Despite economic uncertainty, there are still reasons to back Brazil

The Covid-19 pandemic has caused levels of economic unpredictability to skyrocket in Brazil. The Brazilian Economic Uncertainty Index (IIE-Br), compiled by the Brazilian Institute of Economics at think tank Fundação Getúlio Vargas (IBRE-FGV), has hit its highest mark in history, far above measurements recorded amid previous 21st-century crises. In April 2020, the IIE-Br reached 210.5 points. In its previous peaks — at the 2002 presidential election, the 2008-2009 financial crisis, and Brazil’s loss of investment-grade rating by S&P in 2015 — the index hit 132.1, 132.4, and 136.8 points, respectively.

The so-called “standardization window” of the IIE-Br came between January 2006 and December 2015, where the average uncertainty hit 100 points, considered ‘normal.’ Therefore, the 210.5 points seen in April 2020 is extremely high for the index’s standards. July saw the IIE-Br retreat to 163.7 points, but this is still much higher than previous peaks.

In a recent article published on VoxEU, entitled “Economic uncertainty in the wake of the Covid-19 pandemic,” several aspects of Covid-19-related uncertainty are highlighted.

In epidemiological terms, there are lingering doubts about the degree of contagion and lethality of the virus, the efficacy of social distancing, as well as the time that will be required to produce a vaccine and successfully inoculate populations. With regards to the economy, there is uncertainty over the short-term economic impacts, the effects of reactive public policies, the speed of post-pandemic recovery, and the persistence of changes in habit, such as consumption patterns, business tourism, and remote working.

As the numbers make clear, Brazil was hit squarely between the eyes by the Covid-19 pandemic, being one of the countries with the highest number of cases and deaths from the virus. Therefore, Brazil not only has to deal with the enormous and undeniable short-term consequences of Covid-19, but also the unpredictability over the medium and long-term post-pandemic period.

What indexes such as IIE-Br show is that merely pushing the current bleak scenario to the future is a form of self-deception, similar to excessive optimism, yet working in the opposite direction. On the one hand, it is true that uncertainty in itself weighs heavily on economic activity, reducing investments and spending on more expensive consumer goods, as has been addressed by the economic literature. However, as the word ‘uncertainty’ suggests, the future is up in the air, and there are very few visible elements to forecast ‘trustworthy’ scenarios. In other words, we cannot rule out any possibility, be it pessimistic or optimistic.

However, this heightened uncertainty cannot be used as a justification for economists and other analysts to give up on making projections, even though this task has become much more challenging. And, when working with the future, we cannot rule out a direct consequence of the crisis, seen all around the world: the increase of public debt, which evidently has not spared Brazil.

Soaring public debt

A recent article by economists Victor Gaspar and Gita Gopinath, on the IMF Blog, indicates that global public debt is set to reach 101.5 percent of global GBP this year — the highest level ever, surpassing the peaks seen after World War II. In the case of advanced economies, public debt as a ratio of GDP is forecast...