Water crisis worsens and becomes another obstacle to the growth of the Brazilian economy | water crisis

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Immediately, the drought has led to an increase in the price of electricity bills and has turned into yet another inflationary pressure for the population – which is already suffering from the rise in fuel and food. The industry also faces an adjustment in the cost of production in a scenario where there is little room for maneuver to absorb new shocks.

Finally, the drought should still cause the Gross Domestic Product (GDP) of agribusiness to retreat this year, for the first time since 2016.

“Factors that limit GDP growth in the coming quarters and that weigh (for the activity) in 2022 are coming together”, says Alessandra Ribeiro, economist and partner at Tendências consulting.

The full impact of the drought on Brazil’s GDP is still difficult for economists to measure. The size of the crisis – whether the country will need to adopt rationing, for example – will only become clearer in the coming months, depending on the amount of rain in the reservoirs.

What can be said is that the water crisis has increased in severity in recent days. Last week, the National Electric System Operator (ONS) reported that the country’s current electricity generation capacity will be insufficient to meet demand as of October.

“Given the current level of the reservoirs, if we arrive in October, November, and the rain doesn’t come, the risk (of rationing) increases”, says Luciano Sobral, chief economist at Neo Investimentos.

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Below-average rains light up an alert in the reservoirs of the largest metropolises

Below-average rains light up an alert in the reservoirs of the largest metropolises

Government’s role in the crisis

In the speech, for now, the government recognizes the gravity of the situation, but discards a rationing – although it has adopted a series of measures to try to avoid a blackout:

  • Announced the ‘award’ for consumers who save electricity;
  • Federal public agencies should reduce energy consumption by 10% to 20%, defines decree

For specialists, however, the federal government is taking time to take effective measures to avoid the system’s exhaustion.

In an interview with G1, Renato Queiroz, a researcher at the Energy Economics Group of the Institute of Economics at the Federal University of Rio de Janeiro (UFRJ), stated that there is a delay in the government’s reaction to the problem. He understands that more thermoelectric plants should already have been activated. They produce more expensive energy from burning fuels such as oil or gas.

“We already knew that 2021 would be problematic. And what should be done? Hold water in the reservoirs and put more thermal plants to dispatch. Why not do that? Because our electricity bill is already very expensive”, explained the researcher.

Experts also point out some planning errors that help explain recent water crises.

“The country spent 20 years building a hydroelectric plant without a reservoir [exemplo Belo Monte, que opera a fio d’água, conforme a quantidade de água existente no rio]. In 20 years the demand for energy has almost doubled and we continue with the same size of water reservoirs,” he told the G1 Paulo Arbex, President of the Brazilian Association of Hydroelectric Power Plants and Small Hydroelectric Power Plants.

If an eventual rationing scenario is confirmed and the government determines a 10% reduction in energy consumption for all sectors for a period of one year, the impact should be 1.5 percentage points on GDP, according to calculations carried out by Genoa Capital.

The same exercise shows that, if the government opts for a 20% rationing just to reduce household consumption, also within a year, the impact on activity would be 1 point.

“It can be quite complex to make this drop in residential consumption”, says the chief economist of Genoa Capital, Igor Velecico. “In previous years, there were efficiency gaps in which it was possible to change light bulbs, refrigerators (to save money). Today, these gaps are much smaller and there is a larger portion of people working in the home office.”

See in detail the impacts of the water crisis already felt in the Brazilian economy:

In the daily lives of the population, the water crisis is already having a direct impact on inflation.

With reservoirs at a low, Brazil cannot depend only on hydroelectric plants to guarantee the country’s energy supply. The solution has been to activate the thermoelectric plants, increasing the generation cost, which makes the electricity bill more expensive every month.

In the 12 months to July, residential electricity rose 20.09%, according to the Broad National Consumer Price Index (IPCA). And the cost of energy it won’t fall so soon.

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On Tuesday, the National Electric Energy Agency (Aneel) announced the creation of the “water scarcity tariff flag”. It goes into effect this Wednesday and will add R$14.20 to bills for every 100 kW/h consumed. Electric bills must go up another 7%.

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  • With inflation on the rise, household income for consumption is the lowest since 2005

Weight of essential items in the family budget is the highest in 16 years

Weight of essential items in the family budget is the highest in 16 years

When inflation rises, it reduces the purchasing power of Brazilians, directly affecting consumption. And this rise in prices is even more perverse for low-income families.

You poorer people are less able to absorb these inflationary shocks. – therefore, any increase in an essential item has a large impact on the cost of living of the population that earns less in the country.

The figures from the Institute for Applied Economics Research (Ipea) have translated this movement well. Also in the 12 months accumulated until July, inflation for very low-income families (less than R$1,650.50 per month) reached 10.05%. Among the richest (income greater than R$ 16,509.66 per month), the advance was 7.11% in the same period.

“The increase in electricity affects the budgets of families and reduces the purchasing power of Brazilians,” says Alessandra, from Tendências. “And it’s not just electricity. There are other important increases related to food and fuel, for example.”

Higher cost for the industry

The more expensive energy also makes the industry face an increase in the cost of production. It is another glimpse for the sector, which has not yet managed to fully recover from the damage caused by the pandemic.

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In early August, a survey carried out by the Confederation of National Industry (CNI) showed that the water crisis was a concern for 90% of businessmen in the sector.

Among businessmen with some degree of concern, the biggest fears were, according to the CNI, with the increase in the cost of energy (83%), the possibility of energy rationing (63%) and the instability or interruptions in the supply of electricity. energy (61%).

Reason for concern about the water crisis — Photo: Economy G1

“The industrial sector had been going through a very difficult time, which was aggravated by the pandemic”, says Roberto Wagner, an energy specialist at CNI. “The industry has no room for maneuver to avoid a transfer of these costs. The tendency is that this ends up being incorporated in the costs of products.”

The drought is also expected to impose a loss on agribusiness’ GDP. It will be the first retraction since 2016, according to consultancy Tendências.

“This climate issue significantly affected the projections (for the sector)”, says Alessandra. “The country comes from good years of agribusiness GDP growth. For 2021, we even had a positive estimate, an increase of around 2%.”

Now, Tendências estimates a retraction of 0.4% for the agricultural GDP. This number will be influenced by the following drops in production this year compared to 2020:

  • Corn: 15.5% reduction;
  • Cotton: 22% retreat;
  • Coffee: 22.6% retraction.

Agricultural GDP performance — Photo: Economy G1

“In the third and four quarters, the agribusiness GDP will be negative”” affirms José Francisco Gonçalves, chief economist at Fator bank. “This year it will end badly and it is possible to have an even greater retraction depending on what happens. “

Agribusiness, although it is a limiting factor for the country’s economic activity, it has little potential to affect the outcome of the economy as a whole. The sector accounts for 7% of the country’s total GDP.

SECOND QUARTER 2021 GDP