA
Total Outstanding Loans as a of GDP
Main Players
Local Banks
Foreign Banks
State Owned
Dec/08
Dec08 82
Assets
36
33
15
84
Loans
38
34
13
85
73
Deposits
32
28
13
IV 98
IV 99
IV 00
IV 01
IV 02
IV 03
IV 04
IV 05
IV 06
IV 07
IV 08
I 97
Market Shares
Chilean Consolidated BIS Ratio
20
Total Assets
Total Loans
Total Deposits
18
16
39
37
14
12.5
46
49
47
38
12
10
13
15
15
8
6
State Owned
Foreign
Local
1999
2001
2003
2005
2007
2000
2002
2004
2006
2008
Dec/08
23
Source Moodys Banco Central de Chile Design
Itau BBA
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BAFT Annual Meeting April 26-29,
2009 Ritz-Carlton Laguna Niguel, CA

• Latin America Trade Opportunities and
  Challenges Confronting the Region
• Antonio Calheiros, Banco Itaú BBA S/A
• acalheiros_at_itaubba.com.br

Bankers Association for Finance and Trade