Economic woes begin. The only question is how bad it will get

. May 06, 2020
industry Economic woes begin. The only question is how bad it will get Photo: Kotenko Oleksandr/Shutterstock

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Fitch Ratings has lowered Brazil’s economic outlook as industry figures slide. We explain the reasons for it: both from an economic and a political perspective.

Brazilian industry falls further than predicted

Though Brazil still lacks consolidated, recent data on economic indicators

— which would give a clearer picture of the pandemic&#8217;s impact on the economy — all signs point to a serious deterioration of conditions in the coming months. In March, Brazilian industry suffered a 9.1-percent decline in output — the biggest slide since the <a href="">May 2018 truckers&#8217; strike</a>. The drop is a direct result of the coronavirus crisis, as companies shut down factories, suffered from input shortages, and saw their clients disappear.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2255549" data-url=""><script src=""></script></div> <p><strong>Why it matters.</strong> April&#8217;s industry figures should be much worse, with the entire month being spent under social isolation rules and rising Covid-19 figures. Bradesco predicts a 6-percent drop from March&#8217;s already low baseline.</p> <p><strong>Job market.</strong> Research from think tank Fundação Getulio Vargas states that revenues of 30 percent of all companies have already been significantly affected by the pandemic.</p> <ul><li>Economists from Bradesco believe that average income will fall 25 percent among formal workers, and 50 percent among the informal job market. Some of those losses will be compensated by government programs, but the implementation of this public aid has suffered many hiccups.</li><li>The Brazilian industry remains 20 percent <em>below</em> January 2014 levels. That was before the 2014-2016 recession, which was the worst in Brazilian history and is set to be bested by the coming downturn.</li></ul> <p><strong>Moving forward.</strong> The rhythm of the economy — and the recovery of industry activity —&nbsp;depends on the progression of the pandemic, regardless of stay-home orders or potential lockdowns in some states. However, since the changing of the guard at the head of the Health Ministry, the department has been silent. The government has only delivered 11 percent of 46 million promised test kits, which reduces the country&#8217;s capacity to quantify the outbreak.</p> <ul><li>Data collection has been irregular at best. On Tuesday, the country recorded its worst number of new infections (9,493) and deaths (633) to date —&nbsp;after four straight days of falling numbers. That is because teams are reduced and data compilation is hampered during holidays and weekends. This trend is worrisome, as low figures act as encouragement for people to flout social isolation rules.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/2111814" data-url=""><script src=""></script></div> <hr class="wp-block-separator"/> <h2>More delays in government aid to ailing states</h2> <p>The lack of political coordination at the federal level is making the fight against the pandemic all the more difficult. Among the best examples of this has been the government&#8217;s plan to offer financial aid to struggling states. Without an agreement between the House, Senate, and Executive over the best solution for a bailout plan, each congressional chamber has gone ahead with its own version, stalling its final approval and further jeopardizing the budgets of Brazilian states.</p> <p><strong>Context.</strong> On April 15, the House passed a bill granting federal aid to states and municipalities that will lose tax revenue due to the pandemic — no strings attached. The government then lobbied Senate President Davi Alcolumbre to include some conditions to the plan, such as freezing civil servants&#8217; wages until the end of next year, with the exception of employees working on the frontline to fight Covid-19. That <a href="">new version passed on Saturday</a> and was sent back to the House. On Tuesday, lawmakers made further changes to the core text, adding more exceptions to the proposed wage freezes. This move saw the bill sent back to the Senate.</p> <p><strong>Back and forth.</strong> The Senate President declared he won&#8217;t accept the new changes and that he and his peers will resuscitate the bill they had approved on Saturday, meaning this back and forth could continue.</p> <p><strong>Why it matters.</strong> While Congress plays hot potato, state administrations say they are on the cusp of a total economic collapse, on top of the pressing health crisis.</p> <p><strong>Fiscal responsibility.</strong> The government&#8217;s worries are warranted. It wants to add some strings to the financial aid plan to prevent governors from spending the federal administration&#8217;s cash at will. The Economy Minister wants to make sure that any extra expenditure will be limited to while the pandemic lasts — but won&#8217;t become a structural issue for public finances.</p> <ul><li>That is important because Brazil has recently struggled with a major deficit crisis.</li></ul> <hr class="wp-block-separator"/> <h2>Pandemic, political pandemonium lead Fitch to lower Brazil&#8217;s outlook to &#8216;negative&#8217;</h2> <p>Fitch Ratings has maintained Brazil&#8217;s credit rating at BB-minus (three steps below investment grade), but lowered its outlook from stable to negative.</p> <ul><li>&#8220;Brazil entered the current period of stress with a relatively weak fiscal balance sheet and low economic growth. The pandemic and the related recession will further increase public indebtedness, eroding fiscal flexibility and increasing vulnerability to shocks,&#8221; said Fitch in a statement.</li><li>Besides the pandemic-induced crisis, Brazil also <a href="">lacks political coordination</a> to tame the effects on the economy or reduce the coronavirus death toll.</li></ul> <p><strong>Why it matters.</strong> Since the subprime crisis, the reliability of credit rating companies has been questioned, but the truth is that they still have an influence on investors&#8217; behavior. And a potential downgrade further into junk territory will see Brazil lose even more dollars.</p> <p><strong>Forecasts.</strong> Fitch projects a minus-4-percent GDP growth for this year, in line with the Central Bank&#8217;s Focus Report, a weekly survey with top-rated investment firms. The World Bank, however, sees a 5-percent skid —&nbsp;and The Economist Intelligence Unit predicts an 11-percent drop.&nbsp;</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Aviation.</strong> After its <a href="">USD 4.2-billion deal with Boeing</a> collapsed, Brazilian planemaker Embraer is negotiating a bailout plan with the Brazilian National Development Bank (BNDES). The company hired private bank Itaú Unibanco to assist on the terms of the plan, which could reach up to USD 1.5 billion. Embraer, however, is unlikely to be ahead of airlines in the queue for government assistance.</li><li><strong>Moro.</strong> Former Justice Minister Sergio Moro&#8217;s testimony to the Federal Police — following accusations that President Jair Bolsonaro wanted to have access to confidential police reports — was quite underwhelming. Revealed by <a href=""><em>CNN Brasil</em></a>, Mr. Moro&#8217;s words offer no motive for the president&#8217;s conduct. While the statement does suggest inappropriate behavior, it is unlikely to justify an indictment request against the president. Unless new, substantial information comes to light, this case should bear no legal consequence for Mr. Bolsonaro.</li><li><strong>Backsliding.</strong> On March 30, the Defense Ministry issued a statement calling the 1964-1985 dictatorship a &#8220;<a href="">landmark for Brazilian democracy</a>,&#8221; despite the fact that the regime used state-sponsored torture against political dissidents, suspended direct elections, and censored the press. The post had been removed following a court decision —&nbsp;but Supreme Court Chief Justice Dias Toffoli decided on Tuesday that the Justice system must not weigh in on the matter, and ruled that the government should be allowed to <a href="">defend a dictatorship</a> if it so pleases.

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