Brazil throws money at Covid-19, but will the plan work?

. Mar 17, 2020
brazil paulo guedes Brazil's Economy Minister Paulo Guedes. Photo: ABr

The federal government announced today that it will dedicate BRL 147.3 billion to fight the negative effects of the Covid-19 pandemic in Brazil. While this is an impressive-sounding sum—it would be enough to cover Brazil’s fiscal debt, for example—experts are unsure whether it will suffice to keep the country from falling into a recession.  

According to analysts from XP Investimentos, while the package is a step in the right direction, the government’s program is limited and consists more of “rearranging” funds than bringing in new money. They estimate that only BRL 31.8 billion of the full total is actually new resources and “it is unclear how stimulating this may be in the short term,” they wrote in a report.

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their view, “the first measure was far from what was expected,” which is likely to bring GDP expectations down even further, “unnecessarily transferring the responsibility to the Central Bank”. Analysts now predict that Central Bank will slash benchmark interest rates by 0.5 percentage points during its Wednesday meeting, and “the chances of a 0.75 percentage-point [increase] have risen considerably after the announcement”. </p> <p>This comes after the Central Bank released its own measures to foster credit, aiming to make renegotiation easier for a total of BRL 3.2 trillion in company and family debts, plus allowing banks to increase credit concessions by up to BRL 637 billion, as we reported in <a href="https://brazilian.report/tourism/2020/03/16/brazil-intervenes-in-the-credit-market-tourism-airlines-events/">our March 16 story</a>.&nbsp;&nbsp;&nbsp;</p> <p>Moreover, the analysts believe the tumultuous relationship between the government and Congress is set to make economic recovery even more difficult.</p> <div id="buzzsprout-player-2981242"></div> <script src="https://www.buzzsprout.com/299876/2981242-99-is-recession-inescapable.js?container_id=buzzsprout-player-2981242&#038;player=small" type="text/javascript" charset="utf-8"></script> <hr class="wp-block-separator"/> <h2>Understanding the measures</h2> <p>The measures are divided into two groups: aid for vulnerable populations (BRL 83.4 billion) and incentives to preserve jobs (BRL 59.4 billion)</p> <p>The first group includes previously announced measures, such as advancing Christmas bonuses for pensioners, which now see themselves backed up by salary bonuses, transferring unclaimed funds from social security contributions to the workers’ mandatory severance fund FGTS, and including another 1 million Brazilians in the <a href="https://brazilian.report/society/2020/03/12/bolsa-familia-grinds-halt-jair-bolsonaro/">Bolsa Família income distribution program.&nbsp;</a></p> <p>The second part of the program is largely temporary tax breaks. Companies may delay FGTS payments for 3 months and contributions to fund social services offered by the <a href="https://brazilian.report/business/2019/02/20/understanding-brazils-sistema-s/">“S System”</a> will be halved for the same period. Also, small and medium companies will have BRL 5 billion in loans provided by the Workers’ Support Fund (FAT).</p> <h2>How does it compare with other countries?</h2> <p>In the U.S., Congress has already approved a USD 8.3 billion aid fund, but the Donald Trump administration is reportedly preparing to ask for a USD 850 billion economic stimulus plan—which would include a USD 50 billion aid package for airlines. That comes after the Federal Reserve announced a plan to inject USD 5 trillion into the economy via rate cuts and quantitative easing.&nbsp;</p> <p>In the UK, the Boris Johnson administration has just launched a <a href="https://www.cnbc.com/2020/03/17/uk-announces-massive-aid-package-for-coronavirus-hit-industries.html">new aid package</a> of GBP 330 billion to help companies in distress due to the outbreak. The decision comes after a first GBP 30 billion program to fight off the virus announced last week, including a GBP 5 billion emergency response fund and fiscal loosening of GBP 18 billion. According to the Chancellor of the Exchequer Rishi Sunak, the country is ready to do “whatever it takes” to support incomes, jobs, and businesses.&nbsp;</p> <p>South Africa, whose economy is trying to recover from a recession, <a href="https://www.cnbc.com/2020/03/17/south-africa-declares-state-of-disaster-as-coronavirus-arrives.html">has declared a national state of disaster</a> and partially closed its borders in order to avoid further contamination. However, as its economy struggles, aid packages seem limited to an expected interest rate cut this week.</p> <h2>What else can be done for Brazil? </h2> <p>Brazil does not have much wiggle room, thanks to a public spending cap written into law during the Michel Temer administration. At the time of its inception, it was either seen as necessary to control the public debt, or 20 years of forced austerity. Now, some economists have called to scrap the spending cap, as we touched on in episode 99 of our <a href="https://brazilian.report/podcast/2020/03/11/coronavirus-covid-19-recession-monica-de-bolle/">Explaining Brazil podcast</a>.&nbsp;&nbsp;&nbsp;</p> <p>Senator and former Health Minister José Serra might have found a way to give the government more room to spend, without breaking the fiscal ceiling. According to newspaper <a href="https://valor.globo.com/politica/noticia/2020/03/17/serra-sugere-acionar-regime-de-calamidade-publica.ghtml"><em>Valor Econômico</em></a>, Mr. Serra intends on submitting a legislative decree triggering the provisions for public calamity in the Fiscal Responsibility Law, which would suspend primary fiscal result targets, giving the government some more leeway to spend. The Economy Ministry, however, is reportedly against the idea of declaring public calamity, instead intending to increase its primary deficit target for the year.

 
Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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