The Covid-19 pandemic still does not show signs of slowing down in Brazil, where the average of daily deaths continues to exceed thousand cases. By mid-August, the number of 100,000 coronavirus deaths is likely to be reached.

The new cases exceed the daily threshold of 25 thousand and the population is divided between those who continue to respect isolation (in force since the end of March) and those who continue their activities almost normally.

It is not yet clear what the consequences will be of the choice of not having imposed a rigid lockdown, favoring in a certain way the spread of the virus. Without any apparent planning, the various spheres of government are “playing” on the trade-off between the sacrifice of human lives and the maintenance of a level of economic activity that guarantees the livelihood of the population. If it is true that the complete lockdown is a “luxury” that Brazil cannot afford, we only have to hope that the contagion curve will begin to decrease before having made a real massacre among the population, in particular the poorest one (precisely that who cannot afford a rigid lockdown).

Like so many other things, Covid-19 is not the same for everyone in Brazil.

Waiting to know the data on the GDP trend of the second quarter of 2020, some data on the situation of the economy.

In the meeting of 4-5 August 2020, Banco Central decreased the discount rate (SELIC) by 0.25%, bringing it to 2% per year, yet another historical minimum. This is the ninth consecutive reduction.

In the first half of 2020, a total of 1.2 million formal jobs were lost. The month of June, however, was less catastrophic (only 10 thousand seats lost), which makes analysts think that perhaps the worst could have passed. Recruitment in the agro-food and construction sector grew in June. The government is expected to extend the resignation incentives offered to businesses in August.

The unemployment rate is at 13.1% and could rise when workers who have temporarily given up on finding new jobs because of Covid-19.

On 21 July 2020, the Minister of Economy, Paulo Guedes, handed over to the Brazilian parliament the tax reform proposal prepared by the government. For the moment, the proposal only concerns the introduction of a tax (CBS, Contribution on Goods and Services) which aims to replace five current federal taxes, attributable to the PIS-COFINS nomenclature. In practice it is the introduction of VAT.

Aware of the fact that CBS is only a first step, the Government has announced that it will soon present the other three phases of the planned reform:

– Replacement of the Tax on Industrialized Products (IPI) with a selective tax on certain products, such as alcoholic beverages and cigarettes

– Revision of taxation of income and profits and dividends

– Reduction of the tax on the remuneration of employees (which would benefit service companies in particular), whose lost revenue could be compensated by the introduction of a tax on digital banking transactions

Public debt reached, at the end of the first half of 2020, the record percentage of 85.5% of national GDP. The forecast is that 98% of GDP will be reached by the end of 2020; in 2013, before the crisis, it was 51.3%. This result was the result of a sharp decrease in tax revenues, due to the crisis that has affected companies, and the increase in expenses to help the population and support businesses during the pandemic. The government has always made fiscal austerity one of its flagship, but the situation is dramatic especially among the poorest people and informal workers. There remains the problem of the sustainability of the debt that is accumulating, but right now the priority is to ensure the subsistence of the population.

A phenomenon going against the rest of the world is the accumulation of banknotes by lower-income people. Due to the coronavirus crisis, a substantial part of the government’s revenue or emergency aid has not been spent or even deposited in the bank: as in the old days, it ended up in a mattress, causing a crisis in the supply of money that the Treasury is tackling by printing banknotes (and launching a new R $ 200.00 banknote, which to be fair was long overdue). The forecast is that this large amount of banknotes will return to circulation as the economic situation returns to normal, and that the Treasury will gradually withdraw it from the market.

On the political front it is worth mentioning:

– the exit of DEM and MDB from the political group called “Centrão”, which had recently signed a “physiological” agreement to support the Government’s initiatives;

– the initiative of the President of the Chamber of Deputies, Rodrigo Maia, to create a legislative agenda in favor of the environment. The initiative starts from the solicitation of a group of entrepreneurs and representatives of the country’s financial area, dissatisfied with the policy of the Bolsonaro government in the environmental area and worried with its economic consequences at an international level. That is: if it is not for the environmental conscience of the government, it may perhaps be thanks to the strength of money that Brazil will return to invest in the preservation and conservation of its very important biomes.

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% -5,66%

The perception of Brazilian operators regarding GDP 2020 improves, with a forecast of -5.66% against -6.50 a month ago.

For 2021, the Focus research confirms the growth forecast of 3.5%.

Given the strong impact of the pandemic on the GDP of industrialized economies, we are waiting to see if the official GDP figure for the second quarter will confirm this overly optimistic forecast or not.

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% 1,63%  

Just like the estimate for 2020 inflation a month ago: + 1.63%.

Cumulative inflation at the end of June (last 12 months) is 2.13%. The sharp decrease in the demand for goods and services continues to prevent companies from passing on the significant increase in costs to prices.

 

 

 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 5,20  

The dollar is quoted today at R$ 5.29, slightly less than a month ago (5.36).

The relative optimism about the economic trend is not reflected in the dollar price. There is no significant flow of investments from abroad and the discount rate at historic lows makes Brazilian public debt securities unattractive.

The estimate of the dollar price for the end of 2020 continues around R$ 5.20.

The price of the euro today is 6.29 reais, a significant increase due to the relative weakness of the dollar against the European currency.

 Interest rate

  2014 2015 2016 2017 2018 2019 2020  
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) has been lowered to 2% per year (new historical low) and Banco central has signaled a possible further decrease by the end of 2020.

The market expects SELIC to close 2020 at 2.00% (but the forecast is prior to yesterday’s cut).

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)

Fourth month of growth for the Bovespa index, which increased by 6.3% in July, exceeding 100 thousand points (102,801 the closure on 5 August 2020).

Since the beginning of the crisis, the Bovespa index has lost 10% in reais, 25% in dollars and 31% in euros.

The cut in the discount rate (SELIC), the increase in the price of commodities and the expectation of an expansionist monetary maneuver by the US government are giving impetus to the Brazilian stock market. However, given the trend of the real economy, the hypothesis that a financial “bubble” is being created is far from being discarded and maximum caution is recommended.