RESPONDING
TO COVID-19
IN BRAZIL
Perspectives on government and business responses
Ana Carla Abrão, Partner
Rodrigo Gouvea, Principal
Gabriela Bertol, Principal
April 2020
CONFIDENTIALITY
Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously
applies internal confidentiality practices to protect the confidentiality of all client information.
Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals,
presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent
of Oliver Wyman.
© Oliver Wyman
AROUND THE WORLD LOCKDOWN MEASURES HAVE BEEN PUT IN PLACE TO FLATTEN
THE COVID-19 CONTAGION CURVE AND ALLEVIATE IMPACT ON HEALTH SYSTEMS
Between Jan and Feb 24, the virus had spread to 40+ countries
• China 1st reported to
the WHO Country
office in China that a
pneumonia of
unknown cause was
detected in Wuhan
• Beginning of the
lockdown in China
Dec 31
• 1st international travel
restrictions in place¹
Jan 23
Jan 20
• First reported
case in the US
• 1st reported case in Brazil
Jan 27
Jan 24
• 1st reported case in
Western Europe
Feb 26
Feb 24
• Global markets begin
to fall – losing ~40% of
value in only 30 days in
Brazil
Mar 25
• There are 3BN+ people
in the world in some
sort of lockdown, with
broader impact in society
and the economy
In Brazil, government and businesses have responded to the COVID to try to alleviate impact in society
1. North Korea closed its borders in Jan/22 followed by Malaysia and Mongolia in Jan/27
© Oliver Wyman
3
COVID-19 IS HAVING PROFOUND IMPACT IN THE REAL ECONOMY WITH VERY
DIFFERENT TRANSMISSION CHANNELS WHEN COMPARED TO THE 2008 CRISIS
2008
Financial crisis
2020
Covid-19
Start
Short term impact
• Burst of the U.S. housing
market "bubble" and
subsequent deterioration
of sub-prime mortgagebacked securities
generating panic in
financial markets
• Weakness in the global
financial sector, resulting
from uncertainty about
who held junk securities
• Flight to quality, reducing
market liquidity
• Pandemic caused by a new • Significant demand shock
resulting from national
strain of corona virus
measures to close non(SARS-CoV-2)
essential businesses/
• China was the first
companies and adopt
affected country;
social distancing
beginning of global
• Flight to quality; rapid
economic impact by
deterioration in the value
reduction of China's
of higher-risk assets,
industrial activity and
companies’ stocks
relevance in the global
especially in sectors
trade
mostly impacted by the
crisis (e.g. travel)
Medium/long term
impact
What does it mean for
Brazil
• Cascade effect resulting in • The solutions adopted by
governments and central
insolvency of financial
banks in 2008 will not
institutions (starting with
necessarily be fit for
Lehman Brothers in the
today’s scenario
US)
• In the long run the crisis
caused a global recession;
Brazil suffered less impact
than other major
economies
• Possible impact on
international trade due to
border closures and the
ripple effect of the
slowdown in large
economies (e.g. USA and
China)
• Brazil, for example, in
response to the 2008 crisis
incentivized consumption
(reduction of IPI tax,
relaxation of deposit
requirements, credit
provision by public banks)
• In the current scenario
where the population has
limited ability to consume,
these measures will not be
effective
• Effects in the
medium/long term still
uncertain – will depend on
the duration of the
pandemic and the
extension of restrictions
imposed
Note: The Covid-19 pandemic also coincided with a major economic event – oil price war (led by KSA and RUS)
© Oliver Wyman
4
BRAZIL IS ALSO IN A DIFFERENT ECONOMIC SITUATION THAN BEFORE
Brazilian GDP
In TN BRL, %
GDP growth
GDP
10,0
5,0
0,0
10%
3,4
3,6
3,6
3,9
4,0
4,1
4,2
4,3
4,1
4,0
4,0
4,1
4,1
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Pre-crisis 20081
Pre-crisis COVID-192
Real GDP growth (Average last 3 years)
4.4%
1.3%
Annual inflation (Average last 3 years)
4.4%
3.7%
Annual fiscal result (Deficit/Surplus in BRL BN)
+ 88.1
- 61.9
Net public sector debt (% GDP)
42%
54%
International reserves (USD BN)
205
359
Unemployment rate
7.9%
11.2%
Informality ratio
28%
41%
Exchange rate (BRL x USD)
1.79
4.39
5%
0%
-5%
1. Sep 15, 2008 is assumed to be the date when Lehmann Brothers bankruptcy impacted financial markets. 2. 21 Feb is assumed to be the date when COVID-19 triggered significant and lasting markets crash.
Annual fiscal result pre-crisis 2008 = 2007; pre-crisis Covid-19 = 2019
Source: Time Series Management System from Central Bank of Brazil and IBGE
© Oliver Wyman
5
BRAZIL STOCK MARKET HAS REACTED STRONGLY TO COVID-19 WITH COMPANIES
LOSING ~40% OF THEIR VALUE IN 4 WEEKS
Impact by sector
Equity market impact
Selected sectors total return index (Feb 21st – Mar 23th)1
Aviation
Highly adverse
Tourism
& leisure
Highly adverse
Oil, gas & coal
Highly adverse
Consumer services
Highly adverse
Industry
Highly adverse
Financial services
Medium impact
Telco
Medium impact
Healthcare, pharma
& medical equip
Mixed impact
Aviation
Tourism & Leisure
Oil, gas & coal
Education
Aerospace & defence
Energy
Consumer product & services
Real estate
Oil Ref
Household goods
Technology
Retailers
Insurance
Brazil
Banks & financial services
Utilities
Industrial
Health care
Pharmaceuticals
Telco
Drugstores & Grocery stores
Medical services & Equip services
-76%
-76%
-61%
-61%
-60%
-58%
-55%
-53%
-50%
-49%
-47%
-46%
-45%
-40%
-40%
-36%
-35%
-35%
-26%
-18%
-15%
12%
1. 21 Feb is assumed to be the date when COVID-19 triggered significant and lasting markets crash
Source: Datastream, Oliver Wyman analysis
© Oliver Wyman
6
CONTAINMENT MEASURES ADOPTED IN CHINA, USA AND EUROPE – WHICH ACCOUNT
FOR +50% OF TRADE WITH BRAZIL – WILL LIKELY IMPACT THE LOCAL SUPPLY CHAIN
Key takeaways
% by trade country/region
Total trade1
2019 BRL BN
China
US
Total
402.7
24%
15%
Oil, oil products and related materials
48.3
32%
Metal ores and scrap
30.3
47%
Seeds and oil fruits
26.4
Trade categories
West.
Europe2
15%
Total
55%
30%
8%
70%
2%
10%
59%
77%
0%
6%
84%
Road vehicles
21.0
5%
4%
9%
19%
Raw meat and meat products
16.6
27%
2%
8%
37%
Electrical machinery and parts
15.7
38%
7%
8%
54%
Iron and steel
14.4
15%
30%
14%
59%
General industrial machinery, equip. and parts
14.1
17%
15%
26%
58%
Organic chemicals
14.0
21%
26%
24%
70%
Other transportation equipment
12.8
17%
24%
22%
63%
Raw cereals and cereal products
10.9
0%
2%
8%
10%
Power generation machiney and equipment
9.9
9%
32%
23%
64%
Metal products
9.4
11%
7%
24%
42%
Pharmaceutical and medical products
9.4
5%
15%
44%
64%
Fertilizers
9.3
8%
7%
8%
22%
61%
Machinery specialized for particular industries
8.5
9%
32%
20%
Telco equipment and sound devices
7.8
55%
6%
3%
64%
Pulp and paper
7.7
42%
17%
27%
86%
Chemical materials and products
7.3
11%
25%
23%
Plastics
Animal food (not including unprocessed cereal)
6.6
6.6
8%
2%
24%
1%
17%
42%
60%
49%
Coffee, tea, cocoa, spices and their products
6.2
1%
18%
36%
55%
Non-ferrous metals
Other categories
5.9
83.6
12%
24%
8%
15%
9%
15%
29%
49%
Relevance magnitude %
100
50
20
• Closure of borders and reduction in
industrial activity in key trading
partners will directly impact Brazil’s
supply chain
• China, US and Western European
countries2, which have been severely
impacted by the crisis, represent +50%
of Brazil’s international trade activity
• Mixed effects are still to be felt in the
Brazilian economy
– On one hand, China’s industry
starts to pick back speed after
containment measures are relaxed
in late March
– On the other hand US and Europe
are still increasing these measures
44%
0
1. Total trade expressed as the sum of imports and exports in each category; 2. Select countries in Western Europe with # total Covid-19 cases above 10k as of March 30th = Germany, Belgium, Spain, France,
Italy, Netherlands, UK, Switzerland
Source: Ministério da Economia, Comércio Exterior. Totals may not add up due to rounding
© Oliver Wyman
7
Non exhaustive
COMPANIES’ IMMEDIATE MEASURES CENTERED AROUND BUSINESS CONTINUITY
“Wave 1”
By the 3rd week of March, a wave of
remote/alternative working was put in
place by many companies
• Majority of employees in corporate/
non-client facing functions working
from home
• Critical functions for physical operations
(e.g. IT Ops) split in A/B teams, avoiding
rush hours to commute
© Oliver Wyman
In essential industries/businesses,
tactical initiatives to protect workers
and clients health have been put in
place – e.g. hand sanitizers, increase
space between workers, etc.
Immediate re-prioritization of strategic
initiatives and management attention
• Hold off launching new businesses,
product lines and offices
• Delay longer term strategy
planning exercises
• Hiring freezes
8
Non exhaustive
THESE MEASURES WERE FOLLOWED BY MULTIPLE TYPES OF RESPONSES –
DEPENDING SIZE, SECTOR AND NATURE OF BUSINESSES
“Wave 2”
Response type
Examples
Social impact initiatives
and investment
• Free access to premium digital content/services: e.g. pay-TV networks, e-learning
platforms, online news
• COVID prevention awareness campaigns: e.g. re-design logos, TV and digital media
educational ads
• Production and/or provision of goods and services: e.g. repurposing production lines
(hand sanitizers), importing medical goods for hospitals
• Fundraising: e.g. led by large corporates to support specific sectors, such as small
businesses, restaurants and hospitals
Adaptation of business
model/commercial conditions
• E.g. airlines and travel industry (flex re-booking, delay expiration of miles); closed
restaurants selling discounted credit for consumption later; studios launching new
movies straight in digital platforms vs. theaters
Adaptation of operating model
• E.g. specific servicing hours only for vulnerable population; merchants migrating to full
delivery model; migration from offline to full online ads; reassurance communication to
customers
Taking advantage
of “downtime”
• E.g. image banks updating portfolio of hotels and restaurants pictures; anticipating
maintenance of production lines’ equipment
Financial services
specific initiatives
• E.g. term renegotiation of performing loans; lower interest rates for new loans (down
to CDI); increasing credit card limits
Source: Oliver Wyman analysis
© Oliver Wyman
9
As of April 2nd 2020
SIMILAR TO OTHER NATIONS, THE BRAZILIAN GOVERNMENT HAS PUT FORTH A
STIMULUS PACKAGE TO MITIGATE IMPACT ON THE ECONOMY AND SOCIETY
Overview of stimulus package (highlights)
The Brazilian Federal
Government has committed
so far with at least ~BRL400
BN (~USD 80 BN) in
expenditures for health,
social security, debt
renegotiation, credit facilities
in addition to capital and
liquidity measures as well as
state and municipal level
initiatives
• Providing basic income (BRL 600/person/month) for 3 months for vulnerable population (e.g. informal workers)
and supplementary income to workers with reduced wage – totaling + BRL 55 BN expenditure
• Re-routing and increase budget of Health Ministry and SUS – at least ~BRL 11 BN (e.g. cancelling 2020 census)
• Inclusion of +1MM people in the program Bolsa Familia (financial support for low income families), equivalent
to ~BRL 3 BN
• Anticipation of 13th monthly salary for May and allowing further withdrawals of FGTS (Employees indemnity
public fund) – totaling BRL 46 BN
• National and state-level decisions to suspend collection of bills of essential services (e.g. electricity, telco)
• Support to the states and municipalities: suspending re-payment of state debts, guaranteeing transference of
constitutional funds – total package ~BRL 88 BN
• Several measures by public and private banks to extend loan repayment deadlines, reduce interest rates and
increase available credit for individuals
• In negotiation – approval of separate “War Budget” until the end of the year
• No taxation for products related to combat against coronavirus, waiver in tax payment for SMEs
• Flexibilization in work regulation (hours bank, work shift and temporary reduction of wages)
• Besides loans forbearance and more flexible renegotiation of performing loans, public banks will provide
specific SME credit lines at reduced interest rates
• Special credit lines to medical institutions by CAIXA
• Government subsidization of business loans (no interests) to pay for employees of small businesses for 2
months
• Interest rate reduction to 3.75% (50 bps)
• Central Bank interventions in the FX market to prevent liquidity disruption
• Liquidity support with expected impact of ~BRL1.2 TN and capital relief for the banking sector
See further details on Central Bank initiatives in the next page
Source: Central Bank, Observatório de Política Fiscal – IBRE/FGV (link)
© Oliver Wyman
Welfare & living costs
Business support
Monetary policies
10
As of April 2nd 2020
SPECIFICALLY, THE BRAZILIAN CENTRAL BANK HAS SO FAR ANNOUNCED
MEASURES WITH EXPECTED IMPACT OF BRL 1.2 TN (~USD 240 BN)
Area
Measures
Microprudential
• Banks were authorised to re-negotiate terms of non-performing loans. Approximately BRL3.2 TN (~USD640 BN) in credit operations are eligible
to benefit from the new conditions for debt renegotiations
Macroprudential &
financial
stability
• Reserve requirement ratio on time deposits was reduced from 31% to 25%. The reduction is expected to release liquidity of BRL50 BN
(USD10 BN). Additional reduction from 25% to 17%, with additional release of BRL68 BN (USD13.6 BN) as expected impact
• Regulation enhancement on liquidity coverage ratio (LCR). It is estimated that BRL86 BN (USD17 BN) of reserve requirements that previously
were not eligible as High Quality Liquid Assets (HQLA) will now be part of the banks’ HQLA
• Banks will be able to increase their funding to be guarantee by the FGC (Deposit Insurance Corporation). The expected impact is an expansion
of credit provision by approximately BRL200 BN
• Reduction of the factor applied to calculate the Capital Conservation buffer from 2.5% to 1.25% for one year. With a expected capital relief of
BRL56 BN (USD11.2 BN), this creates room for credit supply expansion of ~BRL640 BN (~USD128 BN)
• Allowing loans backed by Letras Financeiras guaranteed by credit operations – potential to unlock BRL670 BN (~USD134 BN) in credit
• Tax effects arising from the overhedging of investments in equity holding abroad will not be deducted from equity. The estimated impact is a
capital relief of BRL46 BN (USD9.2 BN), enabling ~BRL520 BN (USD104 BN) in expansion of credit
Capital
markets
• Foster secondary market with loans backed by debentures. The expected impact is a potential increase of BRL91 BN (USD18.2 BN) in loans
International
and in-country
coordination
and input
• A US dollar liquidity arrangement (swap lines) was agreed with the US Federal Reserve to increase the supply of US dollars in the domestic
market, the provision amounts to USD60 BN and will remain in place for at least 6 months. Brazilian Real is down 21% against USD since
Oct 2019
• First transactions in US dollars at interest rate 1% totaling USD3 BN were conducted on 20/03
• Central Bank established criteria for conducting repurchase operations in foreign currency, starting on 18/03. The eligible bonds to be
accepted as collateral are external federal public debt securities (Global Bonds), and a haircut of 10% will be applied over bonds’ market value.
The expected impact is a potential increase of BRL50 BN (USD10 BN) in liquidity
Monetary
policy
• Central Bank lowered interest rate (Selic) by 50bps to 3.75%
• This is the 6th cut of interests rates in a row, from the starting level of 6.5% in August 2019
Source: Banco Central do Brasil (Link), (Link), (Link), Forbes (Link), ANBA (Link), Reuters (Link), BB, Caixa and BNDES
© Oliver Wyman
11
OUR CONSIDERATIONS ON THE BRAZILIAN GOVERNMENT INITIATIVES
01
02
03
04
Quick response with at the
required magnitude from the
federal government is
necessary. Although local
governments are on the front
line, they do not have the
financial capacity of the central
government
Balance between adopting
successful measures adopted
globally and considering the
country's economic and social
landscape
Coordination between central
and local governments is key communication and position
need to be aligned
Collaboration with the private
sector to reduce the need for
government funding (e.g.
incentive to banks and finance
companies to provide SME
credit)
© Oliver Wyman
12
HOPE THIS DOCUMENT IS HELPFUL TO YOU DURING THESE UNCERTAIN TIMES AND
READ OUR LATEST INSIGHTS ABOUT COVID-19 AND ITS GLOBAL IMPACT ONLINE
Oliver Wyman and our parent company
Marsh & McLennan (MMC) have been
monitoring the latest events and are putting
forth our perspectives to support our clients
and the industries they serve around the world.
Our dedicated COVID-19 digital destination will
be updated daily as the situation evolves.
© Oliver Wyman
Visit our dedicated COVID-19 website
13