Perspectivas Económicas para 2018

Macroeconomic Research
October 2017
Mário Mesquita
Economic Outlook

Macroeconomic Research •
Roadmap
Global economy: benign environment remains, but there are risks
LatAm: modest growth, but recovery gains traction, while politics becomes
more relevant
In Brazil: better economic news amidst increased political and fiscal uncertainty
2

Global: PMIs at recent highs
5,6%
3,0%
-0,1%
5,4%
4,2%
3,5%
3,4%
3,5%
3,4%
3,1%
3.6% 3.7%
46
47
48
49
50
51
52
53
54
55
56
57
58
-0,5%
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
4,0%
4,5%
5,0%
5,5%
6,0%
6,5%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Global GDP x Composite PMI
Global GDP Global Composite PMI (rhs)
Source: Haver analytics, Bloomberg
46
48
50
52
54
56
58
20072008200920102011201220132014201520162017
Global Manufacturing PMI
(Purchasing Managers Index)
Global Emerging Developed
4

Source: Haver Analytics
Solid growth allows central banks to lessen stimuli
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
2,5%
3,0%
3,5%
4,0%
4,5%
5,0%
5,5%
6,0%
2010 2011 2012 2013 2014 2015 2016 2017
Global Growth and Developed Markets (DM) Interest Rates
Global GDP Growth (YoY) DM 10Y rates* (rhs)
*Weighted average of US, Eurozone, Japan and UK.
5

Source: Itaú Unibanco, Haver Analytics
Global Economy: Our forecasts
2014 2015 2016 2017 2018
World 3.4 3.2 3.1 3.6 3.7
USA 2.4 2.6 1.6 2.2 2.3
Eurozone 1.2 1.9 1.7 2.0 1.7
Japan 0.0 1.1 1.0 1.6 1.4
China 7.3 7.2 6.7 6.7 6.3
6

Source: IMF, Itaú
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
GDP growth: Latin America*
Actual
Forecast based on external factors
External factors are a major influence on growth dynamics for LatAm
*Simple average for Argentina, Brazil, Chile, Colombia, Peru and Mexico
𝑮𝒓𝒐𝒘𝒕𝒉𝒊= α + 𝜷𝟏𝒊 × 𝑾𝒐𝒓𝒍𝒅 𝒈𝒓𝒐𝒘𝒕𝒉 + 𝜷𝟐𝒊 × 𝑰𝒎𝒑𝒖𝒍𝒔𝒆 𝑪𝒉𝒊𝒏𝒂 + 𝜷𝟑𝒊 × 𝑬𝑴 𝑪𝒓𝒆𝒅𝒊𝒕 𝑹𝒊𝒔𝒌 + 𝜺
*
External factors Country-specific
**
8

-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
00 02 04 06 08 10 12 14 16
Brazil
Annual growth
Actual
Forecasted based
on external factors
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
00 02 04 06 08 10 12 14 16
Chile
Annual growth
Actual
Forecasted based on
external factors
0%
1%
2%
3%
4%
5%
6%
7%
8%
00 02 04 06 08 10 12 14 16
Colombia
Annual growth
Actual
Forecasted based
on external factors
Source: IMF, Itaú
In some countries, however, idiosyncratic factors have played a role
9

External factors are consistent with an economic acceleration this year
0,0
1,0
2,0
3,0
4,0
5,0
6,0
Global GDP Growth
50
100
150
200
250
300
EMBI*
* EMBI of eight Non-LatAm EM countries (Czech Republic, Hungary, India, Indonesia, Poland, Russia, South Africa, Thailand and
Turkey). 2017 figures are YTD
10

Source: Haver Analytics, Itaú
At the margin: better activity signs
 Stronger data in most countries. Recovery gains traction in Argentina and Mexico’s slowdown is
milder than expected
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
8,0%
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
Dec-15
May-16
Oct-16
Mar-17
Aug-17
GDP growth
(yoy 3MMA)
Chile Colombia Peru
-6,0%
-4,0%
-2,0%
0,0%
2,0%
4,0%
6,0%
8,0%
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
Dec-15
May-16
Oct-16
Mar-17
Aug-17
GDP growth
(yoy 3MMA)
Mexico Argentina
11

Most currencies already close to equilibrium

Chile: electoral timeline
Date Event
November 21, 2016 Party registration deadline
January 30, 2017 Electoral service sets expenditure limits for election
June 26, 2017 Parties submit member rosters ahead of election
July 2, 2017 Primary elections for Presidential and Congressional races
August 21, 2017 Deadline for registration of coalitions and candidacies
October 20, 2017 Electoral campaigning starts
November 17, 2017 Electoral campaigning ends
November 19, 2017 General election to select president, representatives, (partial)
senate members, other regional authorities
December 17, 2017 Run-off presidential election takes place (if needed)
March 11, 2018 President-elect assumes office
14

Chile: former President Piñera likely to emerge as winner in the
December run-off election
Source: Cerc-Mori, Adimark, Plaza Pública Cadem; second round: Cadem (September)
Presidential elections: 1st round (%) Presidential elections: 2nd round (%)
15
21
51
28
12
50
38
14
50
36
0 20 40 60
Don't know, didn't
answer
S. Piñera
B. Sanchez
Don't know, didn't
answer
S. Piñera
A. Guillier
Don't know, didn't
answer
S. Piñera
C. Goic
0 20 40
Sebastián Piñera
Alejandro Guillier
Beatriz Sánchez
Average Cerc-Mori (1-12 Sept.)
Adimark (3-29 August) CEP (21 Jul.-17 Aug.)
Cadem (13 Sep.-06 Oct.)

Chile: main candidate bios
Candidate Short-bio
Sebastián Piñera,
independent
Center right Chile Vamos
Economist (PhD), 67 years old. Former President of Chile (10-14) and
senator (90-98). Business-man, seen as pro-market, former militant of the
center right Renovación Nacional Party. He is running as an independent
under the center right coalition's umbrella.
Alejandro Guillier,
independent
Center left Fuerza de Mayoría
(majority of parties in current
coalition)
Journalist, 63 years old. Independent senator (2014-) for the mining region
of Antofagasta. His political experience is limited to his tenure as senator.
His appeal as an outsider earned him the support from most of the parties
in the current governing coalition. He is seen a sign of continuity from the
current administration.
Beatriz Sánchez
Left Frente Amplio
Journalist, 46 years old. With no political experience, Ms. Sánchez gained
notoriety for her support of social movements. Her candidacy formalized
back in March. Ms. Sánchez has no defined political program, but she has
sided with key social demands.
Carolina Goic
Center Christian democrats
Social Worker, 44 years old. Currently a senator (2014-) and formerly a
representative (06-14).
José Antorio Kast
Right, Independent
Lawyer, 51 years old. Was a representative (02-14), and secretary general
of right UDI party. Seen in the far political right.
Marco Enriquez Ominami
Center left, PRO
Movie producer, 44 years old. Former representative (06-10). Has run
three times for president, but fell from grace when he was linked to
political funding scandals.
16

Source: Invamer, Sept 2017, Itaú
Colombia: electoral season already underway
Date Event
November 11,
2017
Begins period of restriction to
engage in new public
contracts
March 11, 2018 Senate and congressional
election
May 27, 2018 Presidential elections (first
round)
June 17, 2018 Presidential elections
(second round)
August 7, 2018 President-elect assumes office
Electoral timeline: key dates Voting Intention
(% total)
17
Others;
39,6
Blank; 2,1
Clara
Lopez; 3,2
Claudia
López;
11,2
Gustavo
Petro; 10,4
Germán
Vargas
Lleras;
12,5
Sergio
Fajardo; 21

Colombia: Main candidate bios
Candidate Short-bio Voting
intention
(%)
Sergio Fajardo*,
independent
Citizen
Commitment
Movement
61 years old. Was the major of Medellín (2004-2007) and governor of the Antioquia
department (2012-2015). His tenure as major of Medellín is generally well
regarded.
21
Germán Vargas
Lleras
Independent
(Former Radical
Change, right-
wing)
Lawyer, 56 years old. Former Vice-President to Juan Manuel Santos (2014-2017),
Housing Minister (2012-2013), Interior Minister (2010-2012) and senator (1998-
2008). Mr. Vargas Lleras will possibly receive the backing of President Santos
ahead of the election. 13
Claudia Lopez*
Alianza Verde
(Green Party)
47 years old. Political scientists. Was elected Senator in 2014. Her election had 81
thousand votes, the highest number in her collective. Claudia has been recognized
in Congress for debating controversial topics, especially corruption.
11
Gustavo Petro
Left, Human
Colombia
movement
Economist, 58 years old. Member of the lower house (1998-2006), senator (2006-
2010) and mayor of Bogotá (2012-2015). His tenure as mayor of Bogotá was
tainted by accusations of mismanagement of trash collection and the public
transportation system, which eventually led to his removal from office.
10
18
*Sergio Fajardo and Claudia Lopez formed a center-left coalition in September.
Source: Invamer, Sept 2017, Itaú

Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18
Sep 8, 2017
Beginning of
electoral season
Oct 21, 2017
Last day for
registration of
independent
candidates
31 Dec, 2017
Last day for
registration of
alliances
Dec 14, 2017 -
Feb 11, 2018
Primary Elections
Mar 29, 2018
Deadline for political
parties and
alliances to register
candidates
Mar 30, 2017 -
Jun 28, 2018
Electoral
campaigns
July 1, 2018
Election Day
Mexico: electoral timeline
 Presidential, legislative (lower & upper chambers total renewal), and gubernatorial elections (9 out of
32 states, including Mexico City) will be held in 2018.
19

Mexico: the left leads the electoral race
 AMLO has consolidated his position at the top of presidential polls
 In September, the PAN (right) and the PRD (center-left) announced their alliance. We believe this is
the most competitive platform against AMLO.
0
5
10
15
20
25
30
35
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Lopez Obrador (left, Morena)
Margarita Zavala (right, PAN)
Miguel Angel Osorio Chong (center-right, ruling party, PRI)
Miguel Angel Mancera (center-left, PRD)
10
15
20
25
30
Jul-17 Aug-17 Sep-17
PAN-PRD PRI-Verde Morena-PT
Presidential Election polls, preferences by alliances -
average of Reforma and Mitofsky (% of vote intentions)
Presidential Election polls, preferences by candidates -
average of Reforma, El Financiero, Mitofsky, El
Universal, Excélsior (% of vote intentions)
20

Mexico: presidential candidates are still undefined, except for Morena
 AMLO, only defined
candidate.
 Former Mayor of Mexico
City (2000-2005).
 Two-time presidential
candidate (2006, 2012).
 Founder of Morena (2014),
largest left-wing party in
Mexico.
 Two strongest candidates of
ruling party: Miguel Osorio
(Interior Minister, former
Governor of Hidalgo) and José
Antonio Meade (Finance
Minister).
 PRI recently reformed statute to
open doors for independent
candidates, such as Meade,
who is not yet a member of the
PRI.
 Uncertainty over alliance’s
candidate. However, Ricardo
Anaya (President of the PAN)
has the highest odds of being
selected.
 Margarita Zavala, who has
performed well in polls, resigned
from the PAN because of
confrontation with Anaya. She
will run as an independent
candidate.
 The split of the PAN vote will
benefit the PRI and AMLO
21

Argentina’s mid-term election: ruling coalition obtains a solid victory
 The ruling coalition Cambiemos had an impressive performance at the national level (41% of total
votes for representatives), improving the results obtained in the August.
 Esteban Bullrich's list (Cambiemos) won the Senatorial race in the Province of Buenos Aires with
41,4% of the votes, ahead of former President Cristina Kirchner's (Unidad Ciudadana) with 37,3%. We
note that the winners will get two of the three contested Senate seats, while the third seat will go to the
runner-up.
 In addition, President Macri's party not only obtained victories in the City of Buenos Aires and the
Provinces of Córdoba, Mendoza and Santa Fe but also in some provinces ruled by the Peronist party.
22
40,8
21,9
14,9
5,8
16,7
Votes at national level
lower chamber, % of total
Cambiemos
Kirchnerism
Peronists
Dissident peronists
Others
Source: Itaú

Argentina: The government increased its representation in Congress.
 Still, the government falls short of having a majority in either of the two chambers.
 With strong political power, the government will push to accelerate fiscal reforms. The fragmentation of the
Peronist party will likely facilitate the pass of legislation (federal budget, cap on provincial and federal
primary expenditure, and tax reform).
23
87
115
38
17
16
47
2
7
Congress.Current Composition
Lower
chamber:
257
benches
Senate:
72
benches
Cambiemos
Peronism (including K
and other peronists)
Dissident
peronist
Rest
Source: Itaú
107
67
22
38
9
24
1023
15
Congress. Projection
Lower
chamber: 257
benches
Senate: 72
benches
Cambiemos
Kirchnerism
Dissident
peronist
Peronists
Rest
Source: Itaú
Lower
chamber: 257
benches
Senate: 72
benches
Cambiemos
Dissident
peronist
Rest
Source: Itaú

 Paraguay has grown robustly in spite of a challenging regional environment (3.9% average growth in
2014-2016 and expected 4.5% in 2017).
 Well-anchored inflation expectations to the center of central bank target range (4% ±2.)
 The fiscal deficit complies with the Fiscal Responsibility Law (1.5% of GDP). The government issued
international bond for USD 500 million this year.
 Current account roughly in balance. Central bank have accumulated foreign reserves to 25% of GDP.
 Presidential and congressional elections: April 22, 2018.
Paraguay: Summary
24

 GDP grew 3.9% during the first half of the year. Heavy rains affected temporarily the economy in 2Q17.
 Inflation is running at 4% in line with the central bank target.
 The central bank cut the monetary policy rate by 25 bps, to 5.25% due to well anchored inflation
expectations and recent deceleration in output.
Paraguay: Macro indicators
25
-5
0
5
10
15
20
25
2Q-10 2Q-11 2Q-12 2Q-13 2Q-14 2Q-15 2Q-16 2Q-17
%
GDP growth
(YoY)
Source: BCP
0
1
2
3
4
5
6
7
8
9
10
Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17
%
Inflation and Monetary Policy
Inflation (YoY) Monetary policy reference rate
Source: BCP

 Current account balance remains comfortable, and the central bank is accumulating reserves.
 The exchange rate was has been stable.
Paraguay: Current account balance remains comfortable
26
3.500
4.000
4.500
5.000
5.500
6.000
Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
PYG / USD
Exchange Rate
PYG / USD
Source: Bloomberg

 On the fiscal front, the government restrained current expenditures (payrolls) and increased
infrastructure expenses.
Paraguay: Fiscal accounts
27
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2010 2011 2012 2013 2014 2015 2016 2017f
% of GDP
Source: Treasury
Fiscal Accounts

 Primary elections December 17, 2017.
 Pre-candidates:
 Partido Colorado: Former minister of economy, Santiago Peña and Current Senator Mario
Abdo Benítez.
 Partido Blanco: Efraín Alegre, Salyn Buzarquis and Líder Amarilla.
 Presidential and congressional elections: April 22, 2018.
 Elected president takes office on August 15, 2018.
Paraguay: Presidential Elections
28

PARAGUAY
Economic Activity
Real GDP growth - % 4,3 -1,2 14,0 4,7 3,0 4,1 4,5 3,5
Nominal GDP - USD bn 25,1 24,7 28,9 30,7 27,4 27,6 29,6 31,4
Population 6,4 6,5 6,6 6,7 6,8 6,9 7,0 7,0
Per Capita GDP - USD 3.952 3.821 4.408 4.605 4.052 3.995 4.260 4.500
Unemployment Rate - year avg 7,1 8,1 8,1 8,0 6,5 7,7 7,5 7,0
Inflation
CPI - % 4,9 4,0 3,7 4,2 3,1 3,9 4,0 4,0
Interest Rate
Monetary policy rate - eop - % 7,25 5,50 6,00 6,75 5,75 5,50 5,25 5,00
UGY / USD - eop 4.435 4.220 4.598 4.636 5.782 5.738 5.700 5.900
Trade Balance - USD bn** 0,9 0,6 1,7 1,0 0,6 1,4 0,5 0,5
Current Account - % GDP 0,8 -1,2 2,1 0,1 -1,0 1,7 -1,5 -1,5
Foreign Direct Investment - % GDP 2,3 2,8 0,9 1,2 0,9 1,0 1,3 1,3
International Reserves - USD bn 5,0 5,0 5,9 6,9 6,2 7,1 8,0 8,0
Public Finances
Nominal Balance - % GDP 1,0 -1,7 -1,7 -1,1 -1,8 -1,5 -1,5 -1,5
Gross Public Debt - % GDP 10,9 14,5 14,4 17,6 20,0 22,8 23,5 24,5
Source: FMI, Haver, Bloomberg, BCP, Itaú
2018F2012 2013 2014 2015 2016 2017F2011
Paraguay: Forecasts

Source: Itaú
Latam: our forecasts
2015 2016 2017 2018 2015 2016 2017 2018
GDP - % 3.3 4.0 2.9 4.2 PIB - % 2.6 2.3 2.3 2.1
PEN / USD (dec) 3.41 3.36 3.30 3.35 MXN / USD (dec) 17.4 20.7 18.5 18.5
Interest rates - (dec) - 3.75 4.25 3.25 3.25 Interest rates - (dec) - 3.25 5.75 7.0 6.5
IPC 4.4 3.2 2.6 2.5 IPC 2.1 3.4 5.7 3.3
2015 2016 2017 2018 2015 2016 2017 2018
PIB - % 3.1 2.0 1.6 2.5 PIB - % 2.3 1.6 1.3 2.5
COP / USD (dec) 3175 3002 3050 3120 CLP / USD (dec) 709 670 665 675
Interest rates - (dec) - 5.75 7.50 5.25 4.50 Interest rates - (dec) - 3.50 3.50 2.50 2.75
IPC 6.8 5.8 4.2 3.8 IPC 4.4 2.7 2.4 2.8
2015 2016 2017 2018
PIB - % 2.6 -2.2 2.5 2.8
ARS / USD (dec) 13 15.85 18.0 21.0
Repo 7 d. – (dec) - % n/a 24.75 26.25 20.00
IPC - % (Buenos Aires) 26.9 41.0 22.0 16.0
Argentina
MexicoPeru
Colombia Chile
30

347
287
237
196
162 134
111
629
514
420
343
280
229
187
845
673
537
428
341
272
217
100
200
300
400
500
600
700
800
900
1000
B- B B+ BB- BB BB+ BBB-
Rating S&P vs. CDS
Sep/17 Abril-Junho/2016 Jan-Feb/2016
Non-Investment grade Investment
gradeVIX = 23
VIX = 16
VIX = 10
Highly Speculative Non-
Investment grade
Brasil (jan/16):
500
Brasil (abr/16):
350
Brazil Sep.
193
The global environment offsets political developments
32

Country risk premium and commodity prices play a major role
33
Iron ore
40 60 80
CDS
150 2.96 2.91 2.87
215 3.31 3.25 3.21
275 3.58 3.52 3.47
350 3.86 3.79 3.74
500 4.32 4.24 4.19

Source: Itaú Unibanco, IBGE
Inflation rate below target
3,7
2
3
4
5
6
7
8
9
10
11
set-07 set-09 set-11 set-13 set-15 set-17
IPCA Market-set prices ex Food
(3MMA, SAAR – Average of three core measures)
34
2,5%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17
IPCA
(yoy)

Commodity prices to put some pressure on tradable goods inflation
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jul-08 Jul-11 Jul-14 Jul-17
IPCA industrials
CRB RIND Index BRL
YoY t-8 (rhs)
Industrial prices (IPCA) and CRB industrials Food prices and CRB Food
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-5%
0%
5%
10%
15%
20%
Jul-08 Jul-11 Jul-14 Jul-17
IPCA food
CRB FOOD BRL
YoY (rhs)
Source: Bloomberg, IBGE
35

Source: IBGE
-13%
-11%
-9%
-7%
-5%
-3%
-1%
1%
3%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
IPCA (yoy) – unemployment (rhs)
Services IPCA (YoY)
Services prices, inflation rate and unemployment
But inertia and unemployment to keep services inflation down
36

2017 2018
IPCA 3.0 3.8
Regulated prices 6.7 4.6
Market-set prices 1.8 3.5
Food -2.6 5.0
Industrials 1.0 2.5
Services 4.3 3.5
Market-set ex food 2.9 3.1
Source: IBGE, Itaú
Core inflation to remain low
37

Fundamentals support stable rates ahead
• 2018:
• 2017:
Taylor Rule
Taylor Rule
12.0% 12.5% 13.0% 13.5%
3.0% 6.25% 6.00% 5.75% 5.50%
3.5% 7.00% 6.75% 6.50% 6.25%
4.0% 7.75% 7.50% 7.25% 7.00%
4.5% 8.50% 8.25% 8.00% 7.75%
5.0% 9.25% 9.00% 8.75% 8.50%
Taxa de desemprego
Inflaçãoem
2018
Unemployment rate
2018
inflation
12.0% 12.5% 13.0% 13.5%
3.0% 6.50% 6.25% 6.00% 5.75%
3.5% 7.25% 7.00% 6.75% 6.50%
4.0% 8.00% 7.75% 7.50% 7.25%
4.5% 8.75% 8.50% 8.25% 8.00%
5.0% 9.50% 9.25% 9.00% 8.75%
Inflaçãoem
2019
Taxa de desempregoUnemployment rate
2019
inflation
38

Source: IBGE
Slack in the economy likely to persist
NAIRU=10.0%
Sep/2005 – Oct/2008:
Unemployment -2.5 pp
GDP +4.6%
6%
7%
8%
9%
10%
11%
12%
13%
14%
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Sep/2009 – Oct/2012:
Unemployment -2.2 pp
GDP +3.3%
Unemployment rate (PNADC)
39

BRL 2.80 3.00 3.25 3.50 3.75 3.90 4.00 4.30 5.35
IPCA
(7.5% pass-through)
2.30 2.70 3.25 3.80 4.30 4.65 4.85 5.50 7.75
Inflationary risk: BRL beyond 3.75
Source: Itaú
The BRL & IPCA inflation in 2018
40

Source: BCB, BNDES
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Subsidized loans (BNDES )
(mns of mar/17 BRL, 12MMA)
Federal Government Expenditure – real growth
5000
7000
9000
11000
13000
15000
17000
19000
21000
23000
dez/10
abr/11
ago/11
dez/11
abr/12
ago/12
dez/12
abr/13
ago/13
dez/13
abr/14
ago/14
dez/14
abr/15
ago/15
dez/15
abr/16
ago/16
dez/16
abr/17
Credit to Enterprises (daily average)
Seasonally adjusted, chained BRL bn
Lower terminal rate? possible if neutral rate under 5.0%
41
4,5
5,0
5,5
6,0
6,5
7,0
7,5
8,0
3MMA

GDP grows 0.2% qoq/sa in 2Q17, above expectations (0.0%)
Source: IBGE
0,2%
-2,5%
-2,0%
-1,5%
-1,0%
-0,5%
0,0%
0,5%
1,0%
1,5%
Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
GDP growth
QoQ sa
Investment
Consumption
43

60
70
80
90
100
110
120
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Industry Consumer Retail
Construction Services
Confidence Indexes
Neutral
Uncertainty Index (FGV)
80
90
100
110
120
130
140
150
Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17
Confidence indexes have recovered from recent political turmoil
44

3Q17: data suggest modest growth (around 0.1%)
Source: IBGE
Industrial Production
s.a.
Retail Sales (broad)
s.a.
Services Sector Real Revenues
s.a.
45
82
83
84
85
86
87
88
89
set/15
nov/15
jan/16
mar/16
mai/16
jul/16
set/16
nov/16
jan/17
mar/17
mai/17
jul/17
set/17
81
84
87
90
set-15
dez-15
mar-16
jun-16
set-16
dez-16
mar-17
jun-17
set-17
87
90
93
96
set-15
dez-15
mar-16
jun-16
set-16
dez-16
mar-17
jun-17
set-17

More widespread recovery
Source: IBGE, Itaú
Diffusion Index vs. GDP growth
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
34%
38%
42%
46%
50%
54%
58%
62%
66%
70%
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Diffusion Index 12MMA (t-2)
GDP growth
46

Consumption benefiting from disinflation
-10%
-05%
00%
05%
10%
15%
Jul-02 Jul-05 Jul-08 Jul-11 Jul-14 Jul-17
Real wage bill - YoY
Retail sales - YoY 3MMA
Source: IBGE
-10%
-5%
0%
5%
10%
15%
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Nominal wages - YoY
Real wage bill - YoY
Nominal Wages and Real Wage Bill Real Wage Bill and Retail Sales
47

Consumption also supported by credit
Delinquency rates - Individuals
Credit to Individuals
(daily average)
Household debt
20,0
25,0
30,0
35,0
40,0
45,0
50,0 Debt Debt w/o housing
48
6,0
6,2
6,4
6,6
6,8
7,0
7,2
7,4
7,6
7,8
8,0
3MMA sa
Chained BRL bn
4,7%
5,2%
5,7%
6,2%
6,7%
6,0%
6,5%
7,0%
7,5%
8,0% Delays
Delinquencyrates
Delinquency rates Delays on payment (15-90d)

-200
-150
-100
-50
0
50
100
150
200
250
300
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Level
3MMA
Thousands, s.a.
Gradual improvement in the labor market
Formal Job Creation (CAGED) Admission x Lay-offs
900
1.000
1.100
1.200
1.300
1.400
1.500
1.600
1.700
1.800
1.900
2.000
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Thousands
Lay-offs
Admission
Source: MTE
49

Unemployment falling due to an increase in informal sector job creation
Source: IBGE
32000
33000
34000
35000
36000
37000
38000
52000
53000
54000
55000
56000
57000
58000
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Employment – formal jobs (d)
Employment excluding formal
jobs
Thousands, sa12,6
6
7
8
9
10
11
12
13
14
Unemployment rate
Seasonally adjusted (%)
Employment
50

Withdrawals from "inactive accounts" (FGTS) provided a temporary boost
Source: IBGE
-30%
-20%
-10%
0%
10%
20%
30%
55
60
65
70
75
80
85
90
95
100
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Forecast sales: durable goods
Retail sales (furniture and house appliances - rhs)
51

Source: IBGE, Itaú
2018: recovery led by lower rates and balance sheet relief
Real Interest rates (Ex ante)
0%
2%
4%
6%
8%
10%
12%
0
50
100
150
200
250
300
350
400
450
500
Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
Actual
Forecast
Companies leverage ratio
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
Actual
Forecast
CDS
52

Annual frequency models support growth around 3.0% next year
Coefficient
Independentvariables
GDP agric 0.05
Carry-over 0.8
Inventories 0.5
Real rates -0.6
Leverage -1.4
CDS -1.2
GDP: annual model
Actual
Model (+/- 1s.d.)
-6,0%
-4,0%
-2,0%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
53

2017 2018
Itaú Scenario Target Itaú Scenario Target
% GDP -2.4% -2.4% -2.1% -2.2%
BRL bn -159 -159 -152 -159
Source: Finance Ministry
Recurring result: -219 (gap to target: 60 bn)
Covered with extraordinary revenues (36 bn) and
with spending cuts (28 bn)
Positive surprises from recent auctions may be used to offset
some frustrations (Refis, spending cuts)
Recurring result: -172 (gap to target: 13 bn)
Covered with extraordinary revenues
Risk: weaker activity (2.4% GDP growth would
increase the gap to target by 9bn)
How to meet the fiscal targets?
55

Reforms are needed to meet the spending cap
Deterioration: no pension reform and no other reforms, only spending cap triggers
(abono, unemployment benefits, tax break reversal)
1200
1300
1400
1500
1600
1700
1800
1900
2000
2100
2017 2018 2019 2020 2021 2022 2023 2024 2025
Scenarios and compliance with the spending ceiling
Reforms move forward Muddle Through (baseline) Deterioration Ceiling
BRL bn
(14 bn)
(83 bn)
(210 bn)
Additional adjustment needed
56
Muddle through: watered down pension reform (2019), weaker reforms
(discretionary flat in real terms, no other reforms)

What is the impact of the reforms on fiscal results? (Ceteris paribus)
 Reforms are crucial for a sustainable public debt dynamics: under the same assumptions for GDP growth
and real rates, gross public debt would be 9pp of GDP lower by 2025
83%
86%
92%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Gross debt
Reforms move forward Baseline Deterioration
% GDP
1,8%
0,8%
-0,3%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Fiscal result
Reforms move forward Baseline Deterioration
% GDP
57

The impact of GDP and real rates on gross public debt dynamics
Real interest rates
4.0% 5.0% 6.0%
GDP
1.5% 96% 102% 108%
2.0% 90% 96% 101%
2.5% 84% 89% 95%
Real interest rates
4.0% 5.0% 6.0%
GDP
1.5% 87% 93% 99%
2.0% 81% 87% 92%
2.5% 75% 81% 86%
Gross debt in 2025: reforms approved Gross debt in 2025: deterioration (no reforms)
58

How to meet spending cap restraints?
Measures to meet spending ceiling Measure type Contr.
GDP
pp
(I) Federal Gov. Expenditure in 2025 w/o ceiling - 21.1%
(II) Federal Gov. Expenditure in 2025 under spending ceiling - 16.2%
(I) - (II) = Necessary adjustment
100.0% 4.9%
Pension reform - Rapporteur version in 2017 or set-offs in 2019
(impact on expenditure)
PEC 22.4% 1.1%
Minimum wage (flat in real terms)
Decree + Ceiling
trigger
20.4% 1.0%
Personnel (flat in nominal terms e 50% rep. From 2020 onwards) Ceiling trigger 18.4% 0.9%
Discretionary (2 pp real cut per year from 2020 onwards) Admin 18.4% 0.9%
End of wage allowance (abono salarial) PEC 6.1% 0.3%
Tax break reversal Law 6.1% 0.3%
Unemployment benefits reform Law 4.1% 0.2%
Non-extension of PSI (import replacement program) subsidies Admin. 4.1% 0.2%
59

*
*There’s extra 0.3% of GDP in fiscal adjustment from the revenue side
(Increase in retirement age to boost contributions to the system)
What do we expect?
60

There are, however, some buffers
0
50
100
150
200
250
300
350
400
0%
5%
10%
15%
20%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
International reserves
%GDP
USD bn
100
200
300
400
500
600
700
800
900
1.000
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Oct-09
Jul-10
Apr-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15
Jul-16
Apr-17
Treasury balance of BCB (BRL bn)

Treasury balance at BCB could be used against eventual market turmoil
 Government can use about 65% of its cash (or 13% of GDP) out of a total of 18% of GDP. Remaining
resources are tied to the payment of accrued liabilities, funds and constitutional programs, among others.
 Amount would be enough to roll over debt for about 9 months (or 75% of nominal deficit and debt
maturing in 12 months).
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
1
2
3
4
5
6
7
8
9
10
2011 2012 2013 2014 2015 2016
Debt coverage
(resources from treasury balance of BCB)
Debt coverage (in months) % coverage
Credit
operations;
11%
Social
security and
transfers 0%
Accrued
liabilities; 3%
Donations
and others;
4%
Non-
earmarked; 1%
Treasury Balance of BCB breakdown
(% GDP)

Brazil: electoral timeline
April 2
• Deadline for party
enrollment.
April 7
• Deadline for those
holding executive
positions, not running
for re-election, to
resign in order to run
for office.
From July 20 to August 5
• Political conventions
to determine party
candidates and
alliances.
August 15
• Deadline for the party
and affiliates to
register candidates.
August 16
• Campaign begins.
August 26
• TV & radio campaign
begins.
April July/August September
September 29
• TV & radio campaign
ends.
October
October 7
• First Round of the
Elections
October 28
• Second Round of the
Elections
2018
2017
October 6
• Deadline for changes in electoral Law to be valid in 2018
64

Brazil: main (possible) candidates
• Luiz Inácio Lula da Silva (Lula) – Worker’s Party (PT)
• Fernando Haddad – Worker’s Party (PT)
• Geraldo Alckmin – Brazilian Social Democratic Party (PSDB)
• João Doria – Brazilian Social Democratic Party (PSDB)
• Jair Bolsonaro – National Ecological Party (PEN)
• Ciro Gomes – Democratic Labor Party (PDT)
• Marina Silva – Sustainability Network
65

Source: Datafolha
Lula ahead in the first-round voting intention polls
66
10
8
30
36
14
15
16
6
0
5
10
15
20
25
30
35
40
27/abr/17 23/jun/17 28/set/17
João Doria Lula Marina Silva
Jair Bolsonaro Ciro Gomes
8 8
30
35
15
13
16 17
5
4
0
5
10
15
20
25
30
35
40
17/dez/15
25/fev/16
18/mar/16
08/abr/16
15/jul/16
08/dez/16
27/abr/17
23/jun/17
28/set/17
Geraldo Alckmin Lula
Marina Silva Jair Bolsonaro
Ciro Gomes
1st round - Scenario with Lula and Doria 1st round - Scenario with Lula and Alckmin

Source: Datafolha
0
10
20
30
40
50
Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17
Lula
Marina Silva
Lula ahead in the second-round voting intention polls
0
10
20
30
40
50
Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17
Lula Geraldo Alckmin
0
10
20
30
40
50
60
Jun-17 Jul-17 Aug-17 Sep-17
Lula João Doria
0
10
20
30
40
50
Jun-17 Jul-17 Aug-17 Sep-17
Lula Jair Bolsonaro

Source: Datafolha, 2,772 interviewees, September 27-28, 2% margin of error
Without Lula (1st round): wide open?
Scenario 1
Without Lula, without Doria, with Alckmin
Scenario2
Without Lula, with Doria, without Alckmin
Scenario3
Without Lula, with Doria, with Alckmin
20%
17%
9%
7%
9%
2%
2%
24%
3%
Marina Silva
Jair Bolsonaro
Geraldo Alckmin
João Doria
Ciro Gomes
Haddad
Henrique Meirelles
Blank/Null
Undecided

Source: Datafolha
Without Lula: second-round voting intention polls
29
47
20
25
30
35
40
45
50
55
23-Jun-17 28-Sep-17
2nd round - Marina and Bolsonaro
Jair Bolsonaro Marina Silva
20
25
30
35
40
28-Sep-17
2nd round - Ciro Gomes and Alckmin
Ciro Gomes Geraldo Alckmin
10
20
30
40
50
28-Sep-17
2nd round - Haddad and Alckmin
Fernando Haddad Geraldo Alckmin

Source: Datafolha, 2,771 interviewees, September 27-28, 2% margin of error
Brazil: Rejection rates – high for Lula and Alckmin, lower for Dória
70
42%
33%
31%
29%
27%
26%
25%
25%
2%
3%
Lula
Jair Bolsonaro
Geraldo Alckmin
Fernando Haddad
Ciro Gomes
Marina Silva
João Doria
Henrique Meirelles
Vote for any/no rejection
Wouldn't vote in any

Rejection rates – high for Lula and Alckmin, lower for Dória
Datafolha, 2,771 interviewees, June 21-23, 2% margin of error
71
Lula 1994
FHC 1994
Lula 1998
FHC 1998
Lula 2002
Serra 2002
Lula 2006
Alckmin 2006
Dilma 2010
Serra 2010
Dilma 2014
Aécio 2014
Lula 2017
Alckmin 2017
Doria 2017
Bolsonaro 2017
10%
20%
30%
40%
50%
60%
70%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Votes x Rejection in Elections
Rejection
Votes

Left-wing candidates are already well known and sum 50% of the votes….
72
Source: Datafolha, Ibope e Sensus
52
25
16
0
10
20
30
40
50
60
17/dez/15
22/fev/16
21/fev/16
25/fev/16
25/abr/16
18/mar/16
08/abr/16
05/jun/16
15/jul/16
16/out/16
08/dez/16
11-fev-2017
27/abr/17
27/abr/17
23/jun/17
19/set/17
28/set/17
First round : left vs right- wing
Lula + Marina + Ciro Alckmin + Bolsonaro White/Blanks/Others

….a share that would likely decline if Lula is not a candidate
73
Left 52 34 32 31
Lula 35 0 0 0
Ciro 4 9 10 9
Marina 13 22 22 20
Haddad 0 3 0 2
Right 25 28 29 33
Alckmin 8 9 10 9
Bolsonaro 17 19 19 17
Dória 0 0 0 7
Others /B/N 23 38 39 36
With Lula
Datafolha Sept/17
Poll scenarios
Without Lula Without Lula Without Lula

Lula 27%
José Sarney 13%
Paulo Maluf 12%
FHC 7%
ACM 4%
Blank/Null 18%
Doesn't know 6%
1994
Serra 36%
Dilma Roussef 14%
Ciro Gomes 14%
Heloísa Helena 12%
Marina Silva 3%
Blank/Null 11%
Doesn't know 7%
2010
Source: MCM and Datafolha
Silvio Santos 17%
Leonel Brizola 17%
Mario Covas 16%
Janio Quadros 8%
Lula 8%
None/Doesn't know 24%
1989
FHC 37%
Lula 22%
Paulo Maluf 13%
José Sarney 11%
Ciro Gomes 8%
Blank/Null 10%
Doesn't know 3%
1998
Lula 36%
Alckmin 16%
Garotinho 12%
Heloísa Helena 6%
Cesar Maia 5%
Blank/Null 16%
Doesn't know 8%
2006
Dilma Roussef 36%
Marina Silva 14%
Aécio Neves 14%
Eduardo Campos 12%
Blank/Null 11%
Doesn't know 7%
2014
Elected Candidate
Ruling Coalition’s Candidate
Election outcome vs polls one year earlier
Despite the small sample, polls one year ahead do seem a good leading indicator
(specially for ruling party candidates)
Lula 35%
Ciro Gomes 15%
Itamar Franco 12%
Garotinho 11%
Serra 8%
Eneias 2%
Blank/Null 12%
Doesn't know 5%
2002
74

Brazil: PT weakened in 2016 municipal elections
2012 2016
PMDB 1% 1 1
PSDB 15% 2 2
PSD 9% 4 3
PP 4% 5 4
PSB -5% 6 5
PDT 10% 7 6
PR 8% 10 7
DEM -4% 9 8
PTB -13% 8 9
PT -60% 3 10
Others 30% - -
Parties ranking (# of
elected mayors)
Elected mayors
change (2012 - 2016)
Parties
Municipal elections
January - February 2018
• Fastest trial period by the
current composition of the
TRF-4´s
2018
Lula´s Legal Scenario
July - August 2018
• Average time it takes for an appeal
ruling at the TRF-4
April - May 2019
• Slowest trial period by the
current composition of
the TRF-4´s Eight Group.
August 16 , 2018
• Campaign Period
Begins
October 7, 2018
• First Round of the elections.
October 28, 2018
• Second Round of the elections 2019
75

Brazil: What are Lula’s chances for 2018? The political consultants’ opinion
Consultant Chance of Lula running
If candidate, chance of
winning
Arko 55% 40%
Luciano Dias 30% 5%
MCM 30% 50%
Eurasia 35% 20%
Average 38% 29%

SP
RJ
MG
BA
GO
MS
MT
AM
PA
AC
RR
AP
RO
PR
SC
RS
MA
PI
CE
ES
TO
RN
PB
PE
AL
SE
DF
North:
11.4 mn
7.8%
Northeast:
39.4 mn
27%
Southeast:
63.2 mn
43.3%
South:
21.3 mn
14.6%
Mid-west:
10.6 mn
7.3%
Total Brazil:
146.2 mn
Electoral geography

Electoral geography: Southeast vs. Northeast
SP
RJ
MG
BA
GO
MS
MT
AM
PA
AC
RR
AP
RO
PR
SC
RS
MA
PI
CE
ES
TO
RN
PB
PE
AL
SE
DF
PE, CE, BA:
19.8 mn
16%
SP:
32.6 mn
22.3%
Great SP:
11 milhões
7.5%
Elected BA, CE, PE SP
Collor. 2R-89 53% 58%
FHC. 1R-94 56% 56%
FHC. 1R-98 46% 60%
Lula. 2R-02 65% 55%
Lula. 2R-06 79% 48%
Dilma. 2R-10 75% 46%
Dilma. 2R-14 72% 36%
1st Round/2nd Round

Electoral outcome in NE region: does the ruling party benefit from controlling public institutions?
58%
48%
38%
77%
71%
65%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1994 1998 2002 2006 2010 2014
% of votes for the ruling party
Share of votes for the ruling party – NE region

Brazil: forecasts
2014 2015 2016 2017 2018
Economic Activity
GDP (%) 0.5 -3.8 -3.6 0.8 3.0
Unemployment (%) –
December (PNAD cont.) 7.1 9.6 12.6 12.6 12.0
Inflation
CPI (%) 6.4 10.7 6.3 3.0 3.8
Monetary Policy
Selic Rate (%) 11.75 14.25 13.75 7.00 6.50
Fiscal
Primary Surplus (% GDP) -0.6 -1.9 -2.5 -2.4 -2.1
Balance of Payments
Exchange Rate (eop) 2.66 3.96 3.26 3.25 3.50
Current Account (% GDP) -4.2 -3.3 -1.3 -0.7 -1.6
80

External buffers
82
115% 135% 153%
324%
448%
648%
774%
Turkey
SouthAfrica
Indonesia
Colombia
India
Brazil
Russia
Reserves/Short term external debt
Source: IIF,Haver, Itaú
25%
31% 32% 34%
50%
61%
117%
SouthAfrica
Indonesia
Turkey
Colombia
Brazil
Russia
India
Reserves/M2
Source: Haver, Itaú

External buffers
83
-7%
-5%
-3%
-1%
1%
3%
5%
2008 2009 2010 2011 2012 2013 2014 2015 2016
Direct investment covers multiple
times the current account deficit
Source: BCB, Itaú
Current account balance
Direct investment in the country (equity
participation)
Difference
% GDP

-7
-5
-3
-1
1
3
5
7
Thailand
SouthKorea
CzechRepublic
China
Malaysia
Hungary
Philippines
Russia
Mexico
Poland
India
Peru
Brazil
SouthAfrica
Chile
Indonesia
Argentina
Turkey
Colombia
External Vulnerability in 2016
Source: Haver, IMF, Itaú
+: more vulnerable in 2016 than historical average
-: less vulnerable in 2016 than historical average
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
05 06 07 08 09 10 11 12 13 14 15 16
Brazil: less vulnerable
Source: Haver, IMF, Itaú
Current account
Reserves
External debt/ Exports
Total
+ (-): more (less) vulnerable than the historical series of the
countries included in the sample
External buffers

Perspectivas Económicas para 2018

Recommended

Recommended

More Related Content

Similar to Perspectivas Económicas para 2018

Similar to Perspectivas Económicas para 2018 (20)

More from Cámara de Comercio Paraguay Brasil

More from Cámara de Comercio Paraguay Brasil (20)

Recently uploaded

Recently uploaded (20)

Perspectivas Económicas para 2018