July, 2013

Economic Outlook

Macro Research – Itaú Unibanco

2

Agenda

International

Brazil

Global economy at a new stage. Better growth perspectives in the U.S., emerging

economies decelerate.

The expectation of the Fed´s policy normalization has caused a sell-off in the emerging

markets. The impact depends on each country´s fundamentals.

Markets’ adjustment to the Fed and popular demonstrations have produced a

relevant chance in the macroeconomic scenario.

The Real has depreciated along with other currencies, but it has lost more value

against the dollar than its more than its pairs.

Weaker Real leads to worse inflation perspectives in 2013 and stronger need to raise

interest rates.

Fiscal stance is likely to become less expansionary, but popular demonstrations

have reduced the probability of a deeper public spending adjustment.

More uncertain environment and higher interest rate affect negatively the growth

perspectives.

3

U.S.: Payroll Surprises Again in June

Labor market in the U.S. remains strong.

The payroll has gained 195k in June (BBG survey: 165k) and was revised at 70k in the two

previous months. The unemployment rate remained stable, at 7.6%.

Source: Itaú Unibanco, BLS

0

50

100

150

200

250

300

350

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

1M 3M

7,0%

7,5%

8,0%

8,5%

9,0%

9,5%

10,0%

10,5%

2009 2010 2011 2012 2013

Unemployment Rate – % Payroll – seasonally adjusted, thousands

4

Exchange Rates

% change, May-to-Date

5-year Nominal Rates

bps change, May-to-Date

The Fed Signals Stumili Reduction: Sell-Off in the Emerging Markets

Source: Itaú Unibanco, Bloomberg

0,77

0,18

1,17

1,27

1,48

1,91

U.S.

Chile

Mexico

Peru

Colombia

Brazil

4,9

5,2

6,3

6,5

13,0

Colombia

Peru

Mexico

Chile

Brazil

We believe the Fed will reduce it´s asset purchases pace in the September meeting.

5

China: Focus on Reforms, Lower Growth

Source: Itaú Unibanco, CEIC

Recent policy signaling reflects less concern about short term growth and more focus on

structural reforms that can lead to long run sustainable growth .

GDP – Growth YoY, %

5,0%

7,5%

10,0%

12,5%

15,0%

2007 2008 2009 2010 2011 2012 2013 2014

6

Countries: Brazil, Mexico, Chile, Colombia, South Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand, Russia,

Ukraine, Poland, Hungary, Czech Republic, Turkey, South Africa

Emerging Economies Decelerate

GDP Growth – Emerging Economies

QoQ, SAAR

Source: Itaú Unibanco, Haver Analytics, FMI

3.3%

1.7%

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

7

World: Our Expectations for the Next Years

Source: Haver, CEIC, Bloomberg, Itaú Unibanco

2004-2007 2012 2013 2014 2015-2020

World 5.1 3.2 2.8 3.4 3.5

USA 2.8 2.2 1.9 2.5 2.3

Eurozone 2.5 -0.5 -0.7 0.7 1.4

Japan 1.9 1.9 1.5 1.3 1.0

China 12.1 7.8 7.5 7.2 6.8

8 Source: Itaú Unibanco

Itaú Unibanco Commodities Index

Commodities: Our Expectations for the Short Term

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

9

Peru Mexico

2013 2014 2013 2014

GDP - % 6.0 5.8 GDP - % 2.5 3.6

PEN / USD (YE) 2.70 2.70 MXN / USD (YE) 12.2 12.0

Interest Rate - (YE) - % 4.25 4.25 Interest Rate - (YE) - % 4.00 4.00

CPI - % 2.7 2.5 CPI - % 3.6 3.5

Colombia Chile

2013 2014 2013 2014

GDP - % 3.8 4.7 GDP - % 4.5 4.7

COP / USD (YE) 1900 1850 CLP / USD (YE) 510 525

Interest Rate - (YE) - % 3.25 4.00 Interest Rate - (YE) - % 4.50 4.25

CPI - % 2.8 3.0 CPI - % 2.2 2.8

Argentina

2013 2014

GDP - % 2.0 0.0

ARS / USD (YE) 5.9 7.7

BADLAR - (YE) - % 21.0 25.0

CPI - % (Private estimates) 30.0 35.0

Latin America: Growth Divergence

Source: Itaú Unibanco

10

Growth in Brazil Disappointed

GDP Forecasts for 2012 (%)

Source: Latin Focus Consensus Forecasts

1

2

3

4

5

6

2010 2011 2012 2013

Brazil Mexico Colombia Chile

1

2

3

4

5

6

2010 2011 2012

Brazil Mexico Colombia Chile

GDP Forecasts for 2013 (%)

11

Brazil: Our Expectations for the Short Term

Source: Itaú Unibanco and BCB

2012 2013 2014

Economic Activity

GDP % 0.9 2.2 2.3

Inflation

IPCA % 5.8 6.1 5.9

Monetary Policy

Selic Rate % 7.25 9.75 9.75

Fiscal

Primary Surplus 2.4 1.7 1.1

Balance of Payments

Exchange Rate (eop) 2.08 2.18 2.18

Current Account (% GDP) -2.4 -3.3 -2.9

12

What Explains the Weak GDP in the Last Few Years?

GDP Growth Breakdown

QoQ, SAAR

-2%

-1%

0%

1%

2%

3%

4%

5%

2009.IV 2010.IV 2011.IV 2012.IV

Consumption Gov. Expenditure

Investment Exports - imports

Inventories & residual GDP

Deleveraging:

Higher real interest rates (+150 bps)

Macroprudential measures (reserve + capital

requirements)

Reduction in government current expenditure

growth (to 0% from 10%-15%)

Reduced BNDES disbursements

Global risk aversion (VIX up to 40)

High inventories, decelerating growth and

imports

Supply Issues:

Fiscal expansion and interest rate cuts;

economy reacts slowly

Excessive interventionism creates higher

economic policy risk

Productivity deceleration seems stronger than

cyclical factors; lower potential growth

With low productivity growth, rising wages

reduce margins and become a limitation on

investment

Inflation accelerates, affecting real income and

consumption

Signs of growing net imports

Source: Itaú Unibanco, IBGE

13

Gradual Recovery Reflects Lower Potential GDP

GDP (% Change, QoQ/sa)

Source: Itaú Unibanco, BCB

0,6%

0,8%

0,5% 0,4%

-0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

2010 Q1 2011 Q1 2012 Q1 2013 Q1

1,2%

5,7%

3,2%

3,9%

6,1%

5,2%

-0,3%

7,5%

2,7%

0,9%

2,3% 2,2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2003 2005 2007 2009 2011 2013

GDP – Annual Growth

14

100

105

110

115

120

125

130

135

2007 2008 2009 2010 2011 2012 201370

80

90

100

110

120

130

2007 2008 2009 2010 2011 2012 2013

Gross fixed capital formation

Capital goods consumption proxy

Civil construction

Volatile Industrial Production Data, Investment Shows Signs of Weakness Again

The industrial production has dropped in May, after a sharp rise in the previous month.

The fall was widespread and has reached most subsectors.

The capital goods production had an important fallback. High interest rates, weaker

Real and higher uncertainty are likely to cause a longer cool down in investment.

Source: Itaú Unibanco and IBGE

Industrial Production – seasonally ajusted Investment – seasonally ajusted

15

Confidence Remains Weak

Industry Confidence Index (FGV)

Source: Itaú Unibanco , FGV

Consumer Confidence Index (FGV)

100

105

110

115

120

2010 2011 2012 2013

105

110

115

120

125

130

2010 2011 2012 2013

16

Growth Diffusion Points to Weak Activity Ahead

GDP vs. Diffusion Index Broad Data Set - Diffusion

20%

30%

40%

50%

60%

70%

80%

90%

2009 2010 2011 2012 2013

month 3MMA historical average

Source: Itaú Unibanco

-4%

-2%

0%

2%

4%

6%

8%

10%

35%

45%

55%

65%

75%

1995 1998 2001 2004 2007 2010 2013

Difusão dados (-2) PIB 4T (direita)

17

Will the Labor Market Remain Tight?

Source: IBGE, Itaú Unibanco

Unemployment Rate

%, sa

Average Real Wages

sa (2003=100)

4

5

6

7

8

9

10

11

2007 2009 2011 201385

90

95

100

105

110

115

120

2007 2009 2011 2013

Year average

2011 6.6

2012 5.5

2013 5.4

Annual change

2011 2.7%

2012 4.2%

2013 1.2%

18 Source: Itaú Unibanco, Ministry of Labor

Risk: Jobs Creation Slowing Down

Formal jobs creation (Caged) was well below expectations in May.

Gradual activity recovery is likely to increase the hiring pace, but the persistence of

weak data in the next months may lead to a less favorable labor market perspective

-175

-125

-75

-25

25

75

125

175

225

275

2001 2003 2005 2007 2009 2011 2013

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

-2%

0%

2%

4%

6%

8%

2005 2007 2009 2011 2013

Caged (rhs) PME/IBGE

New Jobs (CAGED)

seasonally adjusted, thousands Occupied Population

annual change

19 Source: Itaú Unibanco, BCB, Bloomberg

More Depreciated Exchange Rate, but there Is Overshooting

Exchange Rate – Reais per Dollar

1,90

1,95

2,00

2,05

2,10

2,15

2,20

2,25

2,30

1,90

1,95

2,00

2,05

2,10

2,15

2,20

2,25

2,30

Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13

Dollar Sales

Dollar Purchases

Capital Controls Loosening

20

IPCA – Consumer Price Index

Source: Itaú Unibanco , IBGE

6,2%

4,9%

6,2%

6,6% 6,7%

6,3%

6,1%

4,5%

5,0%

5,5%

6,0%

6,5%

7,0%

0,00%

0,15%

0,30%

0,45%

0,60%

0,75%

0,90%

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Monthly 12-month (rhs)

Exchange Rate Causes Higher Inflation

21

Impact of Further Depreciation on Inflation

Source: Itaú Unibanco

Exchange Rate 2.18 2.38 2.58

IPCA 2013 6.1% 6.5% 7.0%

IPCA 2014 5.9% 6.1% 6.3%

0,1%

0,5%

0,6%

0,7%

0,0%

0,1%

0,2%

0,3%

0,4%

0,5%

0,6%

0,7%

0,8%

1 2 3 4

Exchange Rate Pass-Through – 10% Devaluation of the Brazilian Real

Number of Quarters After Devaluation

22 Source: Itaú Unibanco, Bloomberg

5,7%

3,5%

4,0%

4,5%

5,0%

5,5%

6,0%

6,5%

Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Hu

nd

red

s

Real Interest Rates – Long-Term Bonds

(NTN-B 50)

Stronger Need to Raise Interest Rates…

Yield-Curve Pricing of Selic Rate

6%

7%

8%

9%

10%

11%

12%

13%

14%

2008 2010 2011 2013 2014

23 Source: Itaú Unibanco, BCB

…and Less Expansionary Fiscal Stance

Primary Surplus - % GDP Net Debt - % GDP

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2010 2012 2014 2016 2018 202030

32

34

36

38

40

42

2010 2012 2014 2016 2018 2020

24

Challenges – Relatively High Labor Costs

Source: U.S. Bureau of Labor Statistics

Manufacturing Sector –

Hourly Compensation Costs in 2011 (USD)

Change in Unit Labor Costs in USD Terms

(2005-10)

0

2

4

6

8

10

12

Brazil Hungary Poland Mexico Phillippines

26%

-8%

20%

-3%

12%

42%

9%

-1%

10%

2%

4%

36%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

China SouthKorea

Israel Mexico Poland Brazil

Real exchange rate change Net costs

25 Source: Heritage Foundation, International Energy Agency (2011); Design: Itaú Unibanco

Challenges – Heavy Tax Burden

Tax Burden – % of GDP

34%

0%

10%

20%

30%

40%

50%

60%

Sw

ed

en

Fra

nce

Germ

an

y

Hu

ng

ary

Uk

rain

e

Po

lan

d

Bra

zil

Ru

ss

ia

Sp

ain

Au

tra

lia

US

A

So

uth

Ko

rea

Arg

en

tin

a

Tu

rkey

Co

lom

bia

Ch

ile

Ind

ia

Ch

ina

Ven

ezu

ela

Me

xic

o

Ara

b E

mir

ate

s

26

Challenges: Infrastructure, Productivity

Infrastructure Ranking

(World Economic Forum)

Ease of Doing Business 2012 Ranking

(World Bank)

Source: World Economic Forum, World Bank

1

2

3

45

47

48

51

68

70

84

89

Hong Kong

Singapore

Germany

Chile

Russia

China

Turkey

Mexico

Brazil

India

Peru

37

43

45

48

89

103

124

130

Chile

Peru

Colombia

Mexico

Uruguay

Paraguay

Argentina

Brazil

27 Source: IBGE, Itaú Unibanco and U.S. Bureau of Labor Statistics

Challenges - Less Labor, Need More Investment

Decreasing Labor Contribution GDP Growth

Labor contribution decreases. Growth depends on increasing investments and productivity.

2,7%

0,9%

2,3% 2,2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2010 2012 2014 2016 2018 20200,0%

0,5%

1,0%

1,5%

2,0%

2008-2011 2012-2015 2016-2020

Labor Capital Productivity

28

Challenges – Lack of Domestic Savings

Source: IBGE and Itaú Unibanco

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

5% 10% 15% 20% 25% 30%

Population aged 65+ (% total)

Mexico

Brazil

Poland

Italy

USA

Japan

Colombia

Sp

en

din

g o

n s

oc

ial s

ec

uri

ty (

% G

DP

)

Public Spending on Social Security

29 Source: IMF and Itaú Unibanco

24 23 23

22 22

19

17 16

13

11 10

54

Ch

ina

Jap

an

Me

xic

o

Pe

ru

Ch

ile

Arg

en

tin

a

Co

lom

bia

Can

ad

a

Bra

zil

So

uth

Afr

ica

UK

US

A

Challenges - Domestic Savings Must Increase to Enable Investments to Grow

Domestic Savings (%, 2011) Investment Rate

15%

16%

17%

18%

19%

20%

21%

22%

2010 2012 2014 2016 2018 2020

30

Conclusion

World: news from the American economy have increased markets volatility in

the short term, but the U.S. recovery is positive for the medium term.

Higher interest rates in the U.S. are here to stay, but some correction in the

asset prices is likely to happen after the sell-off in the emerging markets is

finished.

Brazil: weaker Real leads to higher inflation, higher interest rates and less

expansionary fiscal stance.

More uncertain environment (internal and external) is likely to reduce growth.

The labor market is a risk.

31

Long-Term Scenario

Source: Itaú Unibanco