2021 Brazil: Unfortunately More of the Same

Vice President Hamilton Mourao

For years, I have posted a blog with New Year predictions and then I evaluate what I hit and missed.  My most recent posting here presented my rights and wrongs for 2020.  https://allabroadconsulting.wordpress.com/2020/12/31/2020-dificuldades-e-desafios-revendo-minhas-previsoes/

I have tried to predict things that can be measured objectively.  Thus, we have predictions about inflation, economic growth, election and/or political results and/or changes.  In evaluating last year’s blog, I noted Covid19 surprised and certainly changed the results.  Being familiar with Brazil’s public health system and its past success in combating crisis such as AIDS, Chikungunya, Zika, Malaria and Chagas disease, I would never have predicted that over 200 thousand would succumb to Covid19 in less than a year.  Likewise, I would have found 400 thousand deaths in the US totally beyond the pale.  So, we are in new territory as the pandemic continues and the national and world economies suffer and seek to adjust with unknown and unpredictable consequences for leadership.

As a business consultant, it is important to have an understanding of trends, tendencies and long-term patterns that only change quite slowly if at all.   Nevertheless, year to year changes occur and the related predictions should be testable.  Additionally, it is helpful to have a rationale or justification for expectations.

The Economy: Growth, the economy will not grow more than 1 percent.  This may sound pessimistic and is certainly differs from the predictions put out by the Paulo Guedes, the Economic Ministry or the Central Bank.  Their estimates are 3 or 4 times higher than mine but as we say in Brazil, they are “selling their fish”, engaging in cheerleading and boosterism.  The fact that Ford has closed down its activities in Brazil is one indicator in my favor and the promised tax, public service and privatization reforms have not materialized and the ministry does not have resources for investments.  These can only materialize if the spending ceiling is ruptured but the political cost (possible impeachment) is higher than Bolsonaro can afford.  With no growth and no investments, the increasing demand by the public, the states and the municipalities will lead to higher inflation.  Officially, inflation is on target at around 4.4% and lack of demand will help keep it low, but over the year agriculture, industry and commerce will drive prices higher as their costs rise.  Inflation this year will likely end above 6% as measured by the INPC.  Rising inflation will result in the breakage of the downward trend of Central Bank interest rates and these again will start moving up and the base rate (SELIC) will be between 4 and 5% or almost twice the rate that prevailed in 2020.  In like manner, the Real/dollar exchange will move above 5.5 level to possibly break 6 to 1 barrier.  Although Brazil may be a “bargain” FDI will fall below 50 billion in 2021.

Although Brazil will not grow, agriculture will expand with foreign (China) demand although the primary sector could actually grow more if Brazil somehow could improve upon its long history of environmental degradation.  There is a risk that export to Europe will decline if the fires and predatory activities in the Amazon continue unabated.  Overall industrial production will continue to decline.  Ford’s exit from Brazil is just one more downward indicator.  Nevertheless, certain industrial sectors will grow.  Plastics, paper, pulp, aluminum beverage cans, packaging and food processing are all expanding.  Export industries (steel companies such as Gerdau) that already have a presence in foreign markets will also expand as the US economy picks up and with a likely eventual removal of tariffs and barriers imposed by the Trump administration.  One important negative detail could be Bolsonaro’s stubborn reluctance to make up to Biden can also be an impediment.  Finally, internet commerce will continue to quickly expand and leaders in this sector will hurt small Brazilian businesses that do not have a significant online presence.  At the same time, some smart start-ups in this space will be extremely successful and could achieve the vaunted unicorn status.  Unfortunately, the billion-dollar valuation of unicorns fails to have much of a multiplier effect at least in the short term.  In summary in an economy generating 1.5 to 1.8 trillion dollars (remember that it used to be over 2 trillion) will always have success stories on the individual and local levels but the national impact is limited.

The Polity.  On the political front, the big question is whether Bolsonaro can survive the year.  With over 200 thousand Covid19 deaths, a totally discredited health minister, increasing unemployment currently at over 13% and heading north, (I predict it will reach 15 to 16% by the end of the year) the stage would appear to be set for Bolsonaro’s exit.  The problem is that Bolsonaro garnered almost 58 million votes and has a mandate until 2022. Moreover, he currently controls enough votes in Congress to avoid impeachment.  People forget that Brazil is basically a conservative country accepting of authoritarian and personalistic leadership.  In the absence of an attractive alternative, Bolsonaro has the support of traditional elites in ag, industry and commerce.  The military back him even as his administration has compromised the image of a professionalized Armed Forces.  Social conservatives approve his rhetoric in favor of traditional family values and as a result agree that LBGTs and feminists are out of line in their demands.  While police violence has increased under Bolsonaro, the overall crime rate has fallen with fewer homicides.  Moreover, the right wing in Brazil totally controls the idea of threat posed by “socialists” and “communists” pointing back to the corruption scandals that marked the presidencies of Lula, Dilma and the Worker Party administrations.  So, no Bolsonaro will finish his term and be the leading candidate for reelection.

Paulo Guedes, the Economic Minister, has been Bolsonaro’s guarantor with the financial markets.  He has promised over and over better times that will come with economic liberalization and administrative reform.  However, he has been shown to be weak in trying to get reform through Congress.  Privatization has failed.  Tax reform and government reform have not materialized.  Will Guedes leave or be removed?  So far, he seems to think he has a project to accomplish as and unless he becomes an albatross to Bolsonaro, he likely will remain with even having to suffer Bolsonaro’s whims.

Congress plays to the base and most Brazilians continue to think of themselves as Catholics, Christians, evangelicals, conservatives, people who have or want public jobs and want to retire with pensions.  The so called “povao” (masses) resist change and suspicious of too much freedom or being too “liberal” in the area of social norms.  Foreign Minister, Ernesto Araujo and Human Rights Secretary Damaris fit this conservative profile.  Araujo has insisted in a crusade against “globalism” which, in his opinion. is nothing more than a new disguise for socialist central planning.  Like Bolsonaro, he too has been an ardent Trump supporter and a gadfly against political correctness embodied in climate change.  He has contested climate change and brushed off foreign criticism of the Amazon and Pantanal burnings and land clearings.  Unlike Bolsonaro, he is not an elected official and it is likely that pressure from the new Biden administration allied with his diminished support within the ministry and by politicians will result in his removal before the end of the 2021.  Araujo’s exit will strengthen the more pragmatic Agriculture Minister, Teresa Cristina as she represents Brazil’s interests in the export of beef and soy which are threatened by conflicts promoted Araujo with the European Union and individual countries concerned about Brazil’s role in deforestation.  Damaris, in turn, has been very popular and will remain due to her support of traditional family values.  Boys wear blue and girls wear pink and you don’t teach about sex in school.

Last year, Covid19 drastically impacted predictions made in January.  Now, a year later, the crisis continues with over 200 thousand deaths in Brazil.  The health system in Amazonas has entered collapse and Brazil’s production and distribution of vaccines is in chaos as Bolsonaro is fighting the states that are attempting to produce and distribute.  The biggest conflict is with the State of Sao Paulo and its governor Joao Doria who Bolsonaro perceives as a major threat to his reelection.  The Bolsonaristas are betting that even if the number of deaths in Brazil double this year, Bolsonaro will still be in office and popular enough.  It appears clear though that General Pazuello, the Health Minister will have to be removed.  While Brazil has started some vaccinations, mass coverage will not start before March or April so the health system will continue to be overloaded and the number of fatalities will continue to increase. 

Brazil is receding on many fronts.  There is a major diaspora of academics, scientists, entrepreneurs and creators.  The country used to have a very positive image in Europe and North America.  All of this has been tarnished.  People won’t travel to Brazil due to the pandemic but also because the country’s president is uncouth and viewed with disdain as he promotes policies against the current.  This image problem, while not necessarily permanent, does impact investments and as mentioned above will dampen investments from abroad.

While illness, lack of prospects and pessimism haunt Brazil with the real prospect of more lost time, more inequality, more violence I still need to end this exercise on a more positive note.  Brazil will survive and some in Brazil will thrive.  There is still enough in creativity, optimism, will, drive and opportunity.  Although many want to migrate, most will stay.  With a bit of luck, the beauty, the beach, the trees, rivers and the people we love will remain and eventually find a new balance.  Since I first moved to Brazil in the early 1960’s, Brazil’s stock of wealth has increased and will continue to do so in spite of everything.  And perhaps Brazil can recover its mythical cordiality.  Hope may not be in vain.

2 comments on “2021 Brazil: Unfortunately More of the Same

  1. Flavio Cunha says:

    Muito bom


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