EmNet Quarterly Meeting
Latin America
Based on Latin American
Economic Outlook 2009
Javier Santiso
Director and Chief Economist
OECD Development Centre
Paris
5 December 2008

The financial crisis:
Should Latin America be worried?
Historically speaking, yes: when the U.S. sneezes, Latin America catches cold
Export Exposure to the US
Effect of US Recessions on Latin American growth
(change in average output gap during recessions)
(Median for Region) United States 0
2% Latin America
-0,5
1%
0% -1
-1% -1,5
-2%
-2
-3%
-4% -2,5
-5% -3
-6% Least exposed Most exposed Least exposed Most exposed
-7%
Industrial Countries Emerging Markets
1974-75 1980 1982 1991 2001 All
So urce: Lane and M ilesi-Ferreti, 2006
So urce: IM F , 2007 Recessions

The financial crisis:
Should Latin America be worried?
Current account channel: trade and remittances
Latin American Exports (by destination) Remittances (%, annual growth)
El Salvador Guatemala
100%
90% Mexico Latin America
25
80%
70% 20
60%
50% 15
40%
65% 10
30%
20%
5
10%
0% 0
2001
2002
2003
2004
2005
2006
2000
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
-5
2004 2005 2006 2007 2008
China EU US Rest of World
Source: OECD Development Centre based on World Bank, November 2008
Source: OECD Development Centre based on WITS data, 2008

The financial crisis:
Should Latin America be worried?
Financial channel: foreign banks in local markets
Market share of Foreign Banks in local banking systems Structure of Mexican banks
(% of total assets) (% of total assets)
90% 5%
Mexican Banks 5%
80%
20%
70% BBVA
60% 11%
50% Santander
40%
Citibank
30%
20% HSBC
10%
0% Scotiabank 20%
24%
Mexico
Argentina
Brazil
Peru
Chile
Colombia
Venezuela
Other Foreign
Source: OECD Development Centre based on World Bank, November 2008
Source: OECD Development Centre based on WITS data, 2008
15%
Source: OECD Development Centre based on National Sources and Credit Suisse, 2008 Source: OECD Development Centre based on National Sources and Credit Suisse, 2008

Initial impact is limited,
thanks to credible economic policies and high
internal demand
GDP (% annual growth) Output gap (%)
Advanced countries Emerging countries
Advanced countries Latin America
Latin America
7
5
6
4
5
3
4 2
3 1
2 0
-1
1
-2
0
-3
-1 -4
-2 -5
2000 2001 2002 2003 2004 2005 2006 2007 2008 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: OECD Development Centre, based on IMF (WEO October 2008) Source: OECD Development Centre, based on IMF (WEO October 2008)

But risks remain, depending on sensitivity to
international economic conditions and inflation
Industrial production (% annual growth) Inflation (% y-o-y)
Chile Brazil United States Mexico Brazil Chile Mexico
10
10 9
8 8
6 7
4 6
2 5
0 4
-2 3
-4 2
-6 1
jan-06 jul-06 jan-07 jul-07 jan-08 jul-08 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08
Source: OECD Development Centre, based on Thomson Datastream, 2008 Source: OECD Development Centre, based on Thomson Datastream, 2008

GDP growth forecasts are on the
downside, but still close to potential
Slowdown is not necessarily recession
GDP forecasts for 2009 GDP forecasts for 2009 in Latam
(% annual growth) (% annual growth)
September 08 October 08 November 08
Latin America Advanced economies
5
4
4,5
3,5
4
3
3,5
2,5 3
2 2,5
1,5 2
1 1,5
0,5 1
0 0,5
-0,5 0
2009 (April08) 2009 (July08) 2009 (Oct.08) 2009 (Nov.08) A rgentina M exico Venezuela Chile Co lo mbia B razil Latam
Source: OECD Development Centre, based on IMF (WEO), 2008 Source: OECD Development Centre, based on Consensus Forecasts, 2008

Latin America remains highly vulnerable to
international capital markets’ volatility …
Equity market (basis 100 = Nov.07) Nominal exchange rate (US$, basis 100 = Nov.07)
Argentina Brazil Chile S&P500 Mexico Brazil Chile Mexico
125 140
115
130
105
95 120
85
110
75
65 100
55
90
45
35 80
nov.-07 jan.-08 mar-08 may-08 jul.-08 sept.-08 nov.-08 nov.-07 feb.-08 may-08 aug-08 nov.-08
Source: OECD Development Centre based on Thomson Datastream, 2008 Source: OECD Development Centre based on Thomson Datastream, 2008

…but at least for the public sector, the
sensibility has been reduced
Spreads are now much less sensitive to external shocks
Sovereign bond spreads and “global risk aversion”
E MB I G loba l L a tAm vs. V IX (1998-2004) E MB I G loba l L a tAm vs. V IX (2005-2008)
1600
1600
E MB I G lobal L atA m (bp)
1400
E MB I G lobal L atA m (bp)
1400 to day
1200
1200
average 1000
1000
average
800
800
600 600
EM B I Latam = 27,57xVIX + 1 7,06
1 400
400 EMBI Latam = 7,9978xVIX +146,8
R 2 = 0,603 2
R = 0,5261
200 200
0 0
5 15 25 35 45 55 65 75 5 15 25 35 45 55 65 75
VIX index VIX index
Source: OECD Development Centre based on Thomson Datastream, 2008
The VIX index (CBOE Volatility Index) is the implied volatility of S&P500 index options.

Capital markets are differentiating between countrie
and with respect to past sovereign debt crises
Markets do not appear to be anticipating a crisis for ‘credible’ countries
EMBI sovereign bond spreads (bp) Fees and Sovereign bond spreads (Primary marke
Argentina Brazil Chile Mexico Venezuela 1,8
Brazil (T-1) Turkey (T-3)
1,6
2000 Argentina (T-3)
Un d erwritin g s p read (% )
Argentina (T-2)
1,4 Argentina(T-1)
1800
1600 1,2 Russia (T-1) Turkey (T-1)
1400 1,0 Russia (T-2)
1200
0,8 Turkey (T-2)
1000
800 0,6 Brazil (T-2)
600 0,4
400 today
0,2
200
0 0,0
nov.-07 jan.-08 mar-08 may-08 jul.-08 sep.-08 nov.-08 0 100 200 300 400 500 600 700 800 900
Bond s pre ad (bas is points )
Source: OECD Development Centre based on Thomson Datastream, 2008 Source: OECD Development Centre based on Latin American Economic Outlook, 2008

Why such confidence?
Public debt management has improved
External debt is falling and countries can increasingly borrow abroad in local
currency
External Public Bonds in Latin America “Original Sin Index”
External Public Bonds over GNP External Public Bonds over Exports (right axis)
1,0
25 80
0,8
70
20
0,6
60
15
50 0,4
10
40 0,2
5 30 0,0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2007 - June
2008
Brazil Colombia Peru Uruguay
Source: OECD Development Centre calculations Source: OECD Development Centre calculations based on World Bank, Global Development
based on World Bank, Global Development Finance Finance database (2008).
database (2008).

Latin America’s fiscal performance has
much improved over recent years
Revenues and expenditures
Fiscal policy measures Fiscal policy volatility
Latin America OECD
Latin America OECD
Fiscal balance Total revenue Total expenditure Fiscal balancec Total revenue Total expenditure Total revenue Total expenditure Total revenue Total expenditure
Fiscal balance Fiscal balancec
50 3.5 3.5
50
45
45
40 3.0 3.0
40
35 2.5 2.5
35
30 30
25 2.0 2.0
25
20 20 1.5 1.5
15 15
10 1.0 1.0
10
5 5 0.5 0.5
0 0
-5 0.0 0.0
-5
1990-2006 1990-1994 1995-1999 2000-2006 1990-2006 1990 -1994 1995 -1999 2000 - 2006 1990-2006 1990 -1994 1995 -1999 2000 - 2006
1990-2006 1990-1994 1995-1999 2000-2006
Source: OECD Development Centre calculations based on the Source: OECD Development Centre calculations based on the
ECLAC ILPES Public Finance database for Latin America, and OECD ECLAC ILPES Public Finance database for Latin America, and OECD
General Government Accounts data for OECD countries . General Government Accounts data for OECD countries .

However, fiscal policy does little to
reduce inequality in Latin America
Gini coefficients of income inequality, before and after taxes and transfers
Inequality before taxes and transfers
60
While taxes and transfers
50
40
reduce the inequality by 19
30 Gini points in Europe, the
20 difference is less than two
10
Gini points in Latin America
0
United…
France
Austria
Argentina
Netherlands
Germany
Italy
Denmark
Poland
Colombia
Belgium
Ireland
Chile
Peru
Luxembourg
Portugal
Brazil
Finland
Greece
Mexico
Sweden
Spain
Source: OECD Development Centre (2008), based on Euromod (2008) for OECD countries and Goñi et al. (2008) for Latin America.

Political context: democratic consolidation…
Democratic Consolidation in Latin America: Experts’ and Citizens’ Views
Number of presidential elections in Latin America
7
6
5
4
3
2
1
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201 201
1 2
Source: OECD Development Centre based on Nieto Parra and Santiso (2008)
The Latin American countries covered are Argentina, Brazil, Chile,
Colombia, Mexico, Peru and Venezuela. For elections with a
second (run-off) round, the date of the final round is used.
Sources: BTI Index (2008) and Latinobarómetro (2007).

This time around, the political cycle is
favourable to Latin America
The political cycle and capital markets
Investment-Bank recommendations Real Exchange Rates around Elections
around elections
0,4 103,0
overweig ht
An inc reas e repres ents a deprec iation
0,3 102,5
0,2 102,0
(elec toral month = 100)
0,1 1 ,5
01
0,0
Index
1 ,0
01
-0,1
underweig ht
100,5
-0,2 100,0
-0,3 99,5
-0,4 99,0
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
0 = e le c tion m onth
0 = e le c tion m onth
Source: OECD Latin American Economic Outlook, based on Nieto Parra and Santiso (2008),

EmNet Quarterly Meeting
Latin America
Based on Latin American
Economic Outlook 2009
Javier Santiso
Director and Chief Economist
OECD Development Centre
www.oecd.org/dev/leo Paris
5 December 2008