CARLOS GERALDO LANGONI

ECONOMIC VIRUS

• The coronavirus’ pandemic nature has added to the world economy’s synchronized deceleration. Brazil’s stock market and exchange rate have been affected.

• The global economy is deteriorating at a delicate moment, when Brazil is implementing an agenda whose main focus is on tax and administrative reforms.

• The situation of the public accounts remains a huge problem. The positive impact of concessions and privatizations is necessarily slow.

• At this initial stage of the reform’s agenda, it is important for Brazil that the external shock is moderate and its duration is short.

• Domestic conditions favor economic take off, which would be key to strengthening the labor market and enabling faster corrections of fiscal imbalances.

The coronavirus epidemic is particularly worrying because it is spreading at a moment when the world economy is in synchronized deceleration. The IMF still considers it premature to quantify the impact on global GDP, but the bias is clearly negative.

Scenarios:

There is widespread concern despite the fact that the initial focus is on China, a country where there is room for countercyclical measures of a fiscal and monetary nature.

More relevant than the initial effect on retail and tourism, is a new wave of uncertainty that is fueling global risk aversion which is also a matter of concern.

In Brazil, a sharp decline in the São Paulo Stock Exchange index was driven by commodity-intensive companies (Vale, Petrobras), whose prices are under pressure due to the weakening of China’s demand.

The exchange rate is also under pressure - the dollar has resumed its appreciation trajectory and exceeded the level of USD/BRL 4.20.

This pressure occurs despite the strength of the external accounts. The current account deficit (2.76% of GDP) showed a moderate increase, but continues to be comfortably financed by long-term capital.

Actually, foreign direct investment (FDI) reached US$ 78.6 billion - an expressive figure for a year of governance tests.

Timing:

This new external shock occurs at a delicate moment in the consolidation of the reformist agenda, which puts emphasis on tax and administrative changes.

Despite the municipal elections, Rodrigo Maia, Chairman of the Lower House, considers that there are still good chances that the 1st stage of tax reform will be approved in the 1st semester.

Tax optimization would leverage GDP, which could exceed market projections (2.3%).This positive scenario basically assumes that the virus will have a moderate and transient impact.

Imbalance:

Faster expansion of labor-intensive sectors is key to sustaining a drop in unemployment. According to the Brazilian Institute of Geography and Statistics (IBG, the unemployment rate remained high in December (11.0%), confirming the fragility of the labor market with worrying social impact.

Accelerated growth is also critical for improving public accounts, by beefing up revenue in real terms.

Despite the government's effort, Brazil has generated a primary deficit for the 6th consecutive year, notwithstanding the extraordinary gains from the National Bank for Economic and Social Development (BNDES, the acronym in Portuguese) and the pre-salt auctions.

The public accounts situation remains a huge challenge. One should take into account that there is a necessary time lag regarding the contribution of privatizations and concessions.

In any case, the fiscal impact of the continued growth of public debt has been dampened by the fall in interest rates, which today are historically low. This virtuous circle, however, appears to be nearing its end.

Conclusion:

In short, the Coronavirus has raised the level of uncertainty in the world economy, just as global expectations have improved with the truce in the protectionist war.

For Brazil, which is starting a new reform agenda, it is important for this external shock to be moderate and its duration short.

Domestic conditions favor economic take-off, which is essential to strengthen the labor market and enable faster corrections of fiscal imbalances.