Contexto Económico y Perspectivas 2024

CONTEXTO

ECONÓMICO Y PERSPECTIVAS P A R A

L A T A M

Y

C R

2 0 2 4

XP Macro Outlook: América Latina Bajo crecimiento y política económica más limitada Andrés Pardo A. Director y Jefe de Análisis Macroeconómico para América Latina XP Investments

October 2023

XP RESEARCH

1

Contexto global Tasas de interés globales más altas por más tiempo XP RESEARCH

2

Principales mensajes

October 2023

• Los estímulos que los gobiernos y los bancos centrales del mundo les dieron a sus respectivas economías durante la pandemia , y especialmente a los consumidores, generaron mucha más actividad de la que se esperaba. La mala noticia es que esos estímulos también contribuyeron a generar una burbuja inflacionaria muy fuerte.

• La inflación está disminuyendo en forma relevante en la mayoría de los países del mundo, pero es demasiado temprano para cantar victoria. Los riesgos de que la inflación se torne más “pegajosa” no es despreciable.

• La gran mayoría de los modelos económicos usados para tratar de pronosticar recesiones siguen arrojando un alto riesgo de que la economía de EEUU entre en un decrecimiento secuencial en los trimestres venideros.

• Uno de los activos en el mundo que va a determinar si las cosas avanzan bien o mal para los mercados y para la economía en general es el Bono del Tesoro de EEUU a 10 años.

• Las elevadas tasas de interés a nivel global afectarán el crecimiento económico de América Latina, además de reducir notablemente el espacio para medidas de estímulo fiscal y para atender las mayores demandas por gasto social y de inversión

XP RESEARCH

3

Las tasas de interés de los bancos centrales en países desarrollados aumentaron rápidamente y a niveles excepcionalmente elevados, pero creemos que los ciclos alcistas ya habrían terminado

October 2023

The global economy is expected to weaken amid tighter financial conditions in developed economies Annual Policy Rate (%) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0

Source: Bloomberg, XP

USA

Eurozone

UK

XP RESEARCH

4

La inflación, y especialment la medida subyacente, permanece inusualmente elevada en países avanzados

October 2023

Inflation in developed economies lingers above target

Inflation in developed economies lingers above target

Headline CPI (12-month % change)

Core CPI (12-month % change)

12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

Source: Bloomberg, XP

USA

Eurozone

UK

Target

Source: Bloomberg, XP

USA

Eurozone

UK

Target

XP RESEARCH

5

A pesar de la elevada inflación, esperamos que siga cayendo el próximo año: debilitamiento económico y menores presiones de costos

October 2023

Global economic growth is expected to reamain weak

Material drop in producer prices in developed economies

GDP growth observed and projected (%) 6

Producer price index (percentage change, Y/Y) 25

50

5

20

40

4

15

30

3

10

20

5

10

0

0

-5

-10

-10 Nov-19

-20

2 1 0

World

Advanced

US

Source: IMF WEO (Oct-23), XP

Euro Area

EM Asia

2022

EM Europe

LatAm

2023 (p)

Middle Sub-Saharan Africa East/Central Asia

2024 (p)

May-20

Source: Bloomberg, XP

Nov-20

May-21

US

Nov-21

UK

May-22

Nov-22

May-23

Euro Zone (right axis)

XP RESEARCH

6

Sin embargo, hasta el momento el crecimiento económico en EEUU ha sido más resilitente de lo esperado

October 2023

Inflation has surprised to the downside while activity to the upside in the United States Citi Economic Surprise Index (above 0, upside; below 0, downside) 100

50

0

-50

-100 Jan-21

May-21

Source: Bloomberg, XP

Sep-21

Jan-22

May-22

Inflation

Sep-22

Jan-23

May-23

Sep-23

Economic activity

XP RESEARCH

7

La inflación continúa por encima de la meta, pero está cediendo, aunque los riesgos de persistencia siguen siendo altos (petróleo, salarios, actividad económica resiliente).

October 2023

United States core inflation

Core inflation in the US remains above target

CPI and 3 month seasonally adjusted annual return 10%

Core PCE Deflator 8.0%

8% 6.0%

6% 4%

4.0%

2%

2.0% Target = 2%

0.0%

-2%

-2.0%

Source: Bloomberg, XP

0%

-4%

Core PCE Prices, y/y

3M SAAR

Source: BLS, BBG, XP

3M SAAR

Core CPI, y/y

XP RESEARCH

8

Las presiones para que la política monetaria en EEUU sea más restrictiva se han reducido, pero aún se requiere mantener tasas elevadas por tiempo prolongado

October 2023

XP RESEARCH

9

La inflación en EEUU podría ceder más rápido de lo esperado pues los componentes distintos a los arrendamientos muestran una inflación contenida

October 2023

United States core services ex-rents of shelter inflation

Shelter is the main driver of US inflation

United States core goods inflation

Consumer price index 12%

Consumer price index 10%

Consumer price index 30%

9%

25%

8%

20%

6%

6%

15%

4%

10%

3% 0%

5%

Source: BLS, BBG, XP

3M SAAR

Y/Y

Source: BLS, Bloomberg, XP

Y/Y

Source: BLS, BBG, XP

3M SAAR

Y/Y

XP RESEARCH

10

Jul-23

Apr-23

Oct-22

Jan-23

Jul-22

Apr-22

Jan-22

Jul-21

Oct-21

Apr-21

Jan-21

Jul-20

Oct-20

Apr-20

Jan-20

Jul-19

Oct-19

Apr-19

Jan-19

Jul-18

Oct-18

Apr-18

Jan-18

Jul-23

Apr-23

Jan-23

Jul-22

Oct-22

Apr-22

Jan-22

Jul-21

3M SAAR

Oct-21

Apr-21

Jan-21

Jul-20

Oct-20

Apr-20

Oct-19

Jan-20

Jul-19

Apr-19

Jan-19

Jul-18

-5% Oct-18

0% Apr-18

-6%

0% Jan-18

2%

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23

-3%

La inflación de arrendamientos caerá significativamente en el próximo año, pero tiene rezagos por la forma como se calcula dentro del IPC

October 2023

Shelter is the main driver of US inflation Consumer price index 10% 8%

6% 4% 2%

Source: BLS, Bloomberg, XP

3M SAAR

Jul-23

Apr-23

Jan-23

Oct-22

Jul-22

Apr-22

Jan-22

Oct-21

Jul-21

Apr-21

Jan-21

Oct-20

Jul-20

Apr-20

Jan-20

Oct-19

Jul-19

Apr-19

Jan-19

Oct-18

Jul-18

Apr-18

Jan-18

0%

Y/Y

Los arrendamientos y hoteles, que pesan 42% en la inflación subyacente, están siendo los principales determinantes de la elevada inflación actual en EEUU, pero esperamos una fuerte tendencia bajista en los próximos trimestres. Si el modelo de la Fed de San Francisco resulta ser más adecuado, la inflación subyacente bajaría a 1.4% en 2024 vs nuestro modelo de 2.4%.

XP RESEARCH

11

Adicionalmente, varios indicadores sugieren un importante debilitamiento de la economía de EEUU y que el riesgo de una recesión es alto

The inverted yield curve implies high recession probability in the United States

October 2023

US leading indicators point to high recession probability US Leading Economic Indicator, % YoY (recession in grey)

2-10 Treasury yield spread (%)

20

1

3.0

1 1

10

2.0

1 1

1.0

0

1 0

0.0

0

-10

0

-1.0

0 2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

Source: BBG, XP

-20

0

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

0.00

-2.0

Source: Bloomberg, XP

XP RESEARCH

12

El muy alto nivel de restricción de la política monetaria y de las condiciones financieras en EEUU, que se intensificaron en los meses recientes, también jugarán un rol significativo en la desaceleración económica Real interest rates in the US may be higher going forward

October 2023

Interest rates increased significantly in the US

Real ex-ante interest rates (%): 10Y UST yield - 10Y breakeven inflation

US 10Y Treasury Bond Yield, %

2.5

5.0 Beginning of the Fed´s tightening cycle

2.0

4.5

1.5

4.0

1.0

3.5 3.0

0.5

2.5

0.0

2.0

-0.5

1.5

-1.0

1.0

-1.5

0.5 0.0

Source: FRED, Fed, XP

Real rates

Neutral (pre-pandemic)

Possible new neutral

US yield curve continues to shift upwards

Source: BBG, XP

US Treasury yield per tenor 6.0% 5.5% 5.0% 5.0%

4.5%

4.7% 4.8%

4.0%

4.2% 4.1%

4.9%

4.7% 4.4%

3.8%

3.5%

3.7%

4.3% 4.1% 3.8% 3.7%

3.6%

3.0% 0

2Y

5Y207Y

Source: Bloomberg, XP

10Y 40

60 20Y

6 months ago

Two month ago

80

30Y 100 Current

XP RESEARCH

13

La actividad económica en Europa sí se ha resentido y refuerza la tésis de un débil crecimiento global en 2024

October 2023

Activity indicators in contractionary territory in the Eurozone

Activity indicators in contractionary territory in the Germany

PMI (above 50, expansion; below 50, contraction)

PMI (above 50, expansion; below 50, contraction)

70

70

65

65

60

60

55

55

50

50

45

45

40

40

35

35

Source: Bloomberg, XP

Manufacturing PMI

Services PMI

Source: Bloomberg, XP

Manufacturing PMI

Services PMI

XP RESEARCH

14

La economía China, que es un socio comercial clave para América Latina, también ha mostrado un crecimiento más débil después de la reapertura a comienzos de este año

October 2023

Growth in China continues to disappoint Markit PMI (above 50, expansion, below 50, contraction) 60 55

50 45

40 35 Jan-21

May-21

Source: Bloomberg, XP

Sep-21

Jan-22

May-22

Sep-22

Manufacturing

Jan-23 Services

May-23

Sep-23

Composite

XP RESEARCH

15

La desaceleración en China también puede afectar a la baja la dinámica de los precios de materias primas que exporta América Latina, mientras que la reciente escalada del petróleo pone en riesgo el proceso de desinflación global Commodity prices stabilizing at (not excessively) high levels

Oil prices increased again

CRB all commodities Index (1967=100)

Brent oil (USD per barrel)

650

October 2023

140 120

550

100 450

80 60

350

40 250

150 2000

20

2002

2004

Fonte: Bloomberg, XP

2006

2008

2010

2012

2014

2016

2018

2020

2022

0 2015

2016

2017

2018

2019

2020

2021

2022

2023

Souce: BBG, XP

XP RESEARCH

16

América Latina Débil crecimiento global y menos espacio para la política económica XP RESEARCH

17

La inflación también está cayendo de manera importante en América Latina y esa tendencia debería continuar en 2024

October 2023

Material drop in producer price inflation in Latam Producer price index (percentage change, Y/Y) 40

10.0

30

7.5

20

5.0

10

2.5

0

0.0

-10

-2.5

Source: Bloomberg, XP

Colombia

Chile

Brazil

Mexico (RHS)

XP RESEARCH

18

La caída de la inflación y la respuesta anticipada de los bancos centrales está permitiendo que los recortes de tasas comiencen más temprano, pero los riesgos se sesgan hacia disminuciones más lentas

October 2023

Rate cut expectations in Latin America Annual policy rate (%) and XP forecasts (dotted line) 15 12 9 6 3 0

Source: Bloomberg, XP

Brazil

Chile

Colombia

Mexico

XP RESEARCH

19

Aún así, la política monetaria en la región está en niveles altamente restrictivos lo que implica que las tasas de interés elevadas seguirán pesando sobre la actividad económica en el corto plazo

October 2023

Monetary policy is significantly restrictive in Latam Ex-ante monetary policy rate (%) 12 10 8 6

4 2

0 -2 Brazil

Chile

Colombia Mexico

Source: National Central Bank, XP

Ex-post

Peru

Uruguay

Ex-ante

Costa Rica

DomRep

10yr avg. (ex-ante)

XP RESEARCH

20

La región tiene que enfrentar tasas de interés más altas por más tiempo, especialmente por las alzas récord de tasas globales, pero el accionar de los bancos centrales evitaron subidas mayores al contener las primas de riesgo

October 2023

... but CDS spreads are not excessively above normal standards 5y CDS spreads (bps)

Interest rates at high levels in Emerging markets...

Bloomberg EM USD Aggregate Yield (%) 9

550 500

8

450 400

7

350

300

6

250

200

5

150 100

4 3 2013

50 0 2013

2014

2015

Source: Bloomberg, XP

2016

2017

2018

2019

2020

2021

2022

2023

2014

2015

Source: Bloomberg, XP

2016

2017

Mexico

2018

2019

Colombia

2020

Chile

2021

2022

Brazil

2023

Peru

XP RESEARCH

21

Igualmente, el correcto accionar de los bancos centrales de la región está evitando un mayor debilitamiento de sus monedas, que también hubiera llevado a tasas de interés más elevadas

October 2023

DXY dollar index

LatAm currencies gave back a good portion of their positive performance in 1H23, but levels are similar to pre-pandemic ones

114

Exchange rate index, Feb 2020=100

The USD has strengthened again and approaching multi-year highs

130 109 104

125

120 115

99 94

110 105 100

89

95

Source: Bloomberg, XP

Source: BBG, XP

LACI Index

XP RESEARCH

22

De todas maneras, los altos niveles de tasas de interés recientes, que continuarán en 2024, reducen el espacio fiscal debido a la elevada deuda que se ha acumulado en los últimos años y que está corrigiendo lentamente

October 2023

Hight debt levels in Latin America Debt to GDP ratio (%) - Latin America and the Caribbean 80 70

60 50 40 30 20 10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 (p) 2024 (p)

0

Source: IMF, XP Source

XP RESEARCH

23

Los déficits fiscales de la región están volviendo a ampliarse en el corto plazo debido a una caída en los ingresos, lo que impide el necesario ajuste a la baja de la deuda pública Government debt in Latam countries

Government revenue in Latin America

Fiscal measures in 16 countries (% of GDP)

% of GDP - 16 countries 24.3

25 20.0 19.9

20.6 21.1 21.1 21.2 21.3 21.1 21.0 21.2

22.9

21.6 21.4

20 15 10 5

18.0 18.2 18.7 18.5 18.3 18.3 18.1 18.1 18.3 18.3 17.6 18.8

19.3 18.4

-0.3 0.1 -0.2 -0.8 -0.9 -0.8 -1.0 -0.7 -0.2 -0.3

0.3 -0.4

-1.6

-3.2 -3.0 -2.7 -2.9

-4.1

-2.3 -3.0

20.0

5

18.8

19.3

3.1

3.1

2.6

14.5

15.7

16.2

15.8

2020

2021

2022

2023 (p)

18.3

17.6

3.1

3.0

15.2

2019

15.0

18.4

10.0

-5 -10

2023 (p)

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

Source: ECLAC, XP

Overall Balance (RHS) Total expenditure

10

5.0

-6.7

0

25.0

0

-4.1 -2.0 -1.7 -1.9 -2.6 -2.8 -2.9

15

October 2023

Total income Primary Balance (RHS)

0.0 Other revenue

Tax revenue

Total revenue

Source: ECLAC, XP

XP RESEARCH

24

Los altos niveles de deuda y de tasas de interés implican mayores costos financieros y menos espacio fiscal para estimular las economías y para atender las mayores demandas por gasto social y de inversión Rising interest payments in Latin America

Rising interest payments in Latin America

(percentage of GDP)

(percentage of tax revenue)

6

35

5

4.2

4.3

4.6

30

4.9

21

4

2.8

3

2

1

1.2

1.6

1.9 1.8

1.9

2.1

0.2

3

20

3.6

2.2 2.1

1.8

1

2.9

16

2.6 15

2.5 1.9

1.9

1.7

2.6 2.0

8

10

5

1.7

0.6

Source: ECLAC, XP

9

11

0

2022

2012

3

Source: ECLAC, XP

21

12

23

25

16

21 14

15

17

18

18 15

11

7

6

1.0

17

23

13

10

9

5

1.1

30

30

25

0

October 2023

2

2022

2012

XP RESEARCH

25

La corrección de los déficits de la cuenta corriente también se frenará el próximo año, lo cual también impide una mayor reducción de los elevados niveles de endeudamiento de la región

October 2023

XP RESEARCH

26

La región sufre de bajos niveles de inversión y el aumento en los costos financieros impedirá que este problema comience a corregirse en los próximos años

October 2023

Investment at low levels in Latin America Investment to GDP ratio (%)

45 40 35 30 25 20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

15

Source: IMF, XP

World EM EM Europe Middle East and Central Asia

Advanced economies EM Asia LatAm Sub-Saharan Africa

XP RESEARCH

27

Los bajos niveles de inversión están pesando sobre el crecimiento económico de largo plazo y esta tendencia seguirá siendo una preocupación clave en los próximos años

October 2023

XP RESEARCH

28

La región también sufre un problema estructural asociado a los bajos niveles de productividad laboral

October 2023

Weak productivity growth in Latin America Output per worker index (USD at PPP, 1991=100) 250

220 190 160 130 100 70 1991

1994

Source: ILO, XP

1997

2000

2003

2006

Latam Asia and the Pacific Africa

2009

2012

2015

2018

2021

Northern America Western Europe Eastern Europe

XP RESEARCH

29

El aumento en los costos financieros también limitará el gasto requerido en inversión social y de capital humano, que son necesarios para atacar los graves problemas de productividad

October 2023

Rise in interest payments limit spending on priority areas Central government interest payments relative to spending in each area (%) - 21 countries in Latin America and the Caribbean 200

185

160

120

76 80

63

62

64

47

46

54

40

0

Education Source: ECLAC, XP

Health

Social protection

Public investment

2012

2021 XP RESEARCH

30

La incertidumbre global ha aumentado significativamente en los últimos años y se mantienen elevada, lo que también pesará sobre el desempeño económico de la región, junto con los rezagos en productividad, y pone en duda si podrá aprovechar el near-shoring y friend-shoring

October 2023

Lagging in competitiveness Rank position, Latam countries in yellow

High levels of uncertainty in developed economies World Uncertainty Index (WUI) 50,000 40,000 30,000

20,000 10,000

1990 1991 1993 1994 1995 1997 1998 2000 2001 2002 2004 2005 2007 2008 2010 2011 2012 2014 2015 2017 2018 2019 2021 2022

0

Source: WUI, XP

Global (simple average)

Emerging economies

Venezuela Argentina South Africa Brazil Colombia Mexico Peru Turkey Poland Philippines Chile Indonesia Hungary India Thailand Malaysia Korea Rep. Saudi Arabia United Kingdom Estonia Belgium Austria Australia Qatar China Taiwan Source: IMD, XP

63 62 60 59

57 55 54 52 50 48 45 44 39

37 33 32 27 24 23 22 21 20 19 18 17 7

0

10

20

30

40

50

60

70

XP RESEARCH

31

XP RESEARCH

32

Costa Rica and Latin America’s Sovereign Ratings & Trends Lisa M. Schineller, Ph.d.

Managing Director & Lead Analyst Sovereign & International Public Finance Ratings

Copyright © 2022 by S&P Global.

All rights reserved.

“Costa Rica’s & Latin America’s Sovereign Credit Ratings & Trends” BAC Credomatic Private Banking Annual Conference New York & San Jose

October 10, 2023

2

A Sovereign Rating •

Reflects the sovereign government’s ability & willingness to service its debt in full and on time

•

Is a forward looking estimate of default probability

•

Is not a recommendation to buy or sell a security or a prediction of the stability or volatility of a security price

•

It’s not an endorsement or a condemnation of a set of governmental policies, except to the extent that they have an impact on ability to service debt

•

Addresses the relative credit standing of governments vs other issuers globally

•

Is not a “Country Rating”

3

Sovereign Ratings Global Trends: More Upgrades, but More Negative Outlooks

September 2023 4

Latam Ratings Lead Downside Risks in EM Sovereigns

July 2023 5

Global Outlook Distribution by Region

Source: Global Sovereign Rating Trends Midyear 2023: Fragile Stability. July 5, 2023 6

Sovereign Outlook Changes during 2023

Source: Global Sovereign Rating Trends Midyear 2023: Fragile Stability. July 5, 2023 7

Global Outlook Distribution by Region

Source: Global Sovereign Rating Trends Midyear 2023: Fragile Stability. July 5, 2023 8

Hit to the Region’s Creditworthiness During 2020

9

Various Challenges for the Region Looking Ahead U.S. Recession risk, Banking Sector pressures, Fed Policy, Geopolitical Uncertainty, Inflation inertia and risks?

Political cycles may generate policy swings, less predictability 2021 Presidential elections Ecuador Peru Chile 2022: Presidential elections Costa Rica, Colombia, Brazil; Chile Constituent Assembly 2023: Presidential elections Argentina, Guatemala, Paraguay; Chile CA take 2; Ecuador 2024: Presidential elections DR, El Salvador, Mexico, Panama, Uruguay --- U.S. [[2026: Presidential Peru]]

Social tensions -- lingering energy and food inflation, higher poverty, informality & underemployment Less fiscal space amid higher debt burdens: level and cost of debt Subdued trend growth, low investment & productivity, and reform fatigue 10

Latin America: S&P’s Economic Forecasts

Economic Outlook Emerging Markets Q4 2023: The Lagged Effects Of Monetary Policy Will Test Resilience, Sep 25, 2023; S&P Global Ratings

11

Sovereign Ratings: Latin America and Caribbean Chile A/A+ Aruba BBB/BBB Peru BBB/BBB+ Turks and Caicos BBB+/BBB+ Mexico BBB/BBB+ Panama BBB/BBB Uruguay BBB+/BBB+ Colombia BB+/BBBCuracao BBB-/BBBMontserrat BBB-/BBBTrinidad & Tobago BBB-/BBB-

Paraguay BB/BB Bahamas B+/B+ Brazil BB-/BBDominican Republic BB/BB Guatemala BB/BB Honduras BB-/BBBolivia B+/B+ Jamaica B+/B+

1. ECONOMIC OUTLOOK

Outlook/CreditWatch: Stable, Positive, Negative

Costa Rica B+/B+ Nicaragua B/B Barbados B-/BBelize B-/BEcuador B-/BEl Salvador CCC+/CCC+ Nicaragua B/B Argentina CCC-/CCCSuriname SD/SD

Source: Ratings as of October 5, 2023 as published on S&P Global’s Global Credit Portal.

Framework For Sovereign Ratings

Source: S&P Global Ratings Services “Sovereign Rating Methodology” as of December 18, 2017 as published on the Global Credit Portal®.

13

Mexico’s ‘BBB’ Sovereign Rating •

Outlook revised to stable July 6, 2022

•

Downgrade & Negative Outlook March 26, 2020

•

BBB+ Negative Outlook March 1, 2019

‘BBB’ Rating: •

Committment to stable macroeconomic policy framework, proactive debt management, track record of fiscal adjustment in an economic downturn

•

Weak trend growth amid poor private sector sentiment and low investment

•

Credible monetary, exchange rate, and trade oriented policies

•

Solid external position, with low current account deficits and a floating peso

•

Moderate general government fiscal burden, excluding Pemex

Fiscal trajectory, considering potential contingent liabiltiies associated PEMEX and limited fiscal buffers, and a business climate that support growths and near-shoring prospects key for future ratings actions

14

Mexico’s Ratings Score Snapshot

15

Brazil’s ‘BB-’ Sovereign Rating •

Outlook revised to positive June 2023

•

Outlook revised to stable April 2020, after revision to positive December 2019

•

Followed downgrade to BB-/Stable in January 2018 on weaker institutional assessment

•

Followed downgrade to BB with a Negative outlook in Feb 2016

•

Followed downgrades September 2015, March 2014, initial negative outlook June 2013

‘BB-’ Rating: •

Recurrent resistance from political class across branches of government for timely, structural corrective fiscal measures

•

Growth prospects below that of peers

•

Large fiscal deficits, spending rigidities, high debt

•

That said, other pillars of macroeconomic policies in place – inflation targeting track record

•

External vulnerabilities generally in check

The pace of growth, fiscal policy correction, debate about CB, and prospects for a fiscal and tax reforms to inform rating dynamics Postive outlook considers pragmatism in fiscal policy making in current administration

16

Brazil Ratings Score Snapshot

17

Argentina’s ‘CCC-’ Sovereign Rating •

FC Ratings lowered to CCC- March 29, 2023 on payment vulnerabilities ; various LC defaults in 2023 on distressed debt exchanges; Outlook Negative

•

FC Ratings raised on September 7, 2020, as global- and local- law FC defaults cured •

May 2020 first global bond set to D as grace period expires

•

April 2020 foreign currency ICR lowered to SD on local law decree

•

January 2020 local currency ratings lowered to SD on distressed debt exchange

•

December 2019 FC rating in & out of default on unilateral extension of ST debt by Fernandez government

•

Long-term ratings of ‘CCC- /Negative’ on Aug. 30th ; FC/LC ICR Ratings lowered to ‘SD’ August 29th after the Macri government unilaterally extended the maturity of all short-term paper.

•

Lowered to ‘B-/Negative’ August 16 after PASO elections

•

Lowered to ‘B/Stable’ November 2018 amid financial market stresses and challenges and support associated with 57$ billion IMF Stand-By Arrangement

‘CCC-’ Rating: •

Despite $100 billion commercial debt restructuring in 2020,challenging local debt profile of $85 billion due in 2023 and large IMF payments

•

Significant macroeconomic imbalances and challenges: high inflation, low growth, large fiscal financing needs, ongoing pressure in the foreign exchange markets, low international reserves.

•

Weak debt culture, growth lower than peers, weak external profile with limited financing options.

•

Absence of confidence in peso underpins dollarization, undermines local capital markets and heightens vulnerability of debt profile

2023 national elections key to future ratings upside – as EFF and ad-hoc pólices have failed to stabilize pronounced macro-imbalances Private & Confidential

18

Argentina Rating Score Snapshot

Economic Assessment: GDP per capita – US$ 25.00

20.00

15.00

10.00

5.00

0.00 Peru

Panama

Mexico 2011-2021

Colombia 2022

2023

Chile

Brazil

Argentina

2024 Private & Confidential

20

Economic Assessment: Real GDP growth (%) 12.00

10.00

8.00

6.00

4.00

2.00

0.00 Peru

Panama

Mexico

Colombia

Chile

Brazil

Argentina

(2.00)

(4.00)

(6.00) 2011-2021

2022

2023

2024

Private & Confidential

21

External Assessment: Narrow net ext. debt / CAR (%) 200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Peru

Panama

Mexico

Colombia

Chile

Brazil

Argentina

(20.00) 2011-2021

2022

2023

2024

Private & Confidential

22

External Assessment: Gross ext. fin. needs/CAR + use. res.(%) 200.00

180.00

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00 Peru

Panama

Mexico 2011-2021

Colombia 2022

2023

Chile

Brazil

Argentina

2024

Private & Confidential

23

Fiscal Assessment: Gen. Government balance / GDP (%) 2.00

1.00

0.00

(1.00)

(2.00)

(3.00)

(4.00)

(5.00)

(6.00)

(7.00)

(8.00) Peru

Panama

Mexico

Colombia 2011-2021

2022

2023

Chile

Brazil

Argentina

2024

Private & Confidential

24

Fiscal Assessment: Net Gen. Government debt / GDP (%) 100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00 Panama

Mexico

Colombia 2011-2021

Chile 2022

2023

Brazil

Argentina

2024

Private & Confidential

25

Fiscal Assessment: Gen. Govt. interest / GG revenues (%) 20.00

18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00 Peru

Panama

Mexico 2011-2021

Colombia 2022

2023

Chile

Brazil

Argentina

2024

Private & Confidential

26

Costa Rica’s ‘B+’ Sovereign Rating Upgrade February 2023 to ‘B+’, Stable Outlook Outlook revised to Stable from Negative on ‘B’ Rating March 2022

Previously, Negative trajectory since 2016 with Downgrade June 2020 to ‘B’/Negative: •

December 2018 ‘B+’/Negative

•

February 2016 ‘BB-’/ Negative

‘BB’/Stable Rating Assigned 1997, Positive/Stable/Negative outlooks through early 2016 ‘B+’ Rating: •

Implementation of 2018 fiscal reform gained traction, generated primary surplus in 2022 --- looking better expected in 2023 thus far

•

Progress passing / implementing measures under EFF – will continue?

•

Multi-year borrowing authority to tap global capital markets

•

Fragmented National Assembly and legislative procedures have held back timely corrective policy measures

•

Growth story benefiting from export dynamism – nearshoring?

•

Low inflation and greater exchange rate fluctuation 27

Costa Rica’s Stable Outlook Upside scenario Conversely, we could raise the ratings over the next 12 months if the government and the Legislative Assembly maintain fiscal measures that have supported deficit reduction. Success thus far has stemmed from implementation of the 2018 reform. The public employment reform due to come into effect this year is expected to play a role. Such steps would likely underpin investor confidence, and sustain access to the local market and external (official and capital market) borrowing. In the complex global climate, Costa Rica appears to be benefiting from nearshoring or friend-shoring. Strength in foreign direct investment (FDI) and exports, associated with special trade zones and tourism, could reduce the country's external vulnerability, supporting growth and fiscal performance. These factors could lead to an upgrade.

Downside scenario We could lower the ratings over the next 12 months if policy reversals or fiscal implementation setbacks threaten smooth debt management. While the government's funding needs have declined as deficits have come down, they remain high at around 9.5% of GDP this year and next. Success in tapping global capital markets on favorable terms this year would likely be predicated on signals of continued fiscal commitment and compliance with IMF reviews. If policy setbacks occur, recourse to the central bank or other unconventional financing could cause us to view the country's institutional framework and ability to support public finances less favorably--despite widespread checks and balances and a solid democratic tradition--and lead us to lower the ratings.

28

Costa Rica Ratings Score Snapshot

29

Costa Rica Ratings Score Snapshot

30

Costa Rica – External Profile Current account balance / GDP (%) 0.00

(1.00) (2.00) (3.00) (4.00) (5.00) (6.00) (7.00) (8.00) (9.00) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Narrow net ext. debt / CAR (%) 50.00 45.00 40.00 35.00 30.00 25.00

20.00 15.00 10.00 5.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

31

Costa Rica – Fiscal Profile GG balance / GDP (%) 4.00 2.00 0.00 (2.00) (4.00)

(6.00) (8.00) (10.00) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Net GG debt / GDP (%) 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

32

Institutional Assessment Our analysis focuses on: • The effectiveness, stability, and predictability of policymaking and political institutions • The transparency and accountability of institutions, data, and processes • The payment culture • External security risks • The impact of external organizations on policy settings

33

Costa Rica’s Institutional Assessment • Longstanding, solid democracy with smooth transition process • Checks and balances ➢ Active judiciary, Attorney General, Comptroller General

• Low levels of corruption • Accession to OECD underscores institutional strengths • Absence of social conflict seen in some regional peers • Proactive containment of COVID • Coalition government amid fragmented Congress underscores challenges and need for cross party negotiation • Slow progress on structural corrective fiscal measures over last decade

Alvarado administration passed 2018 reform & Chaves administration maintained solid execution so far – will the fiscal effort weaken?

34

Economic Assessment Our economic assessment focuses on: • Income levels • Growth prospects • Economic diversity and volatility

“Trend” or “medium-term” growth prospects • Diversified, competitive, trade-oriented • Strength of the private sector • Depth of local capital markets • Stable investment climate

35

Costa Rica’s Economic Assessment • Middle income country: PC GDP about $15,000 • Growth had trended slightly lower, now near average ➢ 2018 to 2020 confidence crisis, VAT implementation, pandemic

➢ 2021 to 2022 rebound from pandemic & nearshoring

• • • •

Open & diverse economy: trade, tourism, FDI, & global supply chains ‘Pura Vida’ trademark Infrastructure, business and labor regulation challenges Competitiveness of financial and electricity sectors

How robust is trend growth?

Is near-shoring impacting growth nation-wide?

Will OECD accession generate competitiveness gains?

36

GDP per capita (thousand US$) 18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00 Nicaragua

Honduras

Guatemala 2011-2021

El Salvador 2022

2023

Dominican Republic

Costa Rica

2024

37

Growth in Real GDP (%) 6.00

5.00

4.00

3.00

2.00

1.00

0.00

Nicaragua

Honduras

Guatemala

2011-2021

El Salvador

2022

2023

Dominican Republic

Costa Rica

2024

38

External Assessment

Our external assessment focuses on: •

The currency’s status in international transactions.

•

A country’s external liquidity, which speaks to the capacity of the economy to generate the foreign exchange necessary to meet its (public and private sector) obligations to nonresidents.

•

A country’s external indebtedness, which shows residents’ assets and liabilities (in both foreign and local currency) vis-à-vis the rest of the world.

39

Costa Rica’ External Assessment • Costa Rica’s Colon not a reserve or actively traded currency • External financing needs stable as share CAR & international reserves • Current account deficits generally covered by FDI • Narrow net external debt burden reflects ➢ Higher public sector external debt (wider fiscal deficits) ➢ Borrowing from market & MLIs ➢ IMF RFI for budgetary support, EFF, RSF ➢ IBRD, CABEI, CAF, IADB, AGF ➢ Risks of smooth market access and financing pressure

40

External Debt Net of Liquid Assets/ CAR (%) 120.00

100.00

80.00

60.00

40.00

20.00

0.00 Nicaragua

Honduras

Guatemala 2011-2021

El Salvador 2022

2023

Dominican Republic

Costa Rica

2024

41

Gross External Financing Needs/CAR + Usable Reserves (%) 140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00 Nicaragua

Honduras

Guatemala 2011-2021

El Salvador 2022

2023

Dominican Republic

Costa Rica

2024

42

Fiscal Assessment Our fiscal assessment focuses on: •

Fiscal flexibility

•

Fiscal trends and vulnerabilities

•

Debt structure and funding

•

Contingent liabilities

43

Costa Rica’s Fiscal Assessment • Fiscal deficits trended higher on increased spending ➢ 8% in 2020; to 4.6% in 2021 to 2% in 2022 and 3.2% over forecast ➢ Average 5% of GDP 2010-2019 vs. 2.5% 2000-2009 ➢ GG revenue base steady at 25% of GDP ➢ GG primary deficit averaged over 2% of GDP 2015-2020, but a surplus in 2022

• Higher debt burden exceeded 60% of GDP beginning 2020 ➢ Debt/GDP more than doubled last ten years ➢ Interest / revenues more than doubled last ten years (to 19%) ➢ Procedural rigidities in debt management (including MLI loans) ➢ Higher foreign currency & external borrowing

• Passage of 2018 fiscal reform ➢ Broader income tax base and shift to VAT ➢ Spending rule has supported fiscal policy execution

• Limited contingent liabilities from financial sector and NFPEs 44

General Government Balance (% of GDP) 2.00

1.00

0.00

(1.00)

(2.00)

(3.00)

(4.00)

(5.00)

(6.00) Nicaragua

Honduras

Guatemala

2011-2021

El Salvador

2022

2023

Dominican Republic

Costa Rica

2024

45

Net General Government Debt (% of GDP) Chart Title 80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00 Nicaragua

Honduras

Guatemala 2011-2021

El Salvador 2022

2023

Dominican Republic

Costa Rica

2024

46

General Government Interest / Revenues (%) 25.00

20.00

15.00

10.00

5.00

0.00 Nicaragua

Honduras

Guatemala 2011-2021

El Salvador 2022

2023

Dominican Republic

Costa Rica

2024

47

Monetary Analysis Our monetary analysis focuses on:

• The ability to use monetary policy to buffer economic conditions and address liquidity pressures.

• The credibility of monetary policy, particularly as measured by inflationary trends.

• The effectiveness of monetary tools in affecting the real economy, as gauged by the depth and diversification of the financial sector and local currency debt markets.

48

Costa Rica’s Monetary Assessment • Inflation targeting regime: 3.0 +/- 1.0% • Managed, floating-exchange rate regime since 2015 • Inflation has shifted lower ➢ Average inflation of over 10% until 2008 ➢ Since then around 3% on average

• Central Bank cut rates to historic low 1.25% amid pandemic then raised to 9% amid run-up in inflation in 2022, easing cycle since March 2023 • Dollarization of deposits & loans down at 40% ➢ Still weighs on monetary and exchange rate flexibility ➢ Unhedged borrowers in tourism and construction

• Shallow local currency fixed income & equity market; credit/GDP about 50% 49

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50

Octubre 2023

Costa Rica: Perspectivas y Oportunidades Plan y trayectoria hacia el grado de inversión

Siobhan Morden – Head of Fixed Income Sovereign Strategy

Santander US Capital Markets LLC

Strictly Confidential

La calificación no es la determinante única de la valoración 

El valor de escasez dentro de la categoría de calificación de BB. Hay una diferenciación clara en valoración entre los créditos líquidos e ilíquidos (Costa Rica/Guatemala vs Republica Dominicana)



Los soberanos donde hay un stock de bonos más grande (~$30bn) hay una penalidad de liquidez mientras los soberanos con un stock de bonos más bajo ($5-$7bn) se beneficia de su iliquidez (inversionistas buy/hold y menos transacciones por menos liquidez)

9.0

9.0

Liquid BB credits (yield, duration, size)

8.5

8.5

8.0

8.0

7.5

7.5

7.0

7.0

6.5

6.5

6.0

6.0

5.5

5.5

5.0

5.0

4.5

4.5

4.0

4.0

3.5

3.5

3.0

La valoración no depende solo de la calificación – La penalidad de liquidez

Illiquid BB credits (yield, duration, size)

3.0 0

1

2

3 DOMREP

4

5

6

7 COLOM

8

9

10

11 BRAZ

12

13

14

0

1

2

3 PARA

4

5

6

7 GUAT

8

9

10

11

12

13

14

COSTAR

Source: Bloomberg

La influencia de las agencias de calificación 

El mercado tiene más influencia de los créditos más grandes. Por su mayor peso en los índices, los inversionistas tienen mayor obligación de mayor análisis. También tienen influencia los inversionistas más activos. Más eficaz en valoración.



Hay mayor tendencia de desinformación de los créditos más pequeños - caso Costa Rica en 2023 - cuando la calificación tiene mayor influencia y no reconoce una transformación. Es caso de análisis fluido o estático.

EMUSTRUU % country weighting

Eurobond total debt issuance ($mns)

13 12 11 10 9 8 7 6 5 4 3 2 1 0

Hay problema de información asimétrica por los créditos más pequeños?

Análisis fluido o estático.

9.0% 8.0% 7.0% 6.0% 5.0% 4.0%

3.0% 2.0% 1.0% 0.0% MEXI COLO

DOMR

COST

BRAZ

CHIL

COLO

ARGE

PANA

PERU DOMR GUAT

COST

GUAT

Source: Bloomberg

La convergencia con créditos de calificación BB 

Costa Rica se benefició de una subida de 2-notches en su calificación de Fitch este año después de la convergencia con los créditos de calificación BB.



Fue el único crédito del EMUSTRUU con rendimiento positivo en 2022. También sigue con mayor rendimiento relativo este año.



Ya no hay críticas de la valoración relativa. El debate ahora es cuando Costa Rica puede lograr su grado de inversión.

Credit rating action 2020-2023 upgrade/downgrade (+1/-1)

200

3.0

175

2.0

150

1.0

La transformación a calificación del BB en 2023.

125 100

0.0

75

-1.0

50

-2.0

25 0

-3.0

-4.0

-25 Aug-22

Oct-22

Dec-22

Feb-23

COSTAR-45-GUAT'50

Apr-23

Jun-23

Aug-23

COSTAR'45-PARA'44

Source: Bloomberg

La trayectoria hacia el grado de inversión por Costa Rica. (B2/B+/BB-) 

No hay ningún otro país en la región o incluso en el mundo que haya convertido un déficit primario fiscal de 2.6% de PIB en 2018 a un superávit de 2.3% de PIB en 2022. Este representa un ajuste cumulativo de 5% de GDP durante 4 años e incluso tras el choque de COVID. No solo es impresionante el monto de ajuste, pero, en mi perspectiva, representa el comienzo de un ajuste permanente.



Costa Rica es un país con institucionalidad y normas democráticas bien establecidas. La regla fiscal ha sido sometida a varias pruebas legislativas y aun así ha demostrado gran resiliencia. Hay apoyo popular por mantener el ancla fiscal establecida por el FMI así como por los partidos políticos y por otros sectores de la sociedad. La reforma del empleo público contribuirá a un mayor ajuste fiscal.



Por estas razones, hay muy bajo riesgo de desviarse del superávit de 2% de PIB, factor que mantendrá la trayectoria firme de reducir el peso del déficit fiscal.



La economía es sana y se beneficia del crecimiento alto y diversificación, de la inflación baja y estable, y de ingresos fuertes de inversión extranjera, así como de un tipo de cambio flexible. Costa Rica también era ESG antes que existiese este concepto. Es un país incomparable con instituciones fuertes, trayectoria ambiental sin igual e indicadores sociales fuertes.



Si bien se puede debatir sobre la velocidad de convergencia hacia grado de inversión de Costa Rica y que país llega primero dentro del CAC, no hay duda de que el país mínimo, merece un grado de BB.

La trayectoria hacia el grado de inversión por Costa Rica – Indicadores Positivos Costa Rica primary fiscal performance (% GDP)

4%

Primary balance 2022 % GDP

2.5%

2.0% 3%

1.5%

2%

1.0% 0.5%

1%

0.0% 0%

-0.5%

-1%

-1.0% -1.5%

-2%

-2.0% -2.5%

-3%

-3.0%

5.2 4.8

2022

2021

5.0

4.8

4.5

4.4

4.2

4.0

3.6

3.4

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

-4%

3.4

3.4

3.0 2.1 1.3

2016

2017

2018

2019

Déficit en cuenta corriente

1.0

2020

2021

Inversión directa

2022

CAC economic activity (%y/y)

11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

2023 Costa Rca

DomRep

Guatemala

El Salvador

Source: Bloomberg, https://www.hacienda.go.cr/, https://www.bccr.fi.cr/

La trayectoria hacia el grado de inversión por Costa Rica – las preguntas 

¿La transformación? Paquetazo fiscal – no hay comparación en la región de tanto ajuste fiscal. Este es el ancla y fue la única debilidad. La parálisis de política económica es aceptable.



¿Los riesgos? Las instituciones son más fuertes que los individuos. No hay consenso para debilitar el ancla fiscal. También hay flexibilidad de la reforma del empleo público.



¿El grado de inversión? Plan y trayectoria. No es una solución rápida. Tiene que bajar el peso de deuda desde 60% del PIB a niveles como 40%-50% del PIB para inmunizar contra choques. Este proceso es gradual pero firme.



¿El motivo de mejorar la credencia? El servicio de deuda es grande de ~4% del PIB que complica la rigidez presupuestaria. Es un momento más difícil dado el mayor costo de financiamiento global.



¿La comparación relativa de Perú? El mercado va a anticipar el grado de inversión – hay posibilidad de una tendencia de divergencia. Hay otros países en la región con plan, pero no con la misma firme trayectoria. El impacto es fuerte si logran una calificación del grado de inversión de dos agencias – representa un choque fuerte de mayor acceso de inversionistas y una reducción del premio de riesgo.

La trayectoria hacia el grado de inversión por Costa Rica – los desafíos interest/revenues

IMF projections of primary fiscal (% GDP)

3.0%

40% 2.0%

35% 30%

1.0%

25%

0.0%

20%

-1.0%

15% -2.0% 10% -3.0%

5%

-4.0%

0% 2019

2020

2021

2022

2023

2024

2025

2026

2027

2019

2028

2020

2021

2022

2023

2024

2025

2026

2027

2026

2027

2028

Central government debt % GDP 80%

350

70%

300

60% 250

50% 200

40% 150

30%

100

20%

50

10% 0%

0 0

1

2 GUATEM

3

4

5 PERU

6

7

8

PANAMA

9

10

11

PARAGUAY

12

13

14

COSTAR

15

16

2018

2019

2020

2021

2022 ago.-23 2024

External debt

2025

2028

IMF estimates

Source: Bloomberg, https://www.hacienda.go.cr/, IMF

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This commentary is provided as of the date and time thereof, and Santander does not undertake any responsibility to update or revise any of the information contained herein, which may change without notice. Past performance is not indicative of future results.

Certain information contained herein may use indicative valuations based on certain market conditions and information that can be subject to further verifications, amendments or additions. Clients and /or investors are advised to make an independent review of the information and financial facts included in this document.

This document is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Each party should seek independent financial advice regarding the suitability and/or appropriateness of making an investment or implementing the investment strategies discussed in this document and should understand that statements regarding future prospects may not be realised. Each party should note that income from investments, if any, may fluctuate and that the value of such investments may rise or fall, accordingly, they may receive back less than they originally invested. Although the information set forth herein is reflective of the manner in which Santander believes a transaction might be structured, no assurance can be given that such a transaction could, in fact, be executed as described herein.

Santander and associated personnel may (a) act in several capacities (including hedging activity and trading positions) in financial instruments which may adversely affect any investment performance referred to herein; (b) provide oral or written market commentary or trading strategies to its clients that reflect opinions that may be contrary to those in the materials discussed herein; (c) act upon the contents of this publication prior to your having received it; (d) and/or effect transactions which are not consistent with the materials discussed herein.

To the fullest extent permitted by law, no Santander group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this document. In addition Santander does not state or guarantee in any manner whatsoever the accuracy, adequacy or comprehensiveness of the information contained in this document and expressly waives any responsibility arising from any lack of accuracy, comprehensiveness and adequacy of the information contained in this document.

Please note the publication date of this document. It may contain specific information that is no longer current and should not be used to make an investment decision. Unless otherwise indicated, there is no intention to update this document. This conference may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of Santander.

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