Thought July 09, 2020 / 01:47 pm UTC

Brazil: Confidence to Invest Will Be Hard to Recover

By Pedro Tuesta

While economic authorities are trying to convince investors that Brazil's recovery will be faster and stronger than the market is forecasting, surveys suggest that investors have yet to accept this claim. This supports our view for a weak economic recovery amid the COVID-19 pandemic.

Figure 1: Not Willing to Invest- Investment Intention Index

Source: Getulio Vargas Foundation

The Getulio Vargas Foundation (FGV) quarterly survey on investment intentions showed the largest fall and lowest levels of all the series. Moreover, according to the surveyors, a recovery is not likely to happen in the medium term because of the high level of uncertainty.

FGV surveys four sectors, manufacturing, services, retail and construction, to make indexes where 100 suggests a neutral outlook. Up to Q1, all the indexes were on the rise and well above 100, underscoring Brazil's sustained recovery from the 2014-2016 recession. Retail was looking to expand investment the most and construction the least, with corruption scandals still rocking the latter sector. 

The COVID-19 pandemic and the misguided response from Brazilian President Jair Bolsonaro's administration changed that picture. All four indexes posted significant drops in Q2, with manufacturing showing the largest decline, and in general, all the indexes are now well below the 100 neutral level. Although we do not rule out the possibility of confidence indicators recovering in the next survey, we think this is unlikely, because the survey was performed before the pandemic situation became worse in Brazil. 

We see very few signs of improvement in containing the pandemic, and on that basis, we agree with the FGV team’s assessment that the outlook for the Brazilian economy is negative. Since uncertainty on the recovery is a key element on investment decisions, we believe to tone could improve if the government passes reforms, but only containing the pandemic will help with a return to over 100.

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Analyst Certification
I, Pedro Tuesta, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.