There are now more than 470 thousand deaths from Covid-19 in Brazil. After an improvement that began towards the end of April, the contagion curve unfortunately started to grow again at the end of May. There is talk of a possible third wave that could hit the population in June and July.

The vaccination campaign reached nearly 50 million people, about 22% of the population. Still too little to consistently bend the spread of infections. Federal and state authorities estimate that the adult population will be able to receive at least one dose of the vaccine by the end of 2021.

The GDP in the first quarter of 2021 grew sharply, which registered + 1.2% compared to the last quarter of 2020. With this increase, Brazilian GDP recovered the loss suffered in the first two quarters of 2020, due to of the pandemic on economic activities. The projections of the main economic study centers indicate a GDP growth of between 4.5 and 5.5% for 2021.

The agri-food sector led to this growth, with an increase of 5.2%, together with the mining sector (+ 3.2%); household consumption and the service sector are stationary.

The industry grows by 0.7%, thanks to the increase in stocks: in the pandemic period the lack of industrial components (the most famous case was that of semiconductors) has often forced factories to stop production, and this has pushed manufacturers to increase stocks of raw materials / components. With the return to normal, these stocks will naturally be reduced and the impact of their production on GDP will be reduced.

Confirming the growth of the economy are the tax revenue figures for the month of April (R $ 156.8 billion), which grew by 45% compared to the same month in 2020 and by 13% compared to March 2021. The forecasts indicate an improvement of the fiscal deficit of 2021, which should reach 85% of GDP.

Unemployment, on the other hand, is still growing, reaching the level of 14.7%, a record in the historical series that began in 2012. The effects of the economic recovery have yet to be felt in terms of employment as most companies are using a still low percentage of its production capacity.

Brazil is experiencing a severe water crisis, due to low rainfall during late summer / autumn. The Brazilian energy matrix is ​​strongly based (80%) on renewable resources and mainly on water ones (65%) and climate changes are causing a strong variability in the volume of rainfall. The effects will be those of an increase in electricity tariffs and possible rationing in the supply of electricity towards the end of 2021. If the situation were to worsen further there could be the risk of a rationing also for supplies to industries, with serious consequences for the economy.

The work of the Parliamentary Commission of Inquiry (CPI) on the pandemic, underway in the Senate, continues. The existence of a “parallel health ministry” is being investigated, in which decisions were made on how to deal with the pandemic. The results of the CPI will be announced in a few weeks.

On May 13, the Chamber of Deputies approved the new “Environmental Dismissal Law”, which regulates the location, installation and operation of activities that may have an impact on the environment. The approval took place without a parliamentary debate and without public hearings in which the company could express its opinions. Under the new law, there will no longer be a need for environmental licenses for the exercise of a series of agropecuary activities and for various infrastructural works (for example for the maintenance of roads and ports). The law still has to be approved by the Senate and sanctioned by the President of the Republic before it enters into force.

On May 19, the Chamber of Deputies approved the text of the law that allows the privatization of Eletrobras, a state-owned company that produces and distributes electricity. State participation will drop from 60 to 45% through the opening of capital (issue of new shares).

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%  4,36%

The 2021 GDP forecast is growing strongly, from + 3.14% to + 4.36%. This is even a conservative estimate, given that many operators already dream with a + 5%.

With the increasing vaccination coverage, the trend is that of a marked improvement not only in the sectors related to agribusiness and metal mining but also in family consumption and in the service sector (tourism and catering above all). The forced savings imposed on families by the pandemic could turn into a consumption boom towards the end of the year, with a Christmas that promises to be extraordinary.

Inflation and real/dollar exchange 

IPCA (IBGE – %)10,7%6,29%2,95%3,69%4,20%4,36%5,44% 

The 2021 inflation estimate is still growing, passing in a month from + 5.04% to + 5.44%.

The HICP index for the last 12 months is around 6.5%, while the PGI-M (wholesale prices) exceeded 37% in May. With unemployment still high and firms’ low capacity utilization, the pressure on prices is coming almost exclusively from the demand side.

We will see to what extent Banco Central will be able to contain this flare-up of inflation.

Exchange rate R$/US$ (end of the period)3,903,253,253,754,015,195,30 

The dollar is quoted today at R$ 5.04, down sharply from a month ago (R$ 5.37) and two months ago (R$ 5.60).

The estimate of the dollar price for the end of 2021 is also down: R $ 5.30 compared to R $ 5.40 a month ago.

The appreciation of the real is therefore continuing, this month mainly thanks to the positive signals coming from the economy. Tax reform is also advancing in Parliament, which helps to create a positive climate among foreign investors. According to some analysts, this is still a predominantly speculative flow, so you need to be very cautious in positioning yourself in the Brazilian currency. Around the psychological threshold of R $ 5 for one dollar there could be a significant movement of “hedges”, or the purchase of dollars / euros as monetary protection.

I remember that, 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 addressed at least in a medium-term perspective.

The euro price on June 7 was 6.14 reais, a sharp decrease compared to a month ago (6.44).

Interest rate

Nominal Interest rate (end of the períod)14,9%13,8%7,00%6,50%4,50%2,00%5,75% 
Real interest (deflactor: IPCA)2,60%6,91%4,05%2,81%0,30%  -2,38%  0,31% 

Expectations for SELIC at the end of the year are still increasing: 5.75% today against 5.50% a month ago and 3.00% at the beginning of the year.

At the next meeting in mid-June, Banco Central should – as announced – increase the discount rate (SELIC) from 3.50 to 4.25%. 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 6.5% and the discount rate at 4.25%, the real interest rate is strongly negative (-2.25%).

Should GDP maintain the strong growth rate of this first quarter, Banco Central is likely to bring the discount rate above 6% to try to curb the strong inflation.

The Brazilian stock market (Bovespa)

May was another positive month for the Brazilian stock market, which closed the session on 7 June 2021 at 130,776 points, against 119,564 points at the beginning of May (+ 9.3%); the appreciation was 17% in dollars and 15% in euros.

The economic results of the main companies listed on the stock exchange are exceeding the expectations of market analysts. The positive outlook for the Brazilian economy is reflected in the valuations of Brazilian assets, recalling that the latter continue to be very cheap for foreign investors.

In this positive scenario, several IPOs are expected in the coming months for a total of around 30 billion reais. The operation that could move the market the most is that of Raizen, a joint venture between Cosan and Shell (10 billion reais); slightly lower than the IPO of CSN Cimentos and InterCement (7 billion reais).

In the coming weeks we will dedicate a post exclusively to the IPOs scheduled for the second half of 2021 and a second post regarding the opportunities offered by the Brazilian stock exchange.

Since the onset of the coronavirus crisis, the Bovespa index has gained 14% in reais, has the same value in dollars and has lost 11% in euros.