The economic background

In the first quarter of 2012, there were, once again, major regional differences in terms of economic activity evolution. As a whole, the world economy continued to be strong, primarily due to the boost from emerging regions. Another factor was the easing of financial market tensions, especially in Europe, though the uncertainty regarding the fiscal consolidation process and the restructuring of the financial system remains.

The European economy and the measures adopted by its authorities have again set the pace for the markets over the quarter. Greek’s second bailout was carried out, and at the same time, the fiscal treaty was approved. This treaty ratifies the commitments of the various European countries to fiscal consolidation and growth and has reinforced the capacity of the European stability fund. In addition, the ECB continues with its long-term liquidity support measures in order to reduce the uncertainty regarding the European financial system. Finally, in the peripheral countries, particularly in Italy and Spain, structural reforms have been adopted and these have been very well received by European institutions and the markets, though the uncertainties regarding those countries have also remained high. Even so, the European economy appears to have improved its tone with respect to the last three months of 2011, with a GDP that remains at levels similar to the previous quarter.

In the United States, the outlook has improved slightly after the publication of data that was more positive than expected. This is especially the case for the job market indicators that, though they do not reflect a strong recovery, do show significant job creation and a slight reduction in the unemployment rate. However, activity in the United States is also depressed by the deleveraging process of households and the weakness of the real estate market. The improved outlook has also been based on the publication of stress tests on the financial system, which yielded acceptable results in the event of a very adverse situation.

South America has continued to grow strongly in the first quarter of 2012 due to the buoyant domestic demand and a relative improvement of various factors of the international economic outlook, especially in the increase of commodity prices. Nevertheless, the rise in oil prices will be reflected in an upward pressure on inflation, particularly in those countries whose central banks have set inflation targets (including Peru, Chile and Colombia). The above, therefore, will lead those central banks to remain biased toward a less lax monetary policy.

In Mexico, economic activity shows stronger growth than at the end of 2011. Inflation remained slightly below 4% in March, lower than expected just a few months ago, thus consolidating the monetary policy outlook of stable reference rates.

In China, the economy continues to show signs of a mild slowdown consistent with a scenario of re-balance. The strength of its foreign sector has diminished, in part as a result of the decreased demand of the advanced economies, while inflation has been moderated, which leaves room for action by the authorities in the event the slowdown should intensify.

Finally, Turkey’s economic activity maintains its dynamism although, it remains exposed to Europe’s financial tensions and the high oil prices that hinder the correction of its foreign balance.

With respect to exchange rates, there was general appreciation over the quarter in the average exchange rates of those that most influence the Group’s financial statements. This same trend was also seen in year-on-year terms, though to a lesser extent than in the quarter and with the exception of the Mexican and Argentine pesos and the Turkish lira. Regarding the final exchange rates in the first quarter of 2012, it is worth noting that the Mexican, Chilean and Colombian currencies appreciated while the rest of the currencies relevant to the Group depreciated. When comparing the dollar fixing rates of one year ago, all currencies except the Mexican peso and the Turkish lira appreciated. To sum up, the impact on the balance sheet, activity and earnings is slightly positive in both quarterly and year-on-year terms.

Interest rates

(Quarterly averages)

2012 2011

1Q 4Q 3Q 2Q 1Q
Official ECB rate 1.00 1.28 1.50 1.25 1.00
Euribor 3 months 1.04 1.49 1.54 1.44 1.10
Euribor 1 year 1.67 2.05 2.00 2.13 1.74
USA Federal rates 0.25 0.25 0.25 0.25 0.25
TIIE (Mexico) 4.78 4.80 4.81 4.85 4.85

Exchange rates

(Expressed in currency/euro)

Year-end exchange rates Average exchange rates

31-03-12 Δ% on 31-03-11 Δ% on 30-12-11 1Q12 Δ% on 1Q11
Mexican peso 17.0221 (0.6) 6.0 17.0195 (3.0)
U.S. dollar 1.3356 6.4 (3.1) 1.3108 4.4
Argentinean peso 5.8436 1.1 (4.7) 5.6891 (0.4)
Chilean peso 654.02 4.7 3.2 641.44 2.7
Colombian peso 2,380.95 12.0 5.5 2,358.49 9.0
Peruvian new sol 3.5620 12.1 (2.1) 3.5160 8.1
Venezuelan bolivar fuerte 5.7360 6.4 (3.1) 5.6295 4.4
Turkish lira 2.3774 (7.7) 2.8 2.3556 (8.3)
Chinese yuan 8.4089 10.6 (3.0) 8.2692 8.9