The Attempt to Rebuild Brazil

In the race against the recent impacts of COVID-19, war in Ukraine and semiconductor shortages, the Brazilian government has expanded its actions against accelerating inflation rates. Unlike other countries, they have responded more quickly by increasing domestic interest rates. As expected, in June the interest rate increased: 12.75% to 13.25% and the market expects this rate to go to 13.75% in August and this should be the last increase in the next few years.

People living in Brazil are suffering from rising prices due to inflation. The index called IPCA was 8.99% in July 2021 and 11.73% in May 2022. The Central Bank's target for 2022 was somewhere between 2% and 5%.

The following Figure (1) shows the history of inflation.

Source: https://tradingeconomics.com/brazil/inflation-cpi

This growth is more impacted by the prices of gasoline and other transport materials such as diesel, ethanol and consequently transport by app and car insurance.

As a regular economic policy, the central bank is raising the interest rate, which causes real interest rates to increase together, decreased household investment and consumption, decreased demand for goods and services and help – ultimately – to decrease the inflation.

Source: own creation.

As we can see in Figure 3, the inflation rates of all countries (except Paraguay, Brazil and Venezuela) are higher in May than in April. Likewise, interest rates in all countries are increasing, trying to minimize the impacts through monetary policy.

Source: https://tradingeconomics.com/country-list/inflation-rate?continent=america

Created By: Karine Kobarg

Since 2018, the Brazilian president has been Bolsonaro. His relationship with Argentina, an important neighbour, is sensitive.

It is important to consider that in their first year, a new president in the country still follows the budget rules defined in the previous government, so for the current government the first year dictating the new policy was 2020, the same year in which the COVID-19 crisis occurred. Right up until present day, Bolsonaro has been against the closure of businesses and the WHO's "stay at home" recommendation, as he was concerned about the economic impacts of this movement (increase in unemployment, inflation, reduction of family income, etc. )

As we can see in Figure 4, unemployment is still high - reaching a peak during the pandemic of 14.2%. Today this index is at 10.5%

Source: https://tradingeconomics.com/brazil/unemployment-rate

In 2021 alone, 1.4 million businesses were closed in the country and, as an economic policy, the government established benefits to help companies and employees (reducing working hours and helping companies by paying part of each employee's salary).

While Bolsonaro was worried about the closing of business, it can be compared with neighbouring Argentina, which stood out during the pandemic as one of the most restricted countries: they closed borders until December 2021 and, as we saw in figure 3, their rates of inflation are increasing over time. Publicly, Bolsonaro criticized the neighbour's policy, which damaged the relationship between the countries.

During Trump's administration as US president, as both belong to far-right parties, initially there was an expectation of proximity between governments, which would help Brazil. However, along with the COVID-19 crisis, in the first half of 2020 the US government restricted the import of Brazilian steel, which affected the Brazilian economy (83% less imports in 4Q 2020). Since 2018, the Brazilian quota was 3.5 million tons per year. While Brazil tried to expand its external operations, the need for internal protection made Trump reduce business with Brazil.

As we mentioned, Brazil was one of the first nations to raise interest rates to contain inflation. The forecast is that as of 2023 the interest rate will begin to fall (Central Bank expects 9.25% p.a.) and the IPCA (inflation rate) from 7.89 p.a. now to 4.10% p.a. in 2023.

Figure 5 – Forecast Brazilian Interest Rate and Inflation Rate

Source: https://www.bcb.gov.br/content/focus/focus/R20220429.pdf

With the entire scenario presented so far and the presidential elections between October and November this year, interest and inflation projections, as well as market expectations themselves, should vary weekly, as polls and the proximity of the elections approach.