The number of coronavirus deaths in Brazil is growing dramatically: as of yesterday, April 6, there were more than 335 thousand since the beginning of the pandemic.
With an average of more than 3,000 deaths per day, Brazil has been the country with the highest number of daily deaths for weeks and unfortunately the trend shows no sign of decreasing.
On March 15, 2021, President Jair Bolsonaro dismissed the Minister of Health, General Eduardo Pazuello, the fourth in his management. The doctor Marcelo Quiroga was appointed in his place.
The vaccination campaign reached 20 million people, about 10% of the population.
On March 17, 2021, Banco Central increased the discount rate (SELIC) by 0.75%, taking it from 2 to 2.75% per annum. The press release issued at the end of the meeting also revealed that during the next meeting, to be held in May, the discount rate will be increased by a further 0.75%.
The intervention of Banco Central (the first after the proclamation of its autonomy, which took place in February 2021) comes at a time of growing fiscal deficit and therefore obliges the government and parliament to make a greater effort to contain expenses, given that the cost of debt audience gets higher.
The state budget for 2021 is being discussed. It will be a fundamental test to demonstrate the capacity and willingness of Parliament to manage the very serious fiscal crisis. The so-called “compulsory expenses” (pensions, salaries of public officials, health, etc.) represent about 95% of the total budget, leaving very little room for maneuver for investments and amendments so dear to parliamentarians.
The government’s economic team is struggling to prevent accounting tricks from being approved to allow for higher expenses (which represent a crime of fiscal responsibility and can lead to Bolsonaro’s impeachment) and compromise the financial stability of the state. In any case, the reforms (mainly administrative and tax) necessary to increase the efficiency of the state machinery are urgent.
At the end of March, Bolsonaro resigned the Minister of Defense, General Fernando Azevedo, and the entire command of the Armed Forces (army, navy and air force), guilty – in his opinion – of not having “aligned” with the positions of the government. The new minister, General Walter Braga Netto, was appointed for his greater closeness to the Bolsonarist positions and is now managing the crisis between Bolsonaro and the leaders of the Armed Forces, not willing to be considered an instrument of the government (given the due loyalty to the State and the Constitution). Fernando Azevedo, given his background as a collaborator of the former President of the Supreme Tribunal Federal (STF), was also an important figure of dialogue between the government and the judiciary and his resignation risks worsening the already deteriorated relationship between Bolsonaro and the leaders of the STF.
In the quarter ending January 2021, the unemployment level reached 14.2% of the workforce. There are 14.272 million people, 2.359 million more than in the same period of 2020.
With the worsening of the pandemic and the greater restrictions on economic activities enacted in March, the situation is likely to worsen in the early months of 2021: the only way out is certainly mass vaccination.
Following a lot of pressure from the Centrao (political bloc that supports the government), the Foreign Minister, Ernesto Araujo, was dismissed. With his radical positions he contributed to worsening Brazil’s relationship with the major superpowers, in particular with the China (Brazil’s main trading partner).
A positive figure comes from the Current Account, which records international transactions in goods, services and transfers (excluding capital flows): after years of deficit, the balance is expected to be slightly positive in 2021. The result is determined by the strong rise in commodity prices, of which Brazil is rich, starting from soy to oil and iron minerals. With the consolidation of the recovery of the world economy, Brazil will certainly benefit from a conspicuous entry of hard currency.
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% | 1,3% | 1,8% | 1,4% | -4,1% | 3,17% |
The GDP growth estimate in 2021 is still slightly down: from + 3.50% at the beginning of February, to + 3.26% at the beginning of March, to + 3.17% today. The worsening of the pandemic and the resulting restrictions on mobility are causing a delay in the return to normalcy. The new “auxilio emergencial”, smaller than the analogous one in 2020, will only partially allow household consumption, an important component of GDP, to be supported. Increasingly, an acceleration of the vaccination plan is crucial.
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% | 4,81% |
Strong growth in the 2021 inflation estimate, which went from + 3.98% to + 4.81% in one month.
As was already predicted towards the end of 2020, the macroeconomic situation is incompatible with a low level of inflation. The sharp devaluation of the real was one of the triggers for the inflationary flare-up, together with the growth in demand and prices for commodities worldwide. Even if domestic demand is still compressed due to the pandemic, it is now impossible for companies not to pass on part of the increased costs to customers / consumers.
With the increase in the discount rate, Banco Central intends to give a strong signal in the fight against inflation, but to stem it will require an effort to reduce the fiscal deficit.
| 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 | 5,35 |
The dollar is quoted today at R $ 5.60, down steadily compared to a month ago (R$ 5.65).
On the other hand, the estimate of the dollar price for the end of 2021 has risen sharply: R$ 5.35 compared to R$ 5.15 a month ago.
Even with the increase in the discount rate (which increases the attractiveness of Brazilian bonds), the market does not expect a significant appreciation of the Brazilian currency in the course of 2021. There are several reasons: in particular, the prolongation of the effects of the pandemic on economy, the deterioration of public finances and a political climate that does not allow for the advancement of tax and administrative reforms.
Despite the improvement in the current account seen above, foreign investors still consider it risky to bet on Brazil and Brazilian investors prefer assets in dollars or euros rather than facing the still severe uncertainty of the Brazilian scenario.
However, I confirm the idea expressed a month ago: 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 enhancement of the Brazilian currency.
The price of the euro on April 6 was 6.65 reais, a decrease compared to a month ago (6.74).
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% | 5,00% | |
| Real interest (deflactor: IPCA) | 2,60% | 6,91% | 4,05% | 2,81% | 0,30% | -2,38% | -0,19% |
As written in the introductory text, the discount rate (SELIC) passed in March 2021 to 2.75%.
Expectations for SELIC at the end of the year have changed: 5.00% today against 4.00% a month ago and 3.00% at the beginning of the year.
With these forecasts, the real interest rate (nominal rate minus inflation) should be close to zero, another factor that certainly detracts from the already unattractive Brazilian bonds.
The Brazilian stock market (Bovespa)
The month of March saw a good recovery on the Brazilian stock market, which closed the session of 6 April 2021 at 117,499 points, against 110,335 points at the beginning of March (+ 6.5%); the appreciation was 6.5% in dollars and 8.8% in euros.
The worsening of the coronavirus pandemic is certainly holding back the growth in value of some assets (those related to tourism and real estate funds, above all), but it is increasing those related to the export of commodities and distribution.
The tax issue is what worries investors most. In April it will be necessary to carefully observe the outcome of the approval of the 2021 state budget and whether the Parliament will start the discussion of the tax reform.
In any case, Brazilian assets continue to be very cheap for foreign investors.
Since the onset of the coronavirus crisis, the Bovespa index has gained 3% in reais, while it has lost 20% in dollars and 27% in euros.
Update Brazil 