At the beginning of February, deaths from Covid-19 reached the figure of 628 thousand.

The Omicron variant has also arrived in Brazil with force. The daily average of new cases is around 200 thousand units and in seven states of the federation the level of employment in intensive care has reached or exceeded 80%.

70% of the population is fully vaccinated (two doses); 79% received at least one dose. The vaccination campaign for children between 5 and 11 years is in progress.

In the meeting of the Monetary Policy Committee (COPOM), which ended on February 2, 2022, Banco Central again increased the discount rate (SELIC) by 1.5%, bringing it to 10.75%. The intervention of Banco Central therefore continues as planned to try to contain the inflation rate, still above 10% per annum.

The official GDP figure for November 2021 was positive, + 1.8% compared to the previous month. This is a figure in contrast to the trend compared to September and October 2021, with a positive performance of services, industry and household consumption. However, the arrival of the Omicron variant and the related cancellation of many holidays should slow down the recovery of GDP in December and January.

2021 was a record year for tax revenues, the best since 1995 – the year in which the official collection of this data began. R $ 1.878 trillion was raised, compared to R $ 1.479 trillion in 2020, a growth of 17% net of inflation.

According to the majority of economists, in 2022, with inflation expected to decline and a slower rate of GDP growth, tax revenues are unlikely to maintain this rate of growth.

For this reason, the fiscal deficit should increase significantly, from 38 billion reais in 2021 to at least 79 billion in 2022, as foreseen in the budget law. Considering that 2022 is the year of presidential elections, the deficit is likely to exceed 100 billion reais, as foreseen by the IFI (Instituiçao Fiscal Independente) of the Senate.

Inflation figures are still worrying, which in January 2022 fell less than expected. The January price increase (HICP-15) was 0.56%. On the other hand, the data of the IGP-M index, which measures the change in wholesale prices, showed strong growth: + 1.87% in January compared to December.

Good news on the job front: the unemployment rate fell to 11.6%, practically returning to pre-pandemic levels. In the September-November 2021 quarter alone, 3.2 million jobs were created.

But they are not all roses…. The average nominal wage of workers fell by 11.4%, and to this loss we must add the effect of inflation, which closed 2022 at 10%. Informal jobs are on the rise, but permanent workers are also faced with lower wages than in the pre-pandemic period.

The International Monetary Fund (IMF) has reduced the Brazilian GDP growth forecast for 2022, taking it from +1.5% to +0.3%. According to the IMF, in 2022 Brazil will have the worst GDP performance within a group of 26 emerging economies.

The OECD (Organization for Economic Cooperation and Development) has started the process for the inclusion of Brazil among its members. The approval process of a country lasts on average from three to four years and provides for its adherence to 251 terms defined by the OECD. By December 2021, Brazil had already obtained the endorsement regarding 103 terms. The inclusion of Brazil in the OECD is one of the declared objectives of the Minister of Economy Paulo Guedes, but for it to become a reality it will be necessary to approve and implement important reforms, primarily tax reforms. Entry into the OECD would represent a sort of “quality mark” for the Brazilian economy and it is estimated that it alone could bring about a 0.4% increase in Brazilian GDP.

Foreign direct investment (IDP) rose sharply in 2021: US $ 46.4 billion, an increase of 23% compared to 2020. This flow of capital made it possible to offset the current transaction deficit of 2021, equal to US $ – 28.1 billion. This is a very positive indicator, a sign of the attractiveness of the Brazilian market and the interest of foreign companies to invest in the country.

Here is the trend of the main indicators:

GDP (Value added at market prices)

GDP – real growth (%)-3,3%1,3%1,8%1,4%-4,1%4,50%0,30%

The GDP growth forecast for 2022 is slightly worsening, passing from + 0.36% to + 0.30%, same forecast by the IMF. High inflation and the sharp increase in the discount rate tend to depress household consumption and business investments, and the trend is that of a worsening of the situation in the course of 2022.

Inflation and real/dollar exchange 

IPCA (IBGE – %)6,29%2,95%3,69%4,20%4,38%10,0%5,38%

Inflation will be one of the main nodes of the economy. For 2022, Banco Central has set inflation between 1 and 5% as a goal, with a center at 3%.

Today inflation is around 10%, but economists expect it to drop sharply in 2022, to close just above 5%, mainly thanks to the monetary policy of Banco Central.

Meanwhile, global commodity prices resumed their rise in January and, even though Brazil is a net exporter of commodities, this can have significant inflationary effects. Add to this the dry period which reduced the agricultural production of soybeans and the picture is even more complicated.

Exchange rate R$/US$ (end of the period)3,253,253,754,015,195,575,60

The dollar is quoted today (February 2, 2022) at R$ 5.28, a sharp decline compared to a month ago (R$ 5.69).

The real was the currency that appreciated the most against the dollar in January 2022 (+5%). But how do you explain this performance just as the Federal Reserve announced it was about to begin a cycle of rising interest rates and buying back US debt securities?

The flow of speculative investments towards Brazil increased considerably in January 2022; what attracts them is the search for cheap assets that are less affected by the effects of US monetary policy: commodities and companies in the financial sector, in particular.

Can this movement in real value continue in the coming weeks / months? Impossible to say, as inflation, the fiscal situation and the weakening of the economy continue to cause concern.

By the end of 2022, the estimate of the dollar price continues to be R$ 5.60.

The euro is quoted today at R$ 5.97, down sharply compared to a month ago (R$ 6.42).

Interest rate

Nominal Interest rate (end of the períod)13,75%7,00%6,50%4,50%2,00%9,25%11,75%
Real interest (deflactor: IPCA)6,91%4,05%2,81%0,3%-2,4%-0,75%6,37%

Banco Central brought the SELIC discount rate to 10.75% per annum, the eighth consecutive increase.

The gradual growth of the discount rate is expected to continue in March, until the arrival of clear signs of a substantial weakening of inflation.

According to economists consulted by Banco Central through the monthly Focus survey, SELIC should close 2022 at 11.75%.

If this were the case and if inflation were to settle at 5% at the end of the year, the real interest rate could reach a record level of + 6.75% per year. We recall that with the increase to 10.75%, the real interest rate is now equal to zero.

The Brazilian stock market (Bovespa)

Ibovespa closed the session on February 2, 2022 at 111,894, +7.7% compared to the close of a month earlier (103,921 points on January 3, 2022). The growth was + 15.4% in dollars and euros.

One of the factors that contributed to this growth was the very strong flow of liquidity from abroad, amounting to approximately 25 billion reais. The fact that many Brazilian stock market assets are cheap (in dollars or euros) is well known; so, what could have caused this sudden speculative flow to Brazil?

Shouldn’t the announcement of a restrictive and deflationary monetary policy by the Fed instead cause a shift in liquidity towards US debt securities?

Did the Brazilian macroeconomic scenario improve at the beginning of the year? No, on the contrary, concerns about inflation, the increase in the public deficit, the tensions that will come from the presidential electoral campaign are increasing.

We are waiting for this positive trend to be confirmed, in order to better analyze its reasons and consequences. And in the meantime, let's enjoy this "bonança" of the stock exchange and the real, perhaps making some prudent defensive and protective investments.