July, 2013

Economic OutlookMacro Research – Itaú Unibanco

2

AgendaInternational

Brazil

Global economy at a new stage. Better growth perspectives in the U.S., emerging economies decelerate.

The expectation of the Fed´s policy normalization has caused a sell-off in the emerging markets. The impact depends on each country´s fundamentals.

Markets’ adjustment to the Fed and popular demonstrations have produced a relevant chance in the macroeconomic scenario.

The Real has depreciated along with other currencies, but it has lost more value against the dollar than its more than its pairs.

Weaker Real leads to worse inflation perspectives in 2013 and stronger need to raise interest rates.

Fiscal stance is likely to become less expansionary, but popular demonstrations have reduced the probability of a deeper public spending adjustment.

More uncertain environment and higher interest rate affect negatively the growth perspectives.

3

U.S.: Payroll Surprises Again in June

Labor market in the U.S. remains strong. The payroll has gained 195k in June (BBG survey: 165k) and was revised at 70k in the two

previous months. The unemployment rate remained stable, at 7.6%.

Source: Itaú Unibanco, BLS

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-130

50

100

150

200

250

300

350

1M 3M

2009 2010 2011 2012 20137.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

Unemployment Rate – %Payroll – seasonally adjusted, thousands

4

Exchange Rates% change, May-to-Date

5-year Nominal Ratesbps change, May-to-Date

The Fed Signals Stumili Reduction: Sell-Off in the Emerging Markets

Source: Itaú Unibanco, Bloomberg

U.S.

Chile

Mexico

Peru

Colombia

Brazil

0.77

0.18

1.17

1.27

1.48

1.91

Colombia

Peru

Mexico

Chile

Brazil

4.9

5.2

6.3

6.5

13.0

We believe the Fed will reduce it´s asset purchases pace in the September meeting.

5

China: Focus on Reforms, Lower Growth

Source: Itaú Unibanco, CEIC

Recent policy signaling reflects less concern about short term growth and more focus on structural reforms that can lead to long run sustainable growth .

GDP – Growth YoY, %

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

5.0%

7.5%

10.0%

12.5%

15.0%

6

Countries: Brazil, Mexico, Chile, Colombia, South Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand, Russia, Ukraine, Poland, Hungary, Czech Republic, Turkey, South Africa

Emerging Economies Decelerate

GDP Growth – Emerging EconomiesQoQ, SAAR

Source: Itaú Unibanco, Haver Analytics, FMI

3.3%

1.7%

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

7

World: Our Expectations for the Next Years

Source: Haver, CEIC, Bloomberg, Itaú Unibanco

  2004-2007 2012 2013 2014 2015-2020

World 5.1 3.2 2.8 3.4 3.5

USA 2.8 2.2 1.9 2.5 2.3

Eurozone 2.5 -0.5 -0.7 0.7 1.4

Japan 1.9 1.9 1.5 1.3 1.0

China 12.1 7.8 7.5 7.2 6.8

8Source: Itaú Unibanco

Itaú Unibanco Commodities Index

Commodities: Our Expectations for the Short Term

2000

2000

2001

2001

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

2013

2013

0

50

100

150

200

250

300

350

9

Peru   Mexico  2013   2014     2013   2014

GDP - % 6.0   5.8   GDP - % 2.5   3.6

PEN / USD (YE) 2.70   2.70   MXN / USD (YE) 12.2   12.0

Interest Rate - (YE) - % 4.25   4.25   Interest Rate - (YE) - % 4.00   4.00

CPI - % 2.7   2.5   CPI - % 3.6   3.5

                 

Colombia   Chile

  2013   2014     2013   2014

GDP - % 3.8   4.7   GDP - % 4.5   4.7

COP / USD (YE) 1900   1850   CLP / USD (YE) 510   525

Interest Rate - (YE) - % 3.25   4.00   Interest Rate - (YE) - % 4.50   4.25

CPI - % 2.8   3.0   CPI - % 2.2   2.8

                 

Argentina  

  2013   2014  

GDP - % 2.0   0.0  

ARS / USD (YE) 5.9   7.7  

BADLAR - (YE) - % 21.0   25.0  

CPI - % (Private estimates) 30.0   35.0  

Latin America: Growth Divergence

Source: Itaú Unibanco

10

Growth in Brazil Disappointed

GDP Forecasts for 2012 (%)

Source: Latin Focus Consensus Forecasts

2010 2011 2012 20131

2

3

4

5

6

Brazil MexicoColombia Chile

2010 2011 20121

2

3

4

5

6

Brazil MexicoColombia Chile

GDP Forecasts for 2013 (%)

11

Brazil: Our Expectations for the Short Term

Source: Itaú Unibanco and BCB

  2012 2013 2014

Economic Activity

GDP % 0.9 2.2 2.3

InflationIPCA % 5.8 6.1 5.9

Monetary PolicySelic Rate % 7.25 9.75 9.75

FiscalPrimary Surplus 2.4 1.7 1.1

Balance of PaymentsExchange Rate (eop) 2.08 2.18 2.18

Current Account (% GDP) -2.4 -3.3 -2.9

12

What Explains the Weak GDP in the Last Few Years?

GDP Growth BreakdownQoQ, SAAR

2009.IV

2010.I

2010.II

2010.III

2010.IV

2011.I

2011.II

2011.III

2011.IV

2012.I

2012.II

2012.III

2012.IV

2013.I

-2%

-1%

0%

1%

2%

3%

4%

5%

Consumption Gov. ExpenditureInvestment Exports - importsInventories & residual GDP

Deleveraging: Higher real interest rates (+150 bps) Macroprudential measures (reserve + capital

requirements) Reduction in government current expenditure

growth (to 0% from 10%-15%) Reduced BNDES disbursements Global risk aversion (VIX up to 40) High inventories, decelerating growth and

imports

Supply Issues: Fiscal expansion and interest rate cuts;

economy reacts slowly Excessive interventionism creates higher

economic policy risk Productivity deceleration seems stronger than

cyclical factors; lower potential growth With low productivity growth, rising wages

reduce margins and become a limitation on investment

Inflation accelerates, affecting real income and consumption

Signs of growing net imports

Source: Itaú Unibanco, IBGE

13

Gradual Recovery Reflects Lower Potential GDP

GDP (% Change, QoQ/sa)

Source: Itaú Unibanco, BCB

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0.6%

0.8%

0.5%0.4%

200320042005200620072008200920102011201220132014-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1.2%

5.7%

3.2%

3.9%

6.1%

5.2%

-0.3%

7.5%

2.7%

0.9%

2.3%2.2%

GDP – Annual Growth

14

2007 2008 2009 2010 2011 2012 2013100

105

110

115

120

125

130

135

2007 2008 2009 2010 2011 2012 201370

80

90

100

110

120

130 Gross fixed capital formationCapital goods consumption proxyCivil construction

Volatile Industrial Production Data, Investment Shows Signs of Weakness Again

The industrial production has dropped in May, after a sharp rise in the previous month. The fall was widespread and has reached most subsectors.

The capital goods production had an important fallback. High interest rates, weaker Real and higher uncertainty are likely to cause a longer cool down in investment.

Source: Itaú Unibanco and IBGE

Industrial Production – seasonally ajusted Investment – seasonally ajusted

15

Confidence Remains Weak

Industry Confidence Index (FGV)

Source: Itaú Unibanco , FGV

Consumer Confidence Index (FGV)

2010 2011 2012 2013100

105

110

115

120

2010 2011 2012 2013105

110

115

120

125

130

16

Growth Diffusion Points to Weak Activity Ahead

GDP vs. Diffusion Index Broad Data Set - Diffusion

2009 2010 2011 2012 201320%

30%

40%

50%

60%

70%

80%

90%

month 3MMAhistorical average

Source: Itaú Unibanco

1995 1998 2001 2004 2007 2010 201335%

45%

55%

65%

75%

-4%

-2%

0%

2%

4%

6%

8%

10%

Difusão dados (-2) PIB 4T (direita)

17

Will the Labor Market Remain Tight?

Source: IBGE, Itaú Unibanco

Unemployment Rate%, sa

Average Real Wagessa (2003=100)

2007 2009 2011 20134

5

6

7

8

9

10

11

2007 2009 2011 201385

90

95

100

105

110

115

120

Year average2011 6.62012 5.52013 5.4

Annual change2011 2.7%2012 4.2%2013 1.2%

18Source: Itaú Unibanco, Ministry of Labor

Risk: Jobs Creation Slowing Down

Formal jobs creation (Caged) was well below expectations in May.

Gradual activity recovery is likely to increase the hiring pace, but the persistence of weak data in the next months may lead to a less favorable labor market perspective

2001 2003 2005 2007 2009 2011 2013-175

-125

-75

-25

25

75

125

175

225

275

2005 2007 2009 2011 2013-2%

0%

2%

4%

6%

8%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Caged (rhs) PME/IBGE

New Jobs (CAGED)seasonally adjusted, thousands

Occupied Population annual change

19Source: Itaú Unibanco, BCB, Bloomberg

More Depreciated Exchange Rate, but there Is Overshooting

Exchange Rate – Reais per Dollar

Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-131.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

1.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

Dollar Sales

Dollar Purchases

Capital Controls Loosening

20

IPCA – Consumer Price Index

Source: Itaú Unibanco , IBGE

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-130.00%

0.15%

0.30%

0.45%

0.60%

0.75%

0.90%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

6.2%

4.9%

6.2%

6.6%6.7%

6.3%

6.1%

Monthly 12-month (rhs)

Exchange Rate Causes Higher Inflation

21

Impact of Further Depreciation on Inflation

Source: Itaú Unibanco

Exchange Rate 2.18 2.38 2.58

IPCA 2013 6.1% 6.5% 7.0%

IPCA 2014 5.9% 6.1% 6.3%

1 2 3 40.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.1%

0.5%

0.6%

0.7%

Exchange Rate Pass-Through – 10% Devaluation of the Brazilian Real

Number of Quarters After Devaluation

22Source: Itaú Unibanco, Bloomberg

Apr-11 Oct-11 Apr-12 Oct-12 Apr-13350.0%

400.0%

450.0%

500.0%

550.0%

600.0%

650.0%

572.0%

Real Interest Rates – Long-Term Bonds(NTN-B 50)

Stronger Need to Raise Interest Rates…

Yield-Curve Pricing of Selic Rate

2008

2009

2009

2009

2009

2009

2009

2009

2009

2010

2010

2010

2010

2010

2010

2010

2010

2011

2011

2011

2011

2011

2011

2011

2011

2012

2012

2012

2012

2012

2012

2012

2012

2013

2013

2013

2013

2013

2013

2013

2013

2014

2014

2014

2014

2014

2014

2014

2014

6%

7%

8%

9%

10%

11%

12%

13%

14%

23Source: Itaú Unibanco, BCB

…and Less Expansionary Fiscal Stance

Primary Surplus - % GDP Net Debt - % GDP

2010 2012 2014 2016 2018 20200.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2012 2014 2016 2018 202030

32

34

36

38

40

42

24

Challenges – Relatively High Labor Costs

Source: U.S. Bureau of Labor Statistics

Manufacturing Sector –Hourly Compensation Costs in 2011 (USD)

Change in Unit Labor Costs in USD Terms (2005-10)

Brazil Hungary Poland Mexico Phillippines

0

2

4

6

8

10

12

China South Korea

Israel Mexico Poland Brazil-20%

0%

20%

40%

60%

80%

100%

26%

-8%

20%-3% 12%

42%

9%

-1%

10%

2%

4%

36%

Real exchange rate changeNet costs

25Source: Heritage Foundation, International Energy Agency (2011); Design: Itaú Unibanco

Challenges – Heavy Tax Burden

Tax Burden – % of GDP

Swed

en

Fran

ce

Ger

man

y

Hung

ary

Ukra

ine

Pola

nd

Braz

il

Russ

ia

Spai

n

Autra

lia

USA

Sout

h Ko

rea

Arge

ntin

a

Turk

ey

Colo

mbi

a

Chile

Indi

a

Chin

a

Vene

zuel

a

Mex

ico

Arab

Em

irate

s0%

10%

20%

30%

40%

50%

60%

34%

26

Challenges: Infrastructure, Productivity

Infrastructure Ranking (World Economic Forum)

Ease of Doing Business 2012 Ranking(World Bank)

Source: World Economic Forum, World Bank

Hong KongSin-

gapore

Germany

Chile

Russia

China

Turkey

Mexico

Brazil

India

Peru

1

2

3

45

47

48

51

68

70

84

89

Chile

Peru

Colombia

Mexico

Uruguay

Paraguay

Argentina

Brazil

37

43

45

48

89

103

124

130

27Source: IBGE, Itaú Unibanco and U.S. Bureau of Labor Statistics

Challenges - Less Labor, Need More Investment

Decreasing Labor ContributionGDP Growth

Labor contribution decreases. Growth depends on increasing investments and productivity.

201020112012201320142015201620172018201920200%

1%

2%

3%

4%

5%

6%

7%

8%

2.7%

0.9%

2.3%2.2%

2008-2011 2012-2015 2016-2020

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0% Labor Capital Productivity

28

Challenges – Lack of Domestic Savings

Source: IBGE and Itaú Unibanco

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

5% 10% 15% 20% 25% 30%

Population aged 65+ (% total)

Mexico

Brazil

Poland

Italy

USA

Japan

Colombia

Spen

ding

on

soci

al s

ecur

ity (%

GD

P)

Public Spending on Social Security

29Source: IMF and Itaú Unibanco

Chi

na

Japa

n

Mex

ico

Peru

Chi

le

Arg

entin

a

Col

ombi

a

Can

ada

Bra

zil

Sout

h A

fric

a

UK

USA

54

2423 23

22 22

19

1716

13

1110

Challenges - Domestic Savings Must Increase to Enable Investments to Grow

Domestic Savings (%, 2011) Investment Rate

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 202015%

16%

17%

18%

19%

20%

21%

22%

30

Conclusion

World: news from the American economy have increased markets volatility in the short term, but the U.S. recovery is positive for the medium term.

Higher interest rates in the U.S. are here to stay, but some correction in the asset prices is likely to happen after the sell-off in the emerging markets is finished.

ü

ü Brazil: weaker Real leads to higher inflation, higher interest rates and less expansionary fiscal stance.

ü More uncertain environment (internal and external) is likely to reduce growth. The labor market is a risk.

ü

31

Long-Term Scenario

Source: Itaú Unibanco