BNP raises Brazil’s GDP growth projection to 4.5% in 2021; sees dollar at R$5

RIO DE JANEIRO, BRAZIL – BNP Paribas has revised upward its forecast for Brazilian economic growth in 2021, arguing that global economic recovery will be more than enough to offset the negative impacts from domestic fiscal issues and the pandemic.

The bank now expects a 4.5% increase in Gross Domestic Product (GDP) in 2021, above the 3.2% consensus cited by the institution and the 3.52% rate reported in the Central Bank’s Focus survey released on Monday.

Earlier, the private bank had estimated a 2.5% GDP growth, below overall market projections.

Global growth should contribute with over 3.7 percentage points to Brazil’s GDP growth rate this year, but BNP’s professionals consider that the current levels of commodity prices suggest that the bank’s projections may prove conservative.

The fiscal boost will add 0.4 percentage points to GDP, while the still-stimulative monetary policy will add 2.1 percentage points. Conversely, the Covid-19 pandemic will subtract approximately 3.2 percentage points from the GDP growth rate.

For the first quarter, BNP estimates that the country will avert economic contraction due to the strength of the external scenario.

“In the coming quarters, we see global growth contributing positively to Brazil’s economy, particularly in the second quarter,” Gustavo Arruda, head of research for Latin America, and Luca Maia, foreign exchange and fixed income strategist for the region, said in a report.

“The contribution of fiscal policy could be slightly positive, thanks to the new round of Covid-19-related fiscal spending, while monetary policy could still help, but to a lesser extent, given the ongoing convergence of rates to neutral levels,” they added.

Exchange Rate, inflation and interest rates

BNP projects that the dollar will close the year at R$5.00. The drop would be mainly driven by the increase in interest differentials in favor of Brazil and terms of trade. The bank’s analysis points out that the relationship between the performance of the Brazilian Real and the carry trade rates is not linear, but exponential.

This suggests that as the SELIC moves away from its record 2% minimum, the impact on the currency will be greater.

BNP recently closed out a tactical long dollar position against the Brazilian Real, after the technical position shifted from stretched on the dollar sell side to neutral, with a “fair” price for the exchange rate at R$5.22 per dollar. The dollar was quoted at around R$5.32 on Monday.

Among other macro variables, the French bank’s analysts recently raised their IPCA inflation projection to 6.0% in 2021 from 5.0% previously.

According to analysts, the variance of inflation above the target can be explained by imported inflation (commodity prices in Brazilian reais) and shortage of product supply.

A negative output gap contributes negatively to inflation, but above-target expectations may begin to strengthen this variance in price measures. “This trend strengthens the argument for further (interest rate) hikes. We project a rate of 6.5% in December, compared to the current 3.5%,” said BNP’s experts.