Tough luck

EcoEmerging// 2nd quarter 2020  
Tough luck  
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.  
Stopped abruptly in its tracks  
1- Forecasts  
The coronavirus pandemic will halt Brazil’s three-year long  
economic recovery in its tracks. The economy  which experienced  
a slight slowdown towards the end of 2019  is expected to fall back  
into recession in 2020, a highly regrettable situation in light of the  
economy’s encouraging signs in recent quarters.  
2019 2020e 2021e  
Real GDP growth (%)  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
Current account balance / GDP (%)  
The spread of the virus within the country’s borders since March  
e: BNP Paribas Group Economic Research estimates and forecasts  
together with the deployment of confinement measures is expected  
to lead to a contraction in economic activity in Q2 (simultaneous  
internal supply and demand shocks). The effects of the virus on the  
economy have already started to be felt towards the end of Q1. The  
PMI in the service sector fell by 16 points (34.5 vs 50.4 in February)  
- PMIs dropped in March  
PMI Manufacturing  
PMI Services  
its largest drop since the inception of the time series. Meanwhile,  
the PMI in manufacturing fell below 50 for the first time in eight  
months (48.2 vs 52.3 in February) with subcomponents indicating  
lower levels of production, employment, and new orders as well as  
accelerating drops in foreign sales. Disruptions in global supply  
chains throughout Q1 have also resulted in longer delivery times  
and work backlogs comparable in magnitude to those which  
occurred during the truckers’ strike (May 2018). Layoffs in the  
sectors have also reached a three-year peak. The automotive sector  
has also shown signs of weakening: alongside car sales which have  
dropped by 33% (m/m, sa) in March, car registrations have also  
retracted (-21% m/m).  
Source: IHS Markit  
Increasing pessimism on behalf of economic agents is palpable in  
survey data. The FGV confidence indicator in industry fell by almost  
This scenario would allow the economy to benefit from a strong  
growth carry-over in 2021. Nonetheless, the forecast remains highly  
precarious reflecting the lack of precedents in assessing sudden  
stops and the significant uncertainties at this stage regarding i/ the  
capacity of the health infrastructure to cope with the epidemic, ii/ the  
actual effectiveness of confinement measures  given the high level  
of heterogeneity in the health response across states so far  as  
well as iii/ the magnitude of the impact of the crisis on the informal  
economy (54 mn workers, 41% of employment). Once the epidemic  
is under control, firms weakened by the crisis could also notably  
reduce their investment spending possibly weighing down the  
points in March (97.5) after increasing for four straight months  
while the FGV confidence indicator in services collapsed by  
2 points (82.8). According to a Datafolha survey published on  
March 24, 79% of respondents believe that the Brazilian economy  
will be "strongly affected by the crisis", 57% that their income will  
decrease in the coming months while half believe the pandemic will  
hurt the economy "for a long time."  
The recession is forecasted to reach -4% on an average annual  
basis. This forecast assumes a gradual recovery of economic  
activity in Q3 and a strong bounce back in Q4 without however  
returning to pre- crisis levels (asymmetric U type scenario).  
External accounts : a cascade of shocks  
The external demand shock brought about by the Covid-19 crisis  
alongside the unprecedented oversupply in the oil market is  
expected to keep commodity prices depressed and slowdown sales  
abroad. Brazil  a net oil exporter  whose exports of commodities  
The state of Sao Paulo, which represents approximately 40% of GDP, has  
implemented confinement measures since March 24th until April 22 . Recent  
studies (e.g. OECD) show that some economies across the globe could lose the  
equivalent of 2 to 3 percentage points of GDP on average per month of strict  
EcoEmerging// 2nd quarter 2020  
account for around 50% of foreign sales  will suffer from a  
deterioration in its terms of trade with the fall in oil prices (-61%), the  
price of sugar (-21%), corn (-14%) and cotton (-27%). The  
depreciation of the BRL  which dynamics closely mirror that of the  
commodity cycle and has, in recent months, suffered from  
appreciation in the USD  has meanwhile mechanically increased  
the cost of imports further eroding the purchasing power of exports.  
That said, the reduction in the trade surplus is expected to be limited  
by the concurrent decline in import volumes due to the recession  
and a weakened BRL. The trade balance could also benefit from  
certain commodity prices holding up their ground as seen in Q1  
3- Dislocations across domestic financial markets  
Stock Market Index - B3 Ibovespa (points)  
Yield on 10 year goverment bonds (%, RHS)  
e.g soybeans, coffee, beef, wheat, and iron ore). In 2020, the  
current account deficit should fall (-2.5% of GDP) with the decrease  
in the services balance deficit (-1.9% of GDP in 2019) and that of  
the primary income balance (-3.1% of GDP in 2019) which should  
benefit from the slowdown in transferred profits and dividends.  
01/01/20 16/01/20 31/01/20 15/02/20 01/03/20 16/03/20 31/03/20  
Source: B3, Macrobond  
reserve requirement ratio on term deposits from 30% to 17%,  
iii/ relaxed capital and provisioning requirements iv/ bought back in  
The pandemic has led to a strong surge in risk aversion triggering  
i/ significant capital outflows (non-residents have cumulatively pulled  
around USD 14bn from the stock market since January according to  
data from the IIF) as well as generating ii/ significant shocks to asset  
prices. From January to the end of March, the depreciation of the  
BRL reached -23% against the USD (reaching an all-time low of  
partnership with Treasury sovereign debt securities in the  
secondary market v/ allowed riskier securities (corporate debt) to  
qualify as collateral in transactions with banks vi/ extended  
guarantees for certain types of deposits. The liquidity injection is  
estimated at BRL 1200 bn (16.7% of GDP) and the reduction in  
capital requirements at BRL 1150 bn (16.1% of GDP). At the same  
time, the BCB will continue to provide liquidity to the FX market via  
its swap cambial, repo programs and its spot interventions  
.25), the stock market suffered heavy losses (-45% at its lowest)  
and financial conditions in the secondary corporate and sovereign  
debt markets tightened sharply (the sale of government securities to  
generate liquidity pushed 10-year yields up by +310 bps at their  
highest point over the period). Despite the tightening of financial  
conditions and the drop in the BRL, rollover risks in foreign currency  
in the short term remain limited : i/ redemptions of USD  
denominated debt (bond debt + syndicated bank loans) is moderate  
in 2020 (~ USD 40 bn), ii/ open FX positions of corporates are  
limited, iii/ corporates with foreign currency debt are predominantly  
exporters and hold liquid assets offshore, iv/ FX reserves are  
abundant (~ 345 bn at the end of March), and v/ the BCB reinstated  
in March a USD 60 bn precautionary swap line with the Fed.  
USD 9.7 bn in March).  
On the fiscal front, numerous announcements were made in the  
form of tax / financial relief, direct support and guarantees.  
Communication over the support provided has at times lacked  
clarity. By some estimates, measures amount so far to BRL 490 bn  
6.8% of GDP) and have been deployed to: i/ protect employment  
and the most vulnerable populations (BRL 268 bn): ii/ combat the  
pandemic (BRL 11.5 bn) iii/ alleviate the financial pressures of  
states and municipalities (BRL 85.5 bn) iv/ strengthen the working  
capital / cash flow positions of companies (BRL 123 bn).  
The authorities’ response to the crisis  
By voting a “state of public calamity”, Congress authorized the  
government to suspend its deficit targets and fiscal rules for 2020.  
The primary deficit (excluding interest payments) should thus largely  
exceed the BRL 124 bn (-1.6% of GDP) originally forecasted in the  
2020 budget settling instead around BRL 515 bn (-7.3% of GDP,  
accounting for the contraction in GDP), which would bring the  
headline budget deficit to 12.5% of GDP. Current measures do not  
even take into account a possible post confinement stimulus  
package. Needless to say that concerns over the sustainability of  
Brazil’s public debt – which could flirt in the neighborhood of 90% of  
GDP cannot yet be put to rest.  
A number of steps were taken by political authorities to curb the  
spread of the virus. Borders were shut down and several states  
have declared a state of emergency and have put in place  
measures to reduce the mobility of people. However, containment  
measures have only been partial for the most part. They have also  
been a source of political tension between the various levels of  
government. Most state governors have pushed for tougher  
measures and have also asked Congress to take the lead in the  
fight against the pandemic given the failure of President Bolsonaro  
to recognize the gravity of the health situation.  
Monetary authorities through a combination of monetary easing  
and prudential measures  have taken significant steps to help  
contain systemic credit risks associated with the macroeconomic  
shock. Measures were deployed to alleviate tensions on BRL  
liquidity, facilitate the refinancing of banks and encourage them to  
renegotiate payment terms with households and businesses on  
roughly BRL 3200 bn of outstanding credit. Authorities have i/ cut  
Other estimates evaluate total support to around BRL 700 bn (9.8% of GDP).  
The minister of the economy, Paulo Guedes, estimates that support could reach  
north of BRL 800 bn.  
the policy rate (7 consecutive) by 50 bps to 3.75% ii/ relaxed the  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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