BRAZIL MEMO - THE NEW SOCIAL MEASURES

CARLOS GERALDO LANGONI

August 31th, 2020

• Brazil is currently facing the challenge of transitioning from emergency social measures to a permanent social safety net. The urgency of the transition must consider fiscal sustainability. It’s imperative not to fall into the neo-populist trap, which would steer the country towards the fatal combination of inflation and recession.

• Despite present tensions, industry and commerce confidence indices maintain a positive bias. The July current account surplus, the likeliness that the economy will continue to reopen and the prospect of an effective vaccine soon, all contribute to favorable future expectations.

• Notwithstanding decelerating direct productive investments, which were impacted by riskaversion, the current account deficit has been comfortably financed by long term capital, thus dampening foreign exchange overshooting.

The administration’s most relevant challenge is to even-handedly phase out short-term emergency measures, whose greatest symbol is the monthly stipend paid to those affected by the pandemic.

This transition is an urgent necessity for the economy to find fiscal sustainability again.

Pressures:

Nevertheless, expectations must be adequately managed in order to minimize the social and political costs of the transition. This week's episode involving the decision to pay a supplementary income (Renda Brasil) to the least-favored social classes illustrates the sensitivity of the issue.

The economic team is trying to expand the reach of the current social program (Bolsa Família) to add 7 million beneficiaries who were identified during the pandemic. They lived on the margins of society and were suddenly connected to the real world by the Federal Savings Bank. They can no longer be ignored and must count on a social safety net.

Minister Paulo Guedes is conscious of their reality, but he’s also fully aware that Brazil needs to maintain a favorable country-risk perception in which the fiscal component has a disproportionate weight.

This explains his original idea of canceling scattered benefits - such as salary bonuses and sick pay - in order to concentrate on a project with greater social efficiency. However, this alternative was apparently vetoed: a new program and even the revision of the income tax with the limitation of regressive deductions such as health and education expenses is being discussed.

A CAMARBRA gostaria de agradecer e compartilhar com seus associados a Nota verbal emitida pelo Consulado Geral Argentino em São Paulo.

Not falling into the populist trap is essential: any explosive trajectory of the public debt would lead to the fatal combination of recession and inflation. There would be a strong rise in unemployment - currently at 13.3% in the 2nd quarter of 2020, according to the continuous quarterly National Household Sample Survey - offsetting the benefits of any social program, however ambitious it may be.

Scenarios:

Despite these inevitable tensions, confidence in industry and commerce has remained positive, suggesting a V-shaped format resumption.

The indices calculated by the Getulio Vargas Foundation in August revealed a strong increase, close to pre-crisis levels.

This trend is expected to last during the coming months, because it reflects both a favorable assessment of the present moment - the worst is over - as well as future expectations – a bet on the gradual recovery of the economy

Adjustment:

In addition to exogenous factors, such as the prospect that the economy will continue to reopen and effective vaccines will be available soon, the balance of payments contribution should be taken into account.

In July, Brazil had a new current account surplus, gradually reducing the external imbalance that dropped to a new level of 2.7% of GDP.

This improvement in the current account is largely due to the resilience of exports, which have remained practically stable, even in the face of the global recession.

Paradoxically, Brazil’s trump card is its dependence on commodities, whose demand has been sustained by China's V-shaped format recovery.

Decelerating direct productive investments still maintain a high flow (US$ 63 billion), notwithstanding the impact of increasing risk aversion.

Thus, the current account deficit has been comfortably financed by long-term capital, helping to dampen foreign exchange overshooting.

Conclusion:

In short, the transition from emergency social policies to new permanent programs is an enormous challenge and inevitably creates political tensions.

The problem is even wider due to the urgency to restore fiscal sustainability - a critical factor in Brazil’s risk perception.

Despite short-term uncertainties, confidence indices maintain an upward bias, fueled by sound external accounts and an imminent recovery cycle.