Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild
A healthcare worker prepares to administer the Sinovac Covid-19 vaccine in Sao Paulo. (Photographer: Victor Moriyama/Bloomberg)

Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild

Brazil spent more money shielding its economy from the pandemic slump than almost any other emerging nation, and quite a few wealthier ones too. It put much less effort into containing the pandemic itself.

That combination is putting the country’s economic policy under growing strain. It’s one reason why Brazil is poised to become the first Group of 20 country to raise interest rates this year. The central bank, which just a few weeks ago was talking about keeping its benchmark at a record-low 2% for a while yet, is now expected to hike it by 50 basis points Wednesday.

The bank, led by its President Roberto Campos Neto, has been forced to U-turn in order to stem a slide in the currency that’s pushing inflation higher -- driven, at least in part, by investors worried about public spending. And because Brazil has the world’s worst Covid-19 outbreak right now, it’s hard for the government to pare back its outlays anytime soon.

Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild

President Jair Bolsonaro ran up a record budget deficit last year to pay for what were supposed to be one-time measures, like cash handouts. But his chaotic virus policy -- along with a lagging vaccination program -- is triggering new lockdowns just as other countries are seeing the health crisis abate.

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The upshot: policy makers have already had to renew the emergency aid, including cash handouts to low-income Brazilians. Privately, members of Bolsonaro’s economic team say further extensions are likely.

“Brazil’s problem is not that they didn’t have sufficient fiscal response, it’s the fact that it wasn’t combined with efforts to actually get on top of the virus,” said Neil Shearing, chief economist at Capital Economics in London.

Time for Speed

Treasury Secretary Bruno Funchal said in an interview that the bill extending aid payments contained offsetting measures that will help trim the budget deficit and debt. The Economy Ministry declined to comment. In a report published Monday, the ministry defended its pandemic policies – arguing they helped protect savings and formal employment – and said it’s now time to speed up vaccinations and resume pro-market reforms.

Brazil injected stimulus worth the equivalent of 8.3% of gross domestic product last year, according to the International Monetary Fund –- topping almost every major emerging market as well as developed nations like France and Italy.

That helped cap the economy’s contraction at 4.1%, better than Latin American peers with more stringent aid programs. Brazil won praise from economists and the IMF for its policy response.

Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild

This year, though, it looks set to give up much of that edge. Itau, Brazil’s largest private bank, forecasts the country’s economic growth at 3.8%, the slowest among Latin America’s top five economies.

While central banks in countries like Mexico and Colombia have signaled they still have room to deliver more support for their economies this year by cutting interest rates, Brazil is being pushed onto the opposite track. Investors in interest rate futures are pricing in a hike of at least half a percentage point on Wednesday.

Its currency, the real, has tumbled almost 10% in three months. Many foreign-exchange traders say it would take a much bigger interest-rate increase than the half-point currently forecast by economists to halt the rout. Inflation has climbed to a four-year high of 5.2%.

Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild

Even as it mobilized financial resources, Bolsonaro’s government has been dismissive of health risks from the coronavirus since it first hit the country. Much of the response has been left to individual states or cities.

Fragmented policy has held back the vaccination campaign, too. At the current pace, it will take Brazil 1.7 years to inoculate 75% of its population, the threshold experts say is needed for a return to normality, according to Bloomberg’s Vaccine Tracker. By comparison, Chile, the regional standout, is on track to hit that level in just two months, and for the U.S. it’s four months.

‘From All Sides’

The prolonged virus crisis may end up doing long-term damage to Brazil’s economic institutions, some analysts warn.

Bolsonaro came to power promising to put Brazil’s public finances in order. His government is now poised to blow past spending limits for the second straight year. Last month, the president sacked the head of state oil company Petrobras for letting prices rise.

Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild

“The problem for markets and investors is not how you spend this year, but if politicians take advantage of the situation by trying to change our fiscal institutions for the worse,” said Samuel Pessoa, an economics professor at the Getulio Vargas Foundation, one of Brazil’s top universities.

To be sure, Brazil is far from a repeat of the hyperinflation and debt crises that it experienced in the 1980s and 1990s. The bulk of its debt is denominated in reais, not in dollars. Foreign reserves are in good shape, and the recently passed central-bank autonomy law should protect them from political whims.

Brazil Went All-In on Covid Stimulus But Let the Virus Run Wild

Still, this week’s meeting is widely seen as a test of Campos Neto’s independence from political pressure.

If the bank does raise rates, it will add to headwinds for economic growth from fiscal policy and the deepening virus crisis, according to Laura Carvalho, a professor of economics at the University of Sao Paulo. Even though aid is being maintained, it will amount to a withdrawal of stimulus when compared with last year’s levels, Carvalho said.

“We’re now taking a hit from all sides,” she said.

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