April was the worst month for the coronavirus pandemic in Brazil, with a daily average of deaths often exceeding 3,000 people. By now the dead are more than 410 thousand, but fortunately the new cases are decreasing.
The vaccination campaign reached 32 million people, about 15% of the population.
On May 5, 2021 (with closed markets), Banco Central again raised the discount rate (SELIC) by 0.75%, taking it from 2.75 to 3.50% per annum. The increase was widely expected by the market and should not have a major impact on the dollar price and on the Brazilian stock exchange.
The Supreme Tribunal Federal (STF) has imposed on the President of the Senate the opening of a Parliamentary Commission of Inquiry (CPI) on the work of the Federal Government in dealing with the pandemic, requested by a group of senators. The CPI began its work at the end of April and is threatening to bring out the serious errors that led to the explosion of infections and deaths.
The state budget for 2021 was approved very late on April 23. With the increase in spending caused by the pandemic, the task has been very difficult. After a tug-of-war between Parliament and the government’s economic team, led by Paulo Guedes, President Bolsonaro sanctioned the budget. Considering that compulsory expenses (pensions, salaries of the Public Administration, education, etc.) represent more than 90% of the budget, there are very few resources for public investments and for the functioning of the Ministries.
Positive news, on the other hand, from the tax revenue front. Thanks to the increase in industrial production and the higher payment of taxes by companies, the first quarter closed with R $ 445.9 billion in revenues, the largest volume recorded in Brazil since 1985 (the year in which the registration of data). This is an important figure that improves the outlook for public finances and demonstrates how the Brazilian economy is recovering quickly after the impact of the pandemic. It remains to be seen what the consequences of the spike in infections and containment measures in April will be, but the fact remains that economic activity is in the recovery phase.
The inflation index of the last 12 months (HICP) reached 6.1% in March 2021 and Banco Central has finally decided to intervene, increasing the SELIC from 2 to 2.75% in March and then to 3, 50% in May. Inflation slowed slightly in April, but continues to be a major threat.
The unemployment rate reached 14.4% of the workforce, or about 14.4 million unemployed. Some 4.1 million jobs were lost during the pandemic. The sectors most affected were those related to restaurants / hotels (-1.5 million) and domestic services (-1.3 million),
To try to tackle the serious employment crisis and prevent new layoffs, at the end of April the government published a “decree law” that allows for the stipulation of agreements between companies and workers that provide for the proportional reduction of wages and hours worked. The State will partially compensate for the loss of earnings by the worker through an “emergency benefit” (BEm) for which approximately 19 billion reais will be allocated. The program will run for four months and around 4.8 million agreements are expected to be signed.
The difficult gestation of the 2021 budget has further weakened the position of Paulo Guedes, Minister of Economy. Guedes was practically forced to dismiss the technicians who most tenaciously defended the need for a greater balance between state income and expenditure. The most notable defenestrated are Waldery Rodrigues, special secretary of finance, and George Soares, secretary of the Federal Budget. Soares was a staunch defender of compliance with fiscal rules against the “assault” by deputies, senators and members of the government themselves.
The Climate Summit, sponsored by US President Joe Biden, took place on April 22nd. In the course of his speech, President Bolsonaro abandoned the ideological and extremist tones adopted in similar appointments, indicating the desire to work for the preservation of forests and indigenous communities. Bolsonaro’s speech was greeted with a certain skepticism, given that his sudden “conversion” to the defense of environmental issues appears very little credible. To recover the lost credibility, the government will have to show facts and results and only then will it be able to afford to negotiate international aid from the developed economies and return to the protagonist of the geopolitical climate scene.
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% | 3,14% |
The GDP growth estimate in 2021 is stable this month, passing from + 3.17% to + 3.14%. Despite the protracted pandemic and the (mild) restrictive measures on mobility, a sustained recovery of the economy is expected in the second half of the year. In order to support household consumption, discussions are underway on the possibility of extending the “auxilio emergencial”, due to expire in June.
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% | 5,01% |
The 2021 inflation estimate is still growing, passing in a month from + 4.81% to + 5.04%.
The IPCA index of the last 12 months is always around 6%, while the IGP-M (wholesale prices) has exceeded 32%. To curb the impact of the growth of the IGP-M, the Chamber of Deputies has passed a law that requires the use of the IPCA index instead of the IGP-M to update the level of rents annually.
With the new increase in the discount rate, Banco Central shows firmness in the fight against inflation, we will see in the coming months if its intervention will prove sufficient.
| 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 | 5,40 |
The dollar is quoted today at R$ 5.37, down sharply from a month ago (R$ 5.60).
On the other hand, the estimate of the dollar price for the end of 2021 is increasing: R $ 5.40 compared to R $ 5.35 a month ago.
In recent days, there has been a valuation of the real, mainly due to the approval of the state budget, which has partially reassured investors regarding the containment of the 2021 fiscal deficit.
If the discussion and subsequent approval of the tax reform were to advance quickly to parliament, it is likely that the Brazilian currency will continue its path of valorisation. According to various economists, the real / dollar equilibrium exchange rate – calculated on the basis of macroeconomic data – would be around R$ 4.50 if the current problems in managing the fiscal deficit were tackled at least in a medium-term perspective.
The euro price on May 5 was R$ 6.44, a sharp decrease compared to a month ago (6.65).
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% | 5,50% | |
| Real interest (deflactor: IPCA) | 2,60% | 6,91% | 4,05% | 2,81% | 0,30% | -2,38% | 0,46% |
As written in the introductory text, the discount rate (SELIC) has gone up to 3.50%.
Expectations for SELIC at the end of the year have also changed: 5.50% today against 5.00% a month ago and 3.00% at the beginning of the year.
With these forecasts, the real interest rate (nominal rate minus inflation) should return to positive territory at the end of 2021. Today, considering inflation at 6% and the discount rate at 3.50%, the real interest rate is strongly negative (-2.50%), which also explains the migration to high-risk investments and the flight of capital to foreign countries.
The Brazilian stock market (Bovespa)
April was a positive month for the Brazilian stock exchange, which closed the session on May 6, 2021 at 119,564 points, against 117,499 points at the beginning of April (+ 1.7%); the appreciation was 6% in dollars and 4% in euros.
The prices of companies linked to the export of iron minerals, such as Vale and CSN, are rising sharply. The growth of the Chinese economy is a strong driving force for this important sector.
Negative performance for the banking sector, despite the extremely positive results of Itau, Bradesco and Santander in the first quarter of 2021.
In the coming weeks we will have to observe the progress of the pandemic in Brazil (progress of the vaccination campaign, but also a possible third wave of infections) and - as always - the evolution of the tax issue and reforms.
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 18% in dollars and 24% in euros.
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