At the meeting of the Monetary Policy Committee (COPOM), which ended on 22 March 2023, the Banco Central once again decided to keep the discount rate (SELIC) unchanged at 13.75%. It is the fourth consecutive meeting in which the SELIC remains unchanged. From March 2021 to today, the discount rate has gone from 2% to 13.75%. Thus, despite the strong political pressure from the government and the PT to start a gradual decrease of the SELIC, the BC keeps the discount rate high and, in the note accompanying the decision, signaled that it will extend the maintenance of the SELIC until inflation shows new signs of easing.

On 30 March 2023, the government presented its proposal to balance public finances and contain the growth of public debt. The new fiscal framework (arcabouço fiscal) intends to replace the existing one, approved in 2017 by the Temer government through the “PEC do Teto”. In the intentions of the Lula government, this new fiscal rule should overcome some rigidities introduced by the “PEC do Teto”, which limited the growth of public spending by strictly linking it to inflation.

With the new fiscal framework, a primary deficit of 0.5% is forecast for 2023, which should fall to zero in 2024 and turn into a surplus of 0.5% in 2025 and 1% in 2026.

The proposal must now be examined by Parliament and, since it is not a proposal to amend the Constitution (such as the “PEC do Teto”), it can be approved by a simple majority of voters.

Inflation recorded in mid-March settled at 5.36%, down from 5.63% in February. Transport, fuel and energy prices are on the rise; the prices of meat and food products in general are decreasing.

The official data relating to the 2022 GDP has been released, up by 2.9% compared to 2021. This is a significant increase, which however comes after a decrease of -4.1% in 2020, a year characterized by the strong impact of the pandemic.

It is interesting to observe the contribution of the various macro-sectors to the growth/decrease of GDP in recent years, as shown in the table below.

The service sector (which is worth about 68% of GDP) is on the increase, growing by 4.2%. The reopenings have continued to favor above all trade, catering and tourism.

The industrial sector recorded a growth of 1.6%.

The agri-food sector, on the other hand, decreased by 1.7% due to drought and frosts, which partially compromised production especially in the southern regions of Brazil.

Despite the annual increase in soybean production (11.0%), important crops have experienced a reduction in production and a loss of productivity, such as sugarcane (-10.1%), corn (-15.0 %) and coffee (-21.1%).

Household consumption also grew, +4.3%, thanks to the increase in employment and the provision of the “auxilio emergencial” to the most needy families.

Government consumption is also growing, +1.5%, confirming the benefits of post-pandemic reopening.

Investment growth was modest: +0.9%, a sharp drop compared to +17.9% in 2021.

Unemployment is growing again, after ten quarters of decline. In the period December 2022/February 2023 the unemployment rate was 8.6%, compared to 8.4% in the quarter ended January 2023. The cooling of the economy at the end of 2022 is starting to take its effects .

The number of debtors (to banks, credit cards, finance companies, water/electricity/gas suppliers, chain stores, etc.) is growing, reaching the impressive figure of 70 million. The total debt amounts to approximately US$ 62 billion. Debt increased by 24% in 2022 alone compared to 2021. Inflation and high interest rates are the main cause of this explosion in defaults in Brazil.

On March 20, GM, Stellantis and Hyundai suspended production of cars and placed their employees on forced holidays. The interruption varies between ten days and three weeks and is motivated by low demand. Sales in 2022 were 24.5% lower than in 2019.

For the first time, Brazil entered the ranking of the ten largest solar energy producers in the world, ranking – at the end of 2022 – in eighth place with 25 GW of installed power. In 2022 alone, plants for 10 GW were opened, with an investment estimated at US$ 8.8 billion. Considering the insolation of Brazil, this is certainly only a first step towards a position of leadership worldwide.

Here is the trend of the main economic indicators:

GDP (Value added at market prices)

GDP – real growth (%)1,3%1,8%1,4%-4,1%4,50%2,90%0,90%

The average forecast for growth of Brazilian GDP for 2023 is slightly higher, at around +0.9% per annum. High interest rates are certainly a major brake on the economy, but inflation still above 5% still does not allow for an easing of monetary policy. With the approval of the new tax rule, the economic climate should improve and the government estimates GDP growth of 1.5% in 2023.

Inflation and real/dollar exchange 

IPCA (IBGE – %)2,95%3,69%4,20%4,38%10,0%5,62%5,96%

The forecasts for inflation at the end of 2023 are up slightly, estimated at +5.96%. Although the economy is almost in stagnation, inflationary pressures are not easing as expected.

The new increases in oil and raw material prices will be the main obstacle to face.

Exchange rate R$/US$ (end of the period)3,253,754,015,195,575,255,25

The dollar is quoted today (April 4, 2023) at R$ 5.07, down from a month ago (R$ 5.20). The dollar is weakening globally and this would justify a further appreciation of the real, but the persistence of doubts about the consistency of the government’s fiscal policy is holding back the inflow of foreign investments, both real and speculative. With the forthcoming approval of the new fiscal rule, the scenario should be more positive for the Brazilian currency.

The euro is trading at R$5.53 today, stable from a month ago. We are still far from the prices at the beginning of October 2022 (around 5.10), but we must also remember that in this period the euro has also greatly appreciated against the US currency. The reference currency for Brazil is always the dollar, so a weak dollar also tends to weaken the real against the euro.

Interest rate

Nominal Interest rate (end of the períod)7,00%6,50%4,50%2,00%9,25%13,75%12,75%
Real interest (deflactor: IPCA)4,05%2,81%0,30%-2,38%-0,75%8,13%6,79%

The Banco Central, in its last meeting in mid-March, maintained the discount rate (SELIC) at +13.75%.

SELIC is expected to decline slightly by the end of 2023, but only by 1%. Fiscal uncertainty and inflation still above the target (3.5%) do not allow for more substantial cuts for the moment.

Therefore, the real interest rate (inflation discounted) is expected to remain at record levels again this year (just below 7%).

The Brazilian stock exchange (Bovespa)

A slightly negative month for Brazilian equity assets, which suffered not only from the international banking crisis but also from the uncertainty of domestic economic and fiscal policy.

Ibovespa closed the session of 3 April 2023 at 101,362 points, -2.4% compared to the close at the beginning of March (103,866 points on 3 March 2023). The decrease in the period was -0.1% in dollars and -2.7% in euros.

Since the beginning of the year, Ibovespa has lost 4.7% in reais, grown by 0.5% in dollars and 1.7% in euros.

After a January of almost euphoria, the stock market contracted again until it dropped below the psychological threshold of 100,000 points towards the end of March. While the international markets have overcome (for the moment) the shock of the failure of the Silicon Valley Bank and the crisis of First National Bank, Credit Suisse and Deutsch Bank, pessimism seems to prevail in Brazil regarding the government’s ability to guarantee sustainable growth, with inflation under control and public finances in balance. Credit is scarce and very expensive, and the effort will be precisely to restore confidence and get the credit “taps” reopened by the banking system.