Brazil and the economics of the virus

2020 was supposed to be a year of renaissance for Brazil. Since 2015, the largest economy of South America has been stagnating, with GDP dropping by 3.6% in 2015 and by 3.4% in 2016, and only slowly recovering between 2017 and 2019. In October 2019, the Brazilian Federal Senate passed the milestone pension reform bill, implementing the first structural reform needed to drive the country on a path of sustainable economic growth. Without that reform, the federal pension system of Brazil would have increased to 19.5% of national GDP by 2040. Investors were waiting for the pension reform to test President Jair Bolsonaro’s political willingness and parliamentary support to pursue the path of market-friendly reforms promised during his electoral campaign.

The COVID-19 pandemic has, however, not only completely disrupted the ambitions of growth and reforms of Brazil, but it has also produced a deep political crisis within the government – with strong frictions on whether to implement a national lockdown – and between the federal government and state administrations. On the one hand, Bolsonaro has given governors the power to decide over the introduction of lockdown measures, leading to an uncoordinated approach that has undermined any attempt to contain the spread of the virus. On the other hand, the federal government has maintained control over the economic resources put in place to mitigate the negative effects of the crisis. This ambiguous division of responsibility has created tensions and instability between the federal government and governors, harming the efficiency of both the economic and the health responses.

Local Police asks a men to leave the beach in Niteroi, Rio region, because of coronavirus rules

 

Despite Brazil’s economy being more diversified than many other countries in the region, it is still extremely vulnerable to external shocks. In 2018, exports of goods and services accounted for 14.81% of the country’s GDP, with China as the main partner (26.7% of the total value). With the lower global demand due to the worldwide lockdown and, consequently, the decline of purchasing power internationally, Brazil is likely to pay a high price in terms of GDP loss. Furthermore, Brazil is a great destination of foreign direct investments (FDI), which represented 4.1% of the national GDP in 2018. According to the OECD, under an optimistic scenario, global FDI is expected to fall by 30% in 2020, and developing countries will be more impacted by this downtrend. Tourism is also an important source of income (8.1% of GDP) that has been disrupted by COVID-19. The overall corporate sector of the country is already particularly vulnerable to financial market instability, with  its short-term debt/cash ratio at around 66%, one of highest figures of the region.

In addition, the stagnation of the economy might have a dramatic impact on the informal sector, that is estimated to be around 16% of the national GDP and to employ 41% of the country’s workforce. These workers, who do not have contractual protection, are the most vulnerable to lose their jobs due to this crisis. As they generally work for a daily cash salary, they can rapidly fall below the line of absolute poverty if becoming jobless. Recent research carried out by Data Favela found out that, after only a week of lockdown, 13.6 million residents of the favela lacked the financial means to buy food. Furthermore, the lack of personal savings due to extremely low salaries is a remarkable issue for most low-middle income households of the country, generating risks of poverty also in these social groups.

To respond to such a dramatic economic and social crisis, in line with worldwide governments, Brazil has implemented fiscal stimuli to support the liquidity of firms and the income of households. However, the country already has a high national debt (approximately 91.57% of GDP) which constrains the fiscal room for the needed expansionary measures. Piling up on previous debt, the annual deficit produced this year – that might be around 4.5% of GDP compared to the 1.6% forecast before the pandemic – will leave a mark on the country’s national accounts for a long time.

As a result of the crisis, Brazil’s GDP decreased by 1.5% in the first quarter of 2020, leading labor force participation to an all-time low with almost 70.9 million people out of the workforce. And yet, according to some estimations, the unemployment rate is likely to increase from the current 12.6% to 15-18% in the coming months, further worsening the prospective of the country,

In light of Brazil’s macroeconomic features and weakness, the public economic response to the COVID-19 crisis has to adress multiple challenges. With the most vulnerable social groups in the country already suffering from the long-term effect of the 2014-2016 economic crisis, a top priority has been support for the poorest citizens. According the World Bank, in 2016-2018, more than 5.6 million people fell back into poverty and the number of those living with less than $1.90 per day increased by 2.5 million citizens to exceed 8 million – which became more than 9.3 million in 2018.

These social groups are also the ones who are the most vulnerable to the COVID-19 spread. They often lack access to clean water and soap and live in overcrowded houses and neighborhoods where it is impossible to properly enforce social distancing. These citizens seem to be trapped in a catch-22 situation: staying under lockdown and suffering misery and hunger or continuing to work and facing the risk of getting sick.

To address these issues, in March, the Economic Minister, Paolo Guedes, announced a $150 billion (750 billion reais) economic intervention, of which $9.2 was allocated as an anticipation of the 13th annual salary, or holiday bonus, for the poorer workers, $2.5 billion as salary allowances, $620 million as an integration of Bolsa Familia, and $8 billion as aid for informal and self-employed workers. A few days later, the Senate approved more financial aid to workers (600 reais or $116) and mothers (1,200 reais or $232) who support a family, for a total stimulus of $8.5 billion. Despite being commendable efforts, some experts argue that the government has been to slow in its response to help the poorest people of the country. Others are also concerned that the existing measures will not be enough, especially since governors and cities that have been strapped for cash even before the pandemic, are calling for more federal aid. The current interventions have rapidly fallen short of addressing the basic needs of millions poor and have been not universally guaranteed, particularly in rural areas.

Informal economy is the main source of living for many Brazilians

 

The pandemic in Brazil is still in a critical stage. The complete lack of coordination between the federal government, states and local municipalities has exacerbated the inefficiency of the health and economic response. With the virus moving to indigenous communities, slums and rural areas, the current economic policies put in place appear to be inadequate to support millions of people who are facing poverty, requiring further and time-sensitive public support.

 

 

economyBrazilLatin AmericaBolsonarosocial issuescoronavirus
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