April 2011 1

Brazil:Where next?

Guilherme da NóbregaEconomistItaú BBA

April 2011 2

Latin America:A healthy departure from the past

Deepening democratic values are helping improve macro policies

Voter discipline: less experimentation, more stability, longer-term thinking

New consumer mindset demands low inflation, product quality, sustainability, global ties

Well-designed income transfer programs reduce poverty

Global integration creates world-class companies

Demand for education is growing

April 2011 3

Latam macro achievements: Inflation control, external solvency

Inflation - average annual rateMajor Latam regions

90-99 00-09

South America 273% 8%

Central America 162% 8%

Caribbean 12% 8%

Source: IDB

15%

14%

13%

12%

11%

10%

9%

8%

90 96 02 08

Foreign reserves - % of GDPArgentina, Brazil, Chile, Colombia,Mexico, Peru, Venezuela

April 2011 4

Political openness and market-friendly policies are paying off

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2007 2008 2009 2010 2011

Brazil, Chile, Peru and Mexico

Argentina and Venezuela

Greece

April 2011 5

5

15

14

6

730%

Presidents

Finance ministers

CB presidents

Currencies

Avg annual inflation

Brazil: two very different 15-year periods

1980-1994 1995-2010

2

3

5

1

7%

April 2011 6

2 3 4 2 27

28

38

5

11

3 2

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

• Usiminas• Mafersa• CELMA

• Acesita • Acesita Energética

• Fosfértil• CST• Copesul• Petroflex

• CSN• Açominas • Cosipa • Embraer

• PQU

• Light

• CVRD• BANERJ

• Telebrás System

• BEMGE• Gerasul

• DataMec

• BANESPA• BANESTADO

• BEG

1991 to 2002 (US$ billion)

Steel

Petrochemical

Mining

Power

Oil & Gas

Financial

Transports

Telecom

Sanitation

Other

7.9%3.6%

8.4%

30.9%

0.7%6.7%

6.1%

2.2%

32.1%

1.5%

Proceeds – Breakdown by Sector Highlights

Steel

Petrochemical

Fertilizers

Mining

Aerospace

Railroads

Telecommunication

Privatized Sectors

Ports

Financial

Sanitation

Toll-Roads

Power

Oil & Gas

Partially Privatized Sectors

Privatization

April 2011 7

“Plano Real” – 15 years of inflation control

IPCA inflation vs Central Bank target

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

22.4

9.6

5.2

1.7

8.9

6.0

7.7

12.5

9.3

7.6

5.7

3.1

4.55.9

4.35.9 6.3

5.0

IPCA (YoY)

Inflation Target

April 2011 8

Progress towards world class companies

World’s second largest mining company

World’s third largest commercial aircraft maker

World’s largest brewery

Merger between Unibanco and Itaú created 10th largest bank by market capitalization

Merger with Chile’s Lan will create the world’s fourth largest airliner

Largest animal protein processing company in the world

Perdigão-Sadia merger created the world’s largest meat and poultry company

The world’s 13th biggest steel producer

“Odebrecht wins prize of largest family company of the world.”

The world’s third largest oil company by market capitalization

April 2011 9

Brazil’s fast changing consumer profile

Source: FGV; Itaú Unibanco

Population by annual household income (million)

2003 2004 2005 2006 2007 2008

High (> US$ 35,000)

Middle (US$ 8-35,000)

Low (< US$ 8,000 )

73m

94m

20m

During 2003-09, 36 million new consumers

-23

29

7

Low

Middle

High

36 millionnew consumers

96m

65m

13m

April 2011 10

What’s bringing inequality down?

Bolsa Familia is important, but the key factor has been more income from better jobs (2003-2008)

Other transfers

Pensions

Work

Bolsa Família

Other transfers

Pensions

Work

Bolsa Família

Source: FGV; Itaú Unibanco

67%

17%

16%

76%

1%

20%

2%

2%

The main sources of income, 2008 How each of them helped, 2003-2008

April 2011 11

26.50%

13.75%

8.75%

12.25%11.8%

4.2%3.4%

0%

5%

10%

15%

20%

25%

30%

1999 2001 2003 2005 2007 2009 2011

Interest rates: the road to normality

Nominal Selic Rate

Real Selic Rate

Source:BCB

April 2011 12

63.7

141.3

24.2

46.7

28

48

68

88

108

128

148

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Credit: still the green fields

Source: Febraban; BCB

Loans to individuals (% total)

Other

Acquisition of goods (incl cars)

Total bank accounts and bank lending

Total Credit % GDP (left)

Million bankaccounts (right)

0%

10%

20%

30%

40%

50%

60%

2001 2003 2005 2007 2009 2011

Personal loans (incl payroll debit)

Acquisition of goods (incl cars)

Overdraft

Credit Card

April 2011 13

A diversified investment case

MACRO STABILITY

LOWER COST OF CAPITAL

NATURAL RESOURCES

190 MILLION PEOPLE

INFRASTRUCTURE & CONSTRUCTION

CONSUMER & FINANCIAL SERVICES

COMMODITIES

April 2011 14

GDP growth

A great 2010, but not an outstanding record

Average4.0%

April 2011 15

Near the roof: capacity utilization

Source: FGV

Industrial capacity utilization )%)

Source: Port of Santos website

15%14%

17%

19%

27%

2006 2007 2008 2009 2010

% of ships with more than 72 hs delay at port of Santos

76

78

80

82

84

86

88

2006 2008 2010

April 2011 16

A tight job market

Formalization ratio (% of Total Labor Force)

NAIRU

Unemployment rate

Unemployment rate and NAIRU

5

6

7

8

9

10

11

12

13

14

2002 2004 2006 2008 2010

7.5%

6.2%

Source: IBGE; Itaú

46.23

52.05

40

42

44

46

48

50

52

54

2002 2004 2006 2008 2010

April 2011 17

4.0

4.5

5.0

5.5

6.0

6.5

Jan-10 May-10 Sep-10 Jan-11

Rising inflationary expectations

2011

2012

Source: FOCUS

6.0%

5.0%

April 2011 18

6

7

3

12

24

80

90

100

110

120

130

140

150

2006 2007 2008 2009 2010

140 million

21% growth in 2010

Airport traffic up 21% in 2010

Source: Infraero

April 2011 19

A R$ 50 bn budget freeze

Rebalancing: fiscal policy

Source: BCB; Itaú Unibanco

Our estimate

1%

9%

10%

11%

9%

3%

10%

8%

3%

0%

2%

4%

6%

8%

10%

12%

2003 2004 2005 2006 2007 2008 2009 2010 2011

Government spending growth (IPCA adj)

April 2011 20

Challenges

Low savings ratio

Infrastructure bottlenecks and long-term credit

Quality of government spending and the social security system

High tax burden, complex and inefficient tax code

Education, Education, Education

April 2011 21

Low domestic savings ratio

0%

10%

20%

30%

40%

50%

60%

China India Russia Japan Mexico Eurozone Brazil US

Savings/GDP

Investment/GDP

Average 2004-09

April 2011 22

A generous social security system

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

5% 10% 15% 20% 25% 30%

People older than 65 as a % of total population

Mexico

BrazilPoland

Italy

US

Japan

Colombia

Total social securityspending(% GDP)

April 2011 23

Brazil has a few years to go before the issue gets complicated by population ageing

Source: UN

6%

0%

5%

10%

15%

20%

25%

30%

35%

0

20

40

60

80

100

120

140

160

1980 1990 2000 2010 2020 2030 2040 2050

Pop aged 15 to 60 (million - left)

Pop > 60 as % total (right)

There’s time to act

April 2011 24

300

350

400

450

500

550

600Shanghai

Finland

Korea

Canada

Chinese Taipei

Netherlands

Switzerland

Germany

Macao-China

Iceland

United Kingdom

Slovenia

France

United States

Sweden

Portugal

Austria

Italy

Luxembourg

Croatia

Russian Federation

Israel

Serbia

Bulgaria

Romania

Mexico

Montenegro

Brazil

Kazakhstan

Tunisia

Indonesia

Qatar

Peru

2009 PISA rankings

Source: OECD; Itaú Unibanco

Education: still a long way to go

April 2011 25

2007 2008 2009 2010

IPOs

FOLLOW ONs

A Brazilian advantage: entrepreneurial spirit

Summary 2008Summary 2007 Summary 2009

#AMOUNT(US$ BN)

IPO 64 29.8

Follow On 12 8.5

Total 76 38.3

#AMOUNT(US$ BN)

IPO 4 4.6

Follow On 8 16.6

Total 12 21.2

#AMOUNT(US$ BN)

IPO 6 13.1

Follow On 18 11.9

Total 24 25.0

Summary 2010

#AMOUNT(US$ BN)

IPO 11 6.3

Follow On 12 82.9

Total 23 89.2

Source: Dealogic, CVM, Thomson, Bloomberg

IBOV INDEX

Summary 2011#

AMOUNT(US$ BN)

IPO 5 3.0

Follow On 4 1.1

Total 9 4.1

2011

April 2011 26

Source: Itaú Unibanco

Macro Forecasts2006 2007 2008 2009 2010 2011F 2012F

World EconomyWorld GDP growth 5.1 5.2 3.0 -0.6 4.9 4.4 4.0

USA 2.7 1.9 0.0 -2.6 2.8 2.9 2.5

Euro Area 3.2 2.8 0.3 -4.0 1.7 1.7 1.3

Japan 2.0 2.4 -1.2 -6.3 3.9 0.7 1.4

China 12.7 14.2 9.6 9.1 10.3 9.0 8.5

Brazil

External Sector & Exchange Rate

BRL / USD - eop 2.14 1.77 2.34 1.74 1.69 1.55 1.65

BRL / USD - year avg 2.18 1.95 1.84 1.99 1.76 1.60 1.60

Exports - USD bn 138 161 198 153 202 243 254

Imports - USD bn 91 121 173 128 182 227 250

Trade balance - USD bn 46 40 25 25 20 16 4

Total Trade Flows (exp + imp) - % GDP 21 21 22 18 18 19 18

Current Account - USD bn 14 2 -28 -24 -48 -70 -102

Current Account - % GDP 1.3 0.1 -1.7 -1.5 -2.3 -2.8 -3.7

Foreign Direct Investment - USD bn 19 35 45 26 48 58 65

Foreign Direct Investment - % GDP 1.7 2.5 2.7 1.6 2.3 2.3 2.4

International reserves, cash - USD bn 86 180 194 239 288 335 361

International reserves - % GDP 7.9 13.2 11.7 14.9 13.9 13.3 13.1

Economic Activity

Nominal GDP - BRL bn 2,369.5 2,661.3 3,031.9 3,185.1 3,655.3 4,040.0 4,410.2

Nominal GDP - USD bn 1,088.8 1,366.5 1,650.7 1,598.4 2,076.6 2,521.0 2,749.2

Real GDP growth - % 4.0 6.1 5.2 -0.6 7.5 3.6 3.8

Inflation

IPCA - % 3.1 4.5 5.9 4.3 5.9 6.3 5.0

IGP–M - % 3.8 7.8 9.8 -1.7 11.3 6.3 5.4

Interest Rate

Selic - eop - % 13.25 11.25 13.75 8.75 10.75 12.25 11.50

Selic - year avg - % 15.1 12.0 12.5 9.9 10.0 12.0 12.1

Public Finances

Primary budget surplus - % GDP 3.2 3.3 3.4 2.1 2.8 2.5 1.9

Nominal budget surplus - % GDP -3.5 -2.7 -1.9 -3.3 -2.6 -3.7 -3.0

Net Debt - % GDP 47.0 45.1 38.4 42.8 40.4 39.3 37.9

April 2011 27

Source: Itaú Unibanco

Long run - Macro Forecasts

Data and Forecasts 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

External Sector

Exchange rate Dec 2.34 1.74 1.69 1.55 1.65 1.66 1.65 1.69 1.75 1.79 1.85 1.93 2.00

Current Account % GDP -1.7 -1.5 -2.3 -2.8 -3.7 -3.8 -3.7 -3.5 -3.4 -3.2 -3.2 -3.1 -2.9

Economic Activity

Real GDP growth % 5.2 -0.6 7.5 3.6 3.8 4.7 4.6 4.7 4.7 4.7 4.5 4.4 4.3

Inflation

IPCA % 5.90 4.3 5.9 6.3 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

IGP-M % 9.8 -1.7 11.3 6.3 5.4 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Monetary Policy

Selic Target (% a.a.) Dec 13.75 8.75 10.75 12.25 11.50 10.75 10.50 10.25 10.00 9.75 9.75 9.75 9.75

Fiscal Policy

Primary Surplus % GDP 3.4 2.1 2.8 2.5 1.9 1.5 1.3 1.0 1.0 1.0 1.0 1.0 1.0

Net Public Debt % GDP 38.4 42.8 40.4 39.3 37.9 38.3 37.7 37.0 36.1 35.2 34.3 33.4 32.5

Long Run Scenario