Emerging

A surprisingly resilient recovery

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
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BRAZIL  
A SURPRISINGLY RESILIENT RECOVERY  
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.  
COVID-19: A THIRD WAVE AVERTED SO FAR  
FORECASTS  
Brazil which passed the somber mark of 500,000 Covid-19 deaths in  
June, seems to have avoided a dreaded third wave of infections so far.  
The country – which experienced its pandemic peak in late March/  
early April, with daily death tolls exceeding 3,000 – saw some signs  
of resurgence in key epidemiological indicators again in early June,  
following the easing of restrictions in May. However, fears of a new  
wave have largely subsided with the acceleration of the vaccination  
campaign throughout June. This trend should continue in the short-  
term thanks in particular to vaccine deliveries scheduled for the  
second half of the year (with 42 million doses already expected in July.)  
These deliveries should help smooth out the pace of vaccinations. As  
of early July, 13.6% of the Brazilian population was fully vaccinated and  
2019  
2020  
2021e  
2022e  
Real GDP growth (%)  
1.4  
3.7  
-5.8  
74  
-4.3  
3.2  
5.5  
6.5  
-7.2  
82  
3.0  
4.0  
-7.1  
81  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
-13.2  
89  
Gross public debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
-2.7  
35  
-0.9  
42  
0.7  
51  
-0.8  
47  
Forex reserves (USD bn)  
357  
17  
356  
21  
350  
19  
346  
18  
Forex reserves, in months of imports  
3
8% had received a first dose.  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
Theserelativelyimprovedindicatorshave, however, beenovershadowed  
in recent weeks by allegations of possible irregularities in vaccine  
procurement contracts. These revelations have emerged out of the  
Special Senate Covid Investigating Committee (CPI) – a commission  
of inquiry intended to shed light on the government’s actions in  
managing the health crisis. Since the Committee’s establishment, in  
April, the President’s approval ratings have tumbled, popular protests  
have been on the rise while there has been a steady rise in the number  
of impeachment fillings with the head of the Chamber of Deputies.  
Against this backdrop, former President Lula continues to rise in the  
STRONG IMPROVEMENT IN TERMS OF TRADE  
Terms of trade (2006=100, LHS)  
Exports (12m cum. sum, y/y %, RHS)  
Imports (12m cum. sum, y/y %, RHS)  
140  
30  
25  
135  
130  
125  
120  
2
0
5
1
1
polls .  
10  
5
A RESILIENT ECONOMY IN THE FACE OF THE SECOND WAVE  
115  
0
110  
105  
100  
Activity in Q1 surprised by its strength and led to significant upward  
revisions of growth forecasts in 2021. Despite a more virulent 2nd  
-
-
5
10  
2
epidemic wave , the absence of a fiscal stimulus and the contraction of  
-15  
output in March, real GDP grew by 1.2% quarter-on-quarter (q/q) and 1%  
year-on-year (y/y). Private consumption held up better than expected,  
but it was above all the strong growth in investment (+ 4.6% q/q) and  
the accumulation of inventories that prevented GDP from falling over  
the period. In particular, commodity producers (agribusiness, mining  
sector, pulp and paper, beef industry) took advantage of a favourable  
external backdrop (high demand and prices, competitiveness of the  
currency) to invest.  
Overall, economic activity fared well in Q2 despite a slow start to the  
quarter. The leading indicator of GDP produced by the Central Bank (IBC-  
BR) indeed posted a modest growth in April (+ 0.4%). However, in May,  
industrial activity recovered sharply after a notable drop in the pace of  
production between February and April, as a result of new restrictions  
in several States over the period. These signs of improvement were  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: CAMEX, FUNCEX, BNP PARIBAS  
confirmed at the end of the quarter in survey data with a more rapid  
expansion of production in the manufacturing sector (manufacturing  
PMI at 56.4 in June vs. 53.7 in May) and a marked rebound of activity in  
services with the PMI index returning to expansion territory for the first  
time since the start of the year (services PMI at 53.9 in June against  
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8.3 in May, i.e. the strongest monthly progression in almost 8 years).  
The acceleration of inflation has so far not dampened household  
consumption despite a slight decline in real wages and a still relatively  
high level of unemployment (14.7% in April). Retail sales posted a gain  
for the third consecutive months in May, thanks to excessive savings  
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In June, Lula’s case for a possible running has been boosted after his acquittal by a federal judge in one of the corruption cases opened against him, for lack of evidence.  
The epidemic claimed more lives in the first 4 months of 2021 than in the previous 9 months of 2020.  
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built up in H2 2020, emergency aid distributed since April and solid  
household credit growth (+ 7.8% y/y in May).  
RATES: INFLATION, POLICY RATE, YIELDS ON GOVERNMENT BONDS  
Short-term growth prospects should benefit from a still buoyant  
external environment and renewed optimism on behalf of businesses  
and households, as restrictions ease and vaccinations progress.  
Downside risks remain nonetheless: 1/ emergence of viral strains more  
resistant to vaccines 2/ drought perseverance 3/ a deterioration in the  
political climate 4/ a sharper acceleration of inflation. Some supportive  
measures have already been considered by the authorities to offset  
the effects of a lingering epidemic and rising prices. The government  
announced the extension for at least 3 months of the emergency  
aid package distributed to vulnerable households (from April to July  
initially). The authorities are also expected to increase the value of  
allowances under the Bolsa Familia program by some 60% by year-end.  
Credit lines of up to USD 50.7 bn will also be made available to farmers  
to stimulate agricultural output in 2021/22.  
SELIC policy rate (%, lhs)  
Govies 10 y. yield (%, lhs)  
IPCA - CPI (y/y, % - lhs)  
Govies 10y-2y yields (pp, rhs) 4  
18  
16  
3
2
1
0
1
1
1
4
2
0
8
6
4
2
0
-1  
-2  
2
015  
2016  
2017  
2018  
2019  
2020  
2021  
GROWING CONCERNS OVER INFLATIONARY PRESSURES  
CHART 2  
SOURCE: MACROBOND, BNP PARIBAS  
The stronger-than-expected recovery, the weakness of the real, the  
rise in commodity prices as well as climate-related factors are fueling  
persistent price pressures. In June, the IPCA consumer price index  
reached its highest level in nearly 5 years (+ 8.4% y/y), marking the  
while the spread between the 10-year and 2-year interest rates on go-  
vernment bonds fell by nearly 100 bps. The relative decrease in fiscal  
risks combined with the rise in the interest rate differential (SELIC-Fed  
Funds) and a weaker dollar also allowed the currency to regain some  
strength after its tumble in Q1 (~ 9%). The real, whose dynamics are  
increasingly decoupled from the commodity cycle and the country’s  
terms of trade, reached its strongest level in a year at the end of June,  
falling below the 5 USD / BRL mark.  
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6th consecutive month of accelerating inflation. Since February 2020,  
the food component of the IPCA has increased by around 20% while  
the price of gasoline and cooking gas has increased by around 25%.  
Electricity bills have meanwhile jumped some 10% as a result of the  
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drought which has affected the country for several months now .  
Even if, for the moment, the transmission to core inflation remains li-  
mited (e.g. inflation in services is less than 2%), the departure of nearly  
STRONGER EXTERNAL ACCOUNTS  
points of headline inflation compared to the target (3.75% +/- 1.5) A supportive external environment is helping to close the Brazilian  
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suggests a faster than expected tightening of monetary policy in the current account imbalance. On a 12-month rolling basis, the current  
second half of the year. The Central Bank (BCB) has already made three account deficit reached in May its lowest level in more than 13 years  
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5 basis point (bps) hikes in the SELIC rate since the start of the year (USD 8.4 bn, 0.6% of GDP). This trend is expected to continue in the  
and is projecting another 75 bps hike at its next meeting in August. A short term, as the country benefits from large trade surpluses, which  
deterioration in inflation expectations could, however, prompt the au- since the start of the year, have been marked by a sharp acceleration  
thorities to tighten further at the end of the summer.  
of commodity exports, in particular iron ore and oil, but also meat.  
Unsurprisingly the price effect in exports data (+ 44% y/y in June)  
dominates the volume effect (+ 11% y/y in June). On the financial  
account, foreign direct investment (FDI) flows, which had fallen by  
EASING OF SOVEREIGN RISK PREMIUMS  
The fiscal balance and debt dynamics have improved despite the around 50% in 2020 to stand at USD 34.2 bn (a 25-year low), have  
rate hikes in recent months as a result of 1/ stronger activity 2/ been relatively subdued over the first half of the year in part because  
more dynamics revenues (due to the rise in inflation but thanks to repayments of inter-company loans have been higher than new  
significant gains on FX swaps recorded by the BCB), but also 3/ more disbursements. FDI should total around USD 50 bn in 2021 but are  
limited expenditure (the late approval of the 2021 budget constrained not expected to durably return to pre-crisis levels (USD 72 bn over  
spending). In May, the overall 12-month deficit stood at 9.1% of the period 2015-2019) until at least 2023. On the other hand, portfolio  
GDP (5.4% of GDP primary deficit + 3.7% of GDP interest charge), an investments have remained robust. Net flows from non-residents have  
improvement of 1.5 percentage points (pp) over a month, while gross been positive since August 2020 (with the exception of March) reaching  
debt meanwhile fell by 1.1pp to 84.5% of GDP, thanks in large part to USD 42 bn in May over 12 months – the highest level since 2015.  
higher nominal GDP growth.  
Positive portfolio flows should be supported in the coming quarters  
by the rise in interest rates and the more broad-based recovery in  
economic activity. It is also worth noting that corporates – who a little  
over a year and half ago had bought dollars to deleverage abroad – are  
once again looking for external funding.  
The relative easing of tensions on fiscal accounts, coupled with pro-  
gress over privatisations (eg. Electrobras, Cedae) as well as the pre-  
sentation of the 2nd phase of the tax reform have favoured a reduction  
in sovereign risk premiums. Between March and early July, the 5-year  
CDS and EMBI + spreads fell by around 60 bps and 45 bps, respectively,  
Completed on 9 July 2021  
Salim HAMMAD  
salim.hammad@bnpparibas.com  
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Electricity in Brazil is produced mainly using hydroelectric plants. If water reservoirs reach low levels due to a lack of rain, as has been the case for the past few months, other, more  
expensive sources of energy must then be activated.  
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