1

EM and the World Economy:Something is Different this Time

Visit to the Central Bank of PeruLeonardo Leiderman

October 17, 2002

2

Flight to Quality – Increased Risk Aversion

Dollar Term Returns of Various Assets

-33%

-18%

7%

11%

13%

-40%

-30%

-20%

-10% 0% 10%

20%

World stock index (DJ) (YoY)

S&P500 (YoY)

US Housing (YoY)

United States GovernmentBonds Total Return Index (YTD)

Gold (YoY)

3

Secondary Market Bond Spreads

703

756

731

981

453

871

734

904

55

89 78

81

0

200

400

600

800

1,000

1,200

19992000

2001

2002 YTD

Spr

ead

in B

asis

Poi

nts

EMBI+ High Yield Investment grade

An increase of EM and High Yield Bond Spreads

4

Portfolio Flows are Drying Up

EM Net Capital Flows

-100

-50

0

50

100

150

200

1994

1995

1996

1997

1998

1999

2000

2001

2002

(*)

2003

(*)

(*) IMF Forecast

Bil

lio

ns

of

US

$

Private FDI Flows Private Portfolio Investment

5

Capital Flows Did Not Recover From the 1997-98 Crisis

Total Private Capital Flows (Net)

-60-40-20

020406080

100120140

1994

1995

1996

1997

1998

1999

2000

2001

2002

(*)

2003

(*)

(*) IMF Forecast

Bil

lio

ns

of

US

$

Developing Asia LATAM

6

EM Financing by Type of Issuances

82.4 80.5 89

44.2

23.2 41.8 11.2

8.9

58

94.2

62

23.2

0

50

100

150

200

250

19992000

2001

2002 YTD

Bil

lio

ns

of

US

$

Bonds Equities Loans

Funds Available to Emerging Markets Have Dried Up

7

Reasons:

1. Burst of Nasdaq Bubble.2. Geopolitical risks.3. Loss of investor’s

confidence (corporate accounting scandals).

4. A doubtful US recovery.

8

US Stock Indexes

0

50

100

150

200

250

300

350

400

1997

.01

1997

.07

1998

.01

1998

.07

1999

.01

1999

.07

2000

.01

2000

.07

2001

.01

2001

.07

2002

.01

2002

.07

Ind

ex

, 19

97.

01=

10

0

S&P500 NASDAQ

A Reflection of Fundamental Problems

9

Policy is in Place and Has Been Flexible

Fed Funds Rate in Real Terms (Interest rate less expected inflation based on Univ

of Michigan survey)

-2%

-1%

0%

1%

2%

3%

4%

5%

90.0

191

.01

92.0

193

.01

94.0

195

.01

96.0

197

.01

98.0

199

.01

2000

.01

2001

.01

2002

.01

10

The Fiscal Stance has Gone From Surplus to Deficit

US Budget Surplus(+)/Deficit(-)

0.6%

1.5%

-0.2%

-2.6%-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

1999 2000 20012002(*)

(*) IMF Forecast

% of GDP

11

Growth is Well Below Potential

US Rate of GDP Growth

4.1%3.8%

0.3%

2.2%

2.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1999 2000 20012002(*)

2003(*)

(*) IMF Forecast

12

Is There Any Hope From Europe and Japan?

Rates of GDP Growth

2.8%

3.5%

1.6%

1.1%

2.3%

0.8%

2.4%

-0.3%-0.5%

1.1%

-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

1999 2000 20012002(*)

2003(*)

(*) IMF ForecastEurope Japan

13

EM: Adverse Conditions in 2002…

1.Flight to quality.2.Anemic world growth3.Commodity prices.

…With No Help From Internal EM Factors:

1.Argentina2.Brazil3.Rest of LATAM4.Turkey

14

Commodity Price Indexes, US$ Terms

40

60

80

100

120

140

160

180

200

1980

M1

1981

M7

1983

M1

1984

M7

1986

M1

1987

M7

1989

M1

1990

M7

1992

M1

1993

M7

1995

M1

1996

M7

1998

M1

1999

M7

2001

M1

2002

M7

Non-Fuel Commodities indexAverage Petroleum Spot index

The Majority of Non-Oil Commodity Prices Remain Depressed

15

EM: Something is Different Now—Exchange Rate Flexibility…

Currency Depreciation(+)/Appreciation(-) Against the US$

-16%

-11%

-7%

-5%

-2%

8%

8%

12%

20%

37%

266%

-50% 0% 50%

100%

150%

200%

250%

300%

Czech Rep.

Hungary

Indonesia

S. Korea

Thailand

Mexico

Russia

Israel

Colombia

Brazil

Argentina

16

EM: Something Else is Different This Time-SELECTIVITY

Global Stock Indexes, US$ Terms, YTD

-65%

-58%

-31%

-19%

-6%

1%

13%

13%

21%

30%

32%

-80%

-60%

-40%

-20% 0% 20%

40%

Argentina

Brazil

Israel

Mexico

Colombia

S. Korea

Thailand

Hungary

Indonesia

Czech Rep.

Russia

17

Selectivity Applies to the Real Sector (Growth) As Well

Industrial Production, YoY Rate of Change

-17.0%

-9.2%

-1.8%

-1.2%

3.0%

3.4%

5.1%

8.9%

9.6%

11.0%

12.7%

-20.

0%

-15.

0%

-10.

0%

-5.0

%

0.0%

5.0%

10.0

%

15.0

%

Venezuela

Argentina

Israel

Colombia

Brazil

Russia

Hungary

S. Korea

Thailand

Czech Rep.

China

18

EM and the World Economy:Something is Different this Time

Visit to the Central Bank of PeruLeonardo Leiderman

October 17, 2002