Emerging

Trying to build momentum

st  
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EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Brazil  
Trying to build momentum  
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.  
Shifting gears?… not just yet but promising  
1
- Forecasts  
Brazil’s internal engines of growth are strengthening. In the third  
quarter of 2019, real GDP grew by a robust 2.5% (q/q) in seasonally  
adjusted annualized terms (saar) and by 1.2% year-on-year (y/y),  
even though net exports continued to act as a strong drag on growth.  
2
018 2019e 2020e 2021e  
Real GDP growth (%)  
1.3  
1.0  
2.0  
3.0  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
3.4  
3.7  
3.4  
3.7  
-7.1  
-6.0  
-5.4  
-5.7  
The growth figure  which surprised most observers to the upside –  
benefited from (i) a sharp rebound in production in the mining sector  
Gross public debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
77  
77  
80  
81  
-2.2  
-3.2  
-3.5  
-3.4  
(
+57.4% q/q saar) and (ii) a salutary upturn in activity in the  
36  
38  
42  
45  
construction sector. Heavily affected by the crisis, the construction  
sector posted two successive quarters of growth for the first time  
since 2013. On the demand side, growth was driven by consumer  
spending (0.5 p.p) and investment (0.4 p.p)  the latter confirming  
its healthy progression observed in Q2. Meanwhile, public spending  
fell (-1.7% q/q saar) in line with the government’s continuous fiscal  
adjustment. It is worth noting that a breakdown of economic activity  
by state and by region shows that growth tends to be more dynamic  
in areas where  on the supply side  public services make up a  
smaller share of local GDP. Regions where growth is less reliant on  
public sector spending are currently expanding at rates of 2.5% or  
more while their more dependent counterparts are growing by 0.5%.  
This observation supports the thesis that Brazil is undergoing a two-  
speed recovery which also raises questions about the evolution of  
regional inequalities over time if the gap does not close.  
Forex reserves (USD bn)  
374  
357  
340  
333  
Forex reserves, in months of imports  
Exchange rate USDBRL (year end)  
18  
17  
17  
16  
3.9  
4.0  
4.0  
3.8  
e: BNP Paribas Group Economic Research estimates and forecasts  
Note: The national statistical office, IBGE, has revised growth figures for 2017 and  
2018 from 1.1% to 1.3% for both years.  
2
- Labour market  
Unemployment rate (90 day average)  
▪▪▪ Unemployment rate (90 day average, seasonally adjusted)  
%
14  
13  
12  
11  
10  
9
8
7
6
While the economy is showing more concrete signs of recovery, the  
latest available indicators do point to a slight deceleration of the  
economy in the last quarter of 2019. Indeed, if retail sales remained  
solid in November (+ 0.6% m/m, sa), posting yet another positive  
print since May 2019, services slowed down (-0.1% m/m) while  
industrial production fell again (-1.2% m/m) after three consecutive  
months of increase (driven in large part by mining giant Vale  
resuming production and Petrobras registering record petroleum  
output in Q3). It appears that industrial production may have  
suffered from a slowdown in the manufacturing sector (~11% of  
GDP). The manufacturing PMI  while still in expansion territory in  
December (50.2) has indeed fallen since September (53.4)  
despite improving confidence indicators in the sector. Finally, while  
the Central Bank’s IBC-Br index (a proxy for GDP) shows an  
expansion of economic activity in both October and November there  
is a noticeable slowdown in pace compared to the previous two  
months. Increased spending during the year-end holidays, the  
release of funds from FGTS accounts (cf EcoEmerging Q4 2019)  
and the relatively steady production in mining should nonetheless  
help contain the slowdown.  
2
012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Source: IBGE, GSP  
Monetary policy : the main lever of growth  
In 2020, monetary policy will remain the main lever to stimulate  
economic activity. The easing cycle initiated in the summer (the  
SELIC has been cut by 200 basis points since August 2019) should  
help offset the unfavourable effects on growth of continued fiscal  
austerity and a less buoyant external environment. The lagged  
effects of monetary policy are indeed expected to manifest  
themselves more strongly over the next few quarters, and allow for  
a more vigorous expansion of credit. For the time being, credit  
growth continues to be driven by households (58% of total lending  
and 10.8% growth y/y in November), but there has been an uptick in  
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EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
lending to businesses (2.5% y/y in November). Meanwhile, the  
gradual decline in unemployment (11.8% in seasonally adjusted  
terms in November, from 12.3% in January), the recent increase in  
formal employment and the rise in real wages (1.2% y/y in  
November) should help boost consumer spending, while the  
flattening of the yield curve through its effects on long term rates  
should help support investment.  
3
- Trade balance  
 Trade balance (rhs) ▪▪▪ Exports  Imports  
USD bn  
USD bn  
300  
250  
200  
150  
100  
70  
6
0
50  
40  
External accounts : under pressure  
30  
20  
10  
0
In 2019, the Central Bank of Brazil (BCB) made important  
methodological changes to the country’s balance of payments  
statistics. Following the revisions, a somewhat darker picture of  
Brazil’s external accounts has emerged. The current account deficit  
for 2018 rose from USD 15 bn (-0.8% of GDP) to USD 42 bn (-2.2%  
of GDP) due to a larger than expected deficit on the income balance  
-10  
2014  
2015  
2016  
2017  
2018  
2019  
(
(
USD 19.6 bn). In 2019, the current account deficit widened further  
-2.8% of GDP over 12 months in November) as a result of the  
Source: BCB  
sharp decline in the trade surplus which fell by 20%.  
More generally, net FX outflows reached a record USD 44.8 bn over  
the year, helping to explain some of the downward pressure on the  
BRL. The currency, which hit a historic low against the dollar at 4.27,  
missed out on some upside towards the end of the year: first, the  
weak interest from foreign companies in the auctions of oil rights in  
Q4 limited FDI flows compared to what was initially expected.  
Meanwhile, companies with exports earnings held offshore  
accelerated the amortization of their liabilities to non-residents  
rather than repatriating the hard currency. To contain the pressures  
on the currency and reduce its volatility, the BCB sold USD 36.9 bn  
on the FX spot market in 2019. The USA whose agricultural sector  
is in strong competition with Brazil – accused Brazil of “massive  
devaluation” and in response has since reinstated tariffs on imports  
of Brazilian steel (25%) and aluminium (10%).  
The trade balance suffered from a fall in the country’s leading export,  
soybeans (-21% y/y), due to a drop in Chinese demand following an  
epidemic of swine flu. China - which absorbs around 80% of  
Brazilian soybean exports and uses the plant primarily as a source  
of animal feed has in the intervening time stepped up its imports of  
Brazilian pork, beef and chicken. The resulting increase in meat  
exports combined with that of iron ores was however not sufficient  
to offset the decline in soybeans and petroleum exports as well as  
the sharp drop in vehicle sales (-27.5% y/y). In 2020, a less  
favorable external environment, marked by the deceleration of two  
of the country's main trading partners (China and the United States),  
should adversely weigh on Brazilian exports. In addition, the latter (i)  
should continue to suffer from the continued macroeconomic  
adjustment in Argentina (whose imports fell by USD 5.2 billion in  
2
019), and (ii) could end up benefitting only marginally from a weak  
1
BRL, according to a study by the IIF.  
 Jair Bolsonaro: year 1  
Turning to the financial account, the flow of foreign direct investment  
Jair Bolsonaro’s first year in office as Brazil’s President has been  
marked by a rapid deterioration of the head of state’s image.  
President Bolsonaro’s approval ratings have dropped to 30%, the  
lowest ever figure for a president during his first year in office.  
President Bolsonaro’s government can nonetheless claim some  
important improvements in terms of the state of public finances.  
When finalized, the consolidated public sector’s primary deficit for  
2019 will be cut, in all likelihood, by at least 0.4 points of GDP  
compared to 2018 (-1.6% of GDP). Also, after carrying out an  
ambitious pension reform, additional fiscal measures were  
presented to Congress in early November (the so-called Mais Brasil  
plan) destined to stem the growth of mandatory spending, reform  
the public service, decentralize revenues in favour of regions,  
simplify the tax system and strengthen fiscal responsibility at all  
levels of government. As a result, the rating agency S&P raised its  
outlook on its sovereign debt rating (BB-) from stable to positive,  
suggesting that an upgrade for Brazil may be in the cards in the  
near future the first time since 2011.  
(
FDI) was also revised downwards (on the basis of new survey  
data) from USD 88 bn to USD 78 bn. In 2019, FDI held steady  
USD 77 bn in the 12 months to November), but their composition  
(
changed: intercompany loans fell sharply (down USD 17 bn), whilst  
greenfield investments and other mergers and acquisitions  
increased (up USD16 billion). While net FDI continues to finance the  
current account deficit, the coverage ratio has shrunk (2.9% GDP in  
November vs 4% of GDP in 2018). Meanwhile, the net selling  
position of non-residents in portfolio investments has increased  
(
USD 10.9 bn over 12 months in November 2019 compared to  
USD 6.4 bn at the end of 2018) in large part due to narrowing  
interest rate differentials with developed markets. Therefore, while  
the B3-Ibovespa stock market index gained 31% in 2019, the  
participation of foreign investors in the equity market dropped from  
52% in 2018 to 44% in 2019. Non-resident holdings of sovereign  
debt in the local market also fell to a new low in November, at just  
11.1%.  
1
Weak currencies are failing to lift exports, November 2019, Institute of  
International Finance.  
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