Brazil has crossed the threshold of 65,000 deaths for Covid-19, with no sign of reaching the ceiling of the infections yet. The pandemic is now affecting the Northeast region more strongly and is spreading worryingly among indigenous peoples.
Without ever having made a real lockdown, the big cities have begun a gradual reopening of commercial activities.
On June 24, the IMF worsened the Brazilian GDP growth estimate in 2020, from -5.4% to -9.15% (+ 3.6% in 2021). In addition to the direct effects of the pandemic on internal economic activities, the drop, according to the IMF, will be determined by the lower flow of investment from abroad and the drop in commodity prices at an international level.
At the mid-June meeting, Banco Central further reduced the discount rate (SELIC), from 3.00 to 2.25% per annum. Brazil is experiencing negative real interest rates for the first time, as inflation is around 3% –
According to the IBGE, industrial production increased by 7% in May; an encouraging sign after the disastrous month of April (-26% compared to March). However, it will not be an easy year for the industry: Anfavea (National Association of Automotive Manufacturers), for example, expects a 45% drop in vehicle production, the worst result in the last 20 years.
Worth noting is the open letter sent by a group of international investment funds (with asset management of 4 trillion dollars) to the Brazilian government, asking for the suspension of deforestation in the Amazon: “We are concerned about the financial impact of deforestation, as well as for violations of the rights of indigenous peoples, which have potential consequences for the reputational, operational and regulatory risks of our customers and investee companies “.
The environmental issue, which has always been mistreated by the Bolsonaro government, is also beginning to have a serious economic impact on the agribusiness sector, which sees important contracts for the international supply of raw materials, starting with soy, at risk.
The Brazilian government has started talking again about the tax reform, which has been shoved away in a drawer for almost a year for lack of consensus and political support. Perhaps the first real effect of the agreement with the center parliamentary group (which will cost very dearly in terms of clientele and partitions of public assignments).
Here is the trend of the main indicators:
GDP (Value added at market prices)
|GDP – real growth (%)||0,5%||-3,5%||-3,3%||1,0%||1,1%||1,17%||-6,50%|
Brazilian operators are more optimistic than the IMF and forecast, on average, a 6.50% drop in 2020 GDP. A month ago the forecast was around -6.25%.
For 2021, Focus research expects 3.5% growth.
Given that the first wave of contagions is still at its highest levels, it is not possible to predict when there will be an almost complete reopening of economic activities.
Inflation and real/dollar exchange
|IPCA (IBGE – %)||6,40%||10,7%||6,29%||2,95%||3,69%||4,20%||1,63%|
The 2020 inflation estimate was stable: it was 1.55% a month ago, today it is 1.63%.
The drop in consumption prevents companies from transferring the significant increase in relative costs (especially fixed costs in relation to the decreasing turnover) to prices, but this situation will soon become unsustainable and lead to numerous closures and bankruptcies. On the other hand, as soon as there is a sustained recovery in demand, a significant increase in inflation will be practically inevitable.
|Exchange rate R$/US$ (end of the period)||2,66||3,90||3,25||3,25||3,75||4,01||5,20|
The dollar was quoted today at R$ 5.38, almost like a month ago. In the first week of June, the real reassessed itself until it reached the price of R$ 4.85, but it returned to settle above 5.20.
The estimate for the end of 2020 is a quote around R$ 5.20.
Much will also depend on the credibility of the Brazilian government and the level of interest rates. In the first case, political instability and unfortunate anti-environmental behavior are driving investors away and the government needs to start acting accordingly. Furthermore, with the discount rate at 2.25% per annum (and therefore unattractive), many Brazilian investors are investing abroad, causing a strong flow of buying dollars.
The price of the euro today is 6.07 reais.
|Nominal Interest rate (end of the períod)||11,8%||14,9%||13,8%||7,00%||6,50%||4,50%||2,00%|
|Real interest (deflactor: IPCA)||4,20%||2,60%||6,91%||4,05%||2,81%||0,30%||0,37%|
The discount rate (SELIC) was lowered to 2.25% per annum (new historical low), but without signs of possible further decreases over the next few months.
The market expects SELIC to close 2020 at 2.00%.
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 and will accumulate in these months of pandemic.
The Brazilian stock market (Bovespa)
Another positive month for Bovespa, whose index grew by 11.6% in June, close to 100 thousand points (97,761 the closing on 7 July 2020).
Worth mentioning the performances of:
BTG Pactual (bank): + 56.6%
Gol (airline): + 54.2%
Azul (airline): + 48.3%
Cyrela (real estate): + 34.8%
CVC (tourism): + 26.0%
Via Varejo (distribution): + 23.5%
Since the beginning of the crisis, the Bovespa index has lost 15% in reais, 30% in dollars and 32% in euros.
Even if the market moves based on expectations (recovery of the Chinese economy, increase in commodity prices, anti-Covid vaccine being tested, etc.), after three months of growth (April-June) and with a detachment compared to real economy data, the stock market is likely to take a breath in July.