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Coronavirus pandemic: Brazil vs Russia


The most common topic on people’s mind is the coronavirus epidemic. This epidemic has had several immediate consequences all over the world and on everyone’s lives.

Delving into specific economies, what did this mean for Brazil and Russia?

Russia was hit directly in this crisis. After all, its exports and fiscal revenues are very reliant on energy and commodities in general. Practically, it was not surprising that both the Russian economy and the Russian Ruble got hit hard.

Brazil, though also highly exposed to commodities, have more reliance on things like agricultural products and less reliance on energy sales. Thus, arguably, Brazil should have been hit less by the coronavirus situation.

That said, if we look at what happened to both currencies and markets, Brazil was hit much harder.

In terms of currency alone, the Brazilian real fell approximately 22.7 per cent year to date, while the Russian Ruble fell approximately 11.5 per cent year to date.

Contrary to the above assumptions, Brazil proved itself to be fragile. The Brazilian market was much more expensive, ran a huge and structural fiscal deficit way before the coronavirus hit. Due to ongoing fiscal deficit, Brazil had accumulated a large public debt versus its GDP which lied around 75.8 per cent before the epidemic.

On the other hand, despite its greater exposure to commodities and energy, in particular, Russian markets and the Russian Ruble fared better. This was due to the facts that going into the coronavirus, Russia had the cheapest market in the world and a fiscal surplus. In addition to, Russia had very low public debt/GDP arguably, even zero, if we exclude cash held by the Russian government and Russia’s sovereign wealth fund.

South America’s largest country has emerged as the world’s number two global hotspot for COVID-19, with more cases reported nationwide over the last week than any other seven-day period since the outbreak began.

The most likely outcome of this crisis is for Brazil’s fiscal problem, which already looked unsustainable, to become worse. It is clear that there will be a large drop in state revenues, along with a large increase in state social outlays. The fiscal deficit will widen again, and debt/GDP will take another jump.

While the general public thinks Bolsonaro would always choose to avoid shutdowns because of his ideology, the fact is that Brazil could not afford a shutdown. Furthermore, Brazil has recently experienced more political turmoil with the justice minister resigning after clashing with the president’s decision to sack the head of Brazil’s federal police. This weakened the President’s position and rumours of impeachment have hit the market after Bolsonaro’s coronavirus denial.

As for Russia, the economic hit will be noticeable, but given the good fundamental starting point, it won’t be anywhere near fatal. Indeed, the current oil price recovery nearly took crude to the level where the Russian government would break even. Of course, the economic impact, drop in revenues from other sources, and increase in social outlays should also throw Russia into a significant fiscal deficit.

However, that fiscal deficit will be temporary and the low debt/GDP mean that this temporary dip is easy to overcome by Russia. The current crisis also led Russia to cut its interest rates faster from 6.25% before the crisis hit, to 5.50% right now, with possibly further cuts to come. With Russia having one of the cheapest markets in the world, a drop in interest can be a large factor in driving Russian markets higher.

As stated above, Brazil’s political turmoil has led the country towards further economic deterioration, yet Russia has proven to be more resilient. In conclusion, even though it is too early to quantify COVID-19’s full economic impact on Emerging Markets, pre-coronavirus data indicates that selective economies are better positioned and hence, more resilient for the effects.

Disclaimer: This article was issued by Maria Fenech, credit analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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