Brazil: Business activity, possible rate hike, and political moves

Brazil - Latin America’s largest economy is, following a period of recovery, seemingly re-entering into an unsettling period. Business activity in November dropped, inflation is seemingly persisting, and political uproar – stemming from a fierce run-up to a presidential election, is escalating.

From the coronavirus front, a notable improvement in vaccination coverage was in recent weeks witnessed. The vaccination programme, previously seen as flawed given the supply shortages is under-way with its success now being envisaged as infection rates continue to drop. Resultant to the rising vaccination rate, now exceeding 64 per cent of the population, the seven-day rolling average of daily new cases dropped below 9,000 from over 75,000 in June. Also, coronavirus-inflicted daily deaths significantly fell, on average, to below 200 from almost 3,000 in April.

Linked to a growing vaccine coverage and reduction in coronavirus cases, business sentiment improved.

Business activity edges lower, yet remains in expansionary territory

Brazil’s manufacturing Purchasing Managers Index (PMI) fell to 48.8 in November of 2021, from 51.7 noted in the previous month, the lowest since May 2020. November’s figure was the first below 50 – marking a contraction, in 18 months, as companies scaled back on production to accommodate a decline in demand. This, a result of economic uncertainty and rising interest rates. Price pressures in November mounted amid global shortages of raw material, higher transportation costs, and a weaker BRL. On the employment front, workforce in the manufacturing segment rose. The rate of expansion was however the lowest in an eight-month period.

In the same month, services, headed lower to 53.6 in November of 2021 from 54.9 in the previous month. Despite the decline, the latest reading pointed to the sixth successive month of expansion in the services sector, linked to a growing coronavirus immunisation, reduced number of cases, and improved market confidence. The sustained upturn in services was supported by a rebound in sales growth, as output rose at a near record pace. Improved demand conditions led employment to grow at the fastest pace since mid-2008.

All-in-all, Brazil’s Composite PMI fell to 52 in November, from 53.4 in October. Albeit the slowest one, November’s reading pointed to the sixth straight month of expansion in the country’s private sector.

Another rate hike on the cards?

Brazil’s annual inflation rate climbed to 10.67 per cent in October of 2021, the highest since January 2016, and beating market expectations of 10.45 per cent mostly due to the reopening of the economy, alongside supply bottlenecks, and the effects of a weaker domestic currency. Upward price pressures mainly came from transportation and fuels. On a monthly basis, consumer prices increased by 1.25 per cent over the previous month.

In response to inflationary pressures, Brazil’s central bank has in 2021 swiftly responded, raising its benchmark rate, better known as the Selic rate, by a total of 5.75 per cent over six interest rate hikes.

The Monetary Policy Committee (Copom) - the body of the Central Bank, which defines the basic interest rate of the economy, stated that its recent pace is the most appropriate to guarantee inflation convergence to the targets at the relevant horizon, which includes the years 2022 and 2023.

In the December 8 policy meeting, the Copom is expected to raise its benchmark interest rate by a further 150bps.

Political moves in a bid to increase popularity

With Brazil’s general election less than a year away, pressure on the highly controversial President Jair Bolsonaro is mounting. In opinion polls, Jair Bolsonaro trails former president Luiz Inácio Lula da Silva – a popular left-wing former leader who was set aside after having criminal convictions for corruption.

In addition to failing to deliver on his pre-electoral promises to turn around the country’s economy with his free-market rhetoric, Bolsonaro’s ill-fated response to the pandemic, the latter leading to a congressional inquiry, heightened political pressure.

Consequent to Jair Bolsonaro’s controversial handling of the pandemic - often prioritising the economy at the expense of health, the Senate initiated an investigation, which is also hurting his approval ratings for the upcoming general elections, scheduled to be held in October 2022. The inquiry could pave the way to Bolsonaro’s impeachment, which, although plausible, remains highly unlikely.

The official senate committee’s attention turned to a contract worth R$1.6 billion, equivalent to $320 million, to purchase 20 million doses of Indian-made Covaxin. A point of scrutiny here is the price agreed for the Covaxin shots, which at $15 per dose is considered to be more expensive than others bought by Brazil. Questions are also being raised on the role a company, acting as a middleman, played in such contracts, and why contracts with Covaxin were signed ahead of deals with other manufacturers, although the shot had not yet completed late stage trials. Bolsonaro may in the coming weeks also be investigated over claims, on a live broadcast on October 24, that "official reports from the UK government suggest that fully vaccinated people... are developing Acquired Immunodeficiency Syndrome (AIDS) much faster than anticipated". Brazilian Supreme Court Justice Alexandre de Moraes instructed the country’s top prosecutor, Augusto Aras, to look into the accusation raised by a pandemic inquiry conducted by Brazil’s senate.

As Bolsonaro foresees a possible loss in the upcoming election, he is now seemingly resorting to populism feats.

A massive social welfare program known as Auxilio Brasil, following the approval by both Brazil’s lower house and the senate, will replace Bolsa Familia, which has been a backbone of Brazilian social policy for almost two decades. Auxilio Brasil, introduced by Jair Bolsonaro, will double the size of cash welfare payments to poor families in Brazil to 400 reais ($70.30) monthly and increase the number of families covered to 17 million, from almost 14 million.

While the new social welfare program will support several low-income earners whose livelihoods have been worsened by the coronavirus pandemic, the move may indeed be regarded as a cynical ploy to increase his popularity amongst a wide swathe of voters for the upcoming general election.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.