Image of New Texel “Country in Focus” Presentation on Brazil

New Texel “Country in Focus” Presentation on Brazil

Produced by Roberto Simões Filho, Edward Cheak, Yacintha De Lannoy

Along with our tradition of sharing “deals in focus”, Texel is happy to also bring you a macroeconomic sneak peek into different regions around the globe. In this edition, our attention goes to Brazil where the NPI market has seen and keeps seeing a variety of financings. These transactions typically go from shorter term Structured Trade and Commodity Finance to longer term Project Finance. We hope our brief deep dive will bring you some additional takeaways on this well-known economy which has been on a very interesting trajectory over the past year.

 

Part of a Global Economy

Brazil, a country of 212 million people and covering an area of 8,510 sq. km, is the eight largest economy in the world. As a major exporter of agricultural products (soybeans, maize, coffee, sugar, etc.), fuel (e.g. petroleum) and mining products (e.g. iron ore), Brazil is an important trading partner for China, the United States and the European Union. Even though the country’s output in terms of goods and services accounts for roughly USD 260 Bn (2019), Brazil does show a deficit on its Current Account. The projected Current Account deficit for 2020 is estimated at 0.9% of GDP, a recovery from the 2019 deficit of 2.8% of GDP.

Following the economy’s recession in 2015, Brazil has struggled to maintain investor confidence, partly exacerbated by continued low commodity prices for important exports goods such as sugar and iron ore. The country’s GDP growth fell from 7.5% in 2010, to -3.5% in 2015, returning to 1.4% in 2019 thanks to strong fiscal and monetary efforts to restore the pre- 2015 growth trajectory. Many economic policies were implemented (or ready to be implemented) to allow continued stable growth in 2020: fiscal policy adjustments in line with IMF recommendations, a large pension reform, measures to control government spending, a reduction in state bank lending and a cut in the policy rate to 4.25% – all aiming to stabilise government finances and stimulate activity in the economy. Despite these upcoming or newly incepted policy reforms, the Covid-19 pandemic – a truly unexpected global black swan event – had a severe impact with GDP contracting 4.1% in 2020. In the first half of 2020 alone, economic activity reduced by 7% with the government having to opt for further fiscal measurements and structural reforms to contain any further rippling effects.

Managing the Unexpected

Notwithstanding the severity of the pandemic and the painful denial phase by some key politicians, several measures to protect the economy were taken:

  • Emergency cash-transfer to informal workers and poor households to lift income for 10% of the population above the extreme poverty line
  • Employment retention by subsidizing workers for temporary reductions in working hours
  • Credit and quasi-fiscal support through government-backed credit lines and lowering bank capital requirements when lending to small companies
  • Temporary ban on dividend distributions to ringfence adequate capital buffers within banks
  • Policy rate (SELIC) cut from 25% to 2% by the Central Bank to reduce borrowing costs
  • Liquidity and capital relief measures to support domestic financial markets

These measures are estimated to have taken up 18% of GDP, creating a primary fiscal deficit of approximately 12% for 2020 and driving gross public debt up to almost 100% of GDP. Brazil’s fiscal support was among the largest of all G20 countries, making it a clear outlier in comparison to other emerging markets. Aside from these measures, Brazil’s economy continued to benefit from its core mitigants, countering this unexpected and costly fiscal policy:

  • Strong international reserves of roughly USD 356.9 Bn (2019), equivalent to 20 months of imports helping to cover short-term external debt obligations
  • A resilient banking system with a T1 Capital Adequacy Ratio at +/- 3% (2019) and an average Non-Performing Loan ratio of +/- 3.1% (2019)
  • Low share of public foreign debt, minimising potential foreign exchange shocks

Growing Digitally

Brazil is placing a lot of effort into digitalization and the successes of its start-ups. The country is well connected to the internet with an estimated 70% of the population having access to its resources. In 2019, the country counted 13 unicorns (digital start-ups valued at over USD 1 Bn) and saw several tech companies disrupting various industries such as banking (e.g. Nubank, Creditas) and transportation (e.g. 99, Loggi). As Covid-19 made its way through the economy, it also became clear that the growth in the market capitalization of Brazil’s tech companies outperformed many other sectors of the economy.

The emergence of the Internet of Things (IoT) – i.e. connecting devices to the Internet and among each other – is bringing radical changes to all economic sectors. The large efficiency gains and reduction in marginal costs derived from IoT infrastructure is expected to potentially add USD 200 Bn into the Brazilian economy by 2025. The “IoT Chamber” was assembled in 2014 by putting together several stakeholders from different Brazilian industries. The Chamber introduced its IoT Plan in 2019 aiming to “foster the implementation of IoT as a sustainable development instrument for the Brazilian society, capable of increasing competitiveness, strengthen national production chains and promote higher quality of life”. To unlock this IoT potential, the relevant sectors will be focusing on attracting talent, improving data infrastructure, lobbying positive regulatory changes, enhancing cybersecurity and, more importantly, ensuring consumers are eager to adopt products that use IoT technology.

E Agora?

The expectation is that Brazil’s stimulus package might boost GDP growth to 3.7% in 2021. In the coming years, we may see a more contractionary fiscal policy while the monetary policy might remain somewhat expansive. The latter combined with positive expectations for economic recovery could bring back hopes for a huge range of growth opportunities in Brazil. On the other hand, the increasing political polarization (a trend towards de-globalization and further governmental delays in adopting key reforms) might be counteracting these expansionary efforts. To curb an inflation rate that is trending upwards to 5% p.a., the Central Bank has needed to adapt its monetary policy already by raising the SELIC multiple times, now back at 4.25%. As fuel and food prices continue to increase, we can expect a strong focus on measures to maintain price stability in the economy. Keeping control over its “fiscal expenditure ceiling” will be an additional core requirement in preserving investor confidence in 2021. The evolution of the COVID-19 health crisis, however, clearly plays a major role in whether or not Brazil will be able to rein in its government spending. This in turn may impact the outcome of the presidential elections in 2022 and dictate the level of resilience of the Brazilian economy to plough through and keep its recovery on track.

Sources:

  • 2020 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE

EXECUTIVE DIRECTOR FOR BRAZIL. [online] Available at:

<https://www.imf.org/en/Publications/CR/Issues/2020/12/01/Brazil-2020-Article-IV-Consultation- Press-Release-Staff-Report-and-Statement-by-the-49927> [Accessed 13 July 2021]

  • OECD (2020), Going Digital in Brazil, OECD Reviews of Digital Transformation, OECD Publishing, [online] Available at: <https://doi.org/10.1787/e9bf7f8a-en> [Accessed 13 July 2021]
  • org. 2021. OECD iLibrary | Going Digital in Brazil. [online] Available at:

<https://doi.org/10.1787/e9bf7f8a-en> [Accessed 13 July 2021].2021. [online] Available at:

<https://www.imf.org/en/Publications/CR/Issues/2020/12/01/Brazil-2020-Article-IV-Consultation- Press-Release-Staff-Report-and-Statement-by-the-49927> [Accessed 13 July 2021]

  • 2021 Country Data [online] Available at:

<https://www.imf.org/en/Countries/BRA#countrydata> [Accessed 4 June 2021]

  • worldbank.org. 2021. Population, total – Brazil | Data. [online] Available at:

<https://data.worldbank.org/indicator/SP.POP.TOTL?locations=BR> [Accessed 13 July 2021]

  • org. 2021. Macroeconomics – Organisation for Economic Co-operation and Development. [online] Available at: <https://www.oecd.org/latin-america/data/macroeconomics/> [Accessed 13 July 2021]
  • com. 2021. Brazil’s GDP surges back to pre-pandemic levels. [online] Available at:

<https://www.ft.com/content/9c930e22-6616-413b-a40e-3f21a2315010> [Accessed 13 July 2021]

  • europa.eu. 2021. [online] Available at:

<https://www.ecb.europa.eu/pub/pdf/other/eb201601_focus01.en.pdf> [Accessed 13 July 2021]

  • com. 2021. [online] Available at:

<https://www.fitchratings.com/research/sovereigns/fitch-affirms-brazil-at-bb-outlook-negative- 27-05-2021> [Accessed 13 July 2021]

  • Deloitte 2021. Brazil economic outlook. [online] Available at:

<https://www2.deloitte.com/us/en/insights/economy/americas/brazil-economic-outlook.html> [Accessed 13 July 2021]

  • org. 2021. [online] Available at:

<https://www.wto.org/english/res_e/statis_e/daily_update_e/trade_profiles/BR_e.pdf> [Accessed 13 July 2021]

  • ctfassets.net. 2021. [online] Available at:

<https://assets.ctfassets.net/ws3ue388i71x/rgMP6ZtBa56TKYnrL7VLJ/797a37fed89aea9d9d1039048c b73569/Brazil_Digital_Report_-_Webinar_V8 3_.pdf> [Accessed 13 July 2021]

 

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