Brazil’s Very Bad Year. Good News: 2021 Will Be Better.

Brazil’s had a lousy year.

Tell us something we don’t know.

The pandemic has idled its economy and forced an otherwise fiscally conservative government to spend mightily on stimulus and economic aid packages to keep businesses, and individuals, solvent. Word on the Street is that once the pandemic clears up, hopefully sometime early next year, Brazil’s central bank (BCB) will be the first to start raising interest rates.

Global bond lords will go bananas if they do. Brazil’s been one of the biggest sovereign bond markets in the world, but at 2% yield, a historic low, no one wants it anymore. That’s why the Brazilian real is at its weakest level ever, trading at around R$5 to $1. When the BCB raises rates, money will pour into Brazil’s bond market and the BRL will go to R$4, seemingly overnight.

This will be good for Brazilian equities, a total dud versus the MSCI Emerging Markets Index so far this year.

Reform Agenda Still On

The Senate presented its draft legislation this month that aims to cut government spending next year. A vote is not expected until February. Some of the cuts are anti-growth, so investors will be watching moves on tax cuts.


At the same time, the legislature approved several important micro-reforms, which will help improve the business environment anyway, notes Elizabeth Johnson, a seasoned Brazil analyst at TS Lombard in Brazil.

Some key, market friendly budget directives will be approved this year, but the 2021 budget will not be given the green light until February, she says in a report dated December 11. “The outcome of the battle over the Speakership of the Lower House and Senate Presidency will determine next year’s reform agenda,” she wrote.

Brazil Growth Remains Weak

Brazil’s GDP rebounded strongly in the third quarter but came in below consensus forecasts at 7.7% quarter-over-quarter versus forecasts of 8.7%. GDP fell 9.6% in the second quarter.

Brazil’s third quarter output was the best on the year and best ever, but that is because it is coming off an extremely low base caused by business restrictions and mini lockdowns in Brazil’s most important cities.

On the supply side, the industrial and services sectors expanded by 14.8% and 6.3%, respectively, while agriculture shrunk by 0.5%, disappointing market expectations of a 0.9% increase.

On the demand side, GDP rose across the board: investment was up by 11% quarterly, while household and government spending rose by 7.6% and 3.5%, respectively.

At the same time, Brazil’s main stats firm, IBGE, revised 2019 GDP growth to 1.4% (vs 1.1% previously).

That’s as good as it gets for Brazil’s year-ending GDP, though.

TS Lombard is looking at a 4.5% contraction in 2020.

“The strong recovery in the third quarter was due in large part to the ‘coronavoucher’,” says Wilson Ferrarez, a Brazil economist at TS Lombard. That’s the equivalent of the one-time stimulus checks given out in the U.S. earlier this year.

Brazil did that on a monthly payment schedule. Those voucher payments were an important part of the Covid-relief efforts, equivalent to around 8% of GDP.

Lastly, Brazil’s consumers are surely spending less and recent numbers show that it still fell short of expectations at a 9.8% quarterly increase. Brazilians are saving for a rainy day. The jump in the savings-to-GDP ratio to 17.3% is the strongest level since 2013 when Brazilians were fighting the “currency war”. A strong Brazilian real had them saving more than usual.

The savings rate in Brazil suggests that once the pandemic is finally pass, pent up demand could have the Bovespa Index at least catch up with its emerging market counterparts.

Despite the reduction in the “coronavoucher” program to R$300 per month (down from R$600 previously, Brazil’s new year will be one of coming back to normal; with “normal” looking more like 2022 for most investors at this point.

According to a survey by Natixis, a global asset manager, some 52% of institutional investors think emerging markets will outperform developed market stocks in 2021. Most of them (86%) think investors will have to pick their spots in emerging market nations, however. With Brazil lagging, and if the bond market is right — and Brazil will hike faster than other countries — the local currency will strengthen, helping securities investors. A 3% or even a 4% interest rate is no headwind for Brazilian stocks. That’d still be near historic lows.

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