Brazil’s Economic Response to the Covid-19 Pandemic

Leaders League takes a look at the economic response to the pandemic in Brazil.

Posted lundi, juin 29 2020
Brazil’s Economic Response to the Covid-19 Pandemic

Brazil's Central Bank expects the country’s Gross Domestic Product (GDP) to retract 6.54% in 2020.

On Monday, June 29th, with the Brazilian Central Bank announcing it expects the country’s gross domestic product (GDP) to retract 6.54% in 2020 and global consultancy firm, Alvarez & Marsal, forecasting an all-time high of 2,500 judicial restructuring filings over the next 12 months, the economic repercussions of the Covid-19 pandemic are becoming increasingly clear in Brazil.

As Brazil reached the landmark of 1.2 million official Covid-19 cases on June 25th and in response to a deteriorating economic scenario, Jair Bolsonaro's Federal Government recently redoubled its efforts to stimulate the economy in order to mitigate long-lasting impacts of the coronavirus pandemic.

The Federal Government recently announced a series of stimulus policies representing 11 percent of GDP expenditure, with measures including temporary income support to vulnerable citizens, employment support, lower taxes, reduced import levies on essential medical supplies, and new economic transfers from the federal level to state governments to support higher health spending and serve as a cushion against the expected fall in tax income.

"The Brazilian Central Bank has intervened various times in the foreign exchange market since February, injecting a total $45 billion to avoid more extreme scenarios"

According to the International Monetary Fund’s Policy Tracker: “Financial assistance for states and municipalities – with a temporary stay of debt payments– was also announced. Public banks are expanding credit lines for businesses and households, with a focus on supporting working capital, and the government will back about 1 percent of GDP in credit lines to SMEs and micro-businesses to cover payroll costs, working capital and investment.”

 

Tax relief program

Of late, the Federal Government has launched a tax relief program which will allow debtors to renegotiate overdue balances. Under the program, the government anticipates that 3.5 million individuals and companies will be directly benefited and $10.5 billion in overdue tax debts are likely to be recouped. Furthermore, as part of the government's economic stimulus policies, in early June, the Brazilian Central Bank slashed its benchmark Selic interest rate from 3% to a historic low of 2.25% per year.

On another front, although the exchange rate has depreciated by 16 percent since mid-February and by 24 percent since late 2019, The Brazilian Central Bank has intervened various times in the foreign exchange market since February, injecting a total $45 billion to avoid more extreme scenarios.

Finally, numerous state governments have recently eased social distancing restrictions, which should increase economic activity in the short term, however, at the cost of long-lasting sanitary and economic consequences, especially in the second most affected country in the world.

 

By: François Le Grand