Brazil has been suffering an abrupt drop in the inflow of productive foreign investment, and even Brazilian companies are avoiding bringing into the country dollars obtained in exports, which have grown a lot in recent months.
The new trend thickens what has been called the “Bolsonaro cost”. It is not only reflected in the dollar, which is much more expensive than economic fundamentals would justify, but in more inflation and interest rates, with deleterious impacts on the public debt.
This combination, in a kind of vicious circle, put in check the post-pandemic recovery in 2021 and 2022 and has been increasing the total number of miserable people in the country.
The “Bolsonaro cost” is identified as the transmission to the economy of the political instability fed daily by President Jair Bolsonaro (no party), with coup statements, confrontation with other Powers and questions about the electoral process. With less growth and with the dollar, inflation and poverty on the rise, the expectation is that Bolsonaro will create subterfuges to spend more to try to get re-elected. Today, the president is far from being the favorite in the 2022 election.
The proposal to postpone the payment of judicial debts (precatório) to boost the Bolsa Família (renamed Auxílio Brasil) is the most visible point in this context, in which alternatives are sought to break the so-called spending ceiling, which corrects public spending for inflation and it is the main instrument for controlling the high Brazilian public debt.
But specialists also see the government lost, without political articulation or coherent proposals for reforms, as in the case of the tax one, and now hostage to the so-called centrão, with its politicians pressing for more funds for the electoral period.
The result has been the deterioration of financial indicators (Bovespa index, dollar, inflation and future interest rates) and, more recently, the suspension of plans by foreign and local investors to expand production and employment in Brazil.
In the accumulated in 12 months, the net investments of foreigners directed to the productive sector in the country fell from almost US$ 70 billion, a year ago, to around US$ 24 billion.
Even national exporting companies, which have recently increased their revenues with the rising dollar and a new cycle of appreciation of agricultural and metallic commodities, have preferred to keep their dollars away from Brazil, given the current instability.
The two moves help to further pressure the value of the US currency. In comparison with other heavily indebted countries (with a gross debt/GDP ratio above 65%), it is in Brazil where the dollar rises the most.
Much of this increase is directly transmitted to inflation, via imported products or commodities quoted in dollars, such as oil and gas, animal protein and wheat.
Even so, according to calculations by economist Livio Ribeiro, from Ibre/FGV (Brazilian Institute of Economics of the Getulio Vargas Foundation), the economic fundamentals of Brazil, especially because of balanced external accounts, do not justify the dollar in the range of R$ 5. 30/BRL 5.40.
By their accounts, without “the own goal of the institutional mess” today, the US currency could be worth around R$4.20 – almost 30% less.
“But, given the risk structure and uncertainty in Brazil, exporters now keep as much dollars abroad as possible,” says Ribeiro. This has been allowed since the turn of the last decade.
“In other positive export cycles like the current one, the inflow of dollars appreciated the real. But we lost this stabilizing channel.”
Brazil’s foreign exchange reserves show the trend: even with a positive balance of US$44.1 billion in the trade balance (exports minus imports) up to July, the country’s dollar reserves did not increase this year, remaining stationary around US$ 355 billion.
The so-called “Bolsonaro cost”, now boosted by the expectation of uncontrolled public spending, also leads investors to seek protection in the dollar, fueling a vicious cycle.
In it, the high dollar puts pressure on inflation, especially through the commodities channel, which forces the Central Bank to raise interest rates to control prices. As the higher interest corrects the public debt, it grows. To attract investors willing to finance it, the BC may be forced to raise interest rates even more, making the debt even larger.
“Bolsonaro’s erratic behavior has been wreaking havoc from end to end, exposing a government that has turned out to be very unprepared in general,” says Sérgio Vale, chief economist at MB Associados. According to him, not only foreign investors are avoiding Brazil.
“Without political and macroeconomic stability, projects in agribusiness and oil and gas also suffer.”
The Ministry of Infrastructure itself admitted a few days ago that the troubled political scenario should affect important concessions planned for up to 2022, such as Ferrogrão (railway that will connect Sinop, in Mato Grosso, to the port of Miritituba, in Pará), airports in Congonhas (SP ) and Santos Dumont (RJ) and Via Dutra (BR-116, on the stretch that connects São Paulo to Rio de Janeiro).
For Silvia Matos, coordinator of the Macro Bulletin Ibre/FGV, the deterioration situation was aggravated by the adoption, by a Bolsonaro with a low vote in the polls, of a “narrative so that more can be spent aiming at greater popular support”.
Since the second half of 2020, the height of the payment of emergency aid in the pandemic, the total number of people in extreme poverty in Brazil (monthly income below R$ 261) has soared, from 5% of the population (10.5 million) to 13 % (27.4 million), according to data from FGV Social.
“In the last 12 months, the inflation of the poor was 10%, almost three percentage points higher than that of the high-income, as a result of the increase in food and cooking gas, among others”, says Marcelo Neri, director of FGV Social.
“While the average income from work fell 11% between the first quarters of 2020 and 2021, the fall in the poorest half was 21%.”
Thus, not only did extreme poverty increase. Almost 32 million people have left class C (household income from R$1,926 to R$8,303) since August 2020. Class E (up to R$1,205) was the one that swelled the most, with 24.4 million people. The D (R$1,205 to R$1,926) won 8.9 million.
Along the way, Bolsonaro’s failure rate jumped from 32% to 51% between the end of 2020 and July of this year, according to Datafolha. In an eventual runoff against Lula (PT) in 2022, Bolsonaro would be defeated by 31% to 58%.
“But trying to buy society with stimuli ends up not working and does not sustain itself”, says Silvia Matos. “As the market anticipates this movement, with pressure on the dollar, inflation and interest rates, the country ends up losing time and the opportunity to consolidate the resumption of the post-pandemic.”
Most of the forecasts for growth, the value of the dollar and the behavior of inflation have been deteriorating. Fator bank, for example, already works with the dollar at R$ 5.80 in 2022 and GDP growth around 1%.
“It is a great frustration for those who expected something with their feet and heads from the Bolsonaro government and its team”, says José Francisco de Lima Gonçalves, chief economist at Fator.
Gonçalves recalls that the coming months should be marked by a reversal in monetary stimuli by the United States, making it increasingly likely that an increase in American interest rates to contain inflationary pressures.
When this happens, highly indebted and disorganized countries suffer as investors flee to safer markets, driving down the prices of stocks, assets such as real estate and devaluing the local currency. The result is a poorer and more inflated society.
“In the case of Brazil, we will have an additional problem of inflation. Electricity will rise, oil will not
should fall and there will be increasing inflation in services [que representam 2/3 do PIB] with the return of some normality from now on”, says Gonçalves.
For Silvio Campos Neto, senior economist at Tendências consultancy, many economic agents would accept, without any jolts, an increase of around 50% in the benefits currently paid by Bolsa Família, which could reach R$300, on average.
“There would be some space in the spending ceiling for that. The problem is that there seems to be no minimum consensus in the government on what to do with the economy,” he says.
In his opinion, the fact that Brazil’s external accounts are balanced would justify a dollar below R$ 4.50. In addition, idleness in the labor market (with 14.8 million unemployed) and in companies would support an eventual more robust recovery without major inflationary pressures.
“It would be a whole different story if we had another type of leadership and posture. This falls to the president, a symbol of this disarray and the main cause of noise”, says the economist.