Macro scenario - Brazil

January 17, 2022

Selic rate at significantly contractionary level, economic

slowdown, and disinflation

 Omicron became the dominant variant after the holiday season, leading to a sharp increase in coronavirus
cases. So far, the hospitalization rate has been modest, but the situation underscores the importance of booster
shots and updating vaccines to fight virus mutations.
 We kept our GDP growth forecasts at +4.4%, -0.5% and +1.0% in 2021, 2022 and 2023, respectively. The
significantly contractionary level of the Selic rate is already impacting economic activity, with declines in new
loans and retail sales.
 Inflation will likely retreat to 5.0% in 2022, after rising 10.1% last year. We expect disinflation in tradable goods
and energy prices, with lower impact from past shocks and the significantly-above-neutral Selic rate. With the
lagged effect of higher interest rates and a still-open output gap, we estimate a 3.3% increase in the consumer
price index IPCA in 2023.
 Fiscal sustainability remains a major challenge. We expect a primary budget surplus of 0.3% of GDP in 2021
followed by deficits of 0.8% of GDP in 2022 and 1.1% of GDP in 2023. Gross debt will likely reach 81%, 84%
and 87% of GDP in these three years, respectively.
 We maintained our year-end forecasts for the exchange rate at BRL 5.50/USD in 2022 and BRL 5.75/USD in
2023.
 The increase in the Selic rate throughout 2021 placed real interest rates at a restrictive level. We believe that
the monetary tightening cycle will move further into contractionary territory, but it is nearing the end, with
another 150-bp hike in February and a final increase of 100 bps in March.

Downward trend in new household loans and

Slowing economic activity, impacted by the credit-sensitive retail sales
higher Selic rate 130
Seasonally-adjusted, Feb/20 = 100

GDP probably extended its decline in 4Q21, and we 120

estimate growth for 2021 at 4.4%. Retail sales and 110

industrial production remained on a downward trend
100
throughout 4Q21. New loans to households are already
impacted by higher interest rates and by a large share of 90
consumer income committed to debt payments. We see
80
this trend consolidating in the near future. On the
positive side, and avoiding a deeper contraction in GDP, 70 New households loans (core*)
Retail sales sensitive to credit
automobile production expanded in November and Retail sales sensitive to credit (ex-
60
December, supported by a slight improvement in imports vehicles)
of electronic components. 50
Feb-20

Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Feb-21

Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

*Payroll loans, personal credit and vehicles financing

Source: Central Bank, IBGE, Itaú

Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do
business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect
the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
Macro scenario - Brazil | January 17, 2022

For 2022, we still expect a 0.5% contraction in GDP, Among market-set prices, we forecast increases of
caused mainly by the impact of high interest rates approximately 5.0% in services, 6.0% in industrial
on aggregate demand. Estimates for the 2022 crop goods and 4.0% in food consumed at home.
are being revised downwards in response to the lack of
rainfall in the South region and in the state of Mato
Grosso do Sul. The situation reduces the chances of a Inflation shocks moving to the rearview mirror
significantly positive GDP reading in 1Q22 (we lowered
22
our 1Q22 forecast to 0.4% qoq/sa from 0.7%). There is 12-month change (%)
20
also a risk that the latest Covid outbreak will hurt
18
spending on services early in the year. On the positive Food at home
16 Regulated prices
side, regional governments are expected to deliver a
14 Industrial
fiscal expansion of +0.5% of GDP this year, being a Services
12
major support to prevent a deeper decline in GDP.
10
We revised our year-end estimates for the 8
unemployment rate to 12.0% from 12.2% in 2021 6
and to 13.1% from 13.3% in 2022. Employment 4
continues to advance even as GDP declines. This 2
divergence is partly caused by employment’s lagged 0
response to the economic activity cycle, but it may also -2
indicate a drop in productivity in the Brazilian economy. -4
-6
2016 2017 2018 2019 2020 2021 2022
Disinflation towards 5.0% in 2022 and 3.3% in
Source: IBGE, BCB
2023

The consumer price index IPCA climbed 0.73% in
December and 10.06% in 2021. Inflation was impacted
by subsequent shocks during the year, notably on
energy prices, such as auto fuels (up by 47.5% in the
IPCA) amid rising crude oil prices, and electricity bills
(up by 21.2%), under the impact of the water scarcity
mode in the tariff flag system. Food and industrial items
also experienced inflationary pressure in the year,
climbing 8.2% and 11.9%, respectively. The rising IPCA
was passed through to core measures, with underlying
industrial inflation advancing 8.7% (2.3% in 2020) and
services going up 5.9% (2.5% in 2020).
We maintain our 5.0% estimate for the IPCA in 2022,
with a major impact from the Selic rate in
significantly contractionary territory. Disinflation will
come especially from tradable goods and regulated
prices. Goods inflation should decelerate as metallic
commodity prices (in local currency) remain stable,
providing relief to wholesale and retail inflation.
Moreover, a more restrictive Selic level makes credit
more expensive and reduces demand for goods,
leading to inventory adjustments. Regulated prices will
likely slow down as well, with normalization in fuel costs
and the assumption that the tariff flag system will be in
red mode level 1 in December 2022 (implying a
surcharge of BRL 3.971 per 100 kWh). We forecast an
increase just below 5.0% for regulated prices in 2022.
Considering the lagged effects of the interest rate
hiking cycle and the open output gap, we forecast
inflation at 3.3% in 2023.
Undefined fiscal framework implies risks to
debt sustainability ahead
The consolidated public sector probably delivered a
primary budget surplus of 0.3% of GDP (BRL 25
billion) in 2021, marking the first positive result since
2013, when the surplus reached 1.6% of GDP.
In 2022, the primary result will likely return to a
deficit of 0.8% of GDP (BRL 75 billion). States and
municipalities should see a surplus of 0.5% of GDP
(BRL 45 billion), thanks to still-high revenues and only
partial use of their available room for spending. In the
central government, despite the support provided by the
good revenue performance of 2021, the increase in
spending made possible by the approval of
constitutional amendment PEC 23/21, disinflation and
deteriorating economic growth will lead to a situation in
which expenses rise faster than revenues.

2
Macro scenario - Brazil | January 17, 2022
In 2023, we expect a deficit of 1.1% of GDP (BRL
110 billion). The public budget, to be approved after
the elections, should still comply with rules in the
modified constitutional spending ceiling, but during the
year the government will have to define the fiscal
framework that will be effective from 2024 onwards.
Public debt is expected to decline from 89% in
2020 to 81% of GDP in 2021 and rebound to 84% of
GDP in 2022 and 87% of GDP in 2023. Rising
indebtedness amid high interest rates, weak economic
activity, and an uncertain fiscal framework point to the
risk that the country could return to an unsustainable
fiscal path.
BRL will remain at historically weak levels,
given external and domestic uncertainties
We maintained our year-end forecasts for the
exchange rate at BRL 5.50/USD in 2022 and BRL
5.75/USD in 2023. Even with a higher Selic rate, the
global scenario (with an increase in the U.S.
benchmark interest rate in response to inflationary
pressures) combined with uncertainties related to the
evolution of public accounts in the coming years will
prevent a significant appreciation of the local currency.
The Brazilian real will likely remain at an historically
depreciated level after finishing 2021 at BRL
5.57/USD.
Despite a record trade surplus (USD 61 billion1),
the current account is expected to end 2021 with a
USD 26 billion deficit (USD 24 billion in 2020). The
good trade result was driven by higher commodity
prices on average, the lagged effects of a weaker
exchange rate and the global recovery. However, the
net import of oil-drilling rigs under the Repetro customs
regime (USD 14 billion between January and
November 2021) and purchases of crypto assets (USD
5.5 billion), which only impact the trade balance
disclosed by the central bank, pressured the current
account deficit, even with the exchange rate at a
weaker level.
We now estimate current account deficits of USD
28 billion in 2022 (compared with USD 24 billion
previously, following the revision for crop
forecasts) and USD 19 billion in 2023. Weaker
economic activity and the lagged effects of a weaker
exchange rate help to contain the increase in imports,
ensuring another year of a large trade surplus, despite
lower commodity prices on average. Imports of oil-
1 As per the Secretariat of External Trade (Secex).
3
drilling rigs will likely be much lower than in 2021 (with
the end of Repetro), but net purchases of crypto
assets are likely to continue to increase. Service and
income deficits, in turn, are expected to remain at
historically low levels (as in 2020 and 2021).
Monetary policy: cycle is probably nearing the
end
The Brazilian Central Bank’s Monetary Policy
Committee (Copom) will hold its first meeting of the
year on February 1 and 2, likely raising the Selic rate
by another 150 bps, to 10.75% p.a., as indicated in
its communication so far. At the December monetary
policy meeting, the authorities stated that it is
appropriate for the tightening cycle to advance
significantly into contractionary territory, given the
increase in its forecasts and the threat of de-anchoring
of long-term expectations. When signaling an
adjustment of the same magnitude for the next meeting,
Copom members added that they will persevere in the
monetary tightening strategy until there is consolidation
in the disinflation process and in the anchoring of
expectations around targets. This commitment was
repeated in an open letter to the Minister of Economy,
recently released by the central bank because the IPCA
reading was above the upper limit of the tolerance range
for 2021.
We believe that the monetary authority will finish the
hiking cycle at the following meeting, in March, with
a 100-bp increase to a terminal level of 11.75% p.a.,
observing a decline in inflation expectations for 2023, a
slowdown in economic activity and the lagged effects of
monetary policy. This rate level will likely be maintained
throughout the entire year.
In 2023, we see room for the Selic rate to fall
towards less restrictive levels. More specifically, we
believe that the Selic rate will recede to 8.0% p.a.
However, we emphasize that the room for such
reduction (and for possible additional cuts) in interest
rates will depend on future economic policy choices, in
particular with regard to controlling public accounts.
Although this is clearly the most likely scenario
seen from our current perspective, it is important to
keep in mind that opposing forces will influence the
outlook for monetary policy in 2022. Among the
factors that would lead to even more restrictive stance,
we note that inflation will remain under pressure over the
next few months (with high monthly readings and year-
Macro scenario - Brazil | January 17, 2022

over-year increases near 10% until May) and that the
balance of risks still provides upside for the IPCA in
2022. This is because the risks of lower electricity tariffs
(we assume the tariff flag system will be in red mode
level 1 by the end of the year, but recent rainfall patterns
create the possibility of milder modes) and service
inflation returning to lower levels faster (compatible with
the idle capacity in the labor market) should be more
than offset by those arising from bottlenecks, the
possibility of additional FX depreciation and the effects
of high 2021 inflation on indexed prices or prices that
usually suffer from great inertia. In the opposite
direction, we see economic activity losing strength, a
situation expected to become more intense during the
year and which may lead to a more disinflationary
environment going forward. While elements in the
direction of higher interest rates seem restricted to 2022,
the slowdown in economic activity has major
implications for the longer term. Depending on the
resolution of these uncertainties, we foresee a scenario
in which the Copom, in pursuit of inflation targets for the
following years, could begin to reduce the Selic rate a
little earlier than expected, starting in 2022.

Brazil | Forecasts and Data

2017 2018 2019 2020 2021F 2022F 2023F
Current Previous Current Previous Current Previous
Economic Activity
Real GDP growth - % 1.3 1.8 1.2 -3.9 4.4 4.4 -0.5 -0.5 1.0 1.0
Nominal GDP - BRL bn 6585.5 7,004 7,389 7,468 8,600 8,605 9,245 9,229 9,932 9,904
Nominal GDP - USD bn 2063.3 1,916 1,872 1,447 1,594 1,599 1,659 1,678 1,762 1,757
Population (millions) 206.8 208.5 210.1 211.8 213.3 213.3 214.8 214.8 216.3 216.3
Per Capita GDP - USD 9977 9,189 8,910 6,834 7,471 7,494 7,724 7,811 8,148 8,126
Nation-wide Unemployment Rate - year avg (*) 12.8 12.4 12.0 13.6 13.1 13.0 12.7 12.7 13.2 13.3
Nation-wide Unemployment Rate - year end (*) 12.5 12.4 11.8 14.7 12.0 12.2 13.1 13.3 13.3 13.5
Inflation
IPCA - % 2.9 3.7 4.3 4.5 10.1 - 5.0 5.0 3.3 3.3
IGP–M - % -0.5 7.5 7.3 23.1 17.8 - 5.5 5.5 3.5 3.5
Interest Rate
Selic - eop - % 7.00 6.50 4.50 2.00 9.25 - 11.75 11.75 8.00 8.00
Balance of Payments
BRL / USD - eop 3.31 3.88 4.03 5.19 5.57 - 5.50 5.50 5.75 5.75
Trade Balance - USD bn 56 47 35 50 61 - 58 62 67 67
Current Account - % GDP -1.1 -2.7 -3.5 -1.7 -1.6 -1.4 -1.7 -1.4 -1.1 -1.1
Direct Investment (liabilities) - % GDP 3.3 4.1 3.7 3.1 3.1 3.1 3.6 3.6 3.7 3.7
International Reserves - USD bn 382 387 367 356 362 366 362 366 362 366
Public Finances
Primary Balance - % GDP -1.7 -1.5 -0.8 -9.4 0.3 0.3 -0.8 -0.8 -1.1 -1.1
Nominal Balance - % GDP -7.8 -7.0 -5.8 -13.6 -5.0 -5.0 -9.0 -9.0 -8.7 -8.7
Gross Public Debt - % GDP 73.7 75.3 74.3 88.8 81.0 81.0 84.0 84.0 87.1 87.1
Net Public Debt - % GDP 51.4 52.8 54.6 62.7 58.4 58.4 63.4 63.4 67.1 67.1
Source: IBGE, FGV, BCB and Itaú
(*) Nation-wide Unemployment Rate measured by
PNADC

Macro Research – Itaú

Mario Mesquita – Chief Economist

To access our reports and forecast visit our website:

https://www.itau.com.br/itaubba-pt/macroeconomic-analysis

4
Macro scenario - Brazil | January 17, 2022

Relevant Information
1. This report has been prepared and released by the Macro Research Department of Itaú Unibanco S.A. (“Itaú Unibanco”). This report is not a product of the Equity
Research Department of Itaú Unibanco or Itaú Corretora de Valores S.A. and shall not be construed as a research report (“relatório de análise”) for the purposes of
Article 1 of the CVM Instruction NR. 598, dated May 3, 2018.
2. The exclusive purpose of this report is to provide macroeconomics information and it does not constitute and shall not be construed as an offer to buy or sell or a
solicitation of an offer to buy or sell any financial product, or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to
be reliable as of the date on which this report was released and it has been obtained from public sources believed to be reliable. However, Itaú Unibanco does not
make any explicit or implied representation or warranty as to the completeness, reliability or accuracy of such information, nor does this report intend to be a
complete statement or summary of the markets or developments referred to herein. Itaú Unibanco has no obligation whatsoever to update, modify or amend this
report and inform the reader accordingly.
3. The opinions contained herein reflect exclusively the personal views of the analyst responsible for this report and were prepared independently and autonomously,
including in relation to Itaú Unibanco, Itaú Corretora de Valores S.A. and any other companies within their economic group.
4. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of Itaú Unibanco.
Additional information on the financial products mentioned in this report may be available upon request. Itaú Unibanco and/or any other company within its
economic group is not and shall not be liable for any investment decisions (or otherwise) based on the information provided herein.

Additional Note: This material does not take into consideration the objectives, financial situation or specific needs of any particular client. Clients must obtain financial, tax,
legal, accounting, economic, credit and market advice on an individual basis, based on their personal characteristics and objectives, prior to making any decision based on
the information contained herein. By accessing the material, you represent and confirm that you understand the risks related to the financial instruments described in this
material and the laws in your jurisdiction relating to the provision and sale of financial service products. You acknowledge that this material contains proprietary information
and you agree to keep this information confidential for your exclusive use.
For inquiries, suggestions, complaints, criticisms and compliments, talk to Itaú’s CSCC: 0800 728 0728. Or contact us through our portal https://www.itau.com.br/atenda-
itau/para-voce/. If you are not satisfied with the proposed solution, please contact the Itaú Corporate Ombudsman: 0800 570 0011 (on weekdays from 9 AM to 6 PM) or
our PO Box 67.600, São Paulo-SP, Zip Code 03162-971. Hearing impaired, every day, 24h, 0800 722 1722.