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U.S. investors’ inquiries should be directed to Santander Investment at (212) 350-0707.

July 7, 2010

ECONOMICSEconomics Research

Ernest W. (Chip) Brown, Head

212-583-4663 [email protected]

BRAZIL

Who Wants to Be a Millionaire?

Alexandre [email protected]

• Those who follow the evolution of fiscal accounts in Brazil closely surely have noticed something about the interest

payments on the public sector debt. After a significant (and more or less steady) decline from about 9.5% of GDP in

3Q03 to little less than 5% of GDP in 3Q09, interest payments have started to increase again, standing at 5.4% of GDP during the 12-month period ended in May 2010.

• The implicit cost of net domestic federal debt used to follow quite closely the movements of the Selic rate, but the

correlation broke down in the past two years: while the policy rate declined, the implicit debt cost has gone up. This

development, however, has occurred against a backdrop of lower interest rates and a reduced net debt, which is

something of a puzzle.

• In order to solve this puzzle we put forward the following hypothesis: the rise in interest payments results from the

negative spread between the interest rates received by the government and the interest rate it pays on its debt. This

spread was less important until 2008, when government assets were smaller, but has become more relevant in the

last two years, as government lending to BNDES jumped from 0.5% to more than 6% of GDP.

• An alternative explanation could be the change in the debt profile, resulting from a higher share of fixed interest

rate and inflation linked securities at the expense of Selic-linked notes. Yet, once we include the Central Bank reposin the picture we cannot find a significant difference between the debt profile in 2004-2007 (when the correlation

between the debt cost and the Selic rate was positive and high) and during the 2008-2010 period, when the

correlation broke down.

• With the help of a simple example we find that the implicit debt cost would be close to the Selic rate if one of the two

conditions is valid: (1) the spread between the Selic rate and the return on government is small; or (2) the ratio

between government assets and the net debt is small. The first condition is typically not true, but it was the second

one that ceased to be valid in 2008-2010 on the back of the fast expansion of National Treasury credits to BNDES,

which rose from about 1% of the net debt to 12% of the net debt in that period.

• The negative correlation between the Selic rate and the implicit debt cost observed in the past two years is not,

however, a structural feature. As the spread between the Selic rate and the rate at which the government lends to

BNDES rises, the implicit cost should go up as well, an effect now likely to be magnified by a higher share of BNDEScredits relative to net debt.

• Our calculations do not take into consideration an additional channel. Given that increased funding leads to BNDES

leads to higher lending, it should expand domestic demand, requiring an additional effort in terms of the Selic rate

than it would be necessary in the absence of such policy. Hence, the spread between the Selic rate and the rate at

which the government lends to BNDES is likely to rise even more, leading to a further increase in the interest bill.

Those who follow closely the evolution of fiscal accounts in Brazil surely have noticed something about the interest payments

on the public sector debt. After a significant (and more or less steady) decline from about 9.5% of GDP in 3Q03 to little less

than 5% of GDP in 3Q09, interest payments have started to increase again, standing at 5.4% of GDP during the 12-month

period ended in May 2010. This development is hard to square with the slight decline of the net debt relative to the levels



observed in 3Q09 and the stability of the Selic from 3Q09 until the beginning of 2Q10.

July 7, 2010 2

1 There must be something odd going on

when interest payments rise while the debt has declined and interest rates barely budged.

Interest on debt - % GDP

4.5%

5.5%

6.5%

7.5%

8.5%

9.5%

J a n - 0 0

M a y

- 0 0

S e p - 0 0

J a n - 0 1

M a y

- 0 1

S e p - 0 1

J a n - 0 2

M a y

- 0 2

S e p - 0 2

J a n - 0 3

M a y

- 0 3

S e p - 0 3

J a n - 0 4

M a y

- 0 4

S e p - 0 4

J a n - 0 5

M a y

- 0 5

S e p - 0 5

J a n - 0 6

M a y

- 0 6

S e p - 0 6

J a n - 0 7

M a y

- 0 7

S e p - 0 7

J a n - 0 8

M a y

- 0 8

S e p - 0 8

J a n - 0 9

M a y

- 0 9

S e p - 0 9

J a n - 1 0

M a y

- 1 0

Interest rates & net debt

8%

13%

18%

23%

28%

33%

J a n - 0 0

M a y - 0

0

S e p - 0 0

J a n - 0 1

M a y

- 0 1

S e p - 0 1

J a n - 0 2

M a y

- 0 2

S e p - 0 2

J a n - 0 3

M a y

- 0 3

S e p - 0 3

J a n - 0 4

M a y

- 0 4

S e p - 0 4

J a n - 0 5

M a y - 0

5

S e p - 0 5

J a n - 0 6

M a y - 0

6

S e p - 0 6

J a n - 0 7

M a y - 0 7

S e p - 0 7

J a n - 0 8

M a y - 0

8

S e p - 0 8

J a n - 0 9

M a y - 0

9

S e p - 0 9

J a n - 1 0

M a y - 1

0

I n t e r e s t r a t e - % p e r a

n n u m

35%

40%

45%

50%

55%

60%

N e t d e b t - %

G D P

Selic (left)

360-day swap (left)

Net debt (right)

Source: Central Bank.

The implicit cost2 of net domestic federal debt used to follow quite closely the movements of the Selic rate; even though there

have always been differences between the level of the debt cost and the Selic rate, they tended to move in line, in particularwhen we concentrate on the net domestic federal debt cost. As shown below, the observed correlation between the 12-month

average of the net domestic federal debt cost and the 12-month average of the Selic rate approached 0.9 between 2004 and

2007, becoming, however, significantly negative at -0.6 between 2008 and 2010 (actually the 12-month period ended in May

2010). That is, the decline of domestic interest rates since late 2008 did not result in a correspondent reduction in the debt cost

estimates for most of the period after 2007.

Federal debt cost vs Selic (12-month)

8

13

18

23

28

33

J a n - 0 4

M a y

- 0 4

S e p - 0 4

J a n - 0 5

M a y

- 0 5

S e p - 0 5

J a n - 0 6

M a y

- 0 6

S e p - 0 6

J a n - 0 7

M a y

- 0 7

S e p - 0 7

J a n - 0 8

M a y

- 0 8

S e p - 0 8

J a n - 0 9

M a y

- 0 9

S e p - 0 9

J a n - 1 0

M a y

- 1 0

Net federal debt

Net domestic federal debt

Selic

1 It is true that the 360-day swap rate did increase from 9% per annum to about 12% per annum in the period, but note that this would have had an impact only in the new prefixed debt issued

between 3Q09 and 2Q10, which would hardly explain the rise in interest payments.2 The implicit cost of government debt is estimated by the Central Bank. Using the detailed information currently available only to the Central Bank, it estimates the implicit debt cost as the

ratio of interest payments and the debt. Specifically, in the case at hand, the Central Bank calculates the cost of the net domestic federal debt as the ratio between net interest (interest accrued

on the debt deducted interest accrued on the federal government assets) and the net domestic federal debt.



July 7, 2010 3

Domestic federal debt cost x Selic (2004-07)

14

16

18

20

22

24

26

28

30

11 13 15 17 19 21 23

Selic

D o m e s t i c

f e d e r a l d e b t c o s t

Domestic federal debt cost x Selic (2008-10)

9

10

11

12

13

14

15

8 9 10 11 12 13

Selic

D o m e s t i c

f e d e r a l d e b t c o s t

Sources: Central Bank and Santander estimates from Central Bank data.

In order to solve this puzzle we put forward the following hypothesis: the rise in interest payments results from the negative

spread between the interest rates received by the government and the interest rate it pays on its debt. This spread was less

important until 2008, when government assets were smaller, but has become more relevant in the last two years, as governmen

lending to BNDES jumped from 0.5% to more than 6% of GDP.

Of course, this pattern could have originated from the change in the government debt structure, namely the increase in the share

of government securities whose yield is not directly linked to the Selic rate – the prefixed debt (LTNs and NTN-Fs) and

inflation linked debt (NTN-Bs and NTN-Cs) at the expense of Selic linked debt (LFTs). As more debt had been contracted at

fixed rates, it would be only natural to observe a lower correlation between the overnight rate and the debt cost. A closer look,

however, suggests that this is unlikely to have led to the dramatic change in the correlation observed above.

Whereas it is true that the National Treasury has made a substantial effort to reduce the share of Selic-linked securities, a

somewhat wider definition of the federal domestic debt, which also includes the repo operations through which the Centra

Bank regulates the money supply, reveals that the change in the debt structure becomes less impressive once we include the

repos in the picture. The share of Selic-linked notes indeed reduced from nearly 50% to 29% of the federal debt in between

December 2004 and May 2010, but, during the same period, repos jumped from 5.5% to 18% of the debt. Taken jointly, we stil

observe a reduction in overnight-linked debt, from 55% to 47%, but not that remarkable. Moreover, looking at the 2004-2007

average versus the 2008-20100 average, which would be the relevant comparison to understand the different performance in

these periods, we find a very modest reduction in overnight-linked debt (LFTs and repos), from 49% to 48%, while the share of

prefixed and inflation-linked securities rose from 47% to 50%.

Federal debt duration (excluding repos)

Dec-03

Dec-07

0

5

10

15

20

25

30

J a n - 9 8

J u l - 9

8

J a n - 9 9

J u l - 9

9

J a n - 0 0

J u l - 0

0

J a n - 0 1

J u l - 0

1

J a n - 0 2

J u l - 0

2

J a n - 0 3

J u l - 0

3

J a n - 0 4

J u l - 0

4

J a n - 0 5

J u l - 0

5

J a n - 0 6

J u l - 0

6

J a n - 0 7

J u l - 0

7

J a n - 0 8

J u l - 0

8

J a n - 0 9

J u l - 0

9

J a n - 1 0

M o n t h s


In other words, the federal debt duration figures above overstate, to some extent, the actual increase in duration, since they do

not take into consideration the large share of debt currently under the form of Central Bank repos.



Those figures indicate that we have to look somewhere else to understand the correlation change. In the next section we

illustrate through a simple example, how the negative spread between interest received in domestic government assets and

interest paid on the domestic debt produces an increase in the implicit debt cost.

A simple example

Let “i” denote the interest rate paid on (gross) domestic debt (D), and “i+” be the interest received from government assets (A)

The total interest bill, “I,” would therefore be given by the difference between interest accrued on the debt and interest accrued

on assets:

AiiD I +

−= (1)

We define the net debt (N) simply as the difference between the gross debt, D, and assets, A:

A D N −= (2)

Now adding and subtracting iA in equation (1) and using definition (2) we can find:

AiiiN I )( +

−+= (3)

Dividing both sides of (3) by the net debt (N) we find the following expression for the implicit domestic debt cost : N I i / ˆ ≡

) / )((ˆ N Aiiii+

−+= (4)

The expression above suggests that the implicit debt cost should fluctuate in line with the gross debt cost provided one of the

two following conditions prevails: (a) the interest rate differential (i-i+) is small3; or (b) the ratio between government assets and

the net debt is small. The first condition has not been observed for most of the time as the 12-month spread between the Selic

rate and the Long-Term Interest Rate (TJLP, the interest rate that accrues on government lending to BNDES) has usually been

high, with the possible exception of the most recent period, when it dropped to the neighborhood of 2% per annum.

Selic (-) TJLP (12-month)

0

2

4

6

8

10

12

J a n - 0 0

M a y

- 0 0

S e p - 0 0

J a n - 0 1

M a y

- 0 1

S e p - 0 1

J a n - 0 2

M a y

- 0 2

S e p - 0 2

J a n - 0 3

M a y

- 0 3

S e p - 0 3

J a n - 0 4

M a y

- 0 4

S e p - 0 4

J a n - 0 5

M a y

- 0 5

S e p - 0 5

J a n - 0 6

M a y

- 0 6

S e p - 0 6

J a n - 0 7

M a y

- 0 7

S e p - 0 7

J a n - 0 8

M a y

- 0 8

S e p - 0 8

J a n - 0 9

M a y

- 0 9

S e p - 0 9

J a n - 1 0

M a y

- 1 0

BNDES credit/Net Debt - %

0

2

4

6

8

10

12

14

J a n - 0 1

M a y

- 0 1

S e p - 0 1

J a n - 0 2

M a y - 0

2

S e p - 0 2

J a n - 0 3

M a y - 0

3

S e p - 0 3

J a n - 0 4

M a y - 0

4

S e p - 0 4

J a n - 0 5

M a y - 0

5

S e p - 0 5

J a n - 0 6

M a y - 0

6

S e p - 0 6

J a n - 0 7

M a y - 0 7

S e p - 0 7

J a n - 0 8

M a y - 0

8

S e p - 0 8

J a n - 0 9

M a y - 0

9

S e p - 0 9

J a n - 1 0

M a y - 1

0


However, this did not matter much for the net domestic federal implicit debt cost most of the time, because Treasury lending to

BNDES represented a very small proportion of the net debt, typically hovering between 0% and 2% until late in 2008, as the

chart above at the right reveals. Since then, however, this share jumped to more than 12% of the net debt (measured relative to

GDP it jumped from 0.5% to 6%). Thus, as the second condition failed, the close correlation between the Selic rate and theimplicit net domestic federal cost broke down.

To put it differently, the National Treasury had to finance additional lending to BNDES through the issuance of domestic debt

so at the end of the day the impact on the net debt was zero.4 However, the National Treasury lends to BNDES at a much lower

rate (typically the TJLP) than its borrowing cost, paying, therefore, a negative spread, which, as expressed by equation (4), adds

to cost of (gross) domestic debt. Moreover, the larger are the loans to BNDES, the higher is the impact of negative impact on

the implicit net domestic federal debt.

3 Alternatively, the negative spread (i+-i) is small4 On this issue, please refer to our earlier report “Bond, Federal Bond,” January 7, 2010.

July 7, 2010 4



Notice further that the impact is bound to increase. As we know, the Selic is scheduled to increase in the coming months, which

means that the spread between the Selic and TJLP is going up as well. Even if the Selic and TJLP were to stay at their curren

levels (10.25% and 6% respectively), the 12-month spread would increase from 2.6% observed in May 2010 to 4%. If we are

correct in our forecasts, the Selic rate should reach 13% per annum at the end of the tightening cycle, which would push the

spread further to 6.6% per annum, about 2.5 times higher than the May observation. Hence, regardless of any further increase in

credits to BNDES, one should expect the implicit domestic federal debt cost to go up.

ConclusionThe observed negative correlation may have led to some hope that the impending rise of the Selic rate would not translate into a

similar hike of the debt cost, but this is definitely not the case. The positive correlation broke down because credits to BNDES

increased at the same time interest rates came down, preventing their decline from translating into lower debt costs. Now the

interest rate hike should affect debt costs through two channels, as suggested by equation (4): the direct impact on debt costs

and the increased spread weighed by a higher proportion of government assets relative to the net debt. In other words, the

negative correlation was not a structural feature of the economy.

If one had any hope that the negative correlation implied that BNDES credits would mean a hedge against interest rates hikes

our advice would be to go over the issue again. As argued above, debt costs are about to rise significantly due to the

combination of a higher share of government assets relative to the net debt and the increase in the spread between the gross debcost and the return on government assets.

BNDES impact on implicit debt cost (basis points)

0

5

10

15

20

25

30

35

40

45

50

J a n - 0 1

M a y

- 0 1

S e p - 0 1

J a n - 0 2

M a y

- 0 2

S e p - 0 2

J a n - 0 3

M a y

- 0 3

S e p - 0 3

J a n - 0 4

M a y

- 0 4

S e p - 0 4

J a n - 0 5

M a y

- 0 5

S e p - 0 5

J a n - 0 6

M a y

- 0 6

S e p - 0 6

J a n - 0 7

M a y

- 0 7

S e p - 0 7

J a n - 0 8

M a y

- 0 8

S e p - 0 8

J a n - 0 9

M a y

- 0 9

S e p - 0 9

J a n - 1 0

M a y

- 1 0

BNDES impact on debt cost/GDP (basis points)

0

2

4

6

8

10

12

14

16

18

J a n - 0 1

M a y

- 0 1

S e p - 0 1

J a n - 0 2

M a y - 0

2

S e p - 0 2

J a n - 0 3

M a y - 0

3

S e p - 0 3

J a n - 0 4

M a y - 0

4

S e p - 0 4

J a n - 0 5

M a y - 0

5

S e p - 0 5

J a n - 0 6

M a y - 0

6

S e p - 0 6

J a n - 0 7

M a y - 0 7

S e p - 0 7

J a n - 0 8

M a y - 0

8

S e p - 0 8

J a n - 0 9

M a y - 0

9

S e p - 0 9

J a n - 1 0

M a y - 1

0

Source: Santander estimates from Central Bank data.

There are, of course, other important government assets, in particular international reserves, that also have impacts on the

implicit cost of the net debt (not only the net federal domestic debt), but, as we have argued in previous research, international

reserves display two important differences relative to credits to BNDES. First, international reserves are liquid assets, whichcan, presumably, help finance the debt rollover in a stress scenario. Second, the local valuation of reserves (that is, reserves

translated into domestic currency) should typically increase under bad conditions (a decline in commodity prices, or a sudden

stop in capital flows), and decrease in favorable conditions; that is, they play a role of a hedge, whereas BNDES credits

denominated in local currency, do not.

That said, there is another issue that deserves further exploration, which we intend to go over in future research. In our simple

example above we took the gross debt cost (i.e., the Selic rate) as a given, or, better said, as a variable unaffected by increase or

reduction of government assets, but in a more realistic setting this is unlikely to be the case. We can imagine at least twochannels through which an increase in government funding for BNDES can lead to higher domestic interest rates.

The least important one is a direct result of the previous discussion. If higher funding to BNDES leads to a higher debt cost, and

hence to a higher debt path, everything else constant, there might be some impact on sovereign spreads, which could affect

domestic rates. But this channel would hardly be a relevant one. At the current debt levels and given primary performance, we

are really discussing the speed at which the debt would decline, rather than a process that could lead to much higher rates due to

increasing risk premium on government debt.

We deem as possibly more important the likely effect that additional funding for BNDES would have on lending ability and

hence on domestic demand. Notice, first, how increased National Treasury funding to BNDES from late 2008 onwards (from

BRL20 billion to BRL130 billion) led to a correspondent increase in the bank’s leading, which came from about BRL190

billion in 3Q08 to BRL300 billion in 2Q10. The second leg of increased funding (additional BRL80 billion, from BRL130

July 7, 2010 5



billion to BRL210 billion) that took place in late April has yet to translate into additional lending, but this is only a matter of

time.

BNDES funding - constant R$ million

0

50,000

100,000

150,000

200,000

250,000

J a n - 0 1

J u l - 0

1

J a n - 0 2

J u l - 0

2

J a n - 0 3

J u l - 0

3

J a n - 0 4

J u l - 0

4

J a n - 0 5

J u l - 0

5

J a n - 0 6

J u l - 0

6

J a n - 0 7

J u l - 0

7

J a n - 0 8

J u l - 0

8

J a n - 0 9

J u l - 0

9

J a n - 1 0

BNDES lending - constant R$ million

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

260,000

280,000

300,000

J a n - 0 1

J u l - 0

1

J a n - 0 2

J u l - 0

2

J a n - 0 3

J u l - 0

3

J a n - 0 4

J u l - 0

4

J a n - 0 5

J u l - 0

5

J a n - 0 6

J u l - 0

6

J a n - 0 7

J u l - 0

7

J a n - 0 8

J u l - 0

8

J a n - 0 9

J u l - 0

9

J a n - 1 0

Sources: Central Bank.

At the same time, there is little doubt that the significant increase of BNDES balance sheet (BRL110 billion so far, and possibly

BRL80 billion more to come) should have had a substantial impact on domestic demand. We have argued5

that this policyshares more than a passing resemblance to fiscal policy and, indeed, many have classified BNDES credit expansion as quasi-

fiscal policy. But then, as is usually the case, everything else constant, a more expansionary fiscal policy requires a more

contractionary monetary policy (higher interest rates) to deliver the same level of inflation.

Extending the reasoning to the increase of BNDES funding (therefore its lending), it is straightforward to conclude that theincrease in government assets also implies higher interest rates than the ones that would prevail in the absence of such policy.

Thus, the impact of higher government assets is not limited to being a channel through which the negative spread between

returns on assets and interest on debt increases the implicit debt cost; it also implies an additional increase of the negative

spread through the required rise in the Selic rate to offset the expansionary impact of BNDES lending on demand, magnifying

the effect described in the preceding section.

It is true that BNDES financing should have some impact on investment, hence on potential GDP growth. But this would hardlybe strong enough to offset the impact on demand. For a start, investment is first demand, becoming additional supply only afte

a while. In a recent paper6 we estimated that investment becomes new industrial capacity after some six quarters, being of littleuse to help with current inflationary pressures.

Second, we also estimate that, in order to boost potential GDP growth by 1% per annum, investment needs to increase between

4% and 5% of GDP. Given that investment is currently 18% of GDP, it would have to reach, conservatively, 22% of GDP to

accelerate potential growth from, say, 4.5% to 5.5% per annum, an expansion of 22%. In order to reach this 22% increase in the

investment rate in one year, assuming that the economy would grow at potential7 (4.5%), gross capital formation would have toincrease a little less than 28% in a single year. To reach this target over two years, investment would have to increase about

16% per annum during those years. In any case, domestic demand would have to accelerate drastically due to investmen

growth before any additional supply would appear.

Note, moreover, that the economy is growing much faster than potential (about 9-10% per annum at the margin), so, for

investment to accommodate current growth, it would not be enough to increase investment only by 4% of GDP, but a larger

figure instead, a consideration that only makes the problem much harder to solve.

In short, the notion that one can offset inflationary pressures through the increase in supply resulting from higher investmen

does not really stand on solid ground. For investment to have a meaningful impact on supply, it would have to increase

massively, propping up current demand. Second, it would not become additional supply immediately, but after about a year and

half. In the meantime, the inflationary problem would only get worse, requiring further monetary policy tightening.

Thus, going back to the original issue, it seems reasonable to conclude that the increase in the availability of credit at below-

market interest rates results in further inflationary pressures, and thus higher policy rates. This would feed back into the spread

between the gross debt cost and the return on government assets, amplifying the effect described earlier.

5 “Bond, Federal Bond,” January 7, 2010, page 6.6 “576 Regressions on Capacity Utilization,” April 26, 2010.

7 If growth is higher than potential, the increase in investment would have to be even higher, so our conclusions do not really depend on this assumption.

July 7, 2010 6



We still do not think that such developments would lead to a deterioration of the debt dynamics large enough to cause a deb

crisis. However, we had better get used to a considerably higher implicit debt cost, and, therefore, an interest bill permanently

higher than the one that would have prevailed in the absence of the expansion of government assets. Summing up, the

expansion of BNDES credits implies a higher government transfer for those who have access to cheap financing and can

appropriate the negative spread between the TJLP and the Selic rate – a riskless path to becoming a millionaire.

July 7, 2010 7



CONTACTS

Economics Research Ernest (Chip) Brown Head of Economics Research [email protected] 212-583-4663Sergio Galván Economist – Argentina [email protected] 54-11-4341-1728Alexandre Schwartsman Economist – Brazil [email protected] 5511-3012-5726Juan Pablo Castro Economist – Chile [email protected] 562-336-3389Felipe Hernandez Calle Economist – Colombia [email protected] 571-644-8006

Delia Paredes Economist – Mexico [email protected] 5255-5269-1932

Fixed Income Research Fernando Marin Head of Global Research [email protected] 3491-257-2100Juan Pablo Cabrera Senior Economist – Local Markets [email protected] 3491-257-2172Alejandro Estevez-Breton Local Markets Strategy [email protected] 212-350-3917

Equity Research Cristián Moreno Head, Equity Research [email protected] 212-350-3992Walter Chiarvesio Head, Argentina [email protected] 5411-4341-1564Marcelo Audi Head, Brazil [email protected] 5511-3012-5749Francisco Errandonea Head, Chile [email protected] 562-336-3357Gonzalo Fernandez Head, Mexico [email protected] 5255-5269-1931

Electronic Media Bloomberg STDR <GO> Reuters Pages SISEMA through SISEMZ This report has been prepared by Santander Investment Securities Inc. (“SIS”) (a subsidiary of Santander Investment I S.A., which iswholly owned by Banco Santander, S.A. (“Santander”), on behalf of itself and its affiliates (collectively, Grupo Santander) and isprovided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy anyrelevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interestsin any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the relatedsecurity and, where appropriate, should take into account the content of the related prospectus filed with and available from the entitygoverning the related market and the company issuing the security. This report is issued in Spain by Santander Investment BolsaSociedad de Valores, S.A. (“Santander Investment Bolsa”), and in the United Kingdom by Banco Santander, S.A., London BranchSantander London is authorized by the Bank of Spain. This report is not being issued to private customers. SIS, Santander London andSantander Investment Bolsa are members of Grupo Santander.

ANALYST CERTIFICATION: The following analysts hereby certify that their views about the companies and their securities discussedin this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such

opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, andthat they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations oviews in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is notpegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from thebusinesses and financial transactions carried out by Grupo Santander and any of its affiliates: Ernest W. (Chip) Brown, AlexandreSchwartsman.

The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has beentaken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate ocomplete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date ofthis report and are subject to change without notice.

Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like toeffect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without inany way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S.Securities Exchange Act of 1934) for this report and its dissemination in the United States.

© 2010 by Santander Investment Securities Inc. All Rights Reserved.

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