Brazil has felt, in the greatest intensity, the effects of COVID-19, with high infection rates and currently being accountable for 1 in 4 deaths globally. There have been over 14 million cases reported in total in Brazil with a staggering 378 000 deaths. These figures, if not staggering on their own, have led to eerie circumstances across the country. Brazil has been forced to dig up bodies in used graveyards to make room for those that have lost their battle with COVID. These images have been headlined globally as a stark reminder of the battle the world has not yet passed. As a large producer of iron ore, as well as the largest South American country and the traditional de facto leader of the region, the country’s struggles with COVID remains relevant to Australia and the broader globe.
After battling the first wave towards the back end of 2020, Brazil is now experiencing a resurgence in a new variant of the virus that has led to the follow new thresholds reached.
March 2021: Brazil hits record 100 000 coronavirus cases in a day.
April 2021: Brazil exceeds 4 000 deaths in 24 hours.
As lucidly seen in empirical data, the new variant of COVID seems to present heightened and more pronounced challenges for Brazil. The acceleration of these challenges is further illustrated in the charts below.
Latin America has been steadily growing as the largest contributor of new cases when measured using the seven-day moving average.
Brazil Dominating Deaths Per Capita Figures
Since 2021 has rolled over, Brazil has experienced a material uplift in the deaths per one million people, exceeding that of other COVID affected regions such as the US and UK. Currently Brazil has approximately 11 deaths per million, which is far above that of its neighbours and other large countries. Despite the acceleration of cases in India, Brazil’s deaths per million figures still sits well above that of India.
Source: Our World in Data
Causes for High Cases Numbers: New Variant
There has been a new coronavirus variant (P.1) sweeping through Brazil that has been found to be up to three times as deadly for the younger demographic. The new variant was first detected in Brazil in January of 2021 and researchers have stated that the new variant has the capability to reinfect those who had already been infected by COVID-19. Initial research has also suggested that existing vaccines need to be updated to remain effective against the new strand. Recent data releases outlined below have highlighted the new challenges associated with the ‘P.1’ Brazilian variant. These include:
Causes for High Case Numbers: Government Attitude towards Pandemic
Since Brazil’s first case came from a returning traveller from Italy on March the 11th of 2020, the government, particularly President Jair Bolsonaro, has not addressed the pandemic in its complete severity. There has been enormous media and community backlash to the government response and commentary surrounding the pandemic. Both the domestic and international media have held the president in rebuke due to his passive and dismissive stance in relation to the severe impact and threat COVID has and will continue to be. Here are some ‘highlights’ of the government’s approach in the public domain.
Inaction by Government
The Brazilian government initially took a laissez-faire approach, not imposing strict lockdowns in tandem with other jurisdictions. State government have been forced to impose their own piecemeal social restriction measures, only to be ridiculed by the President.
Head of State Scepticism
Bolsonaro publicly played down the virus labelling it as a “little flu” and consistently not addressing the severity of the virus in the public domain.
Case Reporting Fiasco
Pressure and criticism on the Brazilian government grew and heightened after the Brazilian health ministry in June removed cumulative COVID case data, deciding to only report the number of cases in the last 24 hours. Members across the political spectrum accused the government of trying to mask the severity of the situation. After this mounting pressure, the matter was brought to the Supreme court who ordered the resumption of cumulative data reporting in Brazil.
Brazil’s President Tests Positive to COVID
After showing severe coughing symptoms on a public webinar and the President tested positive to COVID. Despite this, after 3 weeks in isolation he claimed that he was in fact suffering from “mould” in his lung induced from the large amount of time he had spent at home.
Government Economic Argument
Bolsonaro has criticised lockdowns suggesting that their economic impact would be more severe than that of the virus. Despite this impact holding some weight in the immediate short term, by imposing restrictions and managing the health crisis, the economy will only then be best positioned to recover. Both health and economic policy decisions are most effective when they complement each other and ultimately manage the cause of this global recession, that being the virus itself.
Brazil’s Vaccine Plan
Historically, Brazil has been successful in vaccinating its population through its national network of health care hospitals and clinics across almost all municipalities. However, due to the government’s lack of urgency and attention to the matter has left Brazil with some supply bottlenecks.
Initially, Brazil’s health officials announced a rollout plan congruent with other major economies with in-country manufacturing being the main source of vaccine supply. This plan on paper would lead to 30 million doses being available by January 2021 and over 200 million through 2021. However, while other countries signed contracts with various other suppliers to hedge against any uncertain supply shocks, Brazil diverged in their approach by placing all their eggs in one basket: the in-country manufactured AstraZeneca vaccine. Disruption was bound to occur in the uncertain climate that COVID has imposed on the world, and it delivered. The trials for the vaccine took much longer than expected and supply issues surrounding a key ingredient in the vaccine materially impeded the manufacturing program, significantly reducing the volume of doses available coming into 2021.
Lower than projected volumes of manufactured vaccine doses began being distributed after they were approved on January the 17th for emergency use.
With the supply of doses so low and a growing number of cases across Brazil, the government needed to find a short-term supply solution to combat the virus. However, with no solution to the vaccine supply in sight and a covid-sceptic president’s inaction leaving the nation at risk, Sao Paulo’s Governor negotiated with China directly to confirm his state’s own secured supply of vaccines to battle the pandemic. As the situation continued to decline, these doses were eventually passed over to the federal government to support the broader Brazilian community in the vaccination rollout.
As a result of the president’s inaction, Brazil was left with 100 million doses of CoronaVac which the WHO has found to have an efficacy of only 50.4%. If supply risk was mitigated earlier by the government, as other governments across the globe did, Brazil may have had access to other vaccines with higher efficacy.
To date 16.9 million Brazilians have been vaccinated, or 7.9% of the population. At the current rate it has been estimated that it will take 1.7 years to vaccinate 75% of the population.
Despite falling short on managing the health crisis, the Brazilian government did take an aggressive fiscal stance through large stimulus to support the economy. Throughout the COVID period, the Brazilian government has spent a total of 815.5B BRL (US$156.8B) which is valued at 8% of GDP.
This amount is one of the highest in the G20 and twice the average of emerging market COVID responses.
Auxilio Emergencial Stimulus
Within this enormous package involved the Auxilio Emergencial (Emergency Aid) that provided 600 reais (about $142 AUD at the current exchange rate) to 68 million Brazilians in the lowest socio-economic demographic with single mothers receiving double this value. The fiscal support was an extension of Brazil’s internationally commended Bolsa Familia Program, which supports the lowest quintile of the Brazilian population with welfare payments. As indicated below, this has had a material impact in keeping people out of poverty – and indeed, lifting them out of it.
This expansionary policy, alongside record low interest rates at 2%, led to the economy contracting less than expected. The Brazilian economy only contracted by 4.1%, half of what was initially expected, due to Brazil’s expansionary macroeconomic policies.
Significant Macroeconomic Stimulus – What are the Risks?
Despite managing expansionary policy well, the government has not performed as well in managing the health crisis. This has led to several risks rising as indicated below:
With consumption at buoyant levels and the Brazilian currency at one of its lowest points against the USD, inflation has risen to a five year high of 5.1%. With this, the Brazilian central bank increased interest rates for the first time in 6 years by 75 basis points to 2.75%.
With the Health Crisis still not under control and a vaccine shortage still pertinent, social restrictions are expected to increase albeit against the wishes of the country’s president.
Consequent Reversal Risk
During the 2016 recession, the Brazilian government-imposed legislation creating a ceiling on the amount of debt the government can take out. With the aggressive fiscal stimulus, the government is approaching this ceiling and is set to taper off their spending. A climate of decreased government spending, higher interest rates and increased social restrictions create a significant risk towards a reversal in economic activity. These 3 drivers, in the direction that they are currently heading, all contribute to a contractionary environment and in tandem will only magnify the potential downturn.
What Effect Could This Have On Markets?
Commodities - Iron Ore Supply
While iron ore supply in Brazil, one of the world’s largest iron ore suppliers, having been supressed over the last few years due to the 2018 Brumadinho Dam Disaster, Australia has enjoyed record trade performance on the back of high Chinese demand and low global supply. With the COVID situation not improving and increased restrictions expected in Brazil, this may impede Brazil’s projected timeline to increase supply of iron ore to full capacity. If there are delays to Brazil’s ability to supply iron ore at pre-2018 levels, this will mean that Australian producers are able to continue to export in an iron ore market that has lower global supply. However, if Brazil’s currency remains low and Brazilian supply can increase, they will be able to export globally at a more internationally competitive price, which may lead to a decrease in export sales for Australian companies.
Interest Rate Differentials
With interest rates rising and lenders receiving a more attractive return, overseas investors may increase their capital exposures in the Brazilian market. As investors exchange foreign currency into Brazilian Real in FOREX markets, this will increase demand and in turn, all else remaining equal, lead to an appreciation of the currency. An appreciated currency could have flow on effects on public sector debt and trade performance for Brazilian exporters.
Decrease in Agricultural Exports
Some of Brazil’s largest exports are food products such as soybeans and corn. A proxy for these prices in Brazil is the rice market which, as seen below, has increased. This has put pressure on Brazil’s trade performance but is also decreasing the ability of Brazil’s poorest communities to buy food necessities due to inflation reducing their purchasing power. A decrease in Brazilian agriculture exports could be positive for other agriculture producing nations, such as Australia.
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