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Brazil's successful agrocultural exports will help offset declines in other sector, experts say. Here a ship with Brazilian soy.(Photo: Fabio Scremin/APPA )
Wednesday, May 27, 2020

Brazil: Economic Collapse?

Will the coronavirus pandemic and lockdown lead to an economic collapse in Brazil?

Inter-American Dialogue

Economy Minister Paulo Guedes has said Brazil could see an “economic collapse” by the end of the month due to coronavirus-related lockdowns in the country, warning of food shortages and “social disorder.” Meanwhile, the government on May 13 slashed its economic outlook for this year to a contraction of nearly 5 percent, down from a March forecast of zero growth. How deep a recession is Brazil facing, and how long might it take for the economy to recover? Which sectors will fare the worst in the period ahead, and what is the government doing to alleviate the impact? How likely is “economic collapse” to occur in the coming weeks, and what might that look like if it does?

Paulo Vieira da Cunha, partner at Verbank Consulting in New York: It is often said that this crisis is without precedent, and it is. Forecasting is more premonition than prediction—truer for Brazil, where the policy response has been haphazard, even irresponsible. The supply shock is already large, and it continues. Worse is what is likely to happen to demand. The uncertainty of policy and the lack of effective leadership amplify the loss in income, increase precautionary savings (for those who may save at all) and delay any investment response. This is why most analysts say the contraction in 2020 is likely to be closer to 10 percent than 5 percent. The recovery in the years ahead is likely to be slow, burdened by pre-existing weaknesses, the anemic upturn after the recession of 2015-2016 and the lack of structural reforms that will now be delayed or forgotten. The main uncertainty is politics. A crisis of governance precedes the Bolsonaro administration, but it is now virtually unmanageable. The bright spot, as it has been since the mid-2000s, is agribusiness, which remains resilient and, despite faulty logistics, is still capable of competing in a world of diminishing demand and falling commodity prices. The fast depreciation of the Brazilian real helps. With low inflation, low levels of dollar indebtedness and import dependence—now that investment is at a standstill—a weak currency is a boon. It is the automatic stabilizer to the wave of capital outflows. They will continue: Not only foreigners, but also domestic investors, are readjusting their portfolios. Expectations of a quick turnaround and/or large interest rate differentials to the rest of the world are no longer a safeguard for the bleak near-term outlook.

Joel Korn, president of WKI Brasil and senior international partner for the Americas at UPITE Consulting: The pandemic’s effects caught the country at an early stage of a long-awaited recovery, following six consecutive years of economic stagnation, which encompassed a recession in 2015-2016 and negligible annual growth of slightly more than 1 percent. While a contraction of 5 percent in 2020 is a reasonable assumption, the forecast will be subject to further adjustments depending upon how long the current state of paralysis lasts. Minister Guedes’ bleak outlook of ‘economic collapse’ should be interpreted within the context of a concern with a prolonged period of lockdown. However, while a gradual lifting of restrictions on movement may help economic activities and benefit millions of people whose subsistence depends on day to day work, I don’t expect a meaningful impact on demand and supply for the remainder of the year. Uncertainties with the unprecedented times that we are living, fueled by a double-digit and escalating unemployment rate, make individuals wary about their future, prompting stricter consumer spending and behavior changes. This will continue to affect a broad spectrum of economic sectors, particularly tourism and nonessential services, retail, financial services, durable consumer goods and manufacturing, especially in capital-intensive industries. On a positive note, Brazil will continue benefiting from its competitive agribusiness sector as a major contributor to exports. On the political front, President Bolsonaro’s strained relations with Congress and ongoing negotiations to realign alliances for needed legislative support, along with imminent municipal elections still scheduled for the second half of the year, is likely to further delay the passing of overdue tax and administrative reforms. This may well hinder the attraction of private sector investments, especially for infrastructure projects and privatizations. Against this background, I believe economic recovery won’t start until next year, at best. Meantime, the government should continue implementing the enhanced social assistance and financial aid programs, along with liquidity measures and access to credit for micro and small-size companies. In addition, fiscal responsibility, policies to address income distribution imbalances, structural reforms and a competitive regulatory framework are crucial ingredients to restore investor and consumer confidence toward an economic turnaround.

Marcos Casarin, head of Latin American macro services at Oxford Economics in London: The economic collapse Minister Guedes was referring to is already taking place to some extent. Although official data for economic activity in April and May will only be known in a few months, high-frequency indicators from payments methods already show the worst economic contraction on record during those months. Moreover, Brazil is also facing a health crisis, with the country likely to be the worst-affected emerging economy in terms of its Covid-19 death toll. Our latest forecast is for GDP to contract 4.8 percent in 2020, which is not much different from the government’s latest estimates. The economic cost will be felt across the board, but sectors such as aviation, tourism, hospitality, entertainment and some manufacturing subsectors will be hit the hardest. Brazil’s crisis response is among the largest in the emerging market world and includes cash handouts to households, credit lines to businesses and increased ICU supply. The big question mark at the moment is how society will pay for this extra 6 percent of GDP in public spending.

Pedro Rossi, professor at the economics institute of the State University of Campinas: The pandemic strikes Brazil during the greatest economic crisis in its history, with a weakened social structure, more than 10 million people unemployed and a weakened social protection network due to austerity policies. The country, however, has the instruments to mitigate the impacts of the crisis. It does not have a significant public external debt, it has foreign exchange reserves, and it has public banks and a consolidated social policy set of instruments. Paradoxically, the biggest obstacle to overcoming the crisis is the ideological belief in the free market and in austerity policies and the unjustifiable fear of public debt. The idea of deepening austerity policies in the immediate post-health crisis could lead Brazil to economic and social collapse.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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