São Paulo Official Sees GDP Drop Ten Percent in 2nd Quarter; Bolsonaro in Denial

SÃO PAULO, BRAZIL – Amid the impacts of the coronavirus pandemic, the Brazilian economy is expected to contract ten percent in the second quarter of 2020 and three percent in the year-to-date, projects Henrique Meirelles, São Paulo state Secretary of Treasury and Planning.

“The moment we are experiencing is indeed dramatic and requires urgent and effective action,” he said on Wednesday, March 25th.

To his projection, the former Minister of Treasury in the government of Michel Temer uses the official estimate of infectologists on the length of the crisis, with the peak number of cases in April, followed by a recovery process that can be seen in the activity around July. “This basic working assumption has become much worse than it was a week ago,” he says.

Meirelles also says that he deeply regretted President Jair Bolsonaro’s speech on a national network: “He chose to engage in the so-called denial crisis, where the patient refuses to see what is happening, refuses to see reality for short-term convenience. Everyone is wrong except him”.

He says that the important thing is to follow the direction of the leaders of the judiciary, of the press, following the guidance of Brazilian and world specialists, who currently provide a clear direction to the population on the need for confinement. “It’s no use maintaining activity and people getting sick. We have a pandemic threatening a large part of the population. We have to preserve life and then try to restore the economy”.

Meirelles explains that as a large part of the population must follow the social isolation guidelines, the public treasury should feel a sharp drop in revenue. In April, the worst month of the crisis, the decline could reach 30 percent: “The impact in March will be felt in April’s collection, which is when companies pay state taxes. But then it will rebound again during the year”.

This time, the crisis is different

The last time the world saw a global crisis was just over ten years ago, during the collapse of the global financial system. At that time, Henrique Meirelles was president of the Brazilian Central Bank and, therefore, was at the forefront of the fight against impacts on the Brazilian economy.

However, the scenario was different, according to him, because it was possible to attack the cause during that crisis, which was a financial one, and materialized in Brazil first by the collapse of international credit lines.

“Now it is different. We have no economic or financial causes, we have a pandemic. This pandemic does not only lead to an increase in the disease. We need to pinpoint the channel of transmission in the economy,” he says.

To draw a parallel, Meirelles says that with the collapse of European and American banks, there was a 20 percent drop in the total volume of credit in Brazil. Thus, the government’s strategy could be more directed at sustaining the needs of the market because, according to Meirelles, the beginning and end of the crisis were easier to be perceived:

“Preliminary data say that the peak should occur in about 60 days. We are talking about a period of three or four months. But the pandemic is growing, and still starting in Brazil, where data are still vague. Fortunately, the Minister of Health is behaving responsibly and, in time, we may know the correct length of this crisis,” he says.

Meirelles also advocates that the government invest whatever is necessary to contain the effects of the pandemic: “We cannot deal with a crisis situation as one of normality. Health is paramount. Once it is preserved, we return to normality, but without increasing the size of the machine,” he says.

On the foreign exchange market, he says the Central Bank has a large amount of reserves and can ensure liquidity in the market. “We will have a problem when there are people wanting to buy and nobody wants to sell, but the Central Bank has reserves to sustain a free floating market (about US$300 billion). This should not be a concern”.

Micro, small and medium-sized companies

The secretary announced that the São Paulo state development bank is preparing a R$2.5 billion (US$500 million) credit line for micro, small and medium-sized companies, “with lower financing interest rates than the market and longer repayment terms so they can weather the crisis”.

The actions being developed will have the contribution of the government itself, with participation of resources under negotiation with the World Bank and other bilateral organizations, according to the secretary.

Keeping the credit market up and running is also the private sector’s responsibility, he said. “We need to have the financial system maintaining its credit lines, opening special lines, extending payments that are maturing now,” he said.

The government of São Paulo is preparing a meeting with the banks, he says, to provide recommendations in this regard: “The banks must maintain full operation at this time. Not only them: supply chains must work, big transportation companies, the essential trade. The private sector is crucial, every society has to be engaged in it. If you leave it to the government, it’s going to be a problem,” he says.