MORGAN LATIN

STANLEY

RESEARCH

AMERICA

Morgan Stanley & Co. LLC

Gray Newman
Gray.Newman@morganstanley.com +1 212 761 6510

Luis A Arcentales, CFA

Luis.Arcentales@morganstanley.com +1 212 761 4913

Daniel Volberg
Daniel.Volberg@morganstanley.com +1 212 761 0124

October 18, 2013

Morgan Stanley C.T.V.M. S.A.

Arthur J Carvalho
Arthur.Carvalho@morganstanley.com +55 11 3048 6272

Brazil and Venezuela

Rates and Risk
Two Weeks Ahead in Latin America
Weekly Spotlight (page 2): Brazil: No Unraveling, No Resolution by Arthur Carvalho. Remember just a few months ago all of the concern was that Brazil was set to unravel and a weaker currency might increase inflation pressures? The unraveling never took place, but better signs of growth suggest that the Growth Mismatch is back with the old inflation culpritan upturn in domestic demand. Weekly Spotlight (page 4): Venezuela: Risks Rising by Daniel Volberg. Does Venezuelas dollar shortage threaten Christmas? The authorities are doing what is necessary to provide relief ahead of the holiday season by easing the red tape involved in importing sugar, toys and artificial Christmas trees. But we suspect that neither the latest import measures nor the markets hoped for solutiona devaluationwill resolve Venezuelas dollar shortage. Much more is needed. O Que Aconteceu?/Qu Pas? (page 9) Whats Next? (page 10) A Comparative Look (page 14): Regional Credit and Economic Trends
From our Global Team (page 15): US: Time to Shake-off the Shutdown by Vincent Reinhart, Ellen Zentner and Ted Wieseman. After 16 days of shutdown, a simple estimate suggests the direct and indirect costs will weigh on Q4 annualized real GDP growth by some 0.4 percentage points. Recent Reports
Title

Week Ahead in Latin America

Date

Brazil and Argentina: Labor and Legal Arthur Carvalho and Daniel Volberg Colombia: The Three Debates Daniel Volberg Brazil: What Unraveling? Arthur Carvalho Mexico: A Fiscal Banter Luis Arcentales and Gray Newman Mexico: Fiscal Moment or Flop? Luis Arcentales Colombia: Cutting Rates, Revisited Daniel Volberg Latin America: Worst of Both Worlds, III Gray Newman Argentina: End of an Era? Daniel Volberg

October 11, 2013 October 4, 2013

September 27, 2013

September 20, 2013

September 13, 2013

September 13, 2013

September 6, 2013

August 23, 2013

On the Horizon (page 17): Our Annual Forecasts Latin America Weekly Calendar (page 18)
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October 18, 2013 Brazil and Venezuela

Weekly Spotlight
Brazil: No Unraveling, No Resolution by Arthur Carvalho
Just a few months ago, Brazil watchers were worried about the economy unraveling either because of a deteriorating labor market, balance of payments concerns or an overly aggressive hiking cycle. Today, the picture has changed as signs of recovery on the growth front have gained further ground. But concerns over inflation remain present. A few months ago, the concern was that a weaker exchange rate would produce higher inflation. Now, with the return of the more familiar Growth Mismatch, Brazil watchers are wary of another bout of demand-driven inflation. Whether inflation is caused by currency depreciation or stronger growth, it is a problem that Brazil needs to overcome. The currency-related inflation seemed set to erode consumer purchasing power, while price pressures in the services sector are due to rapid wage growth. Brazil has lived with services inflation for the past few years, and although we believe this is the source of many problems, we doubt that the government is prepared to tackle serviceswage inflation head-on given Brazils election dynamics.
Exhibit 1

between keeping inflation under control and not unraveling the tight labor market. Although the banks somewhat more hawkish message seen in the latest minutes released on October 17 poses risks to our call that the central bank will do one final 25 basis point Selic hike and stop at 9.75%, we still believe that the hiking cycle is close to its end.
Exhibit 2

Brazil: Unemployment Rate (% of labor force))

12%

11%

10%

9%

8%

7%

6%

Unemployment Rate (nsa) Unemployment Rate (sa)

Brazil: Exchange Rate (R$/US$, daily)

2.50 2.40 2.30 2.20 2.10 2.00 1.90 1.80 1.70 1.60 1.50 Oct-11

5%

4% Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Source: IBGE, Morgan Stanley Latam Economics

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

The FX inflation risk The recent currency strengthening has at least pushed to mid-2014 any fears of much higher inflation due to pass-through. Brazils balance of payments is not as fragile as some have painted it in the past few months, but once the Federal Reserve starts to taper, it is difficult to imagine that the currency will not weaken. The postponement of currency weakness means that there is much less pressure on the central bank to use monetary policy to curb exchange rate moves and second round inflationary effects of the weaker currency. The central banks current intervention in the exchange rate market might strengthen the currency even further in the absence of tapering. Brazils recent currency volatility has two important effects. The good news is that it means that the pass-through of currency weakness into prices is unlikely to be as dramatic as would have been the case had the currency remained at 2.45 (see Exhibit 1). But the bad news is that the currency depreciation is unlikely to boost investment in the tradable sector given the uncertainty about

Source: Bloomberg

The good news is that Brazils central bank is still signaling a strong commitment to bring inflation down. The not so good news is that we doubt that the authorities will be able to bring inflation close to the 4.5% target any time soon. For some time now, the central bank has stopped using language that hinted that inflation would converge to the center of the target, choosing instead to target a declining trend of inflation. This seems to be a compromise

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October 18, 2013 Brazil and Venezuela

where the currency is headed in the future. Indeed, we expect that the central bank will ease its intervention by not renewing some of the long real swaps that will expire in the next few weeks especially if the goal of this program is to reduce currency volatility, since pushing the currency stronger now knowing that they will eventually have to weaken it would defy the programs goals.
Exhibit 3

household consumption. We have long believed that falling food inflation would boost real income and thus consumption (see Brazil: No Labor Unraveling in Week Ahead in Latin America, July, 19, 2013), but the continued tightness of the labor market has surprised even us (see What Brazilian Companies Say About Hiring and Demand: an AlphaWise Survey of Brazilian Companies, October, 7, 2013). We believe that supply constraints explain why the labor market continues to be so tight, despite the soft economy. This means that labor demand has to soften materially before we see a loosening of the labor market that would slow the current wage dynamics. In turn, given our recent AlphaWise survey finding that companies are actually looking to hire more, it would probably take a large dose of contractionary economic policy in order to achieve that. The stickiness of service price inflation is not a new problem; in fact, it has been one source of the administrations popularity in recent years (see Exhibit 3). Given that the authorities have not tackled service inflation in the past few years, we find very unlikely that they would change course twelve months ahead of general elections. Bottom Line While Brazils unraveling risk appears to have diminished, Brazils inflation problem is unlikely to recede. Indeed, we would argue that Brazils inflation challenge is directly linked to labor market dynamics. Although the labor market is not as tight as it was in the recent past, it is tight enough to continue to add inflationary pressures. More importantly, it is tighter than most Brazil watchers and the central bank had thought just a few months ago. Regardless of whether the central bank stops hiking at 9.75% or 10.00 or 10.25%, this is unlikely to be enough to start to unwind the labor market and ease the inflationary pressures, especially in the face of lax fiscal and quasi-fiscal policies. And that means the postponement of a necessary adjustment until after next years elections.

Brazil: Goods and Services Inflation (% change y-o-y)

15

12

-3

Non and Semi Durable Goods Durable Goods Services

-6 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Source: IBGE, Morgan Stanley Latam Economics

Despite the possible change in FX intervention, inflation risks have diminished materially in the past few months. This leaves more room for the central bank to maneuver in the short term, although this is likely to be temporary relief if one believes the currency will most likely weaken again. The Better-than-expected Growth inflation risk The central bank continues to see risks to growth, but we believe that recent data point to an improved domestic demand picture. While this is good news for the Brazilian consumer, this highlights the difficulty of lowering services inflation. Possibly the biggest surprise for Brazil watchers has been the resilience of the labor market (see Exhibit 2), which has helped to support a recovery in

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October 18, 2013 Brazil and Venezuela

Weekly Spotlight
Venezuela: Risks Rising by Daniel Volberg
While our thesis that Venezuelas principal challenge is a shortage of dollars has gained acceptance, there is still debate on the causes and the possible solutions to Venezuelas current predicament. The conventional wisdom is that the dollar shortage is a function of a misaligned exchange rate, diversion of hard currency inflows into an opaque public sector and excess consumption driven by loose fiscal policy. Those in this camp believe that the right solution is devaluation and a more flexible exchange rate regime. We suspect that the challenge is much deeper. In our view Venezuelas dollar shortage is a structural problem, driven by the combination of overstated oil export receipts and an economy that has been hollowed out by years of policy heterodoxy. If we are right, any meaningful turnaround in Venezuela is going to require much more than a currency fix: Venezuela needs a dramatic policy shift towards a more business friendly climate that encourages investment, especially foreign direct investment (FDI) in the oil sector. And the need for such a shift appears to be long overdue. Indeed, with the recent macro deterioration we are seeing in Venezuela, the near terms risks appear to be on the rise.
Exhibit 1

consumption goods and soaring inflation. After stabilizing at an elevated level for eight months, the index of shortages of goods has begun to rise again in September, signaling that shortages are intensifying (see Exhibit 1). Meanwhile, inflation is approaching the 50% mark September posted 49.4% y-o-y more than doubling since the beginning of the year (see Exhibit 2). In recent weeks, the authorities have made several attempts to deal with these challenges. In late September they authorized a debtfor-food swap with Colombia: $600 million worth of food and Christmas gifts imports are being paid with PDVSA bonds. Then, in early October, the president of Venezuela issued a decree simplifying the import procedures for toys, artificial Christmas trees, medicine, powdered milk and sugar. However, we suspect that these measures are unlikely to dramatically turn the situation around.
Exhibit 2

Venezuela: Inflation (% change, y-o-y)

50%
Inflation (% change, y-o-y)

45%

40% 35%

Venezuela: Shortage of Goods (Establishments reporting a shortage, % of Total)

26 24 22 20 18 16 14 12 10 8 6 4 2 0 Sep07 Mar08 Sep08 Mar09 Sep09 Mar10 Sep10 Mar11 Sep11 Mar12 Sep12 Mar13 Sep13
Shortages Index (% of Total)

30%

25% 20% 15%

10% Sep98

Dec99

Mar01

Jun02

Sep03

Dec04

Mar06

Jun07

Sep08

Dec09

Mar11

Jun12

Sep13

Source: BCV, Morgan Stanley Latam Economics

In our view, rising inflation and mounting shortages of goods are a product of a shortage of hard currency in Venezuela. After all, the shortages of goods intensified 1 when authorities began to dismantle the Sitme system that financed roughly $10.5 billion in imports last year and $9.6

Source: BCV

Christmas gifts, medicine and milk Authorities appear to be scrambling to address the combination of mounting shortages of basic

Sistema de Transacciones con Titulos en Moneda Extranjera (SITME) was a system

created, administered, regulated and supervised by the Central Bank of Venezuela as an indirect mechanism for currency exchange that legally allowed to transact in local currency in Venezuela securities denominated and payable in foreign currency.

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billion in 2011. Indeed, inflation bottomed in October of last year, at 17.9% year-on-year. The following month the hard currency supplied via the Sitme was cut in half and both the index of shortages and inflation started to rise. And when the Sitme was de facto dismantled in January it was formally abandoned in early February the shortages and inflation intensified further. At the same time the gap between the official and the parallel exchange rate the best signal of a shortage of hard currency in Venezuela widened dramatically (see Exhibit 3).
Exhibit 3

significant devaluation should improve the fiscal accounts, tightening the fiscal stance and providing the central bank with the space to tighten monetary policy. And some go further, arguing for a more flexible exchange rate regime post devaluation for example one that brings back a legal permuta market. While on the face of it these policy prescriptions sound reasonable, we suspect they miss the mark. In terms of timing we suspect that devaluation is unlikely ahead of the December 8 municipal elections. Moreover, there are several fundamental reasons why we are skeptical of currency devaluation as a quick fix for the dollar shortage.
Exhibit 4

Venezuela: Exchange Rate (Bolivar Fuerte/US Dollar)

48 46 44 42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 Oct06 May07
Black Market Rate Official Rate

Venezuela: Exports and Imports (US$ millions)

120,000
Official Exports ($ mln) Adjusted Exports ($ mln) Imports ($ mln)

100,000

80,000

60,000

40,000

Dec07

Jul08

Feb09

Sep09

Apr10

Nov10

Jun11

Jan12

Aug12

Mar13

Oct13
20,000

Source: BCV, Morgan Stanley Latam Economics

The shortages and inflation raise two risks that markets may be underestimating in the near term significant debt issuance or a pick-up in social tension. Authorities appear keen to reduce the shortages and bring down inflation ahead of the holiday season at the turn of the year. It seems likely that after trying various largely symbolic measures, the most effective tool in their toolkit may be external debt issuance. After all, issuing external debt would boost hard currency supply and thus help pay for imports of goods before the holiday season. However, there is a risk that the political reality prevents the authorities from issuing debt. In that scenario, the risk of mounting social tension in a fragile political landscape should not be overlooked. The currency fix? Some argue that, rather than issuing debt, authorities may improve the current situation by simply devaluing the currency. Weakening the exchange rate would make imports relatively more expensive, limiting demand and thus making current supply more adequate. Furthermore, a

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: BCV, EIA, Morgan Stanley Latam Economics

We suspect that devaluing the currency is unlikely to have a major fiscal impact because a growing share of fiscal spending has been dollarized. The biggest item of public spending that has been dollarized may be public sector imports, which are on track to account for 6.8% of GDP at the official exchange rate of 6.3 per dollar, but would balloon to 13% of GDP if the exchange rate were devalued to 12 per dollar that is currently offered to the private sector via the Sicad system. And public sector imports represent nearly a quarter of central government spending if measured at the official exchange rate, but balloon to nearly 45% if the exchange rate were to devalue to 12 per dollar. Add to this mix at the very least the external debt service of roughly 2.5% of GDP at the official exchange rate (and 4.8% of GDP at an exchange rate of 12 per dollar). This back of the envelope calculation suggests that unless authorities were to limit public sector imports and debt service costs, the impact

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of a devaluation may not improve the fiscal accounts. Indeed, since 2010 authorities have devalued the exchange rate four times (including parallel currency systems like the Sitme or the Sicad) without arresting the continued deterioration in the fiscal accounts.
Exhibit 5

risks and regulatory uncertainty have hollowed out Venezuelas economy, making it increasingly reliant on imports to supply basic goods that are no longer produced domestically. But financing this growing import bill has become increasingly difficult given the steady decline in the volume of oil exports.
Exhibit 6

Venezuela: Current Account (As % of GDP)

20%
Officia (% of GDP) Adjusted (% of GDP)

Venezuela: External Debt Stock (US$ millions)

140,000

15%

120,000
10%

Total External Debt Public External Debt

100,000
5%

80,000

0%

60,000

-5%

40,000

20,000
-10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: BCV, EIA, Morgan Stanley Latam Economics

0 Dec-99

Jun-01

Dec-02

Jun-04

Dec-05

Jun-07

Dec-08

Jun-10

Dec-11

Jun-13

Source: BCV, Morgan Stanley Latam Economics

We further suspect that a devaluation is unlikely to correct the balance of payments in Venezuela. After all, the way a devaluation tends to improve the balance of payments is through the combination of rationing demand for imports by making them more expensive while at the same time boosting exports by making them cheaper to the rest of the world. However, in Venezuela there is already rationing of imports the scarcity index suggests roughly a fifth of goods demanded are missing from store shelves. And with Venezuelas challenging business climate, it is not clear that an adjustment in relative prices would be sufficient to boost production and non-oil exports. It is even more difficult to imagine a weakening currency boosting oil exports in the near term given the need for many years of much higher investment. Furthermore, making a more flexible exchange regime that includes relaxing capital controls may expose Venezuela to significant capital outflows capital that has been trapped in country since the 2010 tightening of controls. The dollar balance revisited But the fundamental reason why we suspect the focus on the currency regime is misplaced is because we believe Venezuelas dollar shortage is a more structural and intractable problem. In our view, years of a challenging business environment including expropriation

Indeed, Venezuelas dollar shortage may be largely a function of officially reported oil exports that are overstated. Independent data such as the Energy Information Administration (EIA) at the US Department of Energy or the BP statistical yearbook suggest that oil production in Venezuela is lower and domestic oil consumption higher than officially reported. For example for 2012 Venezuela officially reported oil exports of 2.56 million barrels per day, but EIA reports total production of 2.49 million barrels per day and domestic consumption of 0.76 million barrels per day, resulting in 1.73 million barrels per day of exports. In fact, we find that the officially reported current account surplus turns into a substantial deficit if we incorporate this adjustment to oil export volumes and then further account for the share of oil exports that is not paid in cash such as roughly half of the exports under PetroCaribe or roughly 250,000 barrels per day of the shipments to China that are used to repay loans extended in previous years. Once adjusted for the independent estimates of oil exports, we find that last years current account surplus of $11 billion turns into a -$28 billion deficit as Venezuelas oil exports may not be $93.6 billion as reported last year, but rather $54 billion (see Exhibit 4).

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The gap between the officially reported and the adjusted current accounts has widened in recent years. While the EIA and the official figures on oil exports coincided a decade ago, the gap has opened up since 2003. That was the year that the state-owned oil company strike was broken and many of its managers and engineers left the country. Thus the decline in production is consistent with the narrative that a turn towards heterodoxy had left Venezuela on an unsustainable path. According to our estimates the current account deficit last year may have been near -7.4% of GDP, rather than the officially reported 2.9% of GDP surplus (see Exhibit 5).
Exhibit 7

again in December, tapering is a matter of when, not, if. In this context market portfolio financing for current account shortfall is likely to become more challenging. While most emerging economies have graduated, Venezuela is still stuck with an economy that resembles the crisis ridden past in emerging economies. Most emerging economies have moved to a flexible exchange rate, inflation targeting, fiscal responsibility, local currency debt and elevated international reserves model. But Venezuela has an overvalued, fixed exchange rate regime, large twin deficits, dollarized debt and low international reserves. That may make Venezuela especially vulnerable to a global economy where external financing dries up.
Exhibit 8

Venezuela: International Reserves (US$ millions)

45,000 40,000 35,000 30,000 25,000 20,000 15,000
Currency and Equivalents Total

Global: Proved Oil Reserves (Billions of barrels)

350

300
2002 2012

250

200

150

100

10,000
50

5,000
0
ne zu e an a

Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13

Source: BCV, IMF, Morgan Stanley Latam Economics

Source: BP, Morgan Stanley Latam Economics

Eroding balance sheet The current economic difficulties and the macro deterioration of recent years are directly tied to the de facto current account deficit in Venezuela, in our view. After all, the current problems of soaring inflation and mounting shortages are a function of insufficient dollars to pay for imported goods to satisfy domestic demand. And with very limited net FDI at just 0.2% of GDP last year the economy must rely on large portfolio inflows in order to finance the de facto current account shortfall. That helps to explain why since 2007 the first year that we register a de facto current account deficit Venezuela has seen its debt rising and since 2008 its stock of international reserves declining (see Exhibit 6 and 7). Venezuela may be especially vulnerable to the posttapering globe. While the Fed decided to postpone the withdrawal of accommodation in September and may do so

The solution? To deal with the dollar shortage and with its effects we suspect that the authorities need both a medium term plan to turn the structural deterioration around and a near term plan to palliate some of the symptoms. We suspect that the most effective near term measure is significant debt issuance to help pay for imports of goods. Meanwhile, authorities need to execute a policy shift towards a more investment friendly policy mix in order to induce significant FDI inflows into the oil sector and eventually boost oil production. Indeed, in the medium term Venezuelas surest way out of the currently unsustainable mix is to tap into its oil wealth. After all, Venezuela counts the worlds largest proved oil reserves (see Exhibit 8). The good news is that Venezuela has made some steps in the right direction.

Sa ud i

Ve

ig e

0 Jul-04

by a

ia

da

la

uw

us si

Ira

Ira

ra b

Li

ria

ai t

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October 18, 2013 Brazil and Venezuela

Authorities have revised the Special Contribution Law to make exempt from windfall taxes any new oil investment and also investment aimed at recovering mature oil wells. In addition, authorities appear to be considering a pilot project to allow international oil companies to take full control of about 1,000 mature and marginal oil wells. However, there is still a lack of detailed and credible commitment mechanisms to secure property rights, contract enforcement and a functional operating environment that are necessary to induce significant foreign investment in the oil sector. Indeed, two oil companies a Russian and a Malaysian oil firm have pulled out of Venezuela this year. We suspect that these are minor hiccups many of the oil majors that have the necessary technology remain committed to their presence in Venezuela. Yet, the oil majors remain in a wait and see mode, waiting for authorities to create the conditions that would attract major investment.

Bottom Line There is a debate about Venezuelas ability and willingness to service debt both in the near- and medium-term. Though in the near term we suspect that Venezuelas ability to service debt is not in doubt, there are important risks that markets may be underestimating over the next three to six months. In particular, we suspect that markets may be underestimating the risk of significant external debt issuance or if the issuance doesnt come social tension that raises governability risks. But looking ahead, the authorities need to execute a policy shift to improve the business climate and induce investment, at least in the oil sector. So far there are some tentative steps in the right direction but no tangible progress. Meanwhile the balance sheet continues to erode, increasing the risks to Venezuelas solvency over the coming year or two if authorities fail to present a credible turnaround plan.

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O Que Aconteceu? / Qu Pas?

Recent Economic Releases (October 11 - 17)
Argentina CPI (September) Brazil CAGED Formal Job Creation (September) Retail Sales (August) GDP Proxy (IBC-Br) (August) Monetary Policy Minutes IGP-10 FGV (October) CPI FIPE (Second Preview) (September 16 October 15) Business Confidence IMCE (September) Monetary Policy Meeting Monetary Policy Minutes Consumer Confidence (September) IP (August) Retail Sales ANTAD (Real) (September) Unemployment Rate (September) GDP (August) 0.8% m-o-m 211,068 Officially inflation was stable at 10.5% y-o-y, but independent measures show 1.96% m-o-m and 25.3% y-o-y, the highest annual inflation in eight months. Significantly above consensus (146,500) formal job creation continues to recover after the June and July protests. Seasonally adjusted: 91,286 new jobs were created. (see here). Significantly above consensus (4.8%) the consumer is recovering after a weak 1H13. With falling food inflation and recovering real income, we expect further growth on retail sales. The Growth Mismatch is back Demand has been surprising positively, but output has been disappointing, due to industrial sector that continues to struggle from strong REER. By not signaling the end of the hiking cycle as many had expected, the BCB has kept the door open for another 50 bps hike in November. Our detailed thoughts on page 2. In line with consensus (1.11%) wholesale prices continued to be pressured by the weaker FX and its impact on grain prices. We expect that this will revert given the current FX. Slightly above consensus (0.34%) consumer prices accelerated in Sao Paulo, as food deflation gets behind of us. We expect further acceleration. After a sharp 10-point plunge since early 2013, seasonally adjusted index rose slightly even excluding volatile mining moving back above 50. Construction still weak (47.3). Surprise move as central bank cited deterioration in global growth outlook and failure of Fed to taper. But by removing easing bias, difficult to argue for an easing cycle ahead. High oil prices and better than expected 2Q GDP growth contributed to the decision to hold rates, but downside risks remain and we still expect cuts to return with weak data. Confidence rebounded slightly from the depressed reading in August, but remains the second lowest reading since May 2011. Thus economic recovery may have stalled in 3Q. Though headline missed consensus (0.1%), seasonally adjusted output grew sequentially for 4th straight month led by manufacturing, which soared at 8.2% annualized in this period. After three months of modest sequential gains approaching 3% annualized, sales stalled in August not a bad result considering protests in Mexico City and disruptions due to storms. Unemployment has remained remarkably low despite deceleration in economic activity over preceding 18 months. It may be that Perus growth is adjusting to a new (lower) normal. Below expectations (4.5%), as economy continues to struggle. Monthly growth pace slowed to near 3% annualized in the three months through August, signaling weakness ahead.

Brazil Brazil Brazil Brazil Brazil Chile Chile Colombia Colombia Mexico Mexico Peru Peru

6.2% y-o-y 1.32% y-o-y NA 1.11% m-o-m 0.37% m-o-m 54.29 4.75% NA 14.6 -0.7% y-o-y

= = = = = =

= =

-1.5% y-o-y 5.9% 4.3% y-o-y

Source: Government data, Morgan Stanley Latam Economics

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Whats Next?
Friday, October 18 Brazils October IPCA-15 Morgan Stanley Forecast: 0.39% m-o-m; Consensus: 0.41% m-o-m
Brazil: Goods and Services Inflation
(% change y-o-y)
15

12

Food deflation is over. Although annual comparisons are

likely to still produce a decline in food inflation, the monthly low prints are likely behind us.

This is mostly due to seasonal reasons, but also due to a

small part of the pass-through from weaker FX to grains and poultry prices.

0 Non and Semi Durable Goods Durable Goods Services -6 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13

We expect that headline inflation will continue to fall again

this month, but it is getting close to the bottom that we estimate is reached in December. Colombias August IP
Morgan Stanley Forecast: 0.0% y-o-y, Consensus: -0.4% y-o-y

-3

Source: IBGE, Morgan Staley Latam Economics

Colombia: Industrial Production

17% 14% 11% 8% 5% 2% -1% -4% -7% -10% Jul-05 3mma, % change y-o-y (LHS) 3mma, Seasonally adjusted index (RHS) 145 140 135 130 125 120 115 110 105 100 95 90 85 Jul-13

Is manufacturing finally bottoming out? July suggested that

may be the case at least on a sequential, seasonally adjusted basis but we need more data to confirm this turnaround.

Meanwhile, the strength of the recovery is also going to

matter. We suspect that for now the recovery is still modest as many indicators remain mixed (see Colombia: The Three Debates in Week Ahead in Latin America, October 4, 2013).

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Source: DANE, Morgan Stanley Latam Economics

Tuesday, October 22 Argentinas September Trade Balance Morgan Stanley Forecast: $730 million; Consensus: $800 million

Argentina: Trade Balance

(US$ millions, 3mma)
2,250 2,000 1,750 1,500 1,250

With the cold weather receding energy imports should

come down, opening a bit more room for higher trade surplus.

At the same time the soft commodity harvest is ending,

reducing exports.

1,000 750 500 250 Aug-05

Overall, we expect the impact from lower energy imports to

dominate, especially in the context of the authorities once again tightening import controls.

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Source: INDEC, Morgan Stanley Latam Economics

10

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October 18, 2013 Brazil and Venezuela

Whats Next?
Thursday, October 24 Brazils September Unemployment Morgan Stanley Forecast: NA y-o-y; Consensus: 5.4%
Brazil: Unemployment Rate
(% of labor force)
12% 11% 10% 9% 8% 7% 6% 5% 4% Aug-05 Unemployment Rate (nsa) Unemployment Rate (sa)

Brazils labor market remains tight, as even formal job

creation is recovering in the past few months.

According to our latest survey (see What Brazilian

Companies Say About Hiring and Demand: An AlphaWise Survey of Brazilian Companies, October 7, 2013) companies are back in hiring mode, which should keep unemployment low for the time being.

We expect to see further acceleration in real wages as

inflation continued to fall in August.

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Source: IBGE, Morgan Staley Latam Economics

Mexicos August IGAE

Morgan Stanley Forecast: -2.5% y-o-y; Consensus: 0.1% y-o-y

Mexico: IGAE and Leading Economic Indicator

(3mma, % change y-o-y)
9% 6% 3% 0% -3% -6% -9% -12% Jan04 IGAE LEI (pushed forward 3 months)

Economic activity likely expanded on a sequential basis in

August, adding further evidence that the second quarter slump marked the cyclical trough.

The modest recovery in activity so far has been led by

rising industrial production and manufacturing in particular, reflecting firmer external demand.

Oct- Jul-05 Apr04 06

Jan07

Oct- Jul-08 Apr07 09

Jan10

Oct- Jul-11 Apr10 12

Jan13

Oct13

Source: INEGI

Mexicos October 1H CPI Morgan Stanley Forecast: 0.9% 1H/2H; Consensus: 0.22% 1H/2H

Mexico: Headline and Core Inflation

7%

(% change, y-o-y)
Headline

Headline inflation has been well behaved dipping to

3.39% in September, the lowest since January as the massive storms and associated flooding in September seemed to have limited impact on produce prices.

6%

Core

5%

4%

October annual readings should benefit from the

reweighting that took place earlier in the year: because of the lower weighing of electricity prices, overall inflation should experience reduced pressure from seasonal tariff hikes in October and November.
3% 2%

1% Sep-03 Jul-04 May-05 Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Nov-12 Sep-13

Source: INEGI

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Whats Next?
Friday, October 25 Brazils September Current Account Morgan Stanley Forecast: -$2.0 billion; Consensus: -2.9 billion
Brazil: Current Account Balance
3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Aug-95

(As % of GDP, 12-month accumulated)

Current account deficit should contract sharply compared to

Augusts -$5.5 billion, mostly due to Septembers higher trade surplus of $2.1 billion. Also, we expect to see some reversal from Brazilians traveling abroad due to weaker currency.

We also expect FDI to accelerate this month due to further

M&A activity in September. We expect a net inflow of $4.1 billion.

Aug-97

Aug-99

Aug-01

Aug-03

Aug-05

Aug-07

Aug-09

Aug-11

Aug-13

Source: BCB, Morgan Stanley Latam Economics

Colombias Monetary Policy Meeting Morgan Stanley Forecast: 3.25%; Consensus: 3.25%
10%

Colombia: Policy Rate

(% p.a.)

While recent data such as consumer confidence have

come in relatively weak, we suspect that the central bank is not yet ready to cut rates.
8%

However, we suspect that the central bank may cut rates

next month if data continue to disappoint.

6%

4%

2%

0% Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Source: BanRep

Mexicos Monetary Policy Meeting Morgan Stanley Forecast: 3.50%; Consensus: 3.50%

Mexico: Central Bank Target Interest Rate

9.0%

(Annual rate)

Banco de Mexico surprised by cutting rates by 25 basis

points in early September and we suspect to see a similar move in the October meeting.

8.0%

7.0%

Several factors point in that direction: the delay in QE

tapering removes an important source of uncertainty, thus opening a window to ease. Moreover, inflation has remained low and while the large proposed fiscal deficit for 2014 may provide the hawks with some ammunition, the doves are likely to highlight ample slack in the economy as providing room for fiscal stimulus without inflationary consequences.

6.0%

5.0%

4.0%

3.0%

2.0% Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13

Source: Banxico

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Whats Next?
Wednesday, October 30 Chiles September Unemployment Morgan Stanley Forecast: 5.8%; Consensus: 5.7%
Chile: Employment Growth
(3mma, % change y-o-y)
8.0%

Chiles labor markets have been largely immune to the

deceleration in economic activity observed so far this year.
6.0%

Not only has the unemployment rate moved to historically

low levels thanks in great part to improving job growth but other signs from labor markets, from hours to the types of jobs created, suggest that labor market remain firm.

4.0%

2.0%

0.0%

-2.0% Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Source: INE

Thursday, October 31 Mexicos September Tax Revenues Morgan Stanley Forecast: NA; Consensus: NA

Mexico: Public Sector Spending

(6mma, % change y-o-y, deflated by CPI)
20% 16% 12% 8% 4% 0% -4% -8% Nov- Oct- Sep- Aug- Jul- Jun- May- Apr- Mar- Feb- Jan- Dec- Nov- Oct- Sep- Aug99 00 01 02 03 04 05 06 07 08 09 09 10 11 12 13

The normalization in public sector spending, which began in

the second quarter, appeared to lose some steam in the third quarter as the government appeared to tighten its belt in response to disappointing revenues.

The outlook for spending, particularly in December which is

the most important month of the year in terms of public sector outlays, depends heavily in the willingness of congress to approve the proposal for a 0.4% of GDP deficit this year, which the Executive asked in order to offset the revenue shortfall from the first half of the year.

Source: SHCP, Morgan Stanley Latam Economics

Friday, October 1 Brazils September IP Morgan Stanley Forecast: 3.6% y-o-y; Consensus: NA

Brazil: Industrial Production

(2002=100, seasonally adjusted)
135

Leading indicators point to a mean reversion rebound after

last months negative print (-1.2% y-o-y) and sequentially we also expect a rebound (1.9%) after the previous months contraction.

130

125

120

The industrial sector continues to struggle with a multi

decade strong real effective exchange rate and the recent protests, which has produced a very volatile year for the industrial sector. We dont expect that this will change in the short term.

115

110

105

100 Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Source: IBGE

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A Comparative Look: Regional Credit and Economic Trends:

Mexico: Public Sector Borrowing Requirements
(As % of GDP)
4.5% Other (includes Pemex) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Federal Government

Argentina: International Reserves

(US$ millions)
55 50 45 40 35 30 25 20 15 10 Jun-05

Apr-06

Feb-07

Dec-07

Oct-08

Aug-09

Jun-10

Apr-11

Feb-12

Dec-12

Oct-13

Source: SHCP

Source: BCRA

Mexicos disappointing tax proposal has come under fire. The bill failed to broaden the tax base while calling for a much larger fiscal deficit next year (4.1% of GDP using the broadest measure). Recently, even members from the ruling party have called for changes, including scrapping the VAT on education and rents. The modest reach of the tax reform, however, could provide policymakers with much-needed breathing room to advance the energy bill, which has the potential to bring greater benefits in terms of investment and growth (see more here).
Latam: 2014 IMF GDP Forecast
(annual rate)
7% Old (May 2013) 6% New (October 2013)

As Argentinas midterm congressional elections approach (set for October 27), reserves continue to fall. Polls predict an important reversal for the administration. Will the administration turn more pragmatic by devaluing, consolidating fiscal and attacking inflation? We suspect that these are the main issues in ongoing negotiations with a group of provincial governors. The recent settlement of ICSID claims suggests the negotiations may be bearing fruit. However, the jury is still out (see Argentina: End of an Era?).

Peru: GDP Growth

(% change)
16% 12%

5%

8% 4% 0% -4%

4%

3%

2%

-8%
1%
GDP (y-o-y, 3mma)

-12%
0% Argentina Brazil Chile Colombia Mexico Peru Venezuela Latam and Caribbean

GDP (q-o-q, annualized, SA)

-16% Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Source: BCRP, Morgan Stanley Latam Economics Source: IMF

The International Monetary Fund has downgraded its outlook for Latin America. In early October, the IMF cut its 2014 GDP forecast for Latin America to 3.1% from 3.9% in May. The biggest cuts were in Brazil (to 2.5% from 4.0%), Argentina (to 2.8% from 3.5%) and Venezuela (to 1.7% from 2.3%). The revisions highlight the output costs of exhausted growth models and increasingly challenging policy environments among some economies in the region.

Activity in Peru continues to disappoint most Peru watchers, but is in line with our thesis of a decline in trend growth. With GDP posting 4.3% year-on-year in August, this marks the sixth month since the beginning of the year that growth is below 5%. We suspect that the end of the mining boom means Peru is adjusting to a lower trend growth of 4.5-5% rather than the commonly assumed 6% or greater (see Peru: Adjusting to a New Normal)

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. . . From Our Global Team

US: Time to Shake-off the Shutdown by Vincent Reinhart, Ellen Zentner and Ted Wieseman
Open for Business After 16 days of chaos and confusion, the US government has reopened for business. Furloughed employees are reporting for duty and, more importantly, some 2.8 million government workers will begin to receive paychecks. The deal brokered included the following key provisions: 1) funding for the government until January 15, 2014, 2) an extension of the debt ceiling through February 7, 2014, and 3) no limitation on the US Treasurys use of extraordinary financing measures. With financing flexibility, we estimate that if the Treasury can make it through the February and March tax refund season (the most negative period for Treasury cash outflows), tax receipts from April/May will reduce government borrowing needs and extend the hard borrowing limit until July 2014. Ahead of the January 15 deadline funding deadline which, if breached would lead to another shutdown the deal also mandated budget talks. Though theres no recourse for failure, it sets out the aim of concluding talks by midDecember. The most contentious issue to be discussed is the next round of sequester spending cuts set for January 15. Well wait and see what politicians have in store for a potential winter fight, but now that government data providers are heading back to work, well begin to get a clearer picture of how the economy has fared over the past couple of weeks. After 16 days of shutdown, a simple estimate suggests the direct and indirect costs will weigh on Q4 annualized real GDP growth by some 0.4 percentage points. Official government data will be needed to confirm this estimate, and those data will dominate the newswires over the coming weeks. In the interim, alternative data sources and privately sourced data (including our own) suggest the economy kept a healthy backbone prior to and throughout the shutdown. The Feds Beige Book, which aggregates anecdotal evidence gathered by the 12 regional banks, is one such resource. Though not always in vogue, weve long kept tabs on the release and quantify the data in our Beige Book Diffusion Index (BBDI). For the period ending October 7, 2013, our headline index improved by 27 points to 179, and the regional results were consistent with activity expanding at a modest to moderate pace. This months figure makes us more confident that the decline seen during the past three months, from 210 to 152, was just noise: in historical context, data are running well above the long-run average of 39 (standard deviation 83). On a regional basis, changes were modest this period and mixed across the regions, with somewhat notable improvement in Boston (25 vs. last months 14) and New York (9 vs. -1). In home construction and real estate, the report pointed to moderate increases on balance and suggested that multifamily construction remained stronger than single-family construction in a number of Districts, a trend well confirm when housing starts data are released by the Census Bureau. Comments also indicated that rising mortgage rates were having varied impacts across districts, but that overall, respondents were somewhat upbeat about housing activity. While sentiment this month was cautiously optimistic, its worth noting that many participants reported an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate. In most districts participants commented on the varied impacts of uncertainty on economic activity, speaking to the pervasiveness of a shutdowns impacts. Several of those comments are below: Boston If the federal government shutdown lasts more than ten days, it could curtail some leisure travel, as domestic leisure travelers seem to operate within a 10-day booking window. New York One employment agency notes that the government shutdown has hampered efforts to do background checks on prospective employees. Philadelphia In regard to hiring and capital expenditure plans, firms continued to expand cautiously, as they face ongoing uncertainty from the federal government shutdown and implementation of the Affordable Care Act. Cleveland Producers said that they see a need to expand capacity, but

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they will not proceed because of uncertainty about the economy. Atlanta Employers continued to report hiring hesitancy related to changes in healthcare regulation and fiscal policy uncertainty. Chicago Manufacturing contacts, in general, remained cautiously

optimistic for the remainder of this year and 2014, but several expressed concern about the confidence of their customers amid the federal government shutdown. San Francisco Uncertainty about fiscal policy triggered reductions of new orders and revenue in the defense industry.

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On the Horizon
Latin America Annual Economic Forecasts
Argentina Brazil Chile Colombia Mexico Peru Venezuela Region

Real GDP growth (%)

2011 2012 2013E 2014E 2015E

8.9% 1.9% 6.8% 3.0% 2.6% 9.5% 10.8% 10.0% 10.0% 10.0% 4.31 4.92 7.00 8.00 9.00 -0.5% 0.0% -0.3% 0.0% 0.0% 10.0 12.4 10.9 12.1 12.2 14.71% 12.85% 20.00% 20.00% 25.00% 46.4 43.3 34.0 30.0 25.0 -1.7% -2.6% -2.6% -2.9% -3.1%

2.7% 0.9% 2.1% 1.7% 1.6% 6.5% 5.8% 5.8% 6.4% 5.8% 1.88 2.04 2.40 2.55 2.55 -2.1% -2.4% -3.6% -4.2% -3.6% 29.8 19.4 1.0 0.0 7.9 11.00% 7.25% 9.75% 9.75% 11.00% 352.0 373.1 375.0 365.0 365.0 -2.9% -2.5% -1.8% -2.5% -2.0%

5.9% 5.6% 4.2% 3.9% 4.3% 4.4% 1.5% 2.4% 3.2% 2.9% 521 479 520 540 520 -1.3% -3.5% -4.6% -4.3% 0.0% 10.6 3.4 1.2 1.7 0.0 5.25% 5.00% 4.50% 4.50% 4.50% 42.0 41.6 42.0 42.0 42.0 1.5% 0.6% -1.0% -0.6% -0.8%

6.6% 4.0% 3.4% 4.4% 5.1% 3.7% 2.4% 2.4% 3.2% 3.2% 1,943 1,768 1,900 1,825 1,750 -2.8% -3.1% -3.2% -3.4% -3.6% 5.4 4.9 3.4 1.6 -0.8 4.75% 4.25% 2.75% 3.75% 4.50% 32.3 37.5 43.0 45.0 47.0 -2.0% -1.9% -1.9% -1.5% -1.2%

4.0% 3.8% 1.3% 3.7% 4.4% 3.8% 3.6% 3.5% 3.9% 3.6% 13.95 12.85 12.50 11.90 11.60 -1.0% -1.2% -1.6% -1.8% -1.9% -1.5 0.0 -11.8 -15.5 -19.0 4.50% 4.50% 3.50% 3.50% 4.50% 142.5 163.5 175.0 190.0 210.0 -2.5% -2.6% -2.0% -2.0% -1.8%

6.9% 6.3% 4.9% 5.4% 5.3% 4.7% 2.6% 2.8% 2.4% 2.4% 2.70 2.55 2.85 2.85 2.75 -1.9% -3.6% -4.8% -4.4% -4.2% 9.3 4.5 2.3 2.6 2.3 4.25% 4.25% 4.25% 4.25% 4.25% 48.9 64.1 69.0 72.0 79.0 1.9% 2.1% 1.4% 1.1% 1.0%

4.2% 5.5% 1.9% 2.5% 2.9% 27.6% 20.1% 46.6% 30.0% 27.5% 4.30 4.30 6.30 6.30 14.00 7.7% 2.9% 1.8% 1.2% 2.0% 46.0 38.0 33.1 29.4 29.9 14.50% 14.50% 15.00% 15.00% 15.00% 29.9 29.9 25.0 22.0 22.0 -11.6% -14.6% -11.9% -12.8% -11.5%

4.5% 2.8% 2.8% 3.0% 3.2% 7.0% 6.1% 7.6% 7.0% 6.5%

Inflation (year-end, %)

2011 2012 2013E 2014E 2015E

FX rate (year-end vs. US$)

2011 2012 2013E 2014E 2015E

Current account balance (% GDP)

2011 2012 2013E 2014E 2015E

-1.1% -1.7% -2.5% -2.6% -2.3% 109.6 82.6 40.1 31.9 32.5

Trade balance (US$ bn)

2011 2012 2013E 2014E 2015E

Interest rate (year-end)

2011 2012 2013E 2014E 2015E

International reserves (US$ bn)

2011 2012 2013E 2014E 2015E

693.9 753.0 763.0 766.0 790.0 -2.6% -2.8% -2.4% -2.7% -2.4%

Public sector balance (% GDP)

2011 2012 2013E 2014E 2015E

E = Morgan Stanley Latam Forecast

Source: Morgan Stanley Latam Economics

Updated forecasts in bold.

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Upcoming Data Releases (October 18 November 1)

Date Country Statistic Morgan Stanley Forecast Consensus Last**

Friday October 18

Argentina Argentina Brazil Brazil Brazil Colombia Colombia Mexico Mexico

Economic Activity Index (EMAE) (August) Primary Budget Balance* (September) Tax Collection* (September) IGP-M (Second Preview) (October) IPCA-15 (October) IP (August) Retail Sales (August) Formal Employment* (September) Unemployment (September) Median 12-Month Ahead Inflation Expectations Retail Sales INEGI (August) Trade Balance (September) Trade Balance (August) FGV Consumer Confidence (October) Consumer Confidence* (October) Unemployment Rate (September) IGAE (August) Leading Index Conference Board (August) CPI (1H October) Supermarket Sales (Real) (September) CPI FIPE (Third Preview) (September 23 October 23) Current Account (September)

4.7% y-o-y NA NA NA 0.39% m-o-m 0.0% y-o-y 4.7% y-o-y 2.9% y-o-y 5.1% NA 0.8% y-o-y $730 million $169 million NA NA NA 1.0% y-o-y NA 0.29% 1H/2H NA NA -$ 2.0 billion

4.8% y-o-y NA R$ 84.0 billion 0.85% 20d/30d 0.41% m-o-m -0.4% y-o-y 5.5% y-o-y NA 5.1% NA NA $800 million $156 million NA NA 5.4% NA NA 0.22% 1H/2H NA NA -$ 2.9 billion

5.1% y-o-y Ar$ 912.5 million R$ 84.0 billion 1.36 % 20d/30d 0.27% m-o-m 0.2% y-o-y 5.4% y-o-y 3.1% y-o-y 5.2% 30% y-o-y 1.3% y-o-y $568 million -$221 million 114.2 48.65 5.3% 1.7% y-o-y 0.2% m-o-m 0.01% 2H/1H 15.0% y-o-y 0.20% m-o-m -$ 5.5 billion

Monday October 21

Argentina Mexico

Tuesday October 22

Argentina Colmbia

Wednesday October 23 Thursday October 24

Brazil Argentina Brazil Mexico Mexico Mexico

Friday October 25

Argentina Brazil Brazil

NA = Not Available or Not Applicable; *Earliest possible release date **Last denotes last published data by a non-Morgan Stanley source. Source: Morgan Stanley Latam Economics Estimates

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October 18, 2013 Brazil and Venezuela

Upcoming Data Releases (October 18 November 1)

Date Country Statistic Morgan Stanley Forecast Consensus Last**

Friday October 25

Colombia Mexico Mexico

Monetary Policy Meeting Monetary Policy Meeting Preliminary Trade Balance (September) IP (September) FGV Business Confidence (October) Credit Indicators (September) Manufacturing Output (September) Mining Output (September) Retail Sales INE (September) IGP-M (Final) (October) Unemployment (September) Construction Activity Indicator (September) Primary Budget Balance (September) Urban Unemployment Rate (September) Bank Credit to the Private Sector (September) Tax Revenues (Real) (September) Tax Revenue (October) IP (September) Trade Balance (October) Remittances (September) CPI (October)

3.25% 3.50% NA -1.1% y-o-y NA NA 1.0% y-o-y NA NA NA 5.8% NA NA 10.0% NA NA 24.6% y-o-y 3.6% y-o-y NA NA 0.21% m-o-m

3.25% NA NA NA NA NA NA NA NA NA NA NA NA 10.0% NA NA NA NA $ 2.1 billion NA NA

3.25% 3.75% -$234 million -0.4% y-o-y 98.0 NA -2.0% y-o-y 5.9% y-o-y 12.0% y-o-y 1.50% m-o-m 5.7% 10.7% y-o-y
-R$

Monday October 28 Tuesday October 29

Argentina Brazil Brazil Chile Chile Chile

Wednesday October 30

Brazil Chile

Thursday October 31

Argentina Brazil Colombia Mexico Mexico

0.4 billion 10.3%

7.3% y-o-y 13.7% y-o-y 25.2% y-o-y -1.2% y-o-y $ 2.1 billion 1.1% y-o-y 0.11% m-o-m

Friday November 1

Argentina Brazil Brazil Mexico Peru

NA = Not Available or Not Applicable; *Earliest possible release date **Last denotes last published data by a non-Morgan Stanley source. Source: Morgan Stanley Latam Economics Estimates

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Latin America Economics Team

Gray Newman .............................(212) 761-6510 Gray.Newman@morganstanley.com Arthur Carvalho ..........................(55-11) 3048-6272 Arthur.Carvalho@morganstanley.com Luis Arcentales .......................... (212) 761-4913 Luis.Arcentales@morganstanley.com Daniel Volberg............................ (212) 761-0124 Daniel.Volberg@morganstanley.com

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