The data on the trend of the Brazilian economy in the first quarter of 2020, disclosed by IBGE, show a 1.5% decrease in GDP compared to the previous quarter, despite the effects of the coronavirus pandemic were present only in the second half of the March.

But the worst is yet to come. In the second quarter, economists predict a 12.15% drop in GDP, the worst in history. The GDP drop estimates for the whole of 2020 stood at -6.25%, although this still appears to be a very optimistic estimate.

The only sector to grow in the quarter was the agri-food sector (+ 0.6%), which however only weighs 5% of GDP. On the other hand, household consumption (-2%), services (-1.6%) and industry (-1.4%) fell. Investments (FBCF) also grew, with a + 3.1%.

The primary fiscal deficit (not counting interest expense) of April 2020 reached a record figure of 92.9 billion reais (16 billion dollars). In addition to the expenses necessary to support families and businesses in difficulty (about 60 billion reais, according to the Treasury), the loss of tax revenue was postponed to the end of 2020 (approximately 40 billion reais of lost revenue).

A deficit of around 700 billion reais is expected for 2020 (130 billion dollars at today’s exchange rate), which represents 10% of Brazilian GDP. The goal of the beginning of the year was a deficit of 124.1 billion reais.

In terms of unemployment, 1.1 million jobs were lost in the March-April period. The forecast is that 3.5 million jobs will be lost throughout 2020 (in the crisis of 2015-2016 the negative balance had been 2.8 million jobs).

In the meeting ended May 6, 2020, Banco Central again reduced the discount rate (SELIC), from 3.75% to 3%.

On the political front, as has become normal, a different and serious crisis arises almost every day.

In the midst of the coronavirus pandemic (yesterday the deaths exceeded 30,000), Brazil is without a Minister of Health. On April 16 Nelson Teich, just one month after his appointment, resigned to disagree with the administration of chloroquine to patients, as Bolsonaro wanted to impose. To date, the role of minister has been provisionally assumed by a general of the Armed Forces.

Following the investigation into Bolsonaro’s alleged interference in investigations by the Federal Police, the Supreme Federal Court (STF) made public the video of the ministerial meeting of 22 April, in which various ministers – in more than scurrilous language – attack and threaten the other institutions (STF, parliament and state governors, in particular).

The intervention of the Minister of the Environment (now called Minister of the Extinction of the Environment) caused a sensation. Ricardo Salles suggested taking advantage of the concentration of attention on the pandemic to change the regulations and to pass new laws to “sburocratize” the exploitation of protected lands, especially in the Amazon. The support given to him by some industry associations (food, cosmetics, etc.) has provoked strong dissent by the company and the exit of several companies contrary to government policies in the environmental area.

In an attempt to contain the loss of popularity (the government now has the support of only 30% of the electorate, according to recent polls), Bolsonaro is building political alliances with the so-called Centrão, a parliamentary grouping that gathers deputies and senators who have made physiology politics its reason for existence. So, parliamentary support in exchange for positions: just the opposite of what led Bolsonaro to be elected, the refusal of the “old politics”.

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% -6,25%

The GDP growth forecast for 2020 is falling sharply, for which economic operators expect, on average, a drop of 6.25%. A month ago the forecast was around -3.5%. Despite everything, the estimate seems to be still optimistic, with several operators forecasting a drop of close to 10%.

For 2021, Focus research expects growth of 3.1%.

Social isolation measures persist, given that Brazil has become the center of the pandemic and that the peak of the infections is expected to arrive in June: however, gradual reopenings are already planned in several states.

The disastrous management of the coronavirus crisis, without a real lockdown, could delay the remission of the virus and the return to normal of economic activities.

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% 1,55%  

The 2020 inflation estimate is always down: at the beginning of the year it was expected to be 3.6%, today it is 1.55%. For the first time in 25 years, deflation was recorded in the month of -0.31%.

The inflation was mainly driven by the fuel price (petrol -9.3% and ethanol -12.5%). On the other hand, the price of food products rose (+ 1.79%).

With falling demand and falling prices, companies are facing a very difficult period which can lead to numerous closings and bankruptcies.

 

 

 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 5,40  

The dollar reached R$ 5.38 today, down from a month ago. The relative revaluation of the real comes after several months of continuous devaluation and has allowed the value lost by the Brazilian currency to be partially recovered. Despite the positive performance in the month, the market is more pessimistic about the dollar price at the end of the year, forecasting an exchange rate of R$ 5.40.

The price of the euro today is 5.97 reais, below 6 reais for the first time in more than a month.

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% 2,25%  
Real interest (deflactor: IPCA) 4,20% 2,60% 6,91% 4,05% 2,81% 0,30%  

0,70%

  

The discount rate (SELIC) was lowered to 3.00% per annum (historical minimum), with signs of possible further decreases in the coming months by Banco Central. Inflation behavior, if confirmed, allows to further loosen the cost of money and allow easier access for businesses and families to credit.

The market expects SELIC to close 2020 at 2.25%, an all-time low.

As already said in recent months, it is necessary to understand how, at these interest rates and with such a devalued exchange rate, the Brazilian state will be able to finance the huge debt that is accumulating in these months of pandemic.

The Brazilian stock market (Bovespa)

A Goldman Sachs financial report published on May 20, 2020 gave the Brazilian stock exchange an optimism. According to analysts of this institution, the shares traded in Bovespa will benefit from a possible increase in the price of commodities, starting from the second half of the year and from a greater risk appetite by investors.

Also according to Goldman Sachs, the Bovespa index should reach 90 thousand points by the end of July 2020 (today it is already at around 88 thousand).

Also in May (after + 10.3% in April) Bovespa grew strongly: + 8.6%.

Since the beginning of the crisis, the Bovespa index has lost 24% in reais, 38% in dollars and 39% in euros.

The recommendation is always that of caution, especially for the escalating political crisis that could lead to serious consequences for the value of Brazilian assets.