Macro scenario - Brazil

March 15, 2022

Activity, inflation, and interest rate forecasts on the rise

 The direct impact of the Russia-Ukraine war on the Brazilian economy tends to be limited, considering the
limited commercial relations between Brazil and the two countries. The main effects will be indirect – via rising
international commodity prices and impact on global GDP.
 We revised our 2022 GDP growth forecast to +0.2% from -0.5%, incorporating better-than-expected current
data and an improvement in fundamentals for economic activity (higher commodity prices and more fiscal
stimulus). Our estimate for 2023 was revised to +0.5% from +1.0% due to higher interest rates and some
reversal in raw material prices.
 Higher commodity prices and the outlook for marginally better economic growth, as well as a higher Selic rate
throughout the year will likely allow the Brazilian currency to remain at stronger levels for a while. However, our
year-end estimate remains at BRL 5.50 per U.S. dollar due to external and domestic uncertainties.
 We revised our forecast for the IPCA consumer price index in 2022 to 6.5% from 5.5%, primarily reflecting
higher international prices for oil and agricultural commodities. Part of the upward impact is cushioned by the
announced reduction in the IPI tax rate and a stronger average exchange rate. We maintained our 2023
forecast at 3.5% as the effect of greater inertia from 2022 should be offset by a higher interest rate and the
expected decline in commodity prices.
 Higher inflation and commodity prices and better GDP growth lead to stronger government revenues. Our
updated estimates for the primary deficit are 0.3% of GDP in 2022 (deficit of 1.0% previously) and 0.9% of
GDP in 2023 (deficit of 1.3% previously). Gross debt will reach 81% and 84% of GDP this year and the next,
respectively. As these are high levels for an emerging economy, fiscal sustainability will still be a major
challenge going forward.
 Given the increase in inflationary pressures and consequent risk of de-anchoring inflation expectations, the
Brazilian Central Bank’s Monetary Policy Committee (Copom) will likely carry out a more intense monetary-
tightening process than we were expecting before the escalation of tensions between Russia and Ukraine. The
benchmark Selic rate should climb 100 bps at the next meeting, 75 bps in May, and 50 bps in June, ending this
cycle at 13.00% pa, where it should remain until the end of the year.

Stronger GDP growth in 2022 due to a better adjustments in the private sector accelerate, combined
starting point and changing fundamentals with adjustments in the minimum wage and in wages
of state and municipal employees.
GDP grew 0.5% in 4Q21, beating our expectations
and the market’s (+0.1%). Household spending
continued to expand in 4Q21, despite sharp declines
in real income and new consumer loans. This was only
possible because the household savings rate
unexpectedly fell to the lowest level in the historical
series, driven perhaps by repressed demand during
the most critical phases of the pandemic. The current
household savings rate is not sustainable, in our view,
but created positive statistical carryover for GDP
(+0.3%, vs. -0.1% expected) and household spending
(+1.0%) in 2022. Moreover, real income is apparently
recovering in early 2022, as nominal wage

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Macro scenario - Brazil | March 15, 2022

Household savings rate dropped to the lowest BRL appreciation window should last longer,
level in the historical series but uncertainties are still likely to pressure the
30% currency later in the year

25% We maintained our year-end exchange-rate

forecasts at BRL 5.50 per U.S. dollar by YE22 and
20%
BRL 5.75 by YE23, while recognizing that the
current FX appreciation window may last longer.
We project an average exchange rate of BRL 5.25
15%
throughout 2022. Higher commodity prices, the
outlook for marginally better growth and a higher Selic
10%
rate throughout the year are major factors supporting
continuing USD inflows to Brazil, as in January and
5%
February. Hence, the Brazilian currency may plausibly
spend a greater part of the year at a stronger level.
0%
Later in 2022, however, we see some depreciation,
Jul-03
Aug-04
Sep-05
Oct-06
Nov-07
Dec-08
Jan-10
Feb-11
Mar-12
Apr-13
May-14
Jun-15
Jul-16
Aug-17
Sep-18
Oct-19
Nov-20
Dec-21

because the exchange rate would require a reduction

in external and domestic uncertainties to remain at that
Source: Central Bank, Itaú level. Overseas, the increase in global risk aversion in
response to the conflict between Russia and Ukraine
and the perspective of monetary tightening in the U.S.
We revised our 2022 GDP growth forecast to +0.2%
(due to greater inflationary pressures) are important
from -0.5%. In addition to higher-than-expected
factors that weigh on the BRL dynamics. Internally,
statistical carryover, we see an improvement of
doubts related to the evolution of public accounts and
economic activity fundamentals. Brazilian GDP
fiscal sustainability also tend to put pressure on the
responds to three key factors: monetary policy, fiscal
currency.
policy, and commodity prices. Monetary policy will
remain in significantly contractionary territory, but
commodity prices are on the rise and fiscal policy is USD flows to remain positive amid higher
commodity prices, higher Selic rate and
spurring demand. We already expected greater
marginally better growth
spending at the regional level, but the federal
government is also pursuing tax cuts. Some of these 13
Exchange rate transactions (trade+financial), USD bn
initiatives contribute to slowing inflation in the short
10
term amid rising commodity prices, which would have
a negative effect on activity. According to news 8
reports, the government is also considering releasing 5
BRL 30 billion from FGTS, the workers’ severance
3
fund, in 2Q22, bringing upside (around +0.3 pp) to our
2022 GDP forecast. 0

-3
We revised our 2023 GDP forecast to 0.5% from
1.0%. The main factors behind this review are higher -5
interest rates and expected moderation in commodity -8 Median 2015-2019
prices next year. We lowered our forecasts for the 2020
-10 2021
unemployment rate to 12.7% from 13.1% by YE22 and
2022
to 13.0% from 13.3% by YE23. -13
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: Central Bank, Itaú

2
Macro scenario - Brazil | March 15, 2022

We revised our estimates for external accounts, Soft commodities price surge will lift food
incorporating higher average prices for key inflation to around 11% this year
commodities exported by Brazil. We see the trade
90
surplus (as per the MDIC release) at USD 74 billion in 12m 21
Soybean, corn and wheat R$ 12m
2022 (USD 67 billion previously) and USD 72 billion in 80
IPCA food at home (rhs.) 19
2023 (USD 70 billion previously). Deficits in the service 70 17
and income accounts, in turn, should remain at 60 15
historically low levels, as in 2020 and 2021. We project 50 13
current account deficits of USD 12 billion in 2022 (USD 40 11
19 billion previously) and USD 16 billion in 2023. 30 9

Grain and oil prices will lift inflation in 2022
We revised our forecast for the IPCA in 2022 to
6.5% from 5.5%, mainly because of higher commodity
prices. We revised our year-end forecast for Brent
crude to USD 115/bbl from USD 90/bbl previously. We
also revised our forecasts for grain prices and expect
increases relative to our previous scenario of 14% for
corn, 71% for wheat, and 3% for soybeans. As a
result, we now forecast gasoline prices in the IPCA to
climb nearly 8% this year, with food inflation reaching
11%. A part of this upward impact will be dampened
by the announced reduction in the Tax on
Industrialized Products (IPI) of about 25% and the
more appreciated FX path throughout the coming
months. In 2022, we expect regulated prices to rise
5.5%, with the tariff flag system for electricity bills in
yellow mode in December. For market-set prices, we
expect an increase just below 7.0%. Inflation will
remain under pressure in the first half of 2022, with
core measures for industrial and service prices still
running at high levels.
We maintain our forecast for the IPCA in 2023 at
3.5%. Despite greater inflationary inertia from 2022,
we see room for accommodation of commodity prices
– crude as well as grains – at lower levels next year,
contributing to a disinflationary process. The lagged
effects of the interest-rate hiking cycle and output gap
should steer inflation toward a level close to the target.
20 7
5
10
3
0
1
-10
-1
-20 -3
-30 -5
-40 -7
08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Source: Bloomberg, IBGE and Itaú
More inflation, more revenue, more fiscal risks
We revised our forecast for the primary budget
deficit in 2022 to 0.3% of GDP (BRL 30 billion) from
a deficit of 1.0% (BRL 90 billion). Current fiscal
results are still causing positive surprises, especially
regarding taxes linked to business profits. Rising
commodity prices and inflation and better-than-
expected economic activity should boost revenues.
Increased revenues in the face of an uncertain
international scenario and upcoming general elections
mean elevated risk of new measures to increase
spending and reduce taxes, which would lead to
further fiscal deterioration.
For 2023, our primary deficit estimate declined to
0.9% of GDP (BRL 90 billion) from deficit of 1.3%
(BRL 125 billion). In addition to reflecting part of the
aforementioned improvement for 2022, the revision
stems from the just-partial reversal of the increase in
commodity prices. We assume that the public budget –
to be approved after the elections – will comply with
the rules of the recently expanded constitutional
spending ceiling, but the government will have to
define throughout the year the fiscal framework that
will be in effect from 2024 onward.

We expect public debt to rise to 81% of GDP in

2022 and 84% of GDP in 2023. At the margin, higher
commodity prices will cause the implicit GDP deflator
to stay above the average IPCA for another year,
offsetting some of the effects of high interest rates and

3
Macro scenario - Brazil | March 15, 2022

low growth. Structurally, high indebtedness and an
uncertain fiscal framework suggest greater risks of a
return to an unsustainable fiscal path going forward.
Copom: new inflationary shock should lead to
further tightening
Before the war in Ukraine and renewed surge in
commodity prices, we believed that the Selic rate
would end the monetary tightening cycle at 12.50%
pa. That significantly contractionary level would be
reached after increases of 100 bps in March, 50 bps in
May, and 25 bps in June. In our view, these moves
would be consistent with the Copom's signaling, which
anticipated a slower tightening pace in its next
decisions, while indicating that the benchmark interest
rate would go beyond the 12.00% level considered in
the reference scenario, given the upward asymmetry
in the balance of risks for inflation.
Considering the inflationary pressures and
consequent risk that inflation will deviate from the
target in 2023, we expect the committee to pursue
more intense tightening than before the shock,
raising the Selic rate to 13.00% pa. This scenario
considers hikes of 100 bps in March, 75 bps in May,
and 50 bps in June. Given the stage of the monetary
tightening cycle, interest-rate hikes by the Copom
should still be slower than the pace seen until
February.
In 2023, we see room for the Selic rate to decline
toward less restrictive levels. Specifically, the Selic
rate should fall to 8.0% pa during the year. Importantly,
the actual room for this reduction (and possible
additional cuts) in interest rates will depend on future
economic policy choices, in particular with regard to
the control of public accounts.

The balance of risks, however, became more

complex. Additional pressure from energy and grain
prices will result in significantly higher inflation in 2022.
The effects of the shock are mixed in 2023, as
mentioned in the previous section.

Brazil | Forecasts and Data

2017 2018 2019 2020 2021 2022F 2023F
Current Previous Current Previous
Economic Activity
Real GDP growth - % 1.3 1.8 1.2 -3.9 4.6 0.2 -0.5 0.5 1.0
Nominal GDP - BRL bn 6585.5 7,004 7,389 7,468 8,679 9,517 9,288 10,312 10,010
Nominal GDP - USD bn 2063.3 1,916 1,872 1,447 1,609 1,811 1,677 1,830 1,776
Population (millions) 206.8 208.5 210.1 211.8 213.3 214.8 214.8 216.3 216.3
Per Capita GDP - USD 9977 9,189 8,910 6,834 7,541 8,431 7,804 8,460 8,213
Nation-wide Unemployment Rate - year avg (*) 12.8 12.4 12.0 13.7 13.3 12.3 12.5 12.9 13.3
Nation-wide Unemployment Rate - year end (*) 12.5 12.4 11.7 14.9 11.8 12.7 13.1 13.0 13.3
Inflation
IPCA - % 2.9 3.7 4.3 4.5 10.1 6.5 5.5 3.5 3.5
IGP–M - % -0.5 7.5 7.3 23.1 17.8 12.0 7.3 4.0 4.0
Interest Rate
Selic - eop - % 7.00 6.50 4.50 2.00 9.25 13.00 12.50 8.00 8.00
Balance of Payments
BRL / USD - eop 3.31 3.88 4.03 5.19 5.57 5.50 5.50 5.75 5.75
BRL / USD - avarage 3.19 3.66 3.95 5.16 5.40 5.25 5.54 5.64 5.64
Trade Balance - USD bn 56 47 35 50 61 74 67 72 70
Current Account - % GDP -1.1 -2.7 -3.5 -1.7 -1.8 -0.7 -1.1 -0.9 -0.9
Direct Investment (liabilities) - % GDP 3.3 4.1 3.7 3.1 2.9 3.0 3.6 3.3 3.7
International Reserves - USD bn 382 387 367 356 362 362 362 362 362
Public Finances
Primary Balance - % GDP -1.7 -1.5 -0.8 -9.4 0.7 -0.3 -1.0 -0.9 -1.3
Nominal Balance - % GDP -7.8 -7.0 -5.8 -13.6 -4.4 -8.6 -9.2 -8.8 -8.7
Gross Public Debt - % GDP 73.7 75.3 74.3 88.8 80.3 81.3 83.7 84.0 86.5
Net Public Debt - % GDP 51.4 52.8 54.6 62.7 57.2 61.0 62.9 64.5 66.4
Source: IBGE, FGV, BCB and Itaú
(*) Nation-wide Unemployment Rate measured by PNADC.

4
Macro scenario - Brazil | March 15, 2022

Macro Research – Itaú

Mario Mesquita – Chief Economist

To access our reports and forecast visit our website:

https://www.itau.com.br/itaubba-pt/macroeconomic-analysis

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