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Eco Emerging

Brazil: the real economy and markets - the quest for synchronicity
07/15/2024 • By Salim HAMMAD

The messages sent out by the Brazilian financial markets and those of the real economy have become increasingly incongruent. Robust economic growth, low unemployment and relatively subdued inflation have become steadily overshadowed by rising political and fiscal risks, which have weighed more heavily on the currency, equity prices and the yield curve. Lula's parliamentary setbacks, his frictions with the Central Bank and increased interventionism have rattled investors already shaken by major revisions to global and local interest rate projections. The challenge for the second half of the year will be to bolster economic agents’ confidence in an effort to stabilise expectations.

Eco Emerging

Brazil : Resisting the pull of a downturn
05/03/2024 • By Salim HAMMAD

After stagnating in the second half of 2023, economic activity has strengthened in recent months, supported by a surprisingly resilient labor market, amongst other. This good start to the year was however not overtly obvious given the divergence of many indicators. The pace of rate cuts is expected to slow down in the second half of 2024. Monetary easing is indeed coming up against slower-than-expected disinflation and upside risks to inflation expectations. The latter have been dented by the revision of the budgetary targets for 2025-28 and a more pronounced interventionism by the State, anxious to revive investment

Eco Emerging

Brazil: Some cause for satisfaction…amidst a few grey areas
02/13/2024 • By Salim HAMMAD

For his return at the helm of Brazil, Lula can look at his first year back in office with some contentment: macro-financial indicators boasted solid prints, social programs were given a new impetus, an ambitious change in direction was initiated on the environment and the government’s capacity to reform ended up being much stronger than anticipated by most observers. This picture, nonetheless, conceals some imbalances most apparent in Brazil’s growth profile, the dynamics of unemployment and the structure of its trade balance. The markets’ renewed skepticism relative to the government's ability to balance its books (despite the new fiscal framework) constitutes another grey area. In 2024, economic growth, inflation and interest rates will be lower than in 2023

Eco Emerging

Brazil: Defying expectations

10/16/2023 • By Salim HAMMAD

Brazil’s cyclical performance continues to boast positive surprises. Growth and employment have held up well, core inflation is retreating, trade surpluses are beating all-time records and the real is holding its ground despite a rising dollar. Against this backdrop, the Central Bank eased its monetary policy in August for the first time in a year. These developments coupled with the revival of social policies, have helped spur a rise in Lula's approval ratings. In search of new growth drivers to reduce inequality and accelerate the energy transition, the President unveiled the third act of his Growth Acceleration Pact (Novo PAC). Financing the investment programme, however, poses questions in the face of the recently enacted fiscal framework

Eco Emerging

Brazil: A wind of optimism

07/11/2023 • By Salim HAMMAD

A wind of optimism is currently blowing over Brazil. Brazilian assets recovered strongly in Q2 2023 on the back of reform progress and positive surprises from growth, inflation, the labour market and external accounts. The short-term outlook has also improved. New fiscal measures combined with a softening of energy prices and the prospects of monetary easing in H2 has helped mitigate the expected economic slowdown this year. However, flashing green lights conceal the underlying weaknesses of internal demand as well as differentiated performances across sectors. In the absence of higher revenues, the primary result targets defined by the new fiscal framework is expected to be difficult to achieve.

Eco Emerging

Brazil: Quarrels at the top
04/14/2023 • By Salim HAMMAD

The Executive's calls for monetary authorities to lower rates are fuelling debates on the appropriate inflation target, the permanence of the Central Bank’s independence and the right calibration for the policy mix. The opposition between both parties is weighing on inflation expectations due to uncertainty over the path of economic policy. To help create favourable conditions for monetary easing, the government has accelerated the presentation of its new fiscal framework. Following the downturn in activity in Q4 2022, the economy should temporarily return to growth in Q1 2023, driven by the strong performance of the agricultural sector. The deceleration - which began in the second half of 2022 - is however expected to resume its course for the remainder of the year

Charts of the Week

Brazil: current trade patterns with China threaten the promise of re-industrialization
04/05/2023 • By Salim HAMMAD

Trade integration with China (including Hong Kong and Macau) has changed tremendously over the past 20 years. In 2022, bilateral trade amounted to some USD 150 bn – a 37-fold increase relative to trade in 2001. Since 2009, China has been Brazil’s main trading partner absorbing today close to 27% of its exports (vs 11% for the US).

Eco Emerging

Brazil: New priorities
01/17/2023 • By Salim HAMMAD

Luiz Inacio Lula da Silva started his third term as President of Brazil amidst a tense socio-political climate and more benign economic environment. Despite the many obstacles lying ahead of him, Lula bolsters ambitious social and environmental objectives. Their realisation will rely, amongst other, on an increase in public spending and a more interventionist credit policy. In the absence of a credible redefinition of the fiscal framework, market participants and the Central Bank fear that the use of these policies will come at the expense of greater macroeconomic imbalances.

Eco Emerging

Bucking the trend
10/09/2022 • By Salim HAMMAD

Accelerating growth, slowing inflation, falling unemployment and the interruption of monetary tightening differentiate Brazil from most of the world’s major economies. These developments, which are largely attributable to fiscal stimuli (higher social transfers, reduction in taxes and fuel prices), are complicating the task of monetary authorities by partially diluting the restrictive effects of their policy. In the second half of the year, the maintenance of fiscal stimulus should again help limit the slowdown in activity. Brazil’s solid economic performance has allowed financial assets to hold up well despite the general elections and a deteriorating global environment.

Eco Emerging

A difficult calibration of the policy mix

07/08/2022 • By Salim HAMMAD

Economic activity held up well in the first half of the year, but a slowdown in GDP growth is coming and expected to intensify over the second semester. The recovery of the labour market continues. However, the retreat of unemployment has come at the cost of a temporary drop in productivity. Inflation, which has registered double digits growth over the past nine months, is spreading more widely throughout the economy. Looking forward, monetary policy could be increasingly constrained by the announcement of new fiscal support. The latter coupled with the continued weakening of the main fiscal rule could weigh on risk premia and inflation expectations. The enthusiasm that prevailed earlier in the year for Brazilian assets is losing steam.

Eco Emerging

Brazil: Dissonance
04/21/2022 • By Salim HAMMAD

Brazil ended 2021 on a stronger footing than expected, but the economic picture remains fragile. Activity tends to progress in spurts, curbed by internal brakes (Omicron wave, climatic vagaries, elections) and a more degraded external environment (war in Ukraine, trading partners’ economic slowdown, etc.). Meanwhile, inflationary pressures are building up and raise the specter of continued monetary tightening.  Since the start of the year, the improvement in Brazil’s terms of trade and wide interest rate differentials with developed economies have fueled the rebound of the equity market and spurred a strong appreciation of the real. Such developments highlight a form of dissonance between the real economy and assessments of financial markets.  

Eco Emerging

A recovery in loss of momentum
01/25/2022 • By Salim HAMMAD

Despite the acceleration of the vaccination campaign, the anticipated rebound of growth in H2 2021 did not materialize. Instead, the economy fell into a recession in Q3 while available indicators for Q4 continued to show signs of weakness. Meanwhile, binding aspects of the spending cap have been called into question translating into an increased defiance of the market towards the sovereign. As the general election looms (October), economic prospects are expected to be very mild. Uncertainties regarding the evolution of the epidemic, the electoral cycle, the fiscal trajectory, the persistence of inflation and the tightening of monetary and financial conditions are all expected to act as potential brakes on the recovery.

Eco Emerging

Fragile consolidation of the recovery
10/12/2021 • By Salim HAMMAD

The recovery has failed to consolidate in Q2 2021, with production stalling over the quarter despite the dynamism of external demand and the normalization of activity in the service sector. The slowdown of the epidemic since the summer and the acceleration of the vaccination campaign, however, point to a rebound in the second half of the year. But upside risk to growth will be challenged by the persistence of supply constraints in industry, the risk of electricity rationing, the slowdown in China and aggressive monetary tightening to counter soaring inflation. Against this backdrop, the real is still struggling to appreciate despite the rise in rates and the good performance of external accounts. The currency’s weakness make the process of controlling inflation more difficult

Eco Emerging

A surprisingly resilient recovery
07/12/2021 • By Salim HAMMAD

The Brazilian economy has been surprisingly resilient given the challenging sanitary situation it faced in Q1. A more supportive external environment, a stronger recovery in services and a rebound in confidence, should help support the short-term outlook – especially as the epidemic slows down with improving vaccination coverage. Accelerating inflation continues to be a concern and could lead to a more vigorous tightening of monetary policy at the end of the summer. While the currency and portfolio investments stand to benefit from more aggressive rate hikes, the latter also risk slowing down the recovery and adversely affecting public finances. So far though, the sovereign has recorded better fiscal metrics than expected, which have translated into lower risk premiums.

Eco Emerging

An increasingly preoccupying situation
04/15/2021 • By Salim HAMMAD

The health crisis continues to worsen – undermining the economy to a point of entertaining a recessionary risk in the first half of 2021. In this context, confidence has plummeted and financial markets have retreated. The vaccination campaign – after facing significant logistical challenges – has finally begun to accelerate since mid-March and with the concomitant introduction of new restrictive measures, the hope is that the epidemic curve will reach an inflection point over the next two months. Faced with rising inflation and inflation expectations, the Central Bank launched its monetary tightening cycle, which – against a backdrop of slowing economic activity and a high sovereign interest burden – has exacerbated budgetary pressures and risks

Charts of the Week

The stock market’s recovery in Brazil: a local story
01/19/2021 • By Salim HAMMAD

In 2020, the Brazilian main equity index – the B3 Ibovespa – recovered swiftly from the commotion caused by the pandemic. After hitting record highs in January, the index lost 50% of its value in March before ending the year on a 3% gain. The year also ended with a record number of initial public offerings (26 IPOs and nearly USD 8 bn in funds raised – the highest level since 2007). The proceeds of these offerings were used to acquire assets or equity interests, cover working capital needs, pay down debt and invest in infrastructure – in that order. Global factors have facilitated this rapid bounce back.  Liquidity injections and record low interest rates across the globe in addition to vaccines development helped spur an increase in risk appetite

Eco Emerging

A fragile outlook dominated by concerns over the epidemic and fiscal woes
01/18/2021 • By Salim HAMMAD

An active economic policy has helped attenuate the magnitude of the recessionary shock in 2020. The recovery in Q3 was vigorous and was prolonged into Q4. However, the economy showed signs of slowing down towards year-end. Brazil’s external vulnerability did not deteriorate despite high volatility of both portfolio and direct investments as well as a sharp depreciation of the real in 2020. In 2021, the economy will benefit from the recovery in commodity prices and the maintenance of accommodative measures on the monetary side

Eco Conjoncture

Investment, productivity gains & potential growth

10/26/2020 • By Salim HAMMAD

Amidst low investment and stagnant productivity, Brazil has primarily relied on favorable demographics (labor accumulation) to grow. In the face of rapid population ageing and a decline in fertility rates however, Brazil’s demographic dividend has been gradually fading. Brazil will have to alter its pattern of growth and find avenues to stimulate capital investments and improve total factor productivity if its economy is to achieve higher medium-term growth prospects (i.e. lift potential growth). The administration has embraced this challenge through an ambitious structural reform agenda anchored on two complimentary pillars: enhancing the business environment and transforming the role of the state in the economy

Eco Emerging

Some difficult choices lie ahead
10/05/2020 • By Salim HAMMAD

The epidemic remains in full swing, but has shown some signs of deceleration. The recovery in Q3 has been stronger than expected. However, the picture varies considerably from one sector to the next. The central bank has paused its monetary easing cycle for the first time since mid-2019. At the same time, it has adopted a more active communication stance through the embracement of forward guidance. The emergency aid programme – which will push the budget deficit to a record high – has meanwhile helped President Bolsonaro witness a resurgence in popularity.  Negotiations over the 2021 budget are likely to crystallise tensions across the executive and Congress

Eco Conjoncture

Investment in times of fiscal adjustment
08/30/2020 • By Salim HAMMAD

The Brazilian economy is gradually migrating towards a new macroeconomic equilibrium whereby the private sector is gaining a larger role in the allocation of resources. This transition is the result of a changing conception of the role of the state but also stems out of a necessity to consolidate fiscal accounts. The nature of the fiscal adjustment however has had knock-on effects on both public and private investment, with adverse consequences on the recovery and medium-term growth prospects. The recent disruption to the economy resulting from the Covid-19 pandemic has also reset the deck with regards to the outlook for corporate investment and potential output

Eco Emerging

Hit hard
07/22/2020 • By Salim HAMMAD

While the Covid-19 epidemic continues to spread, restrictions have started to ease in parts of the country. A severe contraction of economic activity is anticipated in Q2 with the latest data indicating that a low point was reached in April. A rapid recovery of economic activity will be constrained by the economy’s weak growth engines, especially investment. Fiscal and monetary policy measures have continued to be deployed or extended to help cushion the impact of the crisis. While the currency continues to exhibit weakness and fiscal balances keep deteriorating, continued monetary easing has helped boost the stock market.

Eco Emerging

Tough luck
04/13/2020 • By Salim HAMMAD

The massive economic shock resulting from the coronavirus sanitary crisis will delay Brazil’s economic recovery, suspend the process of fiscal consolidation and stall progress on reforms. While the extent of the recessionary shock remains highly uncertain, measures – both fiscal and monetary – have been taken to mitigate the impact of confinement measures on economic activity, prevent a sharp upturn in unemployment and ensure that tensions over liquidity do not materialize into solvency problems. Intervention capacities on the monetary side are ample and contrast with those on the fiscal side, which are more limited due to the fragilities of public accounts. Brazil’s financial markets, which came under significant stress in Q1, will continue to be challenged.

Eco Emerging

Trying to build momentum
01/27/2020 • By Salim HAMMAD

Despite a more challenging global environment and a deterioration in the country’s external accounts, Brazil’s economic recovery is gaining some traction on the back of a strengthening domestic demand. In 2020, GDP growth is forecast to improve but questions remain nonetheless regarding the economy’s ability to build up and keep up momentum. The easing of monetary and financial conditions should help support the credit market but should continue to have a weakening impact on the currency. During his first year in office, President Jair Bolsonaro’s losses in terms of approval ratings contrast with his government’s notable gains on the public finance front.  

With a GDP of USD 3.220 trillion after adjusting for purchasing power (PPP), Brazil is the 10th largest economy in the world according to data from the World Bank. It accounts for one third of Latin America and the Caribbean’s GDP (PPP) and with 210 million inhabitants, it accounts for one third of the region’s total population. It is also the 5th largest country in the world and hosts 20% of the world’s rainforest. The country has abundant natural resources and the economy is well-diversified. Brazil is weakly integrated in the global economy and also suffers from an important infrastructure gap, high income inequality, a complex tax system, high labour market rigidity, and weak governance.

Brazil’s growth profile over the past decade has been relatively volatile. While the economy has averaged 4.5% growth over period 2007-2011, economic activity since 2013 has mostly alternated between periods of relative stagnation (2014 2017, 2018, 2019) and contraction (2015, 2016, 2020). The subdued growth trajectory of recent years can be traced back to a combination of factors, including policy missteps, a less supportive external environment marked by the end of the commodity super-cycle in 2014 and a string of corruption scandals have affected the political and business communities with significant consequences on society, confidence and investment. In recent years, fiscal rigidities have impeded public investment growth, while record high lending rates (and a lack of access to long-term credit) as well as high administrative burdens and reduced access to subsidized credit have strained private investment. 

Brazil enjoys a well supervised and robust financial system. As the BRL is one of the most volatile currencies across emerging markets, corporations are vulnerable to currency risk. But Brazil’s sound external position—with strong liquidity buffers, moderate external debt levels and dynamic foreign direct investment (FDI) flows—mitigate the risk of transfer restrictions.

The Bolsonaro government has put in place a large economic package to alleviate hardships for corporates and vulnerable populations resulting from the fallout of the Covid-19 pandemic. Relief measures by both fiscal and monetary authorities were rolled out to provide liquidity support to firms, especially SMEs.

Looking forward, it will take time for the economy to recover. The unemployment rate will remain durably high, and the government will not be in a position to provide large stimuli to the economy as the Covid-19 pandemic has exacerbated fiscal imbalances. Inflation and policy rates are at historic lows so the debt burden has been contained so far. Reforms are implemented to control further growth in mandatory public spending (e.g. social security reform, administrative reform), reduce trade barriers and state intervention in credit markets, promote privatisation and concessions (Investment Partnership Program) and simplify the tax code. These reforms – if they materialize – may help to address some of Brazil’s deep-seated economic problems (e.g. weak productivity) and enhance the country’s growth potential.