Massive stimulus helps Brazil to limit losses

The Brazilian economy contracted 4.1 per cent last year, one of the most resilient performances in Latin America, after a massive fiscal stimulus package tempered the impact of the coronavirus pandemic.

Official data released on Wednesday showed that the Brazilian economy grew 3.2 per cent in the fourth quarter last year from the previous quarter, when it expanded 7.7 per cent. That left the Brazilian economy 1.1 per cent smaller than it was in the fourth quarter of 2019, before the pandemic spread globally.

Worth more than 8 per cent of gross domestic product, the fiscal stimulus package that has propped up Brazil’s economy has now left investors in Latin America’s largest economy on edge as concerns mount over the sustainability of the country’s debts.

The concerns are particularly acute this month as the Bolsonaro administration and Congress weigh a fresh emergency relief package to mitigate the impact of an increasingly severe second wave of Covid-19 infections.

“When compared with LatAm economies and even advanced economies, Brazil did pretty well last year. Of course that has left a legacy that it will have to come to terms with — that is the impact of the coronavirus on the fiscal accounts,” said Mauricio Une, chief economist with Rabobank in São Paulo.

“And the problem is that Brazil still has to tackle the pandemic, so there is a lot of uncertainty at the moment.”

The full-year contraction of 4.1 per cent is considerably better than the region’s other major economies, Argentina and Mexico, which shrank 10 and 8.5 per cent respectively in 2020. The UK’s economy, meanwhile, contracted 9.9 per cent last year.

“We are starting to rise up again,” Paulo Guedes, Brazil’s hawkish finance minister, said on Tuesday.

Guedes is attempting to rein in public debt, which has now surpassed more than 90 per cent of GDP. His mission, however, is an increasingly lonely one as Jair Bolsonaro, Brazil’s president, and Congress converge around a fresh cash transfer proposal to put $50 every month in the hands of Brazil’s poorest. Legislation could be passed as soon as this week.

“Policymakers appear to be settling on a relatively limited extension of emergency income. This could be ramped up. But that in turn would raise further concerns about the sustainability of public debt and could cause bond yields to rise,” said William Jackson, chief emerging markets economist at Capital Economics.

As Brazil’s debt ballooned last year, the yield curve for its sovereign bonds steepened sharply, reflecting higher premiums demanded by investors to lend longer term.

Une at Rabobank said that a main point for investors is whether any fresh emergency aid package would also include so-called triggers, which would freeze public service expenses if debt surpassed a certain threshold. The civil service payroll is the government’s second largest mandatory expense, after pensions, accounting for more than 16 per cent of its budget.

“The triggers are very important. They bring the idea of fiscal credibility. What the market would like to see is that this growth in expenses could be smoothed out in the future,” Une said.

The Brazilian economy is expected to grow by between 3 and 3.5 per cent in 2021, although this depends greatly on the trajectory of the pandemic. Health officials across the nation are now demanding the government implement full lockdowns, which it has so far refused to do.

The rollout of vaccines is another important factor. Despite a generally impressive record on vaccination campaigns, Brazil has struggled to dole out the Covid-19 jabs en masse, hampered mostly by a shortage of supplies from China.