ANALYSIS-Brazil economic system outshines Mexico after shock position reversal

By Jamie McGeever and Dave Graham

BRASILIA/MEXICO CITY, Sept 4 (Reuters)The divergence between the Latin America’s two largest economies, Brazil and Mexico, is widening because the area’s most outstanding left- and right-wing leaders undertake stridently totally different fiscal responses to the COVID-19 pandemic.

Their approaches, nonetheless, will not be what could be anticipated – and buyers are adapting accordingly.

The fitting-wing administration of President Jair Bolsonaro – which got here to workplace final 12 months pledging to decrease public spending and lower Brazil’s debt – has opened the faucets and spent billions on unemployment advantages.

In the meantime, in Mexico, President Andres Manuel Lopez Obrador’s left-wing authorities – which promised to deal with poverty with state spending packages – has saved an iron grip on its purse strings.

Economists at Credit score Suisse have estimated that Brazil’s spending in response to the epidemic was not solely 3 times greater than the median for rising market economies, it even exceeded the typical of rich nations.

Citing Worldwide Financial Fund information, the financial institution pegged Brazil’s fiscal effort at a whopping 6.5{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of GDP – dwarfing Mexico’s spending, equal to only 0.7{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of GDP.

The short-term financial influence of this fiscal divergence was mirrored within the information. Whereas Brazil’s economic system shrank by a report 9.7{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} within the second quarter, Mexico’s plunged by a staggering 17.1{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}.

“The Brazilian economic system in 2020 and 2021 (will) be much less affected than that of the median of rising nations,” Credit score Suisse economists wrote, crediting Bolsonaro’s largesse.

In Mexico, the financial panorama definitely appears bleak. The central financial institution warned final week that the nation of 130 million folks might see its output contract by virtually 13{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} this 12 months – the deepest stoop for the reason that Nice Melancholy.

Even its rosiest situation envisages an 8.8{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} slide this 12 months within the roughly $1.1 trillion economic system, earlier than a 5.6{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} rebound subsequent 12 months.

In contrast, economists have been revising upwards their extra bearish forecasts for Brazil, amid indicators the economic system is choosing up within the third quarter following Bolsonaro’s requires lockdowns to be scrapped.

A central financial institution survey of economists now predicts a contraction of 5.3{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} on common this 12 months. The federal government says even that’s too pessimistic and is forecasting a 4.7{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} decline – which might nonetheless be the largest since data started in 1900.

But for buyers, trying past the short-term financial influence, Lopez Obrador’s austerity might make Mexico’s authorities bonds and credit score markets extra enticing in the long term, analysts say, whereas upward stress might construct on Brazil’s long-term rates of interest.

“Mexican bonds might outperform offered there is not hypothesis a couple of attainable downgrade to Mexico’s credit standing,” stated Gabriela Siller, an economist at financial institution Banco BASE. In Brazil, she stated, political turbulence was weighing on the efficiency of sovereign debt.


Whereas Bolsonaro’s authorities has been roiled by corruption scandals and rifts with Congress, his excessive spending has introduced brightening political fortunes. Though Brazil is the world’s second-biggest COVID-19 sizzling spot, with over 120,000 deaths, Bolsonaro’s approval scores have recovered.

Political analysts say that’s largely right down to a 600 reais ($110) month-to-month stipend transferred immediately into the pockets of as much as 85 million of Brazil’s poorest folks.

A Datafolha ballot final month discovered that 37{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of these surveyed seen his authorities as nice or good, in contrast with 32{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} in June, whereas his rejection charge dropped 10 factors to 34{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} who see his authorities as dangerous or horrible.

Crucially, a lot of the rise in reputation got here in Northeast Brazil – a poor area and a bastion of the left-leaning Staff Celebration – which might be decisive in Bolsonaro’s 2022 reelection bid.

Whereas Bolsonaro can also be planning to revamp the “Bolsa Familia” welfare program launched by the Staff Celebration, many within the authorities are questioning how sustainable his anti-poverty initiatives are.

Bolsonaro introduced on Tuesday the COVID stipend could be prolonged to the top of the 12 months, though at a lowered charge of 300 reais a month.

Nonetheless, this system – which can price the Treasury round 350 billion reais, about 5{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of GDP – has blown a gap in Financial system Minister Paulo Guedes’ fastidiously constructed funds this 12 months. Worryingly for buyers, which will come at a political price.

Bolsonaro’s relationship with Guedes, a revered ex-Chicago faculty graduate and monetary disciplinarian, has been broken and hypothesis persists that the “tremendous minister” – a darling of the markets – might resign.

“A foul fiscal place is dangerous for bonds, though I feel a giant deterioration is already priced in for Brazil,” stated Luciano Sobral, chief economist at NEO Investimentos.


Lopez Obrador, in the meantime, says Mexico will reap longer-term rewards by avoiding the errors of the previous, when “neoliberal” governments wasted taxpayer cash bailing out firms – successfully, transferring cash from atypical Mexicans to the rich elite.

“Ultimately, I feel Mexico will serve for instance,” Lopez Obrador stated final week.

Since taking workplace in December 2018, Lopez Obrador has been cautious on spending – cautious to keep away from any threat of leaving his authorities hostage to debt markets.

He has slashed public sector pay to seek out cash for his signature welfare and infrastructure initiatives. The modest reduction measures his authorities has taken in the course of the pandemic have been aimed principally at key constituents such because the poor and the aged.

Mexico pledged some 2 million loans for small companies, however at 25,000 pesos every, the whole outlay involves lower than $2.5 billion.

Some economists say Lopez Obrador has miscalculated the long-term results of such a painful downturn.

Mariana Campos, a public spending knowledgeable at assume tank Mexico Evalua, stated the president has neglected that the overwhelming majority of Mexican employers had been small- or medium-sized companies that can’t survive a significant disaster with out extra authorities assist.

“He is utterly overestimating how a lot capital they’ve and the way lengthy they will final with out recurring earnings,” she stated.

Brazil, Mexico 2020 fiscal support

Brazil, Mexico 2020 GDP progress changes

(Reporting by Jamie McGeever in Brasilia and Dave Graham in Mexico Metropolis Modifying by Daniel Flynn and Steve Orlofsky)

(([email protected]; +55 (0)11 97189 3169; Reuters Messaging: [email protected]))

The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.

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