Analysts slash Brazilian growth forecasts once again

. Mar 04, 2020
Analysts slash Brazilian growth forecasts once again Photo: Corlaffra/Shutterstock

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The coronavirus outbreak leads to more pessimism around Brazil’s 2020 growth. How the outbreak can disrupt the Latin American economy. The Bolsonaro-Congress budget dispute settled—almost.

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Economists jump the gun, slashing forecasts before official GDP data

This morning,

Brazil&#8217;s official statistics agency will publish the country&#8217;s official GDP data for 2019. Before the results are even released, however, pessimism toward Brazil spread through markets. Goldman Sachs drastically cut its Brazilian 2020 growth forecast from 2.2 to 1.5 percent. But the bank is actually more optimistic than consultancy firm Capital Economics—which predicts a paltry 1.3-percent growth for this year.</p> <p><strong>Why it matters.</strong> The world is still trying to assess just how bad the coronavirus epidemic will affect the global economy—and uncertain scenarios are particularly challenging for emerging economies.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1192957"><script src=""></script></div> <p><strong>In Fed we trust?</strong> The U.S. Federal Reserve slashed interest rates by 0.5 percentage points (to 1-1.25 percent). This was the first unscheduled emergency cut since 2008—and the biggest move since then. Stocks initially rebounded after the move, but the curve went back down as analysts fear that the Fed might actually be getting ahead of a coronavirus-related recession.</p> <p>Brazilian stocks followed the trends set by the New York Stock Exchange—with the Ibovespa index closing down 1.02 percent. Meanwhile, the Brazilian Real lost 0.55 percent against the U.S. Dollar and the exchange rate once again reached its highest-ever nominal value (USD 1 : BRL 4.51). In the Brazilian case, however, local political quarrels are also to blame for investors&#8217; bad moods.</p> <p><strong>Central Bank.</strong> The Brazilian Central Bank&#8217;s Monetary Policy Committee meets on March 17 and 18 to set new benchmark interest rates. The bank said it will be &#8220;closely monitoring&#8221; the developments of the coronavirus&#8217; economic impacts—which led many to assume a further cut from the current level of 4.25 percent is to be expected. However, the move would be controversial among analysts, as some argue that a higher interest rate for Brazil could help to bring in foreign capital.</p> <p><em>—with Natália Scalzaretto</em></p> <hr class="wp-block-separator"/> <h2>Coronavirus: the risks for the Latin American economy</h2> <p>In its latest <a href="">Interim Economic Assessment Report</a> dated March 2, the OECD has cut its growth economic forecast for the global economy as the coronavirus continues to spread outside of China. According to the <a href="">Brazilian researchers who mapped the genome</a> of the Covid-19 virus found in two Brazilian patients with confirmed infections, internal transmission is taking place in European countries.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1504619"><script src=""></script></div> <p>The OECD expects the world to see its lowest level of economic expansion since the end of the 2008 financial crisis—and the overall effects will depend on how quickly China will be able to bounce back. Thankfully, the rate of recovery has now surpassed that of new infections in the Asian country. Latin America, a region full of emerging economies, may feel the pinch more than others. Here are some trends to look out for:</p> <ul><li><strong>Exports to China will take a nosedive. </strong>With the exception of Mexico, China is one of the leading export destinations for the entire Latin American region. It is the absolute top trading partner of Brazil, Chile, and Peru. The Asian giant absorbs massive quantities of agricultural products, iron ore, and oil. After more than a month, factories that had shut down to avoid Covid-19 transmissions are only now slowly getting back to work.</li><li><strong>Supply shortages</strong>. Global value chains have been disrupted everywhere in the world. Latin American countries such as Mexico and Brazil—the region&#8217;s biggest manufacturers—should be hit particularly hard by a lack of inputs. An association of Brazilian electronics producers expects Q1 2020 output to take a 22-percent dip. The sector has already begun giving collective vacations and reducing factory hours.</li><li><strong>Commodity prices should fall. </strong>Latin American economies are heavily dependent on commodity exports. The <a href="">super-cycle of the 2000s</a> explained a great deal of the region&#8217;s recent economic rise and subsequent collapse. And with economic activity way down, demand for basic products has cooled. Brent crude oil future contracts, for instance, are down 20 percent this year. So far, Brazilian meat exports haven&#8217;t been disrupted—but the situation must be monitored closely.</li><li><strong>Risk aversion.</strong> Markets have been jittery and investors are looking for safer assets. Last Wednesday alone, over BRL 3 billion in foreign capital fled the Brazilian stock market—and the region&#8217;s currencies have lost value.</li></ul> <p><strong>Latin American growth, by the numbers.</strong> The last time Latin America posted an average growth of over 2 percent was in 2013. Even taking Venezuela out of the equation—with the country experiencing the biggest humanitarian crisis in the Western world—the average since then has been only 0.9 percent per year.</p> <hr class="wp-block-separator"/> <h2>Budget issues between Bolsonaro and Congress to be settled today</h2> <p>After much uncertainty, the government reached a deal with Congress to find a middle ground in negotiations around how parliamentary budgetary grants should be operated. These are provisions in the Constitution that prevent the Executive branch from having monopoly control over the federal budget. Legislators may allocate parts of the budget to projects of their interest—usually infrastructure or healthcare ventures in their constituencies.</p> <p><strong>Context.</strong> In recent weeks, lawmakers have tried to take control over how much and when these grants are paid—which would remove a major whipping tool used by governments.&nbsp;</p> <p><strong>Deal. </strong>In the deal brokered yesterday, both the government and Congress have yielded somewhat. Here are the main points:</p> <ul><li>Parliamentary grants will no longer amount to BRL 30 billion—the new agreed total is BRL 15 billion;</li><li>The government will control how these grants are paid;</li><li>In exchange, the government agrees that these grants are mandatory expenses and must be greenlit every year.</li></ul> <p><strong>Decision.</strong> Senate President Davi Alcolumbre suspended yesterday&#8217;s sitting after lawmakers asked for more time to analyze the terms. The vote should be resumed today.</p> <p><strong>Why it matters. </strong>The dispute over budget control has been at the center of Jair Bolsonaro&#8217;s latest quarrel with Congress. The president incited supporters to join protests scheduled for March 15 asking for the &#8220;shutdown of Congress&#8221; and the &#8220;end of the Supreme Court.&#8221;&nbsp;</p> <p><strong>By the numbers. </strong>Brazil&#8217;s 2020 budget amounts to BRL 3.6 trillion. When we discount expenses on pensions, salaries, and costing public services, the government has only BRL 126 billion for current expenses, investments, and parliamentary grants. That&#8217;s why stakeholders are fighting tooth and nail for every cent.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Coronavirus.</strong> The number of suspected <a href="">coronavirus infections in Brazil</a> (currently at 488) is about to jump considerably as Brazil widens its net of countries at risk of Covid-19 to 27, including those with local transmissions such as the U.S. Meanwhile, Argentina has become the latest Latin American country to confirm a Covid-19 patient, following Brazil, Mexico, Ecuador, and the Dominican Republic.</li><li><strong>Military.</strong> The Brazilian Navy will sign a BRL 9.1-billion tender today to buy four warships to be delivered between 2024 and 2028. As we reported in our <a href="">March 29, 2019 Daily Briefing</a>, the bidding process was highly controversial as the Navy used some fiscal maneuvers to duck under the federal spending cap that forbids the cash-strapped government from raising public expenditure above inflation.</li><li><strong>Climate.</strong> Intense rainfall in the Southeast region has left a death toll of 140 people so far this summer. Storms between Monday and Sunday in the coastal São Paulo region of Santos have killed at least 19 people. While the crisis is certainly related to <a href="">poor urban planning</a>, the fact is that Brazil has already begun feeling the effects of climate change, with <a href="">extreme weather events becoming increasingly more common</a>. In January, rainfall in Belo Horizonte—the capital of Minas Gerais state—was half of what was expected for the entire year.</li><li><strong>Free-trade zone.</strong> President Jair Bolsonaro said he wants to create a &#8220;free-trade zone&#8221; in the Marajó archipelago in the northern state of Pará. The idea is to attract investments through massive tax breaks, in the molds of the <a href="">Manaus Free Trade Zone</a> created in 1967 by the military dictatorship. To sustain this model, the government surrenders around BRL 20 billion in taxes every year—and it is far from a consensual method for driving a growth of investments. One of the model&#8217;s biggest critics is none other than Economy Minister Paulo Guedes.</li><li><strong>Culture.</strong> Actress Regina Duarte will finally take office as the government&#8217;s new Culture Secretary. She will be the fourth person to hold the position in 14 months, replacing former department head Roberto Alvim, a now-disgraced theater director <a href="">fired after publishing a video filled with Nazi imagery</a> and paraphrasing speeches made by Joseph Goebbels.

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