LatAm Macro Monthly...LatAm Macro Monthly – November 2012 On hold for longer European politicians are back to their usual sluggish reaction mode. Without market pressure, Spain prefers

LatAm Macro Monthly Scenario Review

November 2012

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

European Policy Sluggishness, U.S. in Fiscal-Cliff Risk Mode 3 European policy is back to its usual reaction mode. Without market pressure, Spain will keep postponing an aid request. In the U.S., the fiscal cliff is bound to persist into 2013. Meanwhile, global activity stabilized, but the recovery in Europe will be weaker

Brazil

Slower Growth and Lower Interest Rates 7 A slower rebound in investment worsens the GDP growth outlook and Selic rate will likely remain low for a longer period

Argentina

Do you Accept my Pesos? 11 The province of Chaco paid the service of domestic dollar-denominated bonds in pesos after the central bank refused to sell it dollars. A U.S. court decision raised further uncertainty on sovereign-debt payments. The economy rebounded during the third quarter

Mexico

Labor Reform Back to Lower House 14 In spite of weaker activity, the odds of a rate hike increased. The labor reform bill took one step back, while the government pledges to submit to congress legislation that could ease foreign investment caps in some key sectors

Chile

Doubtful Slowdown 16 Chile's economy cooled down, but consumption continues growing very fast. Inflation was higher than expected in September, while core inflation continues running at the lower bound of the target range

Peru

Managing the Flows 18 Boosted by domestic demand, economic growth is on the rise. But the speed of credit expansion and capital inflows is worrying authorities

Colombia

Keep Moving 20 While the peace negotiations had a slow start, the country keeps moving forward with a new tax reform proposal

Commodities

General Decline 22 Fading global optimism and higher supply led to falling commodity prices

Macro Research at Itaú

Ilan Goldfajn – Chief Economist

Adriano Lopes Artur Passos Aurelio Bicalho Caio Megale Carlos Eduardo Lopes

Elson Teles

Felipe Salles Fernando Barbosa Gabriela Fernandes Giovanna Siniscalchi Guilherme da Nóbrega Guilherme Martins

João Pedro Bumachar Juan Carlos Barboza Luiz G. Cherman Luka Barbosa Mariano Ortiz Villafañe Mauricio Oreng Roberto Prado

Tel: +5511 3708-2696 – E-mail: [email protected]

Click here to visit our digital research library.

mailto:[email protected]

http://www.itau.com.br/itaubba-en/economic-analysis/publications/

Page 2

LatAm Macro Monthly – November 2012

On hold for longer

European politicians are back to their usual sluggish reaction mode. Without market pressure, Spain

prefers to wait, and European leaders make very little progress towards more integration. The

ongoing uncertainty stymies a more robust recovery in the region.

In the U.S., President Obama has been reelected just after Sandy battered the East Coast. The

aftermath of the storm will affect activity. The fiscal cliff risk will also be with us for longer. We

continue to expect that, ultimately, only one-third of the measures will expire. Yet the uncertainty is

likely to persist into 2013, with an agreement coming only by the end of the first quarter.

In Asia, the stabilization of activity in China is becoming clearer, while Japan keeps decelerating.

Most commodity prices fell in October as optimism about the impact of higher monetary stimulus in

the G3 lost strength. The steepest decline came from the metal complex. Energy prices also fell due

to both higher supply and lower demand growth prospects. Grain prices continued to fall, with markets

pricing in the better-than-expected supply number in the U.S.

How will Latin American central banks respond to this scenario abroad? In our view, most will decide

to postpone interest rate hikes further. We now expect the central banks of Brazil, Chile and Colombia

to stay on hold for longer, including 2013. That was already our forecast for Peru. The only inflation-

targeting country of the region where we still see rate hikes in 2013 is Mexico. In Argentina, various

policies are unilaterally leading to higher interest rates.

In Brazil, growth looks weaker than we expected for this fourth quarter and points to a slower pace

next year. In particular, companies are still cautious, putting off their investment plans. Firms remain

worried about the international scenario and the consistency of the domestic rebound.

The slower recovery coupled with tamed inflation, opens room for extending many of the economic

stimuli into 2013. That applies not only to the interest rate, but also to the exchange rate, which we

now expect to remain at current levels into next year.

Hope you enjoy,

Ilan Goldfajn and Macro Team

Current Previous Current Previous Current Previous Current Previous

GDP - % 2.9 3.0 3.0 3.2 GDP - % 2.8 2.8 3.7 3.9


GDP - % 1.5 1.7 4.0 4.5 GDP - % 3.8 3.8 3.3 3.3

BRL / USD eop 2.02 2.00 2.02 1.90 MXN / USD eop 13.0 13.0 12.5 12.5

Monetary Policy Rate - eop - % 7.25 7.25 7.25 8.50 Monetary Policy Rate - eop - % 4.50 4.50 5.50 5.50

IPCA - % 5.5 5.5 5.3 5.3 CPI - % 4.2 4.2 3.8 3.8


GDP - % 0.5 0.0 2.5 2.5 GDP - % 5.2 5.2 4.7 4.7

ARS / USD eop 5.0 5.0 5.8 5.8 CLP / USD eop 470 470 460 460

BADLAR - eop - % 18.0 18.0 24.0 24.0 Monetary Policy Rate - eop - % 5.00 5.00 5.00 5.50

CPI - % (Private Estimates) 25.0 26.0 28.0 28.0 CPI - % 2.1 2.1 3.0 3.0


GDP - % 4.4 4.4 4.5 4.5 GDP - % 6.1 6.1 6.0 6.0

COP / USD eop 1800 1800 1800 1800 PEN / USD eop 2.60 2.60 2.60 2.60

Monetary Policy Rate - eop - % 4.75 4.75 4.75 5.25 Monetary Policy Rate - eop - % 4.25 4.25 4.25 4.25

CPI - % 3.2 3.2 3.3 3.3 CPI - % 3.2 3.8 3.0 3.0

Scenario Review

Brazil Mexico

2012 2013 2012 2013

World Latin America and Caribbean

2012 2013 2012 2013

Argentina Chile

2012 2013 2012 2013

Colombia Peru

2012 2013 2012 2013

Page 3


Global economy European Policy Sluggishness, U.S. in Fiscal-Cliff Risk Mode European policy is back to its usual reaction mode. Without market pressure, Spain will keep postponing an aid request. In the U.S., the fiscal cliff is bound to persist into 2013. Meanwhile, global activity stabilized, but the recovery in Europe will be weaker

European politicians are back to their usual sluggish reaction mode – the prominent feature of this

debt crisis. Without market pressure, Spain prefers to wait and European leaders make very little

progress towards more financial and fiscal integration.

It seems that Spain will ask for assistance from the ESM crisis fund only if it faces some degree of

price pressure. Without ESM aid, the European Central Bank (ECB) won’t start buying Spanish bonds

(through the so-called Outright Monetary Transactions – OMT). The delay is likely to push sovereign

yields up, but it is unlikely to trigger the generalized financial stress of the past, because the OMT-

ESM crisis-fighting framework provides a potent backstop. In any case, without actually triggering the

ECB’s OMT, Spain’s yields will remain, in our view, higher than they would otherwise.

In addition, the persistent uncertainty and reform-delays postpone a more robust recovery in the euro

area. The region already faces strong and prolonged headwinds from the significant fiscal and

financial deleveraging in the periphery. Persistent political uncertainty only adds to the challenges. We

lowered our euro-area GDP-growth forecast to 0% from 0.4% in 2013.

In the U.S., President Obama was reelected, while Sandy battered the east coast. The aftermath of

the storm will affect activity. As a result, we revised GDP to 2.1% from 2.2% in 2012. However we

maintained GDP at 1.8% in 2013 because the rebuilding efforts should compensate initial losses.

The fiscal cliff risk will also be with us longer. We continue to expect that, ultimately, only one-third of

the measures will expire, with an impact equivalent to 1.2% of GDP. However the uncertainty is likely

to persist into 2013, with an agreement coming only by the end of the first quarter.

In Asia, the activity-stabilization picture in China is becoming clearer, while Japan keeps decelerating.

We revised output growth in Japan down to 2.0% from 2.4% in 2012 and to 0.7% from 0.9% in 2013.

But, more importantly, recent data confirm the stabilization trend in China, albeit at a lower growth

level. We maintain our view that the Chinese economy will expand 7.7% in 2013, slightly above our

7.6% forecast for 2012.

Europe

European politicians didn’t build upon the momentum created by the ECB. This is not a surprise and

we have been here before. A generalized financial stress is unlikely to follow the politicians’

sluggishness. The possibility of a joint ECB-ESM intervention created a capable crisis-fighting

mechanism. But Spain's reluctance to ask for aid and the difficulty in advancing with integration in the

region remain as headwinds to the economic outlook.

On the integration front, leaders made little progress at the most recent European Union summit.

They agreed to conclude the legislative framework for the Single Supervisory Mechanism (SSM) by

January 2013. Operational implementation will then follow throughout that year. Although this implies

that the SSM should be up and running by the beginning of 2014, no explicit commitment to a specific

date has been made.

In some aspects, we have seen a setback in the past months. Back in June, EU leaders agreed to

allow the ESM to directly inject capital into problematic banks once a SSM was in place. This created

the hope that the ESM would eventually relieve Spain and Ireland of the burden of bailing out their

banks. That is less likely now, as Germany and others oppose applying the new rules to “legacy

assets.” In the end, it could be that ESM will only recapitalize banks that start to experience problems

while being already under the supervision of the SSM.

Page 4


In Greece, the situation remains delicate. Official creditors accept that the country needs more time to

adjust. However, Greek debt has clearly become unsustainable again. The IMF recognizes this and is

pushing the euro-area government to accept some form of debt haircuts. But European officials

oppose it as politically unacceptable, at least for now.

In Spain, we now believe the government

will likely continue to delay an aid request

until it faces more immediate market

pressure. The treasury was able to issue

close to €10 billion ($12.9 billion) per

month of bonds at an average yield below

4.5% in September and October (see

graph). This monthly pace – if sustainable

– would allow the country to fund itself in

2013 (Spain will need to issue between

€100 billion and €120 billion of bonds next

year). The average cost of 4.5% is only

marginally higher than our estimation of

the current implicit cost of debt of 4% (this

also includes bills, which usually have

lower yields.) The average duration of the recent bond sales remains low (4.4 years, versus the

outstanding portfolio’s 7 years), closer to the range where the ECB would act.

While the conditions described above persist, the Spanish government will feel less pressure to ask

for a rescue. But we don’t believe that the benign environment would last if investors perceive the

ECB is not coming. Timing the tipping point in investors’ patience remains tricky though; the current

waiting game could last at most a few more months.

Meanwhile, we lowered our GDP forecast for the euro area to 0% from 0.4% in 2013. Interest rates to

final private borrowers in the periphery are declining more slowly than we anticipated. Consumer and

business confidence across the region is also failing to improve. Even if we expect the fiscal effort in

the euro area as whole to decline to 0.7% of GDP in 2013 from 1.2% in 2012, the adjustment remains

significant. And uncertainty about the size of fiscal multipliers warrants a more cautious approach.

Taken together, these factors led us to see the economy stagnating next year.

We continue to foresee a 0.4% decline in GDP this year. Some one-off factors appeared to have

pushed activity up in 3Q12. GDP could now be unchanged in that quarter (we previously expected a

0.2 decline). Since we expect a payback of most these gains, we have lowered our forecast for the

fourth quarter and maintained the forecast for the year.

Finally, we are changing our call for the ECB from hold to additional monetary easing. This is likely to

come in the form of a 0.25% cut in interest rates and occur in December of 2012. The ECB expects

GDP next year to expand 0.5%. As the economy converges to our new scenario, we think the ECB

will be encouraged into action. The central bank could cut the deposit and main rates, but since some

board members appear reluctant to take the former to negative territory, the ECB could explore some

form of quantitative easing focused on private-sector assets.

U.S.

President Obama was reelected. The Democratic Party retained the majority in the Senate and the

Republicans in the House of Representatives. The elections results have important immediate

implications for the discussions relating the fiscal cliff.

Before Sandy, activity data was broadly consistent with our scenario. Output increased at a 2.0%

annualized seasonally adjusted rate (SAAR) in the third quarter, slightly above our expectations, but

growth was revised down to 1.3%, from 1.7% in second quarter.

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

0

2

4

6

8

10

12

14

16

18

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Source: Bloomberg

1-3 Years (lhs)

3-5 Years (lhs)

Over 5 Years (lhs)

Average duration of bonds issued (lhs)Average Yield (rhs)

Spanish Access to Bond Markets Improves

Spanish bond auctions - volumes, maturity and yields

Euro billion, years

5.2

3.6

5.4

3.84.2

4.55.3

4.4 4.4

% yield

3.9

Page 5


The storm disrupted energy supply in New Jersey and New York states (together these states

account for 11% of U.S. GDP). It should trim real GDP annualized growth by 0.8pp in the 4Q12 (we

now expect only a 0.8% SAAR over the previous quarter). Therefore we reduced our growth estimate

to 2.1% from 2.2% in 2012. The negative wealth effect from capital stock losses (currently estimated

at US$ 30 billion) should also have a negative impact to consumption and investment. However, we

maintained our growth forecast at 1.8% in 2013, as the rebuilding efforts is expected to boost output

in the 1H13 and to compensate for the initial losses.

Downside risks associated with the fiscal cliff are increasing. Ultimately, we foresee that two-thirds of

the fiscal cliff will be rolled over, reducing the fiscal consolidation from 3.7% to 1.2% of GDP in 2013.

But with President Obama reelected, and the split Congress, the negotiations will be complicated (for

details, please refer to our Macro Vision – the Fiscal Cliff: Plausible Scenarios).

And, even if our assumption of fiscal consolidation is correct, the fiscal multiplier could be much

higher than we currently assume. Recent studies (see the paper co-authored by IMF chief economist

Olivier Blanchard in the last World Economic Outlook) indicate that the fiscal multiplier has been in the

range of 0.9-1.7 for developed economies since the financial crisis. Everything else constant, if we

use the multiplier of 1, the fiscal drag would reduce GDP growth next year to 1.4% from 1.8% in our

baseline scenario.

Moreover, we now believe that the fiscal-cliff impasse will extend into 2013. Politicians have little

incentive to come to a compromise in the divided congress during the lame-duck session until the end

of the year. Most likely they will be pressed to reach an agreement by March, when they will once

again need to deal with the debt ceiling.

Fiscal-policy uncertainty might already be affecting

investment decisions. Non-residential investment

dropped 1.3% (SAAR) in 3Q12. Investment should

resume growth in the next quarters as the uncertainty

diminishes, financial conditions remain accommodative

and consumption continues to grow. However, we

cannot rule out that it will drop further if the current

fiscal clouds persist. A further drop in investment should

also have an impact on payrolls (see chart).

Consumption indicators (labor market, consumer

confidence and credit availability) remained positive

through October. But a renewed weakness in

employment and prolonged period of uncertainty could

also spill over to consumers’ spending decisions.

China

Recent data suggest, in a more consistent way, that the

economy is stabilizing at lower growth rates. The GDP

was up 7.4% in 3Q12 over the same period last year.

The pace was in line with our expectations and only

slightly lower than the 7.6% observed in 2Q12.

Additionally, activity indicators improved in September.

Fixed-asset investments were up 22.2% yoy,

rebounding from the 19.0% in August. The breakdown

shows that infrastructure growth jumped to 22.9% yoy

from 14.7%, although investment in manufacturing and

real estate remains weak. Industrial production and

retail sales expansion also picked up to 9.2% and

85

90

95

100

105

110

115

120

6%

7%

8%

9%

10%

11%

12%

13%

Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12

million

Source: Haver, Itaú

Non-residential investmentPrivate payrolls (right)

% of GDP

Will Employment Follow the Recent Decline in Non-Residential Investment?

Private payrolls vs non-residential investment

0%

5%

10%

15%

20%

25%

Jan-06 Jul-07 Jan-09 Jul-10 Jan-12

Source: National Bureau of Statistics, Itaú

Industrial Production Growth Stabilizes

yoy

Page 6


14.2% yoy, from 8.9% and 13.2%, respectively.

Government officials continue to signal only limited stimulus measures. The focus of these measures

remains on the fiscal side, such as moving up already planned investments. We don’t anticipate any

major policy changes with the political power transition, which will happen in mid-November. Without

significant new stimulus ahead, we maintain our GDP growth forecast of 7.6% in 2012 and 7.7% in

2013.

Japan

According to our estimates, the Japanese economy could have contracted 0.5% in the third quarter

(previously we expected stagnation), after expanding at an average quarterly pace of 0.74% in the

first half of the year. Weak net exports and consumer expenditure were the main culprits. Real

exports of goods dropped 6.0% in the quarter, impacted by the weak global economy, while imports

expanded slightly. Meanwhile, the end of subsidies for automobiles purchases caused retail sales to

fall 2.3% in the period. On the positive side, government spending and residential investment

expanded, both still helped by post-earthquake reconstruction demand. However these were probably

not enough to prevent a decline in GDP in 3Q12.

The Bank of Japan (BoJ) is reacting to the economic slowdown, and the prospect of undershooting its

inflation target, with an additional monetary easing for the second month in a row. After a ¥10 trillion

($125 billion) increase in the asset-purchase program in September, the BoJ announced another

¥10.9 in October, taking the total to around ¥91 trillion by December 2013. Most (¥10 trillion) will be

equally split between purchases of Treasury bills and Japanese government bonds (JGB), increasing

the planned monthly average of JGB purchases next year to ¥1.25 trillion from ¥0.8 trillion. The

remaining amount will be directed to private-sector assets.

BoJ also announced a new lending facility (known as the "Stimulating Bank Lending Facility"), in

which the central bank will provide unlimited long-term funds, up to an amount equivalent to the net

increase in lending, at a low interest rate to financial institutions. However, its total impact is still

uncertain, as it relies on the future demand for lending, and this, in turn, depends on the strength of

the demand in the real economy.

Despite the BoJ efforts, we think that these additional stimuli will have limited impact on the economic

activity. Thus, we revised our GDP growth forecast down to 2.0% from 2.4% in 2012, reflecting the

current weaker-than-expected indicators, and to 0.7% from 0.9% in 2013, due to carry-over effects.

Commodities

Most commodity prices fell in October, as the optimism from the major central banks’ stimuli faded.

Metals suffered the strongest correction, with prices dipping 8% in the month, significantly denting the

10.6% gain seen in September. Energy prices also fell by 4%, with news coming on both higher

supply and lower demand. Finally, better-than-expected supply numbers in the U.S. continued to push

down grain prices in the month.

Page 7


Forecasts: World Economy

GDP Growth

World GDP growth - % 5.4 2.8 -0.6 5.3 3.9 2.9 3.0

USA - % 1.9 -0.3 -3.1 2.4 1.8 2.1 1.8

Euro Area - % 3.0 0.3 -4.3 1.9 1.5 -0.4 0.0

Japan - % 2.2 -1.1 -5.5 4.5 -0.7 2.0 0.7

China - % 14.2 9.6 9.1 10.4 9.2 7.6 7.7

Interest rates and currencies

Fed Funds - % 4.2 0.2 0.1 0.2 0.1 0.2 0.2

USD/EUR - eop 1.46 1.35 1.46 1.32 1.30 1.25 1.20

YEN/USD - eop 112.5 91.3 90.0 83.3 77.8 80.0 80.0

DXY Index* - eop 76.8 83.1 76.8 80.0 79.6 81.9 83.9

2012F 2013F2007 2008 2009 2010 2011

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.

Brazil

Slower Growth and Lower Interest Rates

A slower rebound in investment worsens the GDP growth outlook and Selic rate will likely remain low for a longer period

We reduced our 2012 GDP growth forecast to 1.5%, from 1.7%. Our estimate for 2013 fell to 4.0%

from 4.5%, given signs of a slow rebound in investments. In a more moderate growth scenario, we

expect the Selic interest rate to end 2013 at 7.25% (from 8.50% previously). We raised our exchange-

rate forecast for the end of 2013 to 2.02 reais per U.S. dollar (from 1.90 R$/US$). We also revised our

call for the trade surplus in 2012, to US$20.5 billion from US$18 billion, and increased our estimate

for 2013 to US$18 billion from US$13 billion. On the fiscal side, the recent results brought negative

surprises. We expect the primary budget surplus to be lower this year. We revised our estimate for

2012 to 2.4% of GDP, from 2.6%, and maintained 2.2% of GDP for next year. Our estimates for the

consumer price index (IPCA) are 5.5% in 2012 and 5.3% in 2013.

Slower Rebound in Activity, Despite Stimuli

Although the economy is expanding as expected, the

pace ahead may be slower than previously

envisaged. Consumer spending is stronger, while

exports and investments are weaker. We expected

lower growth contribution from the auto sector in

4Q12, but believed that this scenario might be offset

by an increase in investments, pushing GDP growth

to 1.3% in the final quarter of the year. We now

believe that it will not be the case.

After avoiding economic stagnation in 2Q12 and

boosting GDP in 3Q12, the auto sector has lost

momentum. Recent data confirm a cool-down in auto

sales and production. Furthermore, industrial

production was weaker in September, deepening the

downward revision of our Itaú Unibanco monthly GDP growth, to -0.3% from -0.1%, for the month. In

order to grow at the previously expected pace in 4Q12, GDP would need to advance at higher

monthly rates. But the latest data has proved to be worse, and 4Q12 growth is expected to be lower.

The reaction of investments to stimuli may be slower than usual due to both the uncertainties in the

international scenario and doubts regarding the consistency of the domestic rebound. Real interest

rates dropped and business confidence is on the rise, but machinery and equipment purchases show

80

100

120

140

160

180

-25

-15

-5

5

15

25

35

2000.IV 2002.IV 2004.IV 2006.IV 2008.IV 2010.IV 2012.IV

Source: IBGE, FGV, Itaú

Fixed Investment

Expec. on business situation for the next 6 months (rhs)

%, yoy index

Business Confidence Rises but Investment Doesn't React

Page 8


no strength. Public investments are also below expectation. Without a pickup in investments, growth

in 4Q12 is likely to be lower, but still enough to confirm the Brazilian economic recovery. Our 4Q12

GDP growth forecast was revised to 1.0% qoq/sa, from 1.3%. For 3Q12, our call stands at 1.2%

qoq/sa.

Lower growth in the final quarter of the year tends to negatively affect expansion in the following year.

A lower carry-over from 2012 will contribute to a downward revision in growth forecasts for 2013. We

lowered our forecast for next year, to 4.0% from 4.5%, due to three factors: i) the carry-over effect

from our revised 2012 growth forecast, to 1.5% from 1.7%; ii) the expectation of a slower recovery of

investments; and iii) lower growth in the global economy.

Bank loans grew in September after two consecutive

months of declines. Daily average for new consumer

loans rose 0.7% (adjusted for inflation and

seasonality), following an accumulated drop of 6.2%

in the two previous months. Meanwhile, daily average

for corporate loans advanced 4.0% in September,

partially reversing the 5.9% decline registered in July

and August. A strike by bank workers prevented a

sharper recovery in consumer loans, and led to an

increase in the most expensive credit modalities -

overdraft facilities and interest-bearing credit cards -

which are more readily available.

Interest rates and spreads rose slightly for consumers

(largely due to a temporary change in the product mix)

and fell moderately for companies. Seasonally-adjusted delinquency rates for loans 15 to 90 days

past due posted a small increase, while delinquency rates for loans more than 90 days past due were

stable remaining at a high level. The performance of new credit facilities suggests a future decline in

delinquency. In terms of market share, state-owned banks continue to increase their presence.

Rising confidence indicators, a heated labor market, growing credit demand, as well as the

expectation of a decline in delinquency and a rebound in domestic activity are compatible with

moderate credit expansion in the coming months.

Growth and Inflation Should Support the Current Exchange Rate Level

Our scenario of more moderate economic activity and tamed inflation in 2013 opens room for

maintenance of many of the economic stimuli adopted in 2012, including the current exchange rate.

Although we continue to see a decoupling between the real and its peers and risk premiums, the

exchange rate seems to have a prominent role in the current policy to boost manufacturing and

exports. Considering this context and our own inflation scenario (which is unlikely to threaten the

strategy of a weaker currency in the period), we expect the exchange rate to end both 2012 and 2013

at 2.02 reais per U.S. dollar (from 2 reais by year-end 2012 and 1.90 reais by year-end 2013,

previously).

We raised our trade surplus forecasts. In October, the trade balance reached US$1.7 billion,

accumulating US$17.4 billion year to date. The main driver behind the recent acceleration in surplus

was the fact that imports remained at a lower level due to a weaker currency and lower growth

(although the declining trend has been interrupted). For this reason, we adjusted our trade surplus

estimate for 2012 to US$20.5 billion, from US$18 billion. For 2013, we incorporated the expectation of

a plentiful agricultural harvest and our new scenario, in which the real is maintained at a weaker level

and economic recovery is slower. We now forecast a trade surplus of US$18 billion next year (from

US$13 billion previously).

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-3%

-1%

1%

3%

5%

7%

9%

1997 2000 2003 2006 2009 2012

Source: IBGE, Itaú

GDP growth

Carry over (rhs)

Carry Over Suggests Higher Growth in 2013, But Less than Previously Expected

Page 9


Foreign direct investment (FDI) hit US$4.4 billion in September and, for the second consecutive

month, intercompany loans were prominent in the mix (35%, after 41% in August). While these flows

are more volatile, they add volume to the FDI, which accumulated US$47.6 billion in the first three

quarters of 2012. We therefore slightly increased our FDI forecast for 2012 to US$63 billion (from

US$61 billion). For 2013, we maintained our forecast at US$64 billion. Meanwhile, the current account

deficit has been flat, ending September at 2.2% of GDP over the last 12 months, which remains our

forecast for 2012 year-end. For 2013, we now expect a 2.3% gap (down from 2.5%), due to a revised

trade balance estimate and other effects of a weaker currency, such as lower profit and dividend

remittances.

Fiscal Results Remain on a Downtrend

The public sector’s fiscal results continued to decline throughout the year. In September, the

consolidated primary budget surplus stood at 1.6 billion reais. Year to date, the consolidated primary

result is at 2.33% of GDP (January-September 2011: 3.43%), the third worst performance in the

series since 2003. The federal government’s surplus between January and September 2012

narrowed to 1.7% of GDP, from 2.2% in the same period of 2011. The balance of regional

governments retreated to 0.6% of GDP, from 0.8% one year earlier, showing a decline in the budget

performance of areas with greater weight in the public sector.

The impact of the (adverse) economic cycle on the

budget and the choice to stimulate the economy

through tax cuts and higher spending are behind the

drop in the primary budget surplus, which reached

2.30% of GDP in the 12 months through September -

the lowest level since April 2011. Despite signs of a

rebound in some tax categories (such as sales and

personal income taxes), the trend in central

government’s revenue remains weak, down by 1.4%

from year-earlier levels in the six months through

September. On other hand, while expenditures have

apparently lost some steam in the very recent months,

the pace of expansion remains considerable. The six-

month moving average for federal spending points to

an annual real increase of 6.3%, topping our estimate for potential GDP growth (3% to 4%).

Given this scenario, and following a sequence of below-expectation monthly results, we revised our

estimate for the public sector primary budget surplus in 2012 down to 2.4% of GDP, from 2.6%. And

we still see relevant downside risks to our revised forecast for the year. Our estimates account for a

gradual recovery in tax revenue in 4Q12, reflecting the improvement in economic activity and a

expenditure slowdown in the final months of the year. The adjustment in expenditures could possibly

mean the postponement of certain outlays (investments, for instance) to 2013. We therefore revised

our estimates for the real growth rate in central government expenses, to 5.0% from 7.0% in 2012,

and to 8.5% from 7.0% in 2013.

For next year, we maintain our forecast for the consolidated primary budget surplus at 2.2% of GDP.

On one hand, we look for a cyclical improvement in tax revenue (following the expected acceleration

in activity) and a likely accommodation of government transfers (due to a lower increase in the

minimum wage). On other hand, our scenario incorporates deep tax cuts (in the range of 50 billion to

70 billion reais in the year) and a strong pickup in public investments (to 95 billion reais in 2013, from

60 billion in 2012). We believe that the fiscal stance in 2013 will be clearly expansionary.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Source: Brazilian Central Bank, Itaú

% of GDP

*Excludes the fiscal impact of the Petrobras capitalization

deal in September 2010.

Primary Surplus Falling*

Page 10


Falling Food Prices Provide Short-Term Inflation Relief

We maintain our forecasts for the consumer price index (IPCA) at 5.5% for this year and 5.3% for

2013. Current data indicates a slowdown in food prices, partly due to the drop in agricultural producer

prices. Still, we maintain our average monthly IPCA forecast at around 0.55% in 4Q12. Market-set

prices are expected to rise 6.2% this year, while regulated prices are likely to increase 3.2%. Among

market-set prices, we expect a 4% advance in tradable goods and an 8.2% increase in non-tradable

goods.

Our 2013 IPCA forecast remains at 5.3%. Less

volatile inflation indicators (core measures and

diffusion indexes) remain under pressure, suggesting

that the IPCA will hover around current levels. The

downward revision of our economic growth and

commodity price forecasts for 2013 could suggest

some decline in our inflation forecast, but our

expectation of a weaker currency prevented such a

change.

For the general price index (IGP-M), we revised this

year’s forecast to 7.9%, from 8.3%, due to a steeper

retreat in agricultural prices at the margin. The

producer price index (IPA) is expected to rise 8.8%,

with agricultural prices climbing 18% and industrial prices increasing 5.5%. For 2013, the expectation

of lower prices for some agricultural commodities, amid more favorable weather conditions, led us to

revise our IGP-M forecast to 4.2%, from 4.5%.

Stable Selic Rate for Longer

The Brazilian Central Bank cut the Selic rate to 7.25% in October, referring to the cut as "a last

adjustment" in monetary conditions. Looking ahead, the monetary authority signaled that interest

rates will remain at the current level for a "sufficiently prolonged" period.

We previously believed that with a steadier economic rebound, interest rates would bounce back in

the second half of 2013. However, given that we now foresee a slower recovery next year, we believe

that the Central Bank will choose to maintain interest rates unchanged at least until the end of 2013.

2%

3%

4%

5%

6%

7%

8%

Jan-06 Feb-07 Mar-08 Apr-09 May-10 Jun-11 Jul-12

Source: Itaú

Smoothed Trimmed-Mean Core 3mSmoothed Trimmed-Mean Core 12m

saar

Core Inflation Remains High

Page 11


Brazil: Macro Forecasts

Economic Activity

Real GDP growth - % 6.1 5.2 -0.3 7.5 2.7 1.5 4.0

Nominal GDP - BRL bn 2,661 3,032 3,239 3,770 4,143 4,444 4,874

Nominal GDP - USD bn 1,367 1,651 1,626 2,142 2,473 2,284 2,413

Per Capita GDP - USD 7,427 8,871 8,629 11,228 12,853 11,773 12,341

Unemployment Rate - year avg 9.3 7.9 8.1 6.6 6.0 5.5 5.3

Inflation

IPCA - % 4.5 5.9 4.3 5.9 6.5 5.5 5.3

IGP–M - % 7.8 9.8 -1.7 11.3 5.1 7.9 4.2

Interest Rate

Selic - eop - % 11.25 13.75 8.75 10.75 11.00 7.25 7.25

Balance of Payments

BRL / USD - Dec 1.77 2.34 1.74 1.69 1.84 2.02 2.02

Trade Balance - USD bn 40 25 25 20 30 20.5 18.0

Current Account - % GDP 0.1 -1.7 -1.5 -2.2 -2.1 -2.2 -2.3

Foreign Direct Investment - % GDP 2.5 2.7 1.6 2.3 2.7 2.8 2.7

International Reserves - USD bn 180 194 239 288 352 390 415

Public Finances

Primary Balance - % GDP 3.3 3.9 2.0 1.9 3.1 2.4 2.2

Nominal Balance - % GDP -2.8 -1.6 -3.3 -3.3 -2.6 -2.5 -1.8

Net Public Debt - % GDP 45.5 38.5 42.1 39.2 36.4 34.8 33.0

2010 2013F2011 2012F2007 2008 2009

Source: IMF, IBGE, BCB, Haver and Itaú

(For our monthly Brazil forecasts, click here.)

Argentina

Do you Accept my Pesos? The province of Chaco paid the service of domestic dollar-denominated bonds in pesos after the central bank refused to sell it dollars. A U.S. court decision raised further uncertainty on sovereign-debt payments. The economy rebounded during the third quarter

Following a slump in 2Q12, the economy rebounded over the last few months. However, we think that

high domestic risks will play against a sustained rebound. We have revised our growth forecast for

this year to 0.5% (from 0% in our previous scenario) but we maintained our 2.5% forecast for 2013.

We have also raised our forecast for the trade balance to $12 billion this year, from $11 billion. We

expect the exchange rate to continue depreciating at a 15% annual pace, ending 2012 at 5 pesos to

the dollar and reaching 5.8 by year-end 2013; we expect inflation to continue to rise, to 25% by the

end of 2012 (26% previously) and 28% next year. Interest rates have increased and we expect the

Badlar rate to hit 18% in December and 24% by the end of 2013. We forecast a fiscal deficit of 2.6%

of GDP this year and 2.7% in 2013.

A U.S. court decision favoring holdouts and the “pesification” of provinces’ local-law dollar bonds

increased the sovereign credit risk. The court has yet to clarify how much the holdouts are entitled to

receive and how the decision applies to banks that act as trustees, intermediating the payment from

the federal government to bondholders. In any case, we do not expect risk premiums to fall back.

Back to growth

The easing of import controls and an improving external environment for Argentina (higher commodity

prices and a rebound in Brazil’s economy) have helped activity in the past months.

The IGA, a GDP proxy estimated by the consulting firm OJF, gained 1.0% from August to September,

bringing growth to 3.9% qoq/saar, following a 7.5% contraction in the previous quarter. The official

monthly GDP index (EMAE) is also recovering.

http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/

Page 12


We now expect GDP growth to reach 0.5% in 2012 (0% in our previous scenario). For 2013, we

expect a 2.5% expansion, driven by a better harvest, higher grain prices and the recovery of the

Brazilian economy. Policy uncertainties will likely play against stronger growth rates.

Prices and interest rates continued to rise

Consumer prices in Argentina rose 1.92% in August according to private estimates. Annual inflation is

at 24.3%, higher than year-end 2011 (22.8%) in spite of the sharp economic slowdown. According to

a survey run by Universidad Di Tella, the median of inflation expectations for the next 12 months fell

to 27% in October (30% in September) while the average expected inflation rose to 35.1% from

34.9%. We now forecast inflation at 25% this year (down from 26% in our previous scenario) and at

28% in 2013.

Interest rates continued rising in October. The average Badlar rate during the month hit 14.9%, up

from 14.3% in the previous month, as credit growth in domestic currency (41% yoy during the 3Q12)

continues growing faster than peso deposits (35% yoy).

There are three important reasons for higher credit growth. First, provinces, lacking access to

international capital markets, have borrowed from local banks. Also, due to lower dollar deposits,

banks have to substitute their trade-financing lines in U.S. dollars for domestic-currency loans. Finally,

a new banking regulation has induced private banks to boost credit.

More recently, the government introduced some changes in the insurance companies’ regulation

system, requiring that a share of their portfolio (between 5% and 30%, depending on their liquidity

needs) be allocated to medium- and long-term projects. A government commission will decide what

projects qualify for receiving loans.

The new rules should increase funding from insurance companies for these projects to 7 billion pesos

(from 88 million currently). As insurance companies invest the most part of their portfolio (67.7 billion

pesos) in public bonds and time deposits, the new regulation will add new upward pressure on

interest rates.

Apart from credit growth, higher inflation and a potential run to the parallel markets for U.S. dollars will

likely contribute to higher interest rates. We expect the Badlar rate to reach 18% by the end of this

year and 24% in 2013.

Trade surplus remains strong

The peso continues depreciating at a 15% annual pace and we expect the trend to continue. We see

the exchange rate at 5.0 pesos to the dollar by the end of this year and at 5.8 by the end of 2013.

Therefore, the real exchange rate will continue appreciating.

The trade surplus decreased slightly in September, on a seasonally adjusted basis, bringing the

three-month moving average down to a still-strong $12.8 billion (annualized), from $13.2 billion in

August. Exports fell by 7.0% mom, while imports increased by 4.6%, showing some easing in import

controls.

However, because the trade surplus is narrowing slower than expected, we raised our 2012 forecast

to $12 billion, from $11 billion in our previous scenario.

August public-sector balance does not change the fiscal outlook

The federal public sector’s overall fiscal balance recorded a 17 million-peso surplus in August (up

from a 1 billion-peso deficit one year before). The 12-month rolling deficit is now at 40.8 billion pesos

or 2.0% of GDP (1.7% of GDP in December 2011), as primary expenditure grows faster than

revenues.

Page 13


We continue forecasting a fiscal deficit of 2.6% of GDP for 2012. For 2013, we expect 2.7%. Without

accessing international capital markets, the treasury has increased its borrowing from the central

bank. In 2011, financing from the monetary authority (in pesos and in dollars) reached 3.8% of GDP.

This year it will likely total 5%.

Pesification and debt service: Return of the ghosts?

At the beginning of October, the province of Chaco paid the service of dollar-denominated bonds in

pesos, using the official exchange rate, after the central bank refused to sell it dollars. The monetary

authority later stated that it will no longer sell dollars to provinces or to the private sector for servicing

their local-law bonds.

After the Chaco event, the federal government continued honoring its dollar debt under Argentine law

and the Province of Buenos Aires also paid its foreign-law debt service normally. Even so, fears of a

wide-spread “pesification” reemerged. In fact, the Congress is currently discussing a reform of the civil

code that would allow the payment of domestic dollar liabilities in pesos at the official exchange rate

(except federal bonds and dollar deposits).

The higher probability of “pesification” was not the worst recent news for holders of Argentine debt. In

the end of October, a judge in the Court of Appeals in New York ruled that Argentina discriminated

against bondholders who refused to take part in the massive debt restructurings in 2005 and 2010:

the government’s decision to pay to the holdouts later than the debt holders that accepted the

restructured bonds violated the “pari-passu” clause (equal treatment to bondholders).

The court has yet to clarify how much the holdouts are entitled to receive and how the decision

applies to banks that acted as trustees, intermediating the payment from the federal government to

bondholders. If the trustees are affected by the decision, then Argentina’s ability to service the

restructured debt without paying the holdouts is seriously damaged, greatly increasing the risk of a

technical default. If the government decides to pay the holdouts in full, the federal government debt

could increase by around $12 billion (there is still $6 billion in nominal value of untendered debt and a

similar amount owed in interest arrears), also hurting the government’s capacity to continue servicing

the debt. In addition, holders of the restructured debt may also sue Argentina if holdouts get a better

deal than they got.

Following the decision of the U.S. Court of Appeals,

the sovereign CDS spiked (the 5-year rate increased

more than 600 bps). Argentina can still try to appeal to

the U.S. Supreme Court, but it is unlikely that the

court would take the case.

Until the court finishes its ruling, Argentina can

maintain the regular service of its debt, so the

government still has some time to explore

alternatives. One of them is to try changing the

jurisdiction of the debt to Europe or to Argentina (a

cumbersome project that would not necessarily

eliminate the risks of a technical default). Or, if the

trustees are not affected, the government may

continue servicing the restructured debt without paying the holdouts: also an open violation of the

court’s decision.

In our view, the only way to settle the impasse is a ruling that forces holdouts to receive payments as

if they had entered the restructuring. For that, the government would need to abandon its “anti-

holdout” rhetoric. Until then, we expect the risk premium to remain around its current high level.

400

600

800

1000

1200

1400

1600

1800

2000

2200

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Source: Bloomberg, Itaú

CDS 5 years

Argentina Did Not Benefit from the Ease in Global Financial Strains

Page 14


Forecasts: Argentina

Economic Activity

Real GDP growth (Private Estimates) - % 8.9 3.4 -4.2 8.2 5.8 0.5 2.5

Nominal GDP - USD bn 260.4 324.8 305.5 368.0 444.9 501.7 564.8

Population 39.4 39.7 40.1 40.5 40.9 41.3 41.7



Inflation

CPI (Private Estimates) - % 22.3 20.3 14.9 26.4 22.8 25.0 28.0

Interest Rate

BADLAR - eop - % 13.63 19.75 10.00 11.25 17.19 18.00 24.00

Balance of Payments

ARS / USD - eop 3.2 3.5 3.8 4.0 4.3 5.0 5.8

Trade Balance - USD bn 11.3 12.6 16.9 11.4 10.0 12.0 10.0

Current Account - % GDP 2.7 2.1 3.5 0.7 0.1 0.5 0.3


International Reserves - USD bn 46.2 46.4 48.0 52.2 46.4 45.4 45.4

Public Finances

Nominal Balance - % GDP 1.1 1.4 -0.6 0.2 -1.7 -2.6 -2.7

Gross Public Debt - % GDP 55.6 44.9 48.2 44.7 40.1 38.9 37.2

2013F2011 2012F2007 2008 2009 2010

Source: Central Bank, IMF, INDEC, Haver and Itaú.

Mexico

Labor Reform Back to Lower House

In spite of weaker activity, the odds of a rate hike increased. The labor reform bill took one step back, while the government pledges to submit to congress legislation that could ease foreign investment caps in some key sectors

Recent data on activity hint that the global downturn is finally affecting Mexico’s economy. We left our

growth forecasts unchanged, but activity may be weakening faster than expected. In the first half of

October, inflation started to fall, but remained well above the upper bound of the target range. We

expect inflation to fall further in the remainder of 4Q12, ending the year at 4.2% and entering the

target range in 2013. The central bank adopted a more cautious tone recently, signaling that it would

raise interest rates if upcoming data don’t confirm the downward trend of inflation. Still, we don’t

expect rate moves soon. During the second half of 2013, we expect a hiking cycle that takes the

reference rate to 5.5% by the end of the year. Our forecasts for the exchange rate are unchanged, so

we still see room for appreciation.

The Mexican Senate modified the labor reform bill, reintroducing items related to “union

transparency.” The bill now returns to the lower house, but it is no longer under the “preference

initiative” mechanism, raising uncertainty about its future. On the brighter side, the government

pledged to submit legislation that lifts caps on foreign investment in some important sectors, such as

communication and airlines.

The global slowdown affects Mexico

In August, the IGAE (monthly proxy for GDP) fell 0.4%

from the previous month, led by a 0.8% contraction in

industry. While on a quarter-over-quarter basis growth

was still strong, at 4.5% annualized, September’s trade-

balance data points to a further weakening of the

economy. Manufacturing exports contracted by 0.3%

from August, following a 4.6% fall in the previous

month. Both auto and non-auto components performed

poorly. Data on imports of capital and consumer goods

suggest that domestic demand is also losing

momentum.

Thus, the downturn in the U.S. economy is finally -80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Jun-12

Source: INEGI, Itaú

Manufacturing exports

Exports Lose Momentum

qoq/saar

Page 15


affecting the Mexican economy. We maintain our growth forecasts at 3.8% for this year and at 3.3% in

2013. These forecasts already factor in a slowdown from the second half of this year on.

Nevertheless, recent data shows that activity may be weakening faster than we expected.

Inflation starts its downward trend

Inflation came in at 0.45% for the first half of October, led by a seasonal price increase in energy.

Prices for non-processed food fell 0.39% following three very strong consecutive gains. Core prices

posted a modest 0.17% increase.

As a result, annual inflation fell to 4.64%, from 4.81% in the second half of September, as non-core

inflation dropped to 8.27% (8.97% previously). Core inflation was broadly flat, at 3.6%. Within the

core, inflation for goods came down to a still-high 5.19% and inflation for services increased slightly,

to 2.25%.

Inflation is finally retreating, but it continues well above the target range due to high inflation for non-

core food. High inflation for non-processed food is leading to higher prices for processed food, so

inflation for core goods has also been high. However, there is no sign of demand-side inflationary

pressure, as underscored by the low level of service inflation.

We expect inflation to continue falling during 4Q12, ending the year at 4.2%. For 2013, we expect

inflation at 3.8%.

Trade balance continues improving

Mexico’s trade balance posted a strong $5.2 billion surplus (seasonally adjusted and annualized) in

September, led by net energy exports ($19 billion). As a result, the 12-month rolling balance reached

$1.4 billion, the first surplus since December 1997. These numbers are consistent with a very low and

easily financed current-account deficit during 3Q12.

The Mexican peso has depreciated recently, as volatility in global markets reappeared. We still see

room for appreciation next year. Our exchange-rate forecasts are unchanged, at 13 pesos to the

dollar by year-end 2012 and 12.5 by year-end 2013.

Mexico’s central bank becomes more vigilant on inflation

As widely expected, the central bank left the monetary policy rate unchanged at October's meeting.

The significant news came from the press statement, which carried a more cautious message than

before.

Board members said that headline inflation has increased "considerably" over the last few months,

due to transitory agricultural-supply shocks. The board believes that headline inflation peaked in

September and that core inflation reversed its upward trend in August. They also acknowledge that

inflation for services stands at historically low levels. They expect headline inflation to end this year

only slightly above the target range and to move towards 3% during 2013.

However, because the agricultural shock was more intense than expected, the board sees greater

risks for inflation in the short term, especially if considering that there is no spare capacity left in the

economy. But “if shocks persist and the trend-reversal of headline and core inflation is not confirmed,”

the board stated that it would increase interest rates to prevent inflation expectations from rising and

to avoid second-round effects.

Thus, the central bank is clearly more vigilant than before. As in the central bank ’s baseline scenario,

we see inflation falling during the next few months and entering the target range in 2013. Thus we do

not see rate hikes in the near term. However, the board is clearly data-dependent. If the next CPI

numbers show that inflation will take longer to return to the target range, even if this is due to

transitory shocks, rate hikes are likely.

Page 16


Reforms take one step back, but will probably continue ahead

The labor reform bill suffered a setback, as the Senate reinstated items related to “union

transparency,” stripped out from the original proposal in the lower house. While the approval of such

items would be beneficial for Mexico, the bill now returns to the lower house without its “preference

initiative” status. This means that the bill no longer has a two-month deadline to be approved, raising

uncertainty about its future.

The episode shows that the road to reforms is a bumpy one, but we are confident that the government

will drive through it.

On a more positive note, the current government has pledged to submit legislation that lifts caps on

foreign investment in some important sectors, such as communication and airlines. This bill could be

significant, because lack of competition is a key factor behind Mexico’s low productivity growth over

the past years.

Forecasts: Mexico

Economic Activity

Real GDP growth - % 3.3 1.2 -6.0 5.5 3.9 3.8 3.3

Nominal GDP - USD bn 1,035.9 1,094.5 883.4 1,035.9 1,154.5 1,149 1,305

Population 105.8 106.7 107.6 108.6 109.7 110.8 111.9



Inflation

CPI - % 3.8 6.5 3.6 4.4 3.8 4.2 3.8

Interest Rate

Monetary Policy Rate - eop - % - 8.25 4.50 4.50 4.50 4.50 5.50

Balance of Payments

MXN / USD - eop 10.87 13.54 13.06 12.36 13.99 13.00 12.50

Trade Balance - USD bn -10.1 -17.3 -4.7 -3.0 -1.5 0.0 -1.0

Current Account - % GDP -1.1 -1.6 -0.6 -0.4 -1.0 -0.5 -1.0



Public Finances

Nominal Balance - % GDP 0.0 -0.1 -2.3 -2.8 -2.5 -2.5 -2.5

Net Public Debt - % GDP 14.9 18.2 29.0 30.5 32.3 32.3 32.7

2008 2009 2010 2013F2011 2012F2007

Source: Central Bank, IMF, INEGI, Haver and Itaú.

Chile

Doubtful Slowdown

Chile's economy cooled down, but consumption continues growing very fast. Inflation was higher than expected in September, while core inflation continues running at the lower bound of the target range

The economy is slowing, consistent with our view that growth would moderate from the second half of

this year on. However consumption continues expanding at a strong pace. We expect 5.2% growth

this year and 4.7% next year. Inflation picked up in September, following a sequence of very low

readings. In spite of solid growth, core inflation and service inflation show no sign of demand-side

inflationary pressure. We see inflation at 2.1% by the end of this year and at 3.0% next year. The

central bank left the policy rate unchanged in its October meeting. We now expect no rate moves until

at least the end of 2013. Previously we expected hikes before the end of 2013. We see the peso

trading at 470 to the dollar by the end of 2012 and at 460 by year-end 2013. If currency appreciates

beyond these levels, intervention is likely.

Page 17


Economy slows, but consumption has not moderated

In September, the IMACEC (monthly proxy for the

GDP) gained 1.0% from the previous month, following

a 0.3% increase in August. On a quarter-over-quarter

basis, the economy moderated to 5.3% (annualized),

from 7.6% in 2Q12. Although activity is cooling down,

consumption remains very strong. During 3Q12, retail

sales jumped 8.6% year over year, picking up from

2Q12 (7.2%).

As in previous months, Chile's consumers are

benefiting from a combination of a tight labor market

and low inflation, which has led to strong real-income

gains. Real wages increased by 3.8% year over year

in August.

Our growth forecasts are unchanged. We expect the economy to grow 5.2% this year, implying a

slowdown during the second half. For 2013, we see the economy growing by 4.7%.

Higher-than-expected inflation, at last

Inflation in September came in at a higher-than-expected 0.8% month over month (Bloomberg survey:

0.6%). As a result, annual inflation climbed from 2.6% in August to 2.8%, still below the center of the

target. The increase in inflation was led by food items (9.1% yoy in September, from 7.7%). Driven by

higher prices for fuels, inflation for transportation also increased significantly (3.1%, up from 2.0%).

However, in spite of strong demand growth and a heated labor market, the inflation breakdown shows

no sign of demand-side inflationary pressure. Inflation excluding food and energy remained at the

lower limit of the target range, while inflation for services fell to 2.7%, from 3.0% in August and 3.6%

in July.

We see inflation at 2.1% by the end of this year. While this forecast is lower than current inflation, we

note that a stronger comparison base will likely slash annual inflation in December. For 2013, inflation

will probably “normalize” to 3.0%.

Intervention debate continues

During 3Q12, the trade balance registered a $1 billion deficit, bringing the 12-month rolling surplus

down to $5.2 billion ($6.5 billion in 2Q12 and $11 billion in 2011). Thus the current-account deficit

likely widened further during the third quarter.

The peso depreciated somewhat during the second half of October, as volatility in global financial

markets returned. The central bank’s board members are making clear that the current level of

exchange rate is consistent with fundamentals, so there is no willingness to intervene in the currency

at this point. However, the frequent mention of the exchange rate in members’ speeches hints that

they are watching the appreciation path carefully. Our exchange-rate forecasts are unchanged, at 470

pesos to the dollar by the end of this year and 460 by the end of 2013. A stronger appreciation would

likely lead to intervention.

Unchanged rates for longer

As widely expected, the central bank kept the policy rate unchanged at its October’s meeting. The

minutes revealed that board members considered leaving rates unchanged as the only viable option.

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Source: Haver, Itaú

Retail sales

Consumption Continues Strong

3mma/yoy

Page 18


According to the document, all board members noted that financial strains have eased following the

latest measures announced by euro-zone policy makers. On the domestic front, members sounded

concerned over domestic demand dynamism, especially consumption, and over wage growth.

As in previous meetings, members said that a pre-emptive action against external risks could justify a

rate cut. On the other hand, strong domestic demand growth would call for rate hikes. Since the

reference rate is in the neutral range, leaving it unchanged provides "time and flexibility to wait and

accumulate information about the external scenario and its impact on Chile's economy."

Thus, although the board sounded more concerned over the labor market (especially wage growth)

and somewhat more comfortable with external risks, the neutral bias for the upcoming decision is still

on.

In addition, board members are clearly worried about the widening of the current account deficit. In

fact, according to the minutes, in an external scenario where the euro-zone crisis does not deepen,

emerging economies would still face risks, as capital flows lead to exchange-rate appreciation and

higher current-account deficits. In our view, if Chile’s central bank has to cool demand under these

conditions, it might opt for macro-prudential measures instead of rate hikes.

We expect the central bank to keep the reference rate unchanged until at least the end of the next

year. In our previous scenario, we expected rate hikes by the end of 2013.

Forecasts: Chile

Economic Activity

Real GDP growth - % 5.2 3.3 -1.0 6.1 6.0 5.2 4.7

Nominal GDP - USD bn 173.1 179.6 173.0 216.3 248.5 261 299

Population 16.6 16.8 17.0 17.2 17.4 17.6 17.8



Inflation

CPI - % 7.8 7.1 -1.5 3.0 4.4 2.1 3.0

Interest Rate

Monetary Policy Rate - eop - % 6.00 8.25 0.50 3.25 5.25 5.00 5.00

Balance of Payments

CLP / USD - eop 496 629 506 468 521 470 460


Current Account - % GDP 4.1 -3.2 2.0 1.5 -1.3 -3.3 -3.3



Public Finances

Nominal Balance - % GDP 8.2 4.7 -4.3 -0.3 1.5 0.7 0.7

Net Public Debt - % GDP -12.8 -22.6 -12.0 -7.8 -10.7 -10.7 -10.6

2013F2011 2012F2007 2008 2009 2010

Source: Central Bank, IMF, INE, Haver and Itaú.

Peru

Managing the Flows

Boosted by domestic demand, economic growth is on the rise. But the speed of credit expansion and capital inflows is worrying authorities

As economic growth remains robust, boosted by internal demand, we continue to expect GDP growth

at 6.1% this year. Fast credit growth, capital inflows and appreciating currency are leading the

authorities to adopt macroprudential measures and step up intervention in the FX market. While we

continue to expect the Central Bank to remain on hold regarding the interest rate, further measures to

slow down credit growth are likely.

Page 19


Domestic demand sustains strong GDP growth

The economy accelerated further in August. GDP growth stepped up to 9.0% qoq/saar , or a 6.3%

increase over a year ago. Again, the drivers of activity were concentrated on the domestic sector, with

the main leaders being construction (up 17.6% year-over-year), trade (6.5%) and other services

(6.7%).

The outlook for private investment is positive.

Business confidence has recovered partially after

some months of decline when perceptions had been

negatively influenced by the mining-related conflicts.

The Arab-South America summit staged in Lima had

several projects being mentioned as potential

investment for Arab companies in Peru.

Domestic demand is more than offsetting the

deceleration of external demand. In August, exports

were down 19.7% over a year earlier, mostly on

account of lower prices, but also with a decline in

volumes. Still, commodity prices are high enough to

attract substantial amounts of foreign investment for

the country’s mining sector. Net foreign direct

investment hit a record-high $ 9.3 billion in the 12 months to June.

Macroprudential measures, but no interest rate increases

Inflation numbers came in better than expected in October, with a 0.16% decline, pushed down by a

0.35% deflation in food prices. International commodity prices have also come down. We reduced our

inflation forecast for this year to 3.2% (from 3.8% previously). That is still above the inflation target’s

ceiling of 3.0%.

Will that demand action from the Central Bank? The reports issued by the monetary authority do not

suggest so, as it sees the balance of risks to inflation as neutral, the economy growing in line with its

potential and the increase in inflation as caused by temporary supply shocks.

However, the Central Bank does see a risk from the pace of credit growth, fueled by capital inflows.

Central Bank’s president Velarde said that he wished to see loan expansion, which hit 17.6% in

August, below 15%. Mortgages and consumer credit are rising close to 20%. That is why the Central

Bank raised legal reserve requirements on local and foreign currency liabilities for a third time in three

months. We do not expect changes to the interest rate either this or next year, but we believe instead

that the Central Bank would opt for further macroprudential measures when it needs to tighten policy.

Authorities have mentioned the possibility of regulations to decrease the loan-to-value ratios for

mortgages.

The Central Bank is also acting to slow the appreciation of the exchange rate. Its interventions in

October continued to follow the strategy of trying to add volatility to the FX market. Each day, without

announcing it to the market, the Central Bank establishes the amount of its intervention in the dollar

spot market without reference to an exchange rate target. Dollar purchases by the monetary authority

in October reached $ 1.3 billion, higher than September and the monthly average for the year.

Volatility increased, but not much. We maintain our forecast for the year-end exchange rate at 2.60

soles per dollar. With the economy boasting such a strong performance amid a weak global economy,

capital inflows are only likely to increase further.

0%

4%

8%

12%

16%

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Source: DANE, Itaú

qoq/saaryoy/3m

GDP Accelerates Again

Page 20


Forecasts: Peru

Economic Activity

Real GDP growth - % 8.9 9.8 0.9 8.8 6.9 6.1 6.0

Nominal GDP - USD bn 107.2 126.6 127.0 153.6 176.3 201.0 223.7

Population 28.5 28.8 29.1 29.5 29.8 30.1 30.5



Inflation

CPI - % 3.9 6.7 0.2 2.1 4.7 3.2 3.0

Interest Rate


Balance of Payments

PEN / USD - eop 2.98 3.11 2.88 2.82 2.70 2.60 2.60


Current Account - % GDP 1.4 -4.1 -0.6 -2.5 -1.9 -2.5 -2.5



Public Finances

Nominal Central Govt Balance - % GDP 1.6 2.1 -1.5 0.0 0.9 0.5 0.2

Gross Central Govt. Debt - % GDP 29.8 24.2 27.1 23.4 21.7 19.3 17.5

2012F2007 2008 2009 2010 2013F2011

Source: Central Bank, INEI, Haver and Itaú.

Colombia

Keep Moving

While the peace negotiations had a slow start, the country keeps moving forward with a new tax reform proposal

Colombia’s government keeps working to improve the country’s fundamentals, now with a tax reform

aimed at creating jobs and reduce income inequality. The first direct talks with the FARC did not go

smoothly. Manufacturing and retail sales data disappointed in August, but investment keeps growing

at a fast pace. Given the very expansionist monetary policies abroad, and low inflation at home, we

now expect the Central Bank to remain on hold for the next year also.

A new tax reform proposal

On October 3, Finance Minister Mauricio Cárdenas sent a new tax reform proposal to Congress, with

a message of urgency. The reform’s main measures are to reduce non-wage labor costs for

companies, which will stimulate formal job creation, and to create a progressive income tax for

individuals, aiming at improving the country’s income distribution. Colombia’s economic performance

has been stellar in recent years, with several advances in many fronts, but progress has been slower

in creating jobs, as the unemployment rate remains close to 10%.

The reform proposes to replace the taxes on the labor force for a corporate tax on income.

Companies would thus have to pay only if they generate profits. The government estimates that, over

time, the change will generate between 500,000 and 1.1 million new formal jobs.

The reform also brings a new income tax on individuals. The new tax would only apply to individuals

with monthly incomes above 4 minimum wages, and the tax rate would increase with income,

reaching a maximum of 15%. The current income tax rate stays at 5% for all individuals.

Page 21


A disappointing start of the peace negotiations

The peace process between the government and the

FARC entered the phase of direct talks in the third

week of last month, in Norway. However, they kicked

off on a wrong foot, creating some disappointment

relative to the high expectations generated.

The FARC representative, Mr. Márquez, argued that

other topics beyond those already agreed upon had to

be included in the discussion, such as foreign

investment and free trade issues. As was the case in

failed discussions of the past, he asked for changes in

the entire “economic model”.

The government made clear that changing the

“economic model” is not under negotiation. Will it stick

to the agreed agenda or will it accept moving into longer discussions, differently from the initial

strategy?

Aside from the rhetoric of the FARC, the fact is that, due to the decline in drugs production, the

guerrillas are now financially weaker than in the past. The number of members is half what it was ten

years ago. That suggests it is in the guerrillas’ best interest to go on with the negotiations and that the

FARC will go back to the agreed upon agenda.

Monetary policy to stay on hold for longer

After the strong GDP growth in the second quarter of the year, industrial production and retail sales

disappointed in August. Credit growth has also slowed. On other hand, public and private investment

and construction activity continue to expand at a fast pace. We have maintained our forecast for 2012

GDP growth at 4.4%.

The Central Bank kept the policy rate steady at 4.75% at its latest meeting. The statement came out

with a neutral tone, indicating no changes in monetary policy in the short term. Board members said

that lower growth in exports and industrial production were caused by a slow world economy, but they

also think that the risk of a “strong recession” in Europe has declined. They reaffirmed that inflation

and inflation expectations are “very close” to center-target at 3%.

We continue to expect the policy rate stable at 4.75% until the end of this year. And, given the intense

monetary easing in advanced economies, we now believe that the policy rate will also remain stable

until the end of 2013. Before, we expected an interest rate increase to 5.25%.

40

60

80

100

120

140

160

180

2000 2001 2003 2005 2007 2009 2011

Source: DANE

Coca cultivation

Falling Cocaine Production Suggests the FARC

is Financially Weaker

thousand of Ha

Page 22


Forecasts: Colombia

Economic Activity

Real GDP growth - % 6.9 3.5 1.7 4.0 5.9 4.4 4.5

Nominal GDP - USD bn 207.4 244.3 233.8 286.3 333 354 398

Population 43.9 44.5 45.0 45.5 46.0 46.6 47.2



Inflation

CPI - % 5.7 7.7 2.0 3.2 3.7 3.2 3.3

Interest Rate


Balance of Payments

COP / USD - eop 2015 2244 2044 1914 1943 1800 1800

Trade Balance - USD bn -2.9 -2.0 0.0 -0.9 2.3 1.0 0.5

Current Account - % GDP -2.9 -2.8 -2.1 -3.1 -3.0 -2.5 -2.1



Public Finances

Nominal Balance - % GDP -2.8 -1.7 -3.7 -3.5 -2.1 -1.9 -1.8

Gross Public Debt - % GDP 32.9 33.3 35.0 35.0 33.8 33.2 32.6

2013F2011 2012F2007 2008 2009 2010

Source: Central Bank, DANE, Haver and Itaú.

Commodities

General Decline Fading global optimism and higher supply led to falling commodity prices

Most commodity prices fell in October, as optimism

about higher monetary stimulus in the G3 lost

strength. The strongest decline (7% MoM) came

from the metal complex, after September’s 10.6%

price increase. Energy prices also fell by 1.8%, due

to both higher supply and lower demand growth

prospects. Grain prices continued to fall, with

markets pricing in the better-than-expected supply

number in the U.S.

We are adjusting our forecasts for the Itaú

Commodities Index (ICI) in order to accommodate

lower year-end grain prices, given the latest better-

than-expected supply numbers for the 2012/13 U.S.

crop. We now expect an increase of 19.2% in 2012,

from 24.6% previously and a decline of 7.6% for 2013, from -9.6% previously.

Investors continued reducing positions in the grain market, but the movement lost strength. On the

fundamentals side, grain prices were negatively affected by better–than-expected supply numbers

published in the USDA’s (United States Department of Agriculture) October report. With the final

numbers of the U.S. crop now released, the focus should turn to the demand side of the equation and

also to the progress of the South American crop.

Metal prices gave back most of the gains registered in September, as the optimism with the QE3

announcement in the U.S. faded and the stimulus package in China failed to produce higher growth

forecasts. Metals demand is failing to show a meaningful recovery as expected in the beginning of the

year, which, given the expected supply gains for the coming quarters, could produce a surplus in

2013. Iron ore price contracts for the quarter fell from $154 per ton to $122 per ton, a value much

closer to current spot prices and consistent with the industry marginal cost.

140

180

220

260

300

340

Apr-09 Apr-10 Apr-11 Apr-12 Apr-13

Current

Prices Revised Downward

Itaú Commodity Index (Jan/00=100)

Source: Itaú

Previous

Page 23


Crude Brent prices fell back to slightly below $110 (measured by December Futures) after reaching

$115/bbl by mid-October, reflecting revised expectations of a slightly looser global balance. We

maintain our year-end oil price forecast at $112/bbl in 2012, and expect prices to be heavily affected

by the evolution of the fiscal cliff in the U.S. and the political situation in the Middle-East. We are

revising our forecast down for the end of 2013, to $115/bbl from $116/bbl, reflecting a slightly lower

global growth.

Grains: Adjusting the Balance

Grain prices fell nearly 7% MoM in September, negatively affected by high selling flows in the cash

market and reduction of speculative positions. The adjustment continued in October, albeit at a slower

pace, with average prices falling 1.5% MoM. With the harvest in the U.S. nearly over and an

improvement in market positioning, we believe that prices will resume the upward trend in the coming

months.

The USDA’s October report brought the final numbers

for the 2012/2013 U.S. crop. Soybean production

should be 7.5% below 2011/12 and above our forecast

of a 13% decline. Corn production fell 13.4% YoY, in

line with market forecasts and above our initial

estimate of a 20% YoY decline. Given the better-than-

expected supply numbers we revised our year end

price forecasts downward. Despite these adjustments,

our forecasts are still above current market prices and

we maintain our call that the extremely tight balance

should propel prices higher in the coming months.

Soybean prices suffered the deepest decline among

grains. Higher perceived supply of palm oil, the main

substitute for soy oil in Asia, was the main reason for

the correction of soybean prices, which was further stimulated by a higher supply of beans in the U.S.

The USDA revised the initial stocks of soybeans in the U.S. by 1 million tons and also increased both

the yield and harvested area for the 2012/13 crop. Combining both effects, the USDA forecast for total

supply increased 7.2 million tons in the October report, an increase of 9.5% from the previous

release. Despite the revision, supply still is 8.5% below the 2011/12 levels and demand was revised

upward, more in line with our estimates of 80 million tons, maintaining year-end stocks at 4.2% of use,

which is only two weeks of consumption. Given the higher-than-expected supply numbers, we

decreased our year-end price forecast to 1750 cents/bushel from 1800 cents/bushel, but still above

the current 1560 cents/bushel market price. A successful Brazilian crop should help to bring prices

downward, starting in the first quarter of 2013.

Corn balance adjustments were different from soybeans, but led to a similar outcome. Both initial

inventories and production estimates were revised downward in the October report. Total supply

estimates fell 5.44 million tons, 1.8% below September’s values and 13.3% lower than last year.

While supply shrank, current demand is matching the USDA’s pessimistic forecast of an 11% YoY

decline. Not only exports are running at record lows, but also domestic consumption. Cattle

placement in feedlots, which are a proxy for feed corn demand in the U.S., was only 81% of the level

reached in 2011 by this time of year, signaling a significant decline in demand.

We maintained our year-end corn price forecasts at 850 cents/bushel for 2012 and 638 cents/bushel

for 2013, but the return should happen only in the second half of 2013, with confirmation of a good

crop in the U.S. Unlike soybeans, for which Brazil and Argentina can replenish global inventories

between the U.S. crops, corn exports are much more focused on the U.S.

1000

1100

1200

1300

1400

1500

1600

1700

1800

500

550

600

650

700

750

800

850

900

950

1000

Aug-11 Nov-11 Feb-12 May-12 Aug-12

Source: Bloomberg

CornWheatSoybeans (RHS)

Grain Prices Fell: Supply Better than Expected

Prices correspond to CBOT first future

Page 24


The World Agricultural Supply Demand Estimates report (released by USDA) effectively ended the

supply uncertainty about the U.S. crops; now all eyes should turn to both demand behavior and the

South American crop.

Weather: South American Weather Uncertainty

Given the high international grain prices and low global inventories, South American farmers were

expected to start the sowing process early. Nonetheless, climate conditions didn’t help this plan: lack

of winter rains in Mato Grosso, Paraná and Mato Grosso do Sul prevented the main growers of Brazil

from moving the sowing schedule up, while excess of rain in Argentina, Rio Grande do Sul and

Paraguay did the same for the southern growing region.

With the normalization of weather conditions in October, plantings started and are now only slightly

behind schedule. Normal rains forecasted for the next 15 days should help a healthy crop emergence.

While the current normalization of conditions is good news for South American crop, climate risk still

exists. Both soybeans and corn crops have two very climate-sensitive periods: one immediately after

sowing, when seeds need water for germination and the second when the plant is pollinating and

generating the grains.

According to our estimates, this second climate-sensitive phase will happen between the second half

of December and January. Do we have any indication about the weather in this period? While

meteorologists can predict with a reasonable degree of certainty the weather in the next few weeks,

predictions for the next few months carry a much higher level of uncertainty. In the beginning of 2012

it was expected that El Niño was going to be active in the spring and summer of the southern

hemisphere, bringing above-average rains and therefore good crop conditions. During the year, the El

Niño didn’t materialize as expected, with Pacific Ocean temperatures cooling down. Current forecasts

point to a neutral pattern affecting the weather during crop development. Nonetheless, the standard

deviation is high.

Therefore, expect a considerable weather risk in the coming months for South American crops.

Beef: Slaughter Rush Should Lead to Lower Supply in 2013

Higher costs are hitting the cattle sector in the U.S. and Brazil. With higher feed-grain prices and

lower quality of the U.S. pasture due to the drought that we have seen in the past few months, many

producers are reducing their herd. This increases meat supply in the short term while reducing its

availability in the future. In this scenario, we expect prices to increase more than inflation throughout

2013.

The U.S., the biggest beef producer in the world, has

suffered from a severe drought that not only

increased prices of grain used to feed animals in

feedlots, but also damaged the quality of the

pasture, bringing it to a record low (18 percentage

points below the five-year average) increasing the

costs of the sector. In response, producers are

slaughtering more cows than normal, resulting in an

increase in the current meat supply. However, the

lack of females results in lower herd growth,

decreasing future beef supply. Furthermore, recent

data from the USDA reported the lowest September

cattle placements in feedlots (2 million heads) since

1996 – 19% below September 2011 and 46% below

the five-year average. This suggests lower demand

for grain-feed and lower beef supply for 2013, and is consistent with higher cattle and beef prices next

year. However, higher pork and poultry production may offset part of the price increase.

1.3

1.6

1.8

2.1

2.3

2.6

2.8

1 2 3 4 5 6 7 8 9 10 11 12

Lowest September Cattle Placements in Feedlots since 1996 (U.S.)

Source: USDA

2012

Five-Year Average

Range: 2007-11

Million Heads

Page 25


In Brazil, even though the main portion of the production comes from extensive cattle farming, we also

see input cost increasing for domestic producers. In addition, the latest data from IBGE shows a high

proportion of cows and calves slaughtered to steers in 2Q12 (above 2011 and the 5-year average in

the same period). This supply increase supported the low prices until August. However, record beef

exports from Brazil, future stock reduction and the price increase in poultry due the grain shock give

room to a scenario with a likely price increase during 2013.

Finally, as a consequence of the cow and calf slaughter in 2012, as well as the expected fall in grain

prices after the next crop in South America, we expect a lower cattle supply in 2013. This may lead to

higher beef and live-cattle prices throughout the year.

Sugar and Ethanol: Brazil’s Harvest to Recover Next Year

No. 11 raw-sugar prices reached almost $0.22/lb the beginning of October, but returned to levels

between $0.19/lb and $0.20/lb. We expect prices to remain around $0.20/lb for a while.

Harvest evolution in Brazil’s center-south region

showed a strong output in the region between

October 1 and October 15. Mills in the region

processed 38 million tons of sugarcane, up 14 million

tons from a year earlier. Taking this data into account,

we are revising upwards our crop forecast in Brazil’s

center-south to 510 million tons, from 500 million tons

in the previous report. ATR (Total Recoverable

Sugar) yields remains lower than last year and well

below historical levels.

With more than 80% of the current crop year (started

April 1) processed, the focus shifts to the next

season. Given the investment to renew aging

plantations, expected neutral weather conditions and

large planted area, we expect a crop of 550 million tons in Brazil’s center-south, with ATR yields

higher than the previous two years. In this scenario, sugar and ethanol output will be considerably

higher.

The government will probably return the ethanol content in gasoline to 25% (from 20%) next year

(although the specific month is uncertain). If the content increases by mid-June, anhydrous ethanol

will exceed 10 billion liters, 7% above the maximum annual production. The anhydrous production

capacity and level of stocks will play important roles in determining whether the sector can meet the

demand.

Energy: Slightly Looser Oil Global Balance in the Short Term

We forecast Brent crude prices at $112/bbl by the end of 2012. The two main drivers for prices in the

short term are the fiscal cliff in the U.S. and the political situation in the Middle-East. For the end of

2013, we are revising downwards our forecast to $115/bbl from $116/bbl, reflecting a slightly lower

global growth.

Recently, Crude Brent prices fell back to slightly below $110 (measured by December Futures) after

reaching $115/bbl by mid-October. Gasoline prices in the U.S. have fallen roughly 15% since August.

This fall results not only from lower crude prices, but also from refineries completing maintenance and

weak demand. Even if Crude Brent prices recover to levels around $112, gasoline prices are

expected to remain lower than in August and September.

0

100

200

300

400

500

600

2007 -08

2008 -09

2009 -10

2010 -11

2011 -12

2012 -13

2013 -14

Sugarcane: Brazil's Harvest 40 Mi Tons Higher Next Year

Source: UNICA

Million Tons

Page 26


The International Energy Agency’s last Oil Market

Report shows a slightly looser global balance,

revising down global oil demand between 4Q12 and

2Q13 and revising oil production in 1Q13 upward.

U.S. weekly data1 have also been marginally bearish

for crude prices, showing strong production (700 kb/d

above the same period in 2011), high crude

stockpiles and weak demand for gasoline and

distillates.

Recently, there has been no progress with regard to

Iran’s nuclear program or Syrian civil war. Iranian

crude-oil exports fell back to an estimated 860 kb/d in

September from slightly above 1000 kb/d in August.

Despite this, the European Union has further tightened sanctions against both Iran and Syria. At first,

Iran was willing to resume discussions to suspend its 20-percent uranium in exchange for nuclear fuel

provided to a research facility. A few days later, it threatened to suspend all its crude-oil exports. This

threat is not credible, as Iran would hurt its economy even more while having little impact on prices. In

Syria, the recent cease-fire over a holiday backed by the U.N. failed, suggesting that the stalemated

civil war will continue. Following the elections in the U.S we may see a tougher stance towards Iran

and Syria, leading to greater geopolitical risks.

Forecasts: Commodities

Commodities

CRB Index - yoy - % 15.2 -25.7 35.4 21.9 -5.2 6.2 -7.7

CRB Index - avg growth - % 19.3 6.2 -14.6 25.1 19.5 -9.0 0.7

Itaú Commodity Index (ICI)** - yoy - % 30.7 -32.9 44.8 28.4 -17.2 19.2 -7.7

Itaú Commodity Index (ICI) - avg growth - % 20.0 14.6 -20.8 21.8 25.0 -6.3 4.9

Metals - avg growth - % 37.0 -13.0 -25.3 29.4 12.0 -18.3 0.1

Energy - avg growth - % 9.0 28.6 -39.4 21.0 30.2 -7.8 2.5

Agricultural - avg growth - % 18.2 25.3 -7.4 19.8 30.0 -0.3 7.1

2007 2008 2009 2010 2011 2012F 2013F

Source: Bloomberg and Itaú. ** The Itaú Commodity Index is a proprietary index composed of those commodity prices, measured in U.S. dollars and traded in international exchanges that are relevant to Brazilian consumer inflation. Its sub-indexes are Metals, Energy and Agricultural.

Relevant information

1. This report has been produced by Banco Itaú BBA S.A (“Itaú BBA”), a subsidiary of Itaú Unibanco Holding S.A. (“Itaú Unibanco Holding”), and distributed by the companies, directly or indirectly, controlled by Itaú Unibanco Holding (altogether, “Itaú Unibanco Group”). 2. This report is provided for informational purposes only and does not constitute or should not be construed as an offer to buy or sell or 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 in which this report was issued and has been obtained from public sources believed to be reliable. Itaú Unibanco Group does not make any representation or warranty, express or implied, as to the completeness, reliability or accuracy of such information, nor is this report intended to be a complete statement or summary of the investment strategies, 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. Prices and availability of financial instruments are indicative only and subject to change without notice. Itaú Unibanco Group has no obligation to update, modify or amend this report and inform the reader accordingly, except when terminating coverage of the issuer of the securities discussed in this report. 3. The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the subject issuers or securities and were prepared independently and autonomously, including from Itaú Unibanco Group. Because personal views of analysts may differ from one another, the companies of Itaú Unibanco Group may have issued or may issue reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. The analyst responsible for the preparation of this report is not registered and/or qualified as a research analyst with the NYSE or FINRA, and is not associated with Itau BBA USA Securities Inc. and, therefore, may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 4. An analyst’s compensation is determined based upon total revenues of Itaú BBA, a portion of which is generated through investment banking activities. Like all employees of Itaú BBA, its subsidiaries and affiliates, analysts receive compensation that is linked by overall profitability. For this reason, analyst’s compensation can be considered to be indirectly related to this report. However, the analyst responsible for the content of this report hereby certifies that no part of his or her compensation was, is, or will be directly or indirectly related to any specific recommendation or views contained herein or linked to the pricing of any of the securities discussed herein. The analyst declares that (s)he does not maintain any relationship with any individual who has business of any nature with the companies and does not receive any compensation for services rendered to or have any commercial relationship with the companies or any individual or entity representing the interests of the companies. According to Itaú BBA’s compliance policy, the analyst(s) and any member of his/her household do not hold, directly or indirectly, any securities issued by the companies

1 Department of Energy (DOE): weekly data to October 19.

4700

5200

5700

6200

6700

7200

Jan Feb Apr Jun Aug Oct Dec

Highest U.S. Crude Oil Production Since 1998

1000 Barrels per Day

Source:DOE

2012

Range: 2006-11

Page 27


analyzed in this report in his/her personal investment portfolio, nor is (s)he personally involved in the acquisition, sale or trading of such securities in the market. Neither the analyst nor any member of the analyst’s household serves as an officer, director or advisory board member of the companies analyzed in this report. Itau Unibanco Group and the funds, portfolios and securities investment clubs managed by Itaú Unibanco Group may have direct or indirect stake equal to, or higher than, 1% (one percent) of the capital stock of the companies, and may have been involved in the acquisition, sale or trading of such securities in the market. 5. The financial instruments discussed in this report may not be suitable for all investors. This report does not take into account the investment objectives, financial situation or particular needs of any particular investor. Any investors wishing to purchase or otherwise deal in the securities covered in this report should obtain relevant documents from financial instruments and exchange institutions and confirm its contents. Investors should obtain independent financial advice based on their own particular circumstances before making an investment decision based on the information contained herein. Final decision on investments must be made by you considering various risks, fees and commissions. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and the reader of this report assumes any currency risk. Income from financial instruments may vary, and their price or value, either directly or indirectly, may rise or fall. Past performance is not necessarily indicative of future results, and no representation or warranty, express or implied, is made herein regarding future performances. Itaú Unibanco Group does not accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its content. 6. 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 Banco Itaú BBA S.A. Additional information on the financial instruments discussed in this report is available upon request. Additional Note to reports distributed in: (i) U.K. and European: Itau BBA UK Securities Limited, regulated by the Financial Services Authority (FSA), is distributing this report to investors who are Eligible Counterparties and Professional Clients, pursuant to FSA rules and regulations. If you do not, or cease to, fall within the definition of Eligible Counterparty or Professional Client, you should not rely upon the information contained herein and should notify Itau BBA UK Securities Limited immediately at Level 20 The Broadgate Tower, 20 Primrose Street, London EC2A 2EW, UK. The information contained herein does not apply to, and should not be relied upon by, retail customers; (ii) U.S.: 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 Person receiving this report and wishing to effect any transaction in any security discussed in this report 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 Itau Asia Securities Limited, which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) regulated activity. Itau 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 Itau Asia Securities Limited at 29th Floor, Two IFC, 8 Finance Street – Central, Hong Kong; (iv) Japan: This report is distributed in Japan by Itau Asia Securities Limited – Tokyo Branch, Registration Number (FIEO) 2154, Director, Kanto Local Finance Bureau, Association: Japan Securities Dealers Association; (v) Middle East: This information has been distributed by Itau Middle East Limited. Related financial products or services are only available to wholesale clients with liquid assets of over $1 million, and who have sufficient financial experience and understanding, to participate in financial markets in a wholesale jurisdiction. Itau Middle East Limited is regulated by the Dubai Financial Services Authority (DFSA). In Middle East, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Itau Middle East Limited, at Al Fattan Currency House, Suite 305, Level 3, DIFC, PO Box 65703, Dubai, United Arab Emirates; (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 9:00 a.m. to 8:00 p.m.). If you wish to revaluate the presented solution, after utilizing these channels, talk to Itaú’s Corporate Complaints Office: 0800-570-0011 (on business days from 9:00 a.m. to 6:00 p.m.) or Caixa Postal 67.600, São Paulo-SP, CEP 03162-971. 7. This material is authorised by Banco Itaú BBA International S.A. pursuant to Section 21 of the Financial Services and Markets Act 2000. Banco Itaú BBA International S.A. is authorised and regulated by Banco de Portugal. Banco Itaú BBA International S.A. headquarters are located in Portugal at Rua Tierno Galvan, Torre 3, 11º Andar - Lisbon. Banco Itaú BBA International S.A. London Branch, is located at The Broadgate Tower, Level 20, 20 Primrose Street, London EC2A 2EW and is regulated by the Financial Services Authority (FRN 220622) for the conduct of UK business (FSA Register: http://www.fsa.gov.uk/register/firmBasicDetails.do?sid=93694). Banco Itaú BBA International S.A. overseas financial branches located in Madeira is authorised and regulated by Banco de Portugal. Banco Itaú BBA International S.A. also has representative offices in France, Germany and Spain which are authorized to conduct limited activities. In France, the representative office is located at 32, Rue Monceau Niveau 10, Batiment Messine Nord, Paris, 75008. The business activities conducted by the Paris office are regulated by Banque de France. In Germany, the representative office is located at Mainzer Landstrasse, 47, Frankfurt, D-60329. The business activities conducted by the Frankfurt office are regulated by Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin). In Spain, the representative office is located at Calle Pinar 7, 2º Derecha, Madrid, 28006. The business activities conducted by the Madrid office are regulated by Banco de España. None of the offices and branches deal with retail clients. For any queries please contact your relationship manager. 8. This report has been prepared and issued by the Macro Research Department of Banco Itaú BBA S.A. (“Itaú BBA”). This report is not a product of the Equity Research Department of Itaú BBA 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. * Cost of a local call.

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