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Tuesday, February 15, 2011

Please refer to the last page of this report for important disclosures, analyst and additional information. ItaUnibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As aresult, investors should be aware that the firm may have a conflict of interest that could affect the objectivity ofthis report. Investors should not consider this report as the single factor in making their investment decision.

Macroec

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earch

Macro Vision

Ilan Goldfajn Chief Economist

Agustina De Marotte

Adriano Lopes

Aurlio Bicalho

Caio Megale

Darwin Dib

Felipe Salles

Fernando Avalos

Giovanna Siniscalchi

Guilherme da NbregaJoo Pedro Bumachar Resende

Laura Haralyi

Luiz G. Cherman

Mauricio Oreng

Natasha de Almeida Daher

Roberto Prado

Toms Mlaga

[email protected]

Brazil 2020: The future asseen today

It is not an easy task. But once a year here at Ita Unibanco, wedare to forecast a macroeconomic scenario for the next 10 years.It is our Brazil 2020. The scenario contemplates art whichexternal and economic policy trends will be dominant? as wellas science the rigor of consistency in a general equilibriummodel. The current scenario keeps some characteristics from the

previous version (see Brazil 2020: what is the trail?, publishedNov. 23, 2009), but also incorporates some relevant changes.We maintained the view that Brazil will invest more than it did inthe past, mostly financed by external savings and, thanks to arecent productivity gain, will be able to maintain growth between4% and 5% in coming years. There will be an impact from thediscovery of pre-salt oil fields on investment, but also on thetrade balance. Notwithstanding eventual frights, Brazil willremain stable macroeconomic-wise and the trend of interestrates converging to international levels should continue.

But some characteristics are different from the previous version.We forecast fiscal policy will remain expansive (declining primarybudget surplus over the years, after an adjustment in 2011), butwith relocation of resources from current expenditures to publicinvestment, whenever possible. The consumer price index IPCAshould remain within its target range, but possibly above its mid-point. We believe the absence of reforms, the high tax burdenand inflation still at a relatively-high level should be reflected ona loss of vigor in productivity growth in the second half of thisdecade. Real domestic interest rates do converge, but notentirely, to international levels, as some uncertainty regardingfiscal policy and inflation remains. Thus, we expect real interestrates at 4.5% in 2020. We forecast commodity prices will keepgoing up worldwide, albeit slowly, due to structural factors

(demand from China and India, as well as the deterioration ofclimate conditions around the world, which should hurtagricultural supply). Thus, the real exchange rate (discountinginflation) should keep appreciating, but at a pace that will bequite less intense than in the last few years (the nominal rateactually weakens to R$ 2/US$, so as to partially compensateinflation).

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Macro Vision Tuesday, February 15, 2011 The global economy should grow at a pace slightly below 4.0%

throughout the next decade. The composition of growth will beheterogeneous. Emerging nations will continue to have robustperformance and their share in the global GDP will widen. Advancedeconomies will have a difficult decade, due to unfavorable demographicdynamics and to the effects of the 2008 crisis.

In Brazil, we estimate the economy will expand between 4.5% and5.0% in the mid-decade. The acceleration of trend growth at the marginis explained by three factors. First, we forecast a higher investment rateas a share of GDP, implying larger growth for the stock of capital.Second, productivity growth should be slightly higher than nowadays,due to reforms and advancements that already occurred. Third, thestart of activities in the pre-salt region will lead to larger oil output incoming years. By the end of the decade, we should witness a slow-down in the pace of growth to below 4.5%. We expect a less favorabledemographic dynamic, leading to slower growth in the workforce andlower growth for the economy's total productivity (due to the lack ofreforms, increase in the tax burden and uncertainties regardinginflation).

The drop in the Debt-to-GDP ratio and the maintenance ofmacroeconomic stability imply a continuation of the convergenceprocess of domestic interest rates to near-international levels. Thisprocess creates room for an increase in the investment rate to about22.5% of GDP. Other factors will contribute to boost investment. Thereare commitments related to the 2014 FIFA Soccer World Cup and the2016 Olympic Games. Oil exploration in the pre-salt region will alsodemand significant expenditures in coming years. Moreover, thecountry needs to improve infrastructure in many areas, such as energyand transportation. The global context favors investment in emergingcountries whose consumer markets have high growth potential. Brazil in

particular has benefited from the ascent of a new middle class, withhigh propensity to spend.

Domestic savings, especially in the public sector, are insufficient tomeet this larger investment need. That means investment will be partlysupported by a widening current-account deficit, which will likely be inthe range of 3.0% to 4.0% of GDP throughout the decade. Recent gainsin the terms of trade and the improvement in the oil trade balance dueto the pre-salt fields prevent an even-wider gap. There are noimmediate risks related to the sustainability of external accounts inBrazil. The deficit's magnitude is not high, and the composition of globalgrowth attracts foreign investors intent on financing it. Brazil's netexternal liability should increase, but at a sustainable path. In the eventof an unexpected reversal in foreign investors' disposition to financeBrazil's current account gap, the exchange rate would weaken torestore balance in external accounts. Also, as an increasing share ofexternal liabilities is denominated in local currency, the scenario ofcurrency devaluation would also produce an immediate drop in externalliabilities. In that sense, it is crucial to maintain a floating exchange rateto avoid incentives to indebtedness in foreign currency.

We believe Brazil's real exchange rate will continue on a trail of slightappreciation in coming years. Two factors explain this movement. First,terms of trade benefited from higher commodity prices, which shouldkeep rising in coming years. Second, fiscal policy will still pressure

aggregate demand, and an appreciation is needed to reestablishequilibrium in the goods market. However, this appreciation could beavoided. A reduction in government spending over the years wouldlower pressure on aggregate demand, creating room for a weaker

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Macro Vision Tuesday, February 15, 2011 exchange rate and lifting competiveness among Brazilian companies,

causing the current-account deficit to contract.

Inflation has been above the target range mid-point in the last fewyears. By the end of 2011, the 5-year moving average for the IPCAshould reach 5.3%, considering our own 5.8% forecast for this year. Innormal years or years with benign shocks, the IPCA has hovered aroundtarget, but in years with adverse shocks, inflation rises to the upper-limit of the target range. Throughout the decade, we estimate averageinflation at about 5.0%. With the drop in the neutral interest rate as theyears go by, the benchmark Selic rate should converge to one digit.

The debate on fiscal policy should be of a different nature from what wegot used to in past years. In the previous decade, discussions on fiscalpolicy were focused on the need for fiscal surpluses to ensure thesustainability of public debt. Fortunately, the Brazilian economymatured. Nowadays, the most relevant discussion is about the qualityof public spending and the impact of government dissaving on thefinancing of the country's investment needs. Ideally, there should beless spending and a drop in the tax burden, as well as higher

government investment on infrastructure, bringing beneficial effects tototal productivity in the economy in the long run. We do not forecasttax cuts, but believe government outlays will be redirected, as much aspossible, from current spending to public investment.

A higher growth rate in the long run (above 5%) would requireproductivity gains or additional increases in investment. Resuming thereform agenda, maintaining the current macroeconomic framework(floating exchange rate, inflation targeting, fiscal surplus), lifting publicinvestment in infrastructure and lowering the tax burden couldpotentially boost productivity. Another relevant factor is education. TheGDP differential between Latin America (and Brazil in particular) anddeveloped countries is largely explained by the difference in educationlevels. The number of years of study in Brazil has been rising recently,but the quality is improving slowly. We believe the adoption of theabove-mentioned measures would push the growth rate to a higherlevel than we forecast.

In short, we believe global growth will be supported by emergingcountries and commodity prices will keep going up. The outlook for theBrazilian economy is one of stronger growth than in past decades. Also,we expect: (i) partial convergence of the real interest rate tointernational standards; (ii) higher investment to GDP ratio; (iii)inflation under control, but above the target range mid-point; (iv) fiscalexpansion with an emphasis on public investment and lowergovernment debt; (v) the increase in investment will be financed byforeign capital inflows, as internal savings are not enough to meet theneed of resources for investment, and finally (vi) the current-accountdeficit will be higher and the real exchange rate will remain on anappreciating path, but at a slower pace. Bottom line, the scenario isconsistent with the trends that are taking shape nowadays.

Ilan GoldfajnChief EconomistFelipe SallesEconomist

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Macro Vision Tuesday, February 15, 2011

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Table 1 Summarized* Long-Term Scenario

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

World Economy

World GDP growth -0.6% 4.9% 4.2% 3.9% 3.9% 3.9% 3.9% 3.7% 3.7% 3.7% 3.7% 3.7%

CRB Index 360 436 553 580 594 619 645 661 677 694 704 715

Brazil

External Sector & Exchange Rate

Nominal BRL / USD eop 1.74 1.69 1.70 1.70 1.66 1.65 1.69

Real BRL / USD (2010 = 100) 2.02 1.76 1.64 1.62 1.58 1.50 1.51

Trade balance USD bn 25 20 15 3 -3 -10 -7 -7 -2 -1 8 19Current Account USD bn -24 -48 -69 -103 -108 -121 -122 -127 -130 -139 -137 -135

Current Account % GDP -1.5% -2.3% -2.9% -4.0% -3.8% -3.7% -3.5% -3.4% -3.2% -3.2% -3.1% -2.9%

Economic Activity

Real GDP Growth -0.6% 7.5% 4.0% 3.8% 4.7% 4.6% 4.7% 4.7% 4.7% 4.5% 4.4% 4.3%

Total Savings and Investment

Investment (% GDP) 16.5% 19.3% 20.4% 21.0% 21.7% 22.4% 22.6% 22.8% 22.8% 22.9% 22.7% 22.6%

External Savings - 2.3% 2.9% 4.0% 3.8% 3.7% 3.5% 3.4% 3.2% 3.2% 3.1% 2.9%

Domestic Savings 14.7% 17.1% 17.6% 17.0% 18.0% 18.6% 19.1% 19.4% 19.6% 19.6% 19.7% 19.7%

Inflation

IPCA 4.3% 5.9% 5.8% 4.7% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

IGPM -1.7% 11.3% 6.2% 5.5% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Interest Rate

Selic eop 8.75% 10.75% 12.50% 11.50% 10.75% 10.50% 10.25% 10.00% 9.75% 9.75% 9.75% 9.75%

Real interest rate (Selic/IPCA) - eop 5.6% 4.7% 5.8% 6.6% 5.6% 5.4% 5.2% 4.9% 4.6% 4.5% 4.5% 4.5%

Public Finances

Primary Budget Balance % GDP 2.1% 2.8% 2.5% 1.9% 1.5% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Fiscal Budget Balance % GDP -3.3% -2.6% -3.5% -3.9% -3.5% -3.4% -3.5% -3.3% -3.1% -2.9% -2.8% -2.7%

Net Public Debt % GDP 42.8% 40.4% 39 .5% 39.2% 38.3% 37.7% 37.0% 36 .1% 35.2% 34.3% 33 .4% 32.5%Source: Ita Unibanco, BCB, IBGE and Haver*/See a more detailed table on the following page

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Table 2 - Long-Term Scenario for Savings and Investment

20 09 2010E 2011 E 2012E 2013E 2014E 201 5E 2016E 2017E 2018E 2 019E 2020E


Investment (% GDP) 16.5% 19.3% 20.4% 21.0% 21.7% 22.4% 22.6% 22.8% 22.8% 22.9% 22.7% 22.6%

Public Investment (% GDP) - 1.1% 0.9% 1.0% 1.6% 1.9% 2.1% 2.1% 2.0% 1.9% 1.7% 1.6%


Domestic Savings 14.7% 17.1% 17.6% 17.0% 18.0% 18.6% 19.1% 19.4% 19.6% 19.6% 19.7% 19.7%

Public Savings - -2.4% -2.5% -2.4% -1.3% -0.9% -0.7% -0.5% -0.4% -0.3% -0.4% -0.4%

Private Savings - 19.4% 20.1% 19.4% 19.3% 19.5% 19.8% 19.9% 20.0% 20.0% 20.1% 20.1% Source: IBGE and Ita

Table 3 - Long-Term Scenario for the Balance of Payments

% GDP 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Current Account -2.3% -2.9% -4.0% -3.8% -3.7% -3.5% -3.4% -3.2% -3.2% -3.1% -2.9%

Foreign Portfolio Investment 2.2% 1.8% 1.2% 1.0% 0.8% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5%

Foreign Direct Investment 2.3% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.4% 2.4% 2.4%

Net Foreign Inflow 1.4% 0.9% 0.8% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Others -1.2% -0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Changes in Reserves 2.4% 1.8% 0.6% 0.7% 0.6% 0.7% 0.7% 0.8% 0.7% 0.8% 1.0%

Memo:

Rollover Rate 185% 170% 170% 170% 170% 170% 170% 170% 170% 170% 170%

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Total Gross External Debt 256 279 305 333 365 399 436 475 517 561 607

Medium and Long Term External Debt $Bi 199 222 248 276 308 342 379 418 460 504 550

Short Term External Debt $Bi 57 57 57 57 57 57 57 57 57 57 57

Medium and Long Term Debt Rollover Rate 185% 170% 170% 170% 170% 170% 170% 170% 170% 170% 170%

Short Term Debt Rollover Rate /1 184% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

International Reserves $Bi 288 329 332 365 385 410 437 467 497 534 580Medium and Long Term Debt Amortizations $Bi /2 34 34 36 40 46 49 52 56 60 63 66

Total Net Inflow $Bi /3 51 24 25 28 32 34 37 39 42 44 46

Net Total External Debt $Bi /4 -53 -71 -61 -53 -41 -31 -21 -12 -1 6 6

Net Total External Debt %GDP -2.5% -3.0% -2.3% -1.8% -1.2% -0.9% -0.6% -0.3% 0.0% 0.1% 0.1%

1/ Estimate considers stocks estimated by the central bank in Dec/09 and Dec/102/ Considers remaining assets abroad: ~$ 20 bln3/ Includes short term4/ Estimates consider short-term debt stock as of Dec/10Source: Ita and BCB

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Table 4 Fiscal Forecasts for the Long Run

(%GDP) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Net Public Debt 40.4% 39.5% 39.2% 38.3% 37.7% 37.0% 36.1% 35.2% 34.3% 33.4% 32.5%

Fiscal Budget Balance -2.6% -3.5% -3.9% -3.5% -3.4% -3.5% -3.3% -3.1% -2.9% -2.8% -2.7%

Primary Budget Balance 2.8% 2.5% 1.9% 1.5% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Central Government Balance 1.2% 1.6% 1.3% 1.1% 0.9% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7%

Revenues 19.3% 19.3% 19.6% 19.9% 20.1% 20.2% 20.3% 20.3% 20.3% 20.4% 20.4%

Expenditures 18.1% 17.6% 18.3% 18.8% 19.2% 19.5% 19.6% 19.6% 19.6% 19.7% 19.7%

Transfers 8.6% 8.6% 9.0% 9.1% 9.2% 9.4% 9.5% 9.7% 9.9% 10.1% 10.3%

Current Spending 8.1% 7.8% 8.0% 7.9% 7.9% 7.8% 7.8% 7.7% 7.7% 7.6% 7.6%

Investment 1.1% 0.9% 1.0% 1.6% 1.9% 2.1% 2.1% 2.0% 1.9% 1.7% 1.6%Subsidies 0.2% 0.4% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Subnational Entities Balance 0.8% 0.8% 0.6% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Memo:

Tax Elasticity 1.17 1.11 1.54 1.33 1.23 1.14 1.08 1.04 1.03 1.02 1.00 Source: National Treasury, BCB and Ita

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Table 5 - Macroeconomic Long-Term Forecasts

2 009 2 010 E 20 11 E 2 012 E 2 01 3E 2 01 4E 2 01 5E 2 01 6E 2 017 E 2 018 E 2 019 E 2 020 E

World Economy

World GDP growth -0.6% 4.9% 4.2% 3.9% 3.9% 3.9% 3.9% 3.7% 3.7% 3.7% 3.7% 3.7%

USA -2.6% 2.9% 2.8% 2.3% 2.2% 1.9% 2.1% 2.0% 1.9% 1.9% 1.9% 1.9%

Euro Area -4.0% 1.6% 1.2% 1.2% 1 .2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%

Japan -6.3% 4.3% 1.4% 1.0% 0.7% 0.7% 0.7% 0.8% 1.0% 1.0% 1.0% 1.0%

China 9.1% 10.3% 9.0% 8.5% 8.5% 8.5% 8.1% 7.5% 7.3% 7.0% 6.8% 6.6%

CRB Index 360 436 553 580 594 619 645 661 677 694 704 715

Brazil

External Sector & Exchange Rate

Nominal BRL / USD eop 1.74 1.69 1.70 1.70 1.66 1.65 1.69 1.75 1.79

Nominal BRL / USD year a vg 1.99 1.76 1.68 1.70 1.68 1.63 1.67 1.72 1.77 Real BRL / USD (2010 = 100) 2.02 1.76 1.64 1.62 1.58 1.50 1.51 1.53 1.54

Exports USD bn 153 202 242 253 301 350 406 461 523 584 646 713

Imports USD bn 128 182 227 250 304 361 414 467 525 585 638 694

Trade balance USD bn 25 20 15 3 -3 -10 -7 -7 -2 -1 8 19

Total Trade Flows (exp + imp) % GDP 18% 18% 20% 19% 21% 22% 23% 25% 26% 27% 29% 30%

Current Account USD bn -24 -48 -69 -103 -108 -121 -122 -127 -130 -139 -137 -135

Current Account % GDP -1 .5% -2 .3% -2.9% -4 .0% -3 .8% -3 .7% -3 .5% -3 .4% -3 .2% -3 .2% -3 .1% -2 .9%

Foreign Direct Investment USD bn 26 48 58 65 72 82 89 93 98 105 109 114

Foreign Direct Investment % GDP 1.6% 2.3% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.4% 2.4% 2.4%

International reserves, cash USD bn 239 288 329 332 365 385 410 437 467 497 534 580

International reserves % GDP 14.9% 13.9% 13.7% 12.8% 12.7% 11.8% 11.7% 11.7% 11.7% 11.6% 11.9% 12.3%

Economic Activity

Nominal GDP BRL bn 3,185.1 3,654.3 4,039.9 4,403.5 4,839.5 5,316.7 5,844.3 6,423.8 7,063.0 7,747.1 8,492.8 9,301.0

Nominal GDP USD bn 1,598.4 2,076.0 2,401.7 2,590.3 2,875.2 3,262.2 3,504.1 3,732.1 3,991.1 4,279.3 4,473.5 4,720.7

Real GDP Growth -0.6% 7.5% 4.0% 3.8% 4.7% 4.6% 4.7% 4.7% 4.7% 4.5% 4.4% 4.3%


Investment (% GDP) 16.5% 1 9.3% 20.4% 21.0% 21.7% 22.4% 22.6% 22.8% 22.8% 22.9% 22.7% 22.6%

Public Investment (% GDP) - 1.1% 0.9% 1.0% 1.6% 1.9% 2.1% 2.1% 2.0% 1.9% 1.7% 1.6%


Domestic Savings 14.7% 17.1% 1 7.6% 1 7.0% 18.0% 18.6% 19.1% 19.4% 19.6% 19.6% 19.7% 19.7%

Public Savings - -2.4% -2.5% -2.4% -1.3% -0.9% -0.7% -0.5% -0.4% -0.3% -0.4% -0.4%

Private Savings - 19.4% 20.1% 19.4% 19.3% 19.5% 19.8% 19.9% 20.0% 20.0% 20.1% 20.1%

InflationIPCA 4.3% 5.9% 5.8% 4.7% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

IGPM -1.7% 11.3% 6.2% 5.5% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Interest Rate

Selic eop 8.75% 10.75% 12.50% 11.50% 10.75% 10.50% 10.25% 10.00% 9.75% 9.75% 9.75% 9.75%

Selic year avg 9.9% 10.00% 12.19% 12.29% 10.84% 10.63% 10.42% 10.16% 9.87% 9.75% 9.75% 9.75%

Real interest rate (Selic/IPCA) - eop 5.6% 4.7% 5.8% 6.6% 5.6% 5.4% 5.2% 4.9% 4.6% 4.5% 4.5% 4.5%

Public Finances

Primary Budget Balance % GDP 2.1% 2.8% 2.5% 1.9% 1.5% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Fiscal Budget Balance % GDP -3 .3% -2 .6% -3.5% -3 .9% -3 .5% -3 .4% -3 .5% -3 .3% -3 .1% -2 .9% -2 .8% -2 .7%

Net Public Debt % GDP 42.8% 40.4% 39.5% 39.2% 38.3% 37.7% 37.0% 36.1% 35.2% 34.3% 33.4% 32.5%Source: Ita Unibanco, BCB, IBGE and Haver

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Relevant information

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Client, you should not rely upon the information contained herein and should notify Itau BBA UK Securities Limited immediately.The information contained herein does not apply to, and should not be relied upon by, retail customers; (ii) U.S.: Itau BBA USASecurities, Inc., a FINRA/SIPC member firm, is distributing this report and accepts responsibility for the content of this report. AnyUS Person receiving this report and wishing to effect any transaction in any security discussed herein should do so with Itau BBA

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Securities Limited at29th Floor, Two IFC, 8 Finance Street Central, Hong Kong; (iv) Japan: This report is distributed inJapan by Itau Asia Securities Limited Tokyo Branch, Registration Number (FIEO) 2154, Director, Kanto Local Finance Bureau,Association: Japan Securities Dealers Association; (v) Middle East: This information has been distributed by Ita Middle EastSecurities Limited. Related financial products or services are only available to wholesale clients with liquid assets of over $1 million,and who have sufficient financial experience and understanding, to participate in financial markets in a wholesale jurisdiction. ItaMiddle East Securities Limited is regulated by the Dubai Financial Services Authority (DFSA). In Middle East, any investors wishing

to purchase or otherwise deal in the securities covered in this report should contact Ita Middle East Securities Limited, at AlFattan Currency House, Suite 305, Level 3, DIFC, PO Box 65703 , Dubai, United Arab Emirates; (vi) Brazil: Ita Corretora deValores S.A., a subsidiary of Ita Unibanco S.A authorized by the Central Bank of Brazil and approved by the Securities andExchange Commission of Brazil, is distributing this report. If necessary, contact the Client Service Center: 4004-3131* (capital and

metropolitan areas) or 0800-722-3131 (other locations) during business hours, from 9:00 a.m. to 8:00 p.m.,Brasilia time. If youwish to re-evaluate the suggested solution, after utilizing such channels, please call Itas Corporate Complaints Office: 0800-570-

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itau visao 110215 2020 e (1)

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