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The more things change, the more they stay the sameEmerging Markets Research GroupPaul Biszko, Nick Chamie(416) 842-2802November 24, 2006

For Required Disclosures, please see page 12.

This report is priced as of market close November 22, 2006 EST.All values in U.S. dollars unless otherwise noted.

EMERGING MARKETS07Q1 - ASSET CLASS VIEWS

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2

Emerging markets on fire

EMBI+ holding near all-time tights

Discussion Points

EMBI+ closing in on another strong yearof gains (+9.2% total return, -55bp year-to-date)

Drivers: positive (+) global appetite forrisk (supported by above-trending globalgrowth, elevated commodity prices and still

abundant liquidity), + asset classtechnicals and + internal fundamentals

Externally-driven EM valuation correctionlikely not major sell-off over the coming 6to 12 months , as the external backdropturns less supportive

Emerging markets currently priced-to-perfection, exposing the asset class toexternal or internal hiccups

End-2007 EMBI+ forecast: 230bp

0

250

500

750

1000

1250

1500

1750

2000

J a n -

9 1

A u g - 9

2

M a r - 9

4

O c t - 9

5

M a y - 9

7

D e c - 9

8

J u l - 0 0

F e b - 0 2

S e p - 0

3

A p r - 0

5

N o v - 0

6

bps market at historically tight levelsaverage

EMBI /EMBI+spread698bp

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U.S. soft landing priced into expectations

leaving room for disappointment

Discussion Points

Global growth re-balancing expected in2007 from U.S. to Asia and Europe

RBC 2007 G3 GDP forecasts : U.S. 2.6%,Japan 2.1%, Eurozone 2%

=> thus, Emerging Europe (5.2%) andEmerging Asia (7.9%) economies areexpected to outperform Latin America(3.9%) next year

Harder-than-expected U.S. economiclanding the key risk to emergingeconomies next year (Mexico would bemost vulnerable in this scenario). Negativedata may not filter through until Q1 or Q2

0

1

2

3

4

5

6

7

8

910

1993 - 2003

avg

2004 2005 2006F 2007F

G D P g r o w

t h %

Latin America Emerging Asia

Emerging Europe G3

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Global liquidity backdrop tightening

Risks point to higher global rates

RBC forecasts - US, EU-12, Japan

06Q3 06Q4f 07Q1f 07Q2f 07Q3f 07Q3fFed Funds 5.25% 5.25% 5.25% 5.25% 5.00% 4.75%

UST-10yr 4.62% 4.85% 5.00% 4.95% 4.90% 4.80%BCB Min. bid 3.00% 3.50% 3.75% 4.00% 4.00% 4.00%

Japan-call 0.25% 0.50% 0.50% 0.75% 0.75% 0.75%

Discussion Points

U.S. Fed done, BoJ (+50bp in rate hikesstill forecast) and ECB (+75bp) still intightening mode

Clear signs of tightening global liquidityemerging: G7 real interest rates now @2%, higher than 1.7% average since 1990

Key to watch is rates in ultra-low zones (i.e.Japan, Switzerland, etc.) moving up faster-than-expected, potentially spurring a newde-leveraging cycle / re-pricing of globalcredit / risk markets

-2

0

2

4

6

810

12

14

16

1981 1986 1991 1996 2001 2006

%

0

200

400

600

800

10001200

1400

1600

1800bpsG7 Nominal Interest Rates (GDP weighted) LHS

G7 Real Interest Rates (GDP Weighted) LHS

EMBI / EMBI+ spread index RHS

Global Liquidity (M1 - nominal GDP, G3 GDP-weighted)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1992 1993 1995 1996 1998 1999 2001 2002 2004 2005

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Gulf petrodollar and Asian central bank liquidity helping

New money putting money backto work in EM

Discussion Points

Elevated oil prices, rising trade surplusesand strong capital inflows in the last 3 yearshave fuelled a significant shift in wealth /FX reserve build-up in the Middle-eastand Asia

but unlike past booms, money is beingre-invested internally within otheremerging markets to a much greater pro-portion

Key drivers: diversification away from USD,search for higher absolute returns, U.S.

Patriot Act, tighter money flow restrictions inthe U.S. and Europe

GULF CO-OPERATION COUNCIL + IRAN

-50

0

50

100

150

200

250

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006f

Current account balance (USDbn)

Fiscal balance (USDbn)

-500

0

500

1000

1500

2000

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6 F

Current Account Balance (USDbn)

FX reserves ex-gold (USDbn)

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Strategic money pouring in

EM still seen as under-investedasset class

Discussion Points

~$40bn in excess sovereign external debtdemand relative to supply in 2006

Strategic inflows from pension funds,global fund managers and central banksplaying (and likely to continue playing) a

pivotal role in fuelling new demand forEM: estimated at $20bn - $25bn this year(2/3 rds allocated to local markets)

2007 outlook: flow of funds likely toremain supportive. New sovereign supplyexpected to fall by $10bn-$15bn due to pre-

financing, lower external financing needs,buy-backs, shift from external to localissuance, which is likely to be offset onlypartially by greater corporate supply

Local markets more vulnerable to a re-tracement in risk appetite than external

debt

-

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006F

USDbn Coupon & amortization flow

Strategic inflowRetail inflowSovereign issuance net of buybacks

Sovereign External Debt

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Financial market volatility extremely subdued

VIX trending at decade-low

Discussion Points

VIX currently hovering near 10, a levelnot seen since 1996

however, global financial market volatilityis likely to pick-up in 2007, as the globaleconomy slows, commodity prices ease andglobal liquidity conditions tighten further

The VIX indicator will continue to bearclose watching , as historically spikes in theVIX have coincided with weakness inemerging markets

0

5

10

15

20

25

30

35

40

45

J a n -

0 0

A u g - 0

0

M a r - 0

1

N o v - 0

1

J u n -

0 2

J a n -

0 3

S e p - 0

3

A p r - 0

4

D e c - 0

4

J u l - 0 5

F e b - 0 6

O c t - 0

60

200

400

600

800

1000

1200

VIX (LHS)

EMBI+ bps (RHS)

market volatility at multi-year lows

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Vulnerable if equity rally cracks

EMs near-term fate closely tied tomovements in other global credit /

risk markets

Discussion Points

EM debt and U.S. equities have tradedwith a very tight 0.85 to 0.9 correlationsince the beginning of September

Thus, profit-taking in U.S. equities or otherglobal risk markets is likely to also trigger acorrection in emerging market debt and localmarkets (the latter being more vulnerablethan the former given they have received amuch larger share of inflows, some of whichare in less stable hands)

40-Day Return Correlation:

EMBI+ vs NASDAQ; EMBI+ vs DJIA

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

5/18/06 6/17/06 7/17/06 8/16/06 9/15/06 10/15/06 11/14/06

NASDAQ DJIA

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Credit trends supportive

Credit trends still best relativeto G7 peers

Discussion Points

EM debt (corp and sov) upgrades haveexceeded downgrades for 13 consecutivequarters; this trend is unlikely to breakanytime soon

Downgrade ratio (downgrades / total rating

actions) in EM debt (25%) was well belowU.S. (60%) corporate debt in the first threequarters of 2006

Sovereign upgrade candidates (next 6-12months) : Brazil, Colombia, Mexico,Philippines, Russia and Ukraine

Sovereign downgrade candidates (next 6-12 months) : Ecuador, Hungary

0

20

40

60

80

100

120

0 1 Q 3

0 2 Q 1

0 2 Q 3

0 3 Q 1

0 3 Q 3

0 4 Q 1

0 4 Q 3

0 5 Q 1

0 5 Q 3

0 6 Q 1

0 6 Q 3

(%)

0

20

40

60

80

100

120

# o f a c

t i o n s

Upgrades (RHS)

Downgrades (RHS)

Downgrades Ratio (LHS)

EM debt default rate: 1.8%EM debt avg. recovery rate: 33% (weighted by issue)* data since 1990

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