Worsening of the water crisis impacts company plans and threatens the economy until 2022 – 03/09/2021 – Market

The sequence of negative impacts of the prolonged drought is more than a threat to the Brazilian economy in 2021. The effects of the water crisis have gained strength in recent months and, according to analysts, also represent a challenge for economic activity in 2022.

The lack of rain harms agricultural production, raises costs in industry, pressures inflation and, thus, affects household consumption. If this were not enough, some analysts are concerned about the risks of mandatory rationing of electricity and possible blackouts due to drought.

The alert about the impacts of the lack of rain became stronger after the release, on Wednesday (1st), of the GDP (Gross Domestic Product) for the second quarter of this year. The 0.1% indentation in the indicator already reflected, in part, the losses of the adverse climate.

In recent months, the drought has damaged crops and forced the activation of thermal plants in the country, which have higher costs for energy generation. As a result, in addition to food, the electricity bill also became more expensive, putting pressure on inflation.

In 12 months, the IPCA (Extended National Consumer Price Index) approached double digits. The variation in the accumulated up to July was 8.99%.

High prices, in an environment of high unemployment and fragile income, shake household consumption, which stagnated in the second quarter of 2021. In other words, the variation was nil (0%) compared to the initial three months of 2021.

With high inflation, the Copom (Committee of Monetary Policy of the Central Bank) started to increase the basic interest rate, the Selic. Higher interest rates, in addition to affecting consumption, make productive investments in companies difficult, says Alex Agostini, chief economist at the Austin Rating risk rating agency.

“Economic agents are more cautious, and this creates pressure for the next year”, says Agostini.

In an August report, investment manager Rio Bravo underlined that “the water crisis is not only a risk for inflation, but also for economic growth in 2022”.

Economist João Leal, from Rio Bravo, points out that an eventual rationing would bring a series of negative effects to the activity. “It’s a non-negligible risk. The situation is not positive, and we do not see such a strong sign of improvement in the short term”, points out Leal.

Until now, the federal government has been committed to voluntarily reducing energy consumption among residential and commercial customers in the country.

At an event this Friday (3), Luiz Eduardo Barata, former director of the ONS (National Operator of the Electric System), drew attention to the existing difficulties in the water and energy scenario. According to him, “the measures to mitigate the risks have taken a long time and have been timid.”

“The experts who have followed studies recognize that with each passing month, with each passing day, our risks increase. What we’ve seen is an increase in consumption rather than a reduction. The forecast of reaching the months of October and November without being able to meet all consumption is real and quite large”, stated Barata at the online business event Scoop Day.

Paraná is one of the most affected places due to the low level of rain. In early August, the local government decided to extend the water emergency situation to the entire state, which until then was valid only for Greater Curitiba and the Southwest region.

The measure authorizes the rotation of water supply — that is, the mixture between periods of supply and suspension of service. On Thursday (2), the government of Paraná informed in a note that the severe drought “still shows no signs of truce”.

For now, the main impact of the drought on the state’s industries is the increase in energy costs, says João Arthur Mohr, manager of Strategic Affairs at Fiep (Federation of Industries of the State of Paraná).

According to him, as a precaution, part of the sector is already starting studies to change operating hours if necessary in the coming months. In practice, in the event of a further worsening of the water crisis, industries could carry out production processes that demand more energy in periods of the day when light consumption is lower.

For now, cost pressure alone is a major concern, says Mohr. “The increase in energy affects the competitiveness of companies”, he defines.

A recent survey by the CNI (National Confederation of Industry) indicated that nine out of ten businessmen in the industrial sector in the country report concern about the lack of rain.

Given this situation, the demand for electric generators doubled in 2021, compared to 2020, reports José Velloso, executive president of Abimaq (Brazilian Association of Machinery and Equipment Industry).

Velloso recognizes that the water crisis raises the alarm in the industry due to the increase in production costs. He, however, does not currently see any major risks of forced rationing or blackouts in the coming months.

“Of course, without rain until the end of the year, the scenario would worsen in 2022”, he says.

Roberto Leverone is one of the industrial entrepreneurs who are studying adapting their factory due to energy risks.

Director of a company with business in the textile and toy sectors, in Magé (RJ), Leverone evaluates the installation of solar energy panels at the factory. However, he says the costs are high, and that weighs heavily at a time when the economy is still trying to recover.

“An investment like this would have to be more accessible for companies”, says Leverone, who is president of Firjan (Federation of Industries of the State of Rio de Janeiro) Caxias e Região.

Haroldo Ferreira, CEO of Abicalçados (Brazilian Association of Footwear Industries), also reports that the water crisis is beginning to impact business due to the increase in costs.

According to him, in case of need, companies in the segment are also considering adopting measures such as changes in work shifts, to “escape” from peak hours of light consumption.

“These are studies at the moment”, he says.

Fernando Pimentel, president of Abit (Brazilian Association of the Textile and Clothing Industry), highlights that the pressure of more expensive energy can generate reflexes on prices for the consumer.

“The developments are not restricted to 2021, they are projected in prices for next year”, analyzes Pimentel, who still does not see a possibility of “classic rationing”, such as in 2001.

In agriculture, losses due to drought were aggravated in part of crops by the record of frosts in June and July in the Southeast, South and Center-West regions.

This is the case with sugarcane. Due to the adverse climate, crushing at the plants in the Center-South should fall from 12% to 13%, to the level of 530 million tons, indicates Unica (Union of Sugarcane Industry). The projection means 75 million tons less compared to the 2020/2021 harvest.

“After the frosts, the alternative is to harvest the sugarcane as quickly as possible, so that less is lost”, emphasizes Antonio de Padua Rodrigues, technical director of Unica.

The losses in different crops have already affected the production of the national industry, which fell 1.3%, in general terms, in July, pointed out by the IBGE (Brazilian Institute of Geography and Statistics) on Thursday (2).

With the impact of climatic difficulties, Ipea (Institute for Applied Economic Research) reduced its forecast for an increase in agricultural GDP this year, from 2.6% to 1.7%. By releasing the review, on the 26th, the institute drew attention to the negative effects of La Niña in 2021.

The phenomenon is seen as one of the reasons for the water crisis because it affects the distribution of rainfall. In Brazil, La Niña usually causes drought in the Center-South.

Coffee and corn are also among the crops affected by the drought. With the lower offer, prices rose in the field. Arabica coffee, for example, has accumulated an increase of around 80% compared to the end of last year, according to data from Cepea (Center for Advanced Studies in Applied Economics).

Higher inflation, accompanied by higher interest rates and a political crisis, is causing fear in the financial market. In a report, the consulting firm MB Associados reported concern with the Brazilian scenario in 2022. In MB’s view, there is a “contracted slowdown in the economy next year due to the deviations that the government has taken this year”.

“The conjunction of a water crisis with a sharp rise in interest rates causes a feeling of imminent stagflation,” pointed out the consultancy. Stagflation is known as a phenomenon that combines economic weakness and rising prices.

Market analysts consulted by BC’s Focus Bulletin expect an advance of 2% in the Brazilian GDP in 2022. However, there are already estimates below that level. Itaú Unibanco, for example, lowered its projection in August, from 2% to 1.5%.