Brazil Review March 1, 2018 Central Bank near the end of the easing cycle The Brazilian economy in February 2018 The Central Bank reduced the benchmark Selic interest rate by 25 bps to 6.75% and signaled that, in the absence of positive data surprises, the easing cycle should be interrupted. Fitch followed S&P in downgrading Brazil s credit rating. A military intervention was declared for public safety in Rio de Janeiro and the government delayed the pension reform vote. Economic activity is picking up, mostly driven by monetary policy stimuli. GDP expanded 1.0% in 2017. Inflation remains low, with a good composition. The central government posted a primary budget surplus of 31 billion reais in January and is expected to meet this year s fiscal target without hardship. Copom nears the end of the cycle The Central Bank s Monetary Policy Committee (Copom) reduced the benchmark Selic interest rate by 25 bps in its first meeting of the year and signaled that, in the absence of positive data surprises that point to an even more benign inflation scenario, the easing cycle should be interrupted in the March meeting. However, inflation remains low and with a good composition, possibly leading to another cut in the Selic rate in March, though this is not our baseline scenario. We forecast stability in the Selic rate at 6.75% until at least the end of 2018. High-frequency inflation data in Brazil (and the U.S.) must be monitored, along with the impact of such figures on expectations and the prospective scenario, in order to determine if the Copom may choose to add modest monetary stimulus. Fitch follows S&P and downgrades Brazil s credit rating Fitch downgraded Brazil s sovereign credit rating to BB- from BB, and changed its outlook to stable from negative. The country is now three notches below investment grade. Just as S&P did in the previous month, Fitch highlighted headwinds against the fiscal adjustment and the expected intensification of political uncertainties during 2018. Military intervention is declared for public safety in Rio de Janeiro President Michel Temer declared a military intervention in public safety in Rio de Janeiro. The Constitution establishes that federal interventions prevent the approval of constitutional amendments, so that voting the pension reform is not feasible. The government, which apparently did not have enough votes to approve it even before the intervention, formally announced that it will not try to push the pension reform through Congress in the short term. Industrial production sustains an upward trend in December Industrial production advanced 2.8% mom/sa in December, beating the median of market expectations. In 2017, the indicator expanded 2.5%, its fastest growth pace since 2010. Indicators related to gross fixed capital formation remain consistent with growth in this demand component. Production of capital goods was stable at the margin (after seven consecutive increases) and production of construction material climbed 5.0% during the month and 7.2% yoy. Available coincident indicators (industrial confidence, capacity utilization, weekly foreign trade figures, power consumption, auto sector data, among others) point to a 2.1% drop in industrial production in January. Importantly, the upward trend (assessed by the 3-month moving average) would be sustained if such drop is confirmed. 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.
Retail sales increase 2% in 2017 Retail sales dropped 1.5% mom/sa in December, disappointing the median of market expectations. In 2017, sales expanded 2.0%, after falling 6.3% in 2016. Weakness was widespread across segments in December, but those more influenced by store promotions (furniture and appliances; personal items) were particularly relevant, reinforcing the importance of the Black Friday event in explaining the result. Service sector revenues rise for a second straight month Real revenues from services climbed 1.3% mom/sa in December, marking a second consecutive increase. Growth was not widespread (only 7 out of 12 activities posted gains), but reinforces our view that the service sector is tracking the overall recovery in economic activity. GDP grows 1.0% in 2017 GDP increased 0.1% in 4Q17, in line with our call and below market estimates (0.3%). Hence, the economy grew 1.0% in 2017, after shrinking 3.5% in 2016. The agricultural sector posted a robust 13% advance. Furthermore, 4Q17 figures showed that consumption and investment continue to expand. Inflation remains low, with a good composition The mid-month consumer price index IPCA-15 climbed 0.38% in February, close to market expectations, driving the year-over-year change to 2.86%. Service inflation continues to recede, especially due to high unemployment and lower inertia from past inflation. For the full year, our estimate for the headline IPCA is 3.5%, thus below the Central Bank s 4.5% target. Primary budget surplus reaches 31 billion reais in January The central government posted a surplus of 31 billion reais in January, boosted by strong tax revenues, at 155.6 billion reais, or 10.7% more than one year earlier in real terms. Tax amnesty program REFIS provided a noteworthy contribution of 7.8 billion reais during the month. These readings indicate that the government is very likely to meet this year s fiscal target. Financial assets In February, the Ibovespa dropped 2.0% in dollars and rose 0.5% in local currency. Country risk measured by the 5-year CDS increased and ended the month at 156 bps. The exchange rate weakened to 3.24 reais per dollar. Upcoming events The Central Bank s Monetary Policy Committee (Copom) meets on March 21 and may interrupt the easing cycle or decide in favor of an additional 25bp-cut in the benchmark rate to 6.50%. News on the presidential election will also be closely monitored, as the deadline for presidential candidates to join political parties looms in early April. Page 2
Key macroeconomic data INFLATION (1) (2) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accumulated 12M 3M Annualized 2017 CPI (IPCA) 0.4 0.3 0.2 0.1 0.2 (0.2) 0.2 0.2 0.2 0.4 0.3 0.4 2.9 4.7 WPI 0.7 (0.1) (0.2) (1.8) (1.6) (1.2) (1.2) (0.1) 0.7 0.2 0.7 0.9 (2.8) 7.4 IGPM 0.6 0.1 0.0 (1.1) (0.9) (0.7) (0.7) 0.1 0.5 0.3 0.5 1.2 (0.1) 8.3 2018 CPI (IPCA) 0.3 0.4 2.9 4.7 WPI 0.9 0.0 (2.5) 7.6 IGPM 0.8 0.1 (0.0) 8.7 MONEY AND CREDIT (1) (4) 2017 M3 0.7 0.8 1.3 (0.1) 0.9 0.5 1.0 (0.8) 2.2 0.0 0.6 9.8 17.7 48.7 Bank credit (0.1) 0.3 0.1 (0.0) (0.3) 0.3 (0.6) (0.3) (0.2) 0.3 (0.1) 0.0 (0.6) 0.8 2018 M3 (3.2) Bank credit 0.0 INTEREST RATES (5) 2017 Overnight (Interbank rate in R$) 12.9 12.2 12.2 11.2 11.2 10.2 9.2 9.2 8.2 7.4 7.4 6.9 9.8 7.2 Two-year interest rate (in R$) 10.4 9.9 9.6 9.5 9.3 9.2 8.5 8.4 7.9 8.3 8.3 8.1 8.9 8.2 Two-year interest rate (in USD) 2.9 2.6 2.5 2.4 2.7 2.7 2.7 2.8 2.8 2.8 2.9 2.9 2.7 2.9 2018 Overnight (Interbank rate in R$) 6.9 6.6 8.8 6.8 Two-year interest rate (in R$) 8.1 7.7 8.6 7.9 Two-year interest rate (in USD) 3.0 3.4 2.8 3.1 STOCK MARKET - IBOVESPA São Paulo Stock Exchange Market Index (6) 2017 Traded Volume (daily average in US$ mm.) 2184 2935 2568 2558 2949 2533 1985 2681 3179 3215 2909 2811 2709 2978 Index Variation (end of month in US$) 11.9 4.0 (4.6) (0.3) (5.5) (1.7) 10.7 6.9 4.2 (3.3) (2.7) 4.6 25.0 (6.0) 2018 Traded Volume (daily average in US$ mm.) 3227 2796 2983 Index Variation (end of month in US$) 16.3 29.8 96.6 EXCHANGE RATE Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov Dez (End of month) 2017 (a) BRL/USD (6) 3.13 3.10 3.17 3.20 3.24 3.31 3.13 3.15 3.17 3.28 3.26 3.31 --- --- (b) % monthly change (4.1) (0.9) 2.2 0.9 1.4 2.0 (5.3) 0.5 0.7 3.4 (0.5) 1.4 1.5 18.9 (c) BRL/EUR (6) 3.38 3.29 3.33 3.46 3.63 3.78 3.40 3.75 3.40 3.81 3.89 3.96 --- --- (d) % monthly change (1.6) (2.7) 1.3 4.1 4.8 4.2 (10.0) 10.2 (9.3) 12.0 2.1 1.8 15.5 83.4 2018 (a) BRL/USD (6) 3.16 3.24 --- --- (b) % monthly change (4.4) 2.6 4.5 (2.6) (c) BRL/EUR (6) 3.95 3.96 --- --- (d) % monthly change (0.4) 0.4 16.9 7.5 MAIN BRAZILIAN BONDS (%) 2017 CDS 5-yr (8) 251 224 226 218 236 242 210 196 196 172 171 163 BR 40 Spread over US Treasury (9) 300 291 277 269 295 312 286 290 263 274 265 270 2018 CDS 5-yr (8) 144 156 BR 40 Spread over US Treasury (9) 296 270 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) 2014 2015 2016 2017 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Index (1995 = 100) 175.1 173.1 169.1 166.8 165.3 168.5 163.6 163.0 162.1 161.3 162.5 163.0 163.4 163.5 163.7 % quarterly change 0.5 (1.2) (2.3) (1.4) (0.9) (3.8) (1.0) (0.4) (0.6) (0.5) (3.6) 1.0 0.2 0.1 0.1 ECONOMIC ACTIVITY Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 Industrial Production (2) 85.7 86.1 84.8 85.6 86.9 87.1 87.7 87.4 87.8 88.3 88.6 91.1 Capacity Utilization (3) 74.6 74.3 74.4 74.7 74.7 74.2 74.7 74.1 73.9 74.3 74.2 74.5 2018 Industrial Production (2) Capacity Utilization (3) 74.7 75.6 2017 Retail Sales (4) 91.5 91.4 90.2 91.3 91.5 92.3 92.3 91.9 92.3 91.7 92.3 91.0 Consumer Confidence Index (5) 79.3 81.8 85.3 82.2 84.2 82.3 82.0 80.9 82.3 83.7 86.8 86.4 Business Confidence Index (6) 89.0 87.8 90.7 91.2 92.3 89.5 90.8 92.2 92.8 95.4 98.3 99.6 2018 Retail Sales (4) Consumer Confidence Index (5) 88.8 Business Confidence Index (6) 99.4 EMPLOYMENT Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (%) 2017 Unemployment Rate (7) 12.9 13.1 13.2 13.2 13.0 12.9 12.7 12.6 12.6 12.6 12.5 12.4 Employment/Household Survey (8) 89.7 89.6 89.5 89.6 89.8 90.2 90.6 91.0 91.2 91.3 91.5 91.6 Employment/Business Registry(9) 165.7 165.5 165.2 165.1 165.0 165.0 165.0 164.9 164.7 165.0 165.1 165.4 2018 Unemployment Rate (7) Employment/Household Survey (8) Employment/Business Registry(9) PUBLIC SECTOR BUDGET (10) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (% of GDP) 2017 Overall Balance (YTD) (11) 0.1 (5.2) (6.8) (5.8) (7.2) (7.6) (7.7) (7.7) (7.9) (7.7) (7.5) (7.8) Ex-interest Balance (YTD) 7.2 1.3 0.1 0.7 (0.6) (1.1) (1.4) (1.4) (1.7) (1.4) (1.3) (1.7) Gross Public Debt (12) 69.9 70.5 71.2 71.4 72.6 73.1 73.8 73.7 73.9 74.4 74.4 74.0 Net Public Debt (13) 46.5 47.3 47.5 47.4 48.1 48.7 50.1 50.2 50.9 50.7 51.1 51.6 2018 Overall Balance (YTD) (11) 3.4 Ex-interest Balance (YTD) 8.5 Gross Public Debt (12) 74.5 Net Public Debt (13) 51.8 BALANCE OF PAYMENTS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (US$ billion) 2017 Trade Balance 2.5 4.4 6.9 6.7 7.4 7.0 6.1 5.3 4.9 4.9 3.2 4.6 Exports 14.9 15.4 20.0 17.6 19.7 19.7 18.7 19.4 18.6 18.8 16.6 17.6 Imports 12.4 11.1 13.1 10.9 12.3 12.8 12.7 14.1 13.7 13.9 13.4 12.9 Current Account (5.1) (0.9) 1.4 1.1 2.8 1.3 (3.4) (0.3) 0.4 (0.3) (2.4) (4.3) Direct Investment Liabilities (14) 11.5 5.3 7.1 5.6 2.9 4.0 4.1 5.2 6.3 8.1 5.0 5.4 Other Capital Inflows (15) (6.3) 3.3 (4.8) 1.4 (2.1) (3.5) 6.4 2.8 1.4 (0.2) (1.1) (0.9) Brazilian Capital Outflows (16) 0.0 7.4 1.4 4.1 3.1 1.8 6.2 7.7 8.8 6.9 1.5 7.8 Intl Reserves / Liquidity (17) 374.9 375.3 375.3 376.3 377.7 378.4 381.0 381.8 381.2 380.4 381.1 382.0 Central Bank dollar swaps (18) (26.6) (26.6) (22.0) (17.8) (27.8) (27.8) (27.8) (27.8) (23.8) (23.8) (23.8) (23.8) Total External Debt (19) 316.7 315.1 319.2 319.7 314.3 314.9 306.1 315.3 318.4 320.7 317.2 309.5 2018 Trade Balance 2.4 Exports 16.9 Imports 14.5 Current Account (4.3) Direct Investment Liabilities (14) 6.5 Other Capital Inflows (15) 10.0 Brazilian Capital Outflows (16) 12.1 Intl Reserves / Liquidity (17) 383.7 Central Bank dollar swaps (18) (23.8) (23.8) Total External Debt (19) 313.0 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). 87.3 74.4-74.7 91.7 83.1 92.5-88.8 99.4 Year Average 12.8 90.5 165.1 (7.8) (1.7) Last 12 M 64.0 217.2 153.2 (9.8) 70.3 (3.4) 56.6 63.9 219.3 155.4 (9.0) 65.4 12.9 19.9 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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