Economy

Brazil and Mexico currencies in somber mood as pandemic roars on

Real is likely to outperform peers in the second half of the year with economic reopening and vaccination, predicts Goldman Sachs

Brazilian Real and U.S. dollar notes are pictured at a currency exchange office in Rio de Janeiro, Brazil, in this September 10, 2015 photo illustration. Photo: REUTERS/Ricardo Moraes/File Photo
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  • Thousands of Brazilians are dying daily of COVID-19, the economy is struggling and opposition to President Jair Bolsonaro has increased. Under attack from all sides, he has reacted by appointing loyalists in key positions;
  • Brazil’s Treasury has warned the 2021 budget approved by Congress threatens one of the government’s key pillars of fiscal stability and urged the estimates for mandatory spending be brought up to a more “realistic” level;
  • Goldman Sachs estimates that in this semester only 10% to 15% of the eligible population will be vaccinated in Brazil, while in Chile this index should be close to 60%. According to the executive, this percentage will be reached by Brazil in the second half, placing the country on par with other Latin American neighbors such as Mexico, Colombia, and Peru.

Brazil‘s real is starting the second quarter in a somber mood as the coronavirus pandemic continues to wreak havoc in Latin America‘s biggest economy and as pressure builds on the government, a Reuters poll with analysts founds – a worst-than-expected scenario than that painted in December.

The Brazilian currency lost around 10% in the first three months of the year, briefly revisiting its record closing low of 5.88 per U.S. dollar set last year. That mark could be easily breached soon.

Thousands of Brazilians are dying daily of COVID-19, the economy is struggling and opposition to President Jair Bolsonaro has increased. Under attack from all sides, he has reacted by appointing loyalists in key positions.

READ MORE about COVID-19 IMPACTS in LATIN AMERICA

“Domestic risks are for BRL downside: the resurgence of COVID-19, potential for further fiscal pressures should the pandemic deteriorate and last for longer, and political uncertainty,” said Juan Prada, an FX strategist at Barclays.

The real is seen at 5.31 per U.S. dollar in 12 months, according to 27 analysts polled March 26-30. The estimate represents an expected 8.4% gain from Wednesday but a big 3.9% drop from last month’s survey, presaging more tension ahead.

READ ALSO: Brazil accounts for one in every 7 COVID-19 infections reported worldwide each day

Out of 11 respondents who answered a separate question about the currency’s trajectory over the coming year, a majority of 6 said the trend was for a weaker real, four viewed it on a stronger footing, and 1 neutral.

The unit will probably remain soft even after a steep interest rate hike last month that started a policy tightening cycle. The country’s central bank head said later the overall adjustment may not be so aggressive.

Besides the high toll in lives from the raging health crisis and its impact on governability, economists worry Bolsonaro’s drive to tighten the purse strings could run aground amid increasing social demands before next year’s election.

Brazil‘s Treasury has warned the 2021 budget approved by Congress threatens one of the government’s key pillars of fiscal stability and urged the estimates for mandatory spending be brought up to a more “realistic” level.

READ ALSO: Chile’s Central Bank: as vaccination drive pays dividends, the country’s economy gains steam

On Thursday, Goldman Sachs said that the real is likely to outperform its peers in the second half of the year, with the acceleration of vaccination in Brazil placing the country at a level of immunized population similar to that of emerging peers and allowing a reopening of the economy. That’s what Caesar Maasry, head of strategy of the company for emerging markets in the country, said.

Maasry said that Goldman Sachs estimates that in this semester only 10% to 15% of the eligible population will be vaccinated in Brazil, while in Chile this index should be close to 60%. According to the executive, this percentage will be reached by Brazil in the second half, placing the country on par with other Latin American neighbors such as Mexico, Colombia, and Peru.

READ ALSO: Mexico‘s economy seen at pre-pandemic levels in early 2022

In Mexico, the peso is likely to appreciate 1% in one year to 20.32 per U.S. dollar. However, the 12-month outlook for the currency also worsened significantly from March’s poll, as investors remain nervous.

Like Brazil, the country is suffering a severe fresh wave of coronavirus cases. Its death toll is likely at least 60% higher than the confirmed number, putting it in excess of 300,000, according to government data.

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