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Coronavirus advances globally

April 1, 2020

Governments in several countries, including Brazil, have announced measures to stimulate the economy.

The Brazilian economy in March 2020

Global markets were starkly affected by growing concerns on the spread of the novel coronavirus and its negative impact on economic activity, among other factors. In Brazil, the effects of the epidemic are beginning to be reflected, with widespread declines in confidence indicators in March. In terms of inflation, the March’s mid-month reading for the consumer price index IPCA-15 corroborated our assessment of a benign path for the indicator. In our view, the current shock is disinflationary in the short term, with some factors standing out: in particular the recent steep drop in oil prices and the impact caused by restricted mobility (via lower price adjustments). On the political front, government and Congress are working on stimulus packages and on the fight against the impacts of Covid-19.

Governments react to the pandemic

The most recent developments from a global standpoint were the substantial acceleration of cases in the U.S. and signs of deceleration in Italy, one of the hardest-hit countries, suggesting that the latter has reached its peak in the last few days, something that may be repeated soon in the rest of Europe. In Brazil, the Ministry of Health had confirmed 240 deaths and 6,836 cases at the time of publication of this report (learn more in our COVID-19 weekly monitor).

Facing the consequences of the disease spread and social isolation, most countries have been announcing economic stimulus measures. Notably, the U.S. government and its Congress addressed packages equivalent to USD 2 trillion (10% of GDP) in incentives, with support measures for companies and airlines, in addition to cash transfers for its households and expansion of unemployment aid. Moreover, the U.S. Federal Reserve increased liquidity and expanded the scope and effectiveness of its asset purchase program, starting to buy corporate debt securities in addition to traditional government bond purchases. In the context of external liquidity, the Fed signed an agreement that guarantees liquidity in U.S. dollars for other central banks, including Brazil’s, through swap lines with a limit of USD 60 billion. In the same direction, G-7 leaders stated that they are acting and will continue to evaluate the necessary measures to ensure the liquidity of the financial system and mitigate the economic impacts of the pandemic.

Brazilian government also announces stimulus measures 

In response to the coronavirus impacts on the Brazilian economy, Congress approved the state of public calamity declaration, at the request of the federal government, allowing for an increase in public spending and non-compliance with this year’s fiscal target. In this context, the Ministry of Economy evaluates a package of about BRL 750 billion — with some measures already announced and to be addressed by the government, state-owned banks and the Central Bank — to face the economic impacts of the pandemic. The measures work on different fronts: providing support to the most vulnerable population; assistance for informal and self-employed workers; flexibilization of labor laws; financial support for companies, states and municipalities; liquidity expansion in the markets, and others. Among the fiscal measures already announced, we estimate an impact of BRL 172 billion on the economy in 2020, of which BRL 100 billion are associated with extraordinary expenses, BRL 22 billion in tax waivers, BRL 16 billion in transfers to states and municipalities. An additional package of measures (worth BRL 118 bn) without direct fiscal impact was also announced.

To support income and employment, Congress recently approved a bill granting, for three months, emergency aid of BRL 600 to informal workers (BRL 1,200 for mothers supporting homes on their own), with an estimated impact of BRL 67 billion. For formal employment, President Jair Bolsonaro issued a provisional measure that changes labor regulations during the period of public calamity. According to the government, the goal is to provide flexibility in order to protect employment. According to the Ministry of Economy, all workers who earn up to two monthly minimum wages and experience reductions in wages and working hours will get an advance of 25% of what they would receive monthly if they applied for unemployment aid. The government also anticipated, to May, payment of the second installment of the 13th monthly salary for retirees and pensioners in the INSS social security system.

To support companies, the government suspended for three months payments to the workers’ severance fund FGTS and payment of the federal government's share under the Simples Nacional tax regime for micro and small companies. Among state-owned financial institutions, development bank BNDES announced the suspension of loan payments for six months, in addition to an injection of BRL 55 billion in the economy to strengthen corporate cash positions. Caixa Econômica Federal announced lower interest rates and the possibility to suspend for 60 days installment payments for loans signed by individuals and legal entities, including housing loans. On this front, the Central Bank announced an emergency line of credit for companies with sales between BRL 360,000 and BRL 10 million. The program will be exclusive for payrolls (limited to two monthly minimum wages) and will last for two months, amounting to BRL 20 billion per month (BRL 40 billion in total).

The Central Bank also announced a comprehensive set of measures to offer liquidity to the system, which may amount to 16.7% of GDP (compared to 3.5% in 2008, although at that time, the BCB had more leeway on the Selic benchmark rate than it has now). These are some notable actions: additional release of BRL 68 billion in compulsory deposits; new Time Deposit with Special Guarantees (NDPGE) for bank borrowing; and loan backed by debentures. Moreover, a proposed constitutional amendment (PEC) was sent to Congress to allow the Central Bank to purchase securities directly, enhancing the monetary authority’s intervention tools, seeking to normalize liquidity in different segments of the financial and capital markets.

Central Bank lowers the Selic rate to 3.75% p.a.

In their March meeting, authorities ended up delivering the outcome that was largely priced in, a 50-bp cut in an unanimous decision that took the Selic benchmark rate to 3.75% p.a. In the meeting’s statement, the Monetary Policy Committee indicated, explicitly, that for now the authorities see base rate stability, at the new level, as adequate. Dealing with an especially uncertain scenario, the monetary authority stressed that additional rate cuts could be counterproductive if they lead to tighter financial conditions. 

The minutes of the latest meeting delivered an analysis of the effects of the pandemic on the economy. The authorities highlight three effects. One is supply-side, related to disruption of supply chains due to measures aimed at stopping the spread of the disease. The second refers to shifts in commodity and asset prices, which may have ambiguous effects (lower oil prices vs pressured BRL). The third and, in the committee’s view, the most important one, is a negative shock to demand. Said shock in itself, according to the authorities, would have warranted a more aggressive rate cut, above the 50bps seen in the March decision. However, the Copom also cautioned that the outlook for monetary policy depends on continuing economic reforms and noted that neutral interest rates may end up rising (if the response to the crisis leads to a deterioration of fiscal policy). 

We believe they will probably cut again once the market situation calms down, taking the Selic to 3.25% p.a., but not necessarily in the next policy meeting. In this sense, the March 2020 inflation report shows forecasts suggesting that the Selic rate may remain close to its all-time low for a considerable period, with an eventual increase only after 2021. Meanwhile, the forecast for GDP growth was revised to 0% in 2020, which is better than our forecast (-0.7%). Short-term estimates for inflation were presented for March, April and May. For this period, the Central Bank's figures are about 0.30 p.p. above ours. Considering the risks arising from the new coronavirus pandemic, it is clear that inflation may end up being lower than the BCB is currently forecasting.

Confidence indicators start to show the impacts of Covid-19 in Brazil 

Confidence indicators for March point to widespread declines across sectors, showing the first effects of the pandemic on domestic economic activity. The FGV Business Confidence Index fell 6.5 points in March to 89.5 points, the lowest since September 2017. According to the institution, expectations deteriorated substantially in all sectors, especially in retail and services, while perception of the current situation worsened just slightly in relative terms. Even segments that were evolving favorably this year, such as manufacturing and construction, were influenced by slowing economic activity.

Breaking down by sectors, retail confidence experienced one of the sharpest declines in the month, of 11.7 points, the steepest since the beginning of the historical series. This move can be explained by the component that addresses expectations for the future, which plummeted 24.3 points, while the current situation indicator still showed a positive evolution of 1.3 points. In the service sector, the drop was similar, 11.6 points (to 82.8), extending the perception of weakness that had already shown in previous reports. Consumer confidence fell 7.6 points (to 80.2), sharpening a trend that had already been observed in the previous two months. Importantly, although two thirds of the data gathering (carried out from March 2 to 19) were done before restriction measures, one already notices a significant impact on expectations. Finally, confidence in the industrial and construction sectors deteriorated by 3.9 and 2.0 points, respectively. According to FGV, industrial capacity utilization — down by 0.9 points to 75.3% - and entrepreneurs’ perceptions on demand and the business situation suggest that industrial production may have already been impacted by the economic effects of the pandemic.

Gradual growth until February, stable unemployment rate 

In February, industrial production advanced 0.5% mom/sa, marking a second consecutive monthly increase, but receded 0.4% yoy. Different segments pointed to improved output, with 15 of the 26 surveyed segments showing expansion. In January, retail sales (PMC) and service sector revenue (PMS) also suggested that the Brazilian economy continued a gradual recovery. Core retail sales fell 1.0% during the month, while broad retail sales (including vehicles and construction material) climbed 0.6%. In the service sector, the PMS index rose 0.6%, after negative results in the two previous months. However, these reports do not reflect the recent impacts of the coronavirus pandemic on economic activity.

In the labor market, the unemployment rate reached 11.6% in February, matching market expectations and our call. Seasonally adjusted unemployment remained stable at 11.5% as both employment and the workforce expanded 0.1%. Regarding the number of formal jobs created (Caged registry), the Ministry of Economy issued a note about the suspension of these reports for an indefinite period, while it seeks to rectify information on hiring and terminations provided by companies. These were under-reported and prevented consolidation of data for January and February.

12-month inflation slows down to 3.67% yoy in March

According to census bureau IBGE, the mid-month consumer price index IPCA-15 rose slightly by 0.02% in March, printing close to our estimate (0.04%) and the median of market expectations (0.06%). There were noteworthy price drops for auto fuels (-1.2%) and airfares (-16.9%). In this context, our preliminary estimate for the headline IPCA in March is 0.07%, getting relief from the transportation group, with deflation in auto fuels and airfares. In our view, the current shock has disinflationary impact in the short term. Some factors stand out, particularly the dramatic decline in crude oil prices in recent weeks and broader restrictions on personal mobility (via smaller price adjustments/pass-through).

The year-over-year change in the IPCA-15 receded to 3.67% from 4.02% in February. Core inflation measures, which exclude items that are more volatile, remain at comfortable levels. Underlying services posted slight deflation of 0.01%, bringing the year-over-year change to 3.2%. The average of year-over-year core inflation measures continues to hover around 3%. Overall, recent reports corroborate our assessment that inflation remains on a benign path. Substantial spare capacity in the economy and inflation itself – in the form of inertia or anchored expectations — support this scenario. For the full year, our estimates for the IPCA are 2.9% in 2020 and 3.3% in 2021.

Primary deficit of BRL 20.9 billion in February

The consolidated public sector posted a primary deficit of BRL 20.9 billion in February, printing close to our forecast (BRL 21.2 billion) and market consensus (BRL 21.5 billion). The consolidated primary deficit over 12 months remained at 0.7% of GDP. The general government’s gross debt increased to 76.5% of GDP in February from 76.1% in January, while net debt narrowed to 53.5% of GDP from 54.1%, reflecting FX depreciation during the month. Contracting economic activity and measures implemented to cushion the impact of the coronavirus crisis will cause sharp deterioration in fiscal results in 2020, but it is vital not to create permanent expenses, so that the gradual fiscal adjustment enabled by the spending cap constitutional amendment can resume from 2021 onwards.

Current account deficit of USD3.9 billion in February

The current account posted a USD3.9 billion deficit in February 2020, which was wider than our forecast and market estimates (both at -USD3.3 billion). The current account deficit over 12 months amounted to USD52.9 billion, or 2.9% of GDP. In the coming months, the current account deficit is expected to recede in the face of slower economic activity and a weaker exchange rate. Items such as international travel, transportation and profits and dividends will probably be affected the most. The impact on the trade balance is still uncertain as both imports and exports are expected to decline amid shrinking global trade. For the next years, we expect current account deficits of 2.5% to 3.0% of GDP. Even at a higher level, the current account deficit will still be comfortably financed by foreign direct investment. 

Financial assets

In March, the Ibovespa dropped 29.9% in local currency and 39.3% in U.S. dollars. The exchange rate depreciated 15.6% to 5.2 reais per dollar by the end of the month. Amid sharp risk aversion in global markets, country risk measured by the 5-year CDS climbed 144bps and finished the month at 276bps.

What’s next 

All eyes will remain on new cases of coronavirus around the globe, their impacts on the health and routine of families and companies, and consequent reactions by national authorities in terms of economic and healthcare policies. In Brazil, Congress, which has been working remotely, will be focused on discussing and voting on measures related to the outbreak. The bill that regulates fiscal recovery of the states, the so-called Mansueto Plan, may be put to a vote soon. The proposal, which enables states with a fragile financial situation to take credit in exchange for fiscal adjustment measures, may also include provisions that offer legal support to measures already announced by the government in reaction to Covid-19. Two constitutional amendments can also be voted on. One of them, known as the “War Budget”, establishes the separation between expenses to fight the coronavirus and other fiscal expenses in the federal government’s general budget. The proposal also seeks to provide more flexibility to the management of resources aimed at controlling the pandemic. The other would allow the Central Bank to purchase securities in the market, with the goal of balancing the market in periods of dysfunction. These two proposals may be unified in a single project.


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