At the beginning of November, deaths from Covid-19 reached the figure of 608 thousand.
The daily average of new cases is around 10 thousand cases and the deaths have been fewer than five hundred a day for several weeks now. Numbers still high, but which confirm how Brazil seems to have emerged from the most critical phase (April-June 2021).
Brazil has reached 57% of the fully vaccinated population (two doses), corresponding to 121 million people. 75% received at least one dose.
In the State of Sao Paulo, 64% are fully vaccinated and 80% have received at least one dose. In the city of Sao Paulo the situation is even better: 86% of the population is fully vaccinated.
With the gradual return to normal, even the most affected activities (such as trade, catering, tourism) start to grow again, favoring rapid growth of the economy.
The 2022 elections are approaching and President Bolsonaro, in free fall in the polls, is desperately trying to secure parliamentary support and increase popularity among voters.
However, securing the vote of parliamentarians and putting a populist policy into practice has a very high cost for the state coffers. Money that is not there but that can be “created” by increasing the fiscal deficit.
For several months now, the government has been guaranteeing the support of the so-called “Centrão” by ensuring the approval of amendments intended to finance projects by parliamentarians in their constituencies.
To finance the “Auxilio Brasil” program, which should replace Bolsa Familia and increase the amount of the subsidy to R$ 400.00, the government has decided to abandon – at least temporarily – the “teto dos gastos” policy (expenditure ceiling), introduced by the Temer government in 2017. The additional fiscal deficit could be around 83 billion reais in 2022, a real disaster for the already struggling public finances.
To finance this deficit at least partially, the parliament should approve by mid-November a Proposal for a Constitutional Amendment (PEC) to extend the payment of the “precatorios”. It is a sort of default, given that it deals with debts of the State towards companies and citizens that have become res judicata.
The Minister of Economy, Paulo Guedes, once a staunch defender of a liberal policy in the economic field, had to bow to Bolsonaro’s populism and subscribe to the overrun of the spending ceiling. Not so did four members of his team, who resigned as soon as this decision was made: they are the Special Secretary of the Treasury and the Budget (Bruno Funchal), the Secretary of the Treasury (Jefferson Bittencourt) and two other auxiliaries.
Inflation growth is still in the foreground, with the HICP index exceeding 10% on an annual basis.
In the meeting ended on October 27, 2021, Banco Central decided to increase the discount rate (SELIC) by 1.5%, bringing it to 7.75%. This is the sixth increase in 2021 and a new increase has already been announced at the meeting on 7 and 8 December 2021.
Until a few weeks ago, the expectation was of a 1% rise, but the deterioration of the fiscal situation and the continuation of a strong growth trend in inflation led the Central Bank to further increase the intervention.
The water crisis is slightly improving, thanks to the rains in October. For example, the Furnas basin, one of the most important in Brazil, increased from 13.6% to 17.2% of its capacity. The Cantareira basin, in the State of São Paulo, operates at 28% of its capacity. Significant new rains are expected in November.
The International Monetary Fund (IMF) has reduced the Brazilian GDP growth forecast for 2022 from 1.9 to 1.5%. There is no lack of more pessimistic estimates by Brazilian study centers, especially after the announcement of the government’s overrun of the “spending ceiling”. Some agencies even predict a possible recession.
Good news on the employment front. The unemployment rate measured in the June-August 2021 quarter fell to 13.2% against 14.6% in the March-May 2021 quarter. On the other hand, the average wage fell, which does not reach 90% of that of a year. does.
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% | 4,94% |
The 2021 GDP forecast is practically stable, going from + 5.04% at the beginning of September to + 4.94% today.
For 2022, the forecast is for growth of 1.20%, a sharp decline compared to that of two months ago (+ 1.98%). Given the fiscal situation and the trend of rising interest rates, it is likely that this estimate will be revised downwards in the coming months.
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% | 9,17% |
The 2021 inflation estimate is still growing, passing in a month from + 8.51% to + 9.17%.
The IPCA index of the last 12 months has exceeded 10%. Banco Central said it wanted to strongly defend the value of the real, despite the recessive effects of the continuous increases in the discount rate.
According to operators heard weekly by Banco Central, inflation should begin to decline in the coming months and close 2022 at 4.55%.
| 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 | 5,50 |
The dollar is quoted today (November 3, 2021) at R$ 5.59, up from a month ago (R$ 5.49).
The decision to breach the “spending ceiling” has generated great concern among investors, causing a flight of capital to assets in more valuable currencies. It is widely believed among analysts that, given the current Brazilian economic situation, the real has depreciated excessively. However, the uncertainties of an election year in which, as it was easy to predict, Bolsonaro will do everything to be re-elected, even if this will mean chaos on the markets and a recessionary trend.
The expected “rally” of the real will perhaps have to wait a few months or perhaps the outcome of the elections at the end of 2022.
The estimate of the dollar price for the end of 2021 is growing strongly: R$ 5.50 compared to R$ 5.20 a month ago.
The euro quotation on November 3 was 6.49 reais, up sharply compared to a month ago (6.36).
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% | 9,25% | |
| Real interest (deflactor: IPCA) | 2,60% | 6,91% | 4,05% | 2,81% | 0,30% | -2,38% | -0,08% |
Expectations for SELIC at the end of the year are still increasing: 9.25% today against 8.25% a month ago and 3.00% at the beginning of the year.
The real interest rate (nominal rate minus inflation) at the end of 2021 is always in negative territory, but less than at the end of 2020. Today, considering inflation at 10.5 %% and the discount rate at 7.25% the real interest rate is strongly negative (around -3.25%).
But Banco Central alone, without Parliament and Government collaborating in containing the fiscal deficit, cannot stem the devaluation of the real and the rise in prices.
A populist economic policy, such as the one that has emerged in recent weeks, can have disastrous effects on the economy. 2022 will be an election year, the turbulence will be considerable.
The Brazilian stock market (Bovespa)
Ibovespa closed the session on November 3, 2021 at 105,617 points, -4.3% compared to the close of a month earlier. The decrease was -7% in dollars and -6.5% in euros.
Compared to the maximum reached on 7 June 2021 (130,776 points), the fall is 19%.
The negative performance of the stock market during the month of October was mainly caused by internal factors. The market reacted very badly to the government’s populist swerve and the decision not to respect the “spending ceiling”. High inflation, rising interest rates and devalued reals have led to a stampede by investors, especially domestic ones.
Due to the fall in prices and the devaluation of the real, the shares of many Brazilian companies in full health and grinding profits are now very discounted.
The Brazilian stock market today can be compared to a large discount store. Some examples:
| Price in US$ 28/7/2021 | Price in US$ 3/11/2021 | % variation | |
| Vale | 22,95 | 11,75 | -49% |
| CSN | 8,92 | 3,88 | -56% |
| Via Varejo (Via) | 2,31 | 1,21 | -47% |
| Magazine Luiza | 4,21 | 2,03 | -52% |
| CVC | 4,59 | 2,92 | -36% |
| Locaweb | 5,06 | 3,57 | -29% |
With a little courage and a lot of cold blood, there is no shortage of investment opportunities.
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