Brazil & Southern Cone - September 2021

Brazilian politics has remained volatile and confrontational over the last month, and there are signs that, along with other factors, this is dampening down the pace of the country’s economic recovery.

Relations between Brazil’s three powers – judiciary, legislature, and presidency – remain hostile. Large demonstrations in support of right-wing President Jair Bolsonaro were held on 7 September amid threats of an attack on the supreme court (which did not materialise). The president has become increasingly unpopular, and counterdemonstrations are also being organised. The business community often downplays the impact of politics and focuses instead on encouraging signs of recovery, but it has become increasingly difficult to keep the two things separate. Economy Minister Paulo Guedes admitted as much on 20 August, when he said the political crisis was overshadowing positive news on growth and a hoped-for reduction in the fiscal deficit next year. “There is much political noise – it is understandable, but it has to be reduced”, he said. Guedes predicted that despite political uncertainty the primary deficit would drop from 1.7% of GDP this year to 0.3% in 2022, and he forecast a surplus in 2023.

There is however evidence that the recovery is faltering not just due to the political chaos, but also other factors such as a drought. The latest figures show that second quarter GDP unexpectedly fell 0.1% on a quarter-on-quarter basis (due to low baseline effects the year-on-year change was +12.4%). Alberto Ramos of Goldman Sachs told Bloomberg the numbers were “disappointing” and “show that the underlying growth in Brazil is still very weak”. As a result, he said, he was cutting his full year growth forecast down to 4.9% from 5.4% previously. Economists are now predicting a further slowdown in 2022, perhaps to only 1%-2%. 

The slower pace of growth is attributed to the impact of the drought, which has lowered water levels in hydroelectric plants, increasing energy prices, and to higher interest rates as the central bank tightens monetary policy to counteract a surge in inflation. Investors are also concerned that consumption levels are still too dependent on unsustainable coronavirus (Covid-19) stimulus measures.  Marcelo Fonseca, an economist at asset manager Opportunity Total, told the Financial Times that Brazil was experiencing a “triple whammy” of inflation, high interest rates, and uncertainty.