Coronavirus: Dramatic Economic and Social Impacts Await Brazil

RIO DE JANEIRO, BRAZIL – The Covid-19 pandemic is one of the greatest challenges in Brazilian history. In addition to a massive public health threat, its impacts on the economy and society will be tremendous. More so given the context in which the crisis struck the country, says the latest study of the Brazilian Institute of Capital Markets IBMEC.

The Brazilian economy remains fragile since the severe 2015-2016 recession and was slowly rebounding, growing at around one percent per year since 2017. Brazilian per capita income in late 2019 was still about seven percent lower than in the peak of 2013, and even before the advent of the coronavirus, it was not expected to return to that level before 2024. This should now extend even further, in what has become a tragic second lost decade in 40 years.

The economic and social impacts caused by the coronavirus will be dramatic. The growth rate of the Brazilian GDP, according to estimates in the Focus report released on April 20th, should be -2.96 percent this year. However, this is only an initial projection and as weeks go by and new data are collected, it is likely to be even lower.

The first projections point to an increase in the average unemployment rate to at least 15 percent in 2020 (it closed 2019 at 11.6 percent); this is  coupled with the difficulties of the self-employed and entrepreneurs.

The Brazilian private sector is now suffering a dire liquidity crisis, with a need for working capital financing, and government actions are needed to prevent a productive collapse in the wake of the public health crisis.

In general, the measures proposed by the Brazilian government follow the same direction as the best proposals evaluated worldwide, and address the issue of minimum income guarantees, emergency assistance for the self-employed, and the release of liquidity for companies in an effort to preserve employment contracts.

The proposals for liberalizing the labor market are also robust, but the main point at this time is that these measures should not take long to be implemented, nor should they be extremely bureaucratic.

Another relevant issue in this context is the potential judicialization of private contracts, given the uncertainty of one party’s ability to honor them. Unplanned external events can prevent contracts from being honored – in that case, which party is right? The risk of an explosion of lawsuits after the pandemic should not be ruled out; this would generate even greater insecurity and hardship for an economic upturn.

In the government’s aid to tackle the crisis, a recurring concern is the fiscal cost of these measures, but this cannot be put forward as a clash between money and lives, because it is about lives versus lives.

The mortality rate and the destruction of families and lives derived from an economic crisis cannot be overlooked. All that remains is the great cost of public policies to combat the contagion of the disease, coupled with the reduction of poverty and the survival of businesses. For now, providing millions of people with the needed support who, after the pandemic, will rebuild lives and businesses is the main thing.

The growth of public indebtedness will be tackled. With interest rates at extremely low levels, the cost of this indebtedness will be lower, and a cost-benefit analysis is favorable to the measures.

However, over time, this debt will need to be paid off, and maintaining the spending ceiling and the reform agenda will help ensure that, over the next decade, these extraordinary expenses will be paid. Short- and long-term demands must be separated, and debt control is undoubtedly a point to focus on once emergency actions are solved.

Source: Infomoney

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