The number of deaths from Covid-19 is now over 160 thousand, without the curve still showing clear signs of deceleration. While Europe is facing a very strong second wave of infections, in Brazil we are still in the first phase of the pandemic, with the prospect of an improvement given the approach of the summer period.
On the economic front, in the third quarter of 2020 the unemployment reached a record level of 14.4%, against 12.9% in the second quarter and 11% of the pre-pandemic level. The forecast is that this trend will continue until the end of the first half of 2021, with strong consequences on household consumption. The only sector that went against the trend was agriculture, thanks to the hirings for the collection of coffee.
After offering the “auxilio emergencial” to the poor families affected by the economic effects of the pandemic, the Government must decide whether to extend it also in the first months of 2021. The end of the “auxilio emergencial”, would cause a consumption crisis that could bring the economy to its knees; on the other hand, the only way of financing remains that of debt, which has already reached very high levels by Brazilian standards (those of an economy with a very low propensity to save).
By the end of the year, public debt is expected to reach a record level of 100% of GDP (before the coronavirus crisis it was below 80%) and the government is faced with a choice between imposing a fiscal tightening (which averted a debt crisis, a stampede of investors and a further devaluation of the real) and the continuation of a policy of increasing the public thickness to address the effects of the coronavirus crisis on the population. The temptation to follow the populist path of increasing public spending is strong already in view of the next presidential elections in 2022, but its medium-term effects (inflation, debt crisis, devaluation of the real, flight of investors, etc.) would be disastrous.
There is already talk of a further downgrade of the Brazilian debt rating, which is already very deteriorated today (Moody’s: Ba2, S&P: BB-, Fitch: BB-).
The performance of Brazilian assets also reflects the uncertainty regarding the government’s fiscal responsibility. In recent weeks, the real has weakened and the stock market has seen sharp drops, only partly attributable to the international coronavirus emergency.
The government has approved by decree-law a long-term strategy (2021-2031) to increase the Human Development Index (HDI) of Brazil and bring it to the levels of other South American countries, such as Chile and Uruguay. In 2018 the HDI of Brazil was 0.761 on a scale of 0 to 1, that of Uruguay was 0.808 and that of Chile 0.842 (to get an idea, that of USA in 2018 was 0.920).
The decree outlines a series of economic, institutional, social, environmental and infrastructural goals that must be achieved by 2031 to bring the country to an average annual GDP growth of between 2.2% and 3.5%.
The plan includes major tax reform, privatization, investment and new changes to the pension system.
According to some analysts, the Plan was conceived and drawn up exclusively for the request for entry into the OECD, so it is not much more than a rhetorical exercise. In any case, it represents a small victory for the Minister of Economy, Paulo Guedes, who manages to put on paper maintaining the balance of public finances as a strategic line of the Bolsonaro government.
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% | -4,81% |
The 2020 GDP estimate by economic operators is still improving: -4.81% compared to -5% a month ago.
The interventions of the government and Banco Central to reduce the impact of the coronavirus crisis on the economy are working but, as we have seen previously, the price to pay is very high. Brazil is one of the least impacted countries in terms of GDP decline in the short term, but must now be able to control the performance of public finances to avoid an even greater crisis in a few months.
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% | 3,02% |
The 2020 inflation estimate is still increasing: +3.02% compared to +2.12% a month ago and compared to +1.72% two months ago.
The prices of food products have undergone a significant increase, which begins to weigh above all on the consumption of the poorest families: what has been given with the “auxilio emergencial” has been partly removed by the increase in the prices of the basic products.
3% Inflation is still below the Banco Central target for 2020 (4%, with a tolerance of 1.5% more or less), but there is a risk that it could get out of control.
| 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 | 5,45 |
The dollar is quoted today at R $ 5.70, up from a month ago (R $ 5.57).
The Brazilian currency remains one of the weakest in the world, and this trend could continue in the event of a further worsening of the fiscal deficit and an increase in inflation.
The estimate of the dollar price for the end of 2020 has also deteriorated and is around R $ 5.45.
The euro price today is 6.68 reais, up 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% | -1,02% |
The market continues to expect the SELIC (discount rate) to close 2020 at 2.00%.
Banco Central considers that inflation has only undergone a temporary growth, linked to the increase in food products: with the new crops, which are expected to be abundant, prices should return to decline. For this reason, the decision to keep SELIC at 2% and not to foresee an upward adjustment in the coming months.
With rising inflation and a stable discount rate, real interest rates have entered negative ground in an expressive way: -1% per year.
If the government fails to rebalance public finances quickly, the next few months will be really difficult for Banco Central and for Brazil.
The Brazilian stock market (Bovespa)
In the last month, the Brazilian stock market has been in a strong swing, reaching 94 thousand points at the end of October and whose index today stands at around 96 thousand points.
After having crossed the 100,000 points threshold again on 22 October, the bad news on the fiscal front together with the generalized decline in world stock exchanges (caused by fears for the second wave of Covid-19) led to a significant loss, around 6% .
Despite the good news on the economic growth front, uncertainty about the government’s fiscal policy and the resurgence of inflation are holding back investors, both Brazilian and foreign.
Since the onset of the coronavirus crisis, the Bovespa index has lost 16% in reais, 36% in dollars and 41% in euros.
Update Brazil 
Come sempre un ottimo lavoro ma anche come sempre con commenti pessimistici e critici verso le scelte del Governo Brasiliano che evidentemente non e di suo gradimento.
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