On 24 September Banco Central revised its 2020 GDP growth estimate, bringing it from -6.4% to -5%. According to the institution, this year’s new GDP projection considers “strong growth in activity in the third quarter, influenced by government measures to counter the economic impacts of the pandemic and the gradual return to pre-period consumption levels of social isolation “. Banco Central also states: “Despite the sharp decline in activity in the second quarter, available indicators show that the recovery in economic activity after the most acute phase of the pandemic, albeit partial, is taking place faster than expected, contributing to the increase of the annual growth estimate “.
However, this relatively optimistic scenario is based on some conditions / hypotheses: continuity of reforms and maintenance of the current fiscal regime, ensuring the long-term balance of public finances, and a slowdown of the pandemic, which allows a progressive return to consumption models in force before the social distancing period.
Even if the official data on the third quarter of 2020 will be available only in November, the forecast of the BC (shared among other things by a large part of the economic operators) is certainly comforting, but we must take into account the three great conditions: reforms, balance fiscal and pandemic trends.
Brazil is approaching the tragic milestone of 150 thousand deaths from Covid-19 and the contagion curve does not yet give clear signs of decline, even if the approach of summer should help to improve the situation (in contrast to the countries of the hemisphere north, where instead it goes towards the colder months).
On the other hand, with regard to the conditions related to the political agenda, in recent weeks certain not positive signals have arrived, which have also had an impact on the price of the real and on the performance of the Brazilian stock exchange.
To face the economic crisis, the government has rightly and promptly distributed resources to the most needy families, through the “auxilio emergencial” of R$ 600,00 per month (now 300), through an extraordinary (and timely) action from a fiscal point of view. With this, public debt is estimated to reach close to 100% of GDP by the end of 2020.
Debt sustainability is a crucial issue for the Brazilian economy: the temptation to adopt populist measures without an adequate source of financing can lead to very serious consequences in the medium term (2/3 years). With the 2022 presidential elections approaching, this temptation will be stronger and stronger and the first signs have been seen in the last month.
The increase in popularity of Bolsonaro, following the issuance of the “auxilio emergencial”, is pushing the government to study the introduction of a new social program (Renda Cidadã) in expansion and replacement of “Bolsa Familia”, created by Lula government in 2003. But how to finance it? In mid-September Guedes proposed freezing pensions, sparking an uproar and was beaten by Bolsonaro himself; these days we are considering the possibility of delaying the payment of “precatorios”, debts already due by taxpayers, and of using part of the resources of the Fundeb, a fund for education. In the case of the “precatorios”, it is not a question of new resources but only of a financial alchemy (of the same type that cost Dilma Rousseff’s impeachment); in the case of Fundeb, the idea of removing resources from the already disastrous Brazilian education system does not seem brilliant.
Unemployment increased, reaching 13.8% in the quarter May-July 2020; a year ago, in the same quarter, it was 11.8%. According to some estimates, the unemployment rate should worsen until the first quarter of 2021 and then gradually improve and return to pre-crisis levels in 2022 (assuming that the GDP growth in 2021 will be 3.5%).
It should be noted that the “Coalisão Brasil Climate, Florestas and Agriculture” (http://www.coalizaobr.com.br/home/), formed by a group of about 230 organizations and companies
with the aim of creating a space for dialogue between agribusiness and the environmental movement, sent a document with six proposals to tackle the deforestation of the Amazon to the government and parliament. An important signal to the Bolsonaro government, which from the very beginning has shown itself more interested in exploiting the resources of Brazilian biomes rather than in their preservation and conservation.
The fires in the Pantanal continue, helped by the high temperatures recorded in the first days of October. In this regard, I refer to the post: https://updatebrazil.com/2020/09/16/pantanal-a-sanctuary-of-biodiversity-burns-in-brazil/
In a decision of October 1, the Federal Supreme Court (STF) approved the sale of Petrobras refineries without prior parliamentary approval or bids. Thanks to this decision, the government will be able to sell 8 of the 13 refineries in its industrial park, for an estimated value of between 63 and 83 billion reais.
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% | -5,02% |
In line with Banco Central, economic operators have also improved their 2020 GDP estimate, bringing it to -5% compared to -5.3% a month ago. For 2020 GDP, which they estimate on average a decrease of -5, 31% compared to -5.66% a month ago.
For 2021, the Focus research confirms the growth forecast of 3.5%.
It is confirmed that Brazil may be one of the countries least affected by the coronavirus crisis, at least from the point of view of economic growth.
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% | 2,12% |
The 2020 inflation estimate is up: + 2.12% compared to + 1.78% a month ago and compared to + 1.63% two months ago.
After the most critical moment of the coronavirus crisis, there is more room for price growth to partially offset the collapse in demand and the sharp increase in business costs, also linked to the devaluation of the real. As we wrote a month ago, if the anchor of low inflation were to fail, it would be a big problem for Banco Central and its low interest rate policy.
| 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 | 5,25 |
The dollar is quoted today at R $ 5.56, up from a month ago (R$ 5.39). Another month of suffering for the Brazilian currency, which shows the worst annual performance compared to all other world currencies against the dollar, worse than the Turkish lira and the Argentine peso.
The weak positive signals coming from the economy are evidently not sufficient to limit currency bleeding, in a context of concern with the balance of public finances and a recovery in inflation.
However, the estimate of the dollar price for the end of 2020 is always around R$ 5,25, a sign that the market expects an improvement in the next three months.
The euro price today is 6.56 reais, a significant increase compared to a month ago.
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% | -0,12% |
The market continues to expect the SELIC (discount rate) to close 2020 at 2.00%.
For the first time in Brazilian history, the real interest rate (discount rate minus inflation) is negative, albeit just below zero. Banco Central finds itself having to manage monetary policy on a tightrope, caught between the danger of rekindling inflation and the need to stimulate the economy through low interest rates. Despite this, the market is optimistic and expects SELIC to close 2021 still at very low levels (2.50%).
The Brazilian stock market (Bovespa)
In decrease in the last month the Brazilian stock exchange, dropped below 100 thousand points towards the middle of September and whose index today stands at around 96 thousand points.
To weigh on the performance of Brazilian equities was above all the uncertainty on the issues of reforms and the management of the fiscal deficit. Operators are not liking the government’s populist turn, which jeopardizes the balance of public finances and threatens to restart inflation.
Foreign investors are fleeing the Brazilian stock market: the balance for the first 9 months of 2020 is negative for 89 billion reais, when in all of 2019 the outflows amounted to “only” 45 billion reais.
Since the onset of the coronavirus crisis, the Bovespa index has lost 15% in reais, 35% in dollars and 39% in euros.
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