Emerging

In the spotlight

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EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
Brazil  
In the spotlight  
The world’s projectors have descended on Brazil following raging fires in the Amazon forest. President Jair Bolsonaro has come  
under pressure for his lack of engagement and commitment to protecting the environment. The pace of economic growth is still  
struggling to accelerate. Confidence indicators are ambivalent while investment remains weak. In the wake of a much less buoyant  
external environment and low inflation risk, the Central Bank has lowered its policy rate by a cumulative 100 basis points since  
August. The pension reform was approved in the Senate (first round) but was subject to revisions. Throughout the fall, a number of  
major reforms should be deployed and privatizations and concessions should accelerate.  
Downplaying environmental concerns  
1- Forecasts  
In recent months, President Jair Bolsonaro has attracted attention  
for his management of the Amazon rainforest fires, his noted  
absence from the United Nations Climate Action Summit as well as  
his lively exchanges with French President Emmanuel Macron. In  
keeping with environmental concerns, Germany and Norway have  
meanwhile suspended their donations (USD 30 million each) to the  
Amazon Fund, citing the Brazilian government’s lack of engagement  
and goodwill in fighting deforestation.  
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017  
2018 2019e 2020e  
Real GDP growth (%)  
1.1  
1.1  
0.5  
2.0  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
3.0  
3.7  
3.1  
3.5  
-7.8  
-7.1  
-6.7  
-6.8  
Gross public debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
74  
77  
82  
82  
-0.5  
-0.8  
-1.1  
-1.7  
27  
33  
35  
38  
Forex reserves (USD bn)  
373  
374  
365  
360  
These diplomatic spats as well as financial sanctions have cast new  
doubts regarding the future endorsement and ratification of the  
already contested free trade agreement between the European  
Union and Mercosur. If ratified, countries party to the agreement will  
have to comply with international standards and treaties regarding  
environmental protection (including compliance with the Paris  
Agreement). The Amazon crisis and Brazil’s shortcomings in terms  
of environmental protection have also sparked a reaction from  
multinational companies, asset management firms, pension funds  
and insurance companies. To that effect, a group of 230 institutional  
investors totalling USD 1620 bn in assets under management  
published a joint statement demanding that companies ensure that  
their supply chains exclude any activity that contribute to  
deforestation in the Amazon. In response to these pressures, Brazil  
has launched a campaign to improve its image abroad. First,  
through social media but also by mobilizing several ministers, sent  
on assignments  primarily to the United States and Europe  to  
convince businesses and foreign investors that in order to protect  
the rainforest, fight against the activities that threaten it (illegal  
farming, grazing, logging etc.), and reduce poverty, it is necessary  
to leverage the region’s natural resources and foster its economic  
development.  
Forex reserves, in months of imports  
Exchange rate USDBRL (year end)  
20  
18  
18  
18  
3.3  
3.9  
3.8  
3.4  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Rates dynamics  
▪▪▪ Nominal interest rate (SELIC, %)  
Real interest rate (%)  Inflation rate (IPCA,%, y/y)  
16  
%
BCB's  
projected  
targets  
1
4
2
1
Upper limit  
Inflation  
10  
8
target  
6
4
2
Lower limit  
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
Source: IBGE, BCB  
So far, the indicators available through Q3 point to relatively weak  
growth. The Central Bank’s IBC-BR leading indicator of economic  
activity fell 0.2% m/m in July, despite better performances in  
services (0.8% m/m, seasonally adjusted) and stronger retail sales  
A (still) fragile recovery  
The economy is still struggling to find solid growth drivers. On a  
positive note, fears of recession through the first semester were  
dispelled as GDP growth in Q2 proved to be stronger than expected  
(
1% m/m and 4.3% y/y). Industrial production could be losing steam  
(
0.4% q/q). The year-on-year print was even stronger at 0.9%,  
as year-on-year figures show a fall of -3.3% for July-August on  
average with a sharp decline in the production of intermediate  
goods. Growth prospects in the industrial sector remain fragile due  
to the global slowdown and the recession in Argentina. These  
concerns appear to be corroborated by confidence indicators (FGV  
and CNI indices) which all around showed no improvement in  
September. On another note, Petrobras announced in September a  
however it reflected in large part a significant base effect resulting  
from the impact on economic activity of the truckers’ strike in Q2  
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018. On the supply side, growth took advantage of a relative  
bounce back in activity in the industrial sector (notably in  
manufacturing and construction) which overall contributed 0.14  
percentage points (pp) to quarterly GDP growth following two  
quarters of negative contributions.  
3.5% increase in gasoline prices as well as a 4.2% increase in  
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EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
diesel prices. Besides weighing on household consumption, these  
changes could fuel social discontent. Truck drivers have not yet  
reacted to the increases for the moment.  
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- Central government : evolution of spending (% of GDP)  
▪▪▪ Mandatory spending (rhs)  Discretionary spending (lhs)  
6
17  
%
GDP  
In the short term, the economy is unlikely to find an engine of growth  
in public spending. The 2020 draft budget calls for public investment  
to contract by about BRL 7 bn compared to 2019. Total planned  
capital expenditure is estimated at BRL 19.4 bn (0.3% of GDP), the  
lowest figure in ten years. In contrast, private consumption and  
residential investment should benefit from a temporary measure  
16  
15  
14  
5
4
3
13  
1
allowing for the release of funds from FGTS accounts totalling  
12  
around BRL 42 bn over the next two years. Such funds will also be  
allowed to qualify as collateral for mortgages. This move along with  
other measures is expected to help jump start growth in mortgage  
loans which has remained stagnant since the end of the recession.  
11  
10  
%PIB  
2017 2019  
2
001  
2003  
2005  
2007  
2009  
2011  
2013  
2015  
External accounts : jostled but no major risks  
Source: National Treasury  
The current account deficit has widened but remains moderate at  
The current low interest rate environment is generating new market  
dynamics. Local investors accustomed to high bond yields are  
shifting asset allocations which are particularly beneficial to the  
equity market. Interest rate cuts in recent years coupled with the  
stripping of Brazil’s investment grade rating in 2015 also triggered a  
sharp drop in non-resident holdings of government bond in the local  
debt market (from 21% in 2015 to 12% in 2019). The fall in the  
SELIC has also reduced the attractiveness of carry trades strategies  
for some international investors. Conversely, lower domestic rates  
are encouraging some Brazilian companies to exchange foreign  
currency debt for BRL denominated debt.  
1
2
.8% of GDP in August (over 12 months) compared to -0.8% at end  
018. The persistent weakness of sugar and coffee prices (of which  
st  
nd  
Brazil is respectively the 1 and 2 global exporter) have adversely  
weighed on exports in value. While exports to Argentina continue to  
suffer from the country’s economic adjustment, current account  
receipts have on the flipside benefitted from an upsurge in beef  
exports to China (up 15% yoy over the January-August period due  
in large part to the swine fever epidemic affecting the Asian giant).  
So far, the current account deficit remains largely covered by net  
foreign direct investment (2.8% of GDP over 12 months) and, in  
general, capital flows largely cover the country’s external financing  
needs. Foreign exchange reserves have continued to increase over  
the first 8 months of the year (USD 386 billion at the end of August  
against 374 billion at the end of 2018) but fell in September to  
USD 376 billion following the Central Bank's intervention in the spot  
market following a recent policy change.  
Some progress on the reform agenda  
The Senate has approved the pension reform bill through a first  
round of voting (a second vote is expected by the end of the month).  
The fiscal savings achieved through the reform should ultimately  
amount to about BRL 800 bn over 10 years versus BRL 910 bn  
following the vote at the Chamber of Deputies in August. Over the  
course of the fall, the government is expected to present its fiscal  
reform as well as roll out its privatizations and concessions  
programme. A third of the 130 state-owned enterprises (SOEs)  
could be affected. According to a Supreme Court decision in June,  
subsidiaries (half of the SOEs)will not require Congressional  
approval to be sold. New measures have also been adopted to help  
liberalize the economy and support entrepreneurship: i/ improved  
After gaining some ground against the dollar between May and July,  
the BRL plunged sharply in August (-9%) and has hovered north of  
BRL 4 to the dollar ever since. Despite a large surplus basic  
balance, the BRL’s weakness is a good reminder of Brazil’s  
sensitivity to net outflows of portfolio investment (USD 5.1 billion in  
August over 12 months), even though the country is not the most  
vulnerable emerging economy in this respect. Monetary policy  
easing is currently accentuating this sensitivity.  
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access to credit for small and micro enterprises , ii/ new regulatory  
Low interest rates: the new normal?  
framework in the telecommunication sector, iii/ reduced tariffs on  
2300 products. In the next 4 years, the authorities hope to increase  
The Central Bank of Brazil (BCB) has lowered its key policy rate  
SELIC) by 50 basis points (bps) twice since August, bringing the  
trade openness to 30% of GDP from 22% currently.  
(
rate down to 5.5%, after holding it at 6.5% since March 2018. For  
the moment, inflation remains contained below the BCB’s target for  
2019 (2.9% y/y in September vs 4.25%). According to BCB’s  
monthly survey, the market consensus anticipates a SELIC rate of  
4.75% by year end before rising back to 5% by the end of 2020.  
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Fondo de Garantia do Tempo de Serviço is a workers severance fund account  
funded by employer contributions equivalent to about 8% of wages that protects  
against the risk of unemployment among other factors. The funds are deposited in an  
account at Caixa Federal, a government-owned bank.  
A new law voted in April 2019 allows for the creation of Empresas simples de  
credito (ESC), a structure analogous to a microfinance company which provides  
small and micro enterprises access to credit at very low interest rates and require  
less red tape. Since April, 350 ESCs have already been created.  
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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