LatAm Macro Monthly Nov13

8/14/2019 LatAm Macro Monthly Nov13

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LatAm Macro MonthlyScenario Review

November 2013

Please refer to the last page of this report for important disclosures, analyst and additional information. Ita Unibanco or itssubsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider thisreport as the single factor in making their investment decision.

Page

Global EconomyEasier Monetary Conditions to Extend into 1Q14 3We believe that the Fed will wait for stronger evidence of an improvement in economic activity,before reducing its monetary stimulus.

BrazilConstraints for further fiscal expansion 6The room for further fiscal and quasi-fiscal policy expansion has narrowed. Our 3Q13 GDPforecast went through a slight upward revision, contributing to a rise in our estimates for GDPgrowth in 2013 and 2014.

Mexico

An Unbalanced Recovery 11The economy is recovering, but growth has been unbalanced, with exports up and internaldemand down. The lower house introduced positive changes in the tax reform bill.

Chile

Easing Cycle to Continue 14Consumption decelerated in September and several fundamentals point to below-trend growth.The central bank cut the interest rate in October and there is more to come.

Peru

Growth Slows, Composition Changes 17Growth continues to slow, but business confidence improved in September, indicating that thedeceleration will not be steeper than contemplated in our scenario.

ColombiaAn Important November on Peace Negotiations 19November 18th is the deadline for the government and the FARC to announce a peaceagreement. This is a key issue for President Santos to decide if he will be a candidate in nextyears elections.

Argentina

Falling Reserves and Political Shake-Up 21The opposition gained an important victory against Kirchnerism in the mid-term election, on theroad to the 2015 presidential election.

Commodities

We Expect an Additional Drop in Sugar Prices 24

Fundamentals explain just some of the past gains in sugar prices, so we expect further reversal inprices. WTI discount to Brent crude will probably remain wide until early 2014.

Macro ResearchIta

Ilan GoldfajnChief Economist

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

Click hereto visit our digital research library.
mailto:[email protected]:[email protected]:[email protected]://www.itau.com.br/itaubba-en/economic-analysis/publications/http://www.itau.com.br/itaubba-en/economic-analysis/publications/http://www.itau.com.br/itaubba-en/economic-analysis/publications/mailto:[email protected]


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LatAm Macro Monthly November 2013

A window of opportunity for the Emerging

Markets

The Fed signaled that it would not start tapering its monetary stimulus this year. Economic data has

been showing only a moderate recovery, particularly in the labor market. The Fed is likely to wait for

stronger evidence of an improvement before reducing its monetary stimulus, probably in March next

year.

The Feds tapering delay and improving growth numbers in Europe and China have created a more

favorable liquidity environment for emerging markets. Financial inflows resumed, opening room for

lower interest rates, a stronger exchange rate or both.

In Latin America, Mexico and Chile reduced their interest rates in October, while Peru made another

cut in its reserve requirements for local currency deposits. We expect further interest rate cuts in

Chile and Colombia this year. The monetary policy reaction should help reverse the decelerating

trend observed in the region. Country-specific factors, such as the tax reform approval in Mexico, a

possible peace agreement with the FARC in Colombia, and a recovery in business confidence in

Peru will also contribute to the reversal.

In Brazil, the higher global liquidity is reflected in the appreciation of the real, a movement that has

been reinforced by the central banks FX derivatives sales program. We have maintained our forecast

for the exchange rate by year-end at 2.35 reaisper dollar. For the end of next year, our forecast is

now 2.45 reais per dollar, from 2.55 previously. The current data suggests a slight improvement in

economic activity, which led us to revise up our GDP growth 2014 from 1.7% to 1.9%. Higher interest

rates and expected reduction of quasi-fiscal stimuli in 2014, however, cap the pace of recovery.

In Argentina, the highlight is the government's defeat in the October mid-term elections. The result

makes it difficult for the government to pursue a constitutional reform that would allow Cristina

Kirchner to be elected to a third term. Given the uncertainties regarding the economy and the loss of

international reserves, we expect a further tightening of FX controls and acceleration in the official

exchange rate depreciation.

Hope you enjoy,

Ilan Goldfajn and Macro Team

Current Previous Current Previous Current Previous Current Previous

GDP - % 2,8 2,8 3,3 3,3 GDP - % 2,6 2,5 2,7 2,7


GDP - % 2,4 2,3 1,9 1,7 GDP - % 1,3 1,3 3,6 3,6

BRL / USD eop 2,35 2,35 2,45 2,55 MXN / USD eop 12,8 12,8 12,0 12,0

Monetary Policy Rate - eop - % 10,00 10,00* 10,25 10,25* Monetary Policy Rate - eop - % 3,50 3,75 3,50 3,75

IPCA - % 5,8 5,9 5,9 6,0 CPI - % 3,6 3,6 3,7 3,5


GDP - % 2,7 2,0 0,0 0,0 GDP - % 4,2 4,2 4,4 4,4

ARS / USD eop 6,1 6,1 8,2 8,2 CLP / USD eop 500 500 525 525

BADLAR - eop - % 21,0 21,0 25,0 25,0 Monetary Policy Rate - eop - % 4,50 4,50 4,00 4,00

CPI - % (Private Estimates) 28,0 28,0 35,0 35,0 CPI - % 2,2 2,2 2,6 2,6


GDP - % 3,8 3,8 4,2 4,2 GDP - % 5,0 5,0 5,2 5,2COP / USD eop 1880 1880 1950 1900 PEN / USD eop 2,70 2,70 2,80 2,80

Monetary Policy Rate - eop - % 3,00 3,00 3,00 3,00 Monetary Policy Rate - eop - % 4,25 4,25 4,25 4,25

CPI - % 2,5 2,5 2,9 2,9 CPI - % 3,1 3,1 2,5 2,5

Scenario Review

Brazil Mexico

2013 201 4 2013 201 4

World Latin America and Caribbean

2013 201 4 2013 201 4

Argentina Chile

2013 201 4 2013 201 4

Colombia Peru

2013 201 4 2013 201 4

*We changed our forecast on October 17th, after the Copom minutes release.


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Global economyEasier Monetary Conditions to Extend into 1Q14

We expect the U.S. Fed to maintain the current pace of its monetary stimulus until March.

Meanwhile, we forecast growth in the U.S. to improve in 2014, while China has confirmed bettermomentum in 2H13 and Europe continues to stabilize.

With no material change in the world growth outlook, the prolonged monetary expansion in theU.S. should benefit emerging markets.

We now believe that the U.S. Fed will start tapering its asset-purchase program only in March

(we previously expected this in December). There is little evidence that activity is improving in 4Q13,

and the labor market has moderated in the second half of the year. We maintain our expectation that

growth will accelerate to 2.5% in 2014 from 1.5% in 2013. But we believe that the Fed will wait for

stronger evidence of an improvement before reducing its monetary stimulus.

China confirmed the pick-up in activity, with GDP up 7.8% yoy in 3Q13 compared with 7.5% in2Q13. We see some moderation in 4Q13, but overall, China is more supportive for world growth in

2H13.

In Europe, Spain returned to growth in 3Q13 after nine quarters of contraction , another sign that

the region has stabilized. Overall, the recovery in the euro zone is still incipient in an environment of

very low inflation. But Europe now contributes to world growth instead of being a drag, as was the

case until earlier this year.

With no material change in the world growth outlook, the prolonged monetary expansion from the

U.S. Fed benefits emerging markets. Financial inflows reaccelerate, creating room for interest-rate

cuts and/or for exchange-rate appreciation. Indeed, we believe that the central banks in Chile and

Colombia will feel more comfortable to go ahead with a further rate cut this year, as we expect. And inBrazil, the global environment favors a more appreciated Real at the end of the year than we

previously expected. Liquidity conditions would become less favorable next year, when the Fed finally

goes ahead with the QE tapering.

U.S. Fed likely to maintain current stimulus pace until March 2014

The U.S. Congress agreed to fund the federal government until January 15 and suspend the

debt limit until February 7. The solution came after a 16-day shutdown of the federal government

that increased uncertainty and reduced the public sector output in 4Q13. Moreover, the fiscal

uncertainty should remain relatively high at least until mid-January, when Congress has to approve

the budget to avoid another shutdown and a longer-term debt ceiling.

The economic impact of Octobers fiscal battle is not large but is enough to prevent theeconomy from accelerating significantly in 4Q13. We estimate that U.S. GDP grew 2.0%

(seasonally adjusted annual rateSAAR) in 3Q13. With the shutdown, we expect this moderate pace

to continue in the 4Q13 (see graph).

In addition, the labor market was showing some weakness even before the shutdown. The 3-

month-moving average of the non-farm payrolls decelerated to 143k per month in September. This is

significantly lower than the 223k of last April (see graph), right before FOMC members started to

signal a QE tapering this year.


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We now believe that the Fed will start reducing

the asset purchase program in March instead

of December. A 2% (SAAR) GDP growth pace is

below the FOMC forecast of 3% in 4Q13. We think

the Fed would be more comfortable to start

tapering once non-farm payrolls are over 180k,

instead of the less-than-150k level seen recently.

Moreover, the fiscal deal in October was short

term and hence keeps some uncertainty for 1Q14.

Finally, the shutdown has affected the collection

and release of economic data, reducing the

visibility of the pace of recovery. Overall, the

economy doesnt seem to have accelerated in

2H13 as might have been expected by the FOMC.

We think that the economy will pick up in 2014, but the Fed will likely wait for strong evidence before

slowing down its asset purchases.

We see balanced risks around the March tapering start. The last FOMC meeting statement reinforcedthat the asset-purchase program is data dependent. The economy could pick up in the coming

months and Congress address the fiscal issue by mid-December, leading the FOMC to start tapering

before March. However, there seems to be similar probability that the current economic fog will not

clear until March, leading the FOMC maintain its monetary stimulus longer.

We lowered our forecast for the 10-year Treasury to 2.65% from 2.80% at the end of 2013 but keep it

at 3.4% at the end of 2014. In terms of growth, we maintain GDP growth forecasts at 1.5% in 2013

and 2.5% in 2014.

ChinaFocus shifts to reforms as the pick-up in 3Q13 GDP is confirmed

Chinas 3Q13 GDP was 7.8% yoy, in line with expectations . This represents a considerableincrease in the pace of sequential growth to 8.8% qoq (SAAR) from 6.4% and 7.6% in 1Q13 and

2Q13, respectively.

Activity was strong in July and August, but has fizzled out slightly in September. September

industrial production was 10.2% higher than one year ago, compared with 10.4% in August. Urban

fixed-asset investment grew 20.2% year-to-date, compared with 20.3% in the previous month. Finally,

retail sales were up 13.3% yoy in September compared with 13.4% in August.

The NBS Purchasing Managers Index (PMI) increased to 51.4 in October from 51.1 inSeptember. The improvement suggests a good start to activity in 4Q13, although we still expect

some moderation toward the end of the year.

With the 7.5% growth target for 2013 almost assured, policymakers in China are moving to a

more neutral stance and focusing on structural reforms. Activity was better in 3Q13 as

policymakers signaled more support to short-term activity after the slowdown seen in the first half.

Now, the official 7.5% growth target for 2013 is all but assured. Hence, we see the PBoC fine-tuning

its communication and liquidity policy to a more neutral stance in 4Q13, compared with 3Q13.

Overall, policymakers have also shifted the emphasis of their statements toward maintenance of

policies in 2H13 and a focus on structural reforms.

The Communist Partys Third Plenary Session in November will be an important focal point forreforms. We do not expect to see details for implementation, but broad outlines for policy direction

for the next few years. These will likely focus on the structure of the government, tax reforms,financial liberalization, the household registration system, measures to improve the productivity of the

private sector and ways to increase the influence of market forces in the economy.

100

120

140

160

180

200

220

240

260

280

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

Source: BEA, Ita

qoq SAAR thousandsper month

Forecasts

Economy to improve in 2014 (but the Fed will wait)U.S. GDP and Non-Farm Payroll

GDP (left)

Payroll (3-monthsmoving average)


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We maintain our growth forecasts at 7.7% and 7.3% for 2013 and 2014, respectively.

Spain returns to growth

In Spain, GDP increased 0.1% qoq in 3Q13 after

nine quarters of contraction (see graph). Net

exports are the main driver of growth in the country,

but domestic demand is also stabilizing. We believe

that Spain has exited its prolonged recession.

The country is the fourth largest economy in the euro

area and was strongly hit by the debt crisis. We see

its return to growth as another sign that the

region has stabilized.

Euro zones inflation slows further,bringing back discussion of a rate cut

The euro zones CPI declined to 0.74% yoy in October from 1.10% in September. Lower energyand food inflation were the main culprits, but services inflation also weakened in the month. Overall,

the picture of low inflation in the euro area has sharpened.

We see the ECB on hold, but this further decline in inflation from an already low level creates

a significant risk of easing in December. Although the full breakdown of Octobers CPI is not yet

available, we suspect that one-off factors prevailed. If so, the ECB could look beyond this recent fall

in inflation and stay put. However, the composite PMI in October declined to 51.5 from 52.2 in

September. Given this very-low-inflation environment, another weak PMI in November would tilt the

balance towards further easing.

CommoditiesWe expect an additional drop in sugar prices

The Ita Commodity Index (ICI) remained roughly flat in October, falling 0.4% through the

month. The breakdown shows small changes in all sub-indexes: agricultural (-1.8%), metals (0.5%)

and energy (0.0%). Among single commodities, the main highlights were the rise of sugar and the fall

of WTI crude oil prices.

Overall, there were no major data releases or changes to fundamentals in October to prompt

strong moves in prices or adjustments to our forecasts. The fiscal uncertainty in the U.S. was

resolved without a major impact in the growth outlook. The activity pickup in China was confirmed in

3Q13, but we (and the market consensus) continue to see it as temporary. Moreover, the shutdown of

the federal government in the U.S. created a vacuum of commodity-specific data in the month. Major

agencies, like the USDA, DOE and CFTC, have delayed their data releases.

Sugar prices rose a strong 7.5% until October 18, before reverting part of the gains and

closing the month 1.0% up. The movement followed the 5.1% gain seen in September. The

increase is consistent with the global deficit we forecast for the 2H13. But the outlook is for the global

surplus to resume in 1H14. This explains the partial reverse in the end of October. We believe the

adjustment is not over and, hence, we see additional drops in sugar prices ahead.

Supply conditions for corn and soybean improved, with favorable weather for the harvest in

the U.S. and planting in Brazil. It didnt change our forecasts, but it reduced upside risks to prices in

both markets.

The Energy ICI remained unchanged as the increase in Brent prices was offset by the decline

in WTI prices. The WTI discount to Brent widened to USD 12.0/bbl in late October from an average

of USD 4.5/bbl in September as Crude oil surpluses returned to Central U.S. (i.e. inflows greater than

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

2010 2011 2012 2013

Spain Exits its RecessionSpanish GDP growth

Source: Eurostat, Haver

qoq


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use and outflows to the Gulf Coast and East Coast). Outflow capacity is expected to outpace inflows

only in 1Q14, hence the discount may remain above USD 8/bbl until the end of 2013. Meanwhile,

Brent prices remained within the USD 106-110/bbl range. With a higher WTI-to-Brent discount in the

short term, we now expect the ICI energy sub-index to increase 5.8% yoy in 2013 and fall 0.1% yoy in

2014 (previously: 6.6% and -0.8%, respectively). It is worth mentioning that our 2014 year-end level

forecast remains the same.

Forecasts: World Economy

GDP Growth

World GDP growth - % 2.8 -0.6 5.2 4.0 3.2 2.8 3.3

USA - % -0.3 -2.8 2.5 1.8 2.8 1.5 2.5

Euro Area - % 0.3 -4.4 2.0 1.5 -0.6 -0.3 0.9

Japan - % -1.0 -5.5 4.7 -0.6 2.0 1.9 1.4

China - % 9.6 9.2 10.4 9.3 7.8 7.7 7.3

Interest rates and currencies

Fed Funds - % 0.2 0.1 0.2 0.1 0.2 0.2 0.2

USD/EUR - eop 1.40 1.43 1.34 1.30 1.32 1.37 1.33

YEN/USD - eop 90.3 92.1 81.5 77.6 86.3 100.0 105.0

DXY Index* - eop 83.1 76.8 80.0 79.6 79.8 83.5 83.5

2014F2008 2009 2010 2011 2012 2013F

Source: Central Banks, IMF, Haver and Ita.* The DXY is a leading benchmark for the international value of the U.S. dollar, measuring its performance against a basket of currencies thatincludes the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.

Brazil

Constraints for further fiscal expansion

The room for further fiscal and quasi-fiscal policy expansion has narrowed. Risks of a sovereign

rating downgrade reduce the room to maneuver. As a result, we have increased the forecast for theprimary budget surplus in 2014 to 1.3% from 1.1% of GDP. Our estimate for 2013 remains

unchanged at 1.7% of GDP, given the recent fiscal data worsening. We expect slower growth in

public investment and in administrative expenses in the coming years.

The postponement of QE tapering in the U.S. and the outlook for a milder decline in primary

surplus in 2014 remove some of the pressure on the exchange rate. We have maintained our forecast

for the exchange rate by year-end at 2.35 reais per dollar. For the end of next year, our forecast is

now 2.45 reais per dollar, from 2.55 previously.

A relatively stronger currency helps to relieve inflationary pressures. We have cut our estimate for

the IPCA consumer price index this year to 5.8% from 5.9%. Our forecast for 2014 has been revised

downward to 5.9% from 6.0%.

Our 3Q13 GDP forecast went through a slight upward revision, contributing to a rise in our

estimates for GDP growth, to 2.4% from 2.3% in 2013, and to 1.9% from 1.7% in 2014. After the

release of the minutes for the October monetary policy meeting, we revised our forecast for the

benchmark interest rate. We expect the Selic rate at 10.00% p.a. by the end of this year and 10.25%

p.a. next year.

Fiscal policy: Worse results in the short term, but less room for maneuvering

should restrain new stimuli

The public sector posted a primary deficit of 9 billion reaisin September, which equals 2.3% of

GDP. The reading was much worse than market estimates (a surplus of 500 million reais), marking

the weakest performance for the month in the historical series started in 2002. The September deficit

was influenced by both atypical and permanent factors, particularly the pick-up in federal spending.


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Central government outlays expanded 12% yoy in real terms, the fastest pace since 2011. Over 12

months, the primary budget balance stands at 1.6% of GDP (August: 1.8%), the lowest since late

2009. The annual recurring surpluswhich removes atypical revenues and expenseswas 1.1% of

GDP in September (August: 1.3%), the lowest since 2010.

Central government budget figures point to a

gradual recovery in tax revenues. Expenses,

which had been on a downward trend, rebounded

sharply in September. The six-month moving

average of revenues managed by the Revenue

Service posted the fastest year-over-year growth in a

year (2% in real terms). Average six-month growth in

central government spending had been declining,

reaching about 4% in August. However, in

September, outlays picked up again (influenced by

expenses related to the Labor Ministrys FAT fund,

pensions and subsidies to the electricity sector, as

well as by investments), bumping up the half-yearlyexpansion pace to around 6%, the highest in nearly a

year.

Quasi-fiscal incentives, especially National Treasury loans to state-owned banks, are

moderating in 2013. Federal governments loans to BNDES, the state development bank, should

reach 35 billion reais this year, extending the gradual and steady decline seen in recent years. In

2012, the Treasury loaned about 45 billion reais to BNDES, down from 55 billion reais in 2011.

Although the overall quasi-fiscal stance is still expansionary, credit incentives as a percentage of

GDP have been on a downward trend this year.

Some signs of stabilization in the growth of central government expenditures in previous

months and a recent accommodation in loans to state-owned banks suggest that the room for

new fiscal stimuli is vanishing. Notwithstanding the delay in QE tapering in the U.S., we

understand that a scenario of lower international liquidity (in the medium term) and risks of a

sovereign ratings downgrade for Brazil (in the short term) will drive fiscal (i.e., budget) and quasi-

fiscal (i.e., off budget) government policies.

With less room for fiscal maneuvering and signs of a more parsimonious stance towards

fiscal and quasi-fiscal policies, our estimates for the primary budget surplus in the medium

and long run have been revised slightly upward. Our forecast for the consolidated primary

balance in 2013 is unchanged at 1.7%. The federal tax revenue should expand 1.5% in real terms

this year, while federal expenses should increase 5.4%. Our estimate for the primary balance of

regional governments remains at 0.4% of GDP. For 2014, we now expect a less steep decline in thefiscal performance. The expected drop in the primary budget surplus next year is partly explained by

lower atypical revenues in real terms, as compared to 2013. However, we have revised upward our

estimate for the primary budget balance to 1.3% of GDP from 1.1%, due to a reduction of

approximately 8 billion reais in our spending forecast compared with our previous scenario. Our

estimate for real growth in federal tax revenues in 2014 was unchanged at 2.3%, with federal

spending rising 4.2%. We maintained our forecast for the primary balance of states and municipalities

at 0.2% of GDP.

We anticipate a reversal of federal tax breaks and a slight increase in the tax burden starting

in 2015. We also expect stricter control of central government expenses, particularly in 2015. This

additional fiscal effort by the central government (which we expect to come from the part of public

investment and personnel expenses) should be partly offset by a sharper structural decline in the

primary budget balance of regional governments. The latter should follow the fiscal room (which we

estimate around 0.2 to 0.3% of GDP) created by the change in the index that adjusts the regional

-10%

-5%

0%

5%

10%

15%

20%

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Source: National Treasury, Ita

Total revenuesTotal spending

yoy, 6mma,IPCA deflated

Central Government ExpensesOutgrow Revenues


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Page 8


government debt owed to the federal government (a bill was recently approved in the Lower House

and now awaits approval in the Senate). In the add-up, we upwardly revised our estimate for the long-

term primary budget balance to 1.7% of GDP from 1.5%. In this scenario, the public sectors net debt

should reach 39% of GDP in 2020 (previous forecast: 40%; 2012: 35%), with the general

governments gross debt probably around 60% by the end of the decade (previous forecast: 61%;

2012: 59%).

A less depreciated currency and a slower decline in the current-account deficit

We have maintained our forecast for the exchange rate by the end of 2013 and changed for

2014. We have maintained our forecast for the exchange rate by the end of 2013 at 2.35 reaisper

dollar. The Central Bank is expected to maintain its daily swap program until the end of the year, but

is unlikely to fully roll over auctions that are due soon. The roll-over should be adjusted according to

the behavior of the exchange rate. The scenario in 2014 should include some volatility, driven by

monetary policy in the U.S. and by the election cycle in Brazil, which we expect to contribute to

weaken the local currency. But we now expect this devaluation to be less intense than previously

thought, as the decline of primary surplus should be smaller than we expected. We revised our

forecast for the exchange rate by the end of 2014 to 2.45 reaisper dollar from 2.55.

The current-account deficit narrowed in

September to USD 2.6 billion. A larger trade

surplus and hefty inflows of profits and dividends

largely explain this slide. Foreign direct investment

stood at USD 4.8 billion in September, remaining

robust. The highlight in terms of flows was once

again the local fixed-income market, where inflows hit

another all-time high, at USD 7.2 billion. Adding this

to USD 2.3 billion in inflows to the stock market, USD

9.6 billion entered the local market, the most since

November 2009.

We have revised our estimates for the trade

balance and for the current-account deficit in

2014. We broke down our forecasts for the trade

balance, which unveiled a not-as-favorable scenario for next year, even with few changes in our

assumptions. After incorporating into our disaggregated models the expectation of low prices for iron

ore and soybeans and of an abundant corn crop in the U.S. (reducing demand for Brazilian corn), our

forecast for the trade balance came out lower than estimated by aggregate models. This scenario is

reinforced by the outlook of a less depreciated currency. All in all, we have revised our forecast for

the trade surplus in 2014 to USD 7 billion from USD 12 billion. As for the balance for crude oil and its

byproducts, we expect a deficit of USD 9.5 billion in 2014, meaning a net improvement of USD 7billion, because of higher production and the absence of accounting distortions which characterized

the first half of 2013. A lower trade surplus and a relatively stronger currency will slow down the pace

of the adjustment in the current account gap, which should end 2014 at 3.1% of GDP (previously

2.7%).

Slight downward revision in our inflation forecasts for 2013 and 2014

Our estimate for the IPCA in 2013 has been reduced slightly, to 5.8% from 5.9%. Inflation should

pick up in 4Q13 (to 1.9% from 0.6% in 3Q13), but less than we forecasted. Seasonal factors, such as

pressure on food, clothing and some travel services, and the lagged effect of currency depreciation in

previous months put pressure on inflation late in the year. But pressure from the exchange rate, for

instance, will be less intense. Recent appreciation in the Brazilian realreduces the magnitude of the

exchange-rate pass-through to prices in the short term. Additionally, we pushed forward the increase

in fuel prices to mid-December, transferring part of the effect on inflation to early next year (our

10.1 9.9

11.0

4.4

8.9

1.5 2.2

7.8

0.0 0.0

5.8

0.0 0.00

2

4

6

8

10

12

Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14

FX Swaps Expirations Accumulate inthe Coming Months

billion dollars

Source: BCB, Ita


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Page 9


scenario contemplates a 6% hike in gasoline and diesel prices at refineries by mid-December, with an

impact of 0.16 p.p. on the IPCA distributed over December 2013 and January 2014). There is an

ongoing discussion about a pricing methodology for fuels, which could move the price hike up to late

November.

Our estimate for the IPCA in 2014 has also been

revised downward, to 5.9% from 6.0%. A higher

real interest rate and a less-depreciated currency

have helped to reduce the inflation forecast. But

unemployment rate at a lower level than initially

expected cushions that impact.

Slower increases in market-set prices and

sharper lifts in regulated prices in 2014. Market-

set prices should rise 6.3%, with some relief in food

and service prices. We anticipate a smaller change in

the food group (slightly above 6%), following two

years of increases that were much higher thanheadline inflation. Service prices should slow down

somewhat due to the expectation of accommodation

in the labor market, including a smaller hike in the minimum monthly wage. Regulated prices should

advance 4.5%, as the effect of discounts on electricity tariffs will not be repeated.

For the IGP-M, we have revised the forecast for 2013 upward and the estimate for 2014

downward. We have raised our forecast for the IGP-M in 2013 to 5.5% from 5.3%, as current data

point to somewhat higher inflation at the wholesale level. Producer prices (IPA-M) should climb 5.1%,

as manufacturing prices rise 7.8% and agricultural prices slide 1.4%. For the other components, we

forecast increases of 5.4% for the IPC-M and 8.2% for the INCC-M. Our estimate for 2014 has been

lowered to 5.5% from 6.0%, due mostly to a less depreciated exchange rate in our scenario.

Milder decline in the third quarter increases GDP estimates for 2013 and 2014

GDP contraction in 3Q13 was probably milder

than we expected. We have revised upward our call

for 3Q13 GDP to -0.3% qoq/sa from -0.5%. Retail

sales were stronger in July and August, boosting

activity in retail and service sectors. Temporary

factors (such as earmarked credit for furniture and

appliance purchases) boosted household spending in

3Q13, limiting the slide in economic activity. One

remaining uncertainty surrounding the 3Q13 GDPreport is the methodology change in National

Accounts to incorporate data in the Monthly Service

Survey (PMS). This change may impact quarterly and

annual GDP readings.

Revised 3Q13 GDP raises growth estimates for

2013 and 2014. Given a smaller slide in 3Q13 and maintaining our 4Q13 forecast at a gain of 0.6%,

we have increased our estimate for GDP growth in 2013 to 2.4% from 2.3%. A smoother decline in

3Q13 GDP increases the carry-over for 2014. Hence, even maintaining expected quarterly growth

paths throughout 2014, our GDP forecast increased to 1.9% from 1.7%.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Source: IBGE, Ita

IPCAMarket-set pricesRegulated prices

yoy

Upward Regulated Prices in 2014

forecast

6.2

4.63.8

2.40.5 0.0 0.2

1.9

3.5

6.9

10.5

-0.2

-13.6

5.34.1

9.7

-0.4

2.0 2.1

4.7

2.3

4.7

-15

-10

-5

0

5

10

15

Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13

Source: IBGE, Ita

CoreBroad

%, real salesqoq/saar

Growth in Core Retail Sales Accelerates


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Page 10


Fundamentals still point to moderate economic

growth ahead. We have maintained our estimates for

quarterly growth in 2014 at a moderate pace.

Confidence among industrial entrepreneurs dropped

again in October, by 0.2%. This index has fallen 8.3%

since March. Lower confidence reinforces a scenario

of slowing investment. Still-high manufacturing

inventories are also a sign of slow economic growth

ahead. Furthermore, we have adjusted our scenario

for somewhat higher interest rates and for slower

growth in government spending. These are additional

sources of growth moderation in 2014.

Labor-force growth slows down; unemployment

should advance less than expected. The working

population has expanded at a slower pace, indicating a cool-down in the labor market. Employment

among youths aged 18 to 24, for instance, has declined more sharply in recent months. But the

unemployment rate remains low because of the behavior of the labor force, which decreased inrecent months, preventing an increase in unemployment. Thus, with the unemployment rate already

at a lower level, we now expect it to reach a lower level than we previously estimated, even

considering normal behavior for the labor force throughout next year. We expect the average

unemployment rate to be closer to 6.1% than to 6.5% (previous forecast).

Non-earmarked new loans are stable. The daily average of non-earmarked new loans was virtually

stable in September in real terms (0.1% mom/sa). Low growth was partly caused by the beginning of

a labor strike by bank tellers. Overall delinquency remained at 3.25%, with a marginal decline in non-

earmarked delinquency and marginal increase in earmarked delinquency. As for the total credit stock,

annual growth in non-earmarked credit, which had been slowing down for more than a year,

rebounded to 2.7% in September from 2.5% in August, in real terms. The market share of state-owned banks was stable, interrupting an upward trend seen since October 2011.

Copom: Extending the cycle, but not that much

The benchmark interest rate should continue to rise. The minutes of the latest meeting by the

Monetary Policy Committee (Copom) maintained the tone of previous documents and official

statements. It was a sign that the tightening cycle should be extended for a while longer to help to

reverse inflationary resilience that is still observed. Forecasts published in the minutes indicate the

IPCA remaining above the target until 2015, reinforcing the need for additional adjustment in

monetary conditions.

However, the Copom signals preliminary factors that could help the prospective scenario forinflation.On the domestic front, we believe that the Copom expressed more confidence that fiscal

policy will move toward a neutral zone, by stating that it understands the fiscal momentum as the

change in the structural surplus in relation to what was observed in the earlier period.

Recent strengthening in the exchange rate also helps to reduce inflationary risk. The minutes

highlighted a cool-down in the volatility (...) of currency markets, referring to the substantial

appreciation of the Brazilian real in the weeks before the meeting, which will be an important driver for

future inflation dynamics. In our view, successful interventions by the central bank in the currency

market provide more confidence to the Copom that the recent stability in the Brazilian real will be

more permanent.

Hence, interest rates should not increase much beyond the current 9.50% level. We believe thatalready-implemented monetary tightening and the recent evolution of inflation drivers (especially

60

70

80

90

100

110

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

Declining Confidence

Confidence among entrepreneurs

Source: FGV

ServicesManufacturing

index 2010=100, sa


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Page 11


exchange-rate dynamics) make the Copom more comfortable in relation to the prospective scenario.

Hence, the tightening cycle should not be extended much beyond current Selic levels.

We forecast another 50-bp increase in the next Copom meeting in November and a final 25bphike in January, taking the Selic rate to 10.25%.

Forecasts: Brazil

Economic Activity

Real GDP growth - % 5.2 -0.3 7.5 2.7 0.9 2.4 1.9

Nominal GDP - BRL bn 3,032 3,239 3,770 4,143 4,403 4,789 5,132

Nominal GDP - USD bn 1,652 1,620 2,142 2,473 2,252 2,218 2,135

Population (millions) 191.5 193.5 195.5 197.4 199.2 201.0 202.8

Per Capita GDP - USD 8,623 8,371 10,956 12,529 11,304 11,034 10,528

Unemployment Rate - year avg 7.9 8.1 6.7 6.0 5.5 5.5 6.1

Inflation

IPCA - % 5.9 4.3 5.9 6.5 5.8 5.8 5.9

IGPM - % 9.8 -1.7 11.3 5.1 7.8 5.5 5.5

Interest Rate

Selic - eop - % 13.75 8.75 10.75 11.00 7.25 10.00 10.25Balance of Payments

BRL / USD - Dec 2.40 1.75 1.69 1.84 2.08 2.35 2.45

Trade Balance - USD bn 25 25 20 30 19 0 7

Current Account - % GDP -1.7 -1.5 -2.2 -2.1 -2.4 -3.6 -3.1

Foreign Direct Investment - % GDP 2.7 1.6 2.3 2.7 2.9 2.7 2.3

International Reserves - USD bn 194 239 289 352 379 377 381

Public Finances

Primary Balance - % GDP 3.4 2.0 2.7 3.1 2.4 1.7 1.3

Nominal Balance - % GDP -2.0 -3.3 -3.3 -2.6 -2.5 -4.6 -4.0

Net Public Debt - % GDP 38.5 42.1 39.1 36.4 35.2 36.2 37.1

2013F2011 2012 2008 2009 2014F 2010

Source: IMF, IBGE, BCB, Haver and Ita.

(For our monthlyBrazil forecasts,click here.)

Mexico

An Unbalanced Recovery

Mexicos lower house introduced positive changes in the tax reform bill submitted by Pea Nietos

government. The senate approved most of the changes. A political reform is likely within the next

weeks, which would make way for the debate on energy reform.

The economy is recovering during 3Q13, but growth composition has been unbalanced, with

exports up and internal demand down. We expect the economy to grow by 1.3% this year and 3.6%

in 2014.

Tax hikes will likely keep inflation above the target center (but within the target range) next year.

We now expect 2014 inflation at 3.7% (3.5% in our previous scenario).

The central bank reduced the policy rate by 25 bps but closed the door on new rate cuts.

The end of the easing cycle, a successful energy sector reform and the economic recovery will

likely support the Mexican peso next year. The postponement of the tapering will also help in the

short term. We continue to expect the peso to end 2014 at 12.0 to the dollar, from 12.8 at the end of

this year.

Tax reform and, last, but not least the energy reform

Mexicos lower house approved a modified version of the tax reform bill sent to congress byPea Nietos government. The house voted 317-164 to approve the bill, as the left-wing PRDsupported the initiative and the PAN opposed to it. The bill approved doesnt include VAT on private
http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/


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education tuition, mortgages, home rentals or sales, which were contained in the initial version of the

bill. However, the top income-tax rate for individuals was raised to 35% from a proposed 32%. In

addition a 5% tax on high-fat foods was created. The new tax regime for PEMEX will be discussed,

together with Energy sector reform. Among the proposals from the initial version that were included in

the approved bill are: equalization of the VAT rate on the border with the one charged in the rest of

the country; taxing sugar beverages at MXN 1 per liter; a 10% tax on capital gains from the stock

exchange and on dividend payments; and a 7.5% Mining Royalty tax. The senate later approved the

bill with few changes, so the tax reform is now back to the lower house for final approval. The PAN

refused to participate in the senate voting session.

According to the government, the approved bill would add around 1.1% of GDP in fiscal

revenues in 2014 (versus 1.4% in the previous version of the bill). To offset the lower revenues

next year, legislators raised the oil price forecast (a key variable for the budget). Finance Minister

Videgaray, however, estimates that the reform will add 2.8% of GDP in revenues by 2018 (slightly

below the Finance Ministrys estimates before the modification of the bill).

Apart from the new tax code, the congress approved the fiscal responsibility law. This includes

the governments proposal to create a sovereign wealth fund to save part of the excess revenuesduring good times. In addition, the lower house included in the bill a cap of 2.5% for real current

expenditure growth in 2015 and 2016. From 2017 on, real current expenditure growth is capped at

the potential growth rate of the economy.

In our view, the changes introduced by the congress are positive because they limit the risks

to growth next year and make more credible the fiscal 0% medium-term public deficit target

(excluding PEMEX investments). By removing the governments proposed taxes on the Housing

sector, congress has avoided hurting an already fragile Construction sector. In addition, caps on

current public expenditures will leave the fiscal accounts less vulnerable to political conditions.

The PAN and the PRD each presented its own versions of political and electoral reforms. The

PAN initiative was presented in the senate, while the PRD sent its reform proposal to the lowerhouse. The debate is significant for the macro outlook because PAN has made its support for Energy

sector reform conditional on approval of political and electoral reforms, and without the PAN, the PRI

would not be able to pass far-reaching energy legislation.

According to political analysts, the PRI and the PAN will be able to find common ground on

political reform, so an energy reform before the end of this year is likely. In this context, the

secondary laws regulating the new framework for the energy sector could be approved during the first

quarter of 2014. Still, the clashes between the PAN and the PRI during the tax reform debate show

that there is the risk that the PRI could meet resistance from the PAN to approve the energy reform.

An unbalanced recoveryOn one hand, the IGAE (monthly proxy for

Mexicos GDP) increased 0.22% from July toAugust, bringing quarter-over-quarter growth to

2.6% (annualized). The number confirms that

Mexicos economy is recovering gradually from a very

weak first half. Manufacturing activity grew 7.1%

qoq/saar, consistent with a recovery in external

demand (in fact, manufacturing exports gained 11%

during 3Q13).

On the other hand, retail sales grew by only 0.1%in the same period, hinting that private

consumption continues to be sluggish. In addition,98

100

102

104

106

108

110

112

114

116

Jan-10 Dec-10 Nov-11 Oct-12 Sep-1

Export-Driven Growth

Source: INEGI, Ita

ManufacturingProduction

ConstructionRetail sales


13/28

Page 13


construction activity (down 7.0% qoq/saar in August) and imports of capital goods (down 9.5% during

3Q13) point to another contraction in gross fixed investment.

We expect Mexicos economy to continue its gradual recovery over the next quarters. U.S.growth will likely continue to lift Mexicos export sector, which should support internal demand. We

expect the economy to grow 3.6% next year, following an estimated 1.3% expansion in 2013.

Headline inflation falls further, while core inflation continues below the target

center

Headline inflation fell to 3.27% year over year during the first half of October, close to the

center of the target range. The decrease was due to both a reduction in non-core inflation (to 5.85%

from 5.96% previously) and in core inflation (to 2.46% from 2.5%). While the exchange rate

weakened over the past few months, inflation for core goods fell further, to 2.47% (core goods ex-

food inflation is below the lower bound of the target range). Meanwhile, core services inflation is at

2.46%, highlighting the lack of demand-side inflationary pressures in Mexico. Within non-core prices,

non-processed food inflation is running at a low 0.71%, while inflation for regulated prices increased

to 9.15% (previously 8.97%), influenced by the removal of gasoline subsidies.

We expect inflation to end this year at 3.6%. For 2014, we expect inflation at a similar level

(3.7%). Unfavorable base effects will likely drive headline inflation higher in November and

December. Next year, the fiscal package will likely sustain inflation above the target center, but within

the target range. In our previous scenario, we were expecting inflation at 3.5% by year-end 2014.

No more cuts

Mexicos central bank reduced the policy rate by 25 bps in October, bringing it to 3 .5%. Thiswas the second consecutive meeting in which the board decided to lower rates. Although the tone of

the press statement shows that the board is still concerned about the recovery of the economy and

very comfortable with the inflation outlook, the central bank makes clear that it does not intend to cutrates further (additional reductions of policy rate are not advisable in the foreseeable future.)

The board classifies the domestic economic recovery shown by some indicators as

incipient. Also it still sees considerable slack both in the labor market and in the overalleconomy. Although the board expects a narrower output gap in the monetary policy forecast horizon,

it still expects a lot of slack for a long time to come.

The central bank considers that the balance of risks for inflation has improved. Board

members once again noted that core inflation is hovering around record-low levels, while non-core

inflation is falling as the temporary shocks that were lifting it in recent months fade. In addition, they

highlighted that the severe storms that hit Mexico in September have not impacted inflation at this

point. Inflation expectations for 2014 increased in response to the likely tax hikes next year, but

inflation expectations for the longer term continue stable. Economic growth is the key downside risk

for inflation. While financial-market volatility and tax changes were cited as upside potential, the

board downplayed each of those factors.

We do not see policy-rate moves at least until 2015. In our scenario, Mexicos economy

continues its gradual recovery throughout the rest of this year and the next. So we see the policy

rate unchanged at 3.5% both by the end of 2013 and by the end of 2014 (from 3.75% in our previous

scenario).

A stronger peso ahead

Although the Fed will likely start the tapering during 1Q14, we see room for the Mexican peso

to appreciate. Our exchange-rate forecasts are unchanged at 12.8 to the dollar by year-end 2013

and 12.0 to the dollar by year-end 2014. A successful energy reform will be crucial to drive the


14/28

Page 14


currency stronger. The ongoing economic recovery and the end of the easing cycle will also help to

strengthen the peso.

Forecasts: Mexico

Economic Activity Real GDP growth - % 1.4 -4.7 5.1 4.0 3.8 1.3 3.6

Nominal GDP - USD bn 1,101 895 1,047 1,161 1,177 1,261 1,410




Inflation

CPI - % 6.5 3.6 4.4 3.8 3.6 3.6 3.7

Interest Rate

Monetary Policy Rate - eop - % 8.25 4.50 4.50 4.50 4.50 3.50 3.50

Balance of Payments

MXN / USD - eop 13.54 13.06 12.36 13.99 13.01 12.80 12.00

Trade Balance - USD bn -17.3 -4.7 -3.0 -1.5 0.0 -7.0 -8.0



International Reserves - USD bn 85.4 90.8 113.6 142.5 163.5 193.0 208.0Public Finances


Net Public Debt - % GDP 18.1 28.6 30.2 32.1 33.7 34.0 35.0

2013F20122011 2014F 200 8 200 9 2010

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

Chile

Easing Cycle to Continue

Consumption decelerated in September and several fundamentals point to below-trend growth.We maintain our GDP forecasts at 4.2% and 4.4% for 2013 and 2014 respectively.

Annual inflation fell to 2.0% in September, while core measures remain below the lower bound of

the central bank target. We expect the weaker currency to offset the negative contribution from the

looser output gap, leading to higher inflation. We keep our CPI forecasts at 2.2% and 2.6% for this

and the next, respectively.

The central bank cut the interest rate by 25 bps in October (to 4.75%). The timing was surprising,

considering the most recent consumption figures we had been expecting the easing cycle to start in

November. We think that below-trend growth and inflation below the target leaves room for another

cut by 25 bps in November and 50 bps more in cuts during 1Q14.

The Chilean peso has weakened, led by the earlier-than-expected start of the easing cycle. We

still expect that lower domestic interest rates and worse terms of trade will lead to a weaker currency

next year. We maintain our forecast at 500 pesos to the dollar at year-end 2013 and 525 for year-end

2014.

Presidential and parliamentary elections will be held on November 17, while a potential runoff will

be held on December 15. According to recent polls, Michelle Bachelet (from Nueva Mayoria, the

opposition coalition) and Evelyn Matthei (from Alianzapor Chile, the government coalition) will likely

compete in the runoff.

The economy grows below trend in 3Q13Growth was weak in September. The IMACEC (monthly proxy for GDP) grew 3.9% year over year,

below both our expectations and the Bloomberg consensus. On a sequential basis, activity fell 0.8%


15/28

Page 15


from August, bringing the quarter-over-quarter growth to a still below-trend rate (4.1% annualized)

during 3Q13, following a weak 1.4% increase during 2Q13 and 3.1% during 1Q13. Consumption

slowed in September, while manufacturing and building-permit growth remained in negative territory.

Retail and supermarket sales rose 7.0% and 1.3% year over year, respectively (after increasing

12.0% and 9.3% in August), while manufacturing production and building permits fell by 1.0% and

11.2%, respectively.

In addition, several factors are still pointing to below-trend growth ahead. Although business

and consumer confidence improved somewhat in September, this was due to temporary factors. Also,

lower copper prices will continue reducing investment growth. Finally, fiscal policy will be less

expansionary. On the other hand, lower policy rates will likely contribute to smoothing the impact of

these factors on the economy.

We maintain our GDP forecasts. We still expect Chiles GDP to grow 4.2% this year and 4.4% in

2014.

Inflation returns to the lower bound of the target

Headline CPI fell to 2.0% year over year in September, reaching the lower bound of the target

range, while the key core measures are still below the range. Excluding food and energy, inflation

increased to 1.4% (from 1.2%).

We expect inflation to remain below target throughout this year and the next. In our view, lower

private demand growth will contribute to keep non-tradable inflation in check (currently at 3.5%).

However, a weaker currency will lead to a higher tradable inflation. In the short term, we cantrule out

that recent frosts lead to temporarily higher prices for non-processed food. We maintain our forecasts

at 2.2% and 2.6% for year-end 2013 and year-end 2014, respectively.

The Central Bank starts the easing cycle

The central bank reduced the interest rate by 25 bps in October, surprising both us and the

market consensus. The decision does not represent a major departure from our previous scenario

(we were expecting that the first rate cut of the cycle would take place in November), and it is justified

by below-trend economic growth and a below-target inflation rate. However, its timing was puzzling,

especially considering that the decision took place after the release of the strong August retail sales

number, and the central banks tone had beensuggesting that the board was uncomfortable providing

stimulus to an economy in which consumption continues to expand at an unsustainable pace.

In the press statement that accompanied the

decision, the board cited some new elements

supporting the cut. The Feds decision to postpone

the tapering (and its impact on the U.S. dollar); thefact that many leading indicators are pointing to a

further slowdown of internal demand; and lower short-

term inflation expectations. Furthermore, the central

bank cited a consolidation of a less-favorable

external scenario in the medium term (lower global

economic growth, worse terms of trade, tighter

external financial conditions and the end of the global

cycle of mining investment). In our view, a tighter

domestic fiscal policy aided the decision.

We expect another rate cut in November, so the

policy rate would end this year at 4.5%. In the short term, we expect the central bank to deliver the

same amount of monetary stimulus signaled in its most recent monetary policy report (50 bps). In

4.3

4.5

4.7

4.9

5.1

5.3

Jan-12 Jul-12 Jan-13 Jul-13

The Easing Cycle Has Begun

Source: Bloomberg, Ita

Monetary PolicyRateSWAP 3mSWAP 6m


16/28

Page 16


2014, we expect growth to continue below potential and inflation below the target, leaving room for

two additional 25-bp cuts in the first quarter of 2014.

Weaker currency after the Central Bank decision.

The Chilean peso has weakened since the rate cut. Despite the postponement of the tapering by

the Fed, the peso has weakened 4.2% since the central bank reduced rates.

We forecast the peso at 500 and 525 by year-end 2013 and 2014. In our scenario, we expect that

lower interest rates and worse terms of trade will lead to a weaker currency.

Higher public deficit led by lower mining tax revenues

We adjusted our forecasts of fiscal balance from -0.3% of GDP to -0.9% in 2014. The

government announced recently that fiscal spending will grow 3.9% in 2014, after increasing an

estimated 5.9% this year. However, the government estimates a 22.8% reduction in private-mining

tax revenues, due to rising costs in the sector. In addition, the government also mentioned that in

2014 the transitory increase of the mining tax will end, which will also contribute to lower revenues.

Presidential elections to be held soon

Presidential and parliamentary elections will be held on November 17. Nine candidates will run

in the elections. If there is no candidate with more than 50% of the votes, the president will be

elected in a runoff (December 15). According to the latest available polls, there will be a runoff

between Michelle Bachelet (socialist, from the opposition coalition) and Evelyn Matthei (from the

government coalition) and Michelle Bachelet will likely become the next president.

Michelle Bachelet, if elected, pledged to raise corporate taxes to finance educational reform

and to change the constitution through the current legislative mechanisms. She would aimto raise revenues by 3% of GDP, mainly by gradually increasing the corporate tax rate from 20% to

25% in 2018. The extra resources would be used to finance educational reform (which would cost

about 2% of GDP) and to reach a zero structural fiscal balance by the end of her term. Although Ms.

Bachelet will likely fail to get the number of seats in congress necessary for a constitutional change,

she explicitly said that her government would not seek changes through a constituent assembly.

Forecasts: Chile

Economic Activity

Real GDP growth - % 3.3 -1.0 5.8 5.9 5.6 4.2 4.4

Nominal GDP - USD bn 179.6 172.3 217.6 251.2 267.5 283 290



Unemployment Rate - year avg 7.8 9.6 8.3 7.2 6.5 6.2 7.0Inflation

CPI - % 7.1 -1.5 3.0 4.4 1.5 2.2 2.6

Interest Rate


Balance of Payments

CLP / USD - eop 629 506 468 521 479 500 525

Trade Balance - USD bn 6.1 15.4 15.6 10.5 3.4 2.5 -0.6

Current Account - % GDP -3.2 2.0 1.5 -1.3 -3.5 -3.7 -4.1


International Reserves - USD bn 23.2 25.4 27.9 42.0 41.6 43.0 45.0

Public Finances

Nominal Balance - % GDP 4.7 -4.3 -0.3 1.5 0.6 -0.8 -0.9

Net Public Debt - % GDP -22.6 -12.0 -7.8 -10.7 -7.8 -7.8 -8.6

20 0 8 2 00 9 20 10 2 0 14 F 2 0 1 3 F 2 01 1 2 0 12

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


17/28

Page 17


Peru

Growth Slows, Composition Changes

Growth continues to slow, but business confidence improved in September, indicating that the

deceleration will not be steeper than contemplated in our scenario. We maintain our forecast of GDP

growth at 5.0% this year and 5.2% in 2014.

Construction is slowing, while mining activity accelerates. In our view, this change in composition

will consolidate in coming years, generating a healthy decrease in the current account deficit.

The Feds tapering delay reinforces our forecast of a more appreciated currency this year, at 2.70

soles per dollar, depreciating to 2.80 next year.

Slower growth, different composition

GDP grew 4.3% year-over-year in August (4.5% in July), lower than market expectations for the

fourth month in a row. The result was in line with our estimate (4.3%). The 3-month average annual

growth declined to 4.4%, from 4.6% in July and 5.6% in June.

Construction is slowing and mining is picking up. Construction activity (7.7% year-over-year)

decelerated notably, although it continues to outgrow the overall economy. The 3-month average

annual growth stood at 8.7%, the lowest in 19 months. Mining growth, on the other hand, accelerated

to a solid 7.9% year-over-year, from 3.5% in July. In recent years, growth in Peru was led by

investment, particularly the construction of mining projects. These investments are maturing and

construction is decelerating, while mining production accelerates. Going forward, especially into

2014/15, mining will probably consolidate as the sector with stronger growth in the Peruvian

economy, because important mining projects will begin operations.

Business confidence improved in September.After

7 monthly declines in a row, the central banks indexthat measures businesses opinion about the state of

the economy in the next 3 months increased to 53

points in September (48 in August). The index is

tightly correlated with private investment growth and

its recovery in September indicates that the

economys slowdown will not be more pronounced

than contemplated in our scenario. We maintain this

years GDP growth forecast at 5.0%, which assumes

that the economy will grow at a 5.5% annualized pace

in coming months. Our GDP growth forecast for next

year stands at 5.2% (also unchanged).

Current account deficit to improve ahead

The trade surplus remains low.Perus trade surplus reached 0.5 billion dollars in the twelve months

ended in August, down from 3.5 billion dollars in January and 9.7 billion dollars in the beginning of

2012. The deterioration stems from the decline of Perus terms of trade and the strong growth in the

volume of imports, while the volume of exports remained roughly flat.

The change in the composition of growth will help to correct the external imbalance. Going

forward, we expect the deceleration of investment to slow down imports, while the pickup in mining

production will boost the volume of mining exports especially in 2014 and 2015. Therefore, despite

the ongoing declining trend of Perus terms of trade, we see the current account deficit declining to

4.5% of GDP next year, from 5.2% of GDP this year.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Aug-05 Aug-07 Aug-09 Aug-11 Aug-13

Growth Composition Changing

yoy,3m avg

Source: INEI, Ita

GDPMiningConstruction


18/28

Page 18


We expect FX at 2.70 soles per dollar by yearend.The Peruvian sol has appreciated recently, after

reaching levels above 2.80 to the dollar during late August and early September. The central bank

has stopped selling dollars since September 15 (except from one small operation in October 9). The

change in consensus for the beginning of the Feds tapering from December 2013 to March 2014

reinforces our forecast of a more appreciated currency this year, at 2.70 soles per dollar, depreciating

to 2.80 next year.

Central Bank Cuts Reserve Requirements Again

Consumer prices in Lima increased 0.04% in October, slightly above market consensus.As a

result, CPI increased 3.04% year over year (from 2.83% in September), reaching the upper limit of

the central banks target (between 1% and 3%). Between January and October, prices increased by

2.91%. The breakdown showed that inflation was driven by higher prices in some food components

and furniture, adding 0.22 p.p. to monthly inflation, partially offset by lower prices in transport. We

expect inflation at 3.1% by the end of this year. For next year, we expect 2.5%.

The central bank reduced once again the reserve requirement for deposits in soles, from 17%

to 16%. The reserve requirement for deposits in dollars remained unchanged, as the central bankhas been aiming to stimulate the expansion of credit in the local currency. With growth decelerating to

below-potential, the central bank could see room to cut the policy rate in coming quarters and in

2014. However, the prospect of reduction in monetary stimulus in the U.S. next year and its effects on

an economy which is still partially dollarized will probably bring caution to the central bank. We see

the policy rate remaining at the current 4.25% until the end of 2014, and additional cuts in reserve

requirements.

Politics: Changes to the cabinet

The Prime Minister Juan Jimenez Mayor tendered his resignation to President Humala.Cesar

Villanueva, previously the regional president of San Martin, assumes the prime minister role. In his

first public pronouncement, Villanueva stated that improving public security is one of presidentHumalas priorities. This may be the first of more changes to the cabinet. But the Minister of Finance

will likely continue in his post.

Forecasts: Peru

Economic Activity

Real GDP growth - % 9.8 0.9 8.8 6.9 6.3 5.0 5.2

Nominal GDP - USD bn 126.6 127.0 153.5 176.2 200.3 214 227




Inflation

CPI - % 6.7 0.2 2.1 4.7 2.6 3.1 2.5Interest Rate


Balance of Payments

PEN / USD - eop 3.11 2.88 2.82 2.70 2.57 2.70 2.80

Trade Balance - USD bn 2.6 6.0 6.7 9.3 4.5 -0.3 0.3



International Reserves - USD bn 31.2 33.1 44.1 48.8 64.0 72 80

Public Finances

Nominal Central Govt Balance - % GDP 2.4 -1.3 -0.2 1.9 2.1 0.3 0.4

Gross Central Govt. Debt - % GDP 24.2 27.3 23.5 21.2 18.4 16.5 15.7

2008 2009 2010 2013F 2011 2012 2014 F

Source: Central Bank, INEI, Haver and Ita.


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Page 19


Colombia

An Important November on Peace Negotiations

November 18this the deadline for the government and the FARC to announce a peace agreement.

This is a key issue for President Santos to decide, until November 25

th

, if he will be a candidate innext years elections.

Economic activity data have been mixed, with strong retail sales and weak manufacturing.

Leading indicators continue to hint at weakness ahead. We maintain our forecast of GDP growth at

3.8% this year and 4.2% in 2014.

In its latest monetary policy meeting, the central bank sounded less confident about the pickup of

economic activity. We believe in a 25-bp rate cut in December and dont expect rate hikes in 2014.

The FX rate is hovering close to our year-end forecast of 1880 pesos to the dollar. The central

bank continues to buy around 10 million dollars per day.

Focus on peace negotiations

President Santos needs to decide until November 25 whether he will be a candidate in next

years election. His decision seems to be closely tied with the peace negotiations with the FARC.The deadline for the peace agreement, stipulated by the government, is November 18, exactly one

year after the negotiations began. Up to now, agreement has been reached only on land reform, one

of the five-point agenda. Recently, authorities have reduced the length of breaks within the

negotiation process, attempting to improve the chances of reaching an agreement in the short-term.

This change includes establishing a longer negotiating period with only a four day interval (reduced

from nine). It seems that, for Santos to announce its candidacy, more advances need to occur before

the deadline, such as reaching agreement on the issue of FARC rebels participation in politics.

Uribes Centro Democrtico has chosen scar Ivn, former finance minister (2007-10), to bethe candidate for next years presidential elections. Uribes party is clearly against the peacenegotiations, which may be an incentive for the FARC to agree on peace with the government and

increase the chances of Santos reelection.

Mixed data on economic activity

Retail sales continue to strengthen. Retail sales

grew 6.9% year over year in August, above both

market consensus and our forecast (5.3% and 4.6%,

respectively), while sales ex-vehicles increased 8.6%

versus one year ago. Between January and August,retail sales reached an annual growth of 3.7% (4.8%

excluding vehicles). The data reveal that consumption

of goods continues to strengthen. The improvement

can also be observed in the credit market, with a

decline in delinquency rates and pickup in new

consumer loans.

Manufacturing remains weak. Manufacturing

production declined 3.9% year over year (after

growing 0.2% in July), below both our estimates and

market consensus (-1.5% and -1.1%, respectively). The 3-month average annual growth ofmanufacturing production has been in negative territory for one year now, in concert with low

business confidence in the industrial sector. The trend reveals that the sector continues a drag for the

economy.

-10%

-5%

0%

5%

10%

15%

20%

25%

Aug-09 Aug-10 Aug-11 Aug-12 Aug-13

Strong Retailing, Weak Manufacturing

Source: DANE, Ita

Manufacturing ProductionRetail Sales ex-fuel

yoy, 3mma


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Page 20


Confidence remains at low levels.According to Fedesarrollo, consumer confidence increased only

slightly to 14.6% in September, from 13.4% in August (the numbers represent the balance between

positive and negative answers). Excluding the previous month, this is the lowest level of consumer

confidence since May 2011. The breakdown shows that lower confidence has been led by the

worsening of expectations about the economy in the next 12 months, which is the only sub

component in negative territory (-8.7%).Business confidence in the industrial sector improved to 0.4%

in September (from -1.8% in August) but remains at levels consistent with sluggish production growth

going forward.

Other leading indicators also hint at slower

growth ahead.The central bank has updated its

IMACO leading indicator, which correlates well with

GDP growth 5 months ahead. The index declined

further in the last couple of months, indicating that the

economy will decelerate in the second half of this

year.

Our GDP growth forecast stands at 3.8% this yearand 4.2% next year.In all, we believe the data is

consistent with our scenario of growth slowing down

in 2H13, after a positive surprise in 2Q13.

Central bank sees higher downside risks to growth

The central bank kept the policy rate unchanged at 3.25%, as widely expected. The decision

was unanimous according to governor Uribes post-decision speech. Members continued to state that

the interest rate is at a level that stimulates the economy.

The central bank seemed less confident with economic activity than in the previous statement.

In the forward-looking paragraph, members continued to argue that downside risks for economicgrowth are not negligible, but added that those risks may have increased recently. The central

banks GDP growth forecast for this year is between 3.5% and 4.5%, which means that activity would

be growing below trend in the second half. In fact, the central bank removed from the statement the

analysis that economic activity forecasts show a level of product converging to its potential.

The monetary authority remains comfortable with the inflation outlook. Members mentioned that

the 12-month CPI remained stable at 2.3% in September and that inflation remains at the lower

bound of the target range (2-4%). They also said that inflation expectations remain anchored at

center-target (3.0%).

We expect a rate cut in December and no moves in 2014.In our scenario, the economy will also

grow below potential in the second half of this year, which would lead the central bank to implement

an additional rate cut of 25bps in December. In addition, we do not expect rate hikes in 2014, as the

economy continues to grow below potential and inflation remains in check.

We forecast FX at 1880 to the dollar by year-end. The peso is hovering close to our year-end

forecast. The central bank continues to buy around 10 million dollars per day, in line with the program

of up to 1 billion dollars in purchases announced in the September monetary policy meeting.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Nov-93 Nov-98 Nov-03 Nov-08 Nov-13

IMACO Indicates Slower Growth

Source: Dane, Central Bank , Ita

GDP growth(12M/12M)

IMACO


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Page 21


Forecasts: Colombia

Economic Activity

Real GDP growth - % 3.5 1.7 4.0 6.6 4.2 3.8 4.2

Nominal GDP - USD bn 244 234 287 336 359 388 397


Per Capita GDP - USD 5,496 5,199 6,305 7,304 7,706 8,244 8,321 Unemployment Rate - year avg 11.3 12.0 11.8 10.8 10.4 9.0 8.5

Inflation

CPI - % 7.7 2.0 3.2 3.7 2.4 2.5 2.9

Interest Rate


Balance of Payments

COP / USD - eop 2244 2044 1914 1943 1767 1880 1950

Trade Balance - USD bn 0.4 1.7 1.4 5.0 4.9 4.0 4.5




Public Finances


Gross Public Debt - % GDP 30.9 36.1 36.4 34.2 32.2 30.9 30.0

20 12 20 13 F 20 14F 2010200 8 2 009 20 11

Source: Central Bank, DANE, Haver and Ita.

Argentina

Falling Reserves and Political Shake-Up

The opposition gained an important victory against Kirchnerism in the mid-term election, on the

road to the 2015 presidential election.

There are uncertainties about the course of economic policies in the coming months. We expect

further tightening of FX controls to stop the drain on international reserves, and an acceleration of theofficial exchange rates depreciation.

Adverse results for the government in the mid-term elections

The opposition gained an important victory against Kirchnerism in the mid-term election.New-

Peronist forces and opposition parties will likely pose a tough challenge to Kirchnerism in the

presidential election of 2015. According to the final results of the mid-term election, the former chief of

the cabinet and current mayor of Tigre County, Sergio Massa, garnered almost 44% of the votes in

the province of Buenos Aires for the lower chamber, while the candidate supported by Kirchner won

32%. The result exceeds the 5% vote difference won by Massa in the August primaries. Massa has

criticized the high inflation, underperforming officials and safety problems in Argentina. His economic

team is led by former top officials from the first term of the Nestor Kirchner government.

It will be very difficult for the government to pursue a constitutional reform that would allow

Cristina Kirchner to be elected to a third term. In the City of Buenos Aires, Macris candidates for

the Senate obtained 39% of total votes while the incumbent got third place. In this way, Kirchnerism

lost all its senators in the city. Kirchnerism has also lost in the other main electoral districts such as

Mendoza, Crdoba and Santa F. Although Kirchnerism may maintain the majority in both chambers,

political analysts do not discard future realignments in Congress and further loss of political power. To

reform the constitution requires a special majority (2/3 of votes) in each congressional chamber.

There are now strong potential presidential candidates for 2015:Sergio Massa (Peronist party),

Mauricio Macri (right-wing PRO), Hctor Binner (Socialist party) and Julio Cobos (Radical party).

Kirchnerism does not have a candidate yet. Daniel Scioli (governor of the Province of Buenos Aires)

will likely try to take the post. President Kirchner did not vote because she is still recovering from


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Page 22


surgery at the beginning of October to remove a blood clot on her brain. The exact date she will

return to office is still unknown, but will most likely be during November.

The odds that a political change could lead to market-oriented economic reforms have

increased. However, it is still a long road to 2015 from a political point of view. In addition, there

are uncertainties about the course of economic policies in the coming months. We expect further

tightening of FX controls to stop the drain on international reserves, and an acceleration of the official

exchange rates depreciation.

International reserves position continues to deteriorate

Argentinas trade balance showed a USD 0.8billion surplus in September, similar to the

amount reported in September 2012. The last-12-

month surplus remains at USD 9.4 billion. Exports

registered a significant deceleration (-9.8% QoQ/saar)

after posting 6.1% QoQ/saar growth in August and

23.3% QoQ/saar growth in July. Imports are currentlyfalling at a pace of 16.2% QoQ/saar. Despite the

decrease in fuel imports (-8.7% YoY), the 12-month

rolling energy balance deficit worsened to USD 5.8

billion, from USD 5.7 billion. Fuel exports dropped

30% YoY in September. We see downside risk to our

USD 10 billion trade-surplus estimate for 2013 due to

the recent poor export performance. We expect the

surplus to fall to USD 8.0 billion in 2014.

The trend in international reserves is worse than we thought. The central bank has borrowed

USD 1.3 billion to support the level of international reserves during September and October through

external credit lines. However, international reserves continued to fall at a rapid pace (almost USD

10.0 billion year to date). International reserves stand at USD 32.0 billion, net of the recently

confirmed external loans an additional USD 8.7 billion in USD reserve requirements are also

computed into the central banks liability. We now expect international reserves to fall USD 9.0 billion

(to USD 34.3 billion) in 2013 instead of USD 6.0 billion (assuming that the central bank will make use

of the remaining USD 1.7 billion available in credit lines from foreign banks). Our expectation for

Argentinas international reserves by year-end 2014, which implies a USD 7.0 billion decrease from

year-end 2013, does not assume a triggering of the GDP warrant.

A one-off sharp depreciation risk is low in our view. Instead, we expect authorities to allow the

peso to depreciate more rapidly and see a risk of a formal multiple-exchange-rate regime to address

over-valuation. We also believe that the government is likely to introduce new controls on travelsabroad to stop the drain of dollars and put renewed pressure on companies to bring dollars into the

country. The worsening trend in international reserves increases the expectation of currency

devaluation and the introduction of a dual-exchange-rate system. Our current scenario assumes a

30% annual depreciation pace for the remainder of 2013, which would bring the exchange rate to 6.1

pesos to the dollar by the end of the year. For 2014, we expect a 35% depreciation pace, which

would bring the FX rate to 8.24 by December. In the informal FX market, the so-called blue dollar

surpassed the 10 pesos mark (70% above the official FX market), while the Badlar rate continued to

rise to 19.5%. We keep our interest rate forecasts for the end of this year and the next at 21% and

25%, respectively.

0

10

20

30

40

50

Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

Just Taking a Breather

Source: BCRA, Ita

Official FXAnnualizedDepreciation Rate

Monthly changes


23/28

Page 23


Positive surprise in activity

A better-than-expected figure in September and revisions led us to increase our growth

forecast for this year. The IGA, a GDP proxy produced by the consulting firm OJF, increased 1.0%

(seasonally-adjusted) in September, after three consecutive declines in the previous months. The

result, propelled by a rebound in the industrial sector, was better than market expectations. Although

the economy decelerated in the months before September as we had expected, the recent recovery

and revisions in the series improved the growth outlook for the whole year. We now expect the

economy to grow 2.7% in 2013 (previously 2.0%). However, we continue to expect zero growth next

year due to tighter import controls, lower growth in Brazil and weaker harvest growth.

Still rising inflation.Consumer prices in Argentina rose 2.1% month over month in September (vs.

1.93% in September 2012), according to a private-sector survey published by a congressional

commission, bringing annual inflation to 25.4% in September from 25.2% in August. We expect

inflation to continue to accelerate and to reach 28% in 2013 and 35% in 2014, driven by a weaker

exchange rate in both the official and parallel markets.

Talks on debt issuesThere has been some talk that restructured bond holders and holdouts may negotiate an end

to the litigation against Argentina before the Supreme Court decides on whether or not it will

hear the case.There are few details about the proposal, and the Argentine governments position

remains unclear. While a successful agreement could open the countrys access to international

markets, there are still many lingering uncertainties.

Forecasts: Argentina

Economic Activity

Real GDP growth (Private Estimates) - % 3.1 -4.2 8.0 5.1 -0.2 2.7 0.0

Nominal GDP - USD bn 324.8 305.5 368.7 446.0 475.5 516.5 535.9




Inflation

CPI (Private Estimates) - % 20.3 14.9 26.4 22.8 25.6 28.0 35.0

Interest Rate

BADLAR - eop - % 19.75 10.00 11.25 17.19 15.44 21.00 25.00

Balance of Payments

ARS / USD - eop 3.45 3.80 3.98 4.30 4.92 6.10 8.24

Trade Balance - USD bn 12.6 16.9 11.6 10.0 12.7 10.0 8.0

Current Account - % GDP 2.1 3.6 0.8 -0.4 0.1 -0.5 -1.1



Public Finances

Nominal Balance - % GDP 1.4 -0.6 0.2 -1.7 -2.6 -1.9 -1.9

Gross Public Debt - % GDP 44.9 48.2 44.6 40.1 41.5 38.7 37.0

200 8 2009 2010 2 014F 2013F2011 2 012

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


24/28

Page 24


Commodities

We Expect an Additional Drop in Sugar Prices

Fundamentals explain just some of the gains in sugar prices, so we expect prices to drop further

ahead.

WTI discount to Brent crude will probably remain wide until early 2014, as logistical bottlenecks in

the Central U.S. show up again.

The Ita Commodity Index (ICI) was virtually

unchanged in October, falling just 0.4% during the

month. The breakdown by component shows small

changes in all sub-indexes: Agriculture (-1.8%),

Metals (0.5%) and Energy (0.0%). In terms of

products, the highlights were higher sugar prices and

lower WTI crude prices. The fiscal uncertainty in the

U.S. was resolved without a major impact on the

growth outlook. The activity pick-up in China wasconfirmed in 3Q13, but we (and the market

consensus) continue to see it as temporary. The

partial shutdown of the U.S. government delayed data

releases by several agencies some numbers were

made available later (and do not change the

scenario), while other relevant reports were not published.

Agricultural commodities were affected the most by the interruption of data releases by U.S.

government agencies. The absence of weekly reports from the Commodity Futures Trading

Commission (CFTC) affected all commodity categories. Grains, soybeans and beef were further

impacted by probl

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