LATIN AMERICA:  THE FALL-OUT OF THE FINANCIAL CRISIS AND THE NEAR-TERM BUSINESS OUTLOOK
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LATIN AMERICA: THE FALL-OUT OF THE FINANCIAL CRISIS AND THE NEAR-TERM BUSINESS OUTLOOK April 29, 2009 Washington, D.C. ARGENTINA AND THE FINANCIAL CRISIS Carlos E. Alfaro Alfaro - Abogados Argentina. WHAT WE’LL COVER. Argentina’s Economic Situation at the Start of the Crisis

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LATIN AMERICA: THE FALL-OUT OF THE FINANCIAL CRISIS AND THE NEAR-TERM BUSINESS OUTLOOK

April 29, 2009

Washington, D.C.


ARGENTINA AND THE FINANCIAL CRISIS NEAR-TERM BUSINESS OUTLOOK

Carlos E. Alfaro

Alfaro - Abogados

Argentina


WHAT WE’LL COVER NEAR-TERM BUSINESS OUTLOOK

  • Argentina’s Economic Situation at the Start of the Crisis

  • The Aftermath of the Economic Crisis in Argentina

    • The Industry

    • Financial Markets

    • The Agricultural Sector

    • Government Measures to Confront the Crisis

    • Consumption

  • Business Opportunities for Foreign Investors


ARGENTINA AT THE START NEAR-TERM BUSINESS OUTLOOKOF THE ECONOMIC CRISIS

  • Argentina Before the Crisis:

    • 8% Economic Growth for 4 consecutive years.

    • Records in both export volumes and commodity prices

    • Solid and balanced financial market

    • Low unemployment rate

    • Consumption boom

    • Balance budget and fiscal surplus


  • Coping with Labor Law NEAR-TERM BUSINESS OUTLOOK

    • Pro Employee Legislation and Judiciary. Costs of dismissals.

    • Government pressure to avoid layoffs: political pressure + active policy measures (compensation, incentives, subsidies)

  • Alternatives

    Cut back on :

    • Professional Services (lawyers/accountants)

    • Suppliers

    • Internal costs and expenses

LIMITATIONS TO DOWNSIZING


FINANCIAL MARKETS NEAR-TERM BUSINESS OUTLOOK

  • Locally-oriented market. No direct impact from the crash:

    • No exposure to complex structured products

    • Local enterprises listed on the Stock Exchange

    • ADRs

  • Pension Funds

  • Financing: underdeveloped in Argentina. No credit culture. Transactions are mainly in cash


    • The Industry NEAR-TERM BUSINESS OUTLOOK

    • Steel, automobile, services

    • Food industry, tourism, construction

    • Government Measures to Confront the Crisis

    • Soft loans, subsidies, tax amnesty law

    • Agreements business-unions

    • Consumption

    • Supermarkets, retail

    • Cars, electrodomestics


    BUSINESS OPPORTUNITIES NEAR-TERM BUSINESS OUTLOOKFOR FOREIGN INVESTORS

    • Infrastructure

    • Energy

    • Agriculture – food industry

    • Retail – real estate

    • Oil and Gas

    • Mining

    • Fisheries


    MATTERS THAT SHOULD NEAR-TERM BUSINESS OUTLOOKNOT BE OVERLOOKED

    • Level Playing Field for International Investors

    • Transparency and Disclosure Laws

    • Accounting and Auditing: International Standards

    • Strong Corporate Governance Regimes

    • Tax abatement, Unregistered workers

    • Impact for US based companies doing business in Argentina


    BRAZIL AND THE FINANCIAL CRISIS NEAR-TERM BUSINESS OUTLOOK

    Jose Luis De Salles Freire

    Tozzini Freire Advogados

    Brazil


    GROSS DOMESTIC PRODUCT NEAR-TERM BUSINESS OUTLOOK

    Current prices in million US$*

    Growth

    (%)

    Period

    2004

    5.7

    663.552

    2005

    3.2

    881.754

    2006

    3.8

    1,072.357

    2007

    5.4

    1,313.590

    2008

    5.1

    1,621.274

    Source: TheBrazilianInstitute of Geography and Statistics and the International Monetary Fund

    • GDP per capita: US$ 8,449 (2008)

    Source: International Monetary Fund


    FOREIGN DIRECT INVESTMENT NEAR-TERM BUSINESS OUTLOOK

    US$ million dollars

    43,886.30

    45

    40

    33,704.58

    35

    30

    22,231.30

    21,521.57

    25

    20,265.34

    20

    15

    10

    5

    0

    2004

    2005

    2006

    2007

    2008

    Source: Central Bank of Brazil


    2004 NEAR-TERM BUSINESS OUTLOOK

    2005

    2006

    Surplus

    33.696

    Surplus

    44.764

    Surplus

    46.457

    Export

    96.475

    Export

    118.309

    Export

    137.807

    Import

    62.779

    Import

    73.545

    Import

    91.350

    2007

    2008

    Surplus

    24

    .

    835

    Surplus

    40.039

    Export

    160.649

    Export

    17

    3

    .

    10

    7

    Import

    197.

    942

    Import

    120.610

    BALANCE OF TRADE

    Sources: Central Bank of Brazil,

    Ministry of Development, Siscomex and Fundação Getulio Vargas


    IMPACT OF THE CRISIS NEAR-TERM BUSINESS OUTLOOKON THE BRAZILIAN ECONOMY

    • No financial crisis – limited liquidity problems of small and medium size banks

    • Measures taken:

      • Release of compulsory deposits maintained with the Central Bank

      • Authorization for federal banks to acquire privately-held financial institutions

      • Authorization for the Central Bank to guarantee interbank lines


    IMPACT OF THE CRISIS NEAR-TERM BUSINESS OUTLOOKON THE BRAZILIAN ECONOMY

    • Economic crisis – reduction of projections for the 2009 GDP growth – appreciation of the dollar vis-à-vis the local currency – credit crunch

    • Measures taken:

      • Reduction of basic interest rate

      • Reduction of federal fiscal surplus

      • Reduction of federal taxes on sales of vehicles

      • Reduction of federal taxes imposed on sales on freezers, washing machines and other domestic appliances

      • Authorization to use Central Bank reserves to finance export transactions

      • Several measures to incentivate construction of houses

      • Acceleration of infra-structure projects

      • Extension of unemployment benefits


    CHILE AND THE FINANCIAL CRISIS NEAR-TERM BUSINESS OUTLOOK

    Pablo Bauer URENDA RENCORET ORREGO y DÖRR

    Chile


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • Between 2004 and 2007, Chile’s GDP was growing at a 5% rate, however, it was anticipated that this upward cycle could not be sustained indefinitely.

      • Today, analysts claim that Chile’s GDP will grow at a negative rate of (1.5%), although the Central Bank of Chile has not yet changed its forecasted 3.5% positive growth (it may have done so by the time of this presentation)


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • As of the second half of 2007, Chile’s inflation rate started to increase at faster pace, especially after May 2008 and ended up in October 2008 with a double digit inflation (10%) on an annual basis, being the target rate between 3 to 4% per annum

      • Simultaneously, the Central Bank decided to implement a Monetary Policy targeted at reducing the expansive cycle of the Chilean economy, and

      • Consequently, the Central Bank’s discount rate (TPM - Tasa de Política Monetaria) was increased to a high of 8.25% during the last quarter of 2008 (from a low end of 1.75% in 2004)


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • As the growing cycle of Chilean economy was coming to an end, commodities prices begun to drop and inventories of manufactured products begun to increase, shifts to which the Chilean economy is particularly sensitive given its open market structure and being dependant on the export of commodities, i.e. the steep fall of copper prices

      • In November 2008 inflation started a downward trend and commercial activity begun to decrease (i.e. investment projects were put on stand by)


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • This adverse scenario was worsen by the effects of the international financial crisis that had started in September 2008

      • Financially, there is an increase in risk premiums and a downfall in capital flows (a feared lack of liquidity)

      • Economically, export prices drop as they are basically commodities, having its impact in investments, employment and the economic activity generally

      • The uncertainty regarding the consequences of the current financial crisis has eroded the confidence of Chilean market players and has proven to magnify these financial and economic effects


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • However, the Chilean Central Bank remains confident that there is an overreaction, as the fundamentals of the Chilean economy are still sound, the capital flow have not ceased and the expectation is that Chile is well prepared to face this crisis


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • To reinforce this idea, the Central Bank adopted the following measures:

      • To increase its savings and reserves (USD 8 billion in 8 months) to preserve liquidity in the domestic capital market

      • Making available such savings for funding in CLP and USD to the banking system

      • To decrease the discount rate (TPM) to lower the cost of lending and foster investments and consumption, having stripped 615 bps of the TPM in 90 days to a 2.1% in April 2009


    THE CHILEAN NEAR-TERM BUSINESS OUTLOOKCENTRAL BANK’S VIEW

    • Although the private sector concedes that the Central Bank has efficiently succeeded in preventing the contagion effects of international crisis (the glass half full), there is still a pervading sense that commodities prices will continue to deteriorate and that credit conditions will continue to tighten, thus affecting investment plans and domestic demand (the glass half empty).

    • Arguably, as the latest economic data is still being processed by Central Bank’s models, shaping the next-day monetary policy decisions, it seems clear that confidence has not been restored yet and that such uncertainty will continue to feed a rather pessimistic belief on how Chilean economy will perform in the near term: the glass soon to be emptied?


    THE NEAR-TERM BUSINESS OUTLOOK: NEAR-TERM BUSINESS OUTLOOKTHE CHILEAN GOVERNMENT PRO CREDIT PACKAGE

    • The Chilean Government has shown to be committed with maintaining the access to credit for consumers and businesses and improving the credit conditions

    • Starting in January 2009, a first piece of legislation providing for governmental stimulus to investments and employment was enacted. Among other tax benefits, this new legislation provided for a temporal exemption of the existing 1.2% stamp tax on credit transactions for years 2009 and 2010

      • This exemption has proven to be more effective to reduce the cost of borrowing money than the reduction in the Central Bank discount rate, which reduction is diluted by spreads reflecting higher risk premiums


    THE NEAR-TERM BUSINESS OUTLOOK: NEAR-TERM BUSINESS OUTLOOKTHE CHILEAN GOVERNMENT PRO CREDIT PACKAGE

    • By the end of March, the Chilean Government announced a package of 20 measures to stimulate the access to banking and non banking (i.e. institutional investors) credit and to foster additional sources of financing (namely, improving liquidity in the local bond market).

    • Out of these 20 measures (totaling USD3.6 billion in sovereign funds), 7 required legal changes to existing statutes. In mid April 2009, the Chilean Congress approved a bill of law drafted by the Chilean Government, which contains these legal changes. This bill of law should be enacted at any time (if not already).


    THE NEAR-TERM BUSINESS OUTLOOK: NEAR-TERM BUSINESS OUTLOOKTHE CHILEAN GOVERNMENT PRO CREDIT PACKAGE

    • The following 3 measures should be of interest for international investors:

      • The reduced 4% (as opposed to a 35%) withholding tax rate on interest payment is currently in favor of banks and financial institutions only and is now being extended to also benefit foreign insurance companies and pension funds.

      • The capital gains realized in the trading of debt securities (mainly corporate bonds) is currently subject to taxation in Chile at a rate of 35% in the case of offshore market participants (domiciled or resident abroad) and now such capital gains will be deemed a non taxable income, thus improving the liquidity and depth of the Chilean bond market.

      • Chilean insurance companies will be authorized to participate in syndicated loans at different financial terms and conditions, provided there is at least one commercial bank in the syndicate.


    THE CHILEAN BY-PRODUCT OF THE FINANCIAL CRISIS: THE RISE NEAR-TERM BUSINESS OUTLOOKOF THE “HUASO BOND”

    • The Huaso Bond is the Chilean equivalent to the Yankee Bond and, at the existing credit conditions in most capital markets, this security presents an alternative mean of financing for foreign issuers

    • In 2006, the Chilean SEC (the SVS) enacted a regulation that exempted foreign issuers that were listed in other, qualified jurisdictions from registration in Chile provided that they satisfied certain basic reporting requirements


    THE CHILEAN BY-PRODUCT OF THE FINANCIAL CRISIS: THE RISE NEAR-TERM BUSINESS OUTLOOKOF THE “HUASO BOND”

    • The same year America Movil, the Mexican telecom company owned by Carlos Slim, registered a USD 1 billion bond program that was never placed (not until mid April this year), due to a lack of a readily available market for such bonds, since Chilean institutional investors (particularly pension funds) had restriction to invest in this type of securities (deemed to be a foreign security)


    THE CHILEAN BY-PRODUCT OF THE FINANCIAL CRISIS: THE RISE NEAR-TERM BUSINESS OUTLOOKOF THE “HUASO BOND”

    • In July 2007, the Chilean Pension Fund regulator increased the limit for investing in foreign securities from 30% to 45%. This regulatory change together with the tighten of the credit conditions in other markets has led market analysts to conclude that this may be an attractive alternative for foreign issuers (particularly, from the US, Mexico, Brazil and Peru).

    • Additionally, the SVS is currently working on an amendment to its regulations in order to expand the number of qualified jurisdictions were the foreign issuer may be listed.


    MEXICO AND THE FINANCIAL CRISIS NEAR-TERM BUSINESS OUTLOOK

    Jorge León-Orantes B.

    Santamarina y Steta, S.C.

    México


    Current status
    CURRENT STATUS NEAR-TERM BUSINESS OUTLOOK

    Since the last quarter of 2008, Mexico has entered into a recession. Income from oil trading has decreased and the commercial deficit from the private sector has increased. Foreign sources of financing are less available.

    Mexico: decrease level of investment; “crisis” reflects in companies vs financial institutions.

    Macroeconomic Stability, second most important destination of foreign investment, prudent monetary stability and flexible exchange rate.


    Factors that contributed
    FACTORS NEAR-TERM BUSINESS OUTLOOKTHAT CONTRIBUTED

    Due to its proximity to the US, the factors that have contributed to the current economic climate in Mexico are related to the financial dynamics of that country.

    a) 80% of the total exports (not related with oil) are destined to the US.

    b) From the total exports (not related with oil), 23% are from the automotive sector.

    c) The income derived from overseas remittances represents the third source of income; and 98% of these remittances are sent by Mexican immigrants working in the US.

    d) The income derived from tourism represents the fourth source of income; and 80% derives from travelers from the US (either Mexicans residing there or US citizens).

    e) From the total foreign direct investment received by Mexico, 45%-50% comes from the US.

    f) Although there is no hard data, a significant percentage of foreign financing comes from the US.


    Actions from the mexican government
    ACTIONS FROM THE NEAR-TERM BUSINESS OUTLOOKMEXICAN GOVERNMENT

    a) National Infrastructure Program 2007-2012 (July 2007).

    • 253 billion in infrastructure investment (public and private proceeds)

      • Highways and railroads (construction and upgrade) – 90% of federal highways within international standards

      • Harbors (construction and upgrade)

      • Airports (3 new and upgrade 31)

      • Energy (electricity, oil refining, gas and petrochemicals)

      • Telecommunications

      • Potable water and sewerage


    ACTIONS FROM THE NEAR-TERM BUSINESS OUTLOOK

    MEXICAN GOVERNMENT

    • b)National Infrastructure Program has been enhanced by the Program to Promote the Growth and Employment (approved on October 14, 2008).

      • Five main items

        • Broaden expense in infrastructure

        • Adjust- make flexible rules for use of public expenditure

        • New refinery

        • Support small and medium size industries (amend public bid laws to promote direct adjudication and others)

        • Accelerate elimination of tariffs


    Actions from the mexican government1
    ACTIONS FROM THE NEAR-TERM BUSINESS OUTLOOKMEXICAN GOVERNMENT

    c) The Bank of Mexico has placed several tranches of dollars for sale in the Mexican market in order to contain the depreciation of the peso.

    d) Approval by the IMF of a credit line in the amount of $47,000,000,000.00 dollars to be used for any contingency (April 2009).

    e) Several amendments to laws.

    Fiscal Reform  (2007) Flat tax – Informality tax on cash deposits

    Pension System for Civil Servants Reform (March 2007) – portability of pensions across sectors

    Petroleum Reform

    Criminal justice system (February 2008)

    Education Reform (Alianza por la Calidad de la Educación)


    Although Mexico is part of the current global dynamics of recession, there are in fact opportunities for new and existing businesses.

    Modern legal framework

    Survivors

    Multilatinas


    PERU AND THE FINANCIAL CRISIS recession, there are in fact opportunities for new and existing businesses.

    José Antonio Payet

    Payet, Rey, Cauvi Abogados

    Peru


    Main economic figures
    MAIN ECONOMIC FIGURES recession, there are in fact opportunities for new and existing businesses.

    Population: 28.2 million

    GDP Total (U.S.$): 127.7 billion

    GDP Per Capita (U.S.$): $4,528

    Average Growth (2004 – 2008): 7.58%

    Annual Growth 2008: 9.8%

    Projected Growth 2009: 3.0 – 3.5%


    Main trade figures
    MAIN TRADE FIGURES recession, there are in fact opportunities for new and existing businesses.

    Total Exports 2008 (U.S.$): 31.5 billion

    Exports % of GDP 2008: 24.6%

    Total Imports 2008 (U.S.$): 28.4 billion

    Trade Surplus 2008 (U.S.$): 3.1 billion

    Main Exports 2008 (U.S.$):

    Mining: 18.7 billion

    Oil and derivatives: 2.7 billion

    Textile: 2.0 billion

    Fishing: 1.7 billion

    Agriculture: 0.7 billion


    Investment opportunities
    INVESTMENT OPPORTUNITIES recession, there are in fact opportunities for new and existing businesses.

    Anti-cyclical plan:

    U.S. $ 13 billion (10% of GDP)

    Infrastructure and social programs

    Impulse to PPAs and concessions

    Main investment opportunities:

    Mining (Cu, Au, Ag, Zn, Pb)

    Infrastructure projects (ports, roads, waterworks)

    Oil and gas (oil, natural gas, petrochemical)

    Clean energy (hydro)

    Agriculture and forestry


    LATIN AMERICA: THE FALL-OUT OF THE FINANCIAL CRISIS AND THE NEAR-TERM BUSINESS OUTLOOK

    April 29, 2009

    Washington, D.C.


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