Brazil Review Friday, March 01, 2013 Rising Concerns about Inflation The Brazilian economy in February 2013 The Central Bank reinforced its message against inflation, saying that the interest rate is the adequate tool to fight it. The same concern prompted the government to try to stabilize the exchange rate slightly below BRL 2.00/USD. Fourth-quarter GDP suggests a slow recovery. The current-account deficit widened, partly due to higher fuel imports. Among the actions to increase competitiveness, new regulations for ports and highway concessions are advancing However, there are still uncertainties about the measures. Worried about the risk of power outages, the government signaled that it will keep thermal power plants running all year long. Moves for the 2014 presidential election started earlier this time. This month, the focus will be on the next meeting held by the monetary policy committee, on March 6. The Central Bank reinforces the talk against inflation, saying that the interest rate is the adequate tool to fight it. Central Bank President Alexandre Tombini said that prices in the country have shown resistances against a drop in recent months and that monetary cycles have not been abolished. At the same time, he expressed confidence that inflation will fall in the second half of the year. The same concern with inflation led the government to keep the exchange rate relatively stable, slightly below 2.00 reais per U.S. dollar. Despite the drop in regulated prices, inflation has deteriorated. Notwithstanding the cut in electricity tariffs, which shaved about 0.45 p.p. off the mid-month inflation index IPCA-15 in February, year-over-year inflation reached 6.2%, nearing the upper limit of the target range. Measures of underlying inflation remain high, such as the core measured by trimmed means (5.7%) and the diffusion index (71%). Inflation will probably climb to the upper limit of the target range by the middle of the year, and then retreat as the 2012 shock in food prices wanes. Fourth-quarter GDP suggests a slow recovery. GDP grew 0.6% in the fourth quarter, slightly below expectations (0.7%). The result confirms the slow recovery of activity. The breakdown came in a little better-than-expected, with consumption and investment growing 1.2% and 0.5%, respectively. Investment grew for the first time after five contractions in a row. The numbers are consistent with our 3.0% GDP forecast for this year. Current-account deficit rises, partly due to higher fuel imports. The trade balance has worsened due to rising fuel imports, which have been driven by growing demand as well as by insufficient domestic production. The account comprising spending on foreign travelling has also increased steadily. But none of this threatens Brazil s external balance: the current-account deficit (2.6% of GDP in the 12 months through January) is fully covered by direct investments (2.8% of GDP). Furthermore, the improvement in global market trends brought capital flows back to the local stock market, which sustained the heavy flow registered in December (about $3 billion), after many months of net outflows. 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.
Port regulations and highway concessions advance. Congress is expected to vote by early April on a temporary decree creating a new regulatory framework for ports, with more room for private capital. The project is relevant because inefficiency in ports is recognizably one of the largest bottlenecks in the Brazilian economy. As for highway concessions, after initial difficulties, the government eased parameters with longer concession contracts and improved credit conditions in order to attract private investors. However, there are still uncertainties about the measures. The government expects to keep thermal power plants running all year long. Rainfall has been more intense, but the water level at reservoirs remains below the historical average. The outlook is for a still-tight balance between power supply and demand throughout the year. Seeking to lower risks, particularly for next year, the government signaled that it will keep natural gas- and coal-fired thermal power plants running all year long. Moves for the 2014 presidential election started earlier At a Workers Party (PT) event, the prospect of Dilma Rousseff as a candidate for reelection was consolidated. PMDB is probably going to remain on the same ballot as PT, in the vicepresidency box. In the PSDB, Aécio Neves s name strengthened as the party s choice for the race. Marina Silva, who ran as the Green Party candidate in 2010, launched a project for a new party called Sustainability Network, also eyeing the presidential election. The names of the candidates can only be officially filed after June 2014. Two PMDB politicians were elected for leadership posts in Congress: Renan Calheiros as Senate president and Henrique Alves as president of the House of Representatives. The Senate is scheduled to vote in March on the proposal to unify the rate of the tax on the circulation of goods and services (ICMS) across all states. Equities fall, the real appreciates slightly. The Bovespa benchmark index kept falling and dropped by 3.9% in reais (-3.3% in dollars) in February. Over 12 months, the index rose by 12.7% in reais (-24.5% in dollars). The 5-year CDS spread ended February at 133, up by 13.0% from the previous month. The real slightly strengthened in January, finishing at 1.98 real per U.S. dollar. What s next? The focus will be on monetary policy. The monetary policy committee (Copom) meets on March 6 to make a decision on interest rates and communicate its strategy. Inflation indicators became more important: the headline IPCA for February will be out on March 8 and the mid-month IPCA-15 for March will be released on March 22. Page 2
Key macroeconomic data INFLATION (1) (2) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accumulated 12M 3M Annualized 2012 CPI (IPCA) 0.6 0.4 0.2 0.6 0.4 0.1 0.4 0.4 0.6 0.6 0.6 0.8 5.8 6.2 WPI (0.1) (0.3) 0.4 1.0 1.2 0.7 1.8 2.0 1.2 (0.2) (0.2) 0.7 8.6 (3.2) IGPM 0.2 (0.1) 0.4 0.9 1.0 0.7 1.3 1.4 1.0 0.0 (0.0) 0.7 7.8 0.3 2013 CPI (IPCA) 0.9 0.7 6.4 9.7 WPI 0.1 0.2 9.3 4.2 IGPM 0.3 0.3 8.3 5.4 MONEY AND CREDIT (1) (4) 2012 M3 1.8 1.2 2.1 1.0 1.1 1.2 1.6 1.5 0.8 1.3 1.1 0.4 16.1 27.4 Bank credit 1.3 1.4 1.4 1.5 1.4 1.3 1.1 1.0 1.0 1.2 1.3 1.3 16.4 17.8 2013 M3 0.7 14.9 9.2 Bank credit 1.3 16.3 17.0 INTEREST RATES (5) 2012 Overnight (Interbank rate in R$) 10.4 10.4 9.7 8.9 8.9 8.4 7.9 7.4 7.4 7.1 7.1 7.3 8.4 10.6 Two-year interest rate (in R$) 10.0 9.8 9.7 8.9 8.4 8.2 8.2 8.3 8.2 7.7 7.7 7.6 8.6 10.1 Two-year interest rate (in USD) 2.7 2.4 2.3 2.7 2.8 2.8 2.5 2.2 2.1 2.0 1.9 1.5 2.3 2.7 2013 Overnight (Interbank rate in R$) 7.1 7.2 7.9 7.2 Two-year interest rate (in R$) 7.9 8.4 8.3 8.0 Two-year interest rate (in USD) 1.8 1.8 2.2 1.7 STOCK MARKET - IBOVESPA São Paulo Stock Exchange Market Index (6) 2012 Traded Volume (daily average in US$ mm.) 3541 4726 3904 3949 3715 3982 2803 3565 4128 3279 3311 3724 3719 3876 Index Variation (end of month in US$) 9.5 6.2 (8.1) (7.7) (17.5) (0.2) 1.8 2.4 4.0 (3.6) (2.9) 9.4 (10.0) 125.6 2013 Traded Volume (daily average in US$ mm.) 3575 4051 3665 3783 Index Variation (end of month in US$) 0.8 (3.3) (24.5) 29.1 EXCHANGE RATE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (End of month) 2012 (a) BRL/USD (7) 1.74 1.71 1.82 1.89 2.02 2.02 2.05 2.04 2.03 2.03 2.11 2.04 --- --- (b) % monthly change (7.3) (1.7) 6.6 3.8 6.9 (0.0) 1.4 (0.6) (0.3) 0.0 3.7 (3.0) 17.5 (20.5) (c) BRL/EUR (7) 2.29 2.29 2.43 2.50 2.50 2.56 2.52 2.56 2.61 2.63 2.74 2.70 --- --- (d) % monthly change (6.1) 0.1 6.3 3.0 (0.1) 2.4 (1.4) 1.5 1.9 0.9 4.0 (1.6) 17.9 (22.9) 2013 (a) BRL/USD (7) 1.99 1.98 --- --- (b) % monthly change (2.7) (0.6) 15.6 (22.8) (c) BRL/EUR (7) 2.70 2.58 --- --- (d) % monthly change 0.1 (4.3) 13.0 (20.9) MAIN BRAZILIAN BONDS (%) 2012 CDS 5-yr (8) 145.0 141.0 122.0 123.0 171.3 157.3 134.1 131.0 111.8 112.3 109.8 108.4 BR 40 Spread over US Treasury (9) 90.5 48.8 55.1 50.9 112.6 103.6 93.7 71.0 69.9 60.1 87.4 91.0 2013 CDS 5-yr (8) 117.5 132.8 BR 40 Spread over US Treasury (9) 66.4 41.8 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) 2010 2011 2012 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Index (1995 = 100) 154.7 157.1 158.5 159.9 157.5 161.1 162.2 162.0 162.1 161.9 162.3 162.9 163.5 164.4 163.3 % quarterly change 2.0 1.5 0.9 0.9 7.5 0.8 0.6 (0.1) 0.1 2.7 0.1 0.3 0.4 0.6 0.9 ECONOMIC ACTIVITY Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Industrial Production (2) 124.8 126.5 125.5 125.2 124.1 124.4 124.9 126.9 125.8 126.6 124.9 124.8 Capacity Utilization (3) 83.7 83.7 83.8 83.9 84.0 83.8 83.7 84.0 84.1 84.2 84.0 84.1 2013 Industrial Production (2) Capacity Utilization (3) 84.4 84.1 2012 Retail Sales (4) 106.2 106.1 106.3 107.1 106.1 107.9 109.2 109.4 109.7 110.4 110.8 Consumer Confidence Index (5) 116.0 119.4 122.7 128.7 127.1 123.5 121.6 120.4 122.1 121.7 120.0 118.7 Business Confidence Index (6) 102.3 102.5 103.0 103.3 103.4 103.2 102.7 104.1 105.0 106.0 105.2 106.4 2013 Retail Sales (4) Consumer Confidence Index (5) 117.9 116.2 Business Confidence Index (6) 106.5 106.1 EMPLOYMENT Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (%) 2012 Unemployment Rate (7) 5.6 5.5 5.8 5.6 5.4 5.7 5.4 5.3 5.4 5.4 5.4 5.4 Employment/Household Survey (8) 122.2 122.9 122.9 123.3 124.5 123.8 123.3 123.6 124.4 125.3 125.5 125.6 Employment/Business Registry(9) 154.9 155.5 155.7 156.2 156.3 156.5 157.0 157.0 157.2 157.4 157.7 158.2 2013 Unemployment Rate (7) 5.5 Employment/Household Survey (8) 125.7 Employment/Business Registry(9) 158.4 PUBLIC SECTOR BUDGET (10) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (% of GDP) 2012 Overall Balance (11) 1.9 (0.4) (1.3) (1.1) (1.8) (2.1) (2.3) (2.6) (2.7) (2.5) (2.8) (2.5) Ex-interest Balance 7.7 5.3 4.4 4.3 3.6 3.1 2.8 2.6 2.3 2.4 2.1 2.4 Gross Public Debt (12) 55.0 55.5 56.2 56.7 57.0 57.3 57.8 57.8 58.8 59.5 59.7 58.6 Net Public Debt (13) 37.1 37.4 36.5 35.7 35.0 35.2 35.1 35.3 35.5 35.4 35.0 35.1 2013 Overall Balance (11) 2.0 Ex-interest Balance 8.1 Gross Public Debt (12) 59.0 Net Public Debt (13) 35.2 BALANCE OF PAYMENTS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (US$ billion) 2012 Trade Balance (1.3) 1.7 2.0 0.9 3.0 0.8 2.9 3.2 2.6 1.7 (0.2) 2.2 Exports 16.1 18.0 20.9 19.6 23.2 19.4 21.0 22.4 20.0 21.8 20.5 19.7 Imports 17.4 16.3 18.9 18.7 20.3 18.5 18.1 19.2 17.4 20.1 20.7 17.5 Current Account (7.0) (1.7) (3.3) (5.4) (3.5) (4.4) (3.7) (2.6) (2.6) (5.4) (6.3) (8.4) Foreign Direct Investment (14) 5.4 3.6 5.9 5.2 3.7 5.8 8.4 5.0 4.4 7.7 4.6 5.4 Other Capital Inflows (15) 4.4 (1.1) 4.5 6.9 3.2 2.5 3.7 3.2 1.9 0.8 5.4 4.6 Brazilian Capital Outflows (16) (2.8) (0.4) 4.2 (0.2) (3.0) (4.3) (3.6) (5.4) (3.2) (2.8) (3.1) (6.4) Intl Reserves / Liquidity (17) 355.1 356.3 365.2 374.3 372.4 373.9 376.2 377.2 378.7 377.5 378.6 378.7 Total External Debt (15) 300.3 301.1 301.2 297.3 298.2 302.8 308.4 305.5 309.2 308.5 310.8 316.8 2013 Trade Balance (4.0) Exports 16.0 Imports 20.0 Current Account (11.4) Foreign Direct Investment (14) 3.7 Other Capital Inflows (15) 5.0 Brazilian Capital Outflows (16) 3.5 Intl Reserves / Liquidity (17) 377.5 376.7 Total External Debt (15) 317.8 Year Average 125.4 83.9 NA 84.3 108.3 121.8 103.9 NA 117.1 106.3 Year Average 5.5 124.0 156.6 5.5 125.7 158.4 Last 12 M (2.4) 2.5 Last 12 M 19.4 242.6 223.1 (54.3) 65.3 40.2 (31.0) 16.7 242.4 225.7 (58.6) 63.6 40.7 (24.7) 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. 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
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