Brazil, the world’s ninth largest economy, generates a nominal GDP of around US $ 1.8 trillion. Range of approx. 2% contribution in global GDP, however, it does not reflect Brazil’s real contribution to the international division of labor. The significance of this impact on the macroeconomic stability of global economic life is only revealed to us at a glance at the structure and volume of Brazilian exports. Strict, therefore, (apart from deposits of gold, uranium, metals or wood) with the issue of world food security.
In this context, we want to draw attention to Brazil in our review of world markets. What prompts us is both the observation of current social and political events in this country, as well as the experience gained from its recent history.
Assessment of general economic trends
In 2020, the Brazilian economy entered a phase of fragile recovery with economic growth in Q4 (y / y) of + 1.7%, and year-round growth in 2019 estimated by the IMF at +1.1%. In 2017-2018, Brazilian GDP grew at a rate of +1.2% and +1.3% respectively. In March this year, which is assumed to be the period of the global pandemic, industrial production fell by -3.7%. Readings of April PMI indicators for industry amounted to: 36.0 points, and for services – 27.5 points, therefore they clearly decreased in the conditions of COVID – 19 compared to March, when it was 48.5 points for industry and 34.5 points for services. GDP dynamics for the first quarter of this year will be announced on May 29, while the IMF forecasts for Brazil for 2020-2021 provide, respectively: -5.3% and +2.9%.
This means that in the annual dimension, for Brazil, like for almost all major economies of the world, the “V” scenario is expected over the next two years. Therefore, assuming the first negative half of this year. and a clear rebound in the next six months. In our opinion, defining such a trajectory for economic recovery for Brazil is, however, very risky, not only because of the rather modest scope of fiscal support (approx. +3% of GDP), but primarily because of the increasingly worrying political and social situation in this country . This implies thinking in alternative categories, expressed in the graphics of the letter “L”, if not “i”. We are not entirely alone in this approach, similar fears, while maintaining a certain diplomatic canon, are expressed, for example, by OPEC experts. In their May report on the oil market and its macroeconomic environment, they emphasize “friction in the sphere of Brazilian politics,” which they translated into long-term political uncertainty (stability).
Assessment of the current socio-political situation
While the presidential office of Jair Bolsonaro, started with the beginning of 2019, was burdened from the beginning due to his peculiar political (and social) views, a huge risk, and where the term “controversial” can be interpreted as euphemism, the events in which he was actively involved with the advent of the pandemic even elude the recent “loosening” political standards.
In April this year he stood (literally and figuratively) at the head of demonstrators demanding the lifting of security measures imposed in connection with of COVID – 19, and calling on the army to take control of parliament and the Supreme Court, thus lifting existing epidemiological restrictions. Earlier,
J. Bolsonaro dismissed the minister of health, who opposed the president of the country, when he called this global pandemic “flu”, while claiming that “Brazilians have exceptional immunity, because they can be bathed in sewage, and they will not catch anything…”
Meanwhile, Brazil with recognized cases in the amount of approx. 380 thousand. people is already in second place in the world in terms of the number of cases. Their actual state in the country with approximately 220 million inhabitants is probably much larger, because Brazil is a country that has the relatively lowest number of tests carried out.
The spread of COVID – 19 in Brazil takes on an additional load of dimensions in terms of the Amazon, because there may be actual densities of the native indigenous population. With the advent of J. Bolsonaro, the massive and often wild exploration of the Amazon basin intensified, which now in a pandemic takes on a new deadly dimension, is threatened by the lives of 300,000. people living in these areas. There is no shortage of voices that if the president does not stop the invasion of the search for raw materials and “boards storage”, then in the calculation of the biological threat to indigenous peoples, he may be sued by an international court of justice.
At the end of April, Sergio Moro, a person known for working out corruption scandals plunging previous presidents of Brazil, i.e. Luiza Inacia Lula da Silva and Dilma Roussef, resigned as minister of justice. The former head of the Ministry of Justice accused J. Bolsonaro of sabotaging the work aimed at explaining the circumstances related to the involvement of the presidential son in preparing the social ground for blocking the legislative and judicial power by the army. As a result, the Supreme Court has already approved the initiation of a two-month investigation, which, in the event of confirmation of the allegations made by S. Moro, will be the basis for launching the impeachment procedure, incidentally another in the recent history of Brazil. At the turn of April and May 57% of citizens supported these activities.
Stability of the “granary of the world” threatened
The situation is becoming increasingly tense and means that you also have to reckon with the outbreak of mass protests, strikes, resulting in e.g. logistic paralysis of the country. In the case of Brazil, transport to ports takes place mainly by road, as the country has no developed railway infrastructure. Thus, truckers’ protests and roadblocks are a proven, effective means of resisting.
The escalation of the socio-political temperature, as well as the intertwining difficult to predict consequences of the spread of the coronovirus pandemic, which can infect many plantation areas as well as touch individual links in the logistics chain, translates into pressure on prices. So far, it has been noticed mainly in the coffee market, emphasizing concerns about the smooth delivery of black drink beans. However, Brazil, known as the “Coffee Country”, is not just a coffee country. Its share in the global production of cane sugar or soy is not less. The same happens with crops of oranges and other citruses.
Table 1. The importance of Brazil’s plant-animal production in the global economy
| Item name | A place in the world in a given year | Share of world production |
| Plant production | ||
| Coffee | 1 (2017) | 29 % |
| Cane sugar | 1 (2018) | 39 % |
| Soya | 2 (2018) | 33 % |
| Corn | 3 (2018) | 7 % |
| Oranges | 1 (2018) | 22 % |
| Cotton | 4 (2019) | 11 % |
| Livestock production | ||
| Pork | 3 (2014) | 4 % |
| Cattle | 2 (2017) | 14 % |
source: own development based on FAO data
Table 2. Rates of return on financial commodity contracts (in %, as of May 25, 2020)
| Item name | 1 month | 3 months | YTD | 1 year |
| Coffee | –0,9 | –4,8 | –18,7 | +9,7 |
| Coffee Robusta | +7,6 | –5,2 | –12,6 | –11,3 |
| Sugar No. 11 | +19,9 | –23,5 | –12,7 | –5,2 |
| Soyabean | –3,0 | –2,7 | –6,7 | –4,7 |
| Corn | +2,1 | –14,6 | –17,5 | –23,8 |
| Orange juice | +15,2 | +27,3 | +30,5 | +29,1 |
| Cotton | +5,9 | –11,0 | –15,6 | –16,2 |
| Lean Hogs | +16,0 | –13,5 | –21,7 | –38,6 |
| Live Cattle | +16,7 | –15,5 | –22,7 | –9,8 |
source: own development on the basis of stooq.com
Financial instruments related to Brazil
The main indicator of the Brazilian BOVESPA stock market compared to its Argentine neighbor is characterized by clear restraint in terms of recently viewed post-pandemic rebound. The scale of monthly increase at the level of +10% with the index progressing more than three times in Argentina looks undoubtedly flat. We believe that this is largely the effect of the current, and therefore in the epidemiological (and macroeconomic) terms unpredictable, and for political reasons – strongly “developmental” situation in this country.
Table 3. Rates of return on major Latin American stock indexes (in %, as of May 25,
2020)
| Item name | 1 month | 3 months | YTD | 1 year |
| BOVESPA (Brazil) | +9,5 | –18,9 | –25,9 | –9,7 |
| MERVAL (Argentina) | +34,1 | +12,5 | –1,7 | +18,5 |
| IPSA (Chile) | –1,5 % | –13,9 | –19,6 | –22,6 |
source: on the basis of stooq.com
The situation is slightly different with the Brazilian currency. Its exchange rate against the US dollar and the euro has shown clear depreciation tendencies since the beginning of the presidential office by J. Bolsonaro. In the past year, the BRL value against the American and European currency fell very quickly and significantly. Over the past 12 months, both to the dollar and the euro – the real has lost about 1/3 of its value. However, in the spring of this year, i.e. in March – May, the real took several counterattack attempts, the last of which translated into a 6% – 7% rebound against the euro and the dollar brought a clear effect.
At least two factors appear to be behind the attempts to strengthen the Brazilian currency. The first is probably excessive depreciation last year, the second is the already mentioned economical fiscal support (about 3% of GDP) for the pandemic economy. Besides, the budget deficit is estimated at around 6%, but it is not shocking nowadays. Just like the total level of government debt, which oscillates around 75% of GDP. This is not enough, but it does not necessarily mean a collapse of public finances. On the other hand, the picture of events described above generates a considerable risk to the political, social and economic stability of Brazil.
This situation much more than the stock market and the currency spectrum of opportunities it offers gives you a palette of strongly linked to the Brazilian economy commodity contracts on the Forex / CFD market.
Table 3. Rates of return on major Latin American stock indexes (in %, as of May 25, 2020)
| Currency pair | 1 month | 3 months | YTD | 1 year |
| USD/BRL | –5,2 | +21,5 | +34,1 | +33,5 |
| EUR/BRL | –3,9 | +22,5 | +31,3 | +30,9 |
source: on the basis of stooq.com
Selected commodity financial instruments significantly related to Brazil’s agricultural production and offered by city index in the Forex/CFD market
- Coffee C Monthy Future
- Robusta Coffee Monthly Future
- Sugar No. 11 Monthly Future
- Soybean Monthly Future
- Corn Monthly Future
- Orange Juice Monthly Future
- Live Cattle Monthy Future
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