Emerging

A fragile outlook dominated by concerns over the epidemic and fiscal woes

st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
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BRAZIL  
A FRAGILE OUTLOOK DOMINATED BY CONCERNS OVER THE EPIDEMIC AND FISCAL WOES  
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. However, the resurgence of the  
Covid-19 epidemic coupled with delays in rolling out vaccinations as well as uncertainty regarding the fiscal  
consolidation process and the lack of progress on reforms are likely to be sources of stress in financial markets and  
potential destabilising forces for the recovery.  
RE-ACCELERATION OF THE EPIDEMIC, DELAYED VACCINATIONS  
FORECASTS  
The Covid-19 epidemic – after slowing down between late July and  
early November – accelerated again over the past two months or  
so. The number of daily confirmed cases reached a peak in mid-  
December at more than 70,000 cases and averaged over 49,000 cases  
before year-end festivities (from around 14,000 cases on average  
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019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
1.4  
3.7  
-5.9  
76  
-4.3  
3.2  
3.0  
5.1  
-7.3  
91  
3.0  
3.1  
-7.1  
92  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
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at the beginning of November) . Meanwhile, the average number of  
-15.0  
91  
daily deaths more than doubled over the same period (to over 700  
deaths). At the beginning of January, Brazil accounted for around 10%  
of confirmed cases and deaths worldwide (at around 8 million and  
more than 200,000 respectively) and remains the second most death-  
stricken country after the United States.  
Gross public debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
-2.8  
37  
-0.3  
43  
-1.0  
41  
-1.6  
39  
Forex reserves (USD bn)  
357  
17  
356  
21  
350  
19  
346  
18  
Forex reserves, in months of imports  
Exchange rate USDBRL (year end)  
This second wave was however not accompanied by new restrictive  
4.0  
5.2  
4.3  
4.2  
2
measures . There has also been no evidence of increased social  
e: ESTIMATE & FORECASTS  
distancing. In fact, prior to the holidays, Google Mobility data showed a  
tendency for Brazilians’ movements to normalize rather than to adjust  
to the renewed acceleration of the epidemic. Data from Datafolha  
surveys corroborated this trend showing that social isolation had  
reached new lows since the beginning of the pandemic.  
TABLE 1  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
REBOUND IN THE EPIDEMIC (7-DAY MOVING AVERAGE)  
New cases (lhs)  
New deaths (rhs)  
Constrained by logistical and regulatory obstacles, Brazil’s vaccination  
plan has so far lagged behind that of other countries in the region (e.g.  
Argentina, Chile, Costa Rica and Mexico.) The start of the vaccination  
campaign has been constrained by delays in approving the 4 vaccines  
currently under consideration by the regulator (Sinovac, AstraZeneca,  
Pfizer and Janssen). The authorities are planning to immunize just under  
a quarter of the population by June 2021 (i.e. 51 million people). But the  
issue of vaccination has become highly politicized with the President  
himself indicating that he will not get vaccinated. This decision could  
fuel a reluctance to receive the vaccine (which could affect as much as  
6
5
4
3
0000  
0000  
0000  
0000  
1200  
1000  
800  
600  
400  
200  
0
20000  
10000  
2
5% of the population according to some surveys).  
0
The spread of the epidemic, the greater transmissibility of certain  
variants of the virus, the lack of new measures to contain the mobility  
of people and delays in rolling out the national vaccination campaign  
are all factors which risk holding back the recovery.  
CHART 1  
SOURCE : JOHN HOPKINS CSSE COVID-19 DATA  
Through November, monthly indicators continued to improve in indus-  
try and retail - two sectors which by August had already returned to  
their pre-pandemic (February) level of activity. In November, industrial  
production posted its seventh consecutive month of increase, helped  
by improved activity in real estate (in Sao Paulo in particular) and  
the good performance of retail sales (supported by the government’s  
emergency aid programme). The reais’ depreciation (-23% in 2020) also  
allowed for a greater share of domestic demand for industrial goods to  
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020: THE ECONOMY REBOUNDS DURING THE SECOND SEMESTER…  
The recovery in economic activity in Q3 was vigorous but not sufficient  
to offset the losses registered in Q2. The easing of containment  
measures, income-compensation policies, and the restart of production  
in many sectors allowed real GDP to rebound by 7.7% in Q3 (following  
a 9.6% contraction in Q2). Production volumes remained nonetheless  
3
.9% below their Q3 2019 levels.  
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The big drop in cases registered over the holidays was solely due to a statistical artifact caused by a reduction in the number of tests carried out during this period.  
With a few exceptions (e.g. the States of Sao Paulo and Amazonas). However, restrictions were limited and had only marginal effects on mobility.  
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st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
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be satisfied by internal production. Activity in services has also conti-  
nued to improve in October but was still 6% lower than in February.  
STRONG REBOUND IN CORPORATE CREDIT (NOMINAL GROWTH %, Y/Y)  
The balance of payments faced drastic adjustments – however, without  
leading to a weakening of the country’s external vulnerability. The  
trade surplus strengthened in 2020 (+7% y/y), helped by (i) a nearly  
2
5%  
20%  
5%  
10%  
Corporate credit  
Household Credit  
1
0% slowdown in imports and (ii) the strength of Asian demand,  
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which – by absorbing half of sales – helped to contain the decline of  
exports (-6% y/y). On the financial account, portfolio investment flows  
by non-residents resumed along with the economic recovery but were  
insufficient to compensate for the losses incurred over the first half  
of the year (USD 12 bn in net outflows from January to November).  
Foreign direct investment (FDI) also slowed down sharply (-49.6% y/y  
over period from January to November). However, net FDI flows have  
continued to comfortably cover the current account deficit, which –  
over the year – narrowed by around 2 percentage points of GDP. In  
addition, the country still has a very satisfactory external liquidity  
position relative to its imports and external liabilities.  
5
%
0%  
5%  
-
-10%  
-
15%  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
SOURCE: BCB  
CHART 2  
BUT SHOWS SOME WEAKENING SIGNS TOWARDS YEAR-END  
Finally, the new privatization and concession program, unveiled by the  
government (115 state assets targeted in 2021, including 22 airports  
and the 5G network), could support capital expenditure – provided of  
course that investors’ appetite resumes rapidly.  
The economy has nevertheless shown some signs of slowing down that  
have been concomitant with the resurgence of the epidemic and the  
acceleration of inflation (+4.3% y/y in November, the largest increase in  
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8 months.) The loss of momentum is most visible in PMI data, which  
Discussions over the design of the country’s fiscal rules and whether or  
not they will be upheld are likely to dominate headlines in 2021. Des-  
pite a better than expected central government result in the last few  
months of the year (emergency aid payments being cut by half, reduc-  
tion in the number of beneficiaries from 68 to 56 million, improvement  
in tax collection, resumption of activity, retention of certain discretio-  
nary expenditures) the budget deficit has soared to unprecedented le-  
vels and so has the level of debt. Further, the debt’s average maturity  
has shortened and concerns over its sustainability have increased.  
showed either slower (manufacturing) or almost stable (services) rates  
of expansion towards year-end. There has also been a drop in vehicles  
sales in December (a first since April). Meanwhile some confidence  
indicators (households, construction and services) have yet to rebound  
since declining in October.  
Despite year-end dynamics on both the economic and epidemic fronts,  
the equity market rebounded quite strongly in 2020. After hitting record  
highs in January, the equity market then 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). Cyclical and structural factors  
help explain this bounce-back: liquidity injections at the global level,  
the development of vaccines, the increase in the number of local retail  
investors (which has more than quadrupled since December 2018, faci-  
litated by the development of online brokers), and the large drop in the  
SELIC policy rate, which has encouraged the reallocation of portfolio  
investments into equities. A rather moderate economic growth outlook  
could spur some corrective adjustments in 2021.  
In 2021, maintaining fiscal policy credibility will be a key determinant  
for the performance of the reais, the evolution of capital flows and  
the yield curve. This may have important implications for the Treasury  
who will have substantial debt payments to rollover (around 25%  
of the debt stock falls due over the next 12 months). For the time  
being, the budget (presented at the end of the summer) has still not  
been approved and is unlikely to be so until February, after the end of  
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the parliamentary recess . Some governors in the country’s northern  
states have called for an extension to the state of emergency (which  
suspends fiscal control mechanisms) for at least the first half of 2021.  
The local press reports that some members of the government would  
be favourable to such a development, particularly if the second wave  
of the epidemic does not abate.  
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021: AN OUTLOOK CONTINGENT ON FISCAL DEVELOPMENTS  
Economic growth in 2021 will benefit from a large carry-over effect (at  
least 2.5 percentage points). Production levels last seen towards the  
end of 2019 are not expected to materialize until mid-2022. Growth,  
but also inequality and poverty, are likely to be affected by the end  
of emergency aid payments, high unemployment (14.3% in October)  
and the absence of a fiscal stimulus plan. Growth will also suffer from  
the end of tax breaks and could be further penalized by a slower-  
than-expected execution of the immunization program. On the other  
hand, the economy should benefit from the recovery of commodity  
prices and the maintenance of monetary measures (key rate at an  
all-time low, reduction in liquidity and capital requirements for banks,  
etc.). Meanwhile, the renewal of the government’s public guarantee  
program, intended to support small and micro-enterprises, should  
help support firms’ cash flow. These measures have already fuelled the  
strong rebound in corporate credit (+18.2% y/y in real terms).  
In 2021, the Bolsonaro presidency will lose an ideological ally in the  
White House. The Biden administration – in its effort to strengthen the  
US’ involvement in international fora especially on the environment  
could challenge the Brazilian government over issues related to  
deforestation in the Amazon. In February, the elections to pick new  
Presidents for the Senate and the Chamber of Deputies will also have  
a key impact on reform progress (at this stage, no significant reform  
bills are close to being approved). On a positive note, the municipal  
elections in November showed stronger voter support for parties at the  
centre to the detriment of the extremes.  
Completed on 11 January 2021  
Salim HAMMAD  
salim. hammad@bnpparibas.com  
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Congress nevertheless passed a Budget Orientation Act, which allows public spending to continue in the early months of 2021, pending final approval of the budget.  
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