With the dollar appreciating against the real, Brazil became cheap in the eyes of foreigners, which can translate into increased investment and a surprising resumption of growth in the post-pandemic coronavirus period, if the country maintains its fiscal commitment and reform agenda, evaluates Bradesco’s chief economist, Fernando Honorato, in an interview with Estadão / Broadcast.
Honorato explains that, in the absence of the remedy against covid-19, Bradesco’s expectation is for a gradual recovery in the face of people’s fears of returning to normality and the increase in indebtedness of families, companies and governments during the crisis.
“If the discussion (on public accounts) is better than the baseline scenario, GDP may surprise. In the second quarter, a stronger discussion on tax and administrative reform, on privatizations, may start. The country has already been depreciated due to the depreciation Now, for the perception of getting cheap to become an investment opportunity, it depends on looking ahead and seeing that the outlook is good “, he explains.
Bradesco changed the outlook for Brazil’s Gross Domestic Product (GDP) after the first quarter result, from a 4.0% drop to a 5.9% recession. For 2021, the projection was maintained at an increase of 3.5%. Below are the main points of the interview.
Like mr. evaluates the result of the GDP of the 1st quarter, with a decrease of 1.5%? Did it help in the analysis of the magnitude of the crisis we are experiencing?
We have separated this crisis into three pillars: public health, economic impacts and public policy responses, exit strategies. To think about the activity, how much GDP will fall this year and how much it will rise next year, we still depend a lot on the first pillar, that is, public health. It is what will determine the depth and extent of the second, which are the economic impacts. And even the third, about what are the public policy responses needed to mitigate the effects (of the crisis). So, what we are looking at with a magnifying glass is still the first pillar. When Brazil’s cases will stabilize. Here, I would say that there is good and bad news: the good news is that Brazil managed to have a less inclined curve than most countries in which the health system collapsed. This helped a lot to protect some lives. The bad news is that our curve has not yet stabilized, it is still growing. The data for the first quarter and April and May are very similar to what we have seen worldwide. The data for the first quarter, in particular, the investment part, which has still grown, is a great rear view. So there is little information contained in that GDP that helps us to think ahead. In the second quarter, the indicators we have received, both public and private, point to a drop in GDP that can reach 10%. Again, very similar to the expectation of other countries: for the United States it is 10%, for Europe it is also around 10%. It seems to me a very synchronized crisis. We cannot avoid a very large impact in the second quarter.
Considering that, in Brazil, the cases have not stabilized yet and the isolation should last longer, is it possible that our activity data are worse than the other countries afterwards?
You need to do a reverse engineering exercise. Did Brazil close earlier than it should? It is practically impossible to answer and then, from the point of view of saved lives, it seems that it is good that we closed beforehand. It closed before the point of view of total cases, not chronological, because we closed with the United States and Europe, but our number of cases was still low. If a drug had appeared, Brazil would be the country with the best economic performance, because it closed earlier, saved lives. Our curve, in fact, has not yet stabilized, we may take longer than other countries. This will mean a few more months or weeks in terms of economic results. It may be different from the rest of the world starting in June.
Like mr. do you think the recovery process will take place?
The resumption, both globally and in Brazil, depends on an answer that we do not have, which is the existence of the remedy. If you have medicine, I think that life returns to normal relatively quickly. In the absence of medicine, it seems reasonably clear that people will not return to life normally, so I think the recovery tends to be gradual. What we have seen is the example of China, which returned with industrial production relatively fast, running today between 80% to 90%, trade is running from 50% to 60% of what was the pre-crisis and the service sector by 30% to 40%. This appears to be a reasonable pattern of resumption in the absence of medication. Companies will have to adapt, take some health protocols in factories and offices, and this will result in not only a more gradual recovery, but more important costs for companies and society. Hence our projection: a decrease of 5.9% this year with an increase of 3.5% next year.
So, at the end of next year, have we not resumed the pre-crisis level yet?
Yes, in the base scenario, we have not yet resumed. But here I have many doubts. We are seeing a scenario in which there is an increase in the unemployment rate that is important, the income of families being impacted, and the government and companies leaving more indebted from this crisis. Everyone comes out of this crisis a little more indebted. And this naturally causes the disposable income of all agents to be impacted over the next few years. Hence this idea of growth of 3.5% in 2021. That said, I need to do two important qualifications, one technical and one scenario. The technique is that next year’s projection of 3.5% already has a strong margin recovery (5.5% of GDP in the 3rd quarter and 2.0% in the 4th quarter). So, for the average GDP effect, the statistical load, as it fell in the first quarter and will fall more in the second, counts a lot. So, it will still be below, but there is an important acceleration at the margin, which gives a different feeling. The second is whether we will be able to surprise in the post-crisis. If our reform agenda moves forward, if we have a perspective of maintaining the spending ceiling and, therefore, a reduction in the fiscal risk premium, we are able to keep interest rates low for a long period. In fact, it is part of our scenario (2.25% for Selic until the end of 2021) and credit along with liquidity shares of the Central Bank can be a catalyst. There is also an element that is key: this depreciation of the exchange rate has made Brazil cheaper. So, if we are able to resume the reform agenda in this context of commitment to public accounts, Brazil has a chance to surprise. But this surprise is not the base scenario yet. You need to see these developments so that the surprise becomes the base scenario and we can grow more than 3.5% next year.
What does this surprise depend on, if the basic scenario includes low interest rates, resumption of the reform agenda and maintenance of the spending ceiling? Would the growth come from the country’s greater attractiveness for foreign investors?
The base scenario is some resumption of the reform agenda, maintenance of the ceiling and low interest rates. But we are uncertain how this will be discussed, in particular public accounts next year. If the discussion is better than the baseline scenario, GDP may surprise. A stronger discussion on tax and administrative reform, on privatization, could begin in the second quarter. Inexpensive the country has already been due to the depreciation of the exchange rate. Now, for the perception of getting cheap to become an investment opportunity, it depends on looking ahead and seeing that the outlook is good. You need to see what the post-pandemic scenario will be like.
Why has the Brazilian exchange rate taken off so much from the emerging ones in recent months?
If we are very objective, Brazil is a country that has a relative performance that varies more than the market, so much that, in the improvement, we also improved more. This is a characteristic that derives, on the one hand, from the depth of our financial system and, many times, investors use Brazilian assets to protect or defend themselves from other markets, this is historical. But it has a second dimension, which I think made us take off in this crisis. Brazil had been making a very interesting reform agenda, but the level of public debt was still very high, so with the shock of the pandemic, our public debt will jump a lot. This is combined with a very large drop in growth, also because of the effects of the pandemic. But before that Brazil was growing little, so the reforms did not have time to mature. By not growing, public debt continues to grow in relation to GDP. Not growing up generates every kind of political tension you can imagine. I think this is what happened at the moment when the dollar rate hit R $ 5.90, which caused the country to detach a lot from the pairs.
What helped a timid recovery of the Brazilian currency at the end of May?
For the second half of the month, (the investor) began to realize that Brazil may surprise to some extent. Because we still have the spending cap, then any increase in debt is subject to the cap. In addition, until now, all signals issued by the government and Congress are to limit spending to the war budget, to combat the pandemic. Then (the investor) begins to see that the country has not yet destroyed the tax regime. There were doubts in early May, but it was not destroyed. And finally, people began to realize that, at those exchange rates, Brazil was going to have a monumental current account surplus next year. Bradesco estimates that, with R $ 5.50 of exchange, the surplus should already be between US $ 10 billion and US $ 15 billion next year, which would be a variation of US $ 60 billion to US $ 70 billion ( In 2019, the deficit was almost US $ 50 billion and Bradesco projects -US $ 7 billion for 2020). This all starts to enter the radar and to appreciate the currency. The political noises of May are important to the extent that they affect the perception of continuity of reforms and of this debt issue. Therefore, the debt issue is the most important. If there is a political coalition that leads to a resumption of the reform agenda, any possible political noise is left in the background in view of the solvency perspective. The investor will be pragmatic and verify that the country is solvent, that it has a high interest rate still in the average, long interest curve, and that it is getting cheap. So, perfect. It can be a huge investment opportunity in Brazil.
Have the political signs been constructive in this sense of resuming the reform agenda?
There is a sign that, until then, it was somewhat independent of these political noises, which was the fact that the economic team and Congress limited spending to the war budget. That was very important. Investors had a lot of doubt about this, if it was not going to become a tax spree. There were strong signs that it was not, that it was going to be limited. This is all going on, but so far it has been so. The second is that there is an attempt to form a coalition in Congress that, so far, is committed to the economic team. Last week, attempts to increase benefits beyond what was reasonable were blocked by this political coalition. On the margin, there are also slightly better signs in the relationship with Congress. But this is a film that is unfolding. The fundamental point for me is whether the spending ceiling will be maintained and whether we will return to a reform path after the pandemic. If I return, any political noise is secondary.
Can escalating political and social protests hinder the resumption of the economy?
I think there are different natures of social manifestations. If nature is a more severe economic crisis, it tends to have an implication for the recovery. Being objective, for example, if there are protests because unemployment has risen a lot, for a complete change in economic policy, because, for example, social policies have not arrived. But it seems that this is not what happened, I don’t think we are seeing it yet. Even because the R $ 600 program has arrived, we have seen several initiatives to mitigate the economic impacts. When they are protests of a political nature, the economic implications may be different. Being peaceful and legal, in general, they have less of an effect on the prospect of economic recovery, not least because, first, the economic agenda may prevail. If there is a minimally organized economic environment, protests are part of democracy, wherever they appear, and tend to have little weight in the resumption.
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