Moodys Global Economy Sovereign Conference We will begin shortly

October 11, 2011

Moodys Global Economy Sovereign Conference

October 11, 2011

Welcome

Panel I
G3: The Highly Indebted Economies

The U.S. Aaa Rating

Bart Oosterveld, Managing Director, Sovereign Risk Group

Key Drivers Behind Moodys Confirmation of the Aaa Rating

Economic Strength Unparalleled diversity and size, long record of relatively solid economic growth, based on demographics and productivity, and high per capita income

Debt position not out of line with other Aaa-rated governments

Global role of the dollar

Unquestioned access to finance at low and stable cost means the US government can support higher levels of debt than most other governments.

Beginning of process of deficit reduction August 2 adoption of the Budget Control Act, while by itself not sufficient, resulted in deficit reduction. The goal of reversing the upward debt trajectory is shared by both parties.

Negative Outlook on US Rating Due to Future Debt Trajectory

Other large Aaa-rated governments have improving debt trajectories over the medium term.

US projections still do not assure an improving trajectory unless further deficit-reduction measures are forthcoming.

Moodys expectation is that the deficit-reduction process will continue, although it is unlikely to be smooth. There is a risk that political differences will prevent it from occurring. --A negative economic scenario could also impede deficit-reduction.

IMF Projections of General Government Debt

(% of GDP)

120.0

110.0

100.0

90.0

80.0

70.0

60.0 2010 2011f France 2012f Germany 2013f United Kingdom 2014f United States 2015f 2016f

Source: International Monetary Fund, World Economic Outlook Database, April 2011

Future Events Related to the Rating Outlook

November 2011: December 2011: February 2012: November 2012: December 2012: February 2013:

The joint special committee recommendations for deficit reduction, or lack thereof Congressional vote on the committees recommendations Administration presents fiscal year 2013 budget National elections Expiration of the Bush tax cuts New administration presents fiscal year 2014 budget Debt limit reached]

[Early 2013:

Continuing:

Economic data

The Euro Area at a Critical Junction

Sarah Carlson, Vice President and Senior Analyst, Sovereign Risk Group

10

Large number of rating actions in the Euro area

Country Belgium Cyprus Greece Ireland Italy Malta Portugal

Rating end2010

Jan 11

Feb 11 Mar 11

Apr 11

May 11

Jun 11

Jul 11

Aug 11

Sep 11

Oct 11 RUR-

Aa3 STA Ba1 RURBaa1 Neg Aa2 STA A1 STA A1 RUR-

RUR-

A2 STA B1 Neg Baa3 Neg

RURRUR- Caa1 Neg

Baa1 Neg Ca Dev Ba1 Neg RURA2 Neg A2 Neg

A3 Neg Baa1 RUR-

Ba2 Neg

Slovenia
Spain

Aa2 STA
Aa1 RURAa2 Neg RUR-

Aa3 RUR-

11

Key drivers and turning points for ratings

Assumptions about Eurozone support Concerns about growth, competitiveness Increasing risk of constrained market access

Implementation risks to ambitious plans

Structural break in risk pricing for highly indebted economies
Loss of investor confidence is a key rating factor

12

Where to next? Conflicting objectives

Preserve Euro area in current form

Avoid commitment to a fiscal union

13

Strong pressure to change strategy, but large obstacles in the way

The current situation is not a stable equilibrium Policymakers will need to make a choice Ultimately, we think that they will choose to preserve the Euro area

Reconciling the policy options that are available and what the market wants will be a challenge

14

The path ahead depends on the authorities reaction function

Aaa Non-Aaa Supported

more probable

EMU 17

Scenario I: Impact of further Greek default not contained. E scalating tensions and funding costs, and potentially further defaults beyond Greece, result in halting, piecemeal moves towards some further fiscal integration and mutualisation of risk. Scenario II: As above, but with credible steps taken quickly towards much higher level of fiscal integration and mutualisation of risk across euro area. Scenario III: Despite further Greek default, rapid signs of growth and successful implementation of austerity packages in other programme countries reassure investors without material steps towards closer fiscal integration.

Neutral

Negative

Negative

Broadly Neutral (perhaps slight increase in issuance costs)

Positive once intent becomes clear, highly negative in the meantime Positive

Negative for defaulters, positive for survivors once intent becomes clear Positive

Positive

Exits

Scenario IV: Greece defaults and exits but impact isolated through immediate meaningful, credible steps towards deeper fiscal integration and mutualisation of risk. Scenario V: Greece exits from the Monetary Union. Contagion causes one or two further exits before authorities take meaningful and credible steps towards deeper fiscal integration.

Broadly neutral once intent becomes clear, negative in the meantime Negative

Positive once intent becomes clear, highly negative in the meantime Negative

Positive for survivors once intent becomes clear

Negative

less Breakup probable

Scenario VI: Break-up of much or all of the E uro Area

Negative

Negative

Negative

15

Japan
Tom Byrne, Senior Vice President, Regional Credit Office, Asia and Middle East, Sovereign Risk Group

16

Asia-PacificJapan needs reform and growth

End of Koizumi reform momentum

17

Ann Van Praagh, Managing Director

Chief Credit Officer Public Finance
18

Bart Oosterveld
Managing Director Sovereign Risk Group
19

Sarah Carlson
Vice President and Senior Analyst Sovereign Risk Group
20

Tom Byrne
Senior Vice President, Regional Credit Office Asia and Middle East Sovereign Risk Group
21

Break

Panel II
Emerging Markets and Persistent Global Imbalances

Brazil and Mexico

Mauro Leos, Vice President and Senior Credit Officer, Sovereign Risk Group

24

BRAZIL

25

BRAZIL: What about ?

Inflation

7.23% (August) vs. 6.5%

BCB Survey: 2012 expectation 5.53%; policy credibility

the SELIC Battle

Fazenda vs. BCB

Banco Central do Brasil = institutional pillar (track record)

... Salrio Mnimo

14% in 2012 Rule = institutional element = increased policy predictability

26

What is really important for Brazils ratings

1. Medium-term challenges not (very) near-term conditions 2. Fiscal issues not balance-of-payments 3. Positive shocks not negative shocks

* Key assumption: Ability to manage challenges posed by external shocks

27

What about the Positive Outlook ?

when / what ?
Time horizon: 12 18 months
1)
2)

Re-confirmation of shock- absorption capacity

Policy response:
Compliance with primary surplus target Reduction of rollover risk: avg. debt maturity,

(necessary but not sufficient)

3)

Fiscal transparency (no accounting tricks)

28

Brazil
The country is about to face another stress test Brazil is well equipped to handle external shocks Current ratings adequately capture existing credit risks We do not anticipate rating actions in the near term

Brazils sovereign credit prospects will be strongly influenced by fiscal issues and the medium-term growth outlook

29

MEXICO

30

R2

Synchronization business cycles: MX vs USA

Mxico 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0
-3.0

Estados Unidos

-4.0 -5.0 -6.0 -7.0

2011F

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

31

MEXICO: Moderate fiscal impact despite severe economic shock

32

Fiscal Impact of the Crisis: MEXICO vs Baa and A

Debt / GDP (%) -- 2007=100
150.0

Mxico Baa1

Mediana Baa

Mediana A

140.0

130.0

120.0

110.0

100.0

90.0 2007 2008 2009 2010 2011F

33

100

120

140

160

180

200

60

80

05-ene-07 05-mar-07 05-may-07

05-jul-07

Billion dollars

05-sep-07
05-nov-07 05-ene-08

05-mar-08
05-may-08 05-jul-08 05-sep-08
83.6

05-nov-08 05-ene-09 05-mar-09

05-may-09 05-jul-09 05-sep-09 05-nov-09

05-ene-10 05-mar-10 05-may-10

05-jul-10 05-sep-10 05-nov-10

05-ene-11
05-mar-11

LCF con FMI: $72 mmd

MEXICO: International Reserves + IMFs FCL

05-may-11 05-jul-11 05-sep-11

136.1

208.8

34

10,000

20,000

30,000

40,000

50,000

70,000

80,000

60,000

0
2-Jan-07 2-Mar-07 2-May-07 2-Jul-07 2-Sep-07 2-Nov-07 2-Jan-08 2-Mar-08 2-May-08 2-Jul-08 2-Sep-08 2-Nov-08 2-Jan-09 2-Mar-09 2-May-09 2-Jul-09 2-Sep-09 2-Nov-09 2-Jan-10 2-Mar-10 2-May-10 2-Jul-10 2-Sep-10 2-Nov-10 2-Jan-11 2-Mar-11 2-May-11 2-Jul-11 2-Sep-11 %Total Total Government Securities held by non-residents, US million (LH)

A financial Love Story: Non-Residents and MBonos

10%

15%

20%

25%

35%

40%

30%

0%

5%

35

Mexico
Only Latam country that experienced a real stress test Fiscal resilience under worst-case conditions Sovereign credit performance better than others Institutional factors at play:

Fiscal Responsibility Law

Banco de Mexico

Ample financial buffers

36

Russia
Yves Lemay, Managing Director, EMEA Banking

37

Economic recovery continues but is fragile

Industrial output and retail sales (% yoy)

Real economy faces headwinds from global slowdown

GDP growth has not recovered to precrisis level (average of 7% from 2000-07) GDP growth for 2011 & 2012 was revised down in Q3 due to global slowdown Industrial production and retail sales still increased in August

24 16 8 0 -8 -16 -24 01/01/2008 01/04/2008 01/07/2008 01/10/2008 01/01/2009 01/04/2009 01/07/2009 01/10/2009 01/01/2010 01/04/2010 01/07/2010 01/10/2010 01/01/2011 01/04/2011 01/04/2011 01/07/2011
38

Industrial output

Retail sales

Inflation has moderated to 7.2% in September from 8.2% in August

Food prices down to 6.4% in September from 14.2% peak in February

Russia: CPI inflation 16 14 12 10 8 6 4 2 01/01/2008 01/04/2008 01/07/2008 01/10/2008 01/01/2009 01/04/2009 01/07/2009 01/10/2009 01/01/2010 01/04/2010 01/07/2010 01/10/2010 01/01/2011 01/07/2011

Main risk to economic outlook is a sharp drop in oil price

Declining investor confidence with knockon effects and capital flows and exchange rate

Sources: CBR, Bloomberg, Moodys

There are a number of challenges at present

USD bn

Net capital outflows by private sector

Continued net capital outflows

Since Q4 2010, we observe continued outflows but so far they are still well below 2008 numbers Russia is a special case as high capital inflows meet high capital outflows

100 50

0
-50 -100 -150 Q1, 2006 Q2, 2006 Q3, 2006 Q4, 2006 Q1, 2007 Q2, 2007 Q3, 2007 Q4, 2007 Q1, 2008 Q2, 2008 Q3, 2008 Q4, 2008 Q1, 2009 Q2, 2009 Q3, 2009 Q4, 2009 Q1, 2010 Q2, 2010 Q3, 2010 Q4, 2010 Q1, 2011 Q2, 2011 Q3, 2011 BRIC: exchange rates vs USD 160 140 120 100

The Ruble has weakened sharply

FX rate dragged down by global risk aversion despite still high oil prices A sharp drop in oil prices would accelerate downward pressure

Political risk has moved in focus

Elections in December and March

80
01/01/2008 01/04/2008 01/07/2008 01/10/2008 01/01/2009 01/04/2009 01/07/2009 01/10/2009 01/01/2010 01/04/2010 01/07/2010 01/10/2010 01/01/2011 01/04/2011 01/07/2011
39

Economic and institutional reforms

Foreign policy stance

BRL/USD

RUB/USD

INR/USD

CNY/USD

Sources: CBR, Moodys

Large FX reserves & low public debt are credit strengths

International reserves are approaching pre-crisis level
Cushion against external shocks However, Reserve Fund did not recover
International reserves 700 550 400 250 100 -50

01.02.2008

01.05.2008

01.08.2008

01.11.2008

01.02.2009

01.05.2009

01.08.2009

01.11.2009

01.02.2010

01.05.2010

01.08.2010

01.11.2010

01.02.2011

01.05.2011

Low public debt level and debt service burden

Reduced vulnerability against background of Euro-crisis Caveat is that oil price to balance the budget rose sharply from USD 26 in 2007 to above USD 100 at present

FX reserves

Reserve Fund

National Wealth Fund

Gold

Public debt in % of GDP 100 80 60 40 20 0 2007

China (Aa3)

FX rate has become more flexible

This can help to absorb external shocks better than in 2008/2009 However, sharp drop in oil likely to lead to intervention

2008

2009

2010

2011F

2012F
India (Baa3)

Russia (Baa1)

Brazil (Baa2)

Sources: CBR, Moodys

40

01.08.2011

Russian banking sector

Weaker global and Russian macro outlook, and high market volatility, will affect Russian banks through: liquidity squeeze difficulties in raising wholesale funds slower credit growth (5-10% in 2012) pressured asset quality Despite the vulnerabilities, Russian banks have sufficient capital buffers and recurrent earnings to cope with the increase in credit losses anticipated Loan-loss provisions will likely increase to about 12% of gross loans by YE2012, from 9.6% at mid-2011 We note that Russian banks have also strengthened their funding profiles by increasing their focus on customer deposits, away from wholesale borrowings

41

Long-term outlook clouded

TI Corruption Perception Index

Undiversified economy
Oil and gas sector account for about 25% of GDP, 35% of fiscal revenues, 50% of FDI and 60% of exports While there is high level support to modernize the economy, implementation has been slow

4.5 4 3.5

3
2.5 2 1.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Brazil China India Russia

Weak institutions
Weak rule of law, high corruption and unfavorable conditions for doing business impede investment (domestic and foreign) and growth potential

Dependency ratio* 60 55 50 45 40 35 2010

Brazil

Unfavorable demographics
Russia faces a declining population and rising pension and health care costs This has negative consequences for public finances and growth potential

2015
China

2020
India

2025

2030
Russia

*Number of dependents (old aged, children) in % of total population

Sources: Transparency International, UN, Moodys

42

Middle East and Asia Pacific

Tom Byrne, Senior Vice President, Regional Credit Office, Asia and Middle East, Sovereign Risk Group

43

Middle EastHigh Oil Prices Raise GCCs Fiscal Space

120

100 Bahrain US$ per barrel 80 Saudi 60 Oman

UAE
40

Kuwait

Qatar 20 Jan-10

Apr-10
Brent Crude

Jul-10
2010 Average oil price

Oct-10

Jan-11
2011 Forecast oil price

Apr-11

Jul-11

2010 Fiscal breakevens

Source: Bloomberg, Moody's

44

Middle EastFundamentals Boosted by Oil

Fiscal Balance (% of GDP)
30 25 20 25 15 10 5 0 -5 -5 -10 -15 -10 -15 2010 2011F 2012F 20 15 10 5 0 2010 2011F 2012F 40 35 30

CA Balance (% of GDP)

Source: IMF, Moody's

45

Middle EastJasmine Revolution Contagion, Upper Right

lack of wealth and political accountability most pronounced
Saudi Arabia Libya

Syria

Political Voice and Accountability

Libya Syria

Tunisia Oman Qatar Egypt Algeria Yemen

UAE

Bahrain Kuwait

Jordan

Turkey
Lebanon

Morocco

Wealth--Per Capita GDP

Egypt Algeria Saudi Tunisia Turkey Oman Jordan Lebanon Qatar Kuwait Bahrain UAE Morocco Yemen

46

Asia-PacificChinas Market Eclipses the US and EU

In billions USD (2010)

Japan Korea Taiwan Philippines Indonesia Thailand India Australia

Exports to China 176.9 138.5 70.4 16.3 20.8 33.3 20.9 60.0

% Total Exports to China, US, EU 46.1 58.0 50.9 51.8 37.5 42.2 22.1 73.5

Exports to US 120.5 48.9 35.8 8.0 16.5 22.7 29.5 8.6

% Total Exports to China, US, EU 31.4 20.5 25.9 25.4 29.7 28.8 31.3 10.5

Exports to EU 86.1 51.3 32.0 7.1 18.2 22.8 44.0 13.1

% Total Exports to China, US, EU 22.4 21.5 23.2 22.7 32.8 29.0 46.6 16.0

Source: US Census Bureau of Foreign Trade, EuroStat

47

Asia-PacificChina Provides Uplift to Regional Growth

Real GDP Growth Performance 2005 - 2009 % change 2005 2006 2007 2008 Closely Linked to China Japan 1.9 2.0 2.4 -1.2 Korea 4.2 5.1 5.0 2.3 Taiwan 4.7 5.4 6.0 0.7 Thailand 4.6 5.1 5.0 2.5 Australia 3.4 2.5 4.7 2.4 Brazil 3.2 4.0 6.1 5.2 Median 3.8 4.5 5.0 2.3 Mean 3.7 4.0 4.9 2.0 Not Closely Linked to China US 3.1 2.7 Germany 0.8 3.4 Italy 0.7 2.0 Ireland 6.0 5.3 Canada 3.0 2.8 France 1.9 2.2 Median 2.5 2.7 Mean 2.6 3.1
Source: IMF, Moody's

6.00

2009
4.00

-6.3 0.2 -1.9 -2.3 1.4 -0.6 -1.3 -1.6

2.00

0.00

Closely Linked w/ China Mean Not Closely Linked w/ China Mean

-2.00

1.9 2.7 1.5 5.6 2.2 2.4 2.3 2.7

-0.3 1.0 -1.3 -3.6 0.7 0.2 -0.1 -0.6

-3.5 -4.7 -5.2 -7.6 -2.8 -2.6 -4.1 -4.4

-4.00

-6.00

2005

2006

2007

2008

2009

48

Asia PacificResilient Real GDP Growth

ASEAN-5 20.0 European Union Latin America & the Caribbean United States China

15.0

10.0 % YoY Growth

5.0

0.0

-5.0

-10.0 2005 Source: IMF 2006 2007 2008 2009 2010 2011F 2012F

49

Asia-PacificGovt Balance Sheets Less Burdened

And robust growth has minimized debt accumulation post-2008 crisis, ex-Japan
Debt/GDP, 2007 Japan Greece USA France UK Germany India Spain Philippines Malaysia Singapore Taiwan China Korea
Thailand New Zealand Indonesia Australia
-25 25 75 125 175 225 275

Change in Debt/GDP, 2007 to 2010

Source: Bloomberg, Moody's

50

Thomas Keller
Managing Director Global Public Public, Project, and Infrastructure Finance Group
51

Mauro Leos
Vice President and Senior Credit Officer Sovereign Risk Group
52

Yves Lemay
Managing Director EMEA Banking
53

Tom Byrne
Senior Vice President, Regional Credit Office Asia and Middle East Sovereign Risk Group
54

Thank You