Brazil Review March 1, 2017 Congress debates Social Security Reform The Brazilian economy in February 2017 The Lower House Special Committee began its analysis of the Social Security Reform. The government submitted to Congress its new fiscal recovery bill for states facing serious financial problems. Alexandre de Moraes was appointed the new Supreme Court minister and ministers Eliseu Padilha (on leave) and José Serra left the administration. Economic activity has yet to show signs of a recovery, and unemployment remains high. Inflation consolidated its downward trend and the Central Bank cut the basic rate of interest by a further 75 bps, to 12.25%. The public account deficit remains high, but the current account deficit is stable, financed by direct investment. The Lower House Special Committee began its analysis of the Social Security Reform Six sessions of the Lower House Special Committee for Social Security Reform have already been held. The reform s rapporteur, Artur Maia (PPS-BA), confirmed he will publish his report at the end of March. Initially, the text was expected to be submitted to the committee on March 16, but the Lower House decided to add a further four hearings to the nine that were originally scheduled, as well as a seminar. After the vote on the Special Committee rapporteur s report, the bill will move on to the floor of the Lower House, where it needs 60% of the votes for approval in two rounds of voting. New bill to assist recovery of states in serious financial straits The government sent to Congress the new fiscal recovery bill for states facing serious financial problems. The bill sets out a number of adjustments that states must implement before they are allowed to suspend debt payments to the federal government for up to three years, refinance their debts through the financial system and contract new loans to balance their accounts. The adjustments include: privatizations, increased social security contributions from state employees and various cost-cutting measures. The Rio de Janeiro Legislative Assembly approved a bill authorizing privatization of the Companhia Estadual de Águas e Esgotos (State Water and Sewage Company CEDAE). Alexandre de Moraes is the new Supreme Court minister Former justice minister Alexandre de Moraes took up the seat on the Federal Supreme Court (STF) vacated by Teori Zavaski after he died in an aircraft accident in January. Moraes will inherit the cases that Zavaski was responsible for, but the STF assigned another minister, Edson Fachin, to handle the Carwash Operation. President Michel Temer appointed representative Osmar Serraglio (PMDB-PR) to the post of Minister of Justice. Senator José Serra resigned from the Ministry of Foreign Affairs and Eliseu Padilha, the Chief of Staff, took a leave of absence, both for health reasons. Central Bank cuts interest rates by another 0.75 pp The Central Bank Monetary Policy Committee (Copom) cut the benchmark rate of interest by 75 bps once again, taking the Selic rate to 12.25%. In its statement, the Copom left the door open for larger interest rate cuts, saying that any further acceleration of its easing policy will depend on the length of the current cycle, as well as the way that economic activity, risk factors and inflation forecasts and expectations behave, in that order. Significantly, the text also mentions that the length of the cycle will depend on estimates of the Brazilian economy s structural interest rate, which the Committee will reassess over time. Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
Still no signs of recovery from economic activity December figures revealed that economic activity is still retreating. Retail sales fell 2.1% compared with the preceding month, stripping out seasonal effects, while real revenues from the Service sector fell 5.7% year over year. We estimate that fourth-quarter GDP fell 0.6% on the previous quarter the figures will be released on March 7. For January, currently available indicators (vehicle output, cardboard shipments and vehicle highway flows) suggest industrial output remained stable during the month.... while in the labor market unemployment remains high The labor market deterioration continues. The unemployment rate hit 12.6% in the quarter ending in January, representing an increase from 12.7% to 13.0% after stripping out seasonal effects. Inflation consolidates its downward trend In February, inflation as measured by the IPCA-15 stood at 0.54%, the month s lowest result since 2012. Year over year, inflation fell from 5.9% to 5.0% and is well below the 10.7% recorded in 2015. The slowdown in prices is widespread but more intense in foodstuff groups. Inflation expectations for 2017 also continued to fall, from 4.7% to 4.4%, and they remained steady, at 4.5%, for 2018. Government deficit remains high The consolidated public sector registered a primary surplus of BRL 36.7 billion in January, which was much better than expected, but the 12-month, cumulative primary deficit remains high (2.3% of GDP), as does the nominal deficit (9.2% of GDP). As a result, gross public debt rose 0.1 pp, to 69.7% of GDP. The current account deficit remains stable, financed by direct investment In January, the current account deficit totaled USD 5.1 billion. The cumulative 12-month deficit remained practically stable, at USD 23.8 billion (or 1.3% of GDP). Direct investment in Brazil totaled USD 11.5 billion for the month and a cumulative USD 85.0 billion for the preceding 12 months (4.6% of GDP), comfortably financing the deficit. Another month of rising values for financial assets The Ibovespa was up 4.0% in dollars and 3.1% in BRL, while country risk as measured by the five-year sovereign CDS fell 27 bps and ended the month at 224 bps. The exchange rate appreciated 0.9%, to BRL 3.09 per dollar. Upcoming events The Social Security Reform will continue its progress through the Lower House Special Committee in March. Protests against the Social Security Reform are scheduled for March 8 and 15, and demonstrations in support of Carwash Operation are scheduled for March 26. The Central Bank publishes its first-quarter inflation report on March 30. Page 2
Key macroeconomic data INFLATION (1) (2) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accumulated 12M 3M Annualized 2016 CPI (IPCA) 1.3 0.9 0.4 0.6 0.8 0.3 0.5 0.4 0.1 0.3 0.2 0.3 6.3 3.0 WPI 1.1 1.4 0.4 0.3 1.0 2.2 (0.0) 0.0 0.2 0.1 (0.2) 0.7 7.6 2.7 IGPM 1.1 1.3 0.5 0.3 0.8 1.7 0.2 0.2 0.2 0.2 (0.0) 0.5 7.2 2.7 2017 CPI (IPCA) 0.4 0.5 5.0 5.0 WPI 0.7 (0.1) 5.5 5.3 IGPM 0.6 0.1 5.4 5.2 MONEY AND CREDIT (1) (4) 2016 M3 (0.2) 1.2 1.2 0.5 0.8 0.7 1.0 1.2 0.5 1.0 0.7 2.0 11.0 15.8 Bank credit 0.0-0.1 (0.6) (0.2) (0.0) (0.5) (0.2) (0.3) (0.5) (0.3) (0.3) (0.8) (3.6) (5.6) 2017 M3 0.7 12.0 (1.5) Bank credit (0.4) INTEREST RATES (5) 2016 Overnight (Interbank rate in R$) 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 13.9 13.9 13.7 14.1 13.8 Two-year interest rate (in R$) 15.2 14.7 13.8 12.6 12.8 12.7 12.5 12.4 11.7 11.6 11.6 11.0 12.7 11.4 Two-year interest rate (in USD) 4.1 4.2 4.2 2.7 3.2 3.1 2.7 2.7 2.4 2.5 2.8 2.7 3.1 2.7 2017 Overnight (Interbank rate in R$) 12.9 12.2 13.8 12.9 Two-year interest rate (in R$) 10.4 9.9 11.9 10.4 Two-year interest rate (in USD) 2.9 2.6 2.9 2.7 STOCK MARKET - IBOVESPA São Paulo Stock Exchange Market Index (6) 2016 Traded Volume (daily average in US$ mm.) 1293 1503 2444 2316 1866 1907 2079 2281 2037 2751 2746 2328 2129 2608 Index Variation (end of month in US$) (10.0) 7.6 30.8 11.1 (13.7) 19.1 10.2 1.0 0.5 13.6 (10.7) 1.4 66.4 12.1 2017 Traded Volume (daily average in US$ mm.) 2184 2935 2323 2482 Index Variation (end of month in US$) 11.9 4.0 99.3 91.1 EXCHANGE RATE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (End of month) 2016 (a) BRL/USD (6) 4.04 3.98 3.56 3.45 3.60 3.21 3.24 3.24 3.25 3.18 3.40 3.26 --- --- (b) % monthly change 3.5 (1.6) (10.6) (3.0) 4.2 (10.7) 0.9 0.0 0.3 (2.1) 6.8 (4.1) (16.5) 1.1 (c) BRL/EUR (6) 4.38 4.32 4.05 3.95 4.00 3.54 3.62 3.61 3.65 3.48 3.60 3.43 --- --- (d) % monthly change 2.7 (1.3) (6.2) (2.6) 1.4 (11.6) 2.2 (0.2) 1.1 (4.6) 3.4 (5.4) (20.2) (24.3) 2017 (a) BRL/USD (6) 3.13 3.10 --- --- (b) % monthly change (4.1) (0.9) (22.1) (30.7) (c) BRL/EUR (6) 3.38 3.29 --- --- (d) % monthly change (1.6) (2.5) (23.9) (30.3) MAIN BRAZILIAN BONDS (%) 2016 CDS 5-yr (8) 473 460 366 340 363 317 291 260 273 274 297 281 BR 40 Spread over US Treasury (9) 487 487 394 375 388 351 347 320 334 322 360 337 2017 CDS 5-yr (8) 251 224 BR 40 Spread over US Treasury (9) 300 291 1. End of month values. Percentage change over the previous period. 2. WPI (Wholesale Price Index) and IGPM (General Price Index, Market) from the Vargas Foundation; CPI (IPCA) (Consumer Price Index) from IBGE. The last figure for the CPI refers to the 30-day period ending on the 15th of this last month; previous figures refer to the full monthly period. Figures for the IGPM [a weighted average of Vargas Foundation s consumer price index (30%), WPI (60%), and national construction price index (10%)], always refer to the 30-day period ending on the 20th of each month. 3. Based on the average of the last three months, accumulated for 12 months. 4. M3 = currency outside banks plus demand deposits plus savings deposits plus CDs plus money market funds plus repurchase operations with federal securities. Bank credit = financial institutions' total credit to public and private sectors seasonally adjusted by Itaú-BBA 5. Annual yields, in percentage terms, gross of witholding tax on nominal income on nonbank operations. End of period values, except for the overnight rate, which is the cumulative value for the month. The USD rate is a swap rate and is deliverable in BRL. 6. Daily average: total monthly volume/business days. Index variation: ratio of % monthly change of Ibovespa in reais to % monthly change of R$/USD exchange rate. 7. Average of the offer rate of the last business day of the month. 8. CDS = premium in basis points, calculated over Libor, paid as a protection against Brazil's default over a 5y period. 9. Spread over US Treasury bond of equivalent duration, in basis points. BR 40 is callable on or anytime after 2015/08/17. Page 3
Key macroeconomic data (continued) GDP (1) 2013 2014 2015 2016 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Index (1995 = 100) 175.5 174.3 176.7 174.4 174.6 175.0 175.1 173.4 169.3 166.7 164.8 168.5 164.0 163.3 161.9 % quarterly change (0.0) 3.0 0.7 (1.3) 0.1 0.2 0.5 (0.9) (2.3) (1.6) (1.1) (3.8) (0.5) (0.4) (0.8) ECONOMIC ACTIVITY Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 Industrial Production (2) 85.2 83.4 84.5 84.8 85.0 86.5 86.6 83.7 84.3 83.4 83.7 85.6 Capacity Utilization (3) 74.2 73.9 73.9 74.3 73.9 74.0 74.1 73.9 74.2 73.7 73.7 72.9 2017 Industrial Production (2) Capacity Utilization (3) 74.6 74.3 2016 Retail Sales (4) 104.6 105.8 104.7 105.0 104.1 104.2 103.5 102.8 101.9 101.5 102.5 100.4 Consumer Confidence Index (5) 66.6 69.3 66.9 65.3 69.2 72.2 76.5 78.8 79.5 79.8 77.9 73.1 Business Confidence Index (6) 77.9 76.0 76.2 78.1 78.9 82.1 85.7 85.7 87.8 86.1 86.3 84.7 2017 Retail Sales (4) Consumer Confidence Index (5) 79.3 81.8 Business Confidence Index (6) 89.0 87.8 EMPLOYMENT Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (%) 2016 Unemployment Rate (7) 9.9 10.3 10.4 10.7 10.9 11.1 11.4 11.7 11.9 12.1 12.4 12.7 Employment/Household Survey (8) 91.5 91.3 91.1 90.9 90.9 90.7 90.5 90.2 89.9 89.7 89.9 89.8 Employment/Business Registry(9) 144.9 144.1 143.6 143.0 142.6 142.2 141.8 141.4 140.9 140.6 140.1 140.0 2017 Unemployment Rate (7) 13.0 Employment/Household Survey (8) 89.7 Employment/Business Registry(9) PUBLIC SECTOR BUDGET (10) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (% of GDP) 2016 Overall Balance (YTD) (11) (5.8) (8.3) (6.1) (5.2) (6.5) (6.5) (7.0) (7.6) (8.2) (7.3) (8.0) (9.0) Ex-interest Balance (YTD) 5.7 0.5 (0.4) 0.2 (0.5) (0.8) (1.0) (1.4) (1.8) (0.9) (1.5) (2.5) Gross Public Debt (12) 66.4 66.6 66.3 66.7 67.7 67.5 68.6 69.2 69.9 69.7 70.7 69.6 Net Public Debt (13) 35.3 36.2 38.3 38.9 39.1 41.3 41.9 42.7 43.6 43.8 43.9 46.0 2017 Overall Balance (YTD) (11) 0.1 Ex-interest Balance (YTD) 7.1 Gross Public Debt (12) 69.7 Net Public Debt (13) 45.4 BALANCE OF PAYMENTS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (US$ billion) 2016 Trade Balance 0.6 2.9 4.2 4.6 6.2 3.7 4.3 3.9 3.6 2.1 4.5 4.2 Exports 11.1 13.3 15.9 15.3 17.5 16.6 16.2 16.9 15.7 13.7 16.1 15.9 Imports 10.5 10.4 11.7 10.7 11.3 12.9 11.9 13.0 12.1 11.6 11.6 11.7 Current Account (4.8) (1.9) (0.9) 0.4 1.2 (2.5) (4.0) (0.6) (0.5) (3.3) (0.7) (5.9) Direct Investment Liabilities (14) 5.5 5.9 5.6 6.8 6.1 3.9 0.2 7.2 5.3 8.4 8.6 15.4 Other Capital Inflows (15) (4.0) (1.0) (2.7) 0.4 (1.9) 3.8 5.0 (4.4) (2.7) (11.0) (5.0) (3.8) Brazilian Capital Outflows (16) (2.7) 2.7 8.3 3.9 3.0 7.4 (3.5) 2.0 2.2 (4.9) 2.3 5.5 Intl Reserves / Liquidity (17) 369.8 371.7 375.2 376.7 374.6 376.7 377.5 376.9 377.8 375.4 372.8 372.2 Central Bank dollar swaps (18) (108.1) (108.1) (102.0) (69.0) (62.1) (62.1) (52.6) (40.1) (33.1) (28.3) (26.6) (26.6) Total External Debt (19) 332.1 330.7 334.6 337.8 331.4 336.4 338.1 338.8 338.3 335.4 333.8 319.8 2017 Trade Balance 2.5 Exports 14.9 Imports 12.4 Current Account (5.1) Direct Investment Liabilities (14) 11.5 Other Capital Inflows (15) (4.4) Brazilian Capital Outflows (16) 2.0 Intl Reserves / Liquidity (17) 374.9 Central Bank dollar swaps (18) (26.6) Total External Debt (19) 316.7 Year Average Last 12 M 1. Seasonally adjusted IBGE data. 2. Seasonally adjusted IBGE index for Brazil, average 2002=100. 3. Seasonally adjusted FGV data for Brazil. 4. Seasonally adjusted IBGE nationwide index for inflation-adjusted retail sales, 2003=100. 5. FGV survey data on nationwide consumer expectations for their current and future economic conditions. Seasonally adjusted, September 2005 = 100. 6. FGV survey data on nationwide manufacturing industry expectations for their current and future conditions. Seasonally adjusted. 7. IBGE original household data for the entire country, labor force with fourteen years of age or more, 30-day search period, 3-month moving average, seasonally adjusted by Itaú BBA. 8. IBGE household data (PNAD) on employed population for the entire country, millions, 3-month moving average, seasonally adjusted by Itaú BBA 9. Business registry data (CAGED) from the Labor Ministry, average 2003=100, including all employees with labor cards in the country, seasonally adjusted by Itau BBA. 10. Accumulated flows in the year to date, except for net public debt which is an end-of-period stock. Includes federal, state and municipal governments, with respective non-financial enterprises (plus the Central Bank) and excludes Petrobras and Eletrobras. 11. Net public sector borrowing requirements. 12. General Goverment gross debt. Does not include Central Bank, public enterprises and Social Security administration. 13. Gross debts less credits of the general government, plus net debts of Central Bank and public enterprises. 14. Includes intercompany loans. 15. Includes stocks, bonds, loans, suppliers' credits, asset transfers, and others 16. Includes direct investment and others 17. Includes, in addition to cash, stocks of repurchase lines and loans abroad 18. Brazilian Central Bank dollar swaps stock. A negative figure means that the Central Bank s position is long in swaps and, hence, short in U.S. dollars. 19. Total short, medium and long-term external debt of public and private sectors (excluding intercompany loans that are included in direct investment). 84.7 73.9-74.5 103.4 72.9 82.1-80.6 88.4 Year Average 11.3 90.5 142.1 13.0 89.7 (9.0) (2.5) (8.5) (7.1) Last 12 M 45.0 184.5 139.4 (23.5) 78.9 (27.3) 26.2 46.9 188.2 141.3 (23.8) 85.0 (27.7) 30.9 Page 4
Macro Research Itaú Mario Mesquita Chief Economist Tel: +5511 3708-2696 Click here to visit our digital research library. Relevant Information 1. This report has been prepared and issued by the Macro Research Department of Banco Itaú Unibanco S.A. ( Itaú Unibanco ). This report is not a product of the Equity Research Department of Itaú Unibanco or Itaú Corretora de Valores S.A. and should not be construed as a research report ( relatório de análise ) for the purposes of the article 1 of the CVM Instruction NR. 483, dated July 06, 2010. 2. This report aims at providing macroeconomics information, and does not constitute, and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell any financial instrument, or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. 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