Coronavirus Unlikely To Derail Brazil’s Growth

Brazil's economic fundamentals may be strong enough to withstand any coronavirus-related headwinds.

Brazil will likely cut this year’s 2.4% GDP growth forecast due to coronavirus fallout by late this week, Economy Policy Secretary Adolfo Sachsida told reporters last Friday.

“It will probably be to 2.2%,” said Milton Castiel, an independent economist in Sao Paulo, who helps advise corporate finance transactions, adding that the biggest impact of Covid-19 will be onthe country’s trade balance, which accounts for roughly 20% of GDP. 

“Importers are suffering because of lower shipment volumes from China,” noted Castiel. ”They are not getting enough capital equipment or tools, screws and bolts needed to make cars or appliances,” potentially delaying deliveries and export revenues.

Falling prices for key commodity exports to China, such as oil, iron ore and soybeans are also expected to negatively impact growth, according to economists. However, they noted that Brazil’s underlying fundamentals—notably consumption and employment—have been improving and will likely offset losses from sluggish exports in coming months.

“We have rock bottom interest rates and rising employment that will keep consumption strong,” said Flavio Serrano, an economist at Haitong in Sao Paulo. “If you look at hiring stats, they are up 2% in the past two months. So while we may be running at 1.5% (year-over-year GDP growth), we really are at a potential 2.5%-3.0% growth rate.”

Serrano said Sachsida’s plan to lower this year’s forecast also partly stems from a fourth-quarter expansion that came below expectations amid slower-than-hoped manufacturing and investment.

“We were expecting 0.6% but now we think it will be 0.4%,” Serrano said of the bank’s projection for the last quarter of 2019—which likely dragged down the year’s growth to 0.5%, slowing its recovery from recession.

Castiel said coronavirus, which sickened two Brazilians as of the weekend amid 75 suspected cases, is also failing to cause alarm.

“Brazilians are not afraid of getting sick,” continued. “ When you ask young people, they don’t even care about coronavirus. It doesn’t have a high mortality rate. If you catch it, you stay at home for 10 days and you are done.”

Some say the derailing of President Jair Bolsonaro’s contentious reforms package is a bigger threat to Brazil’s economic recovery than coronavirus.

“The main concern right now is Brazil’s reform agenda and not external events,” opines Castiel. Bolsonaro’s recent support for embattled Economy Minister Paulo Guedes’ insults against government workers (such as comparing them to parasites) put the package on shaky ground politically. The administrative reform was expected to be put before Congress at bu press time but they was delayed because “the political scene remains very delicate,” Castiel notes.

If passed, the administrative overhaul will cut bloated public salaries that currently account for 14% of GDP, likely boosting investor sentiment toward Brazil and foreign direct investment, some economists say.