The coronavirus epidemic in Brazil, which is in the midst of the second wave of infections, is worsening. The 270,000 death threshold has just been passed and yesterday (March 10) the daily deaths exceeded two thousand cases.

To cope with the surge in cases and the overcrowding of hospitals, a lockdown regime has been established in many states – including São Paulo.

The vaccination campaign reached nine million people, about 5% of the population. To accelerate the pace of vaccinations and make up for the inefficiency of the federal government, the governors of 24 of the 26 states of the Federation have signed a national pact against Covid-19.

The official figure for 2020 GDP was released, down by 4.1% compared to 2019. This is a significant decrease, but not as strong as was feared at the beginning of the pandemic.

It is interesting to observe the contribution of the various macro sectors to the growth / decrease of GDP in recent years, as shown in the table below.

Preventing a greater fall in Brazilian GDP in 2020 was mainly the agri-food sector, which grew by 2% even during the year of the pandemic. In recent years, the weight of this sector has gone from 5 to 7% of the Brazilian economy.

The service sector (which is worth about 70% of GDP) is in sharp decline, down by 4.5%. The pandemic has hit hard above all restaurants, personal care and tourism. The only exceptions are the financial, insurance and real estate segments.

The industrial sector recorded a decrease of 3.5%. The worst performances were recorded in the automotive and construction sectors.

Household consumption also suffered greatly, which decreased by 5.5% despite the provision of the “auxilio emergencial” to the most needy families. Isolation, growing unemployment and fear of the future have certainly inhibited consumption.

Government consumption also fell, penalized by the closure of schools, universities, museums and parks.

The data for the last quarter of 2020 are encouraging, but the extension of the isolation measures risks compromising consistent GDP growth in 2021. Mass vaccination is certainly the only solution to get out of the tunnel, even economically, caused by the pandemic.

Annual GDP trend-3,5%-3,3% 1,3%1,8%1,4%-4,1%
Household consumption-3,2%-3,8%2,0%2,4%2,2%-5,5%
Government consumption-1,4%0,2%-0,7%0,8%-0,4%-4,7%
FBCF (*) – Gross capital formation-13,9%-12,1%-2,6%5,2%3,4%-0.8%

(*) The FBCF measures how much companies have increased their capital goods, ie those goods that are used to produce other goods (machinery, equipment and construction materials, in short). This is an important value because it highlights the extent to which a country’s production capacity is increasing or decreasing. According to the IBGE, in 2021 the decline was not greater only due to the decision to authorize companies in the extractive sector to include in their assets, as capital goods, what was previously considered export.

On March 4, the Senate approved the “Proposed Constitucional Amendment (PEC) emergencial” which, among other things, will allow the revival of the “auxilio emergencial”. This is a legal ploy to “dribble” the annual public spending ceiling established by law and allow the payment of extraordinary expenses, such as those necessary to deal with the Covid emergency. To avoid repercussions on the already serious and growing fiscal deficit of the Brazilian state, mechanisms have been included in the PEC to contain ordinary expenses (freezing of the salaries of public employees, stop to public competitions, etc.), if necessary.

The PEC is now being approved by the Chamber of Deputies. The value of the new “auxilio emergencial” should be on average R$ 250.00 per family for four months.

With the decrease of 4.1% of GDP and the devaluation of the real (-22% against the dollar) in 2020, Brazil passes from ninth to twelfth position in the ranking of the world’s largest economies, surpassed by Canada, South Korea and Russia . In 2011, Brazil was the seventh largest economy in the world.

We recall three other relevant events that occurred in February:

– the approval of the law establishing the autonomy of Banco Central

– the resignation of the President of Petrobras by the President of the Republic

– the approval of the tender by Anatel for 5G

– the cancellation of the sentences of former president Lula

Here is the trend of the main indicators:

GDP (Value added at market prices)

GDP – real growth (%)-3,5%-3,3%1,3%1,8%1,4%-4,1%-3,26%

The GDP growth estimate in 2021 is still slightly down: from + 3.50% at the beginning of February to + 3.26% today. The worsening of the pandemic and the resulting restrictions on mobility will cause a delay in the return to normalcy. The acceleration of the vaccination plan and the maintenance of prophylaxis rules will be crucial to allow a consistent economic recovery in 2021. The approval of the new “auxilio emergencial” should allow household consumption, an important component of GDP, to remain stable.

Inflation and real/dollar exchange 

IPCA (IBGE – %)10,7%6,29%2,95%3,69%4,20%4,36%3,98%

The 2021 inflation estimate is growing, passing in a month from + 3.53% to 3.98%.

With the cut of the federal taxes on diesel and cooking gas (for two months those on diesel, forever those on gas) the government has for now averted a strike by truckers and responded to one of the reasons for the discontent of the population. However, inflation is not stopped by decrees and the problem will recur in a short time, this time accompanied by an even more serious fiscal crisis. It is therefore almost certain that Banco Central will raise the discount rate during the next meeting in mid-March.

Exchange rate R$/US$ (end of the period)3,903,253,253,754,015,195,15

The dollar is quoted today at R$ 5.65, up sharply compared to a month ago (R$ 5.35).

The estimate of the dollar price for the end of 2021 is around R $ 5.15, also up compared to that of a month ago (R $ 5.01).

Therefore, the weakening of the real continues, despite the forecasts of its progressive strengthening in the first months of 2021. Investors’ concerns about possible interference by the government in the activities of participatory companies weighed in this direction this month. government, such as Petrobras, and an interventionism in the pricing of the electricity sector.

Brazilian assets are extremely cheap and it is likely that at the first signs of improvement in the health and economic / fiscal situation there will be a substantial inflow of capital to Brazil, which would lead to a significant appreciation of the Brazilian currency.

The quotation of the euro today is 6.74 reais, an increase compared to a month ago (6.53).

Interest rate

Nominal Interest rate (end of the períod)14,9%13,8%7,00%6,50%4,50%2,00%4,00%
Real interest (deflactor: IPCA)2,60%6,91%4,05%2,81%0,30%  -2,38%  -0,02%

The discount rate (SELIC) continues stable at 2.00%, but expectations for SELIC at the end of the year have changed: 4.00% today against 3.50% a month ago and 3.00% at the beginning of the year.

Many economists predict that Banco Central, in the next meeting of the COPOM (Monetary Policy Committee) will begin the process of increasing the SELIC. Inflation continues to rise and Banco Central, in the process of becoming autonomous from the government, has already signaled that it will soon begin to intervene.

The Brazilian stock market (Bovespa)

On Monday 22 February, the Brazilian stock market fell by 5% (from 118431 to 112668 points) following the resignation of the President of Petrobras by President Bolsonaro. Petrobras stock (PETR4) lost 20.5% of its value in a single session. A clear message from investors, especially foreigners, who do not accept political interference in a listed company (even if it is under state control).

In the days immediately following the balance of the flow of capital to Bovespa was negative for 9.2 billion reais (about 1.5 billion euros), the worst figure in the last 10 years.

In the first days of March there was a slight recovery in prices, but the Bovespa index collapsed again on March 8 with the news of the cancellation of the sentences of former president Lula.

A rather turbulent March is expected, but - for those who hold hard currencies (dollars or euros) - Brazilian assets continue to be very cheap.

Since the onset of the coronavirus crisis, the Bovespa index has lost 2% in reais, 26% in dollars and 32% in euros.