Analysis: Brazil risks missing out on the post-pandemic rebound party

RIO DE JANEIRO, BRAZIL – After a global pandemic-related economic contraction of 3.3% in 2020, the International Monetary Fund (IMF) projects 6% growth in 2021 (the highest since 1980) and 4.4% in 2022. The United States, a country with 33 million Covid-19 cases and 588,000 deaths, is expected to see a 6.4% GDP growth this year.

China will achieve 8.4% growth. Likewise, other G7 members are expected to perform much better than normal. France, which averaged 1.7% GDP growth between 2016 and 2019, will reach 5.8%. The United Kingdom will rise from 1.5% in the same period to 5.3%. This trend can only be paralleled by the post-WWII era of the 1950s.

In common, all the countries that will enjoy post-pandemic prosperity have invested billions (and in the case of the United States, trillions) of dollars in economic stimulus programs.

Likewise, they have developed comprehensive and effective immunization plans that have ensured them a lead in immunizing their population, paving the way for normalizing activities. The United Kingdom, the first country in the world to roll-out the vaccine manufactured by Pfizer pharmaceuticals in early December 2019, has immunized 55% of its population with the first dose.

The United States, which reached a vaccination rate of 47%, is starting to plan to donate surplus vaccine to the rest of the world, after reaching a stage where masks are no longer mandatory for people immunized with the two doses. Taking the performance of the 30 largest economies on the planet as a basis, it is estimated that for every 10% increase in the vaccinated population, the GDP will be revised upwards by 0.13 points.

If the most developed nations in the world have reasons to celebrate the post-pandemic recovery, Brazil is still lagging in controlling the pandemic and in expectations of a recovery. Although the government has revised the GDP growth estimates to 3.5% in 2021 (close to the 3.7% estimated by the IMF), compared to the 4.1% drop in 2020, the return to pre-Covid-19 levels should only be achieved in 2022, with growth projected at 2.6%.

The Ministry of Health’s plan to vaccinate up to 2.4 million people per day is stagnating at 700,000 doses per day due to a shortage of raw materials for the production of immunizers in the country and a delay in the purchase of vaccines from international suppliers.

At this pace, the vaccination rate stands at 18%, lower even than that of neighbors such as Chile, which invested in a broad immunization strategy outlined last year and is now close to reaching 50% of its population immunized. With this rate, the IMF projects that Chile will achieve a GDP growth of 6.2% this year.

In direct comparison, the advantage of the Andean country is noticeable in activities such as commerce. In March, local retail sales rose 18.3%, compared to the same month last year, against a rise of 2.4% in Brazil. “In relation to Chile, Brazil failed, for example by not investing in activity closures and rapid vaccination,” explains economist Otaviano Canuto, former director of the IMF. “Chile bet on a strict lockdown and closed risky contracts with vaccine manufacturers. Today the country can see the light at the end of the tunnel.”

At the current pace of vaccination and maintaining the government’s projections based on local production and orders for immunizers abroad, Brazil would have a chance to begin a safe reopening of the economy starting in September, according to a survey by investment bank UBS BB.

To do so, the country will need to have about 56% of its population vaccinated, with 90% of those immunized aged 30 or older. Thus, the safety of the population group representing 98% of deaths from Covid and 95% of hospitalizations would be guaranteed. Once these conditions are met, Brazil has a chance to return to pre-crisis levels next year – a result that the United States should achieve as early as this year.

To tackle the impacts of the pandemic, the economic team is repeating the 2020 strategy: it is trying to protect the formal market and the productive sector, albeit through much more modest stimulus programs. The emergency aid, which last year paid out R$293 billion to 68 million people, has been reintroduced with a budget of R$43 billion to be paid to 46 million Brazilians between April and June.

The program allowing the reduction of working hours and the suspension of labor contracts was reintroduced for four months and should last until July. Financing to small companies guaranteed by the Treasury, the PRONAMPE, has not yet been authorized.

The strategy designed by the Ministry of Economy sought to synchronize the measures with the vaccination program and extends until the end of the third quarter. “It is a good plan, with programs that have proven to be effective, but there would be greater security if there were more predictability in vaccination,” says José Pastore, professor of labor relations at USP.

The great short-term challenge for Minister Paulo Guedes’ team is to ensure that companies and workers will withstand the next months of the pandemic in a position to promote recovery, even if a third wave of Covid will affect the population.

“It is essential not to allow a transitory shock to have permanent effects on the economy,” assesses the Ministry of Economy’s secretary of economic policy Adolfo Sachsida. “And, to this end, we must insist on the pro-market reform agenda and on fiscal consolidation,” he explains.

Once the critical stage of the pandemic has passed, the ideal would be for the country to leverage the favorable boost, coming mainly from abroad, to kick-start its own economic recovery. The strong international expansion coupled with a surprisingly high cycle in commodity prices – soybean prices have virtually doubled in one year, while iron ore prices have risen by almost 50% – shows that the country is not short of opportunities.

In addition, the rapid recoveries between the successive shutdowns and openings of non-essential activities during the pandemic demonstrated the ability to recover quickly from the most violent shocks to the economy. However, outside the government, there are plenty of skeptics about the prospect of the country harnessing this bonanza at levels close to its international peers.

“Brazil has two problems: a pandemic and an endemic one,” says Alberto Ramos, director of economic research for Latin America at Goldman Sachs. “The first concerns Covid-19 and vaccination itself. This one will pass. The second has much deeper causes in the economic context and should extend beyond the health crisis.” In this respect, it must be noted that the pattern maintained by Brazil before the emergence of the coronavirus was one of small growth, with low investment and productivity rates.

The causes of the Brazilian economy’s poor performance in recent years are well known and have deteriorated during the crisis: the unsustainable fiscal situation with high public debt, unemployment, and severe political uncertainty. The country has not recorded growth rates above 2% per year since 2013. Since then, there has been a strong recession and successive political crises.

Instability resurfaced with the erratic conduct of Jair Bolsonaro’s government toward the pandemic, currently being investigated in Brazil’s Senate by the Covid CPI. The structural reforms pledged by Paulo Guedes, which offered the prospect of advances, are dragging on, and fiscal adjustment, which was imperative before the pandemic, has now become more pressing.

“It is very difficult to talk about deeper reforms at this time, particularly labor and tax reforms, when the electoral process is approaching,” says Ana Paula Vescovi, director of macroeconomics at Santander Brazil and former secretary of Treasury.

In a cascading effect, the macroeconomic uncertainty ultimately restrains the willingness of entrepreneurs to invest, which compromises the pace of recovery and job creation. Concurrently, the approaching elections point to a potential increase in government spending.

The market assesses that President Jair Bolsonaro will spare no effort (nor public resources) to seek re-election. “Bolsonaro took office pledging to implement a liberal economic model, but this won’t happen because he doesn’t believe in it,” says Armínio Fraga, a former president of the Central Bank.

More indebted countries tend to grow less and have more volatile economies. Any economic oscillation can trigger massive effects. And this can happen if the commodities cycle comes to an end or if the strong American recovery leads to inflation.

An interest rate hike in the world’s largest economy leads investors to look for safer assets, and emerging markets, such as Brazil’s, are ultimately penalized. Brazil can not bet on luck or on miracle solutions. Only vaccines and reforms can guarantee the country’s presence at the great celebration of the end of the pandemic.

Source: Veja