October 12th, 2020

  • The Administration’s considerable challenge is to transition smoothly to a sustained development phase. The recovery of retail sales, which have returned to pre-Covid-19 levels confirm a V-shaped format rebound. In the coming months credit and fiscal incentives are expected to be replaced by market stimuli.

  • The market is betting on 3.6% growth for next year. This apparently optimistic view considers two premises: The Central Bank advancing its monetary easing policy and the primary deficit taking a significant dip.

  • The negative response of the exchange rate and future interest rates is concrete evidence of the fiscal component in the country-risk perception. Any populist policy that considerably impacts fiscal sustainability would lead to prolonged stagnation.

A swift and orderly transition from the pandemic-generated recession to a new stage of sustained growth still poses a great challenge.


The employment leading indicator calculated by the Getulio Vargas Foundation hiked in September. However, it was insufficient to return to pre-pandemic levels.

Employment data are consistent with retail recovery, which had already surpassed pre-Covid levels, confirming the V-shaped format of the rebound.

It should be noted that this relatively quick exit from the crisis results from the combination of two factors: the rebound of consumption, dormant due to social isolation, and the compensatory measures policy.

In the coming months, the trend is to gradually replace fiscal and credit incentives with genuine market stimuli.

In this context, private investment would lead GDP expansion, which would be leveraged by regulatory modernization - sanitation, new gas market, end of the pre-salt sharing model - in addition to the wave of privatizations and concessions.

The consolidation of the fiscal architecture and maintenance of the spending cap is implicit in this strategy.

The expansion of the social protection network would be financed by cuts in current expenses (mainly civil servants) and adjustments in the individual income tax to make it more progressive. Unorthodox solutions are discarded.


The projections of the Central Bank’s Focus bulletin implicitly reflect this revamped liberal strategy with greater social content without giving up macroeconomic stability.

The challenge is to accelerate growth to 3.6% next year.

This seemingly optimistic view is supported by two key pillars: continuity in the easing monetary policy bias with only marginal increase in the base rate to 2.50% and, concomitantly, a sharp drop in the primary deficit converging to a sustainable standard.

Clearly, these expectations could be rapidly reversed in case there is an (frustrated) attempt to transition without adjusting public accounts.

The negative reaction of the exchange rate and future interest due to the premature announcement of the Renda cidadã program (monthly stipend to the poor) is concrete evidence of the pertinence of the fiscal component in the country risk perception.


Despite the September consumer price index (0.64%) upward bias, the gap in relation to the general price indices remains significant. The general market price index variation (IGP-M) was 4.34%.

The 12-month comparison between these important inflation measures are even more striking: 3.14% versus 17.94%.

The main explanation for the above gap is the pressure of commodities on wholesale prices, amplified by the devaluation of the exchange rate. For now, idle capacity has acted as a buffer, reducing impact for the consumer.

On the other hand, the rise in the consumer price index (IPCA) continues to be localized, such as in food and airline tickets. This gap between price indices did not contaminate inflationary expectations: Actually, the market estimates that the IGP-M will strongly decelerate in 2021 and that commodities prices will settle.

In this case, IPCA and IGP-M would return to similar levels, allowing the Central Bank to proceed with its gradual monetary policy.

In a nutshell, the transition from emergency policies to a renewed growth strategy is still extremely demanding.

Returning to fiscal sustainability is a precondition to the optimistic market expectations of 3.6%GDP growth for next year.

Prolonged stagnation would prevail in case of the alternative scenario, which takes into account a “populist relapse”.

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