Brazil is not able to produce chips in the short term, says economist from JPMorgan

By Tiago Amâncio

Brazil can benefit from the geopolitical context that causes the diversification of productive chains amid tensions between China and the US and the Ukraine War because it has natural resources, is far from the conflicts, and close to large consumer markets, assesses Cassiana Fernandez, head of economic research for Latin America at the American bank JPMorgan.

This does not mean, however, that the country will enter the advanced technology chain, such as chip production, in the short term.

In her evaluation, it is necessary to have more favorable conditions for private investment in research and technology in Brazil.

In an interview with Folha, Fernandez also talks about the environment for foreign investment in the country and the expectations for the reduction of interest rates and the dollar price.

How do you see the environment for foreign investment in Brazil today?

Brazil was the first big country among the emerging countries to start normalizing the monetary policy, already in 2021, and the first to stop the cycle of interest rate hikes, which positioned it for faster disinflation.

Some of this disinflation has already happened: at the end of 2022, the IPCA ended at 5.8%.

Core inflation rates are still at very high levels, but we are already starting to see a reduction.

The great concern comes from the lack of definition and uncertainty regarding the direction of fiscal policy and the political environment, which has become more turbulent since last year’s elections, but we have a more constructive view.

The disclosure of the new fiscal framework reduces in a significant way a more negative tail risk about the conduct of economic policy.

But you still have many uncertainties regarding the approval and the direction it will take over the next few years.

Brazil has one of the lowest growth rates in the world among middle-income countries. How to attract investors?

Brazil has two major advantages and two major problems.

Among the problems are low economic growth and government debt and cost.

One of the worst consequences of low growth is a very bad distribution of growth, even more so for a middle-income country, which generates higher demand for spending and social transfers.

On the positive side, Brazil has one of the strongest external accounts among the emerging economies.

And not only the fact that we finance all of our current account deficit with direct investment flows, which is more stable, but also for the fact that we still have around 20% of GDP in international reserves, much higher than the level of public external debt, which provides a reasonable cushion.

Add to this the fact that we are lucky enough to have the availability of natural resources, oil reserves, iron ore, and the whole area for agriculture, which puts Brazil in a very privileged position.

If I look at the current geopolitical context, the commercial and geopolitical tension between the US and China, and the war between Ukraine and Russia, there is a perception that the world will try diversifying the production chains.

Brazil is expected to benefit from the availability of natural resources and from being further away from conflicts and closer to the consumer markets, US and Europe.

Can Brazil enter the production chain of advanced technology, such as the production of chips?

Not in the short term.

You need to create more favorable conditions for private investment in research and technology to participate in positions of products with higher added value within the technology sector.

But undoubtedly, it is something we have the potential to develop.

This discussion that is taking place both in Brazil and in Mexico is very positive in the long term.

However, it is still very difficult to see this being a decisive factor in the countries’ economic performance in the short term.

There is still a lot of homework to be done to attract these investments.

Creating favorable conditions for private investment involves rule stability, legal security, and macroeconomic stability, decisive factors when defining these investments.

Do questions about the Central Bank’s autonomy make Brazil less attractive?

Autonomy is, in fact, an important institutional advance that can generate gains, especially in the medium and long term.

Criticism of Central Bank policy happens everywhere; it is part of independence.

The current board of the Central Bank is very transparent in relation to assuming that it is the role of the monetary authority also to justify its work to society, governments, Congress, etc.

This part of the discussion is part of the game.

Depending on how it is conducted, it may or may not generate more or less noise, but it is important.

The threat of you going back a little goes against what is important for investors: legal security, stability of rules, and macroeconomic stability.

Any decision that reduces these conditions tends to be unfavorable to the country’s investment and interest flow.

A separate discussion regarding the change in the inflation target generated a lot of noise in the market and, in my opinion, contributed to the disanchoring of inflation expectations, especially in the medium and long term, concerning the market the current target of 3%.

But there is still no definition of what is going to happen.

The government can define the target, and then we must discuss the costs and benefits of a change.

In my opinion, today, we have many more costs than benefits in a change of the target level, especially in the medium and long term. This is not the time to change.

And when is the moment to lower interest rates?

Economic activity has already decelerated significantly.

There was a first quarter favored by the agricultural harvest, which should be a record this year, but domestic demand has decelerated more significantly.

Inflation has already left its peak above 12%, it closed last year at 5.8%, and we are now seeing a more positive number.

I see that there is room for the Central Bank to start cutting interest rates later in the year. Our expectation is a first interest rate cut in November of this year.

There are conditions for the Central Bank to anticipate this first cut.

A significant part of why it doesn’t do it faster is that it has this anchoring concerning inflation expectations and the target.

If you take a communicated decision, not only the reduction of fiscal risks, but the definition of the fiscal framework and the discussion of the definition of the target, with a re-anchoring of expectations, the Central Bank could indeed start cutting the interest rate before November.

Does the recent drop in the dollar tend to be lasting? What is the fair price for the dollar?

We had a coincidence of factors on the day the IPCA was released, which was a weakening movement of the global dollar; it was not only the Brazilian currency that performed very well.

Our models do not suggest that the currency is too far off a fair value given the external conditions.

The external sector and the development of the global economy will greatly determine the currency’s level in the coming months.

March and April were quite atypical because the event of the regional banks in the United States [bankruptcy of SVB and Signature Bank] generated greater volatility and risk aversion, besides a greater fear of recession in the US and a generalized repricing of assets.

Our projection is R$5.30 for the end of the year.

Recognizing the enormous uncertainty concerning this projection, great economists have already said that the exchange rate is there to teach economists humility.

X-RAY

Cassiana Fernandez, 46

Since March, she has been head of economic research for Latin America at the US bank JPMorgan.

From 2014 to the beginning of this year, she was chief economist for Brazil at the same institution.

Before that, she worked at Mauá Capital and BNDES. She holds a degree in economics from USP and a master’s degree from PUC-Rio.

With information from Folha de S. Paulo