The month of April 2020 will surely be remembered as one of the most turbulent in Brazil’s recent history.

The pandemic of the new coronavirus has now reached the country with force: the confirmed victims are already at least seven thousand, but unfortunately it is suspected that this number is underestimated, given that the checks of the swabs are delayed even by three weeks.

In a dramatic situation in which it is essential that health and government authorities focus on fighting the spread of the virus and mitigating the impact of the crisis on the population, Brazil is torn apart by a succession of crises in the relations among the various institutions and in the federal government itself.

The forecast is that the peak of the infections will occur around the end of May, which is why a relaxation of the isolation measures is not foreseeable (nor desirable) before June.

On April 16, Bolsonaro dismissed the Minister of Health – Luiz Henrique Mandetta – “guilty” of following WHO indications and supporting social isolation initiatives promoted by most state governments. Bolsonaro himself has repeatedly violated the rules of distancing, causing gatherings, participating in demonstrations and maintaining physical contact with his supporters. In addition to this, Bolsonaro took sides against the governors of the states of the Federation, criticizing the isolation measures implemented by them and thus encouraging the population to leave the house to carry out their activities normally.

On April 24, Sergio Moro – Minister of Justice – resigned, explicitly accusing Bolsonaro of wanting to interfere in the investigative activities of the Federal Police (PF), which has long been on the trail of possible crimes committed by the Bolsonaro clan. The crisis was detonated by the exoneration / resignation of the PF superintendent, Mauricio Valeixo, communicated in the Official Diary, without the consent of the Minister Moro. A serious blow for Bolsonaro, given that Sergio Moro enjoys a very high popularity in Brazil. An investigation has been opened to verify the existence of possible crimes and Sergio Moro has already been interrogated by the Federal Police of Curitiba.

On the economic front, the effects of the pandemic – as in the rest of the world – are dramatic.

In the first quarter, unemployment went from 10.9% to 12.2% with an increase of about 1.2 million unemployed.

Isolation measures resulted in the closure of many production and commercial activities, as well as leaving many informal workers (street vendors, domestic workers, etc.) out of work. The subsidy of R$ 600.00 per month for those left unemployed is still being distributed. The limited saving capacity of the poorest sections of the population is creating serious subsistence problems, but also among the so-called “middle class” – on average not very inclined to saving – financial reserves are scarce and are causing an increase in the default of the payment of mortgages and current expenses, such as condominium, electricity and gas.

On May 2, the Senate approved the transfer of 60 billion reais (11 billion dollars) to states and cities; the approval of the Chamber of Deputies is expected for the first week of May.

With regard to the interventions to counter the dramatic effects of the crisis on the economy, a debate has opened regarding the possibility of issuing currency to finance transfers to families and businesses in difficulty. A group of Brazilian economists, led by Monica de Bolle, of Johns Hopkins University, defends the theory that the state can print money and borrow without generating inflation (but devaluing the value od his currency).

On April 23 the government presented the “Prò-Brasil” plan, a sort of Marshall plan to stimulate economic recovery in the coming years. It is a 7-pages powerpoint (including cover), in which investments of 300 billion reais (55 billion dollars), 250 from concessions and public-private partnerships and 50 of public investments are planned. The document was prepared by the government’s “military wing”, without the economy minister, Paulo Guedes, having even been consulted.

It should be noted that Boeing has stopped negotiations for the purchase of Embraer, an agreement that had been carried out in 2018 for a value of US$ 4,2 billion. In full crisis after the crash of two 737 Max planes and the suspension of orders by several airlines due to the coronavirus crisis, Boeing accuses Embraer of not having fulfilled some conditions set out in the contract. On the contrary, according to Embraer, Boeing would be in bad faith and seek claims to avoid closing the contract and pay the amount due.

Here is the trend of the main 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% -3,76%

The GDP growth forecast for 2020 is falling sharply, for which economic operators expect, on average, a drop of 3.76%. The estimate seems to be still optimistic, given that already in mid-April the IMF estimated a decline of 5.3%.

For 2021, the Focus research expects growth of 3.3% and the IMF of 2.9%.

Given that the pandemic arrived in Brazil about a month later than in Europe, the effects on the real economy are also showing a certain phase shift. As the winter of the southern hemisphere approaches, the impact on the economy could also reach its maximum starting from June / July 2020.

For this reason, the IMF estimate could also be optimistic and the drop in Brazilian GDP could align with that of European countries, that is, closer to -8/9% than -5%.

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% 1,97%  

The inflation estimates for 2020 are still down: at the beginning of the year it was forecast at 3.6%, a month ago at 2.94% and today at 1.97%. Many companies are facing a sharp reduction in turnover against the persistence of high fixed costs (rents, staff, etc.), causing an unsustainable loss of profitability, sometimes even in the short term. Without having sufficient revolving capital and with little room for maneuver to increase prices (given that demand is at this moment very inelastic to price), many companies will be forced to close. It is essential that the government and the banking sector (fortunately healthy, in Brazil) support businesses and allow them to overcome these very difficult months, pending a return to (almost) normalcy.

 

 

 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 5,00  

Following the crisis of the new coronavirus, the dollar today reached R$ 5.52, a new historical high.

The Brazilian currency is the one that, in 2020, was most devalued in the world compared to the dollar: -37.6%

The market estimates a quote of R$ 5.00 at the end of 2020, predicting that the stress caused by the crisis will partially fall within the second half of the year.

However, several analysts do not dismiss the hypothesis of a further devaluation in the coming weeks, especially if the political and economic crisis worsens.

The price of the euro today is 6,04 reais, close to the all-time high of 6,12 reached at the end of April.

 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% 2,75%  
Real interest (deflactor: IPCA) 4,20% 2,60% 6,91% 4,05% 2,81% 0,30%  

0,78%

  

The discount rate (SELIC) is still equal to 3.75% per year, but the director of Banco Central himself, in an interview, gave signs of a new next reduction.

The market expects SELIC to close 2020 at 2.75%, an all-time low.

It is necessary to understand how, at this interest rate and with such a devalued exchange rate, the Brazilian state will be able to finance the huge debt that will accumulate in the coming months (perhaps just by printing new currency …).

The Brazilian stock market (Bovespa)

Despite the worsening of the pandemic and the internal political crisis, the Brazilian stock market showed a good recovery in April, with a performance of + 10.3% in nominal terms. Considering the devaluation of the real, however, in dollars and euros this growth has halved.

Since the beginning of the crisis, the Bovespa index has lost 29% in reais, 43% in dollars and 44% in euros.

After reaching the minimum of 63.5 thousand points on March 23, the Ibovespa has been oscillating around 80 thousand points for almost a month; according to some analysts, the next technical target is the share of 87/88 thousand points, provided that no disastrous news comes from the political front or from an international crisis.

As for some months now, the obvious suggestion is that of maximum caution regarding new investments in shares of the Brazilian stock exchange. However, the Brazilian assets (even the real estate ones) are still very cheap and excellent deals can be made.