Wed. Oct 20th, 2021

Brazilian economy updated

Brazil’s economic recovery after the pandemic threatens to slow sharply next year, as economists sound the alarm about rising inflation and interest rates as well as the effects of an unprecedented drought.

Driven by policies that kept businesses largely open during the Covid-19 crisis, Latin America’s largest economy returned to pre-pandemic levels in the first quarter of 2021 and the year looks set to grow by more than 5 percent annually end.

Data from the second quarter – to be released on Wednesday morning – are expected to show that the economy grew by 0.1% from the previous quarter and 12.7% from the same period last year.

However, the outlook for next year is getting bleaker, and analysts are now starting to change annual growth estimates to between 1 and 2 percent. In addition to concerns about rising prices and interest rates, many fear political instability in the run-up to next year’s presidential election. There are also concerns that the government could jeopardize its fiscal position by distributing cash in the form of new social welfare programs.

“In the future, the economy will be hampered by triple pressure. The first is inflation. This will definitely undermine the purchasing power of consumers. The second is due to inflation – the central bank is now in a hurry to go [interest rate increases]. To combat inflation, we will have to harm the economy, ”says Marcelo Fonseca, chief economist of asset manager Opportunity Total.

“The third is the uncertainty. The fiscal regime is in jeopardy and I do not think the outlook will change during the election period. There will be a lot of turmoil, so a delay in investments that caused the recovery is inevitable. ”

A chart of rising inflation threatens Brazil's recovery from pandemic

Inflation has historically plagued many Latin American nations and the sudden return this year Brazil has upset policymakers, who now want to quickly control prices.

In the 12 months to July, inflation was 8.99 percent, well above the 2021 target of 3.75 percent. In response, the central bank increased its benchmark Celtic interest rate of all times lowest of 2 percent to 5.25 percent. Market expectations are that it will reach 7.5 percent by the end of the year. This will further weigh the economic activity.

To further complicate the picture, unemployment is high at more than 14 per cent, meaning consumption remains stagnant.

“Inflation is already lost for this year – the attempt now is to control it for next year,” said André Braz, an economist at the Brazilian Institute of Economics.

“Brazil is a very unequal country and inflation for poorer people is higher than for rich people, because poorer people spend more of their income to buy food – and the price of food has risen more than other categories,” he added.

“I look like I’m being tested,” Brazilian President Jair Bolsonaro said last week, referring to an unprecedented drought in the country that threatens power outages © AFP via Getty Images

In addition to food, the price of electricity has also skyrocketed, as the effects of the worst drought in almost 100 years take their toll.

Brazil relies on hydroelectricity for 65 percent of its energy generation, but with reservoirs in the central and mid-west of the country now almost dry, the government has become increasingly concerned about power outages, which could hamper the real economy. .

‘We’ve never experienced a drought like this before – it’s like I’m being tested. I appeal to you at home: turn off a light. In this way, you are helping to save energy and water from the hydroelectric dams, ”President Jair Bolsonaro said last week.

Fonseca at Opportunity Total added: ‘Whether it’s rationing of preventative power or simply interruptions, the point is that it is a major risk to growth in the coming quarters.’

Economists are also on the verge of a presidential election campaign next year, which threatens to cause great political instability. Drag in the polls, Bolsonaro has slammed Brazil’s democratic institutions in recent weeks, sparking a ghost of a coup and intimidating international investors in the emerging market.

Line graph of 10-year yields (%) showing that Brazil's debt was under pressure in 2021

‘Concerns about political stability have become much more worrying. So far we have it as part of the [show]. But these are not children’s games. Maybe it means damage, ”said Paulo Bilyk, CEO of Rio Bravo Investimentos.

Analysts also fear that the government may abandon its commitment to fiscal correction before the polls to win votes with cash distributions.

With 84 percent of gross domestic product, Brazil’s government debt remains high for a developing economy.

Investors have so far remained honest about the risks, mostly thanks to a mandate for spending that keeps government spending in line with inflation. However, if the limit is lifted, many people predict an exodus from Brazilian assets and a deep economic turmoil.

‘The economic team is clearly struggling to find a solution to satisfy fiscal constraints and the demands of politicians. As we get closer to the election, there is a risk that politics will prevail, ”said Viktor Szabo, investment director at Aberdeen Standard Investments.

‘Brazil can easily get back on an unsustainable debt path. It has a fairly high debt level with a fairly short maturity date – you do not want to mess with such a situation. The debt can easily explode. ”

Source link

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *