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Bleak economic perspectives for “post-Covid-19” Brazil

. Apr 11, 2020
Bleak economic perspectives for "post-Covid-19" Brazil Supermarket in Porto Alegre. Photo: Thiago B. Trevisan/Shutterstock

A poorer, more unequal Brazil is set to emerge from the Covid-19 pandemic, according to economists from think tank Fundação Getulio Vargas. However, the extent and duration of the economic chaos, they say, depends on how fast and effectively Brazilian authorities will act to save jobs and avoid massive bankruptcies

While economic measures such as income transfer policies, credit lines for companies, and the liquidity provided by the Central Bank were praised as a comprehensive approach to tackle the crisis, professors have echoed the criticism expressed by high-level authorities such as House Speaker Rodrigo Maia due to the delay in implementing measures already approved by Congress. 

“Economic measures

happened too slowly because the Economy Ministry doesn’t share the same vision as the Health Ministry. They support [a reduced approach to] isolation measures and are hoping to spend less, but this isn’t happening, because health experts recommend that people stay isolated. The lack of coordination increases the uncertainties and the outlook for <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/19/latin-america-sliding-deep-recession-say-banks/">recession in Brazil</a>,” said professor Marcio Holland, who is also former Brazil’s Secretary of Economic Policy.&nbsp;</p> <p><a href="https://www.gov.br/economia/pt-br/assuntos/noticias/2020/marco/confira-as-medidas-tomadas-pelo-ministerio-da-economia-em-funcao-do-covid-19-coronavirus">According to the Ministry of the Economy</a>, measures already taken amount to BRL 750 billion, or nearly 10 percent of 2019’s GDP, according to IBGE. Moreover, liquidity measures applied by the Central Bank released another BRL 1.2 trillion into the economy. For professor André Portela, the challenge now is not necessarily guaranteeing more resources, but how to design a system that ensures the funds will reach those who need it the most.&nbsp;&nbsp;&nbsp;</p> <p>“We are a bit late, but we are waking up to the necessity of a set of actions, providing working capital for companies, keeping jobs, and transferring income. The point now is whether it will reach those who need it and on a large enough scale,” he said.</p> <p>On April 7, state-owned bank Caixa launched an online platform through which Brazilians can request the BRL 600 emergency salary for low-income citizens and autonomous workers. According to news website <em>6minutos</em>, 9 million workers requested the benefit in the first few hours after the platform went online, but the first tranche will only be paid in two days, almost two weeks after Congress approved the emergency relief package.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1891439" data-url="https://flo.uri.sh/visualisation/1891439/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>V-shaped recovery?&nbsp;</h2> <p>Based on foreign experiences — such as China’s — and the behavior of the global economy in the 2008 financial crisis, experts were debating on the <a href="https://brazilian.report/business/2018/12/16/shape-brazil-economic-recovery/">possibility of a V-shaped recovery</a> after the pandemic, consisting of a steep acceleration forcefully restrained due to the outbreak. <strong>&nbsp;</strong></p> <p>For professors from Fundação Getulio Vargas, Brazil is unlikely to see trends similar to China, as the country was recovering from a recession when Covid-19 hit. However, saving companies and jobs is the best way to ensure a faster recovery. While there’s little macroeconomic data to make more assertive projections, the first signals of economic trouble show how big the challenge will be: on April 6, the Brazilian Federation of Banks (Febraban) reported that the country’s top 5 banks have received over 2 million debt renegotiation fillings, amounting to BRL 200 billion.&nbsp;</p> <p>&#8220;We&#8217;re expecting a massive GDP drop in the second quarter. But if it is positive in the third quarter, I believe we may expect a faster recovery in 2021. Regardless, I don&#8217;t think it will be as fast as 2008, but not as slow as 2015 and 2016,&#8221; said Marcelo Kfhoury, former Director of Economic Research at Brazil’s Central Bank.</p> <p>In his view, the recovery will depend on whether people will have jobs to return to or not, but some sectors may outperform: retail should have a fast recovery and there’s hope for real estate, as the sector was picking up amid the low-interest environment. On the other hand, oil and gas may be in trouble if prices remain in a slump, as well as <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/05/industry-numbers-spark-early-2020-pessimism-brazil-orban-5g/">industry</a>, “which has been underperforming in the past few years, so I don’t see a perspective for it to recover sooner than the economy.”&nbsp;</p> <p>As highlighted by Mr. Holland, “it will be more of a U-shaped recovery. Don’t expect economic dynamism the day after Covid-19”.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1733972" data-url="https://public.flourish.studio/visualisation/1733972/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>A longstanding bill to pay&nbsp;</h2> <p>Brazilian authorities such as Treasury Secretary Mansueto Almeida and House Speaker Rodrigo Maia have long expressed the fear that the huge increase in public spending to tackle the crisis may affect the entire fiscal adjustment effort that Brazil has been making for the past three years. So far, the primary deficit target has been widened from BRL 124 billion to BRL 164 billion, even before Congress approved a declaration of a<a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/03/20/brazilian-senate-approves-state-of-calamity-against-covid-19/"> state of calamity in the country</a>, which allows the government to breach the target if needed.&nbsp;</p> <p>“We have a process of increasing public debt and this will probably create a rise in the tax burden at some point in the future. This won&#8217;t be a free lunch,” said Mr. Holland, adding that public finances will also suffer from revenue loss, not only spending.</p> <p>Among the measures to avoid collapse is a constitutional amendment to create a so-called “war budget,” but experts see little chance of Brazil escaping the crisis without issuing debt.&nbsp;&nbsp;</p> <p>Earlier on April 6, rating agency Moody&#8217;s <a href="https://extra.globo.com/noticias/economia/deficit-recorde-por-coronavirus-nao-ameaca-perspectiva-estavel-do-brasil-diz-moodys-24354185.html">told</a> <em>Reuters</em> that Brazil’s primary deficit would reach a record of 4.5 percent of GDP in 2020, while overall public debt may jump to 85 percent of the GDP, as a consequence of the increase in public spending to tackle the crisis. As of February, the National Treasury <a href="http://sisweb.tesouro.gov.br/apex/cosis/thot/transparencia/arquivo/31762:1009186:inline:16396747163903">forecasts the public debt</a> at 77.9 percent of the GDP by the end of 2020.</p> <p>“We maintain a stable perspective for Brazil’s sovereign rating because we hope that the deterioration of fiscal and debt metrics will be temporary and constrained to 2020, due to the shock,” Moody’s vice-president and main analyst for Brazil, Samar Maziad, was quoted as saying by <em>Reuters</em>.&nbsp;</p> <p>As we reported in <a href="https://brazilian.report/newsletters/brazil-daily/2020/04/07/president-jair-bolsonaro-health-minister-mandetta/">our Daily Briefing</a> on April 7, ratings agency S&amp;P lowered Brazil&#8217;s outlook from positive to stable. It expects &#8220;Brazil&#8217;s GDP growth and fiscal performance to suffer in 2020 due to the pandemic and extraordinary government spending, before gradual economic recovery and fiscal consolidation resume.&#8221;&nbsp;</p> <p>For Mr. Kfhoury, the worst public finance debt put pressure on Brazil’s sovereign risk and reflects on the long part of Brazil’s interest curve; while bond yields for January 2021 are negotiated at 3.3 percent, levels for January 2025 already reach 7 percent.&nbsp;</p> <p>In his view, selling Brazil’s dollarized international reserves may be a good bet to diminish the debt burden and also reduce the devaluation of the Brazilian currency.&nbsp;</p> <p>“Perhaps it is time to use this insurance because the damage has been done. The first advantage of this is to diminish the public debt, then it will lower the foreign exchange rate and the sovereign risk, making the long part of yields go down a bit,” he explained.&nbsp;</p> <h2>Social debt</h2> <p>The experts also raised concerns on the social effects of the crisis. For Mr. Holland, Brazil was already distancing itself from poverty reduction targets and saw increases in inequality, a process that will be intensified by Covid-19.&nbsp;</p> <p>As S&amp;P shows, Brazil’s GDP per capita is set to be 40 percent below pre-recession levels in 2020, at USD 7,300.&nbsp;</p> <p>“We’ll have a massive debt, we will have to distribute this bill among people and generations and this will affect the economic growth”, summed up Mr. Portella.&nbsp;

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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