Economic Outlook Macroeconomic Research – Itaú Unibanco May 2014

Overview International Activity is picking up while interest rates remain low. Activity in the U.S. is rebounding after a weak start to the year, and the Fed continues to indicate low rates for an extended period. Chinese economy is likely to stabilize following the mini-stimulus package. The recovery in the euro zone is becoming more robust. External environment remains supportive for emerging markets. However, volatility can return with higher long-term interest rates in the U.S. and with the uncertainties related to China. Brazil We forecast 1.4% GDP growth in 2014. We regard the current stronger level of the BRL as likely to be temporary. We maintain our 6.5% IPCA forecast for this year. We expect the Selic rate to remain unchanged, at 11%, until year-end. Additional adjustment in monetary policy is likely to bring Selic rate to 12.5% by the end of 2015. Fiscal adjustment will be difficult this year.

Global Economy Is Recovering   2004-2007 2012 2013 2014 2015-2020 World 5.1 3.2 3.0 3.4 3.3 USA 2.9 2.8 1.9 2.5 2.3 Euro Zone -0.6 -0.4 1.3 1.5 Japan 1.4 1.1 China 12.1 7.8 7.7 7.2 6.7 Source: Haver Analities, CEIC, Bloomberg, Itaú Unibanco

U.S. – Activity Rebounds After a Weak Start to the Year... The U.S. GDP grew only 0.1% annualized in the first quarter. We reduced our GDP forecast to 2.5%, from 2.8%, in 2014. Nonetheless, economic indicators confirm a pick-up in activity. GDP Real Growth ISM Higher than 50 indicates expansion Source: Itaú Unibanco, Institute for Supply Management, Bureau of Economic Analysis

... Without Pressuring Inflation The current wage dynamics and low inflation support the Fed guidance of low rates for an extended period. Nonetheless, the expectation of robust growth and a tighter labor market ahead could increase long-run interest rates. Payroll and Average Hourly Earnings Thousands, YoY change (%) 10-Year Treasury Yield (%) Source: Itaú Unibanco, BLS, Bloomberg

China: Few Signs of Improvement in 2Q14 After the first-quarter slowdown, March data showed a small improvement. Further moderate stimuli will also help economic activity in 2Q14. We maintain our GDP forecast at 7.2% in 2014. Retail Sales and Industrial Production 3 month average, % Additional Stimuli Package Measures RRR cut for rural banks Liberalization measures for infrastructure investment Export and employment subsidies Source: Itaú Unibanco, NBS, Haver Analytics

Europe: We Raised Our Growth Forecast to 1.3% From 1.1% in 2014 Retail sales have picked up in 1Q14, and Industrial production is maintaining a good pace. Survey data suggest that the good growth momentum continues. Industrial Production and Retail Sales YoY Growth, % GDP % Source: Itaú Unibanco, Haver Analytics

Emerging Markets: External Environment Remains Supportive With interest rates in the U.S. well-behaved and stabilizing growth in China, financial flows have returned to developing economies. But volatility may return: weak fundamentals, higher international interest rates and uncertainties surrounding China are the major risks. Exchange Rate Appreciation Since January-02, 2014 Stock Exchange *EM Stock: Geometrical average of Stock Exchange Index from Mexico, Chile, China, Indonesia, South Korea and Turkey. Source: Itaú Unibanco, Bloomberg

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

Latin America: Growth Remains Relatively Weak Peru Mexico   2013 2014 2015 GDP - % 5.6 5.3 5.9 1.1 2.7 3.8 PEN / USD (Dec) 2.80 2.85 2.90 MXN / USD (Dec) 13.1 13.2 Interest Rate- (Dec) - % 4.00 Interest Rate - (Dec) - % 3.50 4.50 CPI 2.9 3.0 2.5 4.0 3.7 3.2 Colombia Chile 4.3 4.5 4.1 3.3 COP / USD (Dec) 1930 1950 1980 CLP / USD (Dec) 526 575 3.25 4.25 5.00 1.9 3.6 Argentina 3.1 -2.0 0.0 ARS / USD (Dec) 6.5 10 13 BADLAR - (YE) - % 21.6 35.0 30.0 CPI - % (Private Estimates) 28.4 37.0 27.0 Source: Itaú Unibanco

Brazil: What Do We Expect in the Short Term?   2012 2013 2014 2015 Economic Activity GDP (%) 1.0 2.3 1.4 2.0 Unemployment (%) - December 5.4 5.1 5.6 Inflation IPCA (%) 5.8 5.9 6.5 Monetary Policy Selic Rate (%) 7.25 10.00 11.00 12.50 Fiscal Primary Surplus (% GDP) 2.4 1.9 1.3 1.7 Balance of Payments Exchange Rate (eop) 2.08 2.36 2.45 2.55 Current Account (% GDP) -2.4 -3.6 -2.8

Brazil: Latest Data Point to Activity Cool-Off... Our diffusion index for economic activity remains at low levels. Confidence continues to slide. Activity Diffusion Index* Ratio of activity indexes that increased on MoM change, 3-Month Average Confidence in the Industrial Sector Seasonally adjusted *A 47.1% Index is consistent with null GDP growth Source: Itaú Unibanco, IBGE, FGV

...Consistent With Our Expectation of Moderate Economic Growth The methodologically revised industrial production series confirms stagnation of industry since 2010. We forecast 1.4% GDP growth in 2014 and 2.0% next year. Industrial Production 12-month accumulated growth Real GDP Seasonally adjusted *Untill February Source: Itaú Unibanco, IBGE

Rationing Risks Persist The recent evolution of the electricity balance in Brazil confirms the risk of power-rationing and the system’s heavy reliance on thermal power plants, at least until 2015. Despite the electricity auction and the loan from the electricity trade chamber known as CCEE, distribution companies are likely to need more cash support in 2014. Aggregate Reservoir Levels (% of total capacity) Hydroelectric Power Generation (% of long-term average) Thermal Plant Usage (GW Average) Source: Itaú Unibanco, ONS

Brazil Has Been Particularly Favored by Recent Capital Flows NTN-B 2050 Rate (%) Five-Year Fixed-Floating Swap Rate (%) Brazilian Five-Year CDS Ibovespa Index Source: Bloomberg

BRL: Appreciation Is Likely Temporary but May Last Longer The recent exchange-rate appreciation is related to a global strengthening movement in emerging-market currencies. The government seems comfortable with the current level of the exchange rate. The central bank reduced the pace of rollovers of swap contracts, signaling flexibility. However, domestic factors such as current account deficit and U.S. treasury-yield upward trend will cause the exchange rate to weaken again during the year. Exchange Rate Monthly average Current Account Balance 12-month accumulated, USD in billions Source: Itaú Unibanco, BCB

Inflation: We Maintain Our 6.5% IPCA Forecast for This Year The IPCA climbed by 0.67% in April, after a 0.92% increase in March, below the median of market expectations (0.80%). Foodstuff prices surprised on the downside (1.2%, while our expectation was 1.55%). The year-over-year change in the IPCA reached 6.28%. We maintain our 6.5% IPCA forecast for this year. The smaller change in food prices was offset by recent revisions to electricity tariffs (to 14%, from 10% previously) and lotto game prices. Foodstuff Inflation Estimates for Regulated Prices   Annual Change 2014 2015 Regulated 5.6% 7.2% Gasoline 6.0% 8.0% Electricity tariffs 14.0% 15.0% Urban bus fares 2.0% 10.0% Others 4.5% 5.0% Source: Itaú Unibanco, IBGE

Our 2015 IPCA Forecast Remains at 6 Our 2015 IPCA Forecast Remains at 6.5% Reflecting a Different Breakdown We have lowered our 2015 estimate for regulated price increases to 7.2% from 8.0%, as we expect some of the correction in electricity tariffs to be moved up to 2014. The slowdown in expected inflation in market-set prices compared with our 2014 estimate (7.1%) is driven by our updated expectation of smaller increases in food and service prices. IPCA Breakdown YoY Change (%) Source: Itaú Unibanco, IBGE

Interest Rate: End of Cycle, If Allowed by Inflation We estimate the Selic rate at 11.00% until the end of 2014. Additional adjustment in monetary policy will bring the Selic rate to 12.50% next year. Selic % p.a Source: Itaú Unibanco, Bloomberg

Fiscal Policy: Waiting for an Adjustment The pace of federal spending remained brisk in the first quarter. With the primary surplus at 2.1% of GDP, the public sector posted the lowest result for a first quarter in the historical series. Real Expenditure Annual Growth % Public Sector Primary Surplus % GDP Source: Itaú Unibanco, BCB

Our Forecast for Fiscal Policy Primary Surplus (% of GDP) Nominal Deficit (% of GDP) Gross Public Debt (% of GDP) Gross Public Debt Minus International Reserves (% of GDP) Source: Itaú Unibanco, BCB

Conclusion Global economic recovery benefits emerging markets, if international interest rates do not increase too much. Brazilian GDP growth at around 1.4% for 2014. Domestic and international scenarios are likely to put pressure on the BRL this year. We regard the current stronger level of the BRL as likely to be temporary. We maintained our estimate for 2014 and 2015 IPCA inflation at 6.5%. We expect the Selic rate to remain at 11.00% this year and reach 12.50% in 2015. Fiscal adjustment will be difficult this year.

Our Economic Analysis Online