Brazil drowns in its own debt

With public-sector debt ballooning towards 100% of GDP, the state cannot afford generous fiscal support measures for much longer.

Brazil’s democracy is tearing at the seams, says Ryan Berg on aei.org. The country has just surpassed 100,000 coronavirus deaths, making it the world’s second worst-hit nation. The virus has deepened bitter political divisions. Embattled by Congressional opposition and Supreme Court probes, President Jair Bolsonaro’s supporters have called for a military coup. That’s unlikely, but political institutions, already discredited by massive corruption, are entering an advanced state of decay.

A second chance

Bolsonaro’s election victory in October 2018 triggered euphoria in the stockmarket, with the benchmark Ibovespa index advancing 38% to January 2020. Yet shares then crashed a stomach-churning 43% as the pandemic hit. The market has since made up much of the lost ground, but is still down 12% for the year to date. That is a noticeable underperformance compared with the emerging-market average, down about 2%. 

Bolsonaro’s first 18 months in office have been disappointing for the country’s business community, says Bryan Harris in the Financial Times. Last year’s pension changes aside, promised reforms have fallen by the wayside. Economic growth has remained anaemic. Yet recent weeks have seen investors’ old “ebullience” return. 

The proximate cause is a proposed tax reform, which should simplify one of the world’s most “byzantine” systems. Brazilian businesses are thought to spend an average of 2,000 hours complying with tax obligations, 20 times longer than their UK counterparts.

Another reason for the recent rally is that government stimulus has turned out to be more generous than expected. A signature crisis measure has been a 600-real (£84) monthly stipend paid to workers in the hard-hit informal economy. Finance minister Paulo Guedes, a disciple of Milton Friedman, has emerged as “the world’s most reluctant Keynesian”, say Martha Viotti Beck and Mario Segio Lima on Bloomberg. Long an advocate of fiscal rectitude, the pandemic has forced him to run Brazil’s “biggest-ever budget deficit”, predicted to be at least 11.5% of GDP this year. 

The headwinds are considerable, says Craig Mellow in Barron’s. With public-sector debt “ballooning” towards 100% of GDP, the state cannot afford generous fiscal support measures for much longer, says Alberto Ramos of Goldman Sachs. Brazil has “one of the weakest fiscal positions” of any emerging economy. Proposed tax reforms are badly needed, but Guedes will need to rally a majority in a fractious legislature. As Monica de Bolle of the Peterson Institute for International Economics puts it, talk of tax reform looks like an exercise in “shuffling deckchairs on the Titanic”. 

House prices jump to a record high

Britain is in the grip of a “mini house-buying boom”, says BBC.com. The Halifax house price index shows that prices hit an all-time high in July, with the average house value of £241,604 up 3.8% on a year before. 

Some 63,250 properties changed hands in June, writes Will Kirkman in the Daily Mail. That is a 32% increase from a month before. Pent-up demand from sales delayed during lockdown is doubtless partly responsible, while Rishi Sunak’s stamp duty holiday has also “put a shot in the arm” of the market. 

The big question is whether the surge in activity can last into the autumn, when the government’s furlough scheme ends. The “mini-boom” could yet turn into a “maxi-bust”, cautions Andrew Montlake of London mortgage broker Coreco.

Perhaps the most striking change has come in the rental market, says Melissa Lawford in The Daily Telegraph. London rents are down by 3% this year and look set to have fallen by 5% come the end of 2020. The rise of distance working is reducing demand for central locations, while the student market has also taken a hit as international students defer courses. 

Meanwhile, supply is increasing as short-term landlords ditch the likes of Airbnb to join the long-term rental market. Rents beyond the capital are still rising, but market watchers think that the rest of the country could soon experience a similar trend. 

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