Oscar García-Serrano Jiménez, Chief Financial Officer at MAPFRE Brazil
We are facing a large-scale downturn in economic activity; the latest data released confirms this trajectory. It will occur most severely in this second quarter. In light of this, significant fiscal measures were adopted in an attempt to mitigate its effects. It is still not known when and to what extent these measures will be effective, but it is expected that they will have an unprecedented fiscal cost. These measures must go beyond being simply temporary, and instead must be focused on fiscal sustainability and the post-crisis scenario.
It is worth mentioning that in the post-pandemic scenario, we will have at least two advantages in relation to other instances of Brazilian economic recovery. The first is the sustainability of our foreign debt. Some numbers speak for themselves. The country’s international reserves—over 340 billion US dollars—exceed its foreign debt. In other words, today Brazil is a net external creditor. The country’s international reserves are equivalent to 16 months of exports, a rare characteristic among emerging and developed economies. Brazil is also ranked among the top 10 countries in the world that most attract Foreign Direct Investment. Without a doubt, it’s a different context than previous decades, when the country’s external solvency was put to the test after periods of risk aversion.
The second advantage is contained inflation, which has responded positively to the effects of the crisis. The IPCA (Índice Nacional de Preços ao Consumidor Amplo — Brazilian Extended National Consumer Price Index) has risen 2.4 percent over 12 months, which is below this year’s inflation goal of 4 percent. The performance of the index is surprising for Brazil. In the past, the depreciation of the real caused a general increase in prices. The Central Bank had no option but to increase interest rates. As a side effect, the lack of liquidity suffocated consolidated companies and crippled investment. The current situation liberates Brazil from this dilemma between growth and inflationary control, and opens up the path toward sustainable GDP growth.
Given these advantages, we must consider the best exit strategies for the post-COVID-19 period. There may be at least three types of opportunities for domestic and foreign capital. First, the agriculture sector. In this regard, the country enjoys a significant advantage compared to its peers. Despite the crisis, the agriculture sector continues to produce and trade in record numbers. The agricultural crop for 2020 is expected to be the largest in history. Restrictions on global commerce have not hindered sales of Brazilian products with surprisingly high margins. The competitiveness and resilience of the players have caused exports of agricultural products to grow 60 percent this year. The performance of the sector provides a natural buffer during the crisis and a potential engine for growth afterward.
A second exit strategy in the period after COVID-19 is found in infrastructure. Brazil’s needs for transportation, sanitation, telecommunications and energy for continental expansion are indicative of the scale and diversity of opportunities on several fronts. The appeal of these investments is even greater within a context of low return on financial capital in central economies. However, that alone is not enough. Governance, legal and regulatory certainty and legislation are some of the prerequisites that must be addressed so that the investments in infrastructure take hold in the country. The State must foster these conditions. Everybody wins: jobs are created, currency flows into the country, historical bottlenecks are reduced, local productivity increases and sustained growth is promoted.
A third exit strategy from the crisis may include investments to replace commodities that are currently imported. Confronting the impacts of the pandemic showed the risks of concentrating supplies from one single region. The need to import pulmonary ventilators and medical and hospital equipment was only the most recent example. There are many others. The chemical and pharmaceutical industries import 40 percent and 46 percent of their supplies, respectively, and this is on the rise. In order to reduce the risks of this dependence, and in light of a global framework of rising protectionism and polarization, we can and should be protagonists in rearranging our global supply chains. The Brazilian economy may benefit from this framework through private investment.
We are aware that the necessary measures to fight this pandemic will leave us with a challenging legacy in fiscal terms and where economic growth is concerned. For that reason, we must focus on creating the conditions for recovery in the post-COVID-19 period. We will need to rebuild the path that leads us there. It is essential that we continue to focus on fiscal consolidation measures and structural reforms. In addition, an increase in private investment, both domestic and foreign, will be crucial for long-term sustainable growth. Without higher rates of investment, we certainly will not emerge from short-term economic cycles.