Brazil Review Wednesday, April 01, 2015 Depreciation of the Real Sharpens The Brazilian Economy in March 2015 GDP growth reached 0.1% in 2014. The latest confidence and employment indicators showed a further weakening of the economy this year. In its inflation report, the Brazilian Central Bank suggested that the interest-rate hiking cycle is coming to an end. The Long-Term Interest Rate (TJLP) increased again. Inflation reached 7.9%, pressured by the readjustment of tariffs (electricity, gasoline, urban bus fares) early this year. The fiscal result was worse than expected and the current account deficit receded. Government approval fell again, amid public protests throughout the country. Education Minister Cid Gomes resigned soon after a confrontation with the PMDB party. GDP Grows 0.3% in 4Q14 In the full year, growth stood at 0.1% GDP expanded by 0.3% qoq in 4Q14. For the full year, growth stood at 0.1%, with a 0.9% expansion in private consumption and a 4.4% drop in investment. The numbers already incorporate the new National Accounts methodology. The data for 2012 and 2013 were revised upward after the adoption of the new methodology. The major revisions focused, from the demand side, on investment, and from the supply side, on the industry. Consumer Confidence Recedes to an All-Time Low Consumer confidence (calculated by FGV) fell 2.9% in March mom/sa. Thus, for the third consecutive time, the index reached a new record low for the series started in 2005. The percentage of people reporting difficulty in finding employment increased from 67.9% in February to 75.4% in March, reinforcing the scenario of weakening labor market. Rising Unemployment According to IBGE, the unemployment rate reached 5.9% in February. On a seasonally-adjusted basis, unemployment rose from 5.4% in January to 5.6% in February, posting a second consecutive increase and sustaining an upward trend. There was a decline in the real wage bill due to a drop in both the workforce and the real wage. Inflation Report Suggests that the Hiking Cycle is Coming to its End The Monetary Policy Committee published the first-quarter Inflation Report. The report discussed the current realignment of relative prices (regulated prices, exchange rate) and concluded that the effects on inflation "tend to be limited to the short term and be strongly mitigated by 2016." The inflation forecasts included in the report support this conclusion. As we understand it, the report suggests that the interest-rate hiking cycle is nearing an end. We believe that the COPOM will implement a final rate hike in April. Long-Term Interest Rate Rises to 6% The National Monetary Council raised the Long-Term Interest Rate (TJLP) by 0.50 pp, which parameterizes the majority of BNDES loans. The hike the second this year is part of a set of economic adjustments proposed by the government s new economic team. 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.
IPCA-15 Inflation Reaches 7.9% in the Last 12 Months Inflation measured by the IPCA-15 stood at 1.24% in March, in line with market expectations. The result was substantially higher than in March of last year (0.73%), bringing the inflation accumulated over the last 12 months to 7.9%. Regulated prices continued to put pressure on inflation, reflecting the realignment of tariffs (electricity, gasoline, urban bus fares) early this year. Over the last 12 months, regulated price inflation reached 11.5%. Worse-than-Expected Fiscal Result The consolidated public sector registered a worse-than-expected primary deficit of BRL 2.3 billion in February. The negative surprise was concentrated in the central government, which showed a deficit of BRL 6.7 billion. Federal revenue continued to fall as a result of weak economic activity. Federal spending is also on a downtrend, but deeper spending cuts are necessary for the primary surplus to reach levels close to the target stipulated for this year. Current Account Deficit Recedes in February The balance of payments in February showed a lower-than-expected current account deficit, with a decline in both the service and income deficit. Over the last 12 months, the current account deficit has dropped to USD 89.8 billion (from USD 90.4 billion in January), but has remained stable as a percentage of GDP (4.2%). In the capital account, foreign direct investment was lower than expected, at USD 60 billion in the last 12 months (or 2.8% of GDP). Government s Approval Rating Fell Again Amid Country-Wide Public Protests Millions of people gathered in various Brazilian cities to protest against the government. According to a Datafolha survey, the government's approval rating dropped to 13% in March, from 23% in February. President Dilma Rousseff's rejection rate rose from 44% to 62%. Soon after a confrontation with the PMDB party, Education Minister Cid Gomes (PROS) resigned from his post. Strong BRL Depreciation; BCB Ends Its FX Swap Program The exchange rate reached 3.20 reais per dolar at the end of March an increase of 11.5% over the previous month. The Brazilian Central Bank announced that, starting in April, it will no longer offer FX swap contracts, but will continue to renew the existing contracts. The Ibovespa fell 0.6% in reais and 10.9% in dollars. The country risk measured by the 5-year CDS increased 41 bps, to 284 bps, reaching 306 during the month. Upcoming Events The progress of the fiscal adjustment bills in Congress will be a highlight, particularly provisional measures 664 and 665, relating to changes in unemployment insurance, salary bonuses and survivor pensions. The next COPOM meeting is scheduled for April 29, when we expect a final monetary rate hike. Page 2
Key Macroeconomic Data INFLATION (1) (2) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accumulated 12M 3M Annualized 2014 CPI (IPCA) 0.5 0.7 0.9 0.7 0.5 0.4 0.0 0.3 0.6 0.4 0.5 0.8 6.4 7.1 WPI 0.3 0.3 2.2 0.8 (0.7) (1.4) (1.1) (0.4) 0.1 0.2 1.3 0.6 2.1 8.8 IGPM 0.5 0.4 1.7 0.8 (0.1) (0.7) (0.6) (0.3) 0.2 0.3 1.0 0.6 3.7 7.8 2015 CPI (IPCA) 1.2 1.2 1.2 8.0 15.8 WPI 0.6 (0.1) 0.9 0.7 5.7 IGPM 0.8 0.3 1.0 3.2 8.4 MONEY AND CREDIT (1) (4) 2014 M3 0.2 0.7 0.6 1.0 1.4 0.8 1.4 2.5 1.0 0.7 1.0 0.8 12.7 10.6 Bank credit 1.1 1.0 0.9 0.8 0.7 0.8 0.8 0.9 1.0 1.0 1.0 0.9 11.4 12.2 2015 M3 0.3 0.4 12.6 6.2 Bank credit 0.9 0.9 11.0 11.1 INTEREST RATES (5) 2014 Overnight (Interbank rate in R$) 10.4 10.7 10.7 10.9 10.9 10.9 10.9 10.9 10.9 11.2 11.2 11.7 10.9 11.3 Two-year interest rate (in R$) 12.6 11.9 12.2 12.0 11.5 11.3 11.3 11.2 12.2 12.2 12.2 13.0 12.0 12.5 Two-year interest rate (in USD) 2.3 2.0 1.6 1.5 1.6 1.6 1.6 1.6 2.1 2.1 2.2 3.0 2.0 2.4 2015 Overnight (Interbank rate in R$) 12.2 12.2 12.7 11.4 12.3 Two-year interest rate (in R$) 12.5 12.7 13.4 12.1 12.9 Two-year interest rate (in USD) 2.4 2.9 3.3 2.2 2.8 STOCK MARKET - IBOVESPA São Paulo Stock Exchange Market Index (6) 2014 Traded Volume (daily average in US$ mm.) 2577 2708 2883 3296 2795 3061 2660 3289 3599 4444 2711 2796 3068 3317 Index Variation (end of month in US$) (10.7) 2.8 10.4 3.6 (0.9) 5.5 2.0 11.1 (19.3) 1.2 (4.5) (13.4) (14.4) (47.1) 2015 Traded Volume (daily average in US$ mm.) 2394 2515 2058 2968 2322 Index Variation (end of month in US$) (6.4) 1.7 (10.9) (28.3) (48.1) EXCHANGE RATE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (End of month) 2014 (a) BRL/USD (7) 2.43 2.33 2.26 2.24 2.24 2.20 2.27 2.24 2.45 2.44 2.56 2.66 --- --- (b) % monthly change 3.6 (3.8) (3.0) (1.2) 0.1 (1.6) 2.9 (1.2) 9.4 (0.3) 4.7 3.8 13.4 14.8 (c) BRL/EUR (7) 3.27 3.22 3.12 3.10 3.05 3.02 3.04 2.95 3.10 3.06 3.19 3.23 --- --- (d) % monthly change 1.4 (1.5) (3.3) (0.6) (1.5) (1.3) 0.7 (3.0) 5.1 (1.2) 4.4 1.3 0.2 14.7 2015 (a) BRL/USD (7) 2.66 2.88 3.21 --- --- (b) % monthly change 0.2 8.1 11.5 41.8 (53.0) (c) BRL/EUR (7) 3.01 3.23 3.45 --- --- (d) % monthly change (6.9) 7.2 6.8 10.5 (22.5) MAIN BRAZILIAN BONDS (%) 2014 CDS 5-yr (8) 205.7 171.3 169.7 146.7 142.3 144.2 156.0 127.0 175.6 151.8 153.5 196.9 BR 40 Spread over US Treasury (9) 150.5 103.9 82.6 20.4 38.9-26.7 18.6-48.9 8.8-17.5 35.7-50.9 2015 CDS 5-yr (8) 226.6 242.9 283.6 BR 40 Spread over US Treasury (9) -59.7 4.2-7.9 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 the 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 withholding 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 BRL to % monthly change of BRL/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 5-year period. 9. Spread over U.S. Treasury bond of equivalent duration, in basis points. BRL 40 is callable on, or anytime after, 8/17/2015. Page 3
Key Macroeconomic Data (Continued) GDP (1) 2012 2013 2014 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Index (1995 = 100) 166.5 167.3 169.4 170.0 168.3 171.2 173.3 173.5 173.6 172.9 174.7 172.3 172.6 173.1 173.2 % quarterly change 0.1 0.5 1.3 0.4 1.8 0.7 1.2 0.1 0.1 2.7 0.6 (1.4) 0.2 0.3 0.1 ECONOMIC ACTIVITY Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 Industrial Production (2) 101.1 101.3 100.5 99.9 99.1 97.7 98.3 98.9 98.4 98.6 97.5 94.4 Capacity Utilization (3) 84.6 84.6 84.4 84.1 84.3 83.5 83.2 83.2 83.0 82.0 82.7 81.3 2015 Industrial Production (2) 96.3 Capacity Utilization (3) 82.0 81.6 Year Average 98.8 83.4 96.3 81.8 2014 Retail Sales (4) 116.4 116.2 115.5 115.1 115.4 114.7 113.6 114.9 115.4 116.7 118.5 115.4 Consumer Confidence Index (5) 108.9 107.1 107.2 106.3 102.8 103.8 106.9 102.3 103.0 101.5 95.3 96.2 Business Confidence Index (6) 99.5 98.5 96.2 95.6 90.7 87.2 84.4 83.4 81.1 82.6 85.6 84.3 2015 Retail Sales (4) 116.3 Consumer Confidence Index (5) 89.8 85.4 82.9 Business Confidence Index (6) 85.9 83.0 76.2 EMPLOYMENT Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (%) 2014 Unemployment Rate (7) 4.9 4.8 4.7 4.6 4.7 4.7 4.8 5.0 4.9 4.8 5.2 5.0 Employment/Household Survey (8) 125.0 124.9 124.8 124.8 124.5 125.0 124.4 124.5 124.3 124.6 124.9 124.2 Employment/Business Registry(9) 161.5 162.1 162.3 162.2 162.2 162.1 162.2 162.2 162.2 162.0 162.1 161.9 2015 Unemployment Rate (7) 5.4 5.6 Employment/Household Survey (8) 124.4 123.9 Employment/Business Registry(9) 161.7 161.3 PUBLIC SECTOR BUDGET (10) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (% of GDP) 2014 Overall Balance (11) (2.5) (2.5) (2.7) (2.3) (3.4) (3.7) (4.2) (4.6) (5.9) (5.7) (6.1) (6.7) Ex-interest Balance (YTD) 4.8 2.7 2.1 2.6 1.5 1.2 0.9 0.3 (0.4) (0.3) (0.4) (0.6) Gross Public Debt (12) 58.1 57.4 57.5 57.9 58.2 59.0 59.6 60.4 61.9 62.4 63.1 63.5 Net Public Debt (13) 33.1 33.6 34.2 34.3 34.7 35.2 35.4 36.1 36.0 36.3 36.2 36.8 2015 Overall Balance (11) 0.7 (6.5) Ex-interest Balance (YTD) 4.9 2.2 Gross Public Debt (12) 64.4 65.5 Net Public Debt (13) 36.6 36.3 BALANCE OF PAYMENTS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (US$ billion) 2014 Trade Balance (4.1) (2.1) 0.1 0.5 0.7 2.4 1.6 1.2 (0.9) (1.2) (2.4) 0.3 Exports 16.0 15.9 17.6 19.7 20.8 20.5 23.0 20.5 19.6 18.3 15.6 17.5 Imports (20.1) (18.1) (17.5) (19.2) (20.0) (18.1) (21.5) (19.3) (20.6) (19.5) (18.0) (17.2) Current Account (11.6) (7.4) (6.3) (8.3) (6.6) (3.5) (6.0) (5.5) (7.9) (8.2) (9.4) (10.3) Foreign Direct Investment (14) 5.1 4.1 5.0 5.2 6.0 3.9 5.9 6.8 4.2 5.0 4.6 6.6 Other Capital Inflows (15) 9.2 5.4 10.4 9.0 9.6 8.7 5.3 8.1 9.7 11.8 3.2 (7.5) Brazilian Capital Outflows (16) (0.1) (3.2) (7.9) (4.8) (8.1) (5.7) 0.6 (7.5) (4.7) (8.7) 2.3 2.8 Intl Reserves / Liquidity (17) 375.8 377.2 377.2 378.4 379.4 380.3 379.0 379.4 375.7 377.0 376.0 373.7 Central Bank dollar swaps (18) (79.8) (80.2) (87.4) (88.0) (86.3) (88.8) (90.2) (93.1) (97.6) (102.2) (105.8) (109.5) Total External Debt (19) 311.3 311.8 320.2 326.3 326.7 333.3 328.4 333.1 338.4 343.5 345.5 348.7 2015 Trade Balance (3.2) (2.8) Exports 13.7 12.1 Imports 16.9 14.9 Current Account (10.7) (6.9) Foreign Direct Investment (14) 4.0 2.8 Other Capital Inflows (15) 11.4 6.2 Brazilian Capital Outflows (16) (5.1) (0.1) Intl Reserves / Liquidity (17) 372.4 372.0 371.5 Central Bank dollar swaps (18) (111.2) (112.8) (112.8) Total External Debt (19) 348.7 348.0 115.7 103.4 89.1 116.3 86.0 81.7 Year Average 4.8 124.7 162.1 5.5 124.1 161.5 Last 12 M (6.7) (0.6) (7.3) (0.7) Last 12 M 89.1 240.4 151.2 (64.5) 65.4 51.5 (31.3) 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 the current and future economic conditions. Seasonally adjusted, September 2005 = 100. 6. FGV survey data on nationwide manufacturing industry expectations for the current and future conditions. Seasonally adjusted. 7. IBGE original household data for the six major Brazilian metropolitan regions, labor force with ten years of age or more, 30-day search period, seasonally adjusted by Itaú BBA. 8. IBGE household data (PME) on employed population for the six major Brazilian metropolitan regions, average 2003=100, 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 Itaú BBA. 10. Accumulated year-to-date flows, 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 government gross debt does not include Central Bank, public enterprises and Social Security administration. 13. Gross debt minus general government credits plus Central Bank net debt and public enterprises. 14. Includes intercompany loans. 15. Includes stocks, bonds, loans, supplier credits, asset transfers and others. 16. Includes direct investment and others. 17. In addition to cash, includes 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). Page 4
Macro Research - Itaú Ilan Goldfajn Chief Economist 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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