The IMF forecasts GDP growth in Brazil to slow to 0.3% in 2022 from over 5% in 2021. Government projections are more optimistic and see growth above 2% this year. This difference created a controversy between the Ministry of Finance and IMF authorities over the strength of Latin America’s largest economy, which culminated in the decision by the IMF to close its representative office in Brazil by June 2022.
The IMF view
There are two main reasons for the IMF’s view that the economy will be weaker than the government expects. First, the negative impact on domestic demand from the monetary tightening implemented by the BCB. Over the last twelve months it has increased the Selic rate eight times, from 2% to 10.75% to fight the rise in inflation, which spiked from 5% to over 10% in that period. Second, reduced fiscal support will contribute to the deceleration in growth. The primary deficit rose to 9.2% of GDP in 2020 and the IMF expects it will have already declined to 1.6% in 2021 and will fall further to just 0.8% in 2022.
The optimistic scenario
Brazilian authorities anticipate a more optimistic scenario. The economic recovery in the United States, China and the eurozone, which account for 55% of the country’s exports, will contribute to a pick-up in external demand; and higher commodity prices, particularly for oil, soybeans and metals will further boost export receipts.
Minister of Finance Paulo Guedes also expects over USD 155 billion in investment, approximately 10% of GDP, and an improvement in the labour market due to a rapid reopening of the economy given high Covid-19 vaccination rates. Government officials assume the recent success at controlling the spread of the virus will support stronger economic growth.
What to expect from Brazil in 2022
Despite the recent upbeat data, activity in Brazil is likely to remain under pressure in the first half of the year due to weakness in consumer demand and industrial production. Demand will continue to be subdued by inflationary pressures and a labour market that has been slow to recover.
The second point to consider relates to the political environment. The general elections scheduled for October 2022 could drive market sentiment in Brazil this year. The incumbent President Bolsonaro and former President Lula Da Silva are expected to be the frontline candidates. The former joined the Liberal party in November 2021 to try to gather support from centre voters, while the latter will run again as the Worker’s Party (PT) candidate after being cleared from corruption allegations.
Despite the uncertainty over the election outcome, inflows into Brazilian equities have hit a record of USD 13 billion in the first two months of the year, driven by foreign investors who currently own 53% of the Brazilian market. Valuations have played a key role, reflected in the relative cheapness of Brazilian equities over the last three years in our valuation model. The rise in commodity prices, which helps domestic stocks, and the potential end to the rate hiking cycle also contributed to the attractiveness of Brazilian stocks.
Overall, we remain cautiously optimistic on Brazil in 2022. The improvement in the external context and the backdrop of higher commodity prices could be a catalyst for stronger growth. However, in the short-term, it is likely the economic situation will get worse before it gets any better as low PMI Indices and high inflation point to a weak economic performance during the first half of the year.