COVID-19 and Government Debt... Brazil Stock Market Rebound is 'Uncertain'

Real Economy Indicators Begin to Take a Hit... March Manufacturing PMI and Non-Manufacturing PMI Both Show Significant Declines

Brazilian President Jair Bolsonaro (center) holds an emergency press conference on March 18 (local time) in the capital Bras?lia to explain measures against the novel coronavirus (COVID-19). (Photo by AFP)

[Asia Economy Reporter Geum Bo-ryeong] The Brazilian stock market has failed to lead a rebound due to the impact of the novel coronavirus infection (COVID-19) and high government debt issues.

According to the Brazilian exchange BM&FBOVESPA on the 13th, the Bovespa Index closed at 77,871.95 on the 12th (local time). This represents a 1.51% (1,192.65 points) decline compared to the previous session.

Before concerns about COVID-19 spread, the Bovespa was above the 110,000 level as recently as December last year. On January 24th, it recorded a 52-week high of 119,593.10, approaching 120,000. Since then, it has been affected by COVID-19, hitting a 52-week low of 61,690.53 on March 19th. This means it halved in about two months.

Brazil has been severely affected by COVID-19. The number of confirmed cases in Brazil has exceeded 160,000, and the death toll has surpassed 11,000. Quarantine measures continue to be implemented in S?o Paulo and Rio de Janeiro states. Since these regions have a high share of the Gross Domestic Product (GDP), this poses a burden from the perspective of economic normalization.

Yoon Sung-hee, a researcher at Hyundai Motor Securities, explained, "Due to the spread of COVID-19, places other than essential sectors such as pharmacies and supermarkets have been forced to close, causing real economic indicators to start suffering. Both the manufacturing PMI and non-manufacturing PMI for March showed a sharp decline, falling below the baseline (50)." He added, "The impact on Brazil's growth rate is expected to be greater than that of the Zika virus, and if the spread of COVID-19 prolongs, the downside risk to the economy could increase further."

Fiscal policy is also expected to be limited. This contrasts with major countries like the United States and China, which are implementing monetary and fiscal policies to stimulate economies depressed by COVID-19. Researcher Yoon said, "High government debt is cited as a major factor hindering Brazil's growth. Since fiscal policy is limited, the method of stimulating the economy through interest rate cuts must be used, but with rapid cuts already made to the benchmark interest rate, causing significant depreciation of the real exchange rate, there is not much room left for further cuts. Therefore, there will likely be limitations in implementing future interest rate cuts."

Given this situation, Brazilian funds have not escaped poor returns. According to fund rating agency FnGuide, as of the 12th, the average one-month return of nine Brazilian funds with assets over 1 billion KRW was minus (-) 5.38%. This was the lowest among 20 regional funds. The average returns over three and six months were also the lowest, at -41.55% and -39.99%, respectively.

This content was produced with the assistance of AI translation services.