The invasion of Ukraine by Russian troops could have economic impacts over 10,000 kilometers away. Brazil can feel the effects of conflict through at least three channels: fuel, food and exchange. The instability in Eastern Europe could not only impact inflation but could result in additional interest rate hikes, jeopardizing economic growth for this year by reducing the room for improvement in prices and consumption.
According to the Latin America Survey, released this week by the Fundação Getulio Vargas (FGV), the turmoil in Ukraine should exacerbate the uncertainties that have hovered over the global economy in recent months. In Brazil, the impacts should be even more intense. One of the reasons is the greater exposure to global financial flows than the rest of Latin America, with the dollar rising and the stock market falling more than the continent’s average.
The survey itself, which consulted 160 experts in 15 countries, found the deterioration of the economic climate. On average in Latin America, the Economic Climate Index dropped 1.6 points between the fourth quarter of 2021 and the first quarter of this year, from 80.6 to 79 points. In Brazil, the indicator dropped 2.8 points, from 63.4 to 60.6 points, and presented the lowest score among the countries surveyed.
A large part of the current drop is due to the Current Situation Index, one of the components of the indicator, which reflects the intensification of international tensions and the increase in oil prices at the beginning of 2022. The other component, the Expectations Index, continued to grow, both on the continent as in Brazil, but the FGV itself warns that the indicator that projects the future could also deteriorate if the conflict between Russia and Ukraine continues.
Channels
According to FGV, there are several channels through which the crisis between Russia and Ukraine can reach the Brazilian economy. The main one is the international price of oil, whose Brent-type barrel ended the week at US$ 105, the highest level since 2014. The same occurs with natural gas, a product of which Russia is the largest global producer, whose BTU, type of energy measure, it can reach US$ 30, according to the director of Refining and Natural Gas at Petrobras, Rodrigo Costa, said this week at a press conference.
Brazil uses natural gas to supply thermoelectric plants. For the director of the state-owned company, the perspective is that the elevation of the reservoirs of the hydroelectric plants at the beginning of the year can compensate, at least in this phase of the beginning of the conflict.
Regarding gasoline, the recovery of the sugarcane crop is reducing the price of anhydrous alcohol, which also helps to hold the pressure of the barrel of oil at first. Since November last year, the liter of anhydrous ethanol has dropped 24.6% in São Paulo, according to the Center for Advanced Studies in Applied Economics (Cepea) at the University of São Paulo.
The biggest pressures on fuel are occurring on diesel, which does not have the addition of ethanol and rose 3.78% in January, according to the Extended National Consumer Price Index-15 (IPCA-15), which works as a preview of inflation. official.
Foods
Another channel through which the war in Eastern Europe can affect the Brazilian economy is food. Russia is the world’s largest wheat producer. Ukraine occupies the fourth position. In this case, Brazil cannot count on other markets because the drought in Argentina, traditionally the biggest exporter of the grain to Brazil, is compromising the local harvest.
The crisis in the oil market also puts pressure on food. That’s because Russia is the world’s largest producer of fertilizers, which are also affected by more expensive oil. Currently, Brazil buys 20% of fertilizers from the Russian market. The increase in diesel also indirectly interferes with the price of food, as it is passed on through more expensive freight.
dollar and interest
The third factor by which the crisis between Russia and Ukraine may impact the Brazilian economy will be through the exchange rate. The dollar, which reached R$5 on Wednesday (23), closed on Friday (25) at R$5.15 after the occupation of Ukrainian cities by Russian troops. For now, the effects on the exchange rate are relatively small because Brazil benefited from a fall of almost 10% in the US currency in 2022. Prolonging the conflict, however, could cancel out the dollar’s decline at the beginning of the year. .
This week, National Treasury Secretary Paulo Valle said Brazil is prepared for the economic impacts of the war. According to him, the country has large international reserves and a low share of foreigners in the public debt, which would help to face the risks of prolonged external turmoil.
However, if the dollar continues to rise and inflation does not subside, the Central Bank may be forced to increase the Selic rate (basic interest rates in the economy) more than expected. In that case, economic growth for this year would be further hampered. In the latest edition of the Focus bulletin, a weekly survey of financial institutions released by the Central Bank, market analysts raised the official annual inflation projection to 5.56% in 2022. This was the sixth week in a row with an increase in the estimate. The growth forecast for the Gross Domestic Product (GDP) was maintained at just 0.3% this year.
