Brazil – Latin America’s largest economy, following a turbulent period brought about by the coronavirus pandemic, is seemingly on track to recovery.

A long-awaited vaccination programme, previously seen as flawed given the supply shortages, is under-way, with its success now being envisaged as infection rates continue to drop. Due to the rising vaccination rate, the seven-day rolling average of coronavirus deaths has dropped below 20 per cent of the peak daily death toll of almost 3,000 in April.

Business activity, supported by; improved demand conditions, growing vaccine coverage, and the reopening of some businesses, recouped.

The latest composite PMI reading – an indicator of economic health for the manufacturing and service sectors, for the third successive month, albeit marginally slowing, revolved in expansionary territory following months of contraction. Continued growth was constrained by a slower increase in manufacturing activity. Meanwhile, services posted the strongest growth since February 2012.

Notwithstanding the recent economic optimism, political turmoil remains.

Economic activity maintains recent pace

Brazil’s manufacturing Purchasing Managers Index (PMI) fell to 53.6 in August 2021, from a five-month high of 56.7 noted in the previous month. August’s figure reflected a significant moderation in the rate of expansion in the goods producing sector. Output growth was the slowest since May amid raw material shortages and faltering new business growth, as export orders decreased for the first time since February. On the employment front, workforce in the manufacturing segment rose but at a more moderate rate than in the previous three months. Prices, consequent to a rise in input charges and BRL depreciating, once again rose.

In the same month, services, previously posing a drag on business activity, rose to the greatest extent in nine-and-a-half years. This, following strong inflows of new work supported by improved demand, growing Coronavirus immunisation, and reopening of some businesses. Services PMI rose to 55.1 from 54.4 in July.

Inflation figures point higher

Brazil’s annual inflation rate climbed to 9.68 per cent in August of 2021, the highest since February 2016, and beating market expectations of 9.50 per cent mostly due to the reopening of the economy, alongside supply bottlenecks, and the effects of a weaker domestic currency – the BRL. Upward price pressures mainly came from transportation, fuels, food and beverage, and household items.

On a monthly basis, consumer prices increased by 0.87 per cent, higher than forecasts of a 0.71 per cent increase.

Inflation prompts Brazil to lift rates

In response to inflationary pressures, Brazil’s central bank raised its benchmark interest rate by a further 100 basis points in its September meeting, to 6.25 per cent. The fifth interest rate hike in 2021.

The Monetary Policy Committee (Copom) – the body of the Central Bank, which defines the basic interest rate of the economy, anticipates a rise of similar magnitude at its next meeting to guarantee inflation convergence to the set target at the relevant horizon and simultaneously, allow the committee to obtain more information regarding the state of the economy and the persistence of shocks.

In its statement, the Copom emphasized that its future policy moves may be adjusted to ensure the achievement of the inflation target and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.

Inflation expectations for 2021, 2022, and 2023 collected by the ‘Focus survey’ which compiles forecasts of around 140 banks, asset managers and other institutions, are around 8.30, 4.10, and 3.25 per cent, respectively.

Political turmoil escalates as election looms

With Brazil’s general election almost a year away, pressure on the highly controversial President Jair Bolsonaro is mounting. In opinion polls, Jair Bolsonaro trails former president Luiz Inácio Lula da Silva – a popular left-wing former leader who was set aside after having criminal convictions for corruption.

In addition to failing to deliver on his pre-electoral promises to turn around the country’s economy with his free-market rhetoric, Bolsonaro’s ill-fated response to the pandemic, the latter leading to a congressional inquiry, is heightening political pressure.

In 2018, a large number of people voted for Bolsonaro as he promised to steer an anti-corruption drive and turn around the country’s economy, through the introduction of reforms, for instance the pension and tax reform. It is predominantly on this latter front that he is considered to have failed the most as the economic landscape looks bleak. Latin America’s largest economy is expected to grow 5.10 per cent in 2021 due to the low-base effect of 2020, and 2 per cent in 2022. From the employment front, more than 14.4 million people are currently unemployed – a figure which sits above pre-pandemic levels and is largely attributed to Bolsonaro’s weak response to the pandemic.

Consequent to Jair Bolsonaro’s controversial handling of the pandemic – often prioritising the economy at the expense of health, the Senate initiated an investigation, which is also hurting his approval ratings for the upcoming general elections, scheduled to be held in October 2022. The inquiry could pave the way to Bolsonaro’s impeachment, which, although plausible, remains highly unlikely. The official senate committee’s attention also turned to a contract worth R$1.6 billion, equivalent to $320 million, to purchase 20 million doses of Indian-made Covaxin, which is turning into a major political headache for Bolsonaro. A point of scrutiny is the price agreed for the Covaxin shots, which at $15 per dose is considered to be more expensive than others bought by Brazil. Questions are also being raised on the role a company, acting as a middleman, played in such contracts, and why contracts with Covaxin were signed ahead of deals with other manufacturers, although the shot had not yet completed late stage trials.

As Bolsonaro foresees a possible loss in the upcoming election, he is now seemingly resorting to anti-democratic feats, many of which revolve around generating uncertainty and distrust in the democratic system. In July, Bolsonaro warned that “there will be no election” if the necessary actions are not taken to modify Brazil’s electoral voting system. This, in his opinion, to reduce fraud. Bolsonaro’s calls come after the country’s top electoral court repeatedly demonstrated the integrity of the system.

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.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.