Virus compounds Brazil’s prolonged economic slump

Antonio Barbosa had hoped to find new employment when the bakery he worked at in São Paulo fell victim to Brazil’s prolonged economic slump. Then the coronavirus pandemic struck, all but killing off the 41-year-old’s hopes of finding work and leaving him sleeping on the streets.

“I fear things will not get better in this country, so I will never have a job again,” he said.

His plight reflects the enormous challenges confronting Latin America’s largest economy. Unable to shrug off a deep recession from four years ago, it is now a global hotspot for Covid-19, with more than 1m confirmed infections and a daily death toll that exceeds 1,000.

With the virus response and the economic hardship dominating the agenda and Jair Bolsonaro, the country’s far-right president, locked in destructive political bickering with state institutions, it appears unlikely that a much-vaunted reforms programme will be resumed anytime soon.

The World Bank forecasts that Brazil’s economy will shrink 8 per cent this year as the broad shutdown weighs on businesses and consumers alike. Economist Monica de Bolle said the contraction could be as large as 10 per cent. Within South America, only Peru is forecast to be hit harder. 

Such a slump in Brazil’s gross domestic product would lead to a wave of corporate bankruptcies, soaring government debt and surging unemployment in a nation with abject public finances.

“The economy was already fragile before the pandemic. Many state and municipal governments were unable to even pay the payroll,” said Marcos de Barros Lisboa, an economist and head of the Insper business school in São Paulo. “Now, the fiscal deficit and public debt will not stop increasing this year”.

Particularly pressing is the issue of unemployment in a country where just a third of the population have access to savings. The official jobless rate in the first quarter of 2020 was 12.2 per cent, equating to almost 13m people. Analysts say it could rise to almost 19 per cent this year as the pandemic further squeezes an enfeebled economy.

“It is different from the 2008 and 1929 crises, which were financial,” Dalia Maimon Schiray, an economics professor at Federal University of Rio de Janeiro, said of Brazil’s predicament. “This crisis is in the real economy.”

At the heart of the crisis are Brazil’s millions of small businesses. Despite employing more than half the working population, they have long complained about being unable to access credit to withstand the impact of the economic shutdown.

Less than half the 6m small businesses that applied for financial lifelines from banks were then granted funding, raising the risk of a wave of bankruptcies, according to Sebrae, an industry body.

“The main issue is credit,” said Solange Srour, an economist with ARX Investimentos. “The government rolled out several credit and liquidity expansion programmes but they were not well-designed. They did not reach the small and micro companies.”

This has had a marked impact on consumption. Retail sales in April plummeted to a record month-on-month decline of 16.8 per cent

The hardship is further complicated by the vast informal sector that takes in about 40m workers, who are not included in official jobless statistics but bear the brunt of the economic shutdown. “That is why a basic income programme is being discussed,” said Ms Srour. “The problem is knowing how to design the programme. Where will this money come from?”

To address the impact of shutdowns, Brazil’s economy ministry implemented a $120 monthly stipend to help sustain low-income and some informal workers during the pandemic. While it is discussing ways to develop this into a broader basic income scheme for Brazil’s most needy, it is constrained by the country’s fragile finances. Goldman Sachs has forecast a fiscal deficit equal to 19 per cent of gross domestic product this year.

This is particularly painful for the Bolsonaro administration, which, since its inauguration last year has attempted to rein in public spending.

The government was able to pass a landmark pensions reform that was due to save the state $250bn over the next decade. But any savings have in effect been wiped out by a stimulus package put in place to counter the effects of the outbreak.

In another blow, Mansueto Almeida, Treasury secretary and an architect of fiscal austerity policy, said this week that he would step down.

The administration’s reform efforts have also floundered, buffeted first by political warring between Mr Bolsonaro and Congress, and then the impact of the virus. Key reforms, such as an overhaul of Brazil’s byzantine tax system and the granting of central bank autonomy, have disappeared from the agenda. 

Roberto Campos Neto, Brazil’s central bank chief, said in a recent interview with the Financial Times that the country’s recovery was dependent on these initiatives. “We need to make sure we are able to show everyone that we can keep the structural reforms and we need to pass some reforms in the second semester of the year. If you ask me if I think this is possible, I think it is,” he said.

Ms Srour does not share his optimism, saying that tensions between Mr Bolsonaro and the institutions of the state will continue to undermine the economic response to the crisis.

“Brazil will return more slowly than other countries because the pandemic has aggravated the political problems. The weight of politics is enormous.”

Additional reporting by Carolina Pulice in São Paulo