Brazil and Mexico Economic Outlook - Interviews with Barclays Economists
The fiscal policy response to the Covid-19 health crisis has been starkly different in Latin America’s two largest economies, Brazil and Mexico. While the Bolsonaro administration opened the taps for increased emergency spending to support employment and activity, López Obrador’s government adopted a more modest countercyclical fiscal policy, keeping a tight grip on its purse strings. To discuss in more detail the differences between these two countries’ policy responses, the implications for their respective recoveries and the economic outlook, we spoke to Marco Oviedo, head of economics research for Latin America and chief economist for Mexico, and Roberto W. Secemski, Brazil economist at Barclays.
Marco Oviedo is Head of Economics Research for Latin America and Mexico Chief Economist, based in New York. Mr. Oviedo joined Barclays in 2012 from the Government of Mexico, where he was most recently the Chief Economic Advisor to the Staff of the President of Mexico. Previously, Mr. Oviedo served as the Deputy General Director of Public Debt at the Public Debt Office, Finance Ministry of Mexico, for more than three years. Mr. Oviedo holds a PhD in Economics from Yale University.
Roberto W. Secemski
Roberto W. Secemski is the Brazil Economist at Barclays, based in New York. Prior to joining the firm in 2018, Mr. Secemski was the senior buy-side Latin America economist for Daiwa Asset Management. Before that, he was a Sovereign Analyst for Fitch Ratings, covering Latin American countries. He started his career in Sao Paulo in 2003, as an economist for Banco Itau BBA, Brazil’s largest private-sector bank. Mr. Secemski was ranked #1 inflation forecaster by FocusEconomics and #2 Overall Forecaster for Brazil in 2019, also regularly appearing on the Brazilian Central Bank’s “Top 5” list of forecasters. Roberto holds a master’s degree in Economics from New York University and a BA in Economics from University of Sao Paulo. He is fluent in Portuguese, English and has working knowledge of Spanish.
- Why has the fiscal response of Brazil and Mexico to the Covid-19 crisis differed so markedly?
Some ideological and political decisions are behind the differences. In Mexico, President López Obrador has promised that public debt should decline during his administration. In addition, he believes that the government should be austere and just focus on the poor and more fragile members of society. In his view, higher spending is likely to promote corruption, particularly if this is allocated to big firms. In that sense, he decided to allocate more resources to health and social spending, reducing other elements of the budget, such as operational expenses and some investment. Brazil underwent much stricter quarantine periods than Mexico, mostly imposed by local states, even if compliance rates at times were not high. The federal government launched significant efforts to buttress households’ income for both formal and informal workers to cushion the blow to the economy—a priority for Bolsonaro—as well as a vast array of monetary measures. As much as BRL600bn (8.3% of GDP) has been committed in primary fiscal resources in this year’s budget, mostly through spending measures, also in healthcare.
- What are the implications for their respective recoveries down the line?
It should be a bit slower in Mexico but Brazil is also facing challenges. In Mexico, we anticipate that investment is likely to remain relatively weak, also due to the low levels of public financing. In addition, the labor market is likely to recover at a slower pace. The relatively weak recovery is related to the fact that the pandemic could have had negative effects on firm destruction that could have been avoided with fiscal support to specific sectors. On the flip side, Mexico is likely to report relatively stable public debt ratios. In Brazil, the fiscal resources used so far have prevented a sharper correction in households’ income despite the ongoing increase in unemployment. Once the stimulus is reduced or possibly eliminated, we believe the recovery in the labor market will be slow, which raises the risks of discontinuing programs without a steadier recovery in place. At the same time, high uncertainty over plans for fiscal consolidation in 2021 is weighing on market sentiment now and could threaten our expected recovery of 3.5% next year.
- What is the impact of the countries’ different policy stances on fiscal accounts?
Mexico should perform with a certain stability. Public debt is expected to increase to 55% of GDP in 2020 from 47% in 2019. However, as the government is aiming at a zero primary balance, public debt might decline to 54% of GDP in 2021. Whereas in Brazil, we see this year’s primary deficit reaching an unprecedented 12.4% of GDP, from 0.9% in 2019; our expectation for a smaller deficit of 3.1% next year is conditional on the spending cap being respected while revenues recover in line with the economy. Even so, we do not see gross public debt declining any time soon, having jumped from 76% of GDP last year to 94% in 2020, likely going over 95% next year in spite of an interest bill expected to be the lowest in several years.
- What are the associated risks to each approach?
It is clear there is no silver bullet. The risk in Mexico is clearly on the growth side. If the economy goes back to contraction territory, both tax revenues and debt ratio metrics will suffer, and hence the deterioration of the fiscal accounts could continue to evolve. Conversely, the risk in Brazil is clearly on the fiscal front, which could still impact growth negatively through weaker economic confidence and solvency questions, thus “twice” affecting the dynamic of debt ratios, both in the numerator (debt) and the denominator (GDP). The Brazilian Treasury has faced some challenges in recent debt auctions as the risk premium demanded by bond holders is on the rise.
- What are the prospects for further stimulus measures?
In Mexico, the 2021 budget considers a 5% increase in public investment, which could help the economy at the margin. If things get worse, the government of Mexico has already announced that no more fiscal stimulus would be implemented. The space for new stimulus is virtually non-existent in Brazil considering that the spending cap is now binding and the government is facing political difficulties to cut mandatory expenditures to make room for higher discretionary spending. Still, Congress is now actively discussing options to create a new basic income program to replace the emergency benefit paid to over 60mn people during the pandemic. This is a tight rope to walk on, since any perceived breaches to the spending cap could render the fiscal anchor no longer credible, potentially raising questions on debt sustainability.
- What is the economic outlook for both countries?
It seems there is an apparent trade-off between fiscal stability and growth. The Mexican economy is expected to collapse 8.8% y/y this year and only to recover 3.0% in 2021. In the case of Brazil, we expect the economy to contract “only” 5% this year, one of the smallest declines in the region, to a large extent thanks to the relatively speedy rebound we are seeing in response to the fiscal and monetary measures deployed to address the effects of the pandemic. The road to recovery is still long, with Brazil still looking to advance on reforms and Mexico suffering from erratic policymaking. In particular, the Mexican economic outlook remains dependent on a vaccine. We expect a vaccine to be available and distributed during H2 21, hence, the recovery is likely to be stronger in 2022, as we forecast a 3.5% y/y expansion. However, since the López Obrador fiscal and energy policies will continue to be in place, the level of GDP is likely to remain below Q4 19 values. Upside risks would only come from a stronger-than-expected U.S. recovery or positive effects in investment coming from the implementation of the new USMCA.
We currently expect Brazilian GDP to return to pre-pandemic levels only toward the end of 2022. Brazil needs to persevere on the reform agenda to reduce structural constraints impeding fiscal consolidation (e.g. administrative reform) but also to foster potential growth (e.g. tax reform). Success on those efforts would allow interest rates to remain low and encourage much-needed investments, potentially unleashing a virtuous cycle unseen during most of the past decade. The bar is high, though; political interests could gain prominence as we approach presidential elections in 2022, postponing unpopular decisions and any expectation of improvement to Brazil’s low potential growth rate.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: October 15, 2020
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