Macro Forum: The Street View
“What we learn from history is that people don’t learn from history”
We saw this wave coming. From a health perspective, the measures taken to mitigate the spread of COVID 19 are supported by research and scientific data, the main objective is to save lives and avoid the collapse of an existing limited health system. In parallel, on the economic front, the overriding priority is to provide support to the low-income population and avoid unemployment, as well as keep small-medium enterprises (SME) from shutting down.
Brazil’s already fragile fiscal situation, which is running a primary deficit at 2% of GDP and public indebtedness at 75% will deteriorate further on the back of the fiscal stimulus to alleviate the sudden stop of the world economy. Meanwhile the high number of informal jobs poses an additional challenge on the implementation of income-transferring measures. On the monetary front, the dilemma of lowering interest rates vs additional pressure on BRL (down 30% YTD against USD) dominates the narrative.
Keynesian treatment a la Guedes
Finance minister Guedes and his cabinet have prescribed a Keynesian treatment to the patient but with some doses of Friedman. The fiscal stimulus package is rooted in three main areas: (i) utilisation of the already established income transferring Bolsa-familia program expanding by more than 1million beneficiaries to c.15million families that will be able to receive an extra US$110 monthly income, in additional to the standard USD$75 monthly income, (ii) an additional c.20million informal workers will also be eligible for the monthly income by registering on an app, and (iii) registered workers will be able to secure a yearly withdrawal from social security funds they contribute to.
A program created by Temer’s administration to enhance consumption during low economic activity, will secure additional liquidity to families by enabling a one-off c.USD200 income. The administration is considering a partnership with Payment Service Providers, such as our investee company Stone, to ensure income can be transferred to both individuals and SMEs.
The prescribed treatment for companies has a combination of new and traditional medicines – minimising impact on working capital by providing cheaper short-term facilities anchored on the all times low interest rate, SELIC 3.75%, or granting a grace period for interest payment for public banks and DFIs, and offering tax deferrals.
There are further measures to enhance bank lending capabilities by reducing compulsory bank deposit reserves from 25% to 17%, adding c.USD12bn to the financial system. The new medicine is in practice putting in place Paulo Guedes’ liberal idea, of reducing labour cost and providing flexible working contract. The result is a relief to companies by reducing tax paid over gross salary, allowing the possibility to reduce the weekly working hours, or even suspending the existing contract, which will be paid temporarily by Federal government.
Despite the effort described above including a c.US$100 billion fiscal package c.3% of 2020’s budget reallocation and c.US$50 billion additional budget approved the economic slowdown is inevitable – Brazil’s GDP is now expected to contract from 2-4%, fiscal deficit may widen from 2% to 7% and public indebtedness climb to 85%.
Energy consumption year-to-date has posted a sharp decline of 1.5% with a year on year 18% reduction from 18 – 30 March. Furthermore, the energy bill has also been the object of an anti-cyclical measure by Bolsonaro’s administration – a granted waiver for low income individuals to pay their bills for the next three months, while vetoing distribution companies from stopping supplying energy to those consumers.
Distribution companies (“DisCos”) will be impacted by a greater need for working capital, as they are obliged to continue paying the long term energy contracts whilst payment from part of their customer base is being waived, which increases the receivables period. Some companies within the poorest region of the countries have c.20-28% low-income segment as a share of their residential segment.
The Treasury department and Ministry of Energy are providing funding of cUS$4 billion to support distribution concessions during this turbulence, replicating the same package designed in 2014 when the same companies faced a sudden shortage of power derived from poor hydrology.
Lunch is served…
The effort and measures to overcome the challenges that COVID-19 imposes to an emerging economy have been put forward. We all agree there is “no free lunch”, but currently our Feijoada (a delicious traditional stew of beans with beef and pork) is being reduced to a Brazilian lunch box, with some familiar and some new flavours thrown in. Our economy needs enough nutrients to have the strength to respond and to be fit for the years to come – recovery and deleveraging in mid-long term is a must.