Latin Finance - July/August 2009 - 2

Front Notes Brown Shoots lobal markets have checked out of intensive care, raising the prospect of a new LatAm bull market. As liquidity sloshes back up the pipe, investors are compelled to ignore fresh fundamental deterioration and hurl themselves back into alluring technicals. Funds are getting muscular inflows and defensive managers risk being left in the dust and suffering redemptions. They are doing bad enough as it is – many dedicated LatAm funds saw their last five years’ gains flushed away in the aftermath of Lehman’s collapse. Better just to go with the flow and follow the herd, goes the somnambulistic buyside mantra. It is comforting to be fanned along by the euphoria, not least in the biggest LatAm economy, Brazil. Rebounding growth, historic low rates, relatively firm fundamentals and a beaming president Lula standing shoulder to shoulder with his Chinese and Indian counterparts mark a renaissance for a country that was always supposed to be part of the future. A potential oil boom fuels the bullish fires for an economy that seems to have experienced little more than a short sharp shock. In June, the IPO machine cranked back up and investment banks started hiring again, marking support for obliterated Brazilian investment banking compensation. John Mack and Vikram Pandit were among the global banking superstars on a pilgrimage to see clients in São Paulo. M&A, private equity and debt markets were also thawing, vindicating the faith of financiers who stuck with Brazil, despite its checkered history. BM&F-Bovespa, whose equity index gained 40% in the first five months, has overtaken London and New York as a trading hub, at least by market cap. It is helped by monopoly status, which allows it to charge higher broker fees. But the mid-June markets retracement give pause for thought, as should the speed of Brazil’s ascent. Investor fears about bearded leftist Lula seizing power were so acute in 2002 that bond prices indicated a very high probability of sovereign default. The IMF was forced to stump up $30 billion – at the time, the largest fund package ever – to restore confidence. In a startling reversal, Brazil has pledged to lend money to a now strained IMF through purchases of up to $10 billion in Fund notes. The LatAm nation simultaneously underscores affinity with other BRIC countries, diversifies away from dollars and makes a bid for a bigger voice at the Washington-based multilateral. IMF managing director Dominique Strauss-Kahn hails Brazil as a leading emerging market economy that will contribute to the Fund’s resources to help member countries weather the global economic crisis. Cash is king and Brazil’s $200 billion in reserves are hard to knock. Brazil is much better placed than many so-called developed countries. Macroeconomists’ forecasts for growth are up and down like a yoyo, but at last estimate, it was poised to shrink by little over 1% this year, much less than initially feared, and stellar versus Mexico’s potential 7% evaporation. A relatively robust Brazil comeback is anticipated for 2010. Brazilian finance minister Guido Mantega is upbeat on the outlook for the rest of the year. He notes durable flows of foreign capital into Brazil, as well as FDI, and predicts that agricultural commodity output will be strong. Mantega also notes athletic performance from the services sector, and says credit levels from Brazilian public banks have recovered. The minister adds that Brazil is back to pre-crisis levels of reserves. The boot is plainly on the other foot, and many bull theories about Brazil appear to have been proved correct. But it is too soon to crack open Champagne. The rest of the world now knows about Brazil, making the trade increasingly crowded as the developed world falters. A lot of the new hands may prove much looser, and some will distort valuations. To make matters worse, LatAm-focused equity funds, which have enjoyed stellar growth, may be due for significant outflows, according to fund trackers. Cassandras will say it is too overbought and correlated to wobbly G7 markets to last. To assume that the US, Europe, or even China are beyond the worst would be foolhardy. Believing that another leg down will not whack Latin America – especially Brazil – is plain stupid. There is much to celebrate in Brazil, and some great opportunities in finance opening up. But strength is all relative. As green shoots are smothered by toxic weeds, a clear read of the risks is required to keep Brazil on track and safeguard its membership of a new global power center. LF EDITOR James Crombie ASSISTANT EDITOR Dan Shirai REPORTERS Ben Miller, Taina Rosa CONTRIBUTORS Lucien Chauvin, Jason Mitchell ART DIRECTOR Rosa Matamoros-Sense COVER ILLUSTRATION Dean MacAdam COMMERCIAL DIRECTOR James Norton DIRECTOR OF BUSINESS DEVELOPMENT Teresa Aguilar MANAGER, CARIBBEAN, PERU, BOLIVIA, ECUADOR Arielle Schrader MANAGER, MEXICO & LEGAL SERVICES Mark Hudson CARIBBEAN & VENEZUELA REPRESENTATIVE Matthew Perks T +1 718 260-8970 SENIOR EVENTS MANAGER Omar Suarez EDITORIAL DIRECTOR, CONFERENCES & SPECIAL PROJECTS Michael Brosgart EVENTS PROGRAMMER Alana Gutiérrez EVENTS MARKETING MANAGER Alex Rubin GROUP MARKETING MANAGER Kathy Andrew CIRCULATION MARKETING MANAGER Patricia Arcic OFFICE MANAGER Teresa Romero ASSISTANT TO THE CEO Vicky Maqueira NETWORK ADMINISTRATOR Lukasz Przybyl LATINFINANCE BOARD OF DIRECTORS Stuart Allen, Christopher Brown, James Crombie, Colin Jones, Giuliana Moreyra CHIEF EXECUTIVE OFFICER & PUBLISHER Stuart Allen CHIEF OPERATING OFFICER Giuliana Moreyra G Telephone: +1 305 448-6593 Fax: +1 305 448-0718 E-mail: editorial@latinfinance.com www.latinfinance.com Subscriptions hotline: U.S. +1 800 437-9997 +1 212 224-3570 U.K. +44 (0) 870 906-2600 E-mail address: subscriptions@latinfinance.com Subscriptions: one year magazine only $495. 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Latin Finance - July/August 2009

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