The outbreak of the coronavirus epidemic in China at the end of January is causing significant falls in the markets, worried about the possible consequences on the Chinese economy and reflecting on international trade. If the emergency were to continue, Brazil would certainly be impacted, given the weight of China in exports of commodities, in this case mainly iron and its derivatives. The Brazilian stock exchange has already undergone a reflection of this crisis, losing about 5% of its value in one week.

On the domestic front, however, a series of good news.

For the first time since 2013, the public debt/GDP ratio decreased in 2019 compared to that recorded in the previous year. In 2019, debt represented 75.8% of GDP, when it was 76.5% in 2018. The decrease occurred mainly thanks to the repayment of a debt of 121.7 billion reais by the BNDES (National Development Bank) and the sale of dollars from the (conspicuous) Brazilian international reserves. Without these exceptional events, the debt-to-GDP ratio would have reached 79%, a new all-time high. In 2019 the primary deficit was 62 billion reais, the lowest since 2013. In order for the reduction to become sustainable in the medium to long term, Brazil must return to producing primary surpluses and reduce interest on debt: the reform of the pensions approved in 2019 and maintaining the discount rate at current levels (below 4.5%) will surely help in this direction.

The unemployment index fell in the last quarter of 2019 to 11%. This is the lowest value since 2015 and equates to approximately 11.6 million unemployed. Before the crisis that started in 2015, the number of unemployed was 6.8 million, so there is still a long way to go to return to pre-crisis levels.

Brazil has received positive signals from the business community participating in the Davos World Forum. The effort to put the public finances in order has been recognized, but the government remains under observation regarding the policies for the preservation of its natural resources, in particular the Amazon. Numerous investment projects presented by the Ministry of Economy, Paulo Guedes: the auction for the 5G network and numerous infrastructure works (railways, ports, airports and highways) and the privatizations of Correios, Eletrobras and other state controlled companies.

We see below the trend of the main economic indicators:

GDP (Value added at market prices)

  2014 2015 2016 2017 2018 2019 2020
GDP – real growth (%) 0,5% -3,5% -3,3% 1,0% 1,1% 1,17% 2,3%

According to Banco Central’s Focus survey, the GDP growth forecast remained unchanged (+ 2.3%) compared to the previous month. The most recent IMF forecast predicts growth of 2.2%. The signals from various economic sectors are positive, first of all the real estate sector, which have been in crisis for years and have recovered sharply in recent months. Record agricultural crops are also shaping up to 2020; agriculture has been the only sector to guarantee significant growth rates and to allow Brazil to see its GDP grow in the last 3 years.

Inflation and real/dollar exchange 

  2014 2015 2016 2017 2018 2019 2020  
IPCA (IBGE – %) 6,40% 10,7% 6,29% 2,95% 3,69% 4,20% 3,40%  

The blaze of inflation in December did not fortunately confirm in this first beginning of 2020. Although it continues above the monthly average of the last few years, inflation has decreased in January and has led economists to estimate it 3.40% for the whole of 2020 (it was 3.60% a month ago). Inflation is the best ally for Banco Central (and the government), which can thus keep the discount rate at historic lows.

 

 

2014 2015 2016 2017 2018 2019 2020  
Exchange rate R$/US$ (end of the period) 2,66 3,90 3,25 3,25 3,75 4,01 4,10  

Due to the panic crisis generated by the coronavirus, the dollar has jumped to new record prices in the past few days. Today it is listed at 4.24 reais.

Despite this, the market believes it is a passing phenomenon and has maintained the forecast of 4.10 reais for the end of 2020.

I repeat my analysis: economic growth – if confirmed in its proportions and made sustainable by a reliable government – could attract new and greater investments from abroad, generating a substantial income of precious currency and therefore an appreciation of the Brazilian currency.

The price of the euro today is 4.69 reais, close to the all-time high of 4.71 reached last week. Brazilian assets are really cheap for European investors.

 Interest rate

  2014 2015 2016 2017 2018 2019 2020  
Nominal Interest rate (end of the períod) 11,80% 14,87% 13,75% 7,00% 6,50% 4,50% 4,25%  
Real interest (deflactor: IPCA) 4,20% 2,60% 6,91% 4,05% 2,81% 0,30%  

0,85%

 

According to the market especialists, the inflation forecast also contained in 2020 seems to leave room for a further new filing of the discount rate (SELIC) by Banco Central. In the coming days there will be the first meeting of the Monetary Policy Committee (COPOM) and there are those who expect a cut of 0.25%.

Banco Central’s role will certainly be crucial, given that low interest rates mean on the one hand a substantial containment of public debt maintenance expenditure and on the other a stimulus to private investments, decisive factors for sustainable growth.

The Brazilian stock market (Bovespa)

After almost reaching the threshold of 120 thousand points in mid-January, Bovespa underwent a series of negative sessions that brought the index back to the values at the beginning of the year, that is, on 115 thousand points today.

The sale of 10% of the shares of Petrobras (PETR3) held by BNDES is scheduled for this week, for an estimated value of approximately 23.5 billion reais. The offer price will be defined on February 5th.

Overall, the cautionary suggestion regarding investments in Brazilian equities continues, at least in this first part of the year.