As reported by the Sace, Latin America, the area among the emerging economies with the lowest average growth in the last decade (2%), is facing the spread of the coronavirus pandemic from a position of relative weakness. Since the fall in commodity prices began, growth has been stagnant, if not negative, in many contexts. To aggravate the situation, the spread of Covid-19, so far relatively limited compared to other geographical areas, which could be favored by some peculiar factors:
- high urbanization rates making it difficult to take social distancing measures;
- the presence of a vast informal economy which discourages the adoption of generalized and prolonged lockdowns due to the possible consequences in terms of social tensions;
- the relative weakness of national health systems;
- the progressive population ageing;
- the inversion of the seasons with respect to Europe in the southern part of the subcontinent.
In Brazil, the impact of the coronavirus pandemic has ended the modest economic recovery that began in 2017. According to Atradius, this year GDP should contract by at least 5%. The economy's vulnerability stems from its dependence on the service sector and commodity exports, as well as high public debt. The spread of the coronavirus in Brazil and the resulting lockdown measures will have a major impact on domestic demand, with investment and private consumption expected to contract by approximately 5% and 8% respectively in 2020. Exports are affected by a sharp decline in demand (especially from China, the USA and Argentina) and are expected to contract by more than 6% this year. The only positive exception is represented by soybean exports, which reached record levels last April.
The ongoing recession is having a major impact on corporate performance and the credit risk situation of almost all key sectors, and has led to many downgrades. Automotive, consumer durables, electronics, services, textile manufacturing and sales are shrinking due to lockdowns and rising unemployment, which is expected to be more than 13 this year %. In the service industry, especially hotels and catering, restaurants, bars, entertainment and tourism-related activities are heavily affected by the current moment. Exports of several commodities are declining due to the slowdown in the global economy, including much lower demand from China.
The oil and gas industry, which was already facing a difficult phase before the pandemic, is suffering from very low prices and limited demand. Falling demand for oil and gas and construction sectors has a knock-on effect on demand for machinery, metals and steel, industries where production is also impacted by the production freeze. Across all industries, firms heavily dependent on imports are negatively impacted by the recent depreciation of the real by more than 25% against the dollar. The risk of insolvency across all major sectors has increased sharply, with corporate insolvencies expected to rise by around 20% this year.
According to the estimates reported by ISPI there would be at least 50 million informal workers who found themselves overnight with nothing. These are families without savings and full of debts: there are 63 million registered on the list of defaulting debtors, who cannot ask for a loan except at rates of 400% per year. The government has allocated one-off emergency aid of 600 reais (100 euros) for those without a fixed salary: 90 million people applied in one month, more than 60% of the active population, just over half received it . According to analysts, if more than half of the population does not respect the quarantine measures decided at the local level, Brazil risks becoming the global epicenter of the virus in June, surpassing the USA in numbers of deaths: in the next month the infections would rise to 400.000, with a lethality of over 10%. Numbers to be taken downwards, if we consider that tests are only carried out in hospitals and that with the intensive care units in the most affected centers collapsed, many people die without being tested.
To support the economy, since the beginning of the year the Central Bank it lowered interest rates several times, to an all-time low of 3,0% in May. Inflation is expected to remain below 4%, as the recession and low energy prices offset higher import costs due to currency weakness. This would offer some scope for further monetary easing if needed. The federal authorities have announced a package of fiscal measures equal to 6,8% of GDP and further measures are expected; Congress declared a state of calamity in March, allowing the government to waive its obligation to comply with stringent laws governing public spending. Due to the additional tax measures and the economic contraction, fiscal deficit expected to rise to more than 10% of GDP, with public debt exceeding 90% of GDP.
The sizable fiscal deficit was already Brazil's main economic weakness before the coronavirus outbreak, with annual budget deficits persistently high over the past two years. A constitutional amendment was passed in 2016 to eliminate the automatic growth of budget spending in line with rising inflation, and a comprehensive pension reform was adopted in 2019. It currently appears that reform efforts are off the agenda due to the focus on containing the spread of the virus and the government's weaker position.
The refinancing and default risk of sovereign debt is for the time being mitigated by the fact that most of the debt is financed domestically (87%), in local currency (95%), and the government is a net external creditor. However, due to the relatively high level of portfolio investment inflows (over 140% of international reserves) Brazil remains vulnerable to changes in investor attitudes. Heightened risk aversion in global financial markets, which triggered large capital outflows from emerging markets due to the coronavirus pandemic, also led to increased pressure on the real, which had depreciated by 28% in early May compared to the US dollar.
Brazil's external financial situation should remain under control, keeping transfer and convertibility risks low. Despite the decline in official reserves due to market interventions since March to support the exchange rate, liquidity is more than sufficient to cover imports (over 15 months) and external refinancing needs. The current account deficit remains low and entirely financed by foreign direct investment. Non-financial corporations account for 63%, banks 22% and government 15% of external debt: and most foreign-indebted firms have either hedged their currency risk or have access to large foreign exchange reserves . The Brazilian banking sector is well regulated and sufficiently capitalized. The system remains modestly dollarised and dependence on funding raised in foreign markets is low, which should protect the banking system from adverse shocks.
