Economic Outlook Macro Research – Itaú Unibanco July, 2013

Agenda International Global economy at a new stage. Better growth perspectives in the U.S., emerging economies decelerate. The expectation of the Fed´s policy normalization has caused a sell-off in the emerging markets. The impact depends on each country´s fundamentals. Brazil Markets’ adjustment to the Fed and popular demonstrations have produced a relevant chance in the macroeconomic scenario. The Real has depreciated along with other currencies, but it has lost more value against the dollar than its more than its pairs. Weaker Real leads to worse inflation perspectives in 2013 and stronger need to raise interest rates. Fiscal stance is likely to become less expansionary, but popular demonstrations have reduced the probability of a deeper public spending adjustment. More uncertain environment and higher interest rate affect negatively the growth perspectives.

U.S.: Payroll Surprises Again in June Labor market in the U.S. remains strong. The payroll has gained 195k in June (BBG survey: 165k) and was revised at 70k in the two previous months. The unemployment rate remained stable, at 7.6%. Payroll – seasonally adjusted, thousands Unemployment Rate – % Source: Itaú Unibanco, BLS

The Fed Signals Stumili Reduction: Sell-Off in the Emerging Markets We believe the Fed will reduce it´s asset purchases pace in the September meeting. 5-year Nominal Rates bps change, May-to-Date Exchange Rates % change, May-to-Date Source: Itaú Unibanco, Bloomberg

China: Focus on Reforms, Lower Growth Recent policy signaling reflects less concern about short term growth and more focus on structural reforms that can lead to long run sustainable growth . GDP – Growth YoY, % 5 Source: Itaú Unibanco, CEIC

Emerging Economies Decelerate GDP Growth – Emerging Economies QoQ, SAAR Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 3.3% 1.7% Countries: Brazil, Mexico, Chile, Colombia, South Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand, Russia, Ukraine, Poland, Hungary, Czech Republic, Turkey, South Africa Source: Itaú Unibanco, Haver Analytics, FMI

World: Our Expectations for the Next Years   2004-2007 2012 2013 2014 2015-2020 World 5.1 3.2 2.8 3.4 3.5 USA 2.2 1.9 2.5 2.3 Eurozone -0.5 -0.7 0.7 1.4 Japan 1.5 1.3 1.0 China 12.1 7.8 7.5 7.2 6.8 Source: Haver, CEIC, Bloomberg, Itaú Unibanco

Commodities: Our Expectations for the Short Term Itaú Unibanco Commodities Index Source: Itaú Unibanco

Latin America: Growth Divergence Peru   Mexico 2013 2014 GDP - % 6.0 5.8 2.5 3.6 PEN / USD (YE) 2.70 MXN / USD (YE) 12.2 12.0 Interest Rate - (YE) - % 4.25 4.00 CPI - % 2.7 3.5 Colombia Chile 3.8 4.7 4.5 COP / USD (YE) 1900 1850 CLP / USD (YE) 510 525 3.25 4.50 2.8 3.0 2.2 Argentina 2.0 0.0 ARS / USD (YE) 5.9 7.7 BADLAR - (YE) - % 21.0 25.0 CPI - % (Private estimates) 30.0 35.0 Source: Itaú Unibanco

Growth in Brazil Disappointed GDP Forecasts for 2012 (%) GDP Forecasts for 2013 (%) Source: Latin Focus Consensus Forecasts

Brazil: Our Expectations for the Short Term   2012 2013 2014 Economic Activity GDP % 0.9 2.2 2.3 Inflation IPCA % 5.8 6.1 5.9 Monetary Policy Selic Rate % 7.25 9.75 Fiscal Primary Surplus 2.4 1.7 1.1 Balance of Payments Exchange Rate (eop) 2.08 2.18 Current Account (% GDP) -2.4 -3.3 -2.9 Source: Itaú Unibanco and BCB

What Explains the Weak GDP in the Last Few Years? GDP Growth Breakdown QoQ, SAAR Deleveraging: Higher real interest rates (+150 bps) Macroprudential measures (reserve + capital requirements) Reduction in government current expenditure growth (to 0% from 10%-15%) Reduced BNDES disbursements Global risk aversion (VIX up to 40) High inventories, decelerating growth and imports Supply Issues: Fiscal expansion and interest rate cuts; economy reacts slowly Excessive interventionism creates higher economic policy risk Productivity deceleration seems stronger than cyclical factors; lower potential growth With low productivity growth, rising wages reduce margins and become a limitation on investment Inflation accelerates, affecting real income and consumption Signs of growing net imports Source: Itaú Unibanco, IBGE

Gradual Recovery Reflects Lower Potential GDP GDP (% Change, QoQ/sa) GDP – Annual Growth Source: Itaú Unibanco, BCB

Volatile Industrial Production Data, Investment Shows Signs of Weakness Again The industrial production has dropped in May, after a sharp rise in the previous month. The fall was widespread and has reached most subsectors. The capital goods production had an important fallback. High interest rates, weaker Real and higher uncertainty are likely to cause a longer cool down in investment. Industrial Production – seasonally ajusted Investment – seasonally ajusted Source: Itaú Unibanco and IBGE

Confidence Remains Weak Industry Confidence Index (FGV) Consumer Confidence Index (FGV) Source: Itaú Unibanco , FGV

Growth Diffusion Points to Weak Activity Ahead GDP vs. Diffusion Index Broad Data Set - Diffusion Source: Itaú Unibanco

Will the Labor Market Remain Tight? Unemployment Rate %, sa Average Real Wages sa (2003=100) Year average 2011 6.6 2012 5.5 2013 5.4 Annual change 2011 2.7% 2012 4.2% 2013 1.2% Source: IBGE, Itaú Unibanco

Risk: Jobs Creation Slowing Down Formal jobs creation (Caged) was well below expectations in May. Gradual activity recovery is likely to increase the hiring pace, but the persistence of weak data in the next months may lead to a less favorable labor market perspective New Jobs (CAGED) seasonally adjusted, thousands Occupied Population annual change Source: Itaú Unibanco, Ministry of Labor

More Depreciated Exchange Rate, but there Is Overshooting Exchange Rate – Reais per Dollar Source: Itaú Unibanco, BCB, Bloomberg

Exchange Rate Causes Higher Inflation IPCA – Consumer Price Index Source: Itaú Unibanco , IBGE

Impact of Further Depreciation on Inflation Exchange Rate Pass-Through – 10% Devaluation of the Brazilian Real Number of Quarters After Devaluation Exchange Rate 2.18 2.38 2.58 IPCA 2013 6.1% 6.5% 7.0% IPCA 2014 5.9% 6.3% Source: Itaú Unibanco

Stronger Need to Raise Interest Rates… Yield-Curve Pricing of Selic Rate Real Interest Rates – Long-Term Bonds (NTN-B 50) Source: Itaú Unibanco, Bloomberg

…and Less Expansionary Fiscal Stance Primary Surplus - % GDP Net Debt - % GDP Source: Itaú Unibanco, BCB

Challenges – Relatively High Labor Costs Manufacturing Sector – Hourly Compensation Costs in 2011 (USD) Change in Unit Labor Costs in USD Terms (2005-10) Source: U.S. Bureau of Labor Statistics

Challenges – Heavy Tax Burden Tax Burden – % of GDP Source: Heritage Foundation, International Energy Agency (2011); Design: Itaú Unibanco

Challenges: Infrastructure, Productivity Infrastructure Ranking (World Economic Forum) Ease of Doing Business 2012 Ranking (World Bank) Source: World Economic Forum, World Bank

Challenges - Less Labor, Need More Investment Labor contribution decreases. Growth depends on increasing investments and productivity. GDP Growth Decreasing Labor Contribution Source: IBGE, Itaú Unibanco and U.S. Bureau of Labor Statistics

Challenges – Lack of Domestic Savings Public Spending on Social Security 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 5% 15% 25% 30% Population aged 65+ (% total) Mexico Brazil Poland Italy USA Japan Colombia Spending on social security (% GDP) ok Source: IBGE and Itaú Unibanco

Challenges - Domestic Savings Must Increase to Enable Investments to Grow Investment Rate Source: IMF and Itaú Unibanco

Conclusion World: news from the American economy have increased markets volatility in the short term, but the U.S. recovery is positive for the medium term. ü Higher interest rates in the U.S. are here to stay, but some correction in the asset prices is likely to happen after the sell-off in the emerging markets is finished. ü Brazil: weaker Real leads to higher inflation, higher interest rates and less expansionary fiscal stance. ü More uncertain environment (internal and external) is likely to reduce growth. The labor market is a risk. ü

Long-Term Scenario Source: Itaú Unibanco