Most emerging market (EM) countries have to some degree followed the IMF’s chief Kristalina Georgieva’s advice regarding their rapid response to the coronavirus-induced crisis, but few have with Brazil’s alacrity.

Brazil’s president Jair Bolsonaro, albeit playing down the threat the coronavirus pandemic posed, arguing that the economy, jobs and activity, were the priority above sanitary recommendations, outspent every other major emerging market economy.

Although strained from a fiscal perspective, Bolsonaro’s pro-business approach to the pandemic led to a significant boost in public spending, bringing forward social assistance payments and deferrals in tax collections. An increase of almost 40 per cent between January and November 2020.

Most of the money spent by Bolsonaro’s administration went on vouchers; a flat-rate temporary income boost for nearly a third of the population.

While increasing Bolsonaro’s popularity (at least in the short-term), the efforts proved ruinous for Brazil’s finances. General government deficit more than doubled in 2020, to 14 per cent of Brazil’s GDP from about 6 per cent in the previous year. Meanwhile, from 75.8 per cent at Dec 2019, Brazil’s government debt to GDP shot to 90.5 per cent (according to CEIC Data) – one of the highest levels of any emerging market.

Despite initial efforts proved fruitful, leading to a better-than-expected performance, an enhanced action is once more necessary.

The recent surge in coronavirus infections, particularly in the Amazonas state, which pushed hospitals in the capital Manaus to their limits, and the country’s struggle with its vaccine rollout is indeed worrisome.

While the surge in infections has not yet heavily re-impacted the economy, as only a few cities have announced lockdowns, a continuation of the trend might force other stringent measures to be taken.

With the latter risk in mind, inevitably leading to economic deterioration, the demand for more social spending to help struggling Brazilians and public investment heightened. Notably, Brazilian politicians, witnessing the benefits reaped from the enormous fiscal stimulus announced during the first wave are lobbying for a restart of the coronavirus vouchers which expired at the end of last year. Brazil’s relief spending helped the economy contract less than most regional peers in 2020 and triggered a consumption boom among many Brazilians.

Although to-date, Jair Bolsonaro appears reluctant to dig deeper into Brazil’s pockets, also stating “Brazil is broke. There is nothing I can do”, the approach may shortly change. Mainly since it seems that the governments’ concern goes further than just the economy but also touches on the president’s popularity, which has seemingly deteriorated in recent weeks.

With general elections scheduled to be held in October 2022, a politically unpopular move that will trigger an economic ache for swaths of his voters is unlikely. Looming election polls along with the risk of a sluggish recovery may tempt Bolsonaro to revert to stimulus spending. This, to revive the economy and simultaneously boost his popularity.

Also, with the said elections approaching, we are likely to envisage a revival of the government’s fiscal reform agenda to boost budgetary flexibility and maintain the credibility on the spending cap – effectively suspended in 2020 to facilitate a pandemic response.

From a monetary perspective, we expect interest rates, currently at 2.00 per cent following a 250 bps cut, to possibly increase in response to recent inflationary pressures – a function of a weaker currency, lingering effects of emergency spending in response to the pandemic, and higher cost of goods.

Without undermining Brazil’s ability to recover from such unprecedented scenario and thus prove that coronavirus pandemic was just a hiccup rather than a detriment to the future of Brazil’s economy, we reiterate that as uncertainties remain, a bottom-up approach is indeed imperative. This, to determine corporates with good fundamentals and robust liquidity, thus capable of servicing its debt, albeit facing plenty of headwinds.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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