Brazil Review Monday, March 03, 2014 Markets Stabilize, GDP Grows 2.3% in 2013 The Brazilian economy in February 2014 Financial markets have stabilized, with appreciation of the Brazilian real and a decline in country risk. The GDP for the fourth quarter of 2013 came in higher than expected. Economic activity, however, shows signs of weakness so far this year, with low business and consumer confidence and still-high industrial inventories. The hot, dry weather early this year affects the harvest and puts pressure on energy prices, adding uncertainty to the scenario. Inflation also continues under pressure. In this environment, the Copom continued the interest rate hike cycle, albeit at a more gradual pace than in previous meetings, and the government announced its fiscal surplus target for this year, trying to signal its more conservative approach to public spending. The government's approval rating slipped, but President Dilma Rousseff continues to lead the polls. Markets stabilize after a turbulent January After a turbulent start to the year, Brazilian financial markets stabilized in February. The real appreciated 3.8% during the month, helped by a less volatile external environment and positive market perception on the announcement of the fiscal effort in Brazil. Country risk fell by 17%, to 170 points from 206, while the Ibovespa decreased marginally by 1.1% in reais but increased by 2.8% in dollars. GDP ends 2013 slightly above expectations... Brazilian GDP grew by 0.7% in the fourth quarter of 2013, above our expectations (+0.3%). The highlight was the better-than-expected performance of the Industrial and Services sectors. On the demand side, the highlight was the moderate growth in gross capital formation during the quarter, despite several indicators showing a drop in investment. Based on these results, GDP was up by 2.3% at year-end 2013. This strong 4Q13 number limits the downside risk to our growth forecast for 2014 (1.4%)....but business and consumer confidence slipped. FGV's Industrial Business Confidence Index fell by 1.0% in February. This is the second consecutive monthly decline, following a slight recovery at the end of last year. A greater number of businesspeople assessed internal and external demand as weak and recorded an increase in inventories. Consumer confidence is also subdued. FGV's indicator retreated 1.7% for the month, the third consecutive monthly decline. The survey also reported a greater number of people indicating that employment is hard to get. Unfavorable weather conditions creates uncertainties over the harvest and energy production The unusually hot and dry weather observed until mid-february has been affecting the expected production of various crops (mainly coffee, sugarcane and corn) and reducing energy generation from hydroelectric power plants. The drought was followed by heavy rains in the Midwest region, affecting the soybeans and beans crops and bringing additional problems to corn. In our view, the risk of energy rationing is significant (depending on rainfall), and the use of thermal power plants will likely be even greater than in 2013 which means higher costs for the industry and more pressure on inflation and/or public spending. 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.
Unemployment rate remains at historical lows... The unemployment rate stood at 4.8% in January, below our estimate and the market consensus (both at 5.1%). Seasonally adjusted, the unemployment rate reached 4.9%, the lowest level since the series started in 2002. The data show employment advancing at low rates. The unemployment rate, however, remains low as a result of limited growth in the labor force....and inflation still causes concern. Inflation measured by IPCA-15 stood at 0.70% in February, slightly above our and market forecasts (both at 0.68%). Food away from home and electronic appliances surprised on the upside. With the result, the 12-month IPCA-15 rate rose to 5.65% in February from 5.63% in January. The Brazilian central bank continues to hike interest rates, but at a more gradual pace... The BCB increased the monetary policy rate (Selic) by 0.25 pp, to 10.75% per year. The decision to reduce the pace of interest rate hikes (from 0.50 pp in the previous meeting) was unanimous and was in line with our expectation. The easing volatility in international markets, low growth and the announcement of the fiscal target for 2014 probably explain the decision to slow the pace of monetary tightening. In our view, the post-meeting statement indicates that the hiking trends will likely continue. We expect a final 0.25 pp hike in April from the Copom, to ensure inflation stability (or decline)....and the government tries to signal a more austere fiscal stance. In its first budget revision for 2014, the government announced a BRL 44 billion cut in spending and reduced the surplus target for the consolidated public sector (central government, states, municipalities and state-owned enterprises) to 1.9% of GDP, below the previous target of 2.1%. The review signaled the government's intention to adopt a less expansionary fiscal stance this year. But there are risks to the implementation of the announced spending cuts, since part of the adjustment was on mandatory spending (including intra-budget transactions with no impact on the primary surplus). Moreover, official revenue projections were based on an above-consensus GDP growth forecast (2.5% for 2014). External deficit shows signs of improvement The service deficit shrank in January, as international travelling retreated, pointing to a gradual decline in the current account deficit. Still, the 12-month rolling deficit increased from USD 81.4 billion to USD 81.6 billion (3.7% of GDP). Foreign direct investments topped our estimate, but once again a relevant share was made up of intercompany loans, in addition to a large equity capital transaction. This supports our expectation of a gradual weakening of these flows ahead. Government approval declines, but Dilma continues to lead polls The CNT/MDA survey indicated a decline in the federal government's approval rating in the first weeks of February. Approval stood at 36.4%, compared with 39% in the previous survey, conducted in November 2013. Despite the lower approval rating for President Dilma, a survey of voters remained relatively unchanged, with 43.7% indicating they will vote for her (43.5% in the previous survey). Aécio Neves came in second with 17% (19.3% previously) and Eduardo Campos reached 9.9% (9.5% previously). Page 2
What s next? Markets will continue to monitor closely the fiscal and balance of payments numbers, and their impact on business and consumer confidence. The uncertainties about the energy sector also will continue to draw attention. There is no monetary policy meeting schedule for March. Key macroeconomic data INFLATION (1) (2) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accumulated 12M 3M Annualized 2013 CPI (IPCA) 0.9 0.6 0.5 0.6 0.4 0.3 0.0 0.2 0.3 0.6 0.5 0.9 5.9 9.4 WPI 0.1 0.2 0.0 (0.1) (0.3) 0.7 0.3 0.1 2.1 1.1 0.2 0.6 5.1 4.2 IGPM 0.3 0.3 0.2 0.1 0.0 0.7 0.3 0.2 1.5 0.9 0.3 0.6 5.5 5.4 2014 CPI (IPCA) 0.6 0.7 5.7 9.0 WPI 0.3 0.3 5.5 5.2 IGPM 0.5 0.4 5.8 6.3 MONEY AND CREDIT (1) (4) 2013 M3 0.9 0.4 1.3 0.6 1.3 0.4 0.5 0.6 0.6 0.3 0.5 1.0 8.7 9.8 Bank credit 1.3 1.3 1.3 1.3 1.2 1.2 1.1 1.0 1.0 1.0 1.1 1.2 14.8 17.1 2014 M3 (0.1) 7.6 5.6 Bank credit 1.2 14.7 14.6 INTEREST RATES (5) 2013 Overnight (Interbank rate in R$) 7.1 7.2 7.2 7.4 7.9 7.9 8.4 8.9 8.9 9.4 9.9 9.9 8.3 7.2 Two-year interest rate (in R$) 7.9 8.4 8.6 8.3 9.1 10.2 9.9 11.2 10.9 11.1 11.6 10.6 9.8 8.0 Two-year interest rate (in USD) 1.8 1.8 1.9 1.6 1.6 1.7 1.7 2.0 1.9 1.9 2.1 2.2 1.8 1.7 2014 Overnight (Interbank rate in R$) 10.4 10.7 8.9 10.3 Two-year interest rate (in R$) 12.6 11.9 10.5 11.7 Two-year interest rate (in USD) 2.3 2.0 1.9 2.2 STOCK MARKET - IBOVESPA São Paulo Stock Exchange Market Index (6) 2013 Traded Volume (daily average in US$ mm.) 3575 4058 3744 4064 3838 4064 2658 3634 3152 2962 3043 2540 3444 3786 Index Variation (end of month in US$) 0.8 (3.3) (3.7) (0.2) (10.1) (14.7) (1.7) 0.1 11.3 5.0 (8.4) (2.6) (26.3) 29.1 2014 Traded Volume (daily average in US$ mm.) 2577 2708 3249 2608 Index Variation (end of month in US$) (10.7) 2.8 (30.6) (36.1) EXCHANGE RATE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (End of month) 2013 (a) BRL/USD (7) 1.99 1.98 2.01 2.00 2.13 2.22 2.29 2.37 2.23 2.20 2.32 2.34 --- --- (b) % monthly change (2.7) (0.6) 1.9 (0.6) 6.5 3.9 3.4 3.6 (6.0) (1.2) 5.6 0.8 14.6 (22.8) (c) BRL/EUR (7) 2.70 2.58 2.59 2.64 2.77 2.88 3.05 3.13 3.02 3.00 3.16 3.23 --- --- (d) % monthly change 0.1 (4.3) 0.1 2.0 5.0 4.2 5.6 2.8 (3.6) (0.6) 5.4 2.2 19.7 (20.9) 2014 (a) BRL/USD (7) 2.43 2.33 --- --- (b) % monthly change 3.6 (3.8) 18.1 1.5 (c) BRL/EUR (7) 3.27 3.22 --- --- (d) % monthly change 1.4 (1.5) 24.8 7.9 MAIN BRAZILIAN BONDS (%) 2013 CDS 5-yr (8) 117.5 132.8 137.2 109.7 146.3 185.2 186.6 206.9 176.7 168.1 205.0 193.8 BR 40 Spread over US Treasury (9) 66.4 41.8 12.1 58.5 76.6 135.5 94.8 76.0 120.7 107.4 136.3 129.0 2014 CDS 5-yr (8) 206.3 170.3 BR 40 Spread over US Treasury (9) 150.5 103.9 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 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) 2011 2012 2013 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Index (1995 = 100) 161.3 162.0 162.0 162.2 161.9 162.4 162.8 163.7 165.2 163.5 165.2 168.2 167.3 168.4 167.3 % quarterly change 0.8 0.4 0.0 0.1 2.7 0.1 0.2 0.5 0.9 1.0 0.0 1.8 (0.5) 0.7 2.3 ECONOMIC ACTIVITY Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Industrial Production (2) 130.2 126.5 127.4 129.4 126.8 129.0 126.4 126.5 127.2 127.6 126.8 122.4 Capacity Utilization (3) 84.4 84.1 84.1 84.2 84.6 84.4 84.4 84.2 84.2 84.1 84.3 84.3 2014 Industrial Production (2) Capacity Utilization (3) 84.6 84.6 Year Average 127.2 84.3-84.6 2013 Retail Sales (4) 110.4 110.1 110.3 110.9 111.3 111.6 113.9 114.8 115.4 115.6 116.3 116.1 Consumer Confidence Index (5) 117.7 116.1 114.0 113.9 113.5 113.0 109.7 112.9 113.8 111.6 112.5 111.2 Business Confidence Index (6) 106.4 106.3 104.9 104.3 104.5 103.6 100.0 99.2 97.9 98.4 99.1 99.9 2014 Retail Sales (4) Consumer Confidence Index (5) 108.9 107.1 Business Confidence Index (6) 99.5 98.5 EMPLOYMENT Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (%) 2013 Unemployment Rate (7) 5.5 5.5 5.3 5.4 5.5 5.7 5.5 5.3 5.4 5.3 5.1 5.1 Employment/Household Survey (8) 125.4 124.8 124.6 124.5 124.6 124.8 125.1 125.1 124.8 124.7 124.5 124.9 Employment/Business Registry(9) 158.4 158.6 159.1 159.2 159.2 159.5 159.6 159.8 160.2 160.6 160.9 161.4 2014 Unemployment Rate (7) 4.9 Employment/Household Survey (8) 125.2 Employment/Business Registry(9) 161.6 PUBLIC SECTOR BUDGET (10) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (% of GDP) 2013 Overall Balance (11) 2.0 (2.1) (2.8) (2.6) (2.8) (2.9) (3.2) (3.5) (3.8) (3.7) (3.3) (3.3) Ex-interest Balance 7.9 3.7 2.8 2.7 2.5 2.3 2.0 1.7 1.3 1.3 1.8 1.9 Gross Public Debt (12) 59.1 59.2 59.4 59.3 59.5 59.1 59.2 58.8 58.3 58.5 58.3 57.2 Net Public Debt (13) 35.2 35.7 35.6 35.4 34.7 34.4 33.9 33.7 34.7 34.9 33.8 33.8 2014 Overall Balance (11) (2.5) Ex-interest Balance 4.8 Gross Public Debt (12) 58.5 Net Public Debt (13) 33.3 BALANCE OF PAYMENTS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (US$ billion) 2013 Trade Balance (4.0) (1.3) 0.2 (1.0) 0.8 2.3 (1.9) 1.2 2.1 (0.2) 1.7 2.7 Exports 16.0 15.5 19.3 20.6 21.8 21.1 20.8 21.4 21.0 22.8 20.9 20.8 Imports 20.0 16.8 19.2 21.6 21.3 18.8 22.7 20.2 18.8 23.0 19.1 18.2 Current Account (11.3) (6.6) (6.8) (8.3) (6.4) (3.9) (9.0) (5.5) (2.6) (7.1) (5.1) (8.7) Foreign Direct Investment (14) 3.7 3.8 5.7 5.7 3.9 7.2 5.2 3.8 4.8 5.4 8.3 6.5 Other Capital Inflows (15) 5.2 9.2 7.6 6.3 7.5 1.7 7.1 1.6 7.7 4.1 2.8 0.3 Brazilian Capital Outflows (16) 4.1 (5.1) (3.5) (2.7) (4.9) (6.4) (3.0) (3.4) (11.0) (7.1) (7.1) (1.0) Intl Reserves / Liquidity (17) 377.5 376.7 376.6 378.7 374.5 371.3 373.6 372.8 376.0 377.3 376.1 375.6 Total External Debt (15) 317.8 316.3 318.0 322.2 324.8 307.7 314.1 311.5 307.7 311.0 311.9 310.5 2014 Trade Balance (4.1) Exports 16.0 Imports 20.1 Current Account (11.6) Foreign Direct Investment (14) 5.1 Other Capital Inflows (15) 5.2 Brazilian Capital Outflows (16) 3.7 Intl Reserves / Liquidity (17) 375.8 376.7 Total External Debt (15) 311.3 113.1 113.3 102.0-108.0 99.0 Year Average 5.4 124.8 159.7 4.9 125.2 161.6 Last 12 M (3.6) 1.7 Last 12 M 2.3 242.2 239.9 (81.4) 64.0 61.4 (51.0) 2.3 242.2 240.0 (81.6) 65.4 61.3 (51.5) 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 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 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 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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