Macro scenario - Brazil

July 8, 2021

Consolidation of a more benign scenario in 2021

 The vaccination campaign is advancing and will likely lead to economic normalization before year-end. The
main risk is the emergence of virus variants that affect the effectiveness of vaccines distributed in the country.
 We revised our GDP growth forecasts to 5.8% for 2021 (from 5.5%) and 2.0% for 2022 (from 1.8%). GDP is
likely to accelerate significantly in 3Q21, as the services sector recovers and the goods sector continues to
enjoy good support.
 With higher expectations for growth, we revised our primary deficit estimates to 1.8% of GDP in 2021 and 0.7%
of GDP in 2022 (from 2.0% and 1.0%, respectively), and lowered our forecasts for gross debt to 81.0% and
80.2% of GDP (from 81.9% and 81.6%, respectively).
 Notwithstanding the market volatility, we maintained our year-end FX forecasts at BRL 4.75/USD for 2021 and
BRL 5.10/USD for 2022. A rising Selic benchmark rate, higher commodity prices and improved economic
activity support appreciation from current levels.
 We raised our inflation forecasts to 6.1% for 2021 (from 5.6%), incorporating stronger economic activity in 3Q21
and higher oil prices this year, and to 3.7% for 2022 (from 3.6%), on stronger GDP growth and higher inertia.
 We expect the Selic rate to increase to 6.5% p.a. by year-end. Note that the tightening pace at future monetary
policy meetings is likely to be particularly influenced by the evolution of inflation expectations and by inflation
readings for services and tradable goods.

Coronavirus: advancing vaccination campaign dose; and ii) the average effectiveness against death
and declining death toll of the already distributed vaccines stands at 55% with
the first dose and 87% with the second.
The advancement of the vaccination campaign will
likely lead to economic normalization in 4Q21. We We estimate that the probability of death for each
expect the entire population aged 18 and above to new case is now 65% lower.
receive the first dose by September.
70%
Probability, for every new case
The main risk going forward is the emergence of (considering total population), that
60% deployed vaccines are able to
virus variants that affect the effectiveness of the
prevent death
vaccines distributed in the country. However, there
is now more diversification in vaccines available, with 50%

different technologies and initial signs that they are

effective against new variants. 40%

In the short term, the immunization campaign is 30%

already having a positive impact, with
hospitalization and death numbers starting to 20%
recede. We estimate that the probability of death for
each new case is currently about 65% lower than 10%
before the start of the vaccination campaign (see
graph), considering that: i) 90% of the population aged 0%
60 and over (which made up roughly 75% of all deaths Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
before vaccines) have received at least the first dose Source: Itaú
and approximately 50% have received the second

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Macro scenario - Brazil | July 8, 2021

Activity: stronger GDP growth in 3Q21 We now forecast GDP growth of 5.8% for 2021
(from 5.5% previously) and 2.0% for 2022 (from
We forecast GDP growth of 0.2% qoq/sa for 2Q21 1.8% previously). The revision of our forecast for
and 1.3% qoq/sa for 3Q21 (from 0.7% previously). 2021 is based on a higher growth estimate for 3Q21
The service sector has shown a clearer recovery with and the revision for 2022 is based on a larger
the advance of the vaccination campaign and statistical carryover and expectations of a milder 5%
normalization of mobility. Meanwhile, the goods sector decline in commodity prices next year (vs. -10% in the
continues to expand (see graph) and industrial previous scenario). In light of the improved economic
production is gaining momentum at the margin. This growth forecasts, we adjusted our year-end estimates
combination is expected to produce the sharpest for unemployment rate to 12.0% for 2021 (from 12.1%)
growth acceleration in 3Q21. We expect the goods and 11.9% for 2022 (from 12.1%). The unemployment
and service sector data for May and June to show rate was at 11.6% in February 2020, before the onset
significant expansion, generating a positive statistical of the pandemic.
carryover into 3Q21. We estimate 0.2% GDP growth in
2Q21, due to the negative statistical carryover of the Stronger growth supports better fiscal results
declines registered in March and April, the peak of the
pandemic-related death toll in Brazil. We revised our primary deficit estimates to 1.8% of
GDP or BRL 152 billion for 2021 (from 2.0% of GDP
Spending on services has rebounded in recent or BRL 170 billion) and to 0.7% of GDP or BRL 70
months while the goods sector shows no billion for 2022 (from 1.0% of GDP or BRL 95
deceleration. billion). The revision was driven by expectations of
stronger economic growth in 2021 and 2022. We
130
7-day moving average
expect extraordinary credits not subject to the
120 10
spending cap to add up to BRL 122 billion (1.4% of
110
0
GDP) this year. For 2022, we see room to increase
100 discretionary spending by BRL 35 billion, which will
90 likely be used to expand cash transfers under the
-10
80 Bolsa Família program and public investments.
70 -20
60 Goods We also expect public debt to decline from 88.8%
Services -30
50 Industrial electricity of GDP in 2020 to 81.0% of GDP in 2021 and 80.2%
40 consumption proxy of GDP in 2022, compared with our previous
Google Mobility -40
30 forecasts of 81.9% and 81.6%, respectively. Debt
(rhs)*
20 -50 dynamics in the period should benefit from temporary
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21

factors, such as an implicit GDP deflator above the

consumer price index IPCA and additional funds to be
*Mobility
. in retail and recreation areas, grocery stores and returned to the National Treasury by the BNDES
drugstores, parks, transit stations and workplaces. development bank.
Source: Itaú, ONS, Google Mobility
Given the pandemic-related dynamics and the
associated social consequences, the main risk is
Growing external demand is contributing
further flexibilization of the spending ceiling fiscal
significantly to the expansion of activity in the
regime. This scenario would affect the already fragile
goods sector. If not for the substantial expansion of
fiscal sustainability in Brazil, increase the domestic risk
the global economy, the goods sector could have
premia, and hurt interest rates, the exchange rate and
suffered as services recovered and went on to take a
economic activity.
bigger share of people’s income. Manufactured
exports have been advancing in recent months and
capital expenditures remain well above pre-COVID
levels, benefiting from higher commodity prices.

2
Macro scenario - Brazil | July 8, 2021

Debt/GDP expected to decline in 2021 Stronger activity and higher commodity prices
pressure inflation in 2021; inflation in 2022 also
95% revised to the upside
% of GDP
90% We revised our forecast for the IPCA consumer
85% price index to 6.1% in 2021 (from 5.6%),
General Government
Gross Public Debt
incorporating a stronger economic activity in 3Q21
80%
and higher oil prices (we raised our forecast for
75% Brent crude to USD 80/bbl from USD 65/bbl). For
market-set prices in the IPCA in 2021, we expect
70%
increases of around 3.0% in services, 7.0% in
65% industrial goods and 6.5% in food consumed at home.
60% For regulated prices, we see an increase of
approximately 9.5%, with gasoline climbing by almost
55%
30% this year. For the electricity pricing system, we
50% expect to enter red mode level 2 from June to
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

November, and red mode level 1 in December.

Source: Central Bank, Itaú
BRL: stronger in 2021, but global environment
will pressure in 2022
Notwithstanding the recent volatility, we maintained
our year-end exchange rate forecast at BRL
4.75/USD. A rising Selic benchmark rate, higher
commodity prices and a stronger economic rebound
should lead to lower risk premia and more favorable
trade and financial flows, paving the way for currency
appreciation from current levels. However, domestic
uncertainties and questions related to the Delta
coronavirus variant could delay this move.
The currency is expected to weaken to BRL
5.10/USD in 2022. In the global scenario, a
combination of stimulus withdrawal, higher interest
rates and a stronger USD tends to pressure the BRL
and other emerging market currencies.
Higher commodity prices, lagged FX effects, and
the global recovery continue to favor Brazil’s
external accounts. The seasonally adjusted and
annualized three-month moving average reached a
record-high surplus of USD 85 billion in June. We
estimate a trade surplus of USD 77 billion for both 2021
(unchanged) and 2022 (from USD 72 billion previously),
incorporating higher average commodity prices next
year. We forecast a current account balance of zero in
2021 and a deficit of USD 8 billion in 2022 (from a
deficit of USD 11 billion previously). On the financing
side, foreign investment is returning to Brazil,
particularly to the stock and fixed income markets.
However, given the short-term scenario of below-
average rainfall, we see potential for a costlier mode
by year-end. The adoption of red mode level 2 in
December would have an additional impact of 0.40 to
0.50 p.p. on the IPCA in 2021, depending on the new
value (between BRL 9.492/100kWh and BRL
11.500/100kWh) approved by the regulator ANEEL.
We revised our forecast for the IGP-M general
market price index in 2021 to 18.5% (from 19.0%),
based on lower readings in 1H21, impacted by a
stronger currency and falling crop and iron ore prices
in June.
Given the stronger economic activity estimate and
higher inertia, we revised our IPCA forecast for
2022 to 3.7% from 3.6%. A rising Selic and stronger
exchange rate later in the year points to the
convergence of the IPCA to the target next year, but
we still see a risk of a potential de-anchoring of the
inflation expectations of households and companies.
This is particularly important given that year-over-year
inflation will be significantly above the upper limit of the
inflation target range for much of 2021, peaking at
around 8.9% mid-year. Note that the high commodity
prices in 2021 are unlikely to be repeated next year, as
supply bottlenecks and temporary demand pressures
ease. The upward pressure on commodity prices in
2021 could therefore have the opposite effect in 2022.

3
Macro scenario - Brazil | July 8, 2021

Monetary policy: full normalization, pace
depends on an evolving scenario
At the last monetary policy meeting, the Brazilian
Central Bank’s Monetary Policy Committee
(COPOM) delivered the widely expected 75-bp
increase in the Selic benchmark rate, to 4.25% p.a.
Authorities signaled in the statement following the
decision that they intend to completely normalize the
monetary stimulus level (removing the mention of a
partial adjustment), adding that the process can be
accelerated by a continued deterioration of inflation
expectations. We believe that the minutes of the
meeting reinforce this signal.
To reflect the committee’s communication twist,
after the release of the minutes we revised our
Selic rate estimate to 6.5% (from 6.0% previously)
in 2021, consistent with the full normalization
signaled by monetary authorities. We anticipate
increases of 100, 75 and 50 bps at the next three
meetings, but note that the outlook for monetary policy
will be conditional on: i) the behavior of inflation
expectations (Focus survey as well as asset prices),
which have remained stable so far or even receded
since the last Copom meeting; and ii) inflation of
tradable goods and services, which the Copom cited
as a source of potential downside for the prospective
scenario in the event of a significant decline in
commodity prices in local currency.
Finally, the National Monetary Council (CMN) set
the 2024 inflation target at 3.0% at its June meeting
(down from 3.25% in 2023), in line with our
expectation and the reduction pace of 0.25 p.p. per
year started in 2018, when the target was at 4.5%.
This decision reaffirms the convergence to levels more
compatible with those in similar emerging markets
(3.0% is the Latin American standard) and contributed
to a better anchoring of expectations, which are crucial
to the inflation targeting regime. The tolerance range
for deviations from the target range was set at 1.5 p.p.
in either direction.

Brazil | Forecasts and Data

2016 2017 2018 2019 2020 2021F 2022F
Current Previous Current Previous
Economic Activity
Real GDP growth - % -3.3 1.3 1.8 1.4 -4.1 5.8 5.5 2.0 1.8
Nominal GDP - BRL bn 6,269 6585.5 7,004 7,407 7,448 8,677 8,605 9,427 9,295
Nominal GDP - USD bn 1,798 2063.3 1,916 1,877 1,443 1,694 1,661 1,908 1,882
Population (millions) 205.2 206.8 208.5 210.1 211.8 213.3 213.3 214.8 214.8
Per Capita GDP - USD 8,764 9977 9,189 8,932 6,816 7,941 7,786 8,883 8,760
Nation-wide Unemployment Rate - year avg (*) 11.5 12.7 12.3 11.9 13.3 13.0 13.4 11.9 12.1
Nation-wide Unemployment Rate - year end (*) 12.7 12.4 12.2 11.6 14.3 12.0 12.1 11.9 12.1
Inflation
IPCA - % 6.3 2.9 3.7 4.3 4.5 6.1 5.6 3.7 3.6
IGP–M - % 7.2 -0.5 7.5 7.3 23.1 18.5 19.0 4.0 4.0
Interest Rate
Selic - eop - % 13.75 7.00 6.50 4.50 2.00 6.50 6.50 6.50 6.50
Balance of Payments
BRL / USD - eop 3.26 3.31 3.88 4.03 5.19 4.75 4.75 5.10 5.10
Trade Balance - USD bn 40 56 47 35 50 77 77 77 72
Current Account - % GDP -1.4 -1.1 -2.7 -3.5 -1.7 0.0 0.0 -0.4 -0.6
Direct Investment (liabilities) - % GDP 4.1 3.3 4.1 3.9 2.4 3.0 3.0 3.1 3.2
International Reserves - USD bn 372 382 387 367 356 356 356 356 356
Public Finances
Primary Balance - % GDP -2.5 -1.7 -1.5 -0.8 -9.4 -1.8 -2.0 -0.7 -1.0
Nominal Balance - % GDP -9.0 -7.8 -7.0 -5.8 -13.6 -6.3 -6.5 -5.8 -5.9
Gross Public Debt - % GDP 69.9 73.7 75.3 74.3 88.8 81.0 81.9 80.2 81.6
Net Public Debt - % GDP 46.2 51.4 52.8 54.6 62.7 61.5 61.7 61.4 62.5
Source: IBGE, FGV, BCB and Itaú
(*) Nation-wide Unemployment Rate measured by
PNADC

4
Macro scenario - Brazil | July 8, 2021

Macro Research – Itaú

Mario Mesquita – Chief Economist

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