CORPORATE | 04.30.2020
Brazil is facing deep recession as a result of the pandemic, in the midst of a political crisis
Brazil is not currently one of the countries worst affected by the global COVID-19 pandemic, yet the virus has succeeded in politically destabilizing Jair Bolsonaro’s government.
Recent weeks have seen both health minister, Luiz Henrique Mandetta, and justice minister, Sérgio Moro, step down due to disagreements with the president. The finance minister, Paulo Guedes, has been forced to suspend his liberal reform agenda in order to launch a fiscal stimulus program worth 150 billion reais (30 billion dollars) in a bid to limit the negative impact on economic activity.
This institutional instability could not have come at a worse time, when the country needs to focus all its attention on combatting the effects of COVID-19 and the economic recession projected for the Brazilian economy by all international agencies.
According to MAPFRE Economics forecasts included in its latest Outlook report, the Brazilian economy could shrink by 2.7 percent this year, according to its baseline scenario, but this contraction would not last, and recovery would be relatively fast, with GDP predicted to reach 4.3 percent next year. If economic conditions deteriorate even further, the report’s adverse scenario envisages an almost 10 percent setback for the Brazilian economy this year (-9.9 percent), with no activity recovered next year (-0.1 percent).
However, the sluggish economy will keep inflation stable at around 4 percent, which would enable the Central Bank to join the rest of the world in triggering highly accommodative countercyclical policies in order to boost the economy. On March 18, the Central Bank cut its Selic interest rate by 50 basis points down to 3.75 percent, as a monetary response to the set of support measures made necessary by the crisis.
As well as favorable financial conditions, the emergency monetary policy has focused on the provision of liquidity. Accordingly, the Central Bank has transferred the dollar liquidity provided by the Federal Reserve as part of its international auction system for emerging countries.
“In the best case scenario, regeneration will begin in the second half of the year, but the pace of activity will not be recovered, due to the permanent damage caused by the current crisis.” explains MAPFRE Economics.
As a result, the Brazilian currency is at an all-time low. It has been one of the worst-affected currencies in the last few months, having fallen in value by more than 25 percent this year. In January 2020, there were 4 reais to the dollar, but its exchange rate against the US currency is now 5.5 reais.
“The loss of the currency’s value, coupled with capital flight from emerging markets, will surely force the current-account balance into positive figures, with exports up and imports down,” concludes MAPFRE Economics.