latam macro monthly - itau.com.br policy rate - eop - % 11,00 11,00 12,00 12,50 monetary policy rate...
TRANSCRIPT
LatAm Macro Monthly Scenario Review
June 2014
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.
Page Global Economy
Positive External Environment for Emerging Markets Continues 3
Interest rates in the U.S might remain low for longer and the ECB has eased policies again. Emerging markets benefit from this environment, but their weak growth might limit some of the gains.
Brazil
Consumers and Businesses Step on the Brakes: Activity Decelerates 7 The slowdown in demand is remarkable and we expect negative GDP growth in 2Q14, followed by a slight recovery in the second half. We expect economic growth of 1.0% in 2014 and 1.7% in 2015.
Mexico
An Unexpected Policy Rate Cut 14 The economy disappointed during 1Q14, but for the second quarter, available indicators suggest some improvement. The central bank took markets by surprise and reduced the policy rate in its June meeting.
Chile Private Consumption, Following in the Footsteps of Investment 17 Activity has been weak on many fronts. We have reduced our GDP growth forecast for 2014 to 2.8% (from 3.3%), while maintaining our 4.0% growth estimate for 2015.
Peru Private Demand Slows Further 20 Peru’s GDP growth slowed in 1Q14 as private domestic demand decelerated. Available indicators for 2Q14 also point to weaker activity. We reduced our GDP forecast for this year.
Colombia An Uncertain Presidential Election 23 Presidential run-off looms,momentum lies with Zuluaga. On the economy, growth remained robust in 1Q14, driven by the good performance of private consumption.
Argentina
Paris Is Well Worth a Mass 26 The agreement with the Paris Club marks an important step in normalizing the country’s financial relations with the international community and could open up access to international financing.
Commodities
Falling Prices for Agricultural Commodities and Metals 29
Favorable weather conditions dragged down prices for agricultural commodities. Iron ore prices continue to drop, given the outlook for larger supply from Australia and concerns involving the real estate sector in China.
Macro Research – Itaú
Ilan Goldfajn – Chief Economist Tel: +5511 3708-2696 – E-mail: [email protected]
Page 2
LatAm Macro Monthly – June 2014
Emerging Markets in Slow Motion
We have been warning that the favorable liquidity conditions for emerging economies would not be permanent. At some point, the global recovery will lead to a normalization of monetary policy, a process that could mean further volatility in financial markets. Over time, markets tend to stabilize as the beneficial impact of global growth on emerging economies compensates for less favorable financing conditions. The process, however, is inherently volatile.
We are now six months into 2014, and the process seems to have stabilized. The U.S. economy posted a weak first quarter and the Fed shows no hurry in normalizing monetary conditions beyond the tapering: U.S. treasury yields remain exceptionally low, and they are even dropping. For its part, the ECB assumed a more expansionary stance, reducing interest rates and adopting new measures to inject liquidity.
Is it possible that unusual policies in advanced economies (and low financing cost to emerging countries) are becoming more permanent? We do not believe so. Sooner or later, global liquidity will tighten again. We still forecast rising U.S. interest rates and more depreciated exchange rates for emerging economies in the future.
However, it is worth noting that the favorable effects of the current scenario seem to be wearing out. Commodity prices have reversed the upward trend seen in the first months of the year, and emerging market currencies are no longer appreciating, as growth disappoints.
In Latin America, we have reduced our GDP forecasts for Brazil, Chile, Mexico and Peru. In Mexico, the weak first quarter led to a drop in growth forecasts, and the central bank responded with an unexpected interest rate cut. Colombia alone continues to post good performance and has rising interest rates. The tight presidential race does not seem to be affecting the economy, as both candidates are market-friendly.
In Brazil, the dynamics of economic activity cause even more concern. The drop in business and consumer confidence in recent months is notable, raising doubts about the performance of consumption and investment in the second half. The central bank stopped raising interest rates, despite the fact that inflation remains close to the upper bound of the target range.
Good news in Argentina: the agreement with the Paris Club marks an important step towards the normalization of the country's financial relations with the international community. But the challenge of macroeconomic adjustment continues. Despite central bank's resistance, we continue to expect exchange-rate depreciation and rising interest rates this year.
While emerging economies advance at a sluggish pace, the coming month promises emotion and great drama as the globe turns its eyes to Brazil for football. We wish everyone good luck at the World Cup!
Hope you enjoy,
Ilan Goldfajn and Macro Team
Current Previous Current Previous Current Previous Current Previous
GDP - % 3,3 3,4 3,6 3,6 GDP - % 1,6 2,0 2,7 2,8
Current Previous Current Previous Current Previous Current Previous
GDP - % 1,0 1,4 1,7 2,0 GDP - % 2,4 2,7 3,8 3,8
BRL / USD eop 2,45 2,45 2,55 2,55 MXN / USD eop 13,2 13,2 13,2 13,2
Monetary Policy Rate - eop - % 11,00 11,00 12,00 12,50 Monetary Policy Rate - eop - % 3,00 3,50 3,50 4,50
IPCA - % 6,5 6,5 6,5 6,5 CPI - % 3,7 3,7 3,2 3,2
Current Previous Current Previous Current Previous Current Previous
GDP - % -2,0 -2,0 0,0 0,0 GDP - % 2,8 3,3 4,0 4,0
ARS / USD eop 10,0 10,0 13,0 13,0 CLP / USD eop 575 575 600 575
BADLAR - eop - % 35,0 35,0 30,0 30,0 Monetary Policy Rate - eop - % 3,50 3,50 3,50 4,00
CPI - % (Private Estimates) 37,0 37,0 27,0 27,0 CPI - % 3,6 3,6 2,9 2,9
Current Previous Current Previous Current Previous Current Previous
GDP - % 4,5 4,5 4,5 4,5 GDP - % 5,0 5,3 5,9 5,9
COP / USD eop 1950 1950 2000 1980 PEN / USD eop 2,85 2,85 2,95 2,90
Monetary Policy Rate - eop - % 4,25 4,25 5,00 5,00 Monetary Policy Rate - eop - % 4,00 4,00 4,00 4,00
CPI - % 3,1 2,9 3,0 3,0 CPI - % 3,0 3,0 2,5 2,5
2015 2014 2015
Brazil
2014 2015 2014 2015
Mexico
Scenario Review
Latin America and Caribbean
2014 2015 2014 2015
Peru
Chile
Colombia
Argentina
2014 2015 2014 2015
World
2014
Page 3
LatAm Macro Monthly – June 2014
Global Economy
Positive External Environment for Emerging Markets Continues
• After a weak start to the year, economic activity in major economies, particularly in the U.S., has improved in 2Q14.
• Meanwhile U.S. interest rates could remain low for longer. We have recently revised our 10-year Treasury forecast for
year-end 2014, to 2.90% from 3.45%.
• The ECB eased its policies again, increasing the perception of lower global interest rates for longer.
• Emerging-market assets benefit from this global environment, but weak growth performance could limit some of the gains.
Economic activity in most major economies is
improving. Admittedly, the U.S. economy was very
weak in 1Q14, but is now on track to post 3.8% growth
(seasonally-adjusted annual rate – saar) in 2Q14. The
recovery in the euro zone has been modest, but is
expected continue. Even the leading indicators in
China have shown a recent improvement. Only in
Japan do we see a temporary contraction due to a
VAT increase. The simple average growth rate for
these countries is likely to increase to 3.7% in 2Q14,
from 2.2% in 1Q14 (see graph).
Growth is accelerating
QoQ
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
GDP Growth - G4 *
Forecast
*USA, Euro Zone, Japan, China Source: IMF, Itaú
Meanwhile interest rates in the U.S could remain
low for longer. Inflation rose, but remains moderate,
and the Central Bank’s rhetoric signals no rush to
increase rates. We recently changed our call on the
timeframe of the FOMC’s next hiking cycle, to 3Q15
from 2Q15. Moreover, we now expect the yield on the
10-year Treasury bond to reach 2.9% (vs. 3.45%
previously) by the end of 2014.
The European Central Bank (ECB) carried out
another round of easing. We believe that the ECB’s
actions (see details below) were necessary to
counterbalance the increasing risk of deflation.
Could the global environment get any better for
emerging markets? So far, so good. Of course some
future risks remain, such as the chance of an earlier
rise in U.S. interest rates and the downside risks to
activity in China, but they appear to be under control
for the time being.
The only (and major) caveat for emerging markets
is that their growth continues to disappoint. Some
countries experience domestic restrictions such as
high inflation and/or a necessary slowdown in fiscal,
credit or investment expansion after years of increase.
Structural reforms are, for the most part, absent. Weak
growth could limit the gains from the current global
environment.
Importantly, with little external pressure and a
slowdown in growth, policymakers in emerging
markets are beginning to increasingly focus on the
latter. In the past month, the central banks of Turkey
and Mexico surprised the markets with interest-rate
cuts triggered by signs of weak activity.
A Strong U.S. Economy and Low Interest
Rates
The U.S. economy was weaker than initially
expected at the beginning of 2014. The 1Q14 GDP
growth was revised 1.0% down (saar), from an initial
estimate of 0.1%. The revision was largely due to less
inventory accumulation. A sharp inventory correction
and harsh winter were clearly the main culprits behind
the slowdown in the first quarter.
Activity improved in 2Q14 and, according to our
models, GDP is on track to expand 3.8% (saar). The
May indicators have been slightly above consensus,
confirming the economy’s more solid footing. Non-farm
payrolls added another 217 thousand jobs and vehicle
sales reached 16.7 million (saar) – the highest level
Page 4
LatAm Macro Monthly – June 2014
since 2006. Finally, the number of aggregate hours
worked has grown at a robust 4.2% annualized pace in
the last three months.
We continue to expect the economy to growth at a
3% pace in 2H14. The good performance of the
economic indicators in May underpin this positive
outlook.
Although comfortable with the outlook, we
reduced our 2014 GDP forecast, to 2.3% from 2.5%,
due to the negative 1Q14 surprise, but maintained
our 3.1% estimate for 2015.
Inflation has been firmer in the last two months,
but remains at fairly comfortable levels. The core
PCE deflator accelerated from 1.1% year over year in
February to 1.4% in April, but remains comfortably
below the Central Bank’s 2.0% inflation mandate.
Meanwhile, FOMC members hint that the hiking
cycle ought to begin in 2H15 or later. Although they
acknowledge that the decision depends on the inflation
evolution and labor-market conditions, the
communication suggests a later and slower hike pace
for Fed fund rates.
The disappointing 1Q14 growth, modest inflation
and Fed rhetoric have led us to postpone our
forecast of interest-rate increases in the U.S. We
have recently revised the start of the monetary policy
tightening cycle to 3Q14, from the second quarter of
2015. We still expect the FOMC to raise rates by 25
bps per meeting, outpacing the current market pricing
and itself, but the current Fed rhetoric is likely to
anchor rates for longer. We therefore reduced our 10-
year U.S Treasury yield forecast, to 2.9% in December
2014 (from 3.45%) and 3.5% in December 2015 (from
3.7%).
The ECB Carries out a New, Aggressive
Round of Easing to Counterbalance the
Increasing Risks of an Overly-prolonged
Period of Low Inflation.
The ECB lowered the interest rate on overnight
bank deposits to an unprecedented negative value
of 0.10% (from 0%) and reduced its main bank-
lending rate by 0.10%, to 0.15%.
Furthermore, the Central Bank will lend funds
(known as TLTRO – target long-term refinancing
operation) to banks for up to four years at a fixed
cost of 0.25%. Banks will be able to initially borrow up
to 7% of their outstanding loans to nonfinancial
corporations and households (excluding mortgages).
The combined initial entitlement totals approximately
EUR 400 billion (USD 550 billion). The actual
placement will depend on banks’ demand for ECB
funding. Banks will be able to place their orders in
September and December 2014. The TLTROs will
continue from March 2015 to June 2016 but will be
limited to the banks’ net lending performance. Note
that if banks do not increase their net lending to the
non-financial private sector (relative to specific
benchmarks), they will be required to pay back the
borrowed amount in September 2016. These
measures are intended to improve bank lending to the
private sector.
The ECB also ended the weekly sterilization of its
periphery sovereign-bond portfolio, which was
acquired during the euro crisis and is likely to imply the
immediate addition of around EUR 120 billion in
liquidity.
Finally, the Central Bank reinforced its forward
guidance of low interest rates It has done so by
extending its full allotment procedure, by which it
allows banks to borrow unlimited funds per one week,
to the end of 2016 from mid-2015. The ECB President
Mario Draghi has pointed out this extension and the
fixed rate until 2018 on the TLTRO suggests that
interest rates will remain low for long.
Will these actions work or should we expect
further easing?
To some extent, the measures are off to a good
start in terms of the impact on inflation
expectations. Implied long-term inflation expectations
rose from 1.45% at the beginning of May to 1.57%
(see chart). It remains to be seen, however, whether
this will translate into a broader rise in inflation
expectations.
Inflation expectations up after the ECB
%
1.25
1.3
1.35
1.4
1.45
1.5
1.55
1.6
1.65
1.7
1.75
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
Long Term* Inflation Implied on Market Prices
* 3 Year inflation 2 years ahead calculated from swaps
Source: Bloomberg, Itaú
Page 5
LatAm Macro Monthly – June 2014
Despite a disappointing 1Q14, we expect the
modest economic recovery to continue. The 1Q14
GDP figure was weaker than expected, at 0.2% qoq,
showing a slightly decline from the 0.3% reported in
4Q13. Although we see a slight growth improvement
going forward, the negative 1Q14 surprise led to a
downward revision of our forecasts for 2014 to 1.1%
(from 1.3%). Our forecast for 2015 remains unchanged
at 1.5%.
We expect this recovery to contribute to a
reduction in disinflationary pressures ahead and
avoid the need for further monetary policy easing
by the ECB.
But the risks are tilted toward further action.
Inflation has been persistently weaker than expected
and there is a lot of uncertainty about the actual
demand for the TLTRO. The ECB has already signaled
that it could carry out asset-backed securities
purchases, which might reach sovereign bonds if
inflation continues to fall. We believe that, if necessary,
a new easing cycle could occur in December or early
2015.
China – Signs of Improvement in 2Q14;
Downside Risks from the Property Sector
Manufacturing PMI rose to 50.8 in May (from 50.4
in April), mainly driven by new domestic orders.
The improvement in domestic demand suggests that
the small, targeted measures are beginning to add up
and helping to stabilize the economy, thereby
offsetting the drag caused by the weakness in the
Property sector.
The risks, however, remain tilted toward the
downside, with the spotlight now on the Property
sector. Several indicators show weakness in the
sector during the first four months of the year and
extending into May. An additional slowdown in housing
might take China’s GDP growth to below 7.0% this
year.
The challenge continues to be balancing short-
and medium-term growth. The government is, in our
view, seeking to stabilize growth and advance reforms.
This is a fine balance, given that some of the reforms,
such as pushing for some deleveraging, will harm
short-term growth. Despite the risks, we believe that
the combination of targeted stimuli (not a repeat of the
broad measures of the past) and an emphasis on
reforms improves the medium-term outlook.
With the recent gain in the country’s PMIs, we are
confident that activity is stabilizing. We maintain
our GDP forecast at 7.2% for 2014 and 7.0% for
2015.
Japan – With better activity, the BoJ is
unlikely to increase its (already-
aggressive) easing policies.
Japan’s GDP grew 5.9% (qoq, saar) in 1Q14,
significantly above consensus. Private investment
rose an impressive 20.1%, notably above expectation.
Moreover, current economic indicators suggest a
modest decline in activity due to a VAT increase in
April, from 5% to 8%, but in line with expectations.
We revised our 2014 GDP growth forecast up to
1.7%, from 1.1%.
Given the improvements in activity and inflation,
which are so far in line with the BoJ’s forecasts,
we no longer expect further monetary easing (we
previously expected an announcement in October).
Emerging Markets – Favorable External
Liquidity Conditions Amid Weak Growth
External liquidity conditions remain supportive for
emerging markets assets. Interest rates in major
developed countries remain low, with little pressure to
rise, but we believe that the situation will change at
some point. For now, however, the environment
supports financial inflows to emerging economies.
Notwithstanding the supportive environment,
growth in developing economies continues to
disappoint. In Latin America, we have reduced our
GDP forecasts for Brazil, Chile, Mexico and Peru.
Importantly, the weak growth performance could
limit some of the gains from the favorable global
environment. For example, following the strong
appreciation trend until April, several emerging-market
currencies have remained mostly flat or even
depreciated (see graph).
Smaller gains in EM exchange rates Exchange rates of selected emerging markets. Index (Jan/14=100, + = appreciation)
92
94
96
98
100
102
104
106
108
110
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
BrazilMexicoTurkeyIndonesia
Smaller gains for EM exchange rates
Source: Bloomberg, Itaú
Page 6
LatAm Macro Monthly – June 2014
Commodities - Falling Prices for
Agricultural Commodities and Metals
The Itaú Commodity Index (ICI) has fallen 3.7%
since the end of April, driven by lower agricultural,
iron ore and natural gas prices. Favorable weather
conditions, particularly in the U.S., have improved the
supply prospects for corn, wheat, soybean and cotton,
leading the ICI-Agricultural index to fall 10.0% in the
period. Easing concerns surrounding Ukraine are
somewhat responsible for the drop in grain and natural
gas prices.
The ICI-energy sub-index rose 0.6%. apart from
lower natural gas prices, there was no clear driver for
other energy-related commodities. Brent and WTI
crude prices rose 1.5% and 4.5%, respectively, with no
relevant changes in fundamentals. We continue to
expect the Brent price to drop to USD 105/bbl by year-
end (from 108.5 in early June) as a result of the better
expected supply in Iran, Iraq and Libya going forward.
We forecast a WTI price of USD 101/bbl, close to the
current levels.
Iron ore extended the losses in May, leading the
ICI-metals sub-index to fall 3.7%. The slowdown at
the beginning of the year, tighter regulation, and now
concerns about the Real Estate sector in China
continue to weigh on the sector. Moreover, the
stronger supply from Australia also encouraged prices
to drop below USD 95/t. We believe there is some
undershooting at play, as the current prices are below
some producers’ operational costs. However, the
supply-demand balance suggests that these
procedures are still necessary in order to reach
equilibrium. We therefore maintain our year-end
forecast at USD 101/t (6% above the current levels).
Improved supply conditions dampen agricultural
prices. Our index has fallen 10.0% since the end of
April, partially reversing the year-to-date gains. All of
the main commodities we track registered declines:
corn (-12.3%), wheat (-14.1%), soybeans (-4.8%),
cotton (-10.2%), coffee (-18.6%) and sugar (-1.5%).
The first four were affected by better supply prospects,
particularly in the U.S., while the last two oscillated
amid uncertainties regarding the fundamentals, given
that estimates range from a small surplus to a sizable
deficit.
Our year-end ICI forecasts remain unchanged at -
1.4% for 2014 and 1.6% for 2015, but not without a
couple of downside risks: i) iron ore prices could
reach equilibrium below USD 95/t and ii) above-
average weather conditions ahead could lead to
further declines in agricultural prices.
Forecasts: World Economy
GDP Growth
World GDP growth - % -0.4 5.2 3.9 3.2 3.0 3.3 3.6
USA - % -2.8 2.5 1.8 2.8 1.9 2.3 3.1
Euro Area - % -4.3 2.0 1.5 -0.6 -0.4 1.1 1.5
Japan - % -5.5 4.7 -0.4 1.4 1.6 1.7 1.3
China - % 9.2 10.4 9.3 7.8 7.7 7.2 7.0
Interest rates and currencies
Fed Funds - % 0.1 0.2 0.1 0.2 0.1 0.1 1.3
USD/EUR - eop 1.43 1.34 1.30 1.32 1.37 1.35 1.35
YEN/USD - eop 92.1 81.5 77.6 86.3 103.6 110.0 110.0
DXY Index* - eop 76.8 80.0 79.6 79.8 80.3 81.7 81.7
2015F2013 2014F2009 2010 2011 2012
Source: Central Banks, IMF, Haver and Itaú. * The DXY is a leading benchmark for the international value of the U.S. dollar, measuring its performance against a basket of currencies that includes the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.
LatAm Macro Monthly – June 2014
Page 7
Brazil
Consumers and Businesses Step on the Brakes: Activity
Decelerates
• In the light of the release of 1Q14 GDP numbers and the economic slowdown in April and May, we reduced our GDP
growth forecast for 2014 to 1.0%. The demand deceleration has been notable, and we expect negative GDP growth in
2Q14, followed by a slight recovery in the second half. We expect economic growth of 1.0% in 2014 and 1.7% in 2015.
• We forecast an exchange rate of 2.45 reais per U.S. dollar by year-end, pressured by a weaker-than-expected trade
balance (our call is USD 1.5 billion), election-related uncertainties and our scenario of a moderate rise in U.S. interest rates.
We see the exchange rate at 2.55 reais per dollar by the end of 2015. In the short term, we expect the exchange rate to
remain within a range that is consistent with the monetary authority’s comfort zone – as implied by the announcement of the
future renewal of the FX swap program.
• We reduced our forecast for the IGP-M general price index, to 6.0% from 6.8%, but maintain our estimate for the IPCA
consumer price index at 6.5%. Our forecast for 2015 stands at 6.5%, with sharper increases in regulated prices and some
deceleration in market-set prices.
• In this low-growth scenario, it will be difficult for the fiscal policy to achieve the primary budget surplus target of 1.9%. We
maintain our primary surplus estimates of 1.3% for 2014 and 1.7% for 2015.
• The Central Bank’s Monetary Policy Committee (COPOM) kept the benchmark interest rate at 11%, but the meeting’s
minutes indicate that concerns are equally balanced between inflation being uncomfortably close to the upper limit of the
target range and the declining economic growth rate. We see the SELIC rate at 11% by the end of this year and 12% in
2015.
• Polls show a drop in the government’s approval ratings and a narrowing of the gap between President Dilma Rousseff and
the other candidates.
Outlining a Lower-Growth Scenario
We revised our GDP forecast for 2014 to 1.0%. The
1Q14 GDP outturn and coincident indicators for April
and May suggest a slowdown in domestic demand,
and we expect negative growth in 2Q14. Depending on
the intensity of this contraction, growth in 1Q14 could
be revised downward to a negative reading as the
seasonal adjustment to that series is updated. In that
case, there would be two consecutive quarters with
negative GDP growth. However, we expect a
moderate economic recovery in 2H14 that will drive
growth to 1.0% in 2014.
The 1Q14 GDP report showed a deceleration in
domestic demand. Economic activity slowed in 1Q14,
with GDP growing 0.2% qoq/sa (1.9% yoy). The
deceleration reached investment, household and
government spending, with the first two actually falling
in the period. (For further details, please refer to the
link). The 1Q14 GDP outturn and the revision of the
2013 GDP figure triggered a deterioration in the
statistical carryover for 2014.
According to the available 2Q14 data, there was a
retreat in industrial activity and a moderation in
retail sales. Industrial activity declined and retail
growth has been moderate. Industrial production fell
0.3% mom/sa in April, showing a sharper decrease in
sectors in which demand is more dependent on
business/consumer confidence and credit availability,
such as capital and durable consumer goods. The
positive highlight was semi-durable and non-durable
consumer goods production, which rose 0.4%. Serasa
Experian’s retail activity index showed a growth
deceleration in May. The same occurred with vehicle
sales, according to FENABRAVE, the auto dealers
association.
Business confidence indices fell to exceedingly
low levels. There was a decline in business
confidence in the four largest economic-activity sectors
in both April and May. Moreover, these indices remain
low, indicating a cool-down in activity in the coming
months. We believe, however, that part of the retreat is
temporary due to the expectation of cuts in working
days during the Soccer World Cup event.
We see negative GDP growth in 2Q14. The statistical
carryover from 1Q14 and coincident indicators for April
and May suggest a 2Q14 retreat in GDP (-0.2%
qoq/sa). Given the revision in seasonal adjustment,
growth in 1Q14 could be negative, thus setting the
LatAm Macro Monthly – June 2014
Page 8
stage for a technical recession. However, we expect
the economy to stabilize in 2H14, expanding by 0.5%
in 3Q14 and 0.4% in 4Q14.
Confidence in low levels index, sa Jul/10=100
60
65
70
75
80
85
90
95
100
105
110
May-08 May-09 May-10 May-11 May-12 May-13 May-14
ConstructionIndustryServicesRetail
Source: FGV, Itaú
We revised our growth forecast for 2015 to 1.7%.
Low growth in 2014 will provide a statistical carryover
that is likely to be less favorable than we anticipated
(our previous forecast for 2015 was 2.0%). We expect
a moderate recovery, fueled by an improvement in
domestic demand as election-related uncertainties are
resolved and business and consumer confidence
levels stabilize.
Industrial Production fall in April Industrial production index, as 2012=100
80
84
88
92
96
100
104
108
Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14
Level3mma
Source: IBGE, Itaú
Despite the slowdown in economic activity,
unemployment remains low. The unemployment rate
stood at 4.9% (seasonally-adjusted) in April (vs. 4.8%
in March), missing both our and market estimates. The
recent decoupling of unemployment and economic
growth has been partly due to successive year-over-
year drops in labor force. We understand that the
retreat is largely driven by young people who have left
the labor market to return to school (please see our
report titled “Macro Vision – Unemployment, Declining
Participation Rate and FIES”).
Looking ahead, we forecast a moderate rise in
unemployment. While our forecast is based on the
slowing economy, we also believe that the recent
dynamics of the declining labor force will eventually be
exhausted. We expect the seasonally-adjusted
unemployment rate to be at 5.3% by year-end and
5.6% by the end of 2015.
Dependence on thermal power plants and rationing
risks persist. The rainfall levels in key regions for
hydropower generation and storage were below
average in May, but have been in line with the
historical average since February 15. Power usage is
showing some signs of cooling down, possibly due to
the still-high prices in the free market. Reservoir levels
started to recede in May, following the seasonal
patterns, and should continue to drop slowly until
November. In a nutshell, recent developments
reinforce a scenario of intense thermal-power-plant
usage and a continued risk of rationing going forward.
Although precipitation levels that surpass the seasonal
average during the dry season (until October) provide
relief, they are not a definitive solution.
QoQ S.A.
2014 Q1
Old Series New Series New Series
GDP 2.3 2.5 0.2
Demand
Household Expenditure 2.3 2.6 -0.1
Government Expenditure 1.9 2.0 0.7
Investment 6.3 5.2 -2.1
Exports 2.5 2.5 -3.3
Imports 8.4 8.3 1.4
Supply
Agriculture 7.0 7.3 3.6
Industry 1.3 1.7 -0.8
Services 2.0 2.2 0.4
%Annual change 2013
Source: IBGE, Itaú
Poor credit performance in April. The daily average
of non-earmarked loans fell 2.5% mom/sa, in real
terms. Moreover, the expansion pace of the credit
stock has slowed. The year-over-year real growth in
total outstanding loans slid to 6.7% in April, from 7.1%
in March. The deceleration in lending was widespread,
reaching both earmarked credit (which slipped to
LatAm Macro Monthly – June 2014
Page 9
15.9% from 16.6%) and non-earmarked loans (down to
0.0% from 0.3%), as well as credit granted by state-
owned banks (down to 13.3% from 14.2%) and private
banks (down to 0.3% from 0.4%). Overall delinquency
remained at 3% for a fifth consecutive month. The
average interest rate was also unchanged, at 21.1%.
While Exports Huff and Puff, the Current
Account Deficit Stands Firm
We revised our 2014 trade-balance forecast
downward. We expect the falling prices for exported
commodities and resilient imports (which continue to
advance despite the economic activity deceleration(
partly due to the fact that fuel prices are being held
back) to have a negative impact on the Brazilian trade
balance this year. We therefore revised our trade-
balance estimate for 2014 to USD 1.5 billion, from
USD 3 billion. A smaller trade balance widens the
current account gap, which is likely to end 2014 at
USD 82 billion (vs. USD 80 billion previously). For
2015, we maintain our expectation of a USD 16 billion
trade surplus.
Current account deficit likely to remain stable in
2014 USD Billions
-100
-80
-60
-40
-20
0
20
40
2009 2011 2013 2015(E)
IncomeTrade balanceServicesCurrent unilateral transfersCurrent account deficit
Source: BCB, Itaú
The current account deficit widened to USD 8.3
billion in April. Profit and dividend remittances were a
positive surprise, in what seems to be a one-off event
related to the recent exchange-rate appreciation. From
a financing standpoint, foreign direct investment (FDI)
remains robust, totaling USD 5.2 billion in the month.
The FDI inflows stand at USD 19.4 billion year to date,
2.3% higher than in the previous year. We revised our
FDI forecasts to USD 60 billion in 2014 (vs. USD 51
billion previously) and USD 57 billion in 2015 (vs. USD
49 billion previously).
The exchange rate has been fluctuating within the
2.20-2.30 range, which seems to be a comfort-zone
for monetary authorities. A weaker level would
increase the risk of breaching the upper-limit of the
inflation target’s margin of error, while a stronger level,
albeit positive for the inflation target, is perceived as
costly to exporters and those holding dollar-
denominated assets (such as the Central Bank itself).
The FX intervention program via swap contracts
will be extended beyond June. As the end of June
approaches, doubts regarding the continuity or
interruption of the Central Bank’s daily intervention
program in the foreign exchange market put pressure
on the Brazilian real last week. Facing this movement,
the monetary authority increased the rollover lot for
contracts expiring in July, to 10,000 daily contracts,
even after announcing the rollover of only 5,000 daily
contracts in the first day of June. Moreover, the
government reduced the IOF tax charges on foreign
borrowing to 180 days, from 360 days. This set of
measures signals that the government is
uncomfortable with a weaker exchange rate because a
weaker real makes the battle against inflationary
pressures more difficult in the short-term. Thus the
government will reach into its toolbox to maintain the
exchange rate stable.
Our year-end exchange-rate forecasts are at 2.45
reais per dollar for 2014 and 2.55 for 2015. We
regard the 2.25 vicinity as temporary, although it may
last a little longer. The recent deterioration in external
accounts, our expectation of a moderate increase in
U.S. yields (2.90% for the 10-year Treasury by year-
end) and electoral-related uncertainties in the second
half of the year are likely to weigh on the real, which is
set to weaken again during the year.
We Reduced Our 2014 IGP-M Forecast, but
Expect the IPCA to Advance 6.5%
The IPCA slowed in May, but topped market
estimates. The IPCA consumer price index rose
0.46% in May, beating our forecast (0.40%) and
median market expectations (0.38%). The inflation
slowdown from April (0.67%) was driven by smaller
changes in the food and transportation groups; the
year-over-year change in the IPCA advanced to 6.37%
in May, from 6.28% in April. Our preliminary forecast
for June indicates a 0.30% gain in the IPCA, with
expected declines in food consumed at home and fuel
costs.
LatAm Macro Monthly – June 2014
Page 10
Inflation: IPCA versus IGP-M YoY
6.5%
6.0%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Forecast
IPCAIGP-MIPCAIGP-M
Source: IBGE, FGV, Itaú
We maintain our full-year IPCA forecast at 6.5%,
despite a slight reduction in our regulated price
estimate (to 5.4% from 5.6%) after incorporating tariff
reductions for landline phones (basic subscription with
Telefônica) and water and sewage (related to
discounts granted by Sabesp to consumers who cut
their water usage). We maintain our estimate for
market-set prices at 6.8%. An exchange rate that
remains at the current levels for a longer period of time
may help ease inflation throughout the second half of
the year.
We also maintained our 2015 IPCA forecast, at
6.5%, but the balance of risks may be a little more
favorable. We expect increases of 7.3% for regulated
prices and 6.3% for market-set prices. In our scenario
for regulated-prices, we include material price
increases in important sub-items such as electricity
tariffs (15%), water and sewage tariffs (12%), urban
bus fares (10%) and gasoline (6%), but the correction
of some of these prices may be more gradual. For
market-set prices, the slowdown relative to 2014 is due
to smaller increases in food and service prices. This
scenario assumes no new supply shocks in the
Agriculture sector and a slight slowdown in the labor
market, which would help reduce the upward pressure
on service costs. In a broader context, the weaker
economic activity may translate into a slightly more
favorable balance of risks for inflation on market-set
prices later this year and early next year.
The IGP-M general price index decreased 0.13% in
May. The IPA producer price index fell 0.65%, after
rising 0.8% in April, with agricultural prices dropping
0.7% (vs. +2.0% in April) and industrial prices sliding
0.6% (+0.3% in April). Iron ore prices fell 6.1%,
marking the largest downward contribution to the
general index (-0.22 pp). IGP-M inflation dropped to
7.8% year over year. According to the current data, the
IGP-M is also likely to remain subdued in June,
probably with another monthly deflation as the year-
over-year change sustains the recent downtrend.
We reduced our full-year IGP-M forecast to 6.0%
from 6.8%, due to a revision of our agricultural
items and iron ore forecasts. The IPA-M producer
price index, which carries the greatest weight in the
IGP-M, is expected to gain 5.6% this year, driven by a
4.6% increase in industrial prices and 8.2% increase in
agriculture goods prices. In the Mining Sectors, iron
ore prices are expected to post a substantial negative
contribution, due to an estimated 25% decline that is
likely to reverse most of last year’s 34.6% gain. For the
other index components, we anticipate a 6.5%
increase in the IPC-M consumer price index and a
7.5% gain in the INCC-M construction cost index.
Fiscal Balance: Postponement of
Expenditures Influences Short-Term
Result
The public sector’s consolidated primary fiscal
budget surplus reached BRL 16.9 billion in April, or
4.0% of the monthly GDP. The result is higher than in
April 2013 (2.6% of GDP) but below the average of the
post-Lehman period (4.7% of GDP). April is usually a
positive fiscal month, mainly due to income tax
payments. The primary surplus from January to April
stands at 2.6% of GDP, compared with 2.7% of GDP in
2013 and a 3.6% average for the post-Lehman period.
The year over year growth in the six-month moving
average real federal spending slowed to 3.8% in
April, from 7.3% in March. Although these numbers
seem to indicate an adjustment in expenditures, we
note that the slowdown was largely due to the
postponement of mandatory expenses to the end of
this year. Indeed, payroll expenses decreased 13.2%
year over year and social security disbursements fell
10.6% year over year. These lines were affected by
the government's decision to defer the payment of
precatórios bonds, which usually occur in April, to the
end of the year. We therefore expect these lines to
rebound at the end of 2014. Moreover, for the first time
this year, there were no transfers to the energy
development account (CDE). Transfers to the CDE
averaged BRL 900 million per month in 1Q14 and the
government’s budget includes BRL 13 billion in
payments to the CDE, which implies an average of
almost BRL 1.1 billion per month.
LatAm Macro Monthly – June 2014
Page 11
Non-tax Revenues Remain High Collection of Dividends Jan-Apr (BRL bn)
3.8
7.2
5.45.0
1.0
8.2
0
1
2
3
4
5
6
7
8
9
2009 2010 2011 2012 2013 2014
Source: National Treasury, Itaú
Discretionary spending (such as investment
spending and government cost) also slowed, but at
a milder pace. The year over year growth in the six-
month moving real investment expenditure slid to 8.1%
in May, from 12.4% in April. In the same metric,
government cost growth dropped to 7.2% from 12.2%.
Although the growth rates remain high, these lines
have the greatest short-term flexibility for adjustments.
For the next few months (May to December), we
forecast a 4.4% year-over-year real growth in total
spending, which would imply a growth rate of 3.9% for
2014.
Non-tax revenue (especially dividends) remains
high, while tax revenue is growing in line with
GDP. Dividends from state-owned enterprises totaled
BRL 2.3 billion in April. Year to date, dividends total
BRL 8.2 billion, versus BRL 1.0 billion in the same
period of 2013.
As a result, the gap between the conventional and
recurring primary surpluses remains wide and the
fiscal stance remains expansionary. In the last 12
months through April, the public sector’s conventional
(non-adjusted) primary balance reached 1.9% of GDP
(vs. 1.7% in March). The recurring primary surplus
(excluding atypical revenues and expenses) rose to
0.8% of GDP (vs. 0.6% in March). According to our
calculations, the primary surplus needed to stabilize
the public debt in the long run stands at 2.0%-2.5% of
GDP. Hence, a recurring surplus below this level
reflects a still-expansive fiscal policy.
Our 2014 primary-surplus estimate remains at 1.3%
of GDP (below the target of 1.9% of GDP). A
slowdown in discretionary spending is required in order
to come closer to reaching the primary surplus target
this year, particularly given the weak economic activity
and the consequent impact on tax revenue. Given the
slowdown in tax collection, efforts are being made to
increase non-tax revenue, which include the reopening
of the Refis fiscal amnesty program. This reinforces
our view that the recurring primary fiscal surplus will
remain below 1% of GDP this year (our forecast is
0.7% of GDP by year-end). The conventional primary
surplus should continue to hover at around 1.7%-1.8%
of GDP until the last two months of the year. By year-
end, we expect a drop in the 12-month cumulative
primary surplus to 1.3% of GDP, due to a tough
comparison base – a large primary surplus at the end
of 2013 caused by extraordinary revenue.
Primary Fiscal Surplus to Decline by Year-end
% PIB Public Sector Primary Fiscal Surplus
(acm. 12 months)
Source: Central Bank, Itaú
For the coming years, we anticipate a fiscal
adjustment particularly driven by an increased tax
burden (i.e., reversal of tax breaks and increases in
other taxes). We see the conventional primary surplus
rising gradually to 2.0% of GDP in 2016, from 1.3% in
2014. According to our calculations, this implies an
increase in the structural primary balance, to 1.8% of
GDP in 2016 from 0.5% in 2014 (i.e., zero momentum
this year). The average fiscal contraction in 2015-16
would be 0.6% of GDP. A less-favorable economic
cycle requires a greater fiscal effort to boost the
conventional primary surplus, increasing the downside
risk to our fiscal forecasts for 2015-16.
LatAm Macro Monthly – June 2014
Page 12
Brazil: The End of the Rate Hikes, at This
Moment
The Monetary Policy Committee (COPOM)
maintained the SELIC benchmark interest rate at
11.00% pa at the May meeting. The decision was
unanimous and in line with our call and most market
estimates. The post-meeting statement included the
phrase “at this moment”, leaving the door open for
future monetary policy actions.
In the meeting’s minutes, the COPOM expressed
heightened concerns about the drop in economic
growth and greater ease with the stability of the
exchange rate. The minutes offered insight into the
elements that supported the decision to interrupt the
hiking cycle. The COPOM argued that growth is likely
to be “less intense” this year than in 2013, and did not
include the paragraph that cited currency depreciation
and volatility as a source of short-term inflationary
pressure in the minutes for the April meeting.
We expect stable interest rates until year-end. The
COPOM will probably wait to assess the effects of the
monetary policy adjustments implemented through
April. The Central Bank continued to indicate that
some of the effects of monetary policy on inflation
“have yet to materialize” and that such effects “tend to
be leveraged” in light of the low confidence levels.
Still, the COPOM acknowledges the importance of
remaining vigilant. There are specific concerns about
the secondary effects of two relative price changes:
the realignment of regulated and market-set prices
(driven by the need to adjust gasoline, electricity tariffs
and transportation fares) and international and
domestic prices (due to a weaker exchange rate).
We maintain our year-end SELIC rate forecast at
11.0%, and revised our projection for 2015 to
12.00% from 12.50%. The COPOM’s May decision
and the minutes that followed reinforce our call of a
stable SELIC rate until the end of 2014. In 2015, we
continue to expect the COPOM to create a new
tightening cycle to ensure stable inflation. However,
weakening activity has led us to reduce the size of the
cycle expected for next year. We revised our SELIC
rate forecast to 12.00%, from 12.50% pa, by the end of
2015.
Falling Approval Ratings and Worsening
Perceptions About the Economy Make for
a More Competitive Electoral Race
An Ibope poll ahead of the presidential elections
showed a drop in voting intentions for President
Rousseff. The President’s voting intentions dropped to
38% from 40%, while Aecio Neves rose to 22% (from
20%) and Eduardo Campos to 13% (from 11%). The
sum of the other candidates rose to 7% (from 5%) and
the percentage of blank/null/undecided fell to 20%
(from 24%). Since Dilma has less votes than all the
other candidates combined, the election, if held today,
would go to a runoff.
In runoff simulations, the gap between Rousseff
and her main opponents shrank. In the simulation
between the President and Neves, the difference
narrowed to 9 pp from 19 pp; against Campos, the gap
narrowed to 11 pp from 20 pp.
The approval ratings for the administration and
confidence in the economy decreased. Approval for
the Rousseff administration (share of participants who
regard her administration as "excellent/good") fell to
31% from 35%, the lowest reading since the wave of
popular protests last June. A poll by Datafolha shows
that perceptions about the economy deteriorated. The
share of people expecting higher unemployment rose
to 48%, from 42%, while 64% of the participants
expect higher inflation, from 58% previously.
Party conventions scheduled for June. From June
10 to 30, political parties will gather to formally decide
on their candidates and party alliances. The TV air
time granted to each party alliance, starting in August,
will be allotted according to the number of seats held
by the alliance parties in the House of
Representatives. The next step is the formal
registration of the candidates and alliances in the
Supreme Electoral Court until July 5, when the official
campaign season kicks off.
Page 13
LatAm Macro Monthly – June 2014
Forecasts: Brazil
Economic Activity
Real GDP growth - % -0,3 7,5 2,7 1,0 2,5 1,0 1,7
Nominal GDP - BRL bn 3.239 3.770 4.143 4.392 4.845 5.201 5.639
Nominal GDP - USD bn 1.620 2.142 2.473 2.247 2.243 2.229 2.252
Population (millions) 193,5 195,5 197,4 199,2 201,0 202,8 203,8
Per Capita GDP - USD 8.371 10.956 12.529 11.277 11.157 10.992 11.050
Unemployment Rate - year avg 8,1 6,7 6,0 5,5 5,4 4,9 5,5
Inflation
IPCA - % 4,3 5,9 6,5 5,8 5,9 6,5 6,5
IGP–M - % -1,7 11,3 5,1 7,8 5,5 6,0 6,0
Interest Rate
Selic - eop - % 8,75 10,75 11,00 7,25 10,00 11,00 12,00
Balance of Payments
BRL / USD - Dec 1,75 1,69 1,84 2,08 2,36 2,45 2,55
Trade Balance - USD bn 25,3 20,1 29,8 19,4 2,6 1,5 16,0
Current Account - % GDP -1,5 -2,2 -2,1 -2,4 -3,6 -3,7 -2,9
Foreign Direct Investment - % GDP 1,6 2,3 2,7 2,9 2,9 2,7 2,5
International Reserves - USD bn 239 289 352 379 376 370 374
Public Finances
Primary Balance - % GDP 2,0 2,7 3,1 2,4 1,9 1,3 1,7
Nominal Balance - % GDP -3,3 -3,3 -2,6 -2,5 -3,3 -4,8 -4,7
Net Public Debt - % GDP 42,1 39,1 36,4 35,3 33,6 35,5 36,9
2015F2009 2010 2011 2012 2013 2014F
Source: FMI, IBGE, BCB, Haver and Itaú.
Page 14
LatAm Macro Monthly – June 2014
Mexico
An Unexpected Policy Rate Cut
• Mexico’s economy disappointed during 1Q14, but for the second quarter, available indicators related to manufacturing
suggest improved economic activity. We see growth at 2.4% this year and at 3.8% in 2015.
• Inflation remained within the target range in May and core inflation is once again at the target center. We expect inflation to
end this year at 3.7% and at 3.2% in 2015.
• Mexico’s central bank took markets by surprise and reduced the policy rate by 50 bps in its June meeting. In our baseline
scenario, the next policy rate move will be a hike and it will come through 4Q15. However, if the economy fails to rebound,
additional rate cuts are possible.
• In spite of lower domestic interest rates and future increase in the U.S. treasury yields, we forecast only a small
depreciation of the peso. Larger capital flows associated with the reform agenda will likely curb the weakening of the
currency. We see the peso at 13.2 to the dollar both by the end of this year and by the end of 2015.
• The secondary laws of the energy and telecommunication reforms will likely be debated and voted in Congress this month.
A Weak First Quarter
Mexico’s economy disappointed during 1Q14. The
IGAE (monthly proxy for Mexico’s GDP) increased by
3.0% year over year in March, surprising market
expectations on the downside. Calendar effects were
very favorable, so the working-day-adjusted IGAE
expanded by a weak 0.5% year over year. As a result,
GDP increased by 1.8% year over year in 1Q14, while
the working-day-adjusted series expanded by only
0.6%.
A disappointing start of the year and increased
hopes for 2Q QoQ, saar QoQ, saar
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-2%
-1%
0%
1%
2%
3%
4%
5%
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
IGAEManufacturing Exports (RHS)
Source: INEGI, Itaú
Indicators available for 2Q14 related to
manufacturing activity are rebounding.
Manufacturing exports increased by 2.1% from March
to April, lifting quarter-over-quarter growth to a strong
17.4% (annualized). Meanwhile, the Manufacturing
PMI (produced by IMEF) and most of its
subcomponents improved from April to May, and the
ISM-Manufacturing PMI of the U.S. remains at a level
consistent with strong growth.
After the release of the 1Q14 GDP, we reduced our
growth forecast to 2.4% (from 2.7%). We note that
this growth rate implies an annualized quarter-over-
quarter growth pace of 4.5% from the 2Q14 to 4Q14.
In fact, Mexico’s economy during 1Q14 was likely hurt
by the transitory contraction in the U.S. economy in the
same period and the introduction of tax hikes, so a
rebound is likely. The manufacturing data mentioned
above is consistent with this view. For 2015, our 3.8%
growth forecast is unchanged.
Inflation Remains Tame
Mexico’s inflation remained within the target range
in May and core inflation fell to the target center.
Headline inflation stood at 3.5%. Core inflation fell to
3.0%, from 3.1% in April. Inflation for core services
declined to 2.9% from 3.2%. Finally, inflation for non-
core items increased to 5.2% (from 4.7%), as the
volatile prices for non-processed food were up by 0.7%
(-1.1% previously), offsetting the decrease in inflation
for regulated items (8.1% vs. 8.5% in April).
We expect inflation to end this year at 3.7%. Low
global inflation, a stable exchange rate and a negative
output gap are all contributing to the comfortable
inflation readings in Mexico. For 2015, we see inflation
evolving close to the target center, as the impact of tax
hikes fades. Our year-end forecast for next year is
3.2%.
Page 15
LatAm Macro Monthly – June 2014
An Unexpected Policy Rate Cut
Mexico’s central bank decided to reduce the policy
rate by 50 bps to 3.0%, in a very surprising move.
No market analyst was expecting a cut in this meeting
or in the upcoming ones. The decision to cut was due
to the disappointing 1Q14 GDP, amid well-behaved
inflation and looser external financial conditions (that
is, lower U.S. Treasury yields). While market
participants (including us) were well aware of these
factors, we read them as conducive to delaying the
start of a hiking cycle, rather than to reducing rates. In
the concluding remarks of the statement announcing
the decision, the board limits the expectation for further
cuts, by saying that it “estimates that additional rate
reductions are not recommended in the foreseeable
future, considering the expected recovery of the
economy and the relative monetary policy stance of
Mexico vis-à-vis the U.S.”
In our baseline scenario, additional rate cuts would
not take place and a hiking cycle by the end of
2015 is likely. However, the “commitment” to not
reduce rates further is conditional on the economic
recovery (we note that when the central bank last
reduced rates, the board also introduced a sentence in
the press statement closing the doors to additional rate
cuts). Economic indicators available for the second
quarter (in Mexico and in the U.S.) suggest that the
long-awaited recovery of Mexico’s economy is coming.
If they prove to be a false alarm and the monetary-
policy stance of the U.S. continues loose, a further
easing of monetary policy would be possible.
The Current-Account Deficit Narrows
The current-account deficit accumulated in four
quarters stood at 1.8% of GDP in 1Q14, from 2.1%
in 2013. In the capital account, net direct investment
was USD 3.2 billion in 1Q14, bringing it to a total of
USD 22.6 billion over the last four quarters. Foreign
portfolio investment remained robust at USD 12.6
billion, but was lower than in the previous quarter
(USD 18.7 billion), and reached USD 49.8 billion over
the last four quarters. Once again, portfolio investment
flew mainly to the fixed-income market and continues
to be low in the equity market.
Thus, Mexico’s external accounts continue to be
solid. The current-account deficit is significantly lower
than in the other core countries of LatAm. Meanwhile,
foreign interest in Mexico’s fixed-income market
continues strong. While FDI continues to be low, we
believe that the reform agenda will change this
significantly starting next year. In fact, due to reforms,
external savings to Mexico will probably be higher than
in the recent past, even with higher interest rates in the
U.S. We see the current-account deficit at 2.4% of
GDP in 2015, from an estimated 2.2% in 2014.
Our exchange-rate forecasts are unchanged, at
13.2 pesos to the dollar by the end of this year and
by the end of the next. In spite of lower domestic
interest rates and our expectation of a faster increase
in the U.S. treasury yields than the market is pricing in,
we see room for only a small depreciation of the peso.
In our view, capital flows associated with the reform
agenda will curb the weakening of the currency.
Secondary Laws of Energy and
Telecommunication Reforms Under
Debate
Gustavo Madero won the domestic elections of the
PAN, providing a positive outlook for the approval
of the energy and telecommunication secondary
laws. Madero was a supporter of the Pacto por
Mexico, an agreement between the main political
parties that pushed the proposal and approval of the
main structural reform agenda of the current
administration. This result should consolidate further
support for the approval of the pending secondary laws
of the proposed reforms.
PRI and its allied parties agreed with the PAN to
discuss the secondary legislation of the energy
and telecommunication reforms in June,
bypassing a proposal from the left-leaning PRD to
delay the discussions until after the World Cup.
The discussions will be transmitted live through the
congress’s television channel. The approval of both
legislations by the end of June or mid-July is likely.
Page 16
LatAm Macro Monthly – June 2014
Forecasts: Mexico
Economic Activity
Real GDP growth - % -4.7 5.1 4.0 4.0 1.1 2.4 3.8
Nominal GDP - USD bn 897 1,052 1,172 1,186 1,261 1,302 1,388
Population (millions) 112.6 114.3 115.7 117.1 118.4 119.6 120.8
Per Capita GDP - USD 7,964 9,202 10,133 10,134 10,650 10,885 11,491
Unemployment Rate - year avg 5.5 5.4 5.2 5.0 4.9 5.0 5.0
Inflation
CPI - % 3.6 4.4 3.8 3.6 4.0 3.7 3.2
Interest Rate
Monetary Policy Rate - eop - % 4.50 4.50 4.50 4.50 3.50 3.00 3.50
Balance of Payments
MXN / USD - eop 13.06 12.36 13.99 13.01 13.08 13.20 13.20
Trade Balance - USD bn -4.7 -3.0 -1.5 0.0 -1.0 -8.0 -10.0
Current Account - % GDP -0.9 -0.4 -1.1 -1.3 -2.1 -2.2 -2.4
Foreign Direct Investment - % GDP 1.9 2.2 2.0 1.5 3.0 2.5 2.9
International Reserves - USD bn 90.8 113.6 142.5 163.5 176.5 196.0 210.0
Public Finances
Nominal Balance - % GDP -2.3 -2.8 -2.4 -2.6 -2.3 -3.4 -3.0
Net Public Debt - % GDP 29.7 30.1 31.1 33.1 35.6 36.0 36.4
2015F2013 2014F2009 2010 2011 2012
Source: Central Banks, IMF, Haver and Itaú,
Page 17
LatAm Macro Monthly – June 2014
Chile
Consumption Following the Footsteps of Investment
• The IMACEC (monthly proxy for GDP) was flat from March to April, after a weak 1Q14. We have reduced our GDP growth
forecast for 2014 to 2.8% (from 3.3%), while maintaining our 4.0% growth estimate for 2015.
• Inflation moderated on a sequential basis in May, but base effects drove it higher on a year-over-year basis (to 4.7%). Core
measures are close to the upper bound of the target, while annual wage inflation continued to rise. We see inflation at 3.6%
by the end of this year and at 2.9% by the end of 2015.
• Chile’s central bank left the interest rate unchanged at 4.0% in May. Although the easing bias was maintained by the
committee, the minutes of the meeting emphasized its greater concern over inflation. We still expect the central bank to
resume the easing cycle, but given the recent inflation dynamics, rate cuts are likely to come only in 4Q14. We expect the
policy rate to end this year at 3.5%, but no moves in 2015 (previously, we saw the policy rate at 4.0% by the end of next
year), amid a wider output gap.
• Loose monetary policy at home and higher U.S. Treasury yields will likely weaken the peso further. Although our forecast
for the exchange rate is unchanged at 575 pesos to the dollar by the end of this year, we now expect the rate to reach 600
pesos to the dollar by the end of 2015.
• In the annual May 21 presidential speech, President Michelle Bachelet shed more light on her government’s reform
program. The tax reform bill, which will be used to finance the majority of her initiatives, is currently being debated in the
Senate. No change is expected to the revenue target, but the government is now more open to changing some of its
proposals to increase collection.
Activity: Poor on Many Fronts
The economy once again grew at a below-trend
pace in 1Q14. Chile’s GDP increased by 2.6% year
over year in 1Q14 (vs.+2.7% in 4Q13). Adjusting for
calendar effects, GDP expanded by even less (2.0%).
The demand-side breakdown showed that gross fixed
investment continues to be the main drag on the
economy, declining by 5.0% from one year before (-
12.3% in 4Q13), while domestic demand components
came in mixed: private consumption weakened to
3.7% year over year (from 4.9% in the previous
quarter), while public sector consumption increased by
9.6% (vs. +3.1% in 4Q13). On a sequential basis, GDP
growth was better but remained below-trend at 3.0%
qoq/saar.
The IMACEC (monthly proxy for GDP) for April
showed that Chile’s economy is still not
recovering. On a seasonally adjusted basis, activity
was flat from March after a 0.4% drop in the previous
month. In April, retail sales declined by 1.0% month
over month and by 1.2% qoq/saar, hinting that
consumption contributed for the weak IMACEC.
Meanwhile, imports of capital goods - a proxy for
investment in machines and equipment - fell by 30%
year over year in the same month.
Private Consumption Less Supportive of Growth
-10%
-5%
0%
5%
10%
15%
20%
25%
Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14
YoYqoq/saar
Source: INE, Itaú.
We have lowered our 2014 GDP estimate to 2.8%
(from 3.3%). Chile’s economy has been slowing more
sharply than we previously expected as higher inflation
and lower employment growth weigh on private
consumption; while higher mining costs, lower copper
prices and uncertainty over tax measures reduce
investment. Meanwhile, exports are rising on the back
of stronger mining output, which is a consequence of
the massive investment made in the sector over the
past few years. Still, we expect a recovery ahead,
supported by looser monetary policy. For 2015, we
maintain our 4.0% GDP growth estimate.
Page 18
LatAm Macro Monthly – June 2014
Wages Picked up, in Spite of the Weak
Economy
Although inflation fell sequentially in May, base
effects drove it higher on an annual basis. The
consumer price index increased by 0.3% between April
and May, after a 0.6% increase. Inflation rose to 4.7%
year over year (4.3% in April), further away from the
target range. Excluding food and energy, inflation was
0.2% month over month and 3.8% year over year
(0.8% and 3.5% previously).
Tradable inflation was once again strong in May.
Tradable prices rose 0.5% from April and by 4.5% year
over year (3.8% previously).
However price indexes less exposed to the
exchange rate and to commodity prices also
continue at an uncomfortable level. While inflation
for wages and non-tradable items fell sequentially, it
continues very high on a year-over-year basis,
especially considering the weakness of the economy.
Nominal wages rose 6.3% year over year (6.2%
previously) in April while non-tradable inflation was
5.1%.
We see inflation at 3.6% this year and 2.9% in
2015. The evolution of the output gap will likely
contribute to reduce inflationary pressures.
Rates on Hold Amid Greater Concern over
Inflation
As expected by us and most market participants,
Chile’s central bank left its policy rate unchanged
at 4.0% for the second consecutive month in May.
It is important to note that we and the market were
expecting the central bank to resume the easing cycle
at this meeting until the much higher-than-expected
April CPI was released. Importantly, the board
maintained its easing bias in the press statement
announcing the decision, stating that it “will evaluate
the possibility of introducing additional policy rate cuts
according to the evolution of the domestic and external
macroeconomic conditions”. However, the central bank
also made it clear in the statement that it remains
vigilant regarding the recent inflation spike, thereby
hinting that it might be a while before additional cuts
are made.
The minutes of the meeting indicated that the
likelihood of additional cuts will depend on
inflation data. The committee members sounded
concerned not only with the level of inflation, but also
with how broad-based it is. Considering the increase in
service and wage inflation, the committee doesn’t think
that the inflationary pressures are coming only from
the exchange rate. On activity, the committee has
been seeing (at least until this latest decision) a
slowdown in line with the forecasts in its most recent
monetary policy report, which highlights the fact that it
is more concerned about inflation than about economic
growth. Although the economy is growing at a below-
potential rate, the committee members acknowledged
that the size of the output gap is uncertain, especially
considering that the unemployment rate remains very
low.
As Chile’s economy continues to be sluggish, we
expect the central bank to further ease the policy
rate ahead. We continue to expect the interest rate to
end this year at 3.5%. However, considering the recent
inflation dynamics, we don’t expect rate cuts soon. In
our view, the central bank will resume the easing cycle
only in 4Q14, once the board has seen clear evidence
that the inflation outlook is no longer a major risk.
Based on our reduced growth forecast, we now expect
the central bank to maintain the reference rate at 3.5%
throughout 2015 (previously, we expected rate hikes
by the end of 2015).
Weak Domestic Demand Helps Narrow
Current Account Deficit
Improved trade balance numbers led to a decline in
Chile’s current account deficit, to USD 0.8 billion in
1Q14 from USD 1.9 billion one year before.
Consequently, the four-quarter rolling deficit declined
to 3.1% of GDP from 3.4% in 4Q13. Although foreign
capital flows to Chile continued to be strong, rolling
four-quarter foreign direct investment (FDI) fell to USD
17.4 billion in 1Q14 (from USD 20.3 billion in 2013 and
USD 28.5 billion in 2012). Net direct investment (FDI
excluding Chilean direct investment abroad) for the
last four quarters was USD 9.0 billion (down from USD
9.3 billion in 2013), still sufficient to fully finance the
current account deficit. Foreign portfolio investment
weakened in the first quarter of 2014, bringing total
portfolio flows for the last four quarters down to USD
10.3 billion (USD 15.7 billion in 2013), although this is
still higher than Chilean portfolio investment abroad
(USD 5.3 billion).
The trade balance continued to strengthen in 2Q14.
The 12-month rolling trade surplus increased to USD
5.3 billion in May (from USD 2.1 billion in 2013), its
highest value since August 2012.
Although our forecast for the exchange rate is
unchanged at 575 pesos to the dollar by the end of
this year, we now expect the rate to reach 600
pesos to the dollar by the end of 2015. Loose
monetary policy at home and higher U.S. Treasury
yields will likely weaken the peso further.
Page 19
LatAm Macro Monthly – June 2014
We have reduced our expected current account
deficit for 2014 to 2.5% of GDP (from 2.7%), as
domestic demand is more sluggish than we
previously thought. In 2015, a weaker peso, higher
mining output and moderate domestic demand growth
will likely help to reduce the deficit further (to 1.7% of
GDP).
A Wider Budget Deficit
Amid slower growth, the government now foresees
a 2014 nominal deficit of between 1.7% and 1.8% of
GDP (up from its original forecast of 0.9% and the
0.6% posted in 2013). The Ministry of Finance
reduced its economic growth forecast for 2014 to 3.4%
from 4.9%. Finance minister Alberto Arenas said that
the government’s forecast for the deficit also takes into
account an average copper price of USD 3.05 per
pound (down from USD 3.25) as demand in China has
continued to slow. In order to make up for the shortfall
in revenues, the minister has spoken about using
resources from sovereign wealth funds, issuing new
debt or to utilize money collected from Codelco that is
being held for military spending.
President Bachelet Spells out Her Political
Plans
In the annual May 21 presidential speech, Michelle
Bachelet spelled out what her government is
planning to achieve in its term in office. Apart from
the widely discussed tax reform (which has started to
be debated in the Senate), the president’s speech also
touched on a USD 650 million energy program that
would focus on strengthening the State´s role in the
planning and regulation of the industry, while
increasing private competition; the commitment to form
a state pension fund (to compete with private pension
funds); and the education reform (an initial reform bill
proposing an end to state subsidies for for-profit
schools has already been submitted to Congress). She
also discussed a proposal to nationalize water rights.
This proposal, which had already been raised in
Bachelet’s first government, would seek to establish
priority uses for water and limit the use of water rights
acquired under certain circumstances. The president
also indicated that a capitalization proposal for the
state-owned copper company Codelco would be
submitted to Congress in the second half of the year.
Codelco’s former CEO, Thomas Keller, has previously
said that the company’s investment program will
require more than USD 20 billion to increase output by
about 10% over this decade, adding that without these
investments, output is likely to fall by more than half as
open-pit ore-bodies start to become commercially
exhausted and are replaced by underground mines.
Forecasts: Chile
Economic Activity
Real GDP growth - % -1.0 5.8 5.8 5.4 4.1 2.8 4.0
Nominal GDP - USD bn 172 218 251 266 277 265 266
Population (millions) 16.9 17.1 17.2 17.4 17.6 17.7 17.9
Per Capita GDP - USD 10,180 12,727 14,563 15,305 15,792 14,991 14,871
Unemployment Rate - year avg 9.6 8.3 7.2 6.5 6.0 7.0 7.3
Inflation
CPI - % -1.5 3.0 4.4 1.5 3.0 3.6 2.9
Interest Rate
Monetary Policy Rate - eop - % 0.50 3.25 5.25 5.00 4.50 3.50 3.50
Balance of Payments
CLP / USD - eop 507 468 520 479 526 575 600
Trade Balance - USD bn 15.4 15.7 11.0 2.5 2.1 3.0 2.5
Current Account - % GDP 2.0 1.5 -1.3 -3.5 -3.4 -2.5 -1.7
Foreign Direct Investment - % GDP 7.5 7.1 9.1 11.3 7.3 4.8 4.7
International Reserves - USD bn 25.4 27.9 42.0 41.6 41.1 45.0 46.0
Public Finances
Nominal Balance - % GDP -4.1 -0.4 1.4 0.6 -0.6 -1.8 -1.0
Net Public Debt - % GDP -10.6 -7.0 -8.6 -6.8 -6.1 -3.9 -2.7
2015F2013 2014F2009 2010 2011 2012
Source: Central Bank, IMF, INE, Haver and Itaú.
Page 20
LatAm Macro Monthly – June 2014
Peru
Private Demand Slows Further
• Peru’s GDP growth slowed in 1Q14 as private domestic demand decelerated. Available indicators for 2Q14 also point to weaker activity. In this context, we reduced our GDP forecast for this year to 5.0% (from 5.3%), while maintaining our 5.9% expected growth rate in 2015.
• The inflation rate increased to 3.6% in May, remaining above the upper limit of the central bank target (between 1.0% and 3.0%), but the core measure is still within range (2.8%). We expect inflation to be at 3.0% and 2.5% at year end of 2014 and 2015, respectively.
• The central bank left the interest rate and the easing bias unchanged in May, while Governor Velarde also indicated that the reserve-requirement rate will be unchanged for the second consecutive month in June. We expect the central bank to maintain the interest rate unchanged at least until the end of 2015. However, considering the looser external financial conditions and the weaker economy, we can’t rule out additional monetary stimulus, through reserve requirements or even lower policy rates.
• The central bank intervened again in the foreign-exchange market, this time as a buyer of dollars, as it continues its policy of limiting currency volatility. We expect the exchange rate to end 2014 at 2.85 soles per dollar, and through a sharper depreciation of the sol in 2015, to end the year at 2.95 per dollar.
• President Humala remains an unpopular figure, with approval ratings sitting in the first quartile, and the first lady, Nadine Heredia (a potential presidential candidate), continues to harm her husband’s image following open criticism of political opponents.
Weak Growth in 1Q14, in Spite of Strong
Public Sector Demand
Peru’s 1Q14 GDP increased by 4.8% year over
year, after a 6.9% expansion in 4Q13. This economic
growth rate is the slowest since the 4.6% recorded in
the same quarter of last year. The slowdown was led
by primary activities (they grew by 4.2%, after 12.4% in
4Q13), but non-primary sectors also grew at a slower
pace (4.9% in 1Q14 vs. 5.6% in 4Q13). On a
sequential basis, the economy also slowed
substantially, to 0.3% qoq/saar (according to the
seasonally-adjusted monthly GDP series published by
the central bank), after a 6.9% gain in 4Q13.
Activity was led by public sector demand while
growth in private demand showed further signs of
slowing. Public sector consumption increased by
9.5% (4.5% in 4Q13) and public sector investment
accelerated to 8.3% (2.1% last quarter). On the other
hand, private consumption grew by 5.1% year over
year, down from the 6.0% recorded last quarter, and
private gross fixed investment slowed further to 1.6%,
from 2.5% in 4Q13. Real exports also weakened, to
0.2% year over year from 3.1% in the previous quarter.
Preliminary indicators suggest that economic
activity slowed considerably in April, negatively
affected by calendar effects. Annual mining and
hydrocarbon output contracted by 6.1% (after
decelerating to 0.9% last month). Consumer goods
imports grew by 5.9% (vs. 13.6% last month), while
new-car sales contracted by 11.1%, after increasing by
a weak 0.9% last month.
Domestic Demand Growth YoY
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Mar-06 Mar-08 Mar-10 Mar-12 Mar-14
Private Demand Public Demand
Source: BCRP, Itaú
Annual electricity generation declined to 4.9% (7.0% in
March), although consumer confidence still remains in
the optimistic zone at 60 points. We expect GDP
growth of less than 3% in April.
We have reduced our GDP estimate for 2014 to
5.0% (from 5.3%), but maintain our 5.9% growth
estimate for next year. All in all, Peru’s economy is
slowing from last year, mostly due to weaker private-
investment growth. At the same time, mining output is
Page 21
LatAm Macro Monthly – June 2014
still not responding to the sizable investment made in
the sector over the past few years, so real exports are
also very weak. Public sector spending should
continue to help the economy in the short term, as the
government carries on with a number of infrastructure
projects. Next year, higher mining output will help the
recovery.
Inflation Slowing Sequentially, but
Remains Above the Target Range
Headline inflation increased to 3.6% in May (from
3.5% in the previous month), remaining above the
1.0%-3.0% target range for the fifth consecutive
month. The core inflation measure, which excludes
food and energy, declined slightly to 2.82% in May,
from 2.83% in the previous month. On a monthly basis,
prices increased by 0.2%, led by the 0.4% increase in
food prices (due to higher poultry prices), which
contributed 16 bps to the monthly CPI change.
We expect inflation to be above the upper bound of
the central bank target throughout our forecast
horizon. We foresee headline inflation converging
slowly towards the target range, ending this year at
3.0% and 2015 at 2.5%.
Unchanged Rates and Unchanged
Reserve Requirements
The Central Bank left the interest rate unchanged,
as expected, at 4.0%. The press statement said that
the decision to maintain the rate was consistent with
an inflation forecast of 2.0% within the next two years,
as inflation expectations remain in the target range and
supply-side pressures continue to moderate. In this
scenario, the central bank expects inflation to remain
near the upper limit of the target band, thereafter
converging to the 2.0% target. The board also
considered the current below-potential growth and the
mixed signals of a global recovery in its decision,
adding that the current indicators point to a dynamic
economy, albeit at a lower-than-expected rate. Finally,
the board repeated what it said in April’s statement
about tracking inflation’s evolution with respect to
additional monetary policy moves.
In addition, reserve requirements for June will be
left unchanged, for the second consecutive month.
After lowering the rate in each of the first four months
of this year, credit growth in local currency increased
by a strong 22.4% year over year in the quarter ending
in April (20.8% in 4Q13), possibly achieving, for the
time being, the desired impact.
We don’t expect the central bank to alter the
interest rate in our forecast horizon. However,
considering the looser external financial conditions and
the weaker economy, we can’t rule out additional
monetary stimulus, through reserve requirements or
even lower policy rates.
The Central Bank intervenes in the
Foreign-Exchange Market…as a Buyer of
Dollars
As a reaction to the recent appreciation of the sol,
the central bank bought dollars in the spot market
for the first time in 13 months. Although the
intervention amount was small, USD 10 million, the
action itself reaffirms the central bank’s policy of
reducing foreign-exchange volatility. The central bank
bought USD 5.2 billion in the first half of 2013 to ease
a currency rally before selling almost the same amount
in the second half of the year as the sol weakened
(last sale was on February 5 of this year.)
We have maintained our 2014 year-end exchange-
rate forecast of 2.85 soles per dollar, but we now
expect a sharper depreciation of the sol in 2015, to
2.95 per dollar (from 2.9) by the end of 2015. This
adjustment has been influenced by the higher U.S.
Treasury yields expected for next year and a local
monetary-policy environment that remains
expansionary.
Peru’s current-account deficit widened further in
1Q14, amid lower foreign-direct-investment flows.
The four-quarter rolling deficit increased to 4.8% of
GDP from 4.5% in 4Q13. The rolling four-quarter
foreign direct investment (FDI) fell to USD 7.6 billion in
1Q14 (from USD 9.3 billion in 2013 and USD 11.9
billion in 2012), so net direct investment (FDI excluding
Peruvian direct investment abroad) for the last four
quarters did not fully cover the current-account deficit.
Foreign portfolio investment weakened slightly in the
first quarter of 2014, bringing total portfolio flows for
the last four quarters down to USD 5.2 billion (USD 5.9
billion in 2013), but remaining well above portfolio
investment abroad (USD 1.6 billion).
We now expect a current-account deficit of 4.8% of
GDP for this year (previously 4.5%). In spite of
weaker domestic demand, Peru’s current-account
deficit is unlikely to improve in the near term due to
poor prospects for the mining sector in the short term.
For 2015, we see the deficit improving to 4.0% as
mining production starts to react to the strong
investments made in the sector over the past few
years and as the exchange rate weakens.
President Humala Remains Unpopular
The May Ipsos poll showed that approval for
President Humala fell to 22% (24% in April), while
in the GFK survey it sits at a low 21%. Respondents
Page 22
LatAm Macro Monthly – June 2014
continue to lament the failure to adequately address
crime and corruption. The first lady, Nadine Heredia,
remains a divisive figure after polls followed up on a
controversial interview in which she accused former
president and potential political opponent, Alan Garcia,
of attempting to manipulate institutions including the
Judiciary to clear him of alleged corruption. Ms.
Heredia also said that the prime minister’s job was too
big for Cesar Villanueva (the previous prime minister of
Peru). In this context, 20% of Ipsos respondents said
that they were not proud of their first lady, while 66%
disapprove of her conduct.
Forecasts: Peru
Economic Activity
Real GDP growth - % 1.0 8.5 6.5 6.0 5.6 5.0 5.9
Nominal GDP - USD bn 127 154 178 199 207 209 221
Population (millions) 29.1 29.6 30.0 30.5 30.9 31.4 31.9
Per Capita GDP - USD 4,362 5,205 5,944 6,525 6,675 6,666 6,937
Unemployment Rate - year avg 8.4 7.9 7.7 6.8 5.9 6.0 6.0
Inflation
CPI - % 0.2 2.1 4.7 2.6 2.9 3.0 2.5
Interest Rate
Monetary Policy Rate - eop - % 1.25 3.00 4.25 4.25 4.00 4.00 4.00
Balance of Payments
PEN / USD - eop 2.88 2.82 2.70 2.57 2.80 2.85 2.95
Trade Balance - USD bn 6.1 7.0 9.2 5.2 0.0 -0.5 0.3
Current Account - % GDP -0.5 -2.4 -1.9 -3.3 -4.5 -4.8 -4.0
Foreign Direct Investment - % GDP 4.9 5.4 4.5 6.0 4.9 5.0 5.0
International Reserves - USD bn 33 44 49 64 66 64 66
Public Finances
Nominal Central Govt Balance - % GDP -1.3 -0.2 2.0 2.1 0.8 0.4 0.5
Gross Central Govt. Debt - % GDP 26.0 23.5 21.4 19.7 19.2 17.3 15.2
2015F2013 2014F2009 2010 2011 2012
Source: FMI, IBGE, BCB, Haver and Itaú.
Page 23
LatAm Macro Monthly – June 2014
Colombia
An Uncertain Presidential Election
• The presidential election became a two-horse race after both the incumbent Juan Manuel Santos and the challenger Óscar
Iván Zuluaga failed to obtain an absolute majority on May 25. Óscar Iván Zuluaga won the first round by approximately 3.5
percentage points. The run-off between the two candidates is set for June 15.
• According to a number of activity indicators, the Colombian economy remained robust in 1Q14, driven by the strong
performance of private consumption. Industrial. production (although still weak) is showing small signs of improvement. We
expect activity growth of 4.5% in both 2014 and 2015.
• Inflation was once again led by volatile food prices in May, pushing the annual headline rate to 2.9%. Core measures, on
average, are also on the rise but remain comfortably below the center of the target range. We see inflation at 3.1% by the
end of this year (2.9% in our previous scenario) and at 3.0% by the end of 2015.
• The Central Bank Board unanimously decided to raise the reference rate by 25bps for the second consecutive month, to
3.75%. The board continued to emphasize that a gradual increase in the monetary policy rate now will prevent the need for a
sharper interest-rate adjustment in the future. We expect the interest rate to end the year at 4.25% and 2015 at 5.0%, but do
not foresee a rate increase this month.
• Increased global liquidity, higher domestic interest rates and the greater weight of Colombian bonds in the benchmark
index for local-currency sovereign debt have led to a strengthening of the peso. However, the appreciation of the peso is
likely to reverse once U.S. treasury yields start to rise. We expect the currency to weaken to 1,950 to the dollar by the end of
this year and to 2,000 by the end of the next.
1Q14 Activity Ends on a Strong Note
Available indicators suggest a robust end to 1Q14.
Retail sales grew 8.3% year over year in March (after
posting a 6.7% expansion in the previous month) and
sales increased 5.9% (excluding vehicles).
Manufacturing production recorded a stronger-than-
expected annual growth of 9.8% in March, after a gain
of 2.8% in February; however, we note that this figure
was heavily influenced by calendar effects. We
estimate that, on a seasonally- and calendar-adjusted
basis, manufacturing continues to underperform most
sectors of the economy, up by a modest 1.6% year
over year and 1.8% qoq/saar. According to the
Finance Ministry’s recently developed ISAAC+ activity
index,the economy grew at a similar rate to the 4.9%
recorded in 4Q13.
Employment and domestic credit continue to be
strong economic drivers. The national
unemployment rate fell to 9.0% in April (well below the
10.2% recorded one year ago), led by a strong 3.4%
growth in total employment (2.1% increase in the labor
force). This is the first time in 14 years in which a
single-digit unemployment rate has been recorded in
April. According to our calculations, consumer credit
registered a strong 19.1% year-over-year expansion in
the quarter ending in April (up from 11.2% in 4Q13),
while housing loans rose 32% in the same period (27%
in 4Q13).
Leading indicators remain positive overall.
Consumer confidence in April, as reported by local
think-tank Fedesarrollo, continued to recover to 17.9
points, following a surprise drop to 15.7 points in
February, but remained below the 23.7 points recorded
in the corresponding period of last year; the
breakdown showed an improvement in the economic
sentiment. Industrial confidence rose to 4.1 points (vs.
2.8 in March), likely driven by an improvement in order
expectations. Meanwhile, retail confidence fell to 26.2
points (vs. 28.8 points in March), due to a slight
decline in economic-condition expectations; these
leading indicators surpass the levels registered in April
2013.
We continue to expect the economy to grow 4.5%
in both 2014 and 2015.
Inflation Led by Volatile Food Prices
Headline inflation rose to 2.9% in May mostly due
to higher food prices. The volatile food component of
inflation has climbed sharply from 0.9% in December
of 2013 to 3.4% in May. Core measures that exclude
food have shown a far more measured rise, increasing
from 2.4% to 2.8% in the same period. When both food
and fuel prices are removed, prices rose by 2.6% in
May from 2.5% in April.
We expect that the shrinking output gap and the
low base of yearend 2013 will push inflation to
3.1% by the end of 2014 (previously 2.9%). We
Page 24
LatAm Macro Monthly – June 2014
continue to foresee inflation at the center of the target
range in 2015.
The Tightening Cycle Continues
In a unanimous decision, the Central Bank raised
the policy rate by 25bps, to 3.75%. This was the
second consecutive 25-bp rate hike and, unlike last
month, was expected by us and most market
participants. The press statement was very similar to
the previous one, once again emphasizing that a
gradual increase of the monetary policy rate now will
prevent the need for a sharper interest-rate adjustment
in the future, under the assumption that the output gap
will close this year.
We expect the policy rate to end the year at 4.25%
and see the tightening cycle continuing in 2015,
until the rate reaches 5.0%.We foresee a pause in
the hiking cycle in June based on the Central Bank’s
clear communication that it will maintain a “gradual
approach” to removing monetary stimulus.
Reactions to a Stronger Peso
Increased global liquidity, higher domestic interest
rates and the greater weight of Colombian bonds
in a benchmark index for local-currency sovereign
debt have led to a strengthening of the peso. As a
result, the Central Bank has decided to use the full
dollar intervention program established in March for
2Q14 (USD 1.0 billion). Finance Minister Mauricio
Cardenas stated that the Ministry will use its “excess
liquidity” to purchase dollars. We expect the Central
Bank to announce a renewal of its dollar purchase
program at the next monetary policy decision, possibly
increasing the size of the potential purchases.
Intervention in the FX market Picks Up USD Million USD Million
20.000
25.000
30.000
35.000
40.000
45.000
50.000
0
100
200
300
400
500
600
700
800
900
jan-11 jul-11 jan-12 jul-12 jan-13 jul-13 jan-14
Gross International reservesDollar purchases (LHS)
Source: Banco de La República.
The expected rise in U.S. treasury yields is likely to
reverse the peso’s appreciation trend. Our
exchange-rate forecast for the end of the year remains
at 1,950 pesos to the dollar. For next year, we see the
peso weakening further, to 2,000 to the dollar.
Presidential Run-Off Looms, Momentum
Lies with Zuluaga
The result of the May 25 presidential election was
somewhat surprising in terms of Óscar Iván
Zuluaga’s margin of victory over current President
Juan Manuel Santos. Mr. Zuluaga (a member of
former President Uribe’s party) received 29.3% of the
first-round vote, while Mr. Santos secured 25.7%. The
failure of the candidates to acquire an absolute
majority will lead to a run-off on June 15. In a
campaign trail fraught with scandals, Mr. Santos’ early
advantage has been whittled away despite the
progress in the peace negotiations with the FARC
rebel group and the country’s strong economic
performance. Mr. Zuluaga, also a business-friendly
candidate, has momentum in his favor.
The latest polls provide mixed results. According to
the Gallup poll, the two candidates are neck and neck
with Mr. Zuluaga receiving 48.5% and Mr. Santos
47.7%. However, the latest Ipsos poll gives Mr.
Zuluaga a clear advantage with 49% of the intended
vote, while Mr. Santos only received 41%.
Mr. Zuluaga has moved away from the threat to
end the peace talks with the FARC rebels if
elected, softening his stance on the election's
most pivotal issue. Mr. Zuluaga maintains that, if
elected, he will demand that the FARC cease conflicts
and criminal activity in order to continue the talks
initiated by Mr. Santos in late 2012, but will no longer
immediately suspend these talks as he had previously
stipulated. This change in stance comes, in part, at the
request of conservative party leader, Marta Lucia
Ramirez (15.5% in the first-round vote), who is now
backing Mr. Zuluaga’s candidacy.
Meanwhile, the peace process between the FARC
rebel group and the Colombian government has
added another notch to its belt by reaching an
agreement last month on the third point (drug
trafficking) of the five-point agenda. The remaining
issues involve victim reparations and transitional
justice.
Page 25
LatAm Macro Monthly – June 2014
Forecasts: Colombia
Economic Activity
Real GDP growth - % 1.7 4.0 6.6 4.0 4.3 4.5 4.5
Nominal GDP - USD bn 234 287 335 370 378 392 415
Population (millions) 45.0 45.5 46.0 46.6 47.1 47.7 48.3
Per Capita GDP - USD 5,203 6,309 7,284 7,944 8,025 8,225 8,592
Unemployment Rate - year avg 12.0 11.8 10.8 10.4 9.6 8.5 8.0
Inflation
CPI - % 2.0 3.2 3.7 2.4 1.9 3.1 3.0
Interest Rate
Monetary Policy Rate - eop - % 3.50 3.00 4.75 4.25 3.25 4.25 5.00
Balance of Payments
COP / USD - eop 2044 1908 1939 1767 1930 1950 2000
Trade Balance - USD bn 1.7 1.6 5.4 4.0 2.2 4.5 5.0
Current Account - % GDP -2.2 -3.1 -2.9 -3.2 -3.4 -3.4 -3.0
Foreign Direct Investment - % GDP 3.0 2.3 4.0 4.2 4.4 4.0 3.5
International Reserves - USD bn 25.4 28.5 32.3 37.5 43.6 47.8 50.0
Public Finances
Nominal Balance - % GDP -4.1 -3.9 -2.8 -2.3 -2.4 -2.1 -1.9
Gross Public Debt - % GDP 37.7 38.6 36.5 34.5 37.3 36.8 36.0
2015F2009 2010 2011 2012 2013 2014F
Source: FMI, IBGE, BCB, Haver and Itaú.
Page 26
LatAm Macro Monthly – June 2014
Argentina
Paris is Well Worth a Mass
• Argentina signed an agreement with the Paris Club to regularize a USD 9.7 billion debt in arrears. The agreement marks an important step in normalizing the country’s financial relations with the international community and could open up access to international financing.
• The U.S. Supreme Court may render a decision in the holdout case in June. If the case is rejected, Argentina will have to pay the holdouts the full USD 1.4 billion amount owed. If the decision is postponed until 2015, the country could negotiate with the holdouts without affecting the restructured bondholders’ right to request a similar deal.
• The Central Bank is resisting depreciating the exchange rate further. Access to capital flows seems to be the only viable strategy to prevent international reserves from falling during the second half of the year and ease the adjustment of financial variables. Our exchange-rate and interest-rate forecasts for the end of 2014 stand at 10 pesos to the dollar and 35%, respectively.
Facing Up to Debts and Creditors
Argentina took an important step toward
regularizing its financial relations with the
international community. The country will pay off its
USD 9.7 billion debt to the Paris Club over a five-year
period, according to the following scheme: an initial
USD 650 million payment in July 2014 and another
USD 500 million to be paid in May 2015 (plus 3%
interest), with the following payment scheduled for May
2016. The agreement sets a minimum annual payment
thereafter, which may be raised if there is new
financing from the Paris Club members. Argentina is
allowed to extend the payments for two additional
years if the new financing is not enough to meet its
commitment. The agreement with the Paris Club
extends the list of the country’s solved disputes with
creditors, which include Repsol and private-sector
claims under World-Bank arbitrage rules.
The U.S. Supreme Court could announce a
decision in the holdout case on June 16. Argentina
appealed the Supreme Court ruling that ordered the
country to pay holdouts in-full and prohibits
intermediary banks from processing payments to
restructured bondholders until the country’s debt to the
plaintiffs is cleared. The court will convene on June 12
to decide whether or not it will hear the case. If the
case is rejected, Argentina will have to pay the
holdouts the full USD 1.4 billion amount owed. If the
court requests the opinion of the U.S. Solicitor
General, the decision will be de facto postponed until
2015. In this case, Argentina will be allowed to
negotiate with the holdouts without affecting the
restructured bondholders’ right to request the same
financial conditions – a scenario that could pave the
way for Argentina to access international financing this
year. However, Argentina recently signaled to the
Supreme Court that it is willing to obey a negative
ruling (which represents a significant change in the
government’s rhetoric on the case), while some
holdouts have said that they are open to negotiation
(which may include a partial payment in bonds).
Is There Room to Ease the Adjustment?
The peso is strengthening and the Central Bank is
finding it difficult to depreciate the currency in an
orderly manner. The Central Bank attempted to set
up some kind of crawling peg in May, but only raised
depreciation expectations, while the gap with the
informal exchange rate widened to 50% (from 30%).
The initiative was soon aborted, the peso remained
slightly above 8 to the dollar and the gap fell to 43%.
The country’s monetary policy and fiscal policy are not
helping. Public sector expenditures continue to grow
(40.6% YoY in 1Q14) due to the heavy burden of
subsidies, and the fiscal deficit is almost entirely
financed by the Central Bank.
Meanwhile, the domestic disputes between the
Ministry of Economy and the Central Bank
regarding the tightening of the monetary policy
have risen. The treasury pressed for a more
aggressive interest-rate reduction due to activity-
related concerns. The Central Bank has already
reduced the interest rate on its sterilization bills
(LEBACS) by 200 bps. According to CB President
Juan Carlos Fábrega, future rates cuts are likely if
inflation falls below 2% (on a monthly basis). The
Badlar rate ended May at 24% (vs. 25.75% in April),
after reaching a peak of 27%.
The second half of the year is usually poor in
terms of dollar inflows to Argentina, and reserves
should fall. The soy harvest ends in late-July and, in
the absence of significant capital inflows, international
reserves are likely to fall to USD 24 billion by the end
of the year. Gross international reserves currently
stand at USD 28.5 billion, following a mild increase of
USD 0.3 billion in May.
Page 27
LatAm Macro Monthly – June 2014
Keeping an eye on international reserves USD Billion USD Billion
20
25
30
35
40
45
50
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14
MoM changeStock (RHS)
Source: BCRA
In our view, a downward trend in reserves will
trigger both a further devaluation of the peso and
interest-rate hikes. We expect the peso to end the
year at 10 to the dollar. Higher interest rates will be
required to prevent inflation from rising much further
and encourage dollar inflows. We expect a year-end
Badlar rate of 35%. The recent appreciation of the real
exchange rate raises concerns about the need for a
sharp devaluation of the currency.
However, we note that a positive outcome in U.S.
courts may lead to higher capital inflows that
would help the government ease the adjustment in
the exchange and interest rates. A deferral of the
Supreme Court’s decision, or even the acceptance of a
negative ruling, may foster issuances by YPF and
provincial governments as well as Central Bank
borrowing.
Activity: Revising the Past, Living the
Present
The official statistics agency (INDEC) reported a
new national account series (2004 prices) after
introducing methodological changes. According to
INDEC, GDP grew 2.95% in 2013. The new GDP
figure matches private growth estimates and is
significantly below the 5.7% official estimate for the
first three quarters of 2013, under the old methodology
(1993 prices). The previous growth figures were
revised downward, the most significant of which were
for 2008, 2009 and 2012. The average revised growth
rate for the period of 2007-12 was 4.9%, compared
with the previously reported 6.0%. However, according
to private consultants, growth during the same period
averaged 3.1%. Meanwhile, the nominal GDP level in
2013 was revised 20% upward. On June 6, the IMF
conducted the first revision of Argentina’s new set of
national accounts and consumer price index. The IMF
recognized that Argentina met the specified actions
requested at this stage to remedy the inaccurate
provision of official data provided for the CPI and GDP.
Argentina must continue implementing actions for end-
September and end-February 2015.
We expect GDP to contract 2% in 2014. The IGA
(GDP proxy produced by consulting firm OJF) fell 1.7%
YoY in April, following a revised 3.7% drop in March.
According the Universidad Di Tella’s leading indicator,
the probability of a recession in Argentina over the
next six months is now 50%.
Inflation continues to decelerate on a sequential
basis, as the depreciation pass-through effects
fade and recession limits the price pressure.
According to estimates produced by Elypsis consulting
firm, inflation likely fell to 2% month over month in May.
The April inflation (2.8%) reported by a congressional
commission again exceeded the mark (1.8%)
published by the official national statistics agency,
giving rise to doubts about the reliability of the new
official CPI. We expect inflation to end the year at
37%, but note that annual inflation is likely to reach
40% soon due to unfavorable base effects. Potential
increases in electricity and transport tariffs add
significant upside potential to this forecast.
Corruption Scandal Involving High
Government Official Goes to Court
Vice President Amado Boudou testified as a
suspect in a criminal investigation. The next step
would be a formal indictment. Amado Boudou is
accused of using his power to get a contract for a
money printing company he controlled (Ciccone
Calcográfica) to provide services to the government.
Page 28
LatAm Macro Monthly – June 2014
Forecasts: Argentina
Economic Activity
Real GDP growth (Private Estimates) - % -4.2 7.9 4.9 -0.2 3.2 -2.0 0.0
Nominal GDP - USD bn 378.5 462.7 557.7 603.1 611.3 544.6 496.7
Population (millions) 40.1 40.5 40.9 41.3 41.7 42.0 42.4
Per Capita GDP - USD 9,432 11,419 13,635 14,608 14,673 12,955 11,712
Unemployment Rate - year avg 8.7 7.8 7.2 7.2 7.1 8.0 8.7
Inflation
CPI (Private Estimates) - % 14.9 26.4 22.8 25.6 28.4 37.0 27.0
Interest Rate
BADLAR - eop - % 10.00 11.25 17.19 15.44 21.63 35.00 30.00
Balance of Payments
ARS / USD - eop 3.80 3.98 4.30 4.92 6.52 10.00 13.00
Trade Balance - USD bn 16.9 11.6 10.0 12.7 8.0 9.0 11.0
Current Account - % GDP 2.9 -0.2 -0.4 0.0 -0.8 -0.7 0.2
Foreign Direct Investment - % GDP 0.9 1.6 1.7 1.8 1.3 0.8 1.8
International Reserves - USD bn 48.0 52.2 46.4 43.3 30.6 23.6 22.0
Public Finances
Nominal Balance - % GDP -0.5 0.2 -1.3 -2.0 -1.9 -1.7 -1.7
Gross Public Debt - % GDP 38.9 35.5 32.1 32.7 30.7 30.2 29.2
2013F 2014F 2015F2009 2010 2011 2012
Source: FMI, IBGE, BCB, Haver and Itaú.
Page 29
LatAm Macro Monthly – June 2014
Commodities
Falling Prices for Agricultural Commodities and Metals • Favorable weather conditions in May dragged down prices for agricultural commodities.
• Iron ore prices continue to drop, given the outlook for larger supply from Australia and concerns over the real estate sector
in China. We expect a slight recovery in prices.
The Itaú Commodity Index (ICI) has fallen 3.7%
since the end of April, driven by lower prices for
agricultural items, iron ore and natural gas.
Favorable weather conditions, particularly in the U.S.,
have increased supply expectations for corn, wheat,
soybeans and cotton. A lower risk perception over the
conflict in Ukraine is also behind price declines for
grains and natural gas. We maintain our ICI forecast
for a decline of 1.4% in 2014 and an uptick of 1.6% in
2015. Our forecast for 2014 assumes an advance of
0.6% from current levels, driven by iron ore and
agricultural commodities (excluding soybeans). The
two main downside risks to our scenario are: i) the iron
ore balance reaching equilibrium with prices below
USD 95.0/ton (our call: USD 101.0/ton); and ii) better-
than-average weather conditions for supply ahead,
leading to further drops in agricultural commodity
prices.
Partial Reversal in Agricultural Commoditites
80
90
100
110
120
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
ICI AgricultureICI EnergyICI Metals
Source: Itaú.
Better weather conditions for agriculture in May.
International prices for agricultural commodities have
declined since the end of April (-10.0%, according to
the ICI-Agricultural), partly reversing the gain year to
date. The recent slide included all the main
commodities: corn (-12.3%), wheat (-14.1%), soybeans
(-4.8%), cotton (-10.2%), coffee (-18.6%) and sugar (-
1.5%). The first four items were directly affected by the
outlook for better supply, particularly from the U.S. In
turn, sugar and coffee prices are influenced by
uncertainty over fundamentals, as estimates for the
balance between supply and demand for both
commodities range from small surpluses to wide
deficits.
Earlier Decline Itaú Commodity Index* (2010=100)
100
105
110
115
120
125
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
Previous
Current
Source: Itaú.
Iron ore prices continue to retreat, driving the ICI-
Metals Index down by 3.7% since the end of April.
In addition to the reasons cited in our latest report
(slowing growth and tighter regulations in China),
concerns over the Real Estate sector in China
combined with higher supply from Australia pushed
prices to below USD 95.0/ton (2013 average: USD
131.8/ton), in a move that we believe is exaggerated.
Current prices are below operational costs for
producers, who must keep working to meet current
demand on a global level. We thus maintain our
forecast at USD 101.0/ton by year-end, 6% above
current levels. Prices for other non-precious metals
marched in the opposite direction, with some gains
during the month.
The ICI-Energy Index has risen 0.6% since the end
of April. Except for lower natural gas prices, there
were no major events involving energy-related
commodities. Brent crude prices rose 1.5%, to USD
109.15/bbl, while WTI crude climbed 4.5%, to USD
103.59/bbl in the same period, without any major
changes in fundamentals. We maintain our year-end
Page 30
LatAm Macro Monthly – June 2014
estimates at USD 105.0/bbl for Brent and USD
101.0/bbl for WTI. Our scenario of lower Brent prices
assumes some increase in the combined supply from
Iran, Iraq and Libya in coming months.
Agricultural Commodities: Favorable
Weather in May
May was marked by favorable weather conditions.
In the U.S., corn planting recovered, while soybean
planting is evolving in line with seasonal patterns.
In Brazil, the winter corn crop benefited from adequate
rainfall. The weather has also been favorable in other
producing regions, prompting price drops for corn (-
12.3%), wheat (-14.1%), soybeans (-4.8%) and cotton
(-10.2%).
Favorable Weather Conditions in U.S. Affect
Prices Prices correspond to CBOT first future
1200
1300
1400
1500
1600
1700
400
500
600
700
800
Jan-13 May-13 Sep-13 Jan-14 May-14
CornWheatSoybean (RHS)
Source: Itaú.
Downside for grain and soybean forecasts. We
maintain our year-end price forecasts for corn, wheat
and soybeans at USD 5.0, USD 6.8 and USD 12.2 per
bushel, respectively. But if favorable weather
conditions are sustained, prices should fall further,
particularly for corn and wheat.
Sugar and coffee prices are expected to rebound.
Weather conditions have been normal in producing
regions in Brazil. There is, however, still a lot of
uncertainty over the 2014-15 crops. Estimates for
these two commodities range widely, from small global
surpluses to large deficits. In our view, the recent
normalization will not be enough to offset losses
caused by the drought in January. Hence, production
in Brazil should be smaller than what is priced in by the
market and will likely lead to deficits in the global
balance for both commodities. We thus continue to
expect price increases for coffee and sugar, to USD
2.20/lb. and USD 0.195/lb., respectively.
El Niño is expected in the second half of the year,
but its intensity and impact are as yet unclear.
America’s National Oceanic and Atmospheric
Administration sees an increasing likelihood of the El
Niño weather pattern in the second half, now above
80%. Meanwhile, conditions in the Pacific Ocean are
evolving in a way that could create a milder and short-
lived phenomenon, with a smaller impact on conditions
for agricultural supply.
Page 31
LatAm Macro Monthly – June 2014
Forecasts: Commodities
Commodities
yoy - % -25.7 35.4 21.9 -5.2 0.8 -5.2 4.5 2.5
avg growth - % 6.2 -14.6 25.1 19.5 -9.5 -3.1 2.8 0.2
yoy - % -34.2 36.8 33.3 -6.5 3.5 -6.1 -1.4 1.6
avg growth - % 25.7 -29.5 32.4 24.9 -7.9 -3.8 -3.3 0.5
a/a - % -26.5 22.2 41.5 -14.8 13.2 -22.4 9.5 3.5
avg growth - % 30.8 -20.3 15.7 35.1 -5.1 -11.5 -4.2 3.3
yoy - % -43.8 47.3 11.5 10.1 -0.7 5.4 -2.3 -0.4
avg growth - % 33.2 -39.2 22.0 25.6 -2.4 0.9 2.1 -1.6
yoy - % -23.4 40.9 63.4 -18.2 -1.0 -3.2 -11.8 3.0
avg growth - % 4.0 -18.9 78.5 13.7 -19.4 -1.2 -11.8 1.3
yoy - % -31.5 37.2 32.5 -6.8 5.0 -11.3 3.6 2.6
avg growth - % 22.9 -23.2 24.8 28.1 -5.7 -7.2 -1.9 2.4ICI - Inflation **
2013 2014F2010
CRB Index
Itaú Commodity Index (ICI)*
Agricultural
Energy
Metals
20122009 2015F2008 2011
* The Itaú Commodity Index is a proprietary index composed of commodity prices, measured in U.S. dollars and traded on international exchanges, which are relevant to
global production. Its sub-indexes are Metals, Energy and Agriculture.
** The ICI-Inflation Index is a proprietary index composed of commodity prices, measured in U.S. dollars and traded on international exchanges, which are relevant to
inflation in Brazil (IPCA). Its sub-indexes are Food, Industrials and Energy.
Macro Research – Itaú
Ilan Goldfajn – Chief Economist
Tel: +5511 3708-2696 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. Itaú Unibanco Group does not make any express or implied representation or warranty as to the completeness, reliability or accuracy of such information, nor does this report intend to be a complete statement or summary of the markets or developments referred to herein. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which it was issued and are, therefore, subject to change without notice. Itaú Unibanco Group has no obligation to update, modify or amend this report and inform the reader accordingly.
3. The analyst responsible for the production of this report, whose name is highlighted in bold, hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions and were prepared independently and autonomously, including from Itaú Unibanco, Itaú Corretora de Valores S.A. and other group companies.
4. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of Itaú Unibanco. Additional information on the financial instruments discussed in this report is available upon request. Itaú Unibanco and/or any other group companies is not, and will not be liable for any investment decisions (or otherwise) based on the information provided herein.
Additional Note to reports distributed in: (i) U.K. and Europe: Itau BBA International plc: This material is distributed and authorized by Itau BBA International plc (IBBA UK) pursuant to Section
21 of the Financial Services and Markets Act 2000. The material describing the services and products offered by Itaú Unibanco S.A. (Itaú) has been prepared by that entity. IBBA UK is a subsidiary of Itaú. Itaú is a financial institution validly existent under the laws of Brazil and a member of the Itaú Unibanco Group. Itau BBA International plc registered office is The Broadgate Tower, level 20, 20 Primrose Street, London, United Kingdom, EC2A 2EW and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FRN 575225). Itau BBA International plc Lisbon Branch is regulated by Banco de Portugal for the conduct of business. Itau BBA International plc has representative offices in France, Colombia, Germany, and Spain which are authorised to conduct limited activities and the business activities conducted are regulated by Banque de France, Superintendencia Financiera de Colombia, Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin), and Banco de España respectively. None of the offices and branches deal with retail clients. For any queries please contact your relationship manager. For more information go to: www.itaubba.co.uk; (ii) U.S.A: Itau BBA USA Securities, Inc., a FINRA/SIPC member firm, is distributing this report and accepts responsibility for
the content of this report. Any US investor receiving this report and wishing to effect any transaction in any security discussed herein should do so with Itau BBA USA Securities, Inc. at 767 Fifth Avenue, 50th Floor, New York, NY 10153; (iii) Asia: This report is distributed in Hong Kong by Itaú Asia Securities Limited, which is licensed in Hong Kong by the Securities and Futures
Commission for Type 1 (dealing in securities) regulated activity. Itaú Asia Securities Limited accepts all regulatory responsibility for the content of this report. In Hong Kong, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Itaú Asia Securities Limited at 29th Floor, Two IFC, 8 Finance Street – Central, Hong Kong; (iv) Japan: This report
is distributed in Japan by Itaú Asia Securities Limited – Tokyo Branch, Registration Number (FIEO) 2154, regulated by Kanto Local Finance Bureau, Association: Japan Securities Dealers Association; (v) Middle East: This report is distributed by Itau Middle East Limited. Itau Middle East Limited is regulated by the Dubai Financial Services Authority and is located at Suite 305, Level
3, Al Fattan Currency House, Dubai International Financial Centre, PO Box 482034, Dubai, United Arab Emirates . This material is intended only for Professional Clients (as defined by the DFSA Conduct of Business module) no other persons should act upon it; (vi) Brazil: Itaú Corretora de Valores S.A., a subsidiary of Itaú Unibanco S.A authorized by the Central Bank of Brazil and
approved by the Securities and Exchange 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 a.m. to 8 p.m., Brasilia time. If you wish to re-evaluate the suggested solution, after utilizing such channels, please call Itaú’s Corporate Complaints Office: 0800-570-0011 (on business days from 9 a.m. to 6 p.m., Brasilia time) or write to Caixa Postal 67.600, São Paulo-SP, CEP 03162-971. * Cost of a local call.