Brazil and the Missing Je Ne Sais Quoi

Is Brazil cursed to be always the country of the future while struggling today? It is perhaps one of the few countries that can be self-sufficient in food, energy, and fresh water. Yet, it seems Brazil is missing a certain inexplicable something that the French call je ne sais quois. It is like trying to grow crystals as a kid without getting that piece of dust to kick start it or blood that does not congeal. In the generation after the military dictatorship has ended, three Brazilian presidents have faced impeachment proceedings, including the two before Bolsonaro.   

In many respects, Brazil is a modern country. Yet like many countries in the region, it never had a bourgeois revolution. The 19th-century and early 20th century landed elite embraced commercialization and industrialization. Many of the great-grandchildren and the great-great-grandchildren of the landless peasants live in favelas—impoverished ghettos.  

Agribusiness still provides the critical surplus that funds industrialization. Brazilian agribusiness once again showed its strength and, through November, the trade balance in the sector shows a positive result of US$ 96.6 billion, that is, $14.8 billion above the accumulated figure in the same period of 2020. For 2022, the perspective is for a record harvest for soy (3.4%), corn production recovery (34.1%), which was hampered this year mainly by frosts, a slight drop in rice production (1.8%), and cotton production increase (12.6%). The other economic sectors, in turn, accumulated a deficit of $39.5 billion year-to-date until November. 

Nevertheless, the improvement in the current account deficit appears to have stalled out, and the 12-month moving average is turned down. The average was roughly $2.6 bln a month in November, $1 bln larger than six months earlier.   Notably, the deficit widened even as the economy weakened.

The country of the future is stuck today with weak growth impulses and high inflation. Stagflation is thrown around by some American pundits; it has taken root in Brazil.    The economy contracted slightly in Q2 and Q3, while consumer prices rose at a low-double-digit pace. The central bank hiked rates aggressively in 2021, doing growth no favors. Moreover, the economic and political challenges in the face of the pandemic have asphyxiated consumer confidence. Consumer confidence has dropped considerably; it reached its lowest level since April to 74.9 points now. Before the pandemic, this figure was above 90 points (The index ranges from zero to 200).

The central bank has hiked rates aggressively, and the tightening cycle is not over. The monetary policy committee of the central bank (COPOM) has pre-committed to raising the policy rate (Selic) by 150 bp for the third such move in a row when it meets on February 2. That will put the Selic at 10.75%. It was at 2.0% in February 2021. 

The central bank responded to the surge in price pressures. The IPCA measure of consumer prices rose by 4.3% year-over-year in December 2019 and bottomed in May 2020 slightly below 1.9%. It was at 4.5% in December 2020 and stood at almost 10.75% in November 2021. The December figures will be published on January 11. Inflation is likely peaking, and this means that the central bank is almost finished. The Selic rate is likely to peak around 11.25%-11.50%.   

The hikes came despite the economic contraction in Q2 (-0.3% quarter-over-quarter) and Q3 (-0.1%). An economic recovery appears to be taking hold, but it will likely be frustratingly slow in 2022. The OECD and IMF models project the economy will expand by 1.4%-1.5% in 2022. Private economists are even more pessimistic, and the median forecast in the Bloomberg survey is 0.8%.  

It may seem counter-intuitive, but the aggressive monetary policy did not appear to support the currency. The Brazilian real fell around 6.8% against the dollar in 2021. In comparison, Mexico's central bank delivered 150 bp of hikes starting in June, and the peso fell by a milder 3% in 2021. Before recovering at the end of the year, the real was near eight-month lows.  

The dollar finished the year near BRL5.57, and the median forecast (Bloomberg survey) puts it at BRL5.65 mid-2022 and BRL5.75 at the end of the year. Given the interest rate differentials, these projections are less than implied by the forward rate.   Brazilian stocks underperformed in 2021, falling by nearly 12%. The MSCI Emerging Market equity index fell a little more than 4.5%. Mexico stands out with a benchmark gain of almost 21%. Foreign investors bought around $13 bln of Brazilian equities in 2021 and about $23 bln of its bonds.  

Bolsonaro has offered a new social aid program.    Auxílio Brasil (Brazil Aid) will reach 14.5 million families with assistance of up to R$ 400.00 (around US$ 70.00) per month. The government also bet on investments in concessions. Auxílio Brasil will be of utmost importance, mainly in the Brazilian Northeast Region, where poverty is high, but this is still too little to counteract the effects of the interest rate increase. 

The cruel truth is Brazil is poorer now than a decade ago. Consider that in 2011, per capita GDP stood near $13.2k in Brazil, edging above Argentina's $12.8k. In 2020, Brazil's per capita GDP was $6.8k. Argentina's per capita GDP stood near $8.4k.   

The presidential election in October looms large on the horizon. The political debate is framed by four issues. The first is the work focused on urgently reducing the enormous social inequality in the country. The second is the need to correct distortions that reduce productivity and hence the country's growth. Third, understanding the frequently-mentioned fiscal balance is a basic condition for leading a sound public policy. Lastly, and growing more salient every passing day, sustainability. 

Gabriel Martins, the CEO of M14 Quimica, an economic consultancy in Brazil, argues that despite what appears to be on the surface a deeply divided body politic, there is a general consensus among the vast majority. In short, there is agreement that it is necessary to improve the income distribution and take the environmental agenda seriously.  

Obviously, there are also differences, but not limited to, about the ideal size of the government and the timing of the fiscal adjustment (whether it should be immediate or whether the essential thing is to guarantee solvency in the long term). But, overall, there is reasonable agreement on what should be done. The exception, Martin argues, are the right-wing extremists – for whom reducing inequalities and sustainability is not a priority – and the left-wing extremists – who think that increasing productivity and fiscal balance are conservative agendas. In the remaining political spectrum, there is room for dialogue.

At the same time, it is clear that there is a chasm between understanding what needs to be done and what has been done. Yet the National Congress agenda at the end of 2021 was moving in the opposite direction. It pursued projects of high fiscal cost and low social return and projects that increase harmful distortions to productivity and weaken environmental protection. 

The most likely scenario is a dramatic clash between Bolsonaro and Lula in the second round of the 2022 elections. Lula is the easy favorite. His is among the most unlikely political stories of our time, from little formal education, shoe-shine, to President of the steelworker's union, to a three-time candidate for President before winning, and after the two-term limit, spent over a year in jail on corruption charges. The charges were eventually recognized as politically motivated by the Supreme Federal Court, and ultimately annulled in June 2021.  Lula appears to have been chastened, but domestic and international businesses must be patient.  That said, some fear post-election drama.  

There is value in Brazil. There always is.   


Brazil and the Missing Je Ne Sais Quoi Brazil and the Missing Je Ne Sais Quoi Reviewed by Marc Chandler on January 04, 2022 Rating: 5
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