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Thomas Trebat Managing Director Emerging Markets Research June 2, 2003

Investments in Emerging Market Bonds:Recent Experiences and Future Challenges Fifth Annual OECD-World Bank Bond Market Forum. Thomas Trebat Managing Director Emerging Markets Research June 2, 2003. Outline of Remarks.

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Thomas Trebat Managing Director Emerging Markets Research June 2, 2003

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  1. Investments in Emerging Market Bonds:Recent Experiences and Future ChallengesFifth Annual OECD-World Bank Bond Market Forum Thomas Trebat Managing Director Emerging Markets Research June 2, 2003

  2. Outline of Remarks • The recent rally in emerging markets bonds – liquidity driven or based on fundamentals? • The case for remaining “constructive” on emerging markets bonds • Are fundamentals really improving? The cases of Mexico and Brazil • Issues in sovereign debt restructurings: voluntary and involuntary approaches • Conclusions and future challenges

  3. 650 4.35 4.25 600 4.15 4.05 550 3.95 3.85 Stripped Spread Yield to Maturity 500 3.75 3.65 450 3.55 3.45 400 3.35 1 Nov 02 29 Nov 02 27 Dec 02 24 Jan 03 21 Feb 03 21 Mar 03 18 Apr 03 16 May 03 US 10yr (right) ESBI Emerging Sovereign Bonds and US TreasuriesNovember 2002-May 2003 Source: Citigroup. 1

  4. 2002 2003 2004 2002 2003F 2004F 3Q 4Q 1QF 2QF 3QF 4QF 1QF United States YoY 2.4% 2.5% 4.3% 3.3 2.9 2.2 2.3 2.3 3.2 3.9 SAAR 4.0% 1.4% 2.2% 1.7% 4.0% 4.9% 4.9% Japan YoY 0.2 % 0.7 % 0.2 % 1.6 % 2.5 % 2.5 % 0.9 % 0.1 % - 0.6 % - 0.5 % SAAR 3.1 1.9 0.0 - 1.3 0.0 - 1.1 0.4 Euro Area YoY 0.8% 0.7% 1.8% 1.0% 1.2% 0.8% 0.6% 0.7% 0.9% 1.4% SAAR 1.4 0.3 0.0 0.7 1.8 1.3 1.6 Citigroup forecast. SAAR Seasonally adjusted annual rate. YoY Year-over-year percentage change. - Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, I/B/E/S, and Citigroup. Economic Forecast, 2002-2004 2

  5. Emerging Market Bonds – Spread ChangesApril-May 2003 (In basis points)

  6. ESBI Correlations with Corporate Bonds, Stocks, Oil, Treasury Yields, and Brazil

  7. US BBB Corporate Spreads and Mexico Spreads, 2002-03

  8. Net Sovereign Debt Purchases by Investor Type, 2003 (Secondary market transactions, excludes new issuance)

  9. Latin American Bond Issuance, 2000-2003(in US $ Bn.) 2000 42 2001 40 2002 20 2003 (f) 32 Source: IIF

  10. Latin American Bonds: Some 2003 Highlights • Mexico: Over $8 bn. in issuance • Mexico: Retired remaining $3.8 bn. in Brady Bonds • Mexico: First issue under N.Y. law with CACs • Brazil: First new issuance since the 2002 crisis ($1 bn., also with CACs) • Uruguay: Exchange offer

  11. 40 Mexico 30 20 China 10 0 I I I I I I I I I 94 95 96 97 98 99 00 01 02 Mexico: FDI from the US, 1994-2002 Cumulative flows in billion US$* *For Mexico, excludes the $12.65 billion purchase of Banamex by Citibank in 2001. 9

  12. Brazil – A New Era Under President Lula? • The new administration maintains monetary and fiscal austerity • Shrinking current account (less than 1% of GDP) • External financing needs comfortable in a risk averse global scenario • While inflation is a concern, monetary easing likely in the near-term • Lula has proposed a reform agenda involving social security and tax reforms and central bank autonomy. • The government enjoys strong popular and congressional support.

  13. Issues in Sovereign Debt Restructurings Options: • “ Voluntary” exchanges (Pakistan, Argentina Phase 1, Uruguay) • “Non-voluntary” exchanges (Russia, Ukraine, Ecuador, Argentina 2002) • SDRM • Trade Offs: • Reputation (voluntary approach) vs. lower debt burden (involuntary) • Other costs of default: institutional weakening, capital outflows, output losses, investment declines.

  14. Can “Voluntary” Exchanges Work? • An important role for multinational lenders • Reputation concerns of the sovereign • Fiscal primary surpluses needed (state sector reform) • CACs helpful to modify terms • Exit consents: useful to prevent attachment of payments on new debt • Broad creditor participation can limit “haircut” in the medium-run • By lowering yields in secondary market • Best case scenario: Sovereign returns sooner to credit market

  15. Conclusions: Future Challenges to Emerging Markets Bonds • Global economy: Adjusting to a possible downturn • Brazil, Mexico, Russia: Can fundamentals continue to improve? • Participation: Role of crossover accounts now that spreads have fallen? • Official lending institutions: future policies on “bailouts”. (U.S. Treasury policy) • Debt restructuring: Voluntary and involuntary approaches • Argentina’s restructuring as a key test for the asset class

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