How Covid-19 is impacting the Brazilian economy

Jul 24, 2020
IBRI director shares his views on how the economy is weathering the pandemic

Every day we are bombarded by news related to the Covid-19 pandemic, the impacts on health, the economy and the world in general. This is very important, as reliable information is the best weapon to combat Covid-19, in relation to both public health and the global economy.

It is no different in Brazil. More than 2 mn people have tested positive for Covid-19, with 80,000 deaths. This will have a profound effect on us socially and on our economy.

The market forecasts, in periodic bulletins from the Central Bank of Brazil, are less pessimistic than some shared by international agents. Earlier this month the International Monetary Fund projected a decrease in Brazilian economic activity by 9.1 percent this year, while the World Bank projects a retraction of 8 percent. The Central Bank of Brazil, however, sees a 6.4 percent retraction in the economy this year.  

In any case, the significant downturn in economic activity affects the country in a year in which a more robust economic recovery was expected. At the beginning of 2020, when the new coronavirus pandemic was concentrated in China and it was unclear when and how it might arrive in Brazil, experts estimated annual economic growth of around 2.3 percent.

Markets and domestic policy

In an attempt to curb the selling momentum and simultaneously give investors time to understand what has happened in the last few months, the circuit breaker on the Brazilian stock exchange has reappeared, and has also been put into practice on other stock exchanges around the world. But the Ibovespa had the best second quarter since 1997 and accumulated an increase of around 50 percent, supported by global liquidity expanded by measures to combat the economic effects of Covid-19, in addition to a drop in the basic interest rate to historic lows.

The Basic Sanitation Law, recently approved by the Brazilian parliament, created a new regulatory reference with the objective of universalizing water supply and sanitation services, as well as modernizing the most backward sector in the national infrastructure. This allows for a massive increase in investment in sewage collection and treatment and water supply networks, with the potential to generate more than 1 mn jobs in this sector alone.

To minimize the impacts of the pandemic, the federal government has already approved R$90 bn ($17.5 bn) in emergency aid for approximately 64.1 mn Brazilian beneficiaries. In addition, the Central Bank of Brazil estimates it will release up to R$55 bn in credit for small companies.

The strong inclination toward concessions and public-private partnerships also tends to heat up the Brazilian economy, attracting resources and generating jobs. In the Northeast region of the country, the transposition of the waters of the São Francisco river to arid regions, as well as the sea water desalination projects and the drilling of artesian wells, are examples of these efforts.

Foreign trade

Despite the Covid-19 pandemic, Brazil continues to record a positive trade balance. In June the surplus was $7.46 bn, according to data from the federal government. That’s the best trade balance for June since records started in 1989. This is largely due to agriculture, which grew 23.8 percent this year, compared with the same period last year.

In yet another initiative to combat the challenges imposed by the Covid-19 pandemic, the Brazilian government, through the Securities and Exchange Commission (CVM), published a set of initiatives aimed at holding shareholders’ meetings. The published rules are another indication of the effort the CVM and market participants have jointly undertaken to make routine capital market events still happen.

Greater optimism

Greater optimism has caused several analysts to recently revise their Ibovespa projections upwards. Goldman Sachs, Bank of America and XP Investimentos all outlined new, more positive scenarios for the main Brazilian stock index in 2020, including considering the important phenomenon of retail investors in Brazil. Since the beginning of the year, there has been a record number of individuals entering B3, which has helped to mitigate the effect of the exit of foreign investors.

Market agents keep an eye on risks to emerging economies, especially the Brazilian one, amid the very challenging scenario caused by the coronavirus pandemic. With an excess of liquidity in the world and a sharp drop in the Ibovespa, however, investors have found reasons to evaluate the national stock exchange with better eyes.

 

André Vasconcellos is director of the Brazilian Institute of Investor Relations (IBRI) and investor relations at Eletrobras

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