FIXED INCOME RESEARCH

JUNE 1, 2001

THE

Sovereign
Strategist
Latin America
Asia
Europe/M.E./Africa

212-526-7036
212-526-6310
44 (0) 207-260-1767

HIGHLIGHTS
Contents
As the outcome of the Argentine debt swap becomes evident

this week, investors will likely shift attention back to the

broader emerging market asset class. Since our valuation tools
imply that emerging market debt is fairly valued, countryspecific events should drive spreads. Specifically, we continue
to suggest caution in Peru, regardless of the presidential
election outcome, and in Turkey, due to heightened political
uncertainty. Conversely, we return to a full overweight in
Brazil, where levels appear particularly cheap.
Compared to the eventful first five months of 2001, Ukranian

political tensions should decrease substantially throughout the

rest of the year. While we do not expect any major progress on
market-friendly reform, economic fundamentals continue to
improve. Considering both the stable short-term outlook and
the recent rally of Ukranian fixed income assets, we recommend buying into weakness.
We discuss the probable impact of the Argentine debt swap

on the countrys financing needs. Given our belief that

Argentina is not inherently insolvent, but rather the victim of a
confidence trap, its ability to grow and preserve fiscal discipline matters most for its creditworthiness. We concentrate on
the financing needs for this year and next and conclude that
the government can easily avoid default during this period.

Market Strategy
Blah, Blah, Blah ......................... 3
Recommended
Sovereign Weightings ............... 7
Recommended Assets ............. 11

Sovereign Strategy
Ukraine:
Is the Storm Over? ................... 13
Economics
Effect of the
Mega-Swap on Argentinas
Financing Needs ...................... 17
Mexico:
Lower Growth,
Lower Deficits,
Less Inflation ............................ 21

Emerging Markets Index

Performance & Analytics ......... 26
Indicators and
Economic Forecasts ................. 28
Sovereign Credit Ratings ......... 31
Sovereign Calendar .................. 32
Index of Recent Articles .......... 34

Sovereign Comparative Statistics

Sovereign Spreads over U.S. Credit Index

EM Best and Worst Performers, Absolute Excess Return, YTD

May 31, 2001

May 31, 2001

bp
Nigeria

1,400
EM-Credit
HY-Credit
ICBI-Credit

1,200

2,474

Russia

1,968

Philippines

1,000

1,132

Colombia

800

972

Indonesia

-109

600

Brazil

-307

Peru

-317

400
200

Argentina

-538

0
1/94

1/95

1/96

1/97

1/98

1/99

1/00

1/01

-1,000 -500

Information Ratio, May 31, 2001

0 bp 500

1,000 1,500 2,000 2,500 3,000

EM Best and Worst Performers,

Contrib. to Index Excess Return, YTD, May 31, 2001
Russia

2
EM
HY
Credit

239.0

Mexico

61.7

Venezuela

36.8

Nigeria

32.4

Indonesia

-0.1

Peru

-3.7

Brazil

-53.0

Argentina -129.8
-1
1-Mo

3-Mo

6-Mo

YTD

-180

-90

0 bp

90

Total Returns for Select Asset Classes, May 31, 2001

Annualized Total Return Volatility, May 31, 2001

%
10

%
12

EM
HY
Credit

180

270

EM
10

HY
Credit

6
6

4
4

2
0

0
MTD

3-Mo

6-Mo

1-Mo

YTD

3-Mo

6-Mo

See Analytical Notes on page 33 for detailed descriptions of charts.

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June 1, 2001

MARKET STRATEGY
Blah, Blah, Blah

Implementation of the
Argentina swap will put a rest
to the market chatter.

The marketplace has been consumed by endless talk of the Argentine

exchange; fortunately, expectations will give way to reality in the
coming week.

Once the analysis of the Argentine swap is completed, it will be time to

reassess the valuation of the broader emerging debt market. Our favorite
measures of relative value suggest that it is fairly valued.

Market direction will therefore be provided by country-specific developments. We remain cautious on Peru and Turkey; Brazil is beginning to
look attractive again.

Rarely has a single transaction generated as much expectation and analysis (or, for
that matter, underwriting fees) as the Argentine swap. While investors have been
sorting out the implications of the transactionnot only on the countrys fundamentals, but also on the emerging market indexthe market for Argentine bonds
has been essentially locked up for the past week. Indeed, liquidity in Argentina has
been as poor as it has been in a long time. The good news is that on June 4, when
the results of the swap are announced, most questions will be answered1 and the
marketplace can take on a more typical character.
The June 1 announcement of the pricing and coupon rates of the new bonds, as well
as the minimum bid prices for the bonds to be tendered, provided few surprises.
Pricing of the new bonds and the minimum bid prices were within spitting distance
of what had been expected. The one significant surprise was the higher-thanexpected coupon rate on the new Global 2008. Originally, market expectation had
been for a 5% coupon stepping up to 12% in 2004. In the end, the government opted
for a 7% coupon stepping up to 15.5% in 2004, creating a fairly hefty longer-term
interest bill on what is likely to be a sizeable new bond.

HOW DOES THE BROADER MARKET LOOK?

Emerging market debt is fairly
valued on a relative basis.

When focus on the Argentine swap finally subsides, renewed attention will be
placed on how the emerging debt market as a whole is trading on a relative basis.
What our valuation tools are telling us is that the marketplace will likely not find
a particular direction based on relative valuation alone. With the asset class
appearing neither rich nor cheap, it is country-specific events that are likely to be
the main drivers of market spreads.

Please see Joaquin Cottanis article Effects of the Mega-Swap on Argentinas Financing Needs, in this
publication, on Argentinas financing needs and sources before and after the swap, following the assumptions
made both by the government and the underwriting group.

June 1, 2001

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MARKET STRATEGY

In Figure 1, we show the normalized spreads for emerging markets, U.S. high
yield, U.S. corporates, and U.S. swaps since May 1995. Normalized spreads are
defined as the difference between the spreads current value and its long-term
mean, divided by the standard deviation of the spread. In effect, they serve as a sort
of Z-score for sector spreads. What the chart shows is that emerging market
spreads have richened on a risk-adjusted basis and are now in fair value territory.
While U.S. corporates have rallied to arguably expensive levels (again, on a riskadjusted basis), the impact on emerging market spreads from any correction there
should be muted; the emerging market beta to U.S. corporates is now 0.57,
meaningfully less than the beta evident in 1999 and 2000.
Our actual versus justified EM spread methodology is telling us the same thing.
In this analysis, we estimate the fair spread of EM debt, given the level of BB U.S.
high yield spreads, commodity prices, and the NASDAQ. The difference between
the actual and justified spreads can also be expressed as a Z-score (Figure 2).

Figure 1.

Normalized Spreads

Standard Deviations
4
3
2
1
0
EMG
U.S. Corporate
U.S. Swap
U.S. High Yield

-1
-2
-3
5/95

11/95

Figure 2.

5/96

11/96

5/97

11/97

5/98

11/98

5/99

11/99

5/00

11/00

Justified EM Spread Z-Score

bp
1,200

Z-Score
4

EM Index Spread (LHS)

Z-Score (RHS)

900

Expensive

600

Cheap
300

-2

0
11/98

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-4
2/99

5/99

8/99

11/99

2/00

5/00

8/00

11/00

2/01

5/01

June 1, 2001

This is done by taking that difference and dividing it by the standard error of the
regression equation. The resulting Z-score provides a measure of how statistically
significant that discrepancy is. Figure 2 confirms that EM spreads are fully in line
with what they should be given the level of our explanatory variables.

WATCH THE COUNTRY-SPECIFICS

We still dont like Peru.

Three countries in particular (aside from Argentina) are likely to command

market attention in the coming weeks. Peru is one obvious place in which
attention will be focused, with presidential elections on the immediate horizon
(June 3). We remain underweight the credit, not only because populist Alan
Garcia stands a good chance of taking the election, but also because regardless
of who wins, the new president will come to power with a weak mandate and face
a rather fragmented congress. This is not an environment conducive to dealing
with a weak economy with proactive, market-oriented policymaking.

Market action is finally

beginning to catch up with
reality in Turkey.

Turkey is also going to continue to flash on investors radar screens. With

market concerns about domestic politics rising again, spreads on Turkish
external debt assets widened by about 100 bp this week. The week began with
a feud between the economy minister and the agriculture minister regarding
agricultural reforms, in particular the support prices for wheat. Resolution of this
issue is a condition for further disbursement under the IMF Letter of Intent,
leading the economy minister to threaten to resign. This political drama was
compounded by yet another argument about the reform of the tobacco sector
(also involving IMF conditionality), this time resulting in the resignation of the
minister responsible for privatization. Heightened political uncertainty will
imply that the risk premium and, consequently, yields on debt are unlikely to
come down at the pace needed for debt dynamics to stabilize quickly.
This negative sentiment emanating from the political situation was further
exacerbated by the governments failure to hold a successful longer-term (13
months) domestic debt auction. This confirmed our long-held view that the
domestic banks have very little appetite for extending maturity, at least at rates
favorable for debt dynamics. In fact, given the extreme stress in the banking
sector and the real sector, we view the ability and the willingness of the domestic
banks to roll over the domestic debt as extremely low. Consequently, we remain
concerned about the negative debt dynamics, because aside from the obvious
difficulties arising from the weak fundamental situation, the extremely fragile
banking system and a volatile political environment are further complicating
the picture.

Brazil is looking cheap,

despite the recent spate of
bad news.

June 1, 2001

Lastly, investor attention should again turn to Brazil. Here, market focus is
likely to be driven primarily by valuation considerations. Yes, there have been
concerns over the exchange rate and its impact on inflation; yes, a number of
scandals have negatively affected the political environment; and yes, there will
be an electricity shortage in the months to come. But by now, none of this is
news anymore. With Brazil now trading against the rest of Latin America at
levels not seen since mid-1999, when the country was recovering from its postdevaluation trauma, it seems to us that it is time to be a little more aggressive in

Lehman Brothers

MARKET STRATEGY

the credit. We reverse our recommendation, made in the April 20 Sovereign

Strategist, to reduce exposure to only a modest overweight. A full overweight is
once again warranted.
Marco Santamaria 212-526-7036
Kaushik Rudra 44-207-260-1767
Robert McAdie, Ph.D. 44-207-260-3036

Figure 3.

Brazil minus Latin America Spread

bp
250
200
150
100
50
0
4/99

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6/99

8/99

10/99 12/99

2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

June 1, 2001

Recommended Sovereign Weightings

Ratings
LATIN AMERICA

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

Rationale

Argentina

B2**/B**

Neutral

na

28-Mar-01

The upcoming swap is creating a strong technical bid

for Argentine bonds. We believe this bid will remain in
place even after the execution of the transaction.
Although country fundamentals are still questionable,
we will wait a bit longer to reassess our weighting.

Brazil

B1/BB-

Overweight

na

10-Sep-00

Despite the uncertainties in Argentina and the recent

uptick in inflation, the basic investment-led, low-inflation growth story remains intact. With Brazil now trading at the widest levels in two years versus the rest of
Latin America, it is time to re-establish a full overweight.

Chile

Baa1/A-

na

Neutral

12-Jan-01

Domestic demand should recover later this year, assisted by lower interest rates. The sovereign looks
fairly valued; high-grade investors with exposures to
corporates should consider swapping to CAF or Mexico.

Colombia

Ba2/BB**

Neutral

Neutral

05-Jan-01

Economic activity appears relatively buoyant, but

progress in congress on (already watered-down) key
reforms is slowing. Valuations are no longer as attractive, given the recent rally, but we still like the carry for
now.

Costa Rica

Ba1*/BB*

Neutral

Outperform

05-Jan-01

Despite the recent economic slump, decent fundamentals and reasonable pricing make this a good play
for crossover investors.

Underweight

na

20-Apr-01

A very confused situation with respect to the VAT

reform suggests that the VAT story is not yet over.
Despite the enormous current yield of the bonds,
political risk remains high.

Ecuador

Caa2/CCC+**

Mexico

Baa3/BB+* Overweight

Outperform

02-Mar-01

Mexico continues to attract interest from both crossover and dedicated investorsnot to mention foreign
direct investors. Congress has dealt a short-term setback by not yet calling for extraordinary sessions to
consider the tax reform; we still believe that progress
will be made and that an S&P upgrade will follow.

Panama

Ba1/BB+

Neutral

Outperform

02-Mar-01

While still a relative safe haven, Panama is exhibiting

some fiscal slippage. Panama is now less attractive
relative to Mexico for dedicated EM investors.

Peru

Ba3**/BB-

Underweight

na

05-Jan-01

With pre-electoral polls giving conflicting signals, the

post-electoral political landscape remains clouded.
Despite the recent back-up in spreads, risks still outweigh rewards.

Trinidad
& Tobago

Baa3/BBB-

na

Outperform

13-Oct-00

We continue to recommend T&T as one of our favorite

higher-quality sovereign credits based on its strong
economic performance and bright prospects. The
recent discovery of an additional 1 trillion cubic feet of
natural gas is a credit positive.

Uruguay

Baa3/BBB- Underweight

Underperform

16-Mar-01

A difficult external environment has led to worsening

macro performance over the past few years. Valuations appear unattractive at current levels.

Venezuela

B2/B

na

26-Jan-01

Recent rhetoric by President Chavez has been particularly disturbing. While the political environment bears
watching, Venezuelas ability to service debt is high.
Take advantage of the wide spreads and the high carry
for now.

Overweight

ICBI = International Crossover Bond Index NA

* Under review for possible upgrade/outlook positive.
** Under review for possible downgrade/outlook negative.
na= not applicable to this investment benchmark

June 1, 2001

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Recommended Sovereign Weightings,

continued

Ratings

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

China

A3/BBB

na

Neutral

01-Dec-00

A sovereign with net external debt worth less than 10%

of GDP and with extensive multilateral credit support is
a statistically sound credit, despite the socialist political system and rickety banking system as underlying
concerns. The strong performance of Chinas recent
ten-year deal has reinforced this credits allure.

Hong Kong

A3/A+

na

Neutral

31-May-00

Hong Kong has no public external debt securities, a

sound fiscal position, and a stabilizing currency board
system with a solid track record. An upgrade from S&P
and a positive outlook from Moodys in mid-February,
plus strong retail interest in recent new issues, have
helped the performance of Hong Kong credits.

India

Ba2*/BB

Overweight

Neutral

28-Apr-00

We maintain an overweight position in India and view

it as a stable credit, offering diversification value.
Further, given the extremely limited number of Indian
external debt issues, we expect it to benefit from
scarcity value.

Indonesia

B3/B-

Underweight

na

29-Mar-01

Any shreds of opportunity in Indonesian assets seem

to have evaporated recently. This has been a specialist-only market since the Asian crisis, and has provided
significant upside in limited cases. With the recent
closure of a large gas facility in Aceh province due to
local unrest and strained relations between the government and the multilaterals, the prospects of sovereign financial difficulties are rising. Indonesia has
become a sovereign risk to be avoided.

Korea

Baa2/BBB

Neutral

Neutral

18-May-01

Our expectation of underperformance relative to the

International Crossover Bond Index has been a significant miscue. We think Korean spreads are well ahead
of fundamentals, but clearly the bias is toward improvement rather than underperformance in the near term.

Malaysia

Baa2/BBB

Underweight

Outperform

05-Jan-01

The momentary lapse of faith in Malaysias exchange

rate peg also created an opportunity for investors to
boost their exposure to this credit. We continue to favor
Malaysia and its quasi-sovereign issuers.

Philippines

Ba1/BB+

Neutral

Underperform

26-Oct-00

We have been overcautious on our Philippine recommendation, although fundamentals (and particularly
the fiscal situation) remain challenging. The new administration has made great strides toward rectifying
some of the major problems, which could result in
further outperformance if prudent policies are followed. First, however, Pres. Arroyos loyalists need to
score a victory in the recently held (but still unconfirmed) congressional mid-term elections..

Thailand

Baa3/BBB- Underweight

Underperform

31-May-00

The new governments policy platform suggest that

fiscal accommodation will be a centerpiece of economic policymaking. Apart from this fiscal challenge,
last years indictment of the prime minister for failure to
properly disclose personal assets could undermine
foreign investor confidence in the new government due
to the risk that the PM will be forced to resign if the
decision is upheld by Thailands Constitutional Court.

Rationale

ASIA

ICBI = International Crossover Bond Index

* Under review for possible upgrade/outlook positive.
na= not applicable to this investment benchmark

Lehman Brothers

June 1, 2001

Recommended Sovereign Weightings

Ratings

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

B2/B+*

Overweight

na

25-May-01

In our view, election-related uncertainty may recede in

coming days as the likely outcome of the election
becomes clearer and the policies and teams of the
likely winners are better defined and understood by
international investors. We expect the direction of
economic policy to remain largely unchanged from the
past four years. We expect Bulgarian assets, which
have underperformed their peers in the region, to rally
as election-related uncertainty recedes.

Neutral

01-Dec-00

Croatias credit fundamentals continue to improve,

albeit gradually. Authorities persist in promising reforms, although the pace thus far remains slow. The
relatively tight spreads offer poor risk/reward relative
to other emerging European peers.
Relatively tight spreads offer poor risk/reward.

Rationale

EUROPE
Bulgaria

Croatia

Baa3**/BBB-** Neutral

Czech Rep.

Baa1/A-

na

Underperform

30-Aug-00

Greece

A2/A

na

Neutral

09-Feb-00

Spreads remain relatively rich to other EMU credits.

Hungary

A3/A-

na

Outperform

05-Jan-01

Continues to be the strongest candidate for EU accession. We recommend Hungary as a credit that offers
defensive value against a potential sharp slowdown in
the U.S.

Poland

Baa1/BBB+ na

Neutral

11-May-01

Credit outlook is on an improving trajectory.. Nevertheless, Hungarys credit fundamentals remain stronger
relative to Poland and warrant tighter spread differentials between the two credits.

Russia

B2/B-

Overweight

na

09-Mar-01

We continue to see Russia as a strong performer in

2001. Possessing twin surpluses and boasting strong
payment capacity over the next 6-12 months, Russia is
cheap at a spread of 1000 bp over. Russias economic
fundamentals will likely remain strong as long as the
hydrocarbon sector remains robust. Finally, we expect
the reform process to pick up in Russia in the coming
monthsan event that is not completely priced in. We
recommend using dips to build positions.

Slovak Rep.

Ba1*/BB+*

Underweight

Outperform

05-Jan-01

We recommend Slovakia for crossover investors as a

country leading its peer group in the EU-accession
process.

Slovenia

A2/A

na

Neutral

03-Feb-00

Slovenia is a solid credit with strong economic fundamentals and a low level of indebtedness. Current
spread levels offer limited near-term upside.

ICBI = International Crossover Bond Index

* Under review for possible upgrade/outlook positive.
** Under review for possible downgrade/outlook negative.
na= not applicable to this investment benchmark

June 1, 2001

Lehman Brothers

Recommended Sovereign Weightings,

continued

Ratings

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

Israel

A2/A-

na

Neutral

16-Feb-01

Strong demand for Israel Electric Corp.s ten-year

issue in May illustrated the positive market outlook for
the Israeli sovereign. The domestic security situation
remains challenging and the growth outlook will be less
robust in 2001, but credit quality remains stable and so
should the sovereign ratings. We think a neutral weighting in Israel is prudent in the face of an increasingly
constructive political environment.

Qatar

Baa2/BBB+* na

Neutral

11-May-01

We continue to see improvements in economic fundamentals on the back of strength in the natural gas
sector. However, at current spread levels, the good
news is priced in.

Turkey

B1**/B-

Neutral

na

09-Apr-01

Despite some near-term relief on the back of favorable

inflows and a debt swap, Turkeys debt dynamics
continue to be on a negative trajectory. In particular,
we remain concerned about the programs ability to
deliver, given the extremely fragile banking system
and troublesome political environment.

Morocco

Ba1/BB

Neutral

na

05-May-00

Credit outlook closely linked to agriculture. With betterthan-normal rainfall over the past few months, agricultural production and, hence, growth are poised to
increase.

Nigeria

NR/NR

Underweight

na

05-May-00

Given the heightened likelihood of Nigerian assets

being included in a Paris Club-led debt restructuring,
we think the risk/reward warrants staying on the sidelines.

South Africa

Baa3*/BBB- Underweight

Underweight

12-Jan-01

South Africa remains rich on a relative basis. The

authorities plan to issue Eurobonds to reduce the
forward book; although this is a positive development
for the credit, it could hurt South African Eurobond
spreads.

Rationale

MIDDLE EAST

AFRICA

ICBI = International Crossover Bond Index

* Under review for possible upgrade/outlook positive.
** Under review for possible downgrade/outlook negative.
na= not applicable to this investment benchmark

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10

June 1, 2001

Recommended Assets

Country

Position

Asset

Current Level

Comments

LATIN AMERICA
Brazil
(Overweight)

Buy
Sell

40
27

Pick yield and liquidity while taking out $ and remaining

in same sector of the curve. This relationship has come
is at widest level.

Buy
Sell

C
DCB

Prefer fixed-coupon bonds over floaters.

Mexico
(Overweight)

Buy
Sell

06 10
16, 19, 26

Widest spread bonds at each part of the curve. Virtually

all yield pick-up of long end comes from Treasuries. Stay
in belly of the curve.

Panama
(Neutral)

Buy
Sell

20
PDI

Extend 0.2 year in duration, pick 50 bp in yield.

Buy
Sell

IRB
PDI

Buy
Sell

29p06
11

Give only 40 bp, receive free extension option.

Trinidad
& Tobago
(Overweight)

Favor

T & T 20

Given our positive view of the credit and the strengths of

T&T relative to both Mexico and Qatar, we believe the
T&T 20 will trade well inside both the UMS 16 and the
Qatar 30.

Venezuela
(Overweight)

Buy
Sell

Par
DCB

23bp sprd
-27bp yld

350 bp

IRBs are 5 yrs shorter in avg life and fixed cpn.

Pick up a lot of stripped spread for 2-year extension with

a lot of default protection. Exit target around 200 bp.

Note: Outright recommendations of the form Favor imply relative value offered by an asset in the context of our sovereign weighting call.

June 1, 2001

11

Lehman Brothers

Recommended Assets

Country

Position

Asset

Current Level

Comments

Bulgaria
(Overweight)

Favor

IABs

641 bp

In line with our overweight call, we expect Bulgarian assets,

which have underperformed their peers in the region, to
rally as election-related uncertainty recedes. We continue
to recommend the IABs., which have mildly outperformed
the other Bulgarian Bradys over the past week. IABs continue to offer a higher current yield and a higher stripped
spread duration than either FLIRBs or Discounts (IAB current yield: 7.77%, IAB stripped spread duration: 4.9 years).

Russia
(Overweight)

Buy
Sell

18
28

22 bp

The Russia 28s have tightened significantly over the past

month with a steeping in the Russian curve. This, combined with the upcoming exchange of FTOs for newly
issued Russia 10s and Russia 30s, has created some
market dislocations. While neither the Russia 28 nor the
Russia 18 participate in the FTO exchange, the Russia
28 has rallied in more than the Russia 18. The difference
in current yield of the Russia 18 versus the Russia 28 is
close to its widest, with the Russia 18 outperforming the
Russia 28 at a current yield of 13.858%. The spread differential now stands at about 22 bp, close to the tightest
level, 13 bp, of the past six months (the average spread
difference over the past six months was 66 bp).

EUROPE

Costas Hamakiotes, Ph.D. 212-526-8082

Robert MeAdie, Ph.D. 44-207-260-3036

Lehman Brothers

12

June 1, 2001

SOVEREIGN STRATEGY
Ukraine: Is the Storm Over?
The first five months of
2001 have seen
political tensions and
economic stability.

The first five months of 2001 have been characterized by heightened political
uncertainty in Ukraine, combined with stable to improving economic fundamentals. On the political side, mounting tensions have caused serious delays to the
reform agenda, forcing the IMF to suspend payments under its 3-year lending
program. The parliaments recent approval of Anatoly Kinakh as prime minister
brought an end to a month of great political uncertainty. But we do not expect
major progress in the implementation of the reform agenda before next years
parliamentary elections. As a consequence, disbursements from the IMF, as well
as talks with the Paris Club, are likely to suffer further delays. On the economic
front, growth has been gaining momentum, boosted by high net external
revenues and strong internal demand. High export receipts, in particular, have
made it possible to finance a capital account deficit and maintain the stability of
the hryvnia despite the absence of inflows from multilateral creditors.

Upcoming period of less

eventful politics provides a
window of opportunity.

In the next few months, Ukraine may enter a less-eventful political period, at
least until the run-up to next Marchs parliamentary elections. Given the
attractive carry offered by Ukrainian Eurobonds, we would recommend that
investors build a long position in any pull-back.

POLITICAL DRAMA APLENTY IN THE PAST SIX MONTHS

No shortage of political drama
in the past six months.

A series of scandals and political fractures within the parliament have dominated
the first five months of the year. The release in December of secret audio
recordings in which a voice similar to that of president Kuchma is heard giving
orders to deal with Georgy Gongadze, a political journalist who was later
found murdered, triggered one of the biggest political crises in recent times.
Kuchmas opponents called for his resignationwithout successbut protests
have assumed a lower profile lately, and the position of the president appears to
have strengthened in the past few weeks, in particular following the dismissal of
Victor Yuschenko. As we anticipated at the beginning of the year,1 the uncertainty arising from the Gongadze case has had a negative impact on the pace of
structural reforms and, thus, on the relationship with multilateral creditors. The
political uncertainty worsened by mid-April, when Victor Yushchenkos cabinet was ousted after a no-confidence vote initiated by the Communist Party. The
success of the no-confidence motion was largely due to the wide participation of
oligarchic fractions and vested interests in the voting. Communists and oligarchs
share a negative view of the reforms pursued by the previous cabinet, accusing
it of giving priority to international rather than local interests. After a month of
increased uncertainty about the identity of the future Ukrainian premier in the
run-up to the next parliamentary election (scheduled in March 2002), on May 29,
1

June 1, 2001

See Ukraine: Heading Toward a Debt Crisis? in the Sovereign Strategist, February 16, 2001.

13

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SOVEREIGN STRATEGY

the Rada approved Kuchmas candidate, Anatoly Kinakh, thanks to the support
of oligarch representatives in the parliament. The Communist Party abstained
from the voting.
Reform process likely to be on
the back burner for now.

Although the new PM has, on occasion, highlighted his willingness to push further
with the reform process, his plan to enhance protection for local producers looks
inconsistent with IMF requests. Moreover, we dont see strong support for
reformist policies among Kinakh allies in the parliament.

STRAINED RELATIONS WITH MULTILATERALS

Relationship with the IMF
remains strained, given the
lack of progress on the
reform agenda.

The relationship with the IMF has been quite strained in the past few years. In
1998, a 3-year, $2.6 billion program was agreed to with the Fund, but it was
subsequently suspended in September 1999 because of shortfalls in the implementation of the reform agenda. Payments were resumed again in December of
last year, but the government failed to meet the conditionalities required for the
release of the $190 million tranche due in March 2000. IMF conditionalities for
the release of further disbursement include, among other things: 1) continuing
the sale of state-owned enterprises, 2) improving the transparency of privatization
deals, 3) enhancing payment discipline in the energy sector, and 4) reducing the
sunflower seed export duty. The last issue, in particular, has been a source of
tension with multilateral lenders since 1999, when it was introduced at the
request of the local sunflower processing industry. In March 2000, the parliament finally compromised, cutting the export duty to 17% from 23%, but the
IMF, which was asking for a more aggressive reduction to 10%, regarded the
move as unsatisfactory. As for the energy sector, the government managed to
improve the level of energy cash collection in 2000, but cash collection as a
percentage of total payments has been falling so far this year compared with last
years levels. The dismissal earlier this year of Yulia Timoshenko, the former
deputy prime minister and an outspoken proponent of reforms in the energy
sector, raises serious questions about the willingness of the president and his
allies in the parliament (and, thus, of the new cabinet, which is supported mainly
by oligarchs and vested interests) to reform the sector. Confirming our view,
President Kuchma has recently ordered the State and Property Fund to suspend
the planned privatization of electricity and distribution companies.2

But strategic and geopolitical

factors may continue to
influence multilateral
lending decisions.

To deliver on reforms and, thus, resume the IMF lending program, a marketfriendly cabinet with strong support in the parliament is needed. However, we
think these ingredients are missing in the current political environment, and
we believe any substantial progress on the reform agenda is unlikely, at least
before next years parliamentary elections. As a consequence, the release of
the June tranche ($190 million) is likely to suffer further delays. However,
political and strategic considerations are likely to play an important role in
shaping future development on this front. Concerns about the strengthening of
the political and economic links between Russia and Ukraine, however, may
convince the West to provide the country with some sort of financial support
(through multilaterals).
2

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Six electricity companies have been privatized so far this year. 21 companies remain in public hands.

14

June 1, 2001

The government has also been pushing for the rescheduling of about $750 million
in Paris Club debt, which Ukraine stopped servicing early last year, and $300 million
in gas-related debt owed to Turkmenistan. Talks with the Paris Club began in March,
but came to a halt after the IMF suspended its payments. The Paris Club has made
it clear that compliance with IMF conditions is a prerequisite for any restructuring
deal, so the likelihood of a final agreement with the Paris Club is also questionable.
If the government fails to reach any agreement with the bilateral creditors, we would
expect Ukraine to continue with its present policy of not servicing that debt.

THE ECONOMY REMAINS IN GOOD SHAPE

The economy continues to
perform better than expected.

Despite the political turmoil, the macroeconomic picture has continued to improve
in 2001. Ukraines economy has been doing remarkably well in the first quarter,
beating market expectations of a slowdown.
In 2000, GDP registered growth of about 6%, after almost 10 years of recession.
In the first four months of 2001, the economy continued to gain momentum, with
growth reaching 10.8% on a year-over-year basis in April, up from 7.7% in March.
The strong economic recovery is attributable to an increase in consumption, capital
investment, and a strong external account. Consumption grew on the back of
higher household income, rising real wages, and more timely wage and pension
payments. On the other hand, investments have benefited from higher liquidity and
lower interests rates.

Economic developments in
Russia continue to be a major
driver of economic
performance in Ukraine.

However, the external sector has been the main driver of growth, with metal and
chemical exports performing well notwithstanding the real appreciation of the
currency and the global slowdown. Commercial links with Russia, in particular,
have been strengthening in the past year and a half, with exports to the country
rising by about 40% from 1999 levels. As a result, the Ukrainian economy is highly
dependent on the developments in the Russian economy. The trade balance
recorded a surplus of about $460 million in the first three months of the year,
compared with a deficit of about $388 million in the same period last year.

NEAR-TERM FINANCING APPEARS SECURE

Near-term financing capacity
remains secure.

Although the combined effect of an appreciating real exchange rate, slowing

growth in Russia, and the lack of structural reforms may have a negative impact
on the external balance in the second part of the year, we expect the current account
surplus to remain relatively strong and to cover a significant portion of the
countrys external financing needs. As Figure 1 shows, we estimate amortization
payments to be around $638 million in the second half of this year. As of March
2001, foreign exchange reserves stand at about $1.8 billion. Further, given that
capital controls are still in place, part of the trade-related debt may take the form
of non-cash payments, and Eurobond debt service is relatively small ($227 million
including the June payment), we expect Ukraine to have enough resources to meet
its Eurobond obligations this year.

BOTTOM LINE
Ukraines fundamentals have been on an improving trajectory since the beginning
of last year, and we expect them to remain so in the coming months. We expect

June 1, 2001

15

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SOVEREIGN STRATEGY

Figure 1.

Debt Service Payments, $ million

Total Debt Service

Interests Payments due
of which Eurobonds
Amortization
IMF
Other Multilateral
Official Bilateral
Due
Paid
Private creditors
of which Eurobonds

2001 (2nd Half)

1141

2002
2283

503
108
638
130
138
0
217
0
370
65

1020
202
1263
183
178
234
n/a
n/a
668
108

growth, led by a strong performance on the external front, to remain fairly robust
in the second half of this year (albeit slowing marginally). The current account
surplus should also help provide an additional cushion to meet a significant portion
of the countrys external obligations. These favorable economic dynamics are
likely to be accompanied by a less-eventful political environment . Although we
do not expect the political environment to be favorable to reform-friendly
policymaking (especially with elections coming in early 2002), we think multilateral financing may still be available to Ukraine, but driven more by international
strategic factors.
The carry and risk reward
profile are attractive, but wait
for a pull-back to build
a position.

Given that the economic and political backdrop is likely to be relatively stable
over the next few months, we recommend that investors use any pull-back to
build positions in Ukrainian external debt instruments, with a view toward
holding them for about 3-4 months. The bonds offer an attractive carry and
present a good risk/reward trade, at least for the next few months. The recent rally
in these assets (on the back of the rally in Russian Eurobonds), suggests that
investors should buy into weakness.
Giuseppe Di Graziano 44-207-260-2329

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16

June 1, 2001

ECONOMICS
Effect of the Mega-Swap
on Argentinas Financing Needs
This article examines the probable impact of Fridays mega-swap of bonds on the
servicing of Argentinas national government debt. As is well known, the main
objective of the swap is to push amortization and interest payments forward in time
to obtain liquidity relief and, hopefully, reduce sovereign spreads by averting nearterm default risk. Given our belief that Argentina is not inherently insolvent, but
rather the victim of a confidence trap, we concentrate on the financing needs for
this year and next and conclude that the government can easily avoid default during
this period. This is necessary for the public sector to recover creditworthiness,
which, in turn, is essential for the economy to start growing.

PRE-SWAP CONDITIONS
In December 2000, prior to the signing of the IMF agreement known as blindaje,
the funding needs of the national government looked as shown in Figure 1.
Several transactions executed since then have changed this profile. On the one
hand, the January debt exchange extended bond maturities, reducing principal
payments by near $600 million per year (Figure 2).
On the other, a large proportion of the financing Argentina obtained from
international organizations in December and from local sources this year is short
term and, hence, has an impact on debt service in the next four years.

Figure 1.

Funding Needs as of December 2000, US$ billion

2001
6.5
14.6
3.7
10.9
1.0
22.1

Fiscal Deficit*
Debt Amortization
Loans
Bonds
Other
Total

2002
5.0
16.5
5.2
11.3
1.0
22.5

2003
3.7
17.3
5.9
11.4
1.0
22.0

2004
2.4
15.1
3.7
11.4
1.0
18.5

2005
0.0
12.3
2.4
9.9
1.0
13.3

2004
436

2005
109

* As per Fiscal Responsibility Law.

Figure 2.

Cash Saved by February Exchange, US$ million

2001
444

Cash Saved

June 1, 2001

17

2002
944

2003
918

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ECONOMICS

Of the $13.7 billion to be disbursed by the IMF between December 2000 and
February 2003, $2.7 billion corresponds to the special reserves facility (SRF)
and $11 billion to the standby facility (SB). One half of the SRF must be paid
back within 12 months of disbursement and the remaining half within 18
months. After a 12-month grace period, the three-year SB is repaid in eight
quarterly installments.1 In both cases, however, Argentina can choose to
postpone the initiation of repayments for one year.
In April, the government sold a $2 billion 9%-coupon bond to local banks and
a $1 billion floater to institutional investors. The first of these bonds matures in
2002 and can be computed as part of banks reserve requirements. The floater
will mature in 2004.

Taking this information into account, the funding requirement schedule is shown
in Figure 3.

POST-SWAP REALITY
For the mega-swap to attain the objectives sought by the government, cash flow
relief must be substantial. The numbers in Figure 4 correspond to the governments
own projections.
Assuming that these results do materialize, funding needs would fall to the levels
reported in Figure 5.

The same conditions apply to the $1 billion loan provided by the Spanish government.

Figure 3.

Funding Requirement Schedule, US$ billion

2001
6.5
13.8
3.5
10.3
1.0
21.3

Fiscal Deficit
Debt Amortization*
Loans
Bonds
Other
Total

2002
5.0
19.6
8.6
11.0
1.0
25.6

2003
3.7
17.7
7.1
10.6
1.0
22.4

2004
2.4
19.3
6.5
12.8
1.0
22.7

2005
0.0
19.7
6.2
13.5
1.0
20.7

* 2001 amortization figure includes effect of January exchange and $400 million government adjustment to
earlier estimation.

Figure 4.

Government Projection of Cash Flow Savings,* US$ billion

2001
0.5
3.0
3.5

Interest
Principal
Total
* Road

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2002
2.0
2.8
4.8

2003
1.9
1.4
3.3

2004
1.7
0.8
2.5

2005
1.6
1.3
2.9

Period
7.7
9.3
17.0

show presentation (May 30).

18

June 1, 2001

2001 FINANCING PROGRAM

Having lost fluid access to voluntary financing in the last quarter of 2000,
Argentina managed to avoid default thanks to IMF financing and non-market
(special) transactions with local investors (Figure 6).
International organizations will guarantee an additional $5.8 billion in financing
this year, enough to cover the gap until December (which results from subtracting
the $12.6 billion attained so far from the $17.6 billion post-swap annual borrowing
needs). If, on the other hand, voluntary markets reopen after the swap, the
government will be able to tap them and collect $4.3 billion, as envisaged in the
financial program (more or less depending on market access). These funds will
help build a cushion against next years financing needs.2

THE 2002 FINANCING CHALLENGE

If the June swap is successful and fiscal targets are met in June, September, and December
of this year, financing 2002 will not be a problem. Under these conditions, Argentina will
manage to raise $4.3 billion from voluntary markets this year as planned, and multilateral
agencies will disburse $5.8 billion in 2H01 and $6.2 billion in 2002 as promised.
Assuming that the government does not place in 2001 bonds that mature in 2002, the
financing gap for next year should be $10.3 billion. This gap can be reduced further by:

Postponing repayment of blindaje loans to the fund by one year (this can save
$2.4 billion in 2002 at the expense of 2004).

Of course, we are also assuming that rolling Treasury bills (Letes) is not a problem.

Figure 5.

Funding Needs Under Government Projections, US$ billion

2001
6.0
10.8
3.5
7.3
1.0
17.8

Cash Flow Deficit

Debt Amortization
Loans
Bonds
Other
Total

Figure 6.

June 1, 2001

2003
1.8
16.3
7.1
9.2
1.0
19.1

2004
0.7
18.5
6.5
12.0
1.0
20.2

2005
-1.6
18.4
6.2
12.2
1.0
17.8

2001 Financing Program, US$ million

IMF1
World Bank/IDB/Spain
Special Transactions
Intra Public Sector
Bond Against Reserves (2002)
Patriotic Bond (2004)
Pension Fund Fiduciary
Local Market
Global/Euro/Yen
Total
* Includes

2002
3.0
16.8
8.6
8.2
1.0
20.8

Program
8.800
3,000
4,260
500
2,000
1,000
760
2,600
3,300
21,960

Done
6,300
700
4.260
500
2,000
1,000
760
0
1,600
12,860

Pending
2,500
2,300
0
0
0
0
0
2,600
1,700
9,100

$2.1 billion disbursed in December 2000.

19

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ECONOMICS

Rolling over the 9% bond held by banks against liquidity requirements (this
would save an extra $2 billion ). (Figure 7)

The financing gap has now dropped to $6 billion ($500 million per month). If markets
stabilize, local institutional investors should be able to absorb this amount easily.3

THE FINANCING CHALLENGE GOING FORWARD

While the financing challenges for 2003 and beyond are serious (Figure 8), they
can be ameliorated through a combination of multilateral refinancing (i.e., new
lending programs with the Fund and the other IFIs to roll over existing debt) and
liability management (i.e., more debt swaps after 2002).
Odd as it may sound, we believe continuing to push debt forward is the right
strategy for Argentina, since, having reformed its public pension system in 1994,
the government faces lower social security debt than in the past, implying that its
fiscal solvency will improve over time.
In the final analysis, what matters from the point of view of Argentinas creditworthiness is not what it has to pay three years from now (which cannot be accurately
predicted anyway, since it depends on the maturity of new debt being issued) but
its ability to grow and preserve fiscal discipline.
Having solved impending fiscal problems through cost-cutting and revenue-enhancing
measures and financing problems through the mega-swap, Argentina will soon be able
to refocus its attention on growth. If the economy does take off by the end of this year,
as expected by the government, concerns about fiscal solvency will quickly dissipate.
Joaquin Cottani 212-526-1979
jcottani@lehman.com
3 In addition, the government plans to increase the participation of retail investors through a series of measures

designed to increase the friendliness of government securities, which may help to expand the local market.

Figure 7.

Financing Needs for 2001 and 2002, US$ billion

Financing Needs
Pre-financing
Multilateral Loans
Special Transactions
Deferred IMF Payment
Voluntary Market
Financing Gap

Figure 8.

2002
20.8
4.2
6.2
2.0
2.4
6.2
0.0

Financing Needs for 2003 and Beyond, US$ billion

2003
19.1
0.0
19.1

Post-Swap Needs
Deferred IMF Payment
Total

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2001
17.8
2.1
9.7
4.3
0.0
5.9
-4.2

20

2004
20.2
2.4
22.6

2005
17.8
0.0
17.8

June 1, 2001

ECONOMICS
Mexico: Lower Growth,
Lower Deficits, Less Inflation
The economy is slowing faster than anticipated, and strange as it may seem, this
is good news.1 What it means is that supply and demand are starting to move in
tandem, forestalling fears of major price misalignments in the months ahead. The
path of inflation converges to the target of 6.5% year-over-year at year-end and the
outlook for the exchange rate is relatively stable. The economy adjusts through
quantities, not prices.
Output growth has decelerated since 3Q00, notably in manufacturing and, especially, exports; the output cycle, which follows the U.S. Demand, meanwhile,
remained buoyant through 4Q00. Investment slowed down, but real wages and
consumption grew at a fast clip through 1Q01. Again, there is some parallel with
the U.S. and Canada. Mexico, however, is a more open and much smaller economy
than the U.S. The weight of exports in output growth is strikingly larger, and it
lacks a capital market built upon a sturdy base of real and financial assets worth
multiples of current output. Consequently, in contrast to the U.S., where consumption in excess of output can help bridge the trough of the cycle, in Mexico, the
difference in beat between supply and demand could easily lead to an unsustainable external imbalance. And the more so when, due to asymmetries in policy and
in the foreign investment cycle between the two countries, there is a tendency for
the peso to appreciate vis--vis the US$.2
In Mexico, growth in real M1 closely tracks the trend in retail sales and, hence, a big
chunk of consumption.3 The use of credit cards and other non-cash credit instruments
is limited to the urbanized upper-income classes. Growth in real M1 decelerated,
measured by the 12-month moving average, growth has trended down from a peak of
12% year-over-year in November 2000 to 9.6% in April 2001. More important, the
expectation is that real M1 growth will continue to slow, trending to about 4.5%-5.5%
by year-end. Indications for a slowdown can be seen clearly in the recent behavior of
the wholesale index. Measured by the 12-month moving average, growth in wholesale
sales peaked at 6.1% year-over-year in October 2000, falling to 3.2% year-over-year
in February 2001. We expect real consumption growth to slow to 5.2% in 2001, from
8.7% in 2000, with a massive run-down of accumulated inventories. Slower consump-

GDP fell 3.0% in 4Q00, 1.2% in 1Q01, month-over-month SAAR.

2 In the U.S., policy-based reductions in the interest rate spur demand as the fear of inflation falls; in Mexico,

the need to disinflate the economy (through tighter monetary policy and higher rates) helped slow down
activity, notably demand.
3 For the period January 1999-February 2001, the correlation coefficient between the two variables is 0.982.

June 1, 2001

21

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ECONOMICS

Figure 1.

M1a and Retail Sales

M1a deflated by the CPI index, retail sales index 1993 = 100,
standardized (Z) scores

4
Real M1a
3

Retail Sales

2
1
0
-1
-2
1/99

Figure 2.

4/99

7/99

10/99

1/00

4/00

7/00

10/00

1/01

Trend in Real M1a

y-o-y % change, M1a deflated by the CPI index

18%
M1a/CPI
15%

12 mma

12%
9%
6%
3%
0%
1/00

Figure 3.

3/00

5/00

7/00

9/00

11/00

1/01

3/01

Wholesale and Retail Sales

y-o-y % change in the 12 mma index 1993=100

12%
10%

Wholesale
Retail

8%
6%
4%
2%
0%
1/99

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5/99

9/99

22

1/00

5/00

9/00

1/01

June 1, 2001

tion growth with depletion of inventories eases concerns about demand-push inflation
and/or a widening trade gap4 (that could pressure the exchange rate to depreciate,
resulting, through the still high pass-through coefficient, in rising domestic prices and,
possibly, a re-kindling of inflation).
The current account deficit (CAD) measured $4.38 billion in the first quarter of
2001, $1.89 billion less than in the previous quarter and 5.7% less than in the same
quarter in 2000. For the year as a whole, we expect the CAD to stay below $20
billion (our current estimate is $19.81 billion) with a trade deficit of $8.79 billion,
little changed from last years outcome of $8.05 billion. Higher-than-expected
FDI inflows (notably the Citigroup-Banacci transaction) further allay fears of a
growing scarcity in the supply of foreign exchange and/or of rising spreads in
international credit markets. As a result, BANXICO couldand didrelax
monetary policy, allowing interest rates to drop significantly, with the perspective
of following rather than reacting against U.S. rates. The shift to a neutral stance in
monetary policy reduced uncertainty and apprehension about the course of policy.
A shift in fiscal policy reinforced the positive sentiment. FInance Minister Mr Gil
Diazs intention to pursue prudent fiscal policy was never in doubt. Rather, with the
slowdown in output and fall in oil income,5 of concern was his ability to negotiate the
approval of the tax-reform bill and keep the balance between revenue and expenditure
simultaneously.

4 Mainly, the trade balance adjusts endogenously. Lower exports reduce the flow of inputs, lower production for

the domestic market reduces intermediate imports, and lower investment reduces imports of capital goods.
The remaining exogenous or demand-driven, element is the smallest component of the trade account: imports of consumption goods. This is, however, precisely the component growing at the faster pace.
5 The fiscal balance of payments is in surplus. The government receives more in foreign exchange revenues (from

oil) than it spends on debt service and imports. Hence, it suffers a revenue loss when the currency appreciates.

Figure 4.

Balance of Payments, US$ million

Current Account
Trade Balance (FOB)
Exports
Imports
Services
Transfers
Capital Account
FDI (Net)
Investment from Abroad
Portfolio Flows
M&LT Loans and Financing
Disbursements
Amortization
Short-term Capital
Errors & Omissions
Overall Balance

June 1, 2001

23

1999
-14,087
-5,584
136,391
-141,975
-14,816
6,313
15,657
15,769
11,869
3,901
2,528
26,788
-24,261
-3,620
980
1,571

2000
-17,730
-8,049
166,424
-174,473
-16,381
6,701
17,920
10,937
13,162
-2,225
-561
26,126
-26,687
10,140
-2,597
190

2001
Forecast
-19,813
-8,790
174,436
-183,226
-17,589
6,566
22,813
20,743
16,452
4,291
-1,702
28,575
-30,277
3,772
0
3,000

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ECONOMICS

His initial foray into legislative compromise was disappointing. Seemingly, based
on the experience of past PRI administrations, he negotiated mainly with the
opposition (now the PRI), counting that the situation (now the PAN) would support
en block the governments proposal. The PAN, however, is a divided party even
within the legislature, with a faction that feels and behaves independently of the
administration. It is not willing to sacrifice its popular base by backing an
unpopular reform in the VAT on aspects that they are not convinced about.
By focusing on the PRI+PAN demands (exemptions to the VAT for a basket of
basic food items and medicines), by seeking the support of governors (lower
federal VAT rate with the ability of states, if willing, to levy a local surtax), and
by being more explicit on the uses to be made of the additional revenue, Gil Diaz
could achieve a compromise on the bill. The congressional commissions are at
work, and an agreement could happen before the start of the next legislative session

Figure 5.

Macroeconomic Indicators, % of GDP

GDP Growth
Domestic Final Sales
Inventories
Net Trade
Inflation (GDP Deflator-period Average)
Inflation (CPI Deflator-eop)
Average Exchange Rate
Eop Exchange Rate (MNP$/US$)

1999
3.8
4.8
-0.5
-0.5
14.9
12.3
9.561
9.415

2000
7.2
8.8
0.0
-1.9
10.9
9.0
9.470
9.572

2001
Forecast
2.4
2.9
-1.0
0.5
7.1
6.7
9.513
9.840

Y-O-Y Change in constant prices

Domestic Absorption
Total Consumption
Government
Private Consumption
Total Investment
Government
Private Investment
Changes in Stocks

4.9
4.2
3.9
4.3
7.7
6.2
7.9
-15.7

8.9
8.7
3.5
9.5
10.0
-4.0
12.2
0.0

2.9
5.2
0.3
5.9
1.8
-16.5
4.3
-37.8

-1.2
-2.9
23.5
13.4
2.8
10.7
20.9
22.2
-1.3
2.3
6.5
1.3
4.8
0.4

-1.4
-3.1
23.3
13.4
2.2
11.1
21.8
22.9
-1.1
2.7
3.9
1.1
2.4
0.4

-1.4
-3.2
20.4
10.3
1.9
8.4
22.4
23.3
-0.9
2.6
4.1
0.9
2.7
0.5

Y-O-Y Change in % of GDP

Trade Balance
Current Account Balance
Gross Domestic Investment
Fixed Capital Formation
Government
Private
Government Revenues
Government Expenditures
Fiscal Balance
Primary Balance
PSBR
Fiscal Balance
Contingent and Other Items
Extraordinary Income

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24

June 1, 2001

in September. Importantly, the anxiety of legislative deadlock is all but gone: the
shared expectation is that the tax reform bill will be approved at the latest by endSeptember, in one shape or another. Otherwise, there is the fear that Diaz would
be forced to resignand the PAN knows, in its entirety, that this event could
destabilize the administration.
Meanwhile, the secretary of finance followed through in implementing expenditure cuts to keep pace with falling revenues. And Diazs preferred vehicle for
revenue enhancementimproved tax administration with increased compliance
is already producing results.
The upshot is that optimism remains despite the slowdown in growth and, perhaps,
because of it. Structurally, the economy is sound, and far-reaching policies may
further enhance its competitiveness. Mexico is in the preamble of negotiations for
a free-trade agreement with Japan. President Fox will visit China soon and support
its entry into/compliance with the WTO. A Japan-Mexico agreement would then
be more likely, because it could count on U.S. support. And with it, Mexico would
enjoy advantages that the U.S., Japan, and the EU lack. It could intermediate
among the trading blocksprovided that the goods supplied meet the rules-oforigin conditions required by each block. This would favor production from
Mexico, enhancing the export-drive that began with NAFTA.
These events are in the distant future. But they influence current perceptions. For
now, we have revised our estimates to accept lower activity in 2001 (GDP growth
of 2.4% instead of 3.1%), lower inflation (CPI rate of 6.7% versus 7.2%), and
improved fiscal outcome (central government fiscal deficit of 0.9% of GDP and
PSBR-new definition of 4.9% of GDP). We expect domestic sales to grow ahead
of output (expanding 3.2% in 2001), mainly on account of consumption with flat
to negative investment growth. We envisage a small but positive contribution of
net trade to growth (0.3%) and, as in the U.S., a major contraction in inventories
(-1.1%) that should help stimulate growth late in 2001 and through 2002.
Paulo Vieira da Cunha 212-526-1751

June 1, 2001

25

Lehman Brothers

Emerging Markets Index: Performance, May 31, 2001

REGIONAL COMPARISON
Total Returns (%)

Distribution by Market Weight

25
EMG
AMERICAS
EUROPE
MID EAST
AFRICA
ASIA

20
15
10

AMERICAS
71%

AFRICA
4%

0
MTD

3-M

6-M

MID EAST
5%

YTD

ASIA
5%

-5

EUROPE
15%

TOTAL RETURNS: AMERICAS

Month-to-Date (%)

Year-to-Date (%)

9.4

Ecuador
4.2

Peru
3.3

Argentina

12.4

Colombia
Panama

10.4

Ecuador

10.2

EMG

2.6

Uruguay

Costa Rica

2.6

Costa Rica

8.8
8.4

Colombia

2.4

Venezuela

Mexico

2.3

EMG

4.5
4.5

AMERICAS

1.8

Mexico

Panama

1.8

AMERICAS

Uruguay

1.2

Peru

Venezuela

1.1

Brazil

Brazil

-0.8
-2

7.8

1.2
-0.9
-1.4

Argentina -3.8
0

Lehman Brothers

10

-5

26

10

15

June 1, 2001

Emerging Markets Index: Performance, May 31, 2001

TOTAL RETURNS: EUROPE, MID-EAST, AFRICA

Month-to-Date (%)

Year-to-Date (%)

Nigeria

6.3

Russia

Russia

5.8

EUROPE

Nigeria
3.6
3.5

Bulgaria

S. Africa

8.2

Morocco

8.1

EMG

2.6

Croatia

S. Africa

2.6

EMG

Croatia

0.6
0.5

Slovak Rep.
0

6.0
5.3
4.5

Lebanon

0.8

Lebanon

7.4

Bulgaria

3.2

MID EAST

14.2

Slovak Rep.

3.4

Morocco

20.3

AFRICA

4.7

AFRICA

23.2

EUROPE

4.8

Turkey

29.3

3.3

Turkey

2.7

MID EAST

2.6
0

10

15

20

25

30

TOTAL RETURNS: ASIA

Month-to-Date (%)

Year-to-Date (%)

3.9

Thailand
3.5

Philippines

0.0

June 1, 2001

4.5

EMG

0.5

Kazakhstan

5.4

ASIA

0.8

Indonesia

7.0

Thailand

2.6

EMG

9.4

Kazakhstan

3.1

ASIA

14.2

Philippines

1.5

Indonesia
1.0

2.0

3.0

4.0

27

12

15

Lehman Brothers

Equity Market Indicators, May 31, 2001

U.S.

Americas
Index

5,250

Nasdaq
S&P rescaled
EMG Index (R)

4,625

Index
1,400

900

EMG Index (R)

850

4,000

800

3,375

750

2,750

700

2,125

650

1,500

600

1/00

2/00

4/00

6/00

8/00

10/00 12/00

2/01

900

Americas

1,300

840

1,200

780

1,100

720

1,000

660

600

900

4/01

1/00

E. Europe

2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

Asia
Index

Index

900

270

85

830

240

820

75

760

210

740

65

690

180

660

55

620

150

580

550

120

95

E.Europe
EMG Index (R)

45
1/00

2/00

4/00

6/00

8/00

10/00

12/00

2/01

4/01

900

Asia
EMG Index (R)

500

1/00

2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

Regional Equity Industry Source: Morgan Stanley Capital International Emerging Markets Index Series.

Currencies
Brazil Real

Polish Zloty
Index

Index
900

900

5.00

2.28

850

4.75

850

2.15

800

4.50

800

2.03

750

4.25

750

1.90

700

4.00

700

1.78

650

3.75

650

600

3.50

2.40

Bzl Real
EMG Index (R)

1.65
1/00

2/00

4/00

Lehman Brothers

6/00

8/00

10/00 12/00

2/01

1/00

4/01

28

Pol Zloty
EMG Index (R)

600
2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

June 1, 2001

Credit Market Indicators

High Yield Mutual Fund Flows:

Downgrade/Upgrade Ratio

March 4, 1992 - May 30, 2001

1,500,000

May 30, 2001: $183.5 million

YTD: $5.62 billion

High Yield Fund Flows

8 Week Moving Average

12
Moodys
10

1,000,000

S&P
Average

8
500,000

6
0

4
-500,000

2
0

-1,000,000
3/92

3/93

3/94

3/95

2/96

2/97

2/98

2/99

2/00

2/01

6/93

Moody's Trailing 12-Month,

Dollar-Based Default Rate (Spec. Grade)

6/94

6/95

6/96

6/97

6/98

6/99

6/00

4/01

1/00

7/00

1/01

Sovereign Credit Quality Indicators

Index

14%

10.2

12%

10.0

10%

9.8

8%

9.6

6%

9.4

4%

9.2

2%

9.0

0%
4/90

8.8

4/92

4/94

4/96

4/98

4/00

1/97

Credit Market Indicators

May 31, 2001
Est. Spread
(bp)
Credit Index
Telecom
Energy
Media
Electrics
Banks
Finance Companies
Reits
Sov, Sup & Canadians
Non U.S. Corporates
Emerging Yankees
AA+
A
BBB
X-overs
Cap Securities Index

June 1, 2001

Current
Index OAS
153
183
150
191
193
124
129
219
111
176
310

MTD

YTD

-4
-4
-3
-5
-5
-2
+0
+0
-5
-13
-14

-37
-40
-13
-43
-40
-38
-30
-2
-19
-34
-42

90
145
217
342
220

-2
-5
-7
-39
+2

-22
-40
-49
-132
-94

7/97

1/98

7/98

1/99

7/99

Moodys
Baa2
13
Baa3
12
Ba1
11
Ba2
10
Ba3
9
B1
8
B2
7
B3
6

S&P
BBB
13
BBB12
BB+
11
BB
10
BB9
B+
8
B
7
B6

Note: Country ratings weighted

by outstanding marketable
debt (external)

29

Lehman Brothers

Economic Indicators
Real GDP
(% Change y-o-y)
AMERICAS
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Panama
Peru
Venezuela
EMEA
Bulgaria
Croatia*
Czech Republic
Hungary
Israel
Poland
South Africa
Russia
Turkey**
ASIA
China
Hong Kong
India
Indonesia
Malaysia
Philippines
Korea
Thailand

Inflation
(% Change y-o-y)

Current Account Bal

(% of GDP)

Exchange Rate
(End Period)

2000

2001

2002

2000

2001

2002

2000

2001

2002

2000

2001

2002

-0.5
4.5
5.4
3.0
2.5
7.2
2.7
3.5
3.2

1.0
3.6
3.5
3.0
4.0
2.4
3.0
1.0
4.0

3.0
5.2
5.0
4.0
4.0
4.1
3.5
4.0
2.5

-0.8
6.0
4.5
8.7
91.0
9.0
1.4
3.7
13.4

-0.5
5.5
3.5
8.3
28.9
6.7
3.0
2.5
12.2

1.0
3.0
4.0
8.5
20.0
6.5
1.8
4.0
30.0

-3.5
-4.5
-1.3
-0.2
8.5
-3.3
-9.2
-3.0
12.0

-4.9
-2.8
-1.5
-2.0
-2.0
-3.5
-8.0
-3.2
7.0

-3.7
-3.5
-3.0
-3.0
-4.0
-2.1
-7.0
-3.8
3.0

4.5
2.9
3.1
5.2
4.8
4.1
3.1
7.7
7.2

5.0
3.0
3.5
5.2
4.0
3.5
3.4
4.0
-7.5

4.0
3.0
3.8
5.0
n/a
4.5
3.8
3.5
4.0

10.1
4.7
3.9
9.8
0.9
10.2
5.3
20.2
40.0

6.0
4.5
4.6
9.0
2.5
6.3
6.4
16.0
65.0

5.0
4.0
4.8
7.5
n/a
6.3
6.6
9.0
35.0

-4.8
-5.0
-4.8
-3.3
-1.0
-6.3
-0.3
18.5
-5.0

-4.0
-4.5
-6.5
-4.5
-0.9
-5.5
-0.2
12.7
2.5

-3.5
-4.0
-7.0
-4.0
n/a
-5.5
-0.9
9.3
-2.0

1.82
7.3
37.6
281.1
4.20
4.14
7.59
28.2
685

8.0
10.5
6.0
4.8
8.5
3.9
8.8
4.3

7.5
4.0
5.8
3.8
3.9
3.0
4.5
3.3

8.0
5.5
7.0
4.5
6.7
4.2
7.0
5.0

0.3
-3.7
5.3
3.8
1.6
4.3
2.3
1.5

1.0
0.2
6.0
9.0
2.2
5.5
4.0
1.8

1.0
3.0
6.0
6.0
3.0
4.5
3.5
2.7

1.9
4.8
-1.2
4.0
13.0
9.0
2.4
8.5

1.2
3.8
-1.5
3.0
6.0
4.5
1.8
4.0

0.2
5.1
-1.3
1.0
3.5
1.0
0.2
2.0

8.28
8.31
8.00
7.80
7.80
7.80
46.6
50.0
50.0
9625 11000 14000
3.8
3.8
3.8
49.9
53.0
52.0
1263 1300 1225
43.4
47.0
45.0

1.00
1.00
1.00
1.95
2.17
2.25
574
615
640
2,236 2,570 2,776
25,000 25,000 25,000
9.6
9.8 11.26
1.0
1.0
1.0
3.53
3.80
3.99
700
740
851

1.80
8.0
38.6
283.2
4.30
4.06
7.90
30.0
1350

1.80
8.5
36.0
237.0
n/a
4.30
7.90
31.0
1600

* Croatia exchange rate is period average.

** Turkey calculations based on GNP.

Lehman Brothers

30

June 1, 2001

Sovereign Credit Ratings, May 31, 2001

Rating
Moodys
Argentina
Australia
Austria
Bahamas
Bahrain
Barbados
Belgium
Belize
Bermuda
Bolivia
Brazil
Bulgaria
Canada
Cayman Islands
Chile
China
Colombia
Cook Islands
Costa Rica
Croatia
Cuba
Cyprus
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Estonia
Fiji
Finland
France
Germany
Gibraltar
Greece
Guatemala
Honduras
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Ireland
Israel
Italy
Jamaica
Japan
Jordan
Kazakhstan
Korea
Kuwait
Latvia

B2**
Aa2
Aaa
A3
Ba1
Baa2
Aa1
Ba2
Aa1
B1
B1
B2
Aa1
Aa3
Baa1
A3**
Ba2

Ba1*
Baa3**
Caa1
A2**
Baa1
Aaa
B1
Caa2
Ba1
Baa3
Baa1
Ba2
Aaa
Aaa
Aaa
Aaa
A2
Ba2
B2
A3*
A3
Aa3
Ba2*
B3
B2
Aaa
A2
Aa3
Ba3
Aa1
Ba3
B1*
Baa2
Baa1
Baa2

Rating
Moodys

S&P
B**
AA+
AAA

AAA+
BB
AA
B+
BBB+*
AA+

ABBB
BB**
B
BB*
BBB-**

A
AAAA
B+
CCC+**
BBB-**
BB+
BBB+*

AA+*
AAA
AAA

A+
AA+*
BB
CCC+**

AA+*
AAA
B+
AA+
BB-*
BB
BBB*
A
BBB

Lebanon
Liechtenstein
Lithuania
Luxembourg
Macau
Malaysia
Malta
Mauritius
Mexico
Moldova
Monaco
Mongolia
Morocco
Netherlands
New Zealand
Nicaragua
Norway
Oman
Pakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russia
Saudi Arabia
Singapore
Slovakia
Slovenia
South Africa
Spain
Suriname
Sweden
Switzerland
Taiwan
Thailand
Trinidad & Tobago
Tunisia
Turkey
Turkmenistan
Ukraine
UAE
United Kingdom
USA
Uruguay
Venezuela
Vietnam**

B1**
Aaa
Ba1
Aaa
Baa1
Baa2
A3
Baa2
Baa3
B3
Aaa

Ba1
Aaa
Aa2
B2
Aaa
Baa2
Caa1**
Ba1
B1
B2
Ba3**
Ba1**
Baa1
Aa2
Baa2
B3
B2
Baa3
Aa1
Ba1*
A2
Baa3*
Aa2

Aa1
Aaa
Aa3
Baa3
Baa3
Baa3
B1**
B2
Caa1**
A2
Aaa
Aaa
Baa3
B2
B1

S&P
B+
AAA
BBBAAA

BBB
A

BB+*

B
BB
AAA
AA+

AAA
BBB
BBB+
B+
B**
BBBB+**
BBB+*
AA
BBB+*
B-*
B
AAA
BB+*
A
BBBAA+
B-**
AA+*
AAA
AA+**
BBBBBBBBB
B-**

AAA
AAA
BBBB

* Under review for possible upgrade/outlook positive.

** Under review for possible downgrade/outlook negative.
Not rated

June 1, 2001

31

Lehman Brothers

Sovereign Calendar
LATIN AMERICA
Mon 4
Colombia: DANE inflation data, %

Period Prev 3
May
1.89

Prev 2
1.48

Prev 1 LBGE Market

1.15
0.7

Tues 5

Argentina: Automobile Sales, units, %y-o-y

Argentina: INDEC inflation rate, %
Brazil: FIPE inflation (Sao Paulo), %
Chile: INE inflation rate, %
Mexico: Banxico weekly foreign-reserve levels, US$m

May
May
May
May

-42.23
-0.2
0.11
-0.3
38.65

-41.78
0.2
0.51
0.5
38.37

-37.27
0.7
0.61
0.5
38.37

Wed 6

Brazil: IBGE Industrial Production, %m-o-m

Brazil: Anfavea vehicle sales, units, % y-o-y
Venezuela: Vehicle Sales, % y-o-y

Apr
May
May

-2.3
17.96
17.74

0.8
40.08
50.46

-0.3
31.98
62.57

-3.0

Thurs 7

Argentina: Government trade balance, US$m

Mexico: INEGI gross fixed investment figures
Mexico: Banxico inflation rate, %

Apr
Mar
May

93
3.3
-0.07

124
0.4
0.63

1
-0.5
0.5

200
0.5
0.4

0.4

Mexico: INEGI definite trade balance, US$m

Peru: Government GDP data, %
Peru: Government trade data, US$m

Apr
Apr
Apr

-989
-1.6
-41.8

-493
-2.5
-91.3

-794.5
-3.6
-52.7

0.5

-1.9

April
April
Apr
H2 May
May

-266
-339
6.3
1.4
17.1

-55
-109
-3.3
1.4
6.2

-49
-125
-4.0
1.4
7.1

-170
-220
3.1
1.4
2.1

-51
-97

Fri 8

ASIA, EUROPE, MIDDLE EAST, AND AFRICA

Mon 4
Hungary, Indonesia, Malaysia: National Holiday
Hungary: Current account balance, euro mn
Hungary: Trade balance, euro mn
Philippines: Exports, % y-o-y
Poland: Food prices, % m-o-m
South Africa: New car sales, % y-o-y, nsa

-0.1
0.3

Tues 5

Czech Rep.: Current account balance, $m (nsa)

Philippines: Consumer price index, % y-o-y
South Africa: Gross FX reserves, rand bn
South Africa: Net open foreign exchange position, $bn

Q1
May
May
May

-386
6.7
58.0
9.5

-533
6.7
60.3
9.4

-1078
6.7
60.2
9.0

-590
6.6
60.9
8.9

Wed 6

Hungary: Industrial output, % y-o-y (wd+sa)

Korea: Memorial Day Holiday
Malaysia: Industrial production, % y-o-y
South Africa: Retail sales volumes, % m-o-m, sa

April

9.5

18.3

5.3

15.6

Apr
Mar

11.1
-0.2

1.8
-1.8

0.5
0.0

0.8
0.3

Hong Kong: Volume of retail sales, % y-o-y

Hungary: Agricultural PPI, % y-o-y
Korea: Central bank monetary policy meeting
South Africa: SACOB survey, sales expectations, bal
South Africa: Electricity production, % m-o-m, sa

Apr
April

3.0
26.1

-1.6
21.3

3.2
20.4

4.0
17.0

Jun
Apr

74
-0.2

74
-2.5

75
0.1

75
0.3

Turkey: Industrial production (% y-o-y)

Turkey: Industrial production (%, m-o-m, sa)

April
April

7.6
0.6

-5.3
-2.8

-7.7
-9.9

-19.2
-1.0

Thurs 7

Fri 8

0.5
0.4

10.0

Further Ahead
June 17
Bulgaria: Parliamentary elections

Lehman Brothers

32

June 1, 2001

Analytical Notes
Sovereign Comparative Statistics (Page 2)
1)

2)

3)
4)

5)

6)

Sovereign Spreads over U.S. Credit IndexThe spread differentials (1994 to present)
between Lehmans Emerging Markets and U.S. Credit Indices, the High Yield and U.S.
Credit Indices, and the International Cross-Over Bond (ICBI) and U.S. Credit Indices.
Best and Worst Performers YTD (Absolute EM Index Excess Return)The
absolute Excess Returns for the four best and four worst performers in the Emerging
Market Index for the year-to-date.
Information RatioThe ratio of Excess Returns to the volatility of those returns for
the Emerging Markets, High Yield, and U.S. Credit Indices.
Best and Worst Performers YTD (Contribution to EM Index Excess Return)The
four best and four worst performers (year-to-date) in terms of contributions to
Emerging Markets Index Excess Returns.
Total Returns for Select Asset ClassesThe total returns for the Emerging
Markets, High Yield and U.S. Credit Indices for the month-to-date, the past 3 months,
the past 6 months, and the year-to-date.
Annualized Total Return VolatilityThe volatility of Total Returns of the Emerging
Markets, High Yield and U.S. Credit Indices over 1-month, 3-months, and 6-months
and annualized.

Emerging Markets Index: Performance (Page 26)

1)

2)
3)

4)

Regional Comparison
a) Total ReturnsThe total returns of the Lehman Brothers Emerging Markets
Index and each of the regions in the Index for the month-to-date, past 3 months, past
6 months, and year-to-date.
b) Distribution by Market WeightThe distribution by market weight of each of the
regions in the Emerging Markets Index.
Total Returns: AmericasThe month-to-date and year-to-date total returns of each
of those countries in the Americas that are part of Lehmans Emerging Markets Index.
Total Returns: Europe, Mid-East, AfricaThe month-to-date and year-to-date total
returns of each of those countries in Eastern Europe, the Middle East and Africa that
are part of Lehmans Emerging Markets Index.
Total Returns: AsiaThe month-to-date and year-to-date total returns of each of
those countries in Asia that are part of Lehmans Emerging Markets Index.

Equity Market Indicators (Page 28)

1)
2)
3)
4)

United StatesThe NASDAQ (year-to-date) and the S&P 500 (which is rescaled to
correspond to Nadaq levels) against Lehman Brothers Emerging Markets Index.
AmericasThe Morgan Stanley Capital International (MSCI) Index for the Americas
(year-to-date) against Lehman Brothers Emerging Markets Index.
E. EuropeThe Morgan Stanley Capital International (MSCI) Index for Eastern
Europe (year-to-date) against Lehman Brothers Emerging Markets Index.
AsiaThe Morgan Stanley Capital International (MSCI) Index for Asia (year-to-date)
against Lehman Brothers Emerging Markets Index.

Currencies (Page 28)

1)
2)

Brazil RealThe Brazilian Real (year-to-date) against the Emerging Markets Index.
Polish ZlotyThe Polish Zloty (year-to-date) against the Emerging Markets Index.

Credit Market Indicators (Page 29)

1)
2)
3)

4)

June 1, 2001

High Yield Mutual Fund FlowsHigh Yield Mutual Fund Flows from March 4, 1992
until the present, and an 8-week moving average of those weekly flows.
Downgrade/Upgrade RatioThe ratio of downgrades to upgrades by Moodys,
Standard & Poors and an average of the two agencies.
Moodys Trailing 12-Month Dollar Based Default Rate (Spec. Grade)The
percentage of speculative grade debt outstanding over time that has been in default
over the last 12 months.
Sovereign Credit Quality IndicatorsThe average of the numeric S&P and Moodys
sovereign ratings of each of the countries in our Sovereign Weightings list in the beginning
of this publication, weighted by the outstanding marketable debt of each country.

33

Lehman Brothers

Index of Recent Articles

GLOBAL THEMES
June 1, 2001
May 25, 2001
May 18, 2001
May 4, 2001
April 27, 2001
April 20, 2001
April 5, 2001
THE AMERICAS
January 19, 2001
Argentina
June 1, 2001
May 18, 2001
May 11, 2001
May 4, 2001

Brazil
April 5, 2001
March 23, 2001
March 16, 2001
March 9, 2001

Effect of the Mega-Swap on Argentinas

Financing Needs
Argentina: Swap from the Swamp
The Argentine Malaise Lingers On,
but Not for All Credits
Argentina Holds the Sovereign
Market in Suspense

Brazil: The (External) Crisis That

Will Not Come
Brazil: COPOMDoing the Right Thing
Brazil: Politics and Posterity
Our Thoughts On The Brazil Exchange:
Not A Deal To Rush Into

Reinvigorating Politics in British Columbia

Chile
May 11, 2001

Chile: Not Guilty By Association

Mexico
June 1, 2001

Bulgaria: Are Election Worries Receding?

Cote dIvoire
November 3, 2000

Cote dIvoire: Waiting for Political Stability

Poland
October 13, 2000

Poland: Election Fallout

Russia
May 11, 2001
April 5, 2001
February 16, 2001
January 12, 2001

Russia: Structural Policy Update

Russia: IMF Confusion
Russia: Paris Club Victory
Russia: Increased Default Risk?

Turkey
May 18, 2001
May 18, 2001
May 4, 2001
April 20, 2001
April 20, 2001
March 16, 2001

Turkey: Unfavorable Debt Dynamics

Turkey: Will It Work?
Turkey: IMF Rescue . . . Again
Turkey: Something Has to Give
Turkey: Shifting Political Sands
Turkey: Dervis to the Rescue?

Ukraine
June 1, 2001
February 16, 2001

Ukraine: Is the Storm Over?

Ukraine: Heading Toward a Debt Crisis?

ASIA
May 4, 2001

Indonesia
April 27, 2001
Japan
March 30, 2001

Colombia: Rescuing the Peace Process

Corporacin Andina de Fomento

May 4, 2001
Dont Blink: CAF Gets Upgraded Again
Ecuador
February 2, 2001

Bulgaria
May 25, 2001

Quebec: Changing of the Guard

British Columbia
May 25, 2001

Colombia
January 26, 2001

EASTERN EUROPE/MID-EAST/AFRICA
March 9, 2001
Emerging Europe: An Overview
January 19, 2001
Europe, Middle East, and Africa:
Financing Requirements for 2001

Blah, Blah, Blah

Swap Fever
Is It Time to Switch from
Fixed-Coupon to Floating-Rate Bonds?
Argentina Holds the Sovereign
Market in Suspense
Dont Worry, Be Happy
Even the Fed Cant Hide the
Witches Warts
Counterbalancing Forces

February 9, 2001

Ecuador: Debt or Alive?

May 25, 2001

Mexico: Lower Growth, Lower Deficits,

Less Inflation
Mexico: Good Policy and Luck

Panama
May 25, 2001
March 2, 2001

Panama: Less Wind in the Sails

Panama: Its Time for a Switch

Trinidad & Tobago

February 16, 2001

Lehman Brothers

Hedging Japan Risk: Higher

Beta Choices
Japanese Bank Capital Ratios: New
Accounting Procedures Add Pressure

SK Corporation (Baa3, Stable/NR)

A Korean Puzzle

Pakistan
October 20, 2000

Pakistan: Debt Restructuring

Philippines
March 16, 2001

Thailand
January 12, 2001

Peru: APRA-Cadaver ?

Indonesias Fiscal Tightrope

Korea
March 2, 2001
February 16, 2001

January 26, 2001

Peru
March 30, 2001

Asian Fundamentals Are

Getting Squeezed

Philippine Telecoms:
Time for Another Look
The Philippines: Bottom in Sight?

Thailand: Political Turbulence

Could Be Hot Air

Peaceful Resolution to the

Political Impasse in Trinidad & Tobago

34

June 1, 2001

Sovereign Strategy

Rob Gvozden
Costas C. Hamakiotes, Ph.D.
Robert McAdie, Ph.D.
Kaushik Rudra
Marco Santamaria

Reto Bachmann
Corinne Bethke
Giuseppe Di Graziano
Nicole Sermier

Asia, High Grade Sovereigns

Fixed Income Strategy
Fixed Income Strategy, Europe
European Sovereigns
Latin American Sovereigns

212-526-6310
212-526-8082
44-207-260-3036
44-207-260-1767
212-526-7036

44-207-260-3036
212-526-8469
44-207-260-2329
212-526-7804

Publications: L. Pindyck, A. DiTizio, B. Davenport, W. Lee, D. Kramer, S. Bryant, J. Threadgill, R. Madison, A. Acevedo
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Brothers Inc. Under no circumstances should it be used or considered as an offer to sell or a solicitation of any offer to buy the securities or other instruments
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Brothers Inc. All rights reserved. Member SIPC.

MONTHLY SOVEREIGN STRATEGY COMMENT

Lehman Brothers is pleased to invite you to a monthly on-demand
multimedia presentation on the Internet as a webcast. On the first Monday
of each month, a sovereign analyst will provide an update on our
sovereign views and discuss our sovereign fixed income investment
ideas. Beginning at 10:00 am (EST) on the first Monday of each month,
you will be able to access this presentation at two different sites:
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If you have any questions about the webcast, please call Corinne Bethke
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