Brazil facing crippling debt in post-Covid-19 world

. Apr 14, 2020
Brazil facing crippling debt in post-Covid-19 world Photo: Artem Oleshko/Shutterstock

This newsletter is for PREMIUM subscribers only. Become one now!

We’re covering today the worrisome prospects for Brazil’s public debt. The plan to give financial aid to state administrations. And the massive underreporting of coronavirus cases in Brazil.

What will happen to Brazil’s public debt?

The uncertainties

created by the coronavirus crisis will affect the trajectory of Brazil&#8217;s GDP and its public debt for the next decade, says a <a href="">report</a> by the Independent Fiscal Institution (IFI) —&nbsp;a consultancy body attached to the Brazilian Senate. Before the coronavirus, the IFI expected the government&#8217;s level of indebtedness to remain stable, at around 80 percent of GDP until 2024, before decreasing. Now, the institution predicts a debt-to-GDP ratio of 100 to 138 percent, depending on the scenario.</p> <ul><li>Tax revenue is set to fall BRL 151 billion (USD 29 billion) in 2020. Meanwhile, public spending will go up BRL 212 billion due to countercyclical measures.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/1929137" data-url=""><script src=""></script></div> <p><strong>Why it matters.</strong> Ballooning debt will make it harder for the government to foster investments in a post-pandemic world. Brazil has just come out of a <a href="">lost economic decade</a> —&nbsp;and could be heading into another.</p> <p><strong>How bad?</strong> The lasting effects of the coronavirus on the economy will depend on how well the country can contain the spread —&nbsp;how long will social isolation be necessary, and how the pandemic will continue to affect productive sectors in Brazil and elsewhere.</p> <p><strong>2008.</strong> The &#8220;Uncertainty Index&#8221; — elaborated by think tank Fundação Getulio Vargas — reached an all-time peak in March 2020,&nbsp;higher than during the 2008 global financial crisis).</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1929060" data-url=""><script src=""></script></div> <p><strong>Outlook.</strong> IFI economists say the scenario is &#8220;very negative&#8221; and that it will take tremendous effort by the government to &#8220;recover some sort of normalcy following the coronavirus crisis.&#8221;</p> <ul><li>To avoid a worst-case scenario, policymakers must promote severe reforms to public spending (i.e. civil servants&#8217; payroll). Not to mention the risks for the government, which would not be able to comply with fiscal responsibility rules until 2021.</li></ul> <hr class="wp-block-separator"/> <h2>House approves financial aid for states</h2> <p>In a 431-70 vote, Brazil&#8217;s lower house passed a bill granting financial aid to states and forcing the federal government to compensate for their loss in tax revenue. The vote is yet another defeat for Economy Minister Paulo Guedes, who called the bill a &#8220;fiscal bomb,&#8221; estimated at BRL 89 billion (more than double of what the Economy Ministry was willing to spend). Mr. Guedes also criticized the lack of conditions placed on state governors, saying the bill hands states a &#8220;blank check.&#8221;</p> <ul><li>Long before the coronavirus, the government had proposed a financial aid plan to states, forcing them to impose severe austerity measures to curb indebtedness before receiving federal assistance.</li></ul> <p><strong>Why it matters.</strong> Few proposals to mitigate the economic impacts of the coronavirus faced more resistance from the government than this one. The overwhelming result shows how the weakness and disarray of Jair Bolsonaro&#8217;s congressional coalition.</p> <p><strong>Veto?</strong> Mr. Guedes has vented the possibility of asking President Jair Bolsonaro to veto the bill once it passes in the Senate. That move, however, would deepen the friction between him and House Speaker Rodrigo Maia —&nbsp;who backed the financial aid plan.&nbsp;</p> <p><strong>Half-full.</strong> Lawmakers dropped an article that would have suspended all debt payments to the federal administration.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1928278" data-url=""><script src=""></script></div> <hr class="wp-block-separator"/> <h2>Do the coronavirus numbers mean anything?</h2> <p>The most recent Covid-19 update by the Health Ministry showed that the coronavirus has infected 22,430 people in Brazil, causing 1,328 deaths. Scientists from the Universities of São Paulo and Brasília, however, estimate that at least 313,000 people have already contracted the virus —&nbsp;that is, 15 times more than the official statistics.</p> <p><strong>No testing.</strong> Brazil is one of the countries with the lowest rate of testing —&nbsp;only 296 per 1 million people —&nbsp;despite figuring among the top 15 worst-affected countries. In the U.S., which has now become the epicenter of the outbreak, 8,866 patients out of every 1 million inhabitants are tested, and that is already considered to be a low rate.</p> <ul><li>In the northeastern state of Maranhão, projections say the true number of cases is some 5,200 percent higher than reported.</li></ul> <p><strong>Why it matters.</strong> Massive testing is considered key for countries to relax social isolation measures as it would give policymakers a clearer picture of the outbreak&#8217;s true extent.</p> <p><strong>Signs.</strong> Between March 8 and 28 alone, almost 10,000 people were admitted to hospitals in São Paulo with acute respiratory distress syndrome, according to monitoring by the Oswaldo Cruz Foundation. That is more cases than the entirety of 2019.</p> <p><strong>Collapse.</strong> The states of Rio de Janeiro, São Paulo, and Ceará —&nbsp;as well as federal capital Brasília —&nbsp;are bracing for &#8220;the worst 60 days of the pandemic,&#8221; between May and June. Authorities are seeking ways to reinforce social distancing measures in order to postpone the collapse of the healthcare system as much as possible.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Post-coronavirus.</strong> Members of the São Paulo Federation of Industries (FIESP) have begun remote meetings to discuss a safety protocol to be adopted once companies are allowed to resume their activities. The idea is to monitor what is being done in countries such as China and South Korea — which were hit by the pandemic way earlier than Brazil — and what can be implemented locally. As our <a href="">live Covid-19 blog</a> reported, shopping mall administrators have elaborated a guide with hygiene recommendations and instructions on how to deal with financial losses and defaults from store owners.</li><li><strong>Tests 1.</strong> Researchers at the Federal University of Minas Gerais are developing a new rapid Covid-19 test; it would be the first-ever developed in Brazil and each unit would cost BRL 5. Their work, however, has been stalled by a lack of inputs. The group of professors needs BRL 1.5 million to keep their project alive. Without funding from the university, they have started an <a href="">online crowdfunding campaign</a>. If they find investors, the researchers say they could produce up to 1 million tests in the short-term future. </li><li><strong>Tests 2.</strong> Despite a lack of federal regulation, Rio de Janeiro drugstores are already selling rapid Covid-19 tests — which is illegal. These tests cost around BRL 390 and haven&#8217;t been proven to be effective. Experts warn that false negatives could give people a fake sensation of security and help increase the spread of the virus.</li><li><strong>Masks.</strong> The state government of Mato Grosso has issued a decree making the use of facemasks in public mandatory. Throughout this week, police officers will give warnings on the importance of protective equipment. As of next week, non-compliant citizens will be fined an undefined amount.</li><li><strong>Spending.</strong> A report by consultancy firm Elo Performance Insights, owned by a credit card company, shows that Brazilians have spent 25 percent more in supermarkets and 10 percent more in drugstores between March 19 and April 1. In general, spending on retail dropped 54 percent, with segments such as clothing suffering even more (down 78 percent). Analysts say Brazilians are returning to their spending habits of 2016 — the worst moment of the <a href="">2014-2016 recession</a>.

Our content is protected by copyright. Want to republish The Brazilian Report? Email us at