August 5, 2021

Hard times for Brazil | Economy

Hard times for Brazil | Economy

Nothing that happens in the eighth most important economy in the world – ahead of Italy, Canada or Spain – is indifferent to the markets. And even less when it occurs amidst a generalized tension in emerging economies, exacerbated by the change in the monetary cycle in the United States. An unforeseen result in the elections this Sunday or that the markets consider harmful can lead to greater volatility for the Brazilian market, despite the relative calm of recent weeks.

"Of the two main contenders, it is fair to say that the far-right populist is going to be better received by the markets than his leftist rival," says William Jackson, chief economist of emerging markets at Capital Economics, from London. As Jackson's words reveal, investors seem to feel more comfortable with Jair Bolsonaro, whom they consider more favorable to the market, against the more statist profile of Fernando Haddad. Of course, markets are not always characterized by a good eye.

Hard times for Brazil

In the summer of 2002, when Luiz Inácio Lula da Silva was about to stage his first electoral victory, investor distrust of the PT candidate forced the intervention of the International Monetary Fund (IMF) with a 30,000-million-euro aid package. Dollars. The Fund considered that both the drop in the real and the rise in the Brazilian debt were due to an irrational overreaction of the markets, without there being a real risk of suspension of payments. Four years later, the Stock Exchange, the currency and foreign investment celebrated the re-election of Lula and the Brazilian president became a world leader. On this occasion, the country's risk premium has been re-triggered by political tensions and has not begun to be reduced until Lula was vetoed by the courts of the presidential race on August 31.

A deficit of 7% and a debt of 84% of GDP force to put the accounts in order

"Whatever the outcome of the elections, we foresee moderate growth in Brazil in the medium term," ratifies Alejandro

Hardziej, Julius Baer analyst, in a note to clients. The Brazilian economy is in what the IMF calls a "moderate recovery", after the severe recession that it suffered in 2015 and 2016. The organism forecasts a growth of 1.8% for this year and 2.5% for 2019, something less than expected at the beginning of the year.

In favor of the next government, the low current account deficit (0.5% of GDP), the scarce dollar denomination of debt (4% of the total) and a considerable cushion of foreign exchange reserves (367,000 million dollars in August) ). But with a deficit of more than 7% of GDP of public debt, which last year stood at 84% of GDP, according to the IMF, the need to put order in public accounts should be a priority. Martin Castilian, head of analysis for Latin America of the Institute of International Finance (IIF), warns that this scenario gives little margin to the new Government to make mistakes and without structural reforms of draft -such as the pension- the possibility that the country sum in a deep financial crisis is triggered. "If you can not put control over spending, that can quickly reduce investor confidence, accelerate the rise in interest rates to maintain attractiveness and damage growth," he explains.

So far this year the real has left 15% of its value against the dollar

Hence, as pointed Cliff Kupchan, risk analyst Eurasia Group, the key to this Sunday is more in what happens in Congress, than in the candidates and their programs. Today two thirds of the Senate seats are renewed (54 of 81) and 513 seats of the Lower House. The corruption scandals of recent years have affected the main political parties and have triggered the mistrust of the Brazilians in their political class: according to the competitiveness report of the World Economic Forum, they occupy the 137th position out of a total of 138. This situation explains the growing support for the most extreme candidates and, among all the candidates, no one as anti-system as the populist Bolsonaro. Everything indicates that after the vote today there will be a second round on the 28th and that the next president will be Bolsonaro or Haddad.


The polarization of the electoral campaign suggests a very extremist and highly fragmented Parliament (at present 35 parties have representation in the Chambers). This means that to form a government, a coalition of many parties must be achieved, which in most cases have little in common, resulting in a fragile executive. 90% of the public budget consists of compulsory expenses, that is, it is used to pay pensions, public salaries, healthcare, education and various subsidies. These types of expenditures are especially difficult to reduce and will require structural reforms, as Irina Topa-Serry of AXA points out in a recent report. "Many of the measures that are needed to improve public finances are very unpopular, but they must be supported by large majorities to get ahead," explains Jackson. "So even if the next president gives a boost to the reforms, they are not likely to go very far," he says.

So far this year, the real has been left at 15% against the dollar. It may be only the beginning if the worst fears of the analysts materialize. And it may happen before the new government takes office on January 1, 2019.


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