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Economic Outlook
Macro Research – Itaú Unibanco
October 2013
Agenda
International
 Five years after the financial crisis, the advanced economies are starting to grow again.

The euro zone is out of recession.
 While developed countries improve, emerging markets are still facing deceleration.

Growth in China has stabilized.
 Growth recovery in the U.S. means higher interest rates and a stronger dollar.

Tapering postponement brings a relief for emergent markets in the short term.

Fiscal debate is likely to be a temporary noise.
Brazil

Growth around 2% in this year and the next.

Monetary policy in the U.S. and Central Bank interventions appreciate the BRL and
bring a temporary relief to the exchange rate.

Weaker price increases in the last months and less depreciated exchange rate bring
our IPCA projection down to 5.9%.

Inflation is still a source of concern for the Copom, but we maintain our Selic rate
forecast at 9.75%.

Fiscal policy remains expansionary, but there is limited room for additional stimuli.
2
U.S. Labor Market Improves, Despite the Fiscal Drag
Payroll – Job Creation
thousands
Fiscal Drag
Annualized, p.p. of GDP
forecast
3,5%
2,8%
3,0%
2,5%
2,5%
2,5%
1,8%
2,0%
1,5%
1,5%
1,0%
0,5%
0,3%
0,0%
-0,5%
-1,0%
-0,8%
-0,8%
-1,5%
-1,3%
-1,7%
-2,0%
-2,5%
2010
12-month moving average
2011
2012
Fiscal adjustment
2013
2014
GDP growth
* Structural blance adjustjment (expenditure cuts + higher taxes)
Source: Itaú Unibanco, BLS, Bloomberg, Haver Analytics, IMF
3
The Fed Signals Stimuli Reduction: Impact on the
Emerging Markets
Exchange Rates
% change, May-to-date
5-year Nominal Rates
p.p. change, May-to-Date
US
0,8
1,2
7.2
Chile
Colombia
0,6
9.8
Mexico
3,8
0,7
1,6
6.4
Colombia
Peru
Brazil
1,0
5,1
Peru
1,8
1,4
9.7
2,1
2,3
3,0
Current Prices
Source: Itaú Unibanco, Bloomberg
Mexico
8,0
22.2
10,0
5,9
Chile
Brazil
Maximum change
4
Europe: End of Recession, After Six Quarters of
Contraction
 The euro-zone growth prospects remain positive. Indicators show a positive trend,
reinforcing the confidence that the region has resumed growth, but at a moderate pace.
Euro zone composite PMI
Euro zone GDP
QoQ change, seasonally adjusted
60
1,0%
0,5%
0,29%
55
0,0%
50
-0,5%
45
-1,0%
40
-1,5%
-2,0%
2008
2009
2010
Source: Itaú Unibanco, Bloomber, Haver Analitics, IMF
2011
2012
2013
35
2007
2008
2009
2010
2011
2012
2013
5
China: Smaller Growth but no Hard Landing
 Policy signaling reflects less concern about short-term growth and more focus on
structural reforms that can lead to sustainable growth.
 Government’s recent actions aim to avoid GDP growth volatility in the short-term.
GDP – YoY Growth, %
15,0%
12,5%
10,0%
7,5%
5,0%
2007
Source: Itaú Unibanco, CEIC
2008
2009
2010
2011
2012
2013
2014
6
World: What Do We Expect for the Next Years?
2004-2007
2012
2013
2014
2015-2020
World
5.1
3.2
2.8
3.3
3.5
USA
2.9
2.8
1.5
2.5
2.5
Euro zone
2.5
-0.6
-0.3
0.9
1.4
Japan
1.9
2.0
1.9
1.4
1.0
China
12.1
7.8
7.7
7.3
6.8
Source: Itaú Unibanco, Haver Analytics
7
Commodities: Our Expectations for the Short Term
Itaú Commodities Index
150
137,2
134,4
130
120,2
119,4
108,5
110
106,4
100,6
99,2
104,4
90
91,0
70
71,7
61,8
50
49,4
30
2004
Source: Itaú Unibanco
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8
Deceleration in Latin America
GDP – Growth, %
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
Argentina
Chile
Colombia
2010
Source: Itaú Unibanco, Haver Analytics
2011
Mexico
2012
Peru
Brazil
2013
9
Slowdown of Economic Activity and Low Inflation Lead to
Cuts in Interest Rates
Peru
Mexico
2013
2014
2013
2014
GDP - %
5.0
5.2
GDP - %
1.3
3.6
PEN / USD (YE)
2.70
2.80
PEN / USD (YE)
12.8
12.0
Int. Rate - (YE) - %
4.25
4.25
Int. Rate - (YE) - %
3.75
3.75
CPI - %
3.1
2.5
CPI - %
3.6
3.5
2013
2014
GDP - %
4.2
4.4
Colombia
Chile
2013
2014
3.8
4.2
PEN / USD (YE)
1880
1900
PEN / USD (YE)
500
525
Int. Rate - (YE) - %
3.00
3.00
Int. Rate - (YE) - %
4.50
4.00
CPI - %
2.5
2.9
CPI - %
2.2
2.6
2013
2014
GDP - %
2.0
0.0
ARS / USD (YE)
6.1
8.2
BADLAR - (YE) - %
21.0
25.0
CPI - % (Priv. estimates)
28.0
35.0
GDP - %
Argentina
Source: Itaú Unibanco
10
Brazil: What do We Expect for the Short Term?
2012
2013
2014
0.9
2.3
1.7
5.8
5.9
6.0
7.25
9.75
9.75
2.4
1.7
1.1
Exchange Rate (eop)
2.08
2.35
2.55
Current Account (% GDP)
-2.4
-3.6
-2.7
Economic Activity
GDP %
Inflation
IPCA %
Monetary Policy
Selic Rate %
Fiscal
Primary Surplus (% GDP)
Balance of Payments
Source: Itaú Unibanco, BCB
11
Moderate Growth Ahead
GDP (% Change)
GDP (% Change, QoQ/as)
(Seasonally Adjusted)
8%
2,0%
7,5%
7%
6,1%
6%
1,5%
1,5%
5,7%
5,2%
5%
1,0%
4,0%
4%
3,2%
0,6%
2,7%
3%
2,3%
0,6%
0,5%
0,5%
1,7%
2%
1,1%
0,9%
1%
0,0%
0%
-0,3%
-1%
2003
2005
Source: Itaú Unibanco, BCB
2007
2009
2011
2013
-0,5%
2010 Q1
2011 Q1
2012 Q1
2013 Q1
-0,5%
2014 Q1
12
Confidence Deterioration, but the Worst Is Past
Index Selected Components
Confidence Indexes
Hard to get a job
160
140
Demand for capital goods
130
140
120
120
110
100
100
80
Services
90
Industry
60
Consumer
80
40
70
2008
2009
Source: Itaú Unibanco, FGV
2010
2011
2012
2013
2006
2007
2008
2009
2010
2011
2012
2013
13
Diffusion Points to Weak GDP Growth Ahead
Broad Data Set - Diffusion
GDP vs. Diffusion Index
75%
10%
90%
8%
80%
6%
70%
4%
60%
2%
50%
0%
40%
-2%
30%
-4%
20%
2009
65%
55%
45%
35%
1995
1998
2001
2004
Data diffusion (-2)
Source: Itaú Unibanco
2007
2010
2013
GDP 4Q (RHS)
month
2010
2011
3MMA
2012
2013
historical average
14
Jobs Creation Slowing Down, Wages Still Rising
Offered Nominal Wages – New Jobs
(Fipe/Catho) annual change
Occupied Population
annual change
25%
9%
8%
20%
7%
6%
15%
5%
4%
10%
3%
7,5%
2%
5%
1%
0%
0%
-1%
-2%
2005
-5%
2007
2009
2011
2013
2011
2012
2013
Caged
Source: Itaú Unibanco, Ministério do Trabalho e Emprego, Fipe/Catho
15
Moderate Growth of Wages and Consumption Ahead
Retail Sales
Real Wages Bill
180
130
170
120
160
110
150
100
140
90
Annual Change
130
2011
120
110
100
2006
2008
2010
2012
4.8%
2012
6.3%
2013
2.2%
2014
2.4%
2015
2.8%
2016
3.2%
2014
2016
Source: Itaú Unibanco, Ministério do Trabalho e Emprego, Fipe/Catho
Annual Change
80
70
60
2006
2008
2010
2012
2011
6.6%
2012
8.4%
2013
3.3%
2014
2.8%
2015
3.1%
2016
2.5%
2014
2016
16
After Temporary Relief, Pressure on Inflation Is Likely to
Return in the Next Months
IPCA – Consumer Price Index
Monthly 12-month
0,90%
7,0%
0,75%
6,5%
0,60%
6,0%
0,45%
5,5%
0,30%
5,0%
0,15%
0,00%
4,5%
Jan-12
Apr-12
Jul-12
Oct-12
Monthly
Source: Itaú Unibanco , IBGE
Jan-13
Apr-13
Jul-13
Jan/13
0.86%
6.2%
Feb/13
0.60%
6.3%
Mar/13
0.47%
6.6%
Apr/13
0.55%
6.5%
May/13
0.37%
6.5%
Jun/13
0.26%
6.7%
Jul/13
0.03%
6.3%
Aug/13
0.24%
6.1%
Sep/13
0.35%
5.9%
Oct/13
0.53%
5.8%
Nov/13
0.71%
5.9%
Dec/13
0.78%
5.9%
Oct-13
12-month (rhs)
17
What Is the Exchange-Rate Impact on Inflation?
Exchange Rate Pass-Through Simulations
BRL = Base Case
10% deval.
20% deval.
Recent sample models (2004-13)
Pass-through: 8%
IPCA 2013
5.9%
6.1%
6.2%
IPCA 2014
6.0%
6.7%
7.4%
Full sample models (2001-13)
Pass-through: 11%
Source: Itaú Unibanco
IPCA 2013
5.9%
6.2%
6.4%
IPCA 2014
6.2%
7.2%
8.2%
18
Intervention on the BRL due to Impact on Inflation
Exchange Rate
BCB Position in Swaps (in billions of dollars)
20
10
0
-10
-20
-30
-40
-50
-60
2011
Source: Itaú Unibanco, BCB
2012
2013
19
What Is the Equilibrium Exchange Rate?
Three Different Views
 Equilibrium 1: Purchasing power parity (PPP): with competitive markets and no transportation
costs or other kinds of friction, homogeneous goods should trade at the same price in all
countries.

Equilibrium rate = BRL 2.63 (Big Mac Index); BRL 3.02 (average real exchange rate
1982-2012).
 Equilibrium 2: “Current rate”: assumes that the exchange rate reacts to several cyclical variables
(net external liabilities, CDS, terms of trade).

Equilibrium rate = BRL 2.24.
 Equilibrium 3: Current-account equilibrium approach: exchange rate clears savings and
investment market.

Equilibrium rate = BRL 2.30 (assuming external financing = 1.5% of GDP).
Equilibrium Exchange Rate (BRL/USD)
Source: Itaú Unibanco
Big Mac Index
2.63
PPP (average real exchange rate)
3.02
“Current rate”
2.24
Current account equilibrium (1.5% of GDP)
2.30
20
More Depreciated Exchange Rate Reduces the CurrentAccount Deficit
Current Account (% of GDP)
3%
2%
1%
0%
-1%
-1,5%
-2%
-3%
-4%
-5%
2000
2002
Source: Itaú Unibanco, BCB
2004
2006
2008
2010
2012
2014
2016
2018
2020
21
Less Room for Counter-Cyclical Monetary Policy…
Yield-Curve Pricing of Selic Rate
Correlation Between Exchange Rate and
Prefixed Market Interest Rates
1,0
14%
0,89
0,8
13%
0,6
12%
11,6%
0,4
0,2
11%
0,0
10%
9,75%
-0,2
9%
-0,4
8%
-0,6
-0,34
-0,85
-0,8
7%
-0,93
-1,0
6%
2008
2010
2011
2013
2014
-1,2
2010
2011
2012
2013
Projeção
Itaú Unibanco
Itaú Unibanco
forecast
Apreçamento
da SELIC implícito na curva de DI futuro
Yield curve pricing
Source: Itaú Unibanco, Bloomberg
22
…and Counter-Cyclical Fiscal Policy
Primary Surplus - % GDP
Net Debt - % GDP
3,5
40
39,1
3,1
3,0
38
2,7
2,5
36,4
2,4
36
35,2
35,1
34,7
2,0
1,7
34
1,5
1,1
32
1,0
0,5
30
2010
Source: Itaú Unibanco, BCB
2011
2012
2013
2014
2010
2011
2012
2013
2014
23
Brazil Needs to Become More Competitive
Competitiveness Ranking
(World Economic Forum, 2013)
Switzerland
Singapore
Finland
China
Chile
Turkey
South Africa
Mexico
Brazil
India
Peru
Russia
Argentina
Venezuela
Chade
Source: World Economic Forum
1
2
3
29
34
44
53
55
56
60
61
64
104
134
148
24
Prices in Brazil Are High
Currency Appreciation (+) or Depreciation (-) Measures
Prices relative to the
U.S. (PPP) in 2012
Emerging
Effective real exchange
Big Mac Index
rate (against 04-11 average) (nominal exchange rate vs.
Jul/2013
PPP) Jul/2013
South Africa
-34.0%
-14.9%
-60.0%
South Korea
-28.0%
-7.6%
-24.6%
India
-61.0%
-7.2%
-67.1%
Mexico
-33.0%
-2.0%
-37.3%
Chile
-16.0%
4.4%
-13.6%
Brazil
2.0%
4.6%
16.0%
Colombia
-27.0%
13.7%
-1.8%
Russia
-20.0%
16.5%
-42.0%
China
-34.0%
26.0%
-42.8%
Japan
29.0%
-18.3%
-29.8%
United Kingdom
4.0%
-11.3%
-11.8%
Euro zone
9.0%
-6.8%
2.3%
Australia
59.0%
7.6%
1.4%
Developed
Source: Itaú Unibanco, FMI, The Economist, BIS
25
High Costs Relative to Productivity Level
Wages
thousand U.S. dollars per year
Wages + Labor Benefits
thousand U.S. dollars per year
current prices
current prices
India
India
2012 prices
2012 prices
China
China
Mexico
Mexico
Russia
Russia
Brazil
Brazil
0
10
20
0
30
Productivity, 2012 (% of U.S.)
India
China
China
Brazil
Brazil
Mexico
Mexico
Russia
Russia
10%
20%
Source: Itaú Unibanco, KPMG, FMI, Penn World Table
20
30
40
50
60
GDP Per Capita, 2012 (PPP)
India
0%
10
30%
40%
0%
5%
10%
15%
20%
26
Where Does Brazil Need to Improve?
Ranking: Ease of Doing Business
(World Bank, 2012)
Most Problematic Factors for Doing Business
% of answers (World Economic Forum, 2013)
Infrastructure
Chile
19,7
37
Tax regulations
Peru
Colombia
Mexico
43
45
16,8
Tax rates
15,1
Government bureaucracy
14,9
Labor regulations
48
11,7
Corruption
Uruguay
7,3
89
Workforce quality
Paraguay
Argentina
Brazil
103
124
130
Policy instability
2,7
Access to financing
2,6
Capacity to innovate
Others
Source: World Economic Forum
5,8
1,2
2,2
27
Challenges: Need for Better Infrastructure
Overall Quality of Transportation Infrastructure
Grading: 0 - 7 (World Economic Forum, 2013)
7
6
5
114th place, among 148
4
3
2
1
Source: Itaú Unibanco, World Economic Forum
28
Challenges: Heavy Tax Burden
Tax Burden – % of GDP
60%
50%
40%
34%
30%
20%
10%
0%
Source: Itaú Unibanco, Heritage Foundation
29
Challenges: Public Expediture Needs to Be more Efficient
Public Expenditure Quality
Rate from 0 to 7 (World Economic Forum, 2013)
Tax Burden vs. Expenditure Quality
(World Economic Forum, 2013)
Total tax burden, % of profits
100%
6
90%
80%
5
Brazil
70%
60%
4
50%
132nd place, among148
3
40%
30%
20%
2
10%
0%
Singapore
Switzerland
Chile
Canada
China
Panama
Japan
Australia
USA
South Africa
South Korea
Mexico
India
Peru
Russia
Colombia
Angola
Brazil
Argentina
Venezuela
1
Source: Itaú Unibanco, World Economic Forum
1
2
3
4
5
Public expenditure quality, rate from 0 to 7
30
Challenges: PISA Scores in Brazil Are Below Average
PISA 2009 – Average Test Score (math, science, reading)
550
500
496
450
408
400
350
Source: Itaú Unibanco, OECD, Hanushek & Woessmann (2010)
31
Challenges: Less Labor, Need More Investment
 Labor contribution decreases in the years to come. Growth depends on increasing
investments and productivity.
GDP Growth
Decreasing Labor Contribution
8%
2,0%
Labor
Capital
Productivity
7%
1,5%
6%
5%
4%
1,0%
2,7%
3%
2,3%
2%
0,5%
1,7%
0,9%
1%
0%
0,0%
2010
2012
Source: IBGE, Itaú Unibanco
2014
2016
2018
2020
2008-2011
2012-2015
2016-2020
32
Challenges: Lack of Domestic Savings
Public Spending on Social Security
Source: Itaú Unibanco, IBGE
33
Source: Itaú Unibanco, UNCTAD
South Korea
Germany
Poland
Israel
Chile
Mexico
UK
Canada
France
South Africa
Turkey
India
China
Russia
Peru
Indonesia
Venezuela
Colombia
Brazil
Challenges: Market Openess
Sum of imports and exports (%GDP)
120
100
80
60
40
20
0
34
Opportunities: Infrastructure Auctions, an Important Step
Total estimated investments: around USD 100 billion
Investment
values
Characteristics
Follow up
BRL 42 billion
• Auction through lowest toll fee
• Concession term of 25 years
• Subsided credit (BNDES + CEF): 25 years (5 years grace period) at TJLP + 2%
p.a. (currently representing 7% p.a.)
• Real unleveraged IRR of up to 7.2% (with the highest allowed toll fee)
• Equity support by public banks or pension funds
• Two highways (BR-050 and
BR-2562) already
auctioned.
• BR-262 without bids
• 3 further highways to be
auctioned in 2013
Railways
• 10 Railroads
• 12,000 km
BRL 91 billion
• Operator sells 100% of transport capacity to Valec (EBF, state-owned company),
which manages transport fees to final costumer
• Concession term of 30 years
• Subsided credit (BNDES + CEF), 30 years (5 y grace period) at TJLP+ 1% p.a.
• Real unleveraged IRR of up to 8.5% (subject to changes)
• Equity support by public banks or pension funds
• Guidelines (“Edital”) still
under evaluation of TCU
(Federal Court of Auditors)
• Auctions should begin in
early 2014
Airports
• Galeão (RJ)
• Confins (MG)
• Regional Airports
BRL 18.6
billion
(for Galeão
and Confins)
• Auction winner subscribes 51% of equity into SPE. 49% is subscribed by Infraero
(public airport manager)
• Concession term of 25 years
• Unleveraged real IRR of up to 6.63%
• Financing of about 14 years (2 years grace period) at about TJLP + 1.5% p.a.
• Auctions scheduled for
November, 22
Ports
• 16 states
• First tranch in
Santos and Pará
BRL 54.7
billion
• Concession either through lowest tariff or highest investment
• 25-year term, renewable once
• Uncertainties regarding the
details of this program.
Auctions should begin in
2014
High-speed train
• Rio to Campinas
(through São Paulo)
BRL 35.7
billion
•
•
•
•
Concession
Highways
• 9 Federal Highways
• 7,500 km
Source: Itaú Unibanco
Conditions subject to change
40-year term, not renewable
Real unleveraged IRR of 7.0%
Government to bear occasional losses, if they exist
• Auction postponed for late
2014
35
Conclusion

World: Prospect of recovery in the U.S. and higher interest rate hikes hasn’t
changed (despite the recent postponement).

Brazil: Fundamentals point to a growth around 2% in 2013 and 2014.

Equilibrium exchange rate is around its current values; in PPP it is more
depreciated. Short term pressure may come back.

Given moderate growth and recent stability in the exchange rate, we maintain
our expectation of a hike in the benchmark rate to 9.75% by year-end.

Long-term growth depends on investments, infrastructure, education and
bureaucracy reduction, among others.
36
Long-Term Scenario
Source: Itaú Unibanco
37
Our Economic Analysis Online
38