Brazil closes 2020 with a death toll of almost 200 thousand coronavirus deaths and still no vaccination plan for the population.
On the economic front, the effects of the pandemic were less severe than in other countries, thanks above all to the timely introduction of the “auxilio emergencial”, a transfer of R$ 600,00 per month (which later became 300) to the most needy families.
The fiscal cost of this intervention, however, was high and its maintenance was considered unsustainable by the government, which stopped it starting from January 2021.
With an unemployment rate already at 14.3% and the end of the anti-firing benefits given to companies, Brazil is now in danger of being submerged by a wave of poverty with economic and social consequences that are still difficult to predict.
The government is counting on an accelerated process of economic growth already in the first months of 2021, but it is a bet that can prove to be quite risky, given the health situation. It is therefore likely that, despite the serious tax consequences, the government will decide to extend the “auxilio emergencial” for the first months of 2021.
Public debt has reached 88.1% of GDP, a value not excessive for the parameters of developed countries but worrying for Brazil, which has very low domestic savings, interest rates at historic lows and which can therefore have problems of financing. If the government will revive the “auxilio emergencial” (or similar measures) to tackle the poverty crisis caused by the coronavirus, the side effects (currency devaluation, inflation, interest rate increase, new recession, etc.) could prove worse than the disease you want to cure
However, there is no shortage of good news.
Despite the numerous interventions by Banco Central to contain the devaluation of the real (for a total of about 24 billion dollars), Brazil’s international reserves remain at the same level as at the end of 2019, i.e. around 357 billion dollars. This “mattress” of hard currency is certainly one of the factors that allows Brazil to look at the difficult 2021 with greater serenity.
Also on the front of commodity prices, of which Brazil is a major global producer, the news is positive. After the slowdown at the beginning of the pandemic, the demand for commodities has started to grow again and with it their prices: for example, in 2020 the price of iron minerals has almost doubled and that of soy has grown by around 35%. For 2021, forecasts are positive and global demand should help support Brazilian exports.
Here is the trend of the main indicators:
GDP (Value added at market prices)
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| GDP – real growth (%) | -3,5% | -3,3% | 1,0% | 1,1% | 1,17% | -4,4% | -3,40% |
According to the economists consulted by Banco Central, 2020 GDP should close at -4.36%. A result certainly unexpected until a few months ago and mainly due to the state support for families, which prevented a worse collapse of the economy.
The price, in terms of debt, was very high and will be so also in the first months of 2021, given that it is not possible to abandon the poorest population to its fate.
How to finance the growing public debt will be the central point in 2021? Will the government and parliament be able to rise to the challenge?
For 2021, the economists consulted by Banco Central expect GDP growth of 3.40% on average.
Inflation and real/dollar exchange
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||
| IPCA (IBGE – %) | 10,7% | 6,29% | 2,95% | 3,69% | 4,20% | 4,36% | 3,34% |
The 2020 inflation estimate is still increasing: +4.38% compared to +2.12% three months ago.
Starting from the second quarter of 2021, however, a decrease in food prices (responsible for much of the growth in inflation in 2020), is expected. In fact, record agricultural harvests are expected, which – as for years now – will save the Brazilian economy.
Higher inflation is expected in the service sector and administered prices (government-controlled transport, fuels, medicines, etc.), which remained artificially low in 2020 due to low demand (despite rising costs) and for political decisions.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||
| Exchange rate R$/US$ (end of the period) | 3,90 | 3,25 | 3,25 | 3,75 | 4,01 | 5,19 | 5,00 |
The dollar is quoted today at R$ 5.30, slightly higher than a month ago (R$ 5.23).
After a period of appreciation, the real has once again weakened against the dollar and especially the euro. The fiscal crisis leaves no room for a significant revaluation of the Brazilian currency, even if the flow of capital (especially speculative) for the purchase of Brazilian assets is increasing.
Instead, the estimate of the dollar price for the end of 2021, which is around R$ 5.00, decreases.
The government’s action (or inaction) in tackling the problem of public debt financing will determine the trend of the exchange rate, given that the private sector is still showing optimism about a positive exit from the crisis, as shown by the investment flows of the recent months.
The euro price today is 6.52 reais, up compared to a month ago (6.30).
Interest rate
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||
| Nominal Interest rate (end of the períod) | 14,9% | 13,8% | 7,00% | 6,50% | 4,50% | 2,00% | 3,00% | |
| Real interest (deflactor: IPCA) | 2,60% | 6,91% | 4,05% | 2,81% | 0,30% | -2,38% | -0,68% |
The discount rate (SELIC) continues stable at 2.00% and the market expects that in 2021 there will be a gradual increase up to 3% at the end of the year.
At this interest rate, the Brazilian Treasury could begin to have difficulty in issuing new bonds to finance an ever-growing debt. In the first quarter of 2021, bonds worth 643 billion reais (about 120 billion dollars) mature, equal to 15.4% of the entire Brazilian debt. It will be a big challenge for the Treasury, which will likely have to offer interest rates well above the nominal 2% to entice investors to buy (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 continued to grow in the last month, reaching 119 thousand points (+ 11% compared to the beginning of December).
This trend appears to be more the result of the migration of Brazilian investors towards higher-risk investments, rather than the improvement in the prospects of publicly traded Brazilian companies.
Dissatisfied with the profitability of safer assets, investors are turning to assets that have the potential to deliver higher returns in the short term.
Is a dangerous speculative bubble being created? I will talk about it in the next post, focused as usual at the beginning of the year, on the performance of the Brazilian stock market.
Since the onset of the coronavirus crisis, the Bovespa index has gained 5% in reais and lost 13% in dollars and 24% in euros.
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