Brazil becomes more risky, and foreigners prefer other countries

The Brazilian economy has fallen less and is coming out of the crisis caused by the pandemic more quickly than other emerging countries thanks to higher public spending in 2020 and 2021. But the bill is already coming, with higher inflation, interest rates and the dollar, factors that will hinder growth in 2022 and make the country less attractive to foreign investors. That’s what executives from US and European banks and the two largest rating agencies in the world say.

According to them, the presidential elections and the risk of energy rationing here in Brazil, in addition to the increase in interest rates in the United States and the slowdown in China abroad, are other factors that should hold up the performance of the Brazilian economy. With all this on the radar, the expectation of these market agents heard by the UOL is that foreigners will prefer fixed income in 2022, because of the high interest rates. Big bets on the stock market will remain after the elections. And investments in the real economy, such as infrastructure, will be punctual, depending on concession programs and the economy.

Investment in the real economy has been falling for nearly four years. In 12 months, according to the Central Bank, it was:

  • US$ 80.7 billion (4.25% of GDP) in 2017
  • US$ 77.4 billion (4.3% of GDP) in 2019
  • US$49.4 billion (3.12% of GDP) in August 2021

For Drausio Giacomelli, chief strategist at the German Deutsche Bank, Europe’s fourth largest bank, Brazil had already been losing ground in the preference of foreign investors before the pandemic, along with other Latin American economies, while Asia has been gaining ground.

Ramon Spano, senior portfolio manager at Italian asset manager Azimut Global, which manages 77 billion euros in 18 countries, agrees and highlights that countries where the expansion of the middle class and investment in technological infrastructure are fundamental for development, such as China is preferred by investors over those who depend on commodities, such as Brazil.

Public accounts got worse here

The Senior Economist for Latin America at S&P Global Ratings, Elijah Oliveros, says that Brazil should not lose space as an option for international investors because of the pandemic, as other emerging economies were also affected.

The problem, he emphasizes, is that it is clear to the markets that Brazil is one of the emerging markets where fiscal accounts have deteriorated the most. In this sense, the country was even further behind, says the executive of the largest credit rating agency in the world.

Brazil was one of the fastest recovering GDP, but this had a high fiscal cost. The country will face a very challenging 2022, with high inflation, high interest rates, unemployment and high levels of political uncertainty ahead of the elections.
Elijah Oliveros of S&P Global Ratings

Brazil spent more than other emerging countries, with programs such as emergency aid and lines of credit to companies.

See pandemic expenditures in relation to GDP, according to the IMF (International Monetary Fund):

  • Brazil: 9.2%
  • Chile: 14.2%
  • Argentina: 4.5%
  • Mexico: 0.7%

This resulted in a smaller drop in GDP:

  • Brazil: -4.4%
  • Argentina: -9.9%
  • Mexico: -8.5%
  • Chile: -6%

But the Brazilian public debt in relation to GDP jumped from 78% in 2019 to almost 90% in January this year. In July, it dropped to 83%, but is still above pre-pandemic levels.

According to Leonardo Porto, chief economist for Brazil at the US bank Citi, the debt in relation to GDP may drop a little further, to 81.5%, thanks to higher tax collections with the heated economy. But it will rise again in 2022, with public spending maintained at the levels of the pandemic.

Medium and long-term fiscal risks are worsening, and fiscal accounts are expected to resume their deteriorating trajectory in 2022.
Leonardo Porto, from Citi bank

‘We will return to the previous pattern of low growth’

The chief economist for Brazil at British bank Barclays, Roberto Secemski, says that fiscal uncertainty — that is, whether the government will continue to increase spending — negatively affects the country’s economic growth scenario because it raises Brazil’s risk premium . In other words, Brazil needs to pay more interest for the investor to place it here.

When that happens, the dollar goes up. And the rise in the US currency fuels inflation, which, in turn, forces the Central Bank to raise interest rates.

After the cyclical recovery of the economy this year, we will return to the previous pattern of low growth seen in much of the past decade. We project a GDP of 1.7% in 2022, which could be even worse depending on the unfolding of the water crisis and the typical volatility of election years.
Roberto Secemski, from Barclays Bank

And there’s still the US and China

In addition to domestic factors, there are also external issues that threaten the Brazilian economy, these professionals point out. The two main ones are the possible resumption of interest rates in the United States and the Chinese economic slowdown.

As advanced economies withdraw monetary stimulus programs, Brazil’s interest rate could increase even more, to continue attracting some capital to invest in our fixed income, highlights Secemski.

For Giacomelli, China could be even more harmful to Brazil, because the country is much more dependent on the Chinese economy than on the North American one.

Greater challenge for those who depend on the domestic market

If the economy is going to decelerate sharply in 2022, companies must not escape this slowdown, which affects foreign interest in the Stock Exchange.

Moody’s, the world’s second-largest ratings agency, says that the operating profit and cash generation of large Brazilian companies tracked by the firm improved during the pandemic. They sought lines of credit and made new equity issues to reduce debt and lengthen their repayment term.

Corporate sector debt will fall from $288 billion in 2019 to $240 billion this year, according to Moody’s projections. While operating income (measured before interest, taxes, depreciation and amortization) will rise from US$ 95 billion to US$ 126 billion in the period.

But the devaluation of the real and higher food and oil prices, which have already caused interest rates to rise, will become even more challenging in 2022, says the agency.

Brazilian companies focused on the domestic market will be the ones that will suffer the most from macroeconomic risks in 2022.
Carolina Chimenti, Vice President of Moody’s

Fixed income instead of stock market

In this environment, outside investors will be very selective in putting money around here. Fixed income should be a stronger option than the stock exchange in 2022, according to these market professionals.

In recent years, with the fall in interest rates, foreign participation in the federal public debt fell from 19% in 2015 to 9% this year.

Now these investors have started to return, and the movement should intensify in 2022, says Giacomelli, who projects a 9.25% Selic for next year and inflation retreating to 4.5%, but a GDP of only 1.8%.

At the Stock Exchange, he points out, a wave of foreign contributions is not expected, even considering that stock prices are at low levels in dollar terms.

If inflation is controlled over the next year, which I believe will happen, an interest rate close to 9% per year will not be ignored by the fixed income investor. On the stock exchange, Brazil is cheap, but there is the issue of risk and return, which is not favorable.
Drausio Giacomelli of Deutsche Bank

Long term in the real economy

On the other hand, long-term investments in the real economy will depend on punctual opportunities and the recovery of the economy, further ahead, points out the vice president of Moody’s, Carolina Chimenti.

After 2022, corporate investment and construction activity will depend on Brazil’s economic prospects.
Carolina Chimenti, from Moody’s

Commodities can help

Spano, from Italy’s Azimut Global, highlights that the global recovery, which has increased demand for commodities, has a positive aspect for Brazil, as the value and volume of the country’s agriculture and mining exports represent around 40% of the country’s exports. parents.

And the Brazilian economy is still perceived by the international financial community as a country closely linked to commodity exports.
Ramon Spano from Azimut Global