A Higher Interest Rate and Economic Stagnation
During the second wave of COVID contagion, which is working to contract the economy through spontaneous social distancing, the risk premiums have been rising (steepening slope of the yield curve and weakening of the exchange rate), and the Central Bank is poised to raise the interest rate. Added to this situation are the uncertainties coming from a government without a diagnosis and bereft of a map for economic policy execution. As can be imagined, this situation of extreme uncertainty is standing in the way of better performance.
With explicit acknowledgment that we have chosen an optimistic bias, our projection is for GDP growth of 3.2% in 2021. Output will almost surely contract in the first quarter, and possibly in the second as well, with recovery in the third and fourth quarters stimulated by growth of the global economy. Based on a reasonable set of hypotheses, growth should continue in 2022, but our caution prevents us from hazarding a forecast.
For inflation accumulated in 2021 to remain near 4.5%, the Central Bank will have to hike the SELIC rate, but its choice of the pace of the tightening will have to consider that the economy will remain in the doldrums in the first six months, and that it needs to minimize the costs in terms of weaker GDP. For this reason, we project a gradual rise of the SELIC rate to 4.5% by the end of this year, starting soon with an increase of 50 basis points, and continuing to rise in 2022 until reaching 6.5%. These projections take into account average real exchange rates of R$5.40/US$ in 2021 and R$5.20/US$ in 2022.
The weak growth will hinder imports, and the combination of a weak real exchange rate with rising commodity prices and the global economic recovery will increase the trade surpluses. We project a robust trade balance, of US$ 96 billion in 2021, along with a surplus of US$ 56 billion (3.8% of GDP) in the current accounts. Although direct investments will shrink, we see no problems for the balance of payments, with maintenance of a high level of reserves.
In the fiscal field, the game has already begun, with approval of a watered down emergency constitutional amendment and a supplementary credit for payment of the stipends under the renewed Emergency Relief program. But the croupier is dealing from a stacked deck, reducing the credibility of the rules of the game, which can be changed at any time without prior notice.
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