By Ana Beatriz Bartolo

Investment.com: Brazil faces a difficult outlook in 2022. The macroeconomic outlook will be difficult despite the declining trend of inflation. There will be high interest rates, a and concerns over the fiscal position. Market volatility will be aggravated by the election of the president at the close of the year.

“For 2022, the expectation for domestic consumption is not good. We expect stability or a small drop, but not growth,” comments Rafaela Vitória, chief economist at Banco Inter. We expect 0.5% growth, however, this aggregate data is not very accurate as we have both sectors that are in decline and those that are growing.

Vitória explains that agriculture and some industries, such as extractive industries, are better positioned for next year. On the other hand, the service and retail sectors should be affected by inflation and lower salaries leading to a decrease in families’ purchasing power.

Because it has a stronger base after recent strong quarters, the consumer durable goods sector may experience a weaker performance. “The overall temperature may point to a recession, because the sectors with strong prospects employ fewer people,” explains Vitória.

It is hard to have a great year. Brazil is weak structurally, making it vulnerable to shocks. Zeina Letif, an economic consultant for Brazil sees mild recession 2022. Low productivity, with low skilled workers, is a problem in Brazil. The specialist also pointed out that the country has seen an increase in its imports, despite the strengthening real and the rise in exchange rates.

We are a weak and almost stationary economy. The turnaround was quick after 2020. [when the pandemic crisis started]”But this caused problems, particularly in fiscal matters,” says Latif.

Latif explained that while capital was needed to reduce the effects of the pandemic on the economy, the industry in the country was not equipped to handle the country’s demand. Brazil’s overall spending was excessive and it didn’t have a clear goal. She explains that part of the reason for our inflation, which began last year was due to over-stimulating of the economy.

Additionally, mistrust has been generated about government fiscal commitments. It puts downward pressure on exchange rates and inflation. Investing.com Brazil consulted analysts to forecast that the value of the US dollar in 2022 would be R$ 5,40-5,50. There will also be a Selic (Brazilian Interest Rate) between 10.5%-12.5%, an IPCA (inflation marker or CPI), close to 5% per year.

2022 Presidential Election

Latif explained that the “institutional weakness of the (constitutional] spending limit” has occurred in the past year. This includes off-budget expenditure and recent discussions regarding the PEC of PrecatóriosThis changes the country’s fiscal anchor. These changes will all have an impact on the presidential elections. “Now the market discussion is about how committed candidates to the cap law and fiscal responsibility laws.” Latif believes that long-term, or structural projects can only be started after the election results are known.

“There is a favorable situation for a center-left candidate to win, because the level of activity in Brazil is very weak and the average consumer’s income and purchasing power has dropped a lot, either because the labor market is bad or because inflation is high. In a situation like this it is very difficult to raise a liberal, free-market flag,” explains André Perfeito, chief economist at Necton Investimentos.

Although the names of the presidential candidates are not yet decided, Perfeito points out that among the possibilities presented so far, the main center-left representative that could win the elections next year is former president Luiz Inácio Lula da Silva, of the Workers’ Party (PT). A possible win for the PT could mean that the Central Bank will not be pressured to decrease the Selic. The Selic is expected to rise to 11.5% at Necton by 2022.

Perfeito explained that even though interest rates reached 2% over the past year, they had not significantly affected the economy. In fact, the reduction brought about a “series of dysfunctionalities” in the financial sector. The bond and stock markets are also very disconnected.

The perceived risk was very low at the moratorium interest rate. The higher the interest rate, the more asset prices fall. This may create a positive sentiment in the market for 2022, in spite of the fact that Lula da Silva is expected to win.

International scene is no help

Brazil’s economic situation will be affected by the external challenges as well. Latif states that the world’s trade must remain stagnant, and will face an inflation problem in 2022. The economic consultant explains that the Fed is raising interest rates, and the world trade grows more slowly than before, making it more challenging for emerging nations.

For the economist and professor at USP, José Francisco de Lima Gonçalves, the expectation is that the United States monetary policy will tighten global financial conditions over the next year, which together with doubts about Chinese demand, should impact commodities. This situation is complicated by the economic bottlenecks and questions regarding the Omicron coronavirus variant.

Brazilian exports have not seen much interest from overseas, which means that there will be a lot of production in agriculture but no pricing power. Besides, less favorable financial conditions abroad pose difficulties for investments here, which increases speculative or fixed income positions,” explains Gonçalves.

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