FIXED INCOME RESEARCH > EMERGING MARKETS > STRATEGY > GLOBAL 8 August 2002

Emerging Markets Sovereign

Strategy Daily
http://research-and-analytics.csfb.com/

Brazil & IMF: Near term and medium term implications for outright
performance and curve shape

“Positive contagion”: Mexico to be the main beneficiary

Implications of the package on asset prices and the curve

We try to analyze the potential implications of the announced IMF agreement for
Brazil. We recommend maintaining a market weight position (and several intra-
country relative value positions) while waiting for increasing support for Serra
starting at the end of August.
Contributors As we write, news regarding the IMF package has hit the wires. Today we try to assess the
Filippo Nencioni expected impact on asset prices and curve behavior. At present only summary details
+1 212 325 2082
filippo.nencioni@csfb.com
regarding the package are available. We base our views on the assumption that:

Paul Fage • Multilaterals have committed $30bn of new funds over the next 15 months
+44 20 7883 7994
paul.fage@csfb.com • $6bn will be made available this year
Linan Liu
+1 212 325 4592 • The floor for Net International Reserves (NIR) has been reduced by $10bn
linan.liu@csfb.com
We expect detailed information to become available sometime on Thursday.

Better than expected

We believe the package is better than expectations in terms of overall size and
disbursements in 2002. Although our impression is that original expectations increased
throughout the past couple of days, we still believe the announcement will be taken
favourably by the market. Notably, the IMF stresses that the Brazilian authorities believe
the package will be supported by the leading Presidential candidates.

Probability of muddle-through scenarios increases

Given the current opinion polls and the endorsements of the package by all candidates, we
believe that the most likely scenario is that of an orthodox economic program, with
significant IMF support and with either (i) a President committed to these type of policies
since the beginning of the campaigning (Serra) or (ii) a President that has moved towards
these policies following the recent dramatic sell-off in Brazilian assets and following the
additional and sizeable incentive offered by the IMF package. Furthermore, as our
economists point out, the endorsement of the package by all candidates could play against
Serra as he is no longer seen as the only candidate willing to pursue sound economic
policies. We conclude that while near-term default risk should decrease substantially, if an
opposition candidate were to win the election, the market would probably want to see the
new President achieving some of the initial targets before concluding that Brazil will be on
track with the IMF program. As a result, under such a scenario, it would probably take
longer for Brazilian assets to deliver the full upside potential under a scenario in which the
IMF targets are to be reached.
 Emerging Markets Sovereign Strategy Daily

More intervention likely

We take the reduction in the Net International Reserves (NIR) floor as a signal that additional
intervention power will be given to the Central Bank. It is not unreasonable to expect that some
portion of this additional $10bn will be deployed in the external debt market. If this turns out to be
the case, we suspect that the intervention goals would be different this time. In our view, the
focus should not be on the “visible” repurchase of short-dated assets as has been the case with
recent intervention. Instead, we think the central Bank should focus on high-coupon and
low-price securities that will return the highest level of overall debt reduction and forward-
looking NPV savings (when/if the international capital markets are open again). After all,
servicing the external debt in 2003-04 should have been made much easier by the $24bn to be
disbursed in 2003. We would recommend the Government to focus on low-priced and high–
coupon bonds as well as illiquids trading at a significant discount.

Local markets to signal sentiment changes

Beside the initial expected rally, it will be interesting to see how domestic investors will react to the
rally. We believe some local players will use higher prices to reduce exposure to the currency and
the domestic debt. In addition, it will also be interesting to see how the new likely scenario of an
opposition candidate winning the elections and sticking to the IMF program will be priced in the FX
market. We would expect the local market to be the first to signal potential changes in market
sentiment.

Outright view
We would expect a rally first and then some
consolidation ahead of the TV time allocations Chart 1 C bond price performance
on August 20. At that point, if Serra does not Offer price

start improving, we would expect the market to 90

trade within a relatively wide range. Post-

80
election performance would probably be
capped for some time if an opposition
70
candidate were to win the election. Local
market sentiment and central bank intervention 60
are also two important potential drivers. As a
reference, Chart 1 shows the performance of 50
Jan-02 Feb-02 Apr-02 Jun-02 Aug-02
the benchmark C bonds since January 2002.
Source: Credit Suisse First Boston

2 8 August 2002
 Emerging Markets Sovereign Strategy Daily

Curve view
The reduction in near-term default risk will
likely accelerate the already ongoing flattening Table 1 Performance on August 7
process. This seemed to be already
happening yesterday (see Table 1). Obviously, Bond Px chg Swp sprd chg

potential intervention (if it materializes) could BR 04 6.5000 -587

distort relative value relationships. Despite the BR 05 5.5000 -361

flattening, we believe the low-priced, longer- BR 06 5.0000 -306

BR 07 4.2500 -225
duration assets will outperform the short-end.
BR 08N 4.0000 -196
In addition, as observed yesterday, we would
BR 08 4.7500 -250
expect the price paid for liquidity to decrease, BR 09 5.7500 -236
hence resulting in an underperformance of C BR 10 4.7500 -215
bonds vs. similarly priced Globals. BR 12 5.2500 -229
BR 20 5.0000 -217
Strategy BR 24 3.7500 -169
BR 27 4.0000 -177
Although we expect higher prices, we opt to
BR 30 4.5000 -198
continue to play Brazil via curve positions (long BR 40 4.5000 -186
illiquids vs. liquids and short-end). Past the BR EI 3.0000 -275
initial rally we believe the increasing chances of BR NMB 2.5000 -227
a muddle-through scenario will prevent BR DCB 2.2500 -141
investors from increasing exposure BR C 3.7500 -169
BR Par 1.5000 -165
substantially. For that to happen, we would
BR Dis 1.7500 -202
need politics to turn for the better (ie: in favour
Source: Credit Suisse First Boston
of Serra). We believe such improvement is
likely to take place towards the end of August.
In the meantime, we keep our market weight position in Brazil, as well as our curve
positions. As a reference, Table 2 on page 4 presents the closing offer side levels for Brazilian
assets.

8 August 2002 3
 Emerging Markets Sovereign Strategy Daily

Table 2 Closing levels as of August 7

Bond Curr. Cpn Ask px Curr yld Bld yld Swp sprd Sprd dur

BR 04 11.6250 81.50 14.26 25.86 2,372 1.32

BR 05 9.6250 68.00 14.15 25.86 2,295 2.23
BR 06 10.2500 65.00 15.77 26.41 2,325 2.47
BR 07 11.2500 59.25 18.99 26.47 2,283 3.12
BR 08N 11.5000 59.25 19.41 25.59 2,178 3.12
BR 08 9.3750 53.75 17.44 25.10 2,123 3.35
BR 09 14.5000 67.75 21.40 24.14 2,011 3.41
BR 10 12.0000 57.75 20.78 24.42 2,027 3.62
BR 12 11.0000 55.25 19.91 22.69 1,832 4.23
BR 20 12.7500 56.50 22.57 22.96 1,846 4.18
BR 24 8.8750 45.75 19.40 19.78 1,507 4.68
BR 27 10.1250 49.50 20.45 20.59 1,597 4.46
BR 30 12.2500 55.00 22.27 22.31 1,781 3.90
BR 40 11.0000 54.00 20.37 20.38 1,577 4.22
BR EI 3.0625 74.00 4.14 21.79 1,910 1.47
BR NMB 3.1250 54.50 5.73 27.93 2,462 2.06
BR DCB 3.1250 47.25 6.61 22.63 1,875 3.56
BR C 8.0000 59.25 13.50 20.21 1,620 3.51
BR Par 6.0000 58.00 10.34 11.19 1,993 1.47
BR Dis 3.0625 58.00 5.28 11.27 1,820 1.82
Source: Credit Suisse First Boston

Candidates for “positive contagion”

Which country’s assets should benefit the most from a reduction of near-term default risk in
Brazil? We single out Mexico as the most likely main credit to benefit. Although, as
mentioned in our Daily in the recent past, the macroeconomic links between the two countries are
very weak, we have also demonstrated the very high level of correlation between their assets.
And yesterday was no exception. In addition, Mexican spreads are still among the highest for EM
BBBs.

Other LatAm names (Colombia, Peru, Panama) should also benefit but to a lesser extent.

We are not sure Ecuador, Uruguay, and Turkey will be that affected, as they are all facing internal
challenges. Russia and Bulgaria are expensive vs. LatAm BBs and should only benefit
marginally, in our view.

How will the Argentine authority react to the Brazil IMF program? The signal from
Washington is clear, in our view. At the margin it should be positive.

4 8 August 2002
GLOBAL EMERGING MARKETS TEAM

Kasper Bartholdy
Global Head, Emerging Market Research
+44 20 7888 3170
kasper.bartholdy@csfb.com

EMERGING EUROPE, MIDDLE EAST & AFRICA STRATEGY

Peter Worthington Berna Bayazitoglu Filippo Nencioni Ray Farris
Regional Head +90 212 339 0239 Head of Sovereign Strategy +65 6212 3367
+44 20 7883 3652 berna.bayazitoglu@csfb.com +1 212 325 2082 ray.farris@csfb.com
peter.worthington@csfb.com Bulgaria, Turkey filippo.nencioni@csfb.com Interest & FX Strategy non-Japan Asia
Cote d’lvore, Nigeria, South Africa

Sergei Voloboev Olivier Desbarres Paul Fage Jason Bonanca

+44 20 7888 3694 +44 20 7888 5619 +44 20 7883 7994 +1 212 325 7185
sergey.voloboyev@csfb.com olivier.desbarres@csfb.com paul.fage@csfb.com jason.bonanca@csfb.com
Russia, Ukraine, Lebanon, Qatar Hungary, Poland Sovereign Strategy Local Currency Strategy Latin America

Umberto Alvisi Marie Myers Igor Arsenin Koon Chow

+44 20 7883 6309 +27 11 343 22 15 +1 212 325 6437 +44 20 7888 3857
umberto.alvisi@csfb.com marie.myers@csfb.com igor.arsenin@csfb.com koon.chow@csfb.com
Algeria, Croatia, Israel, Morocco, Romania, Baltics South Africa Sovereign Strategy Local Currency Strategy EMEA

Tatiana Morozova Henry Yu Dean Wang

+44 20 7888 1966 +1 212 325 9019 +65 6212 3368
tatiana.morozova@csfb.com henry.yu@csfb.com dean.wang@csfb.com
Czech Republic, Egypt, Slovakia High-grade Sovereign Strategy Interest & FX Strategy non-Japan Asia

Linan Liu
+1 212 325 4592
linan.liu@csfb.com
Sovereign Strategy

ASIA LATIN AMERICA

Dong Tao PK Basu Rodrigo Azevedo Lacey Gallagher
Chief Economist, non-Japan Asia Chief Economist, South-East Asia Regional Co-Head Regional Co-Head
+852 2101 7469 +65 6212 3001 +55 11 3841 6347 +1 212 325 5570
dong.tao@csfb.com pk.basu@csfb.com rodrigo.azevedo@csfb.com lacey.gallagher@csfb.com
China, Hong Kong, Korea, Taiwan India, Indonesia, Malaysia, Philippines, Singapore, Brazil Mexico, Chile, Ecuador, Argentina
Thailand

Sharad Bhandari Joseph Lau Paulo Grahl Carola Sandy

+65 6212 5685 +852 2101 7427 +1 212 325 8943 +1 212 325 2471
sharad.bhandari@csfb.com joseph.lau@csfb.com paulo.grahl@csfb.com carola.sandy@csfb.com
Indonesia, Thailand Taiwan, Korea Brazil, Venezuela Argentina, Peru, Colombia

Tse Chern Chia Sheila Yip Alonso Cervera Jan Dehn

+65 6212 3002 +852 2101 7409 +1 212 538 2351 +1 212 538 1576
tsechern.chia@csfb.com sheila.yip@csfb.com alonso.cervera@csfb.com jan.dehn@csfb.com
Philippines Mexico, Chile Panama

Audra Query
+1 212 325 7683
audra.query@csfb.com
AMSTERDAM ........................31 20 5754 890
ATLANTA...............................1 404 656 9500
AUCKLAND ............................ 64 9 302 5500
BALTIMORE ..........................1 410 223 3000
BEIJING ............................... 86 10 6410 6611
BOSTON................................1 617 556 5500
BUDAPEST............................. 36 1 202 2188
BUENOS AIRES .................. 54 11 4131 2700
CAIRO ..................................... 202 567 7600
CHICAGO ..............................1 312 750 3000
FRANKFURT ........................... 49 69 75 38 0
GENEVA ...............................41 22 394 70 00
HOUSTON .............................1 713 220 6700
HONG KONG......................... 852 2101 6000
ISTANBUL ........................... 90 212 278 2500
JOHANNESBURG ................ 27 11 884 67 41
LONDON ............................. 44 20 7888 8888
MADRID ............................... 34 91 423 16 00
MELBOURNE ........................61 3 9280 1666
MEXICO CITY.........................52 5 283 89 00
MILAN....................................... 39 02 7702 1
MOSCOW..............................7 501 967 8200
MUMBAI ................................91 22 230 6333
NEW YORK ...........................1 212 325 2000
PALO ALTO...........................1 650 614 5000
PARIS................................... 33 1 40 76 8888
PASADENA ...........................1 626 395 5100
PHILADELPHIA .....................1 215 851 1000
PRAGUE ............................. 420 2 210 83111
SAN FRANCISCO .................1 415 836 7600
SÃO PAULO.........................55 11 3841 6000
SEOUL .................................. 82 2 3707 3700
SHANGHAI...........................86 21 6881 8418
SINGAPORE ............................65 6212 2000
SYDNEY................................ 61 2 8205 4400
TAIPEI ..................................886 2 2715 6388
THAILAND...............................66 2 614 6000
TOKYO.................................. 81 3 5404 9000
TORONTO............................. 1 416 352 4500
VIENNA ...................................43 1 512 3023
WARSAW................................. 0114 434343
WASHINGTON DC................ 1 202 354 2600
WELLINGTON.........................64 4 474 4400
ZUG...................................... 41 41 727 97 00
ZURICH.................................. 41 1 333 55 55

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution,
publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse First Boston or its subsidiaries or affiliates (collectively "CSFB") to any registration or licensing
requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CSFB. None of the material, nor its content, nor any copy of it, may be
altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CSFB. All trademarks, service marks and logos used in this report are trademarks or
service marks or registered trademarks or service marks of CSFB.
The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or
subscribe for securities or other financial instruments. CSFB may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CSFB will not treat
recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you
consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation
that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CSFB does not advise on the tax consequences of
investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change.
Information and opinions presented in this report have been obtained or derived from sources believed by CSFB to be reliable, but CSFB makes no representation as to their accuracy or completeness. CSFB
accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or
regulations applicable to CSFB. This report is not to be relied upon in substitution for the exercise of independent judgment. CSFB may have issued, and may in the future issue, other reports that are
inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them
and CSFB is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.
CSFB may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers,
and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities
mentioned in the material presented in this report. CSFB may, to the extent permitted by law, act upon or use the information or opinions presented herein, or the research or analysis on which they are based,
before the material is published. CSFB may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or
all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related
investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some
investments solely by CSFB, or an associate of CSFB or CSFB may be the only market maker in such investments.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions
and estimates contained in this report reflect a judgement at its original date of publication by CSFB and are subject to change without notice. The price, value of and income from any of the securities or
financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the
price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk.
Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved.
The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity,
market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the
product and consult with their own professional advisers as to the risks involved in making such a purchase.
Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised.
Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to
pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some
investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an
investment is exposed.
This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to CSFB’s own website material, CSFB has not reviewed any such site and takes no
responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CSFB’s own website material) is provided solely for your convenience and information and the
content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CSFB’s website shall be at your own risk.
This report is issued and distributed in Europe (except Switzerland) by Credit Suisse First Boston (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by
The Financial Services Authority (“FSA”). This report is being distributed in the United States by Credit Suisse First Boston Corporation; in Switzerland by Credit Suisse First Boston; in Canada by Credit Suisse
First Boston Securities Canada, Inc.; in Brazil by Banco de Investimentos Credit Suisse First Boston S.A; in Japan by Credit Suisse First Boston Securities (Japan) Limited; elsewhere in Asia/ Pacific by
whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse First Boston (Hong Kong) Limited, Credit Suisse First Boston Australia Equities Limited, Credit Suisse
First Boston (Thailand) Limited, CSFB Research (Malaysia) Sdn Bhd, Credit Suisse First Boston Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on
Taiwanese securities produced by Credit Suisse First Boston, Taipei Branch has been prepared and/or reviewed by a registered Senior Business Person.
In jurisdictions where CSFB is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to
jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a
CSFB entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse First Boston
Corporation in the U.S.
Please note that this research was originally prepared and issued by CSFB for distribution to their market professional and institutional investor customers. Recipients who are not market professional or
institutional investor customers of CSFB should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.
This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers
and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report.
Copyright Credit Suisse First Boston, and its subsidiaries and affiliates, 2002. All rights reserved