The coronavirus pandemic continues to give no respite to Brazil, which never came out of the first wave and which is now facing a new increase in cases, despite the approach of summer. The deaths from Covid-19 are almost 173 thousand to date.
Elections for mayor offices were held throughout Brazil in November, an important test also for measuring the popularity of Bolsonaro and his opponents. From the polls came a merciless verdict both for the current president of the Republic and for the PT (Partido dos Trabalhadores). In the big capitals, none of the candidates supported by Bolsonaro was elected and in several cases (such as in Sao Paulo) they did not even reach the second round ballot; on the other hand, not even the PT, in the big cities, has managed to elect its candidates.
Even if the municipal elections have a meaning that reflects local interests and more administrative than strictly political aspects, the voters have sent a strong and clear signal, both to Bolsonaro and to the PT. The center (PSDB, MDB, DEM, PSD, PP) is thus strengthening, while the left is reorganizing around new names such as those of Boulos (PSOL) and Manuela D’Avila (PCdoB).
The Central Bank has announced that the economic activity index (an anticipation of the GDP figure) in the third quarter of 2020 recorded a growth of 9.5% compared to the previous quarter. This figure signals the reaction of the economy, but obviously many unknowns remain for the coming months. The possible suspension from January of the “auxilio emergencial” in favor of the most needy families could trigger a new contraction of the economy and, above all, plunge millions of people into poverty. The economy minister, Paulo Guedes, however, declared that – in the event of a worsening of the pandemic – the “auxilio emergencial” will not be suspended.
Concern remains high about the fiscal deficit, which must approach 95% of GDP by the end of the year, and with its financing. The Brazilian Treasury is refinancing its debt with the issuance of bonds with ever shorter maturities and could begin to have difficulties in the coming months, given the low interest rates offered. The fact that the Brazilian debt is practically all expressed in local currency avoids external shocks, but limits the room for maneuver for new and necessary large issues of securities. If the trajectory of the deficit were to continue to rise, the consequences would soon be dramatic: accelerated growth of inflation, increase in interest rates, dollar price above 7 reais, decrease in GDP, growth in unemployment, etc.
Speaking of inflation, the FGV has published the result of the IPA (Indice de preços ao Produtor Amplo) of October 2020, which measures the inflation rate of wholesale prices: + 31.05% per year. A very high figure, second in the world only to that of Argentina (+ 39.20%). The IPA reports the increase in the costs of production processes, such as prices of raw materials and semi-finished products, for example, which grew mainly due to the devaluation of the real, which lost more than 30% of its value against the dollar in 2020 alone. The IGP-M (Indice Geral de Preços-Mercado), often used as an index for rents, is + 23%. How long will consumer inflation remain under control? Until when will companies be able to absorb the increase in costs without increasing sales prices? When the period of severe recession ends, companies will adjust their price lists and the Central Bank will have its work cut out for not blowing up inflation without causing a new and worse recession.
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%||-4,50%|
Another improvement in the 2020 GDP estimate by economic operators: -4.50% compared to -4.81% a month ago.
As mentioned earlier, state support for families has worked, preventing a worse collapse of the economy. In 2021, in what is hoped to be the post-pandemic phase, government and parliament will have to be able to lead Brazil on the tracks of a new economic equilibrium, an equation whose variables are currently almost all out of place. A unity of purpose and a planning capacity are needed that seem out of reach today, for this reason all the institutions will have to collaborate and make a great deal for the country.
For 2021, the economists consulted by Banco Central expect GDP growth of 3.47% on average.
Inflation and real/dollar exchange
|IPCA (IBGE – %)||6,40%||10,7%||6,29%||2,95%||3,69%||4,20%||3,54%|
The 2020 inflation estimate is still increasing: + 3.54% compared to + 3.02% a month ago and compared to + 2.12% two months ago.
The recession is holding back companies from reviewing the cost increase on consumer prices, but this tension will sooner or later have to be resolved. In the event of a robust increase in GDP in 2021, inflation can grow well beyond the 3.5% forecast by economists for next year, even if the prices of factors of production (especially labor costs) remain low.
|Exchange rate R$/US$ (end of the period)||2,66||3,90||3,25||3,25||3,75||4,01||5,36|
The dollar is quoted today at R $ 5.23, down sharply from a month ago (R$ 5.70).
Biden’s election caused the Brazilian currency to appreciate. The market evidently considers that Brazil can benefit from a greater flow of foreign investments and a more favorable climate for international trade.
The estimate of the dollar price for the end of 2020 has also improved and is around R$ 5.36; that at the end of 2021 is estimated at R$ 5.20. To prevent better estimates for 2021 (i.e. a return below 5) are mainly the uncertainties about the management of the fiscal deficit and administrative reforms.
Indeed, a worsening of the situation would immediately affect the dollar rate, which could reach R $ 7 or even more.
The price of the euro today is 6.30 reais, a decrease compared to a month ago (6.68).
|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%||-1,46%|
The discount rate (SELIC) has now reached its lower limit of 2.00% and the market expects that in 2021 there will be a gradual increase up to 3% at the end of the year.
Much will depend on the trend of inflation, certainly the variable most exposed to the turbulence of this period (the maintenance of the exchange rate is not one of the goals of Banco Central, which in any case keeps it under control for its potential inflationary effects).
Real interest rates have now largely reached negative territory, prompting a shift towards riskier investments and exchange rate hedge instruments. Recall that Brazil was, until a few years ago, the paradise of the most conservative investors, with interest rates well above the world average.
The Brazilian stock market (Bovespa)
The Brazilian stock market has grown strongly in the last month, reaching 111 thousand points (+ 16% compared to the beginning of November).
The change in trend began after the announcement of the result of the American elections, which caused a significant flow of capital from abroad (positive balance of 33 billion reais in November, which however only partially compensates for the flight that occurred during the first ten months of 2020).
The market also seems optimistic in relation to the approval of the tax reform (which could be voted in Parliament by the end of the year) and the management of the fiscal deficit.As previously analyzed, in 2021 the tax issue will be crucial in determining both the performance of the Brazilian stock exchange and that of the real economy.
Since the onset of the coronavirus crisis, the Bovespa index has lost 2% in reais, 18% in dollars and 26% in euros.