It is very difficult to comment on the trend of the Brazilian economy as the Covid-19 pandemic rages. All the parameters are upset, the indicators have lost – at least momentarily – their ability to predict the future trend of the economy.

The strong impact of this crisis on the economy, unemployment and the well-being of the entire Brazilian population is certain.

Brazil is struggling to prevent the pandemic from taking apocalyptic proportions, with the loss of many human lives and incalculable social consequences.

The government, despite the resistance of the president of the republic, has imposed social isolation, supported by the governors of most states.

To help the least protected sectors of the population, Parliament passed a law that provides R $ 600.00 per month – for three months – to help informal workers (around 38 million people), now without income and with few (or zero) savings to cope with the emergency. The law must be promulgated by the president of the republic, Jair Bolsonaro and implemented later for the money to reach the recipients soon.

In aid of workers hired regularly, the government has announced an aid plan of around R $ 50 billion which provides for the payment of part of the unemployment benefit due by the companies, to avoid layoffs.

In the meeting ended March 18, 2020, Banco Central reduced the discount rate (SELIC) by 0.5%, bringing it to 3.75% per year.

As written above, the medium-term economic forecasts are unreliable, but Banco Central still carries out its weekly “Focus” research with 120 economic operators, of which I publish and comment the results:

 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% -0,5%

Economic operators expect, on average, a 0.5% drop in Brazilian GDP in 2020. However, this estimate still appears to be very optimistic. If the suspension of activities considered “non-essential” were to continue for several weeks, as it seems, the decline in GDP could be of several percentage points.

Several economists predict a drop of up to -7%.

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% 2,94%  

The 2020 inflation estimates are still down: at the beginning of the year it was expected at 3.6%, today we are at 2.94%. Considering that it is a crisis of demand and not of supply, however, it is still necessary to understand what will happen to the prices of goods and services once people return to buy, even if with less purchasing power. In addition, an impact of the further devaluation of the real on the prices of imported goods (raw materials, semi-finished products and final products) is also foreseeable.

 

 

 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 4,50  

Following the crisis of the new coronavirus, the dollar reached an all-time high of R $ 5.20 today.

The market estimates a price of R $ 4.50 at the end of 2020, predicting that the stress caused by the crisis will partially fall within the second half of the year.

In recent weeks, Banco Central has intervened several times selling dollars and swap contracts, but without managing to contain the devaluation of the real. I remember that its main mission is to maintain the purchasing power of the currency on the internal market and therefore it is mainly guided by the inflation index, which for the moment continues to be under control.

The price of the euro today is 5.70 reais, an all-time high.

 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% 3,50%  
Real interest (deflactor: IPCA) 4,20% 2,60% 6,91% 4,05% 2,81% 0,30%  

0,54%

  

Banco Central, following the example of the FED, reduced the discount rate (SELIC) by 0.50%, which is now equal to 3.75% per year.

The market expects SELIC to close 2020 at 3.50%, an all-time low.

 

The Brazilian stock market (Bovespa)

The Brazilian stock market suffered a real meltdown in March 2020.

From the 105 thousand points reached at the beginning of March, in the last days of March it is oscillating around 73/74 thousand points, after having reached the minimum of 63.5 thousand points on 23 March.

Adding this drop to that of the real / dollar and real / euro exchange rate, the losses of foreign investors have been around 46/47%, since the coronavirus crisis began.

Like last month and before, the obvious suggestion is that of maximum caution regarding new investments in shares of the Brazilian stock exchange. But, when the coronavirus emergency begins to shrink, being ready to bet on Brazil could lead to significant gains.

Here are the performances of the main actions in the week from February 21 to March 31 2020:

Petrobras (PETR4): – 46%

Vale (VALE3): -14%

Itau (ITUB4): -30%

Bradesco (BBDC3): -35%