The Lens is a weekly newsletter published by FrontierView’s Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Our teams of analysts are conducting research into the potential impacts of the novel coronavirus (COVID-19) on the global economy and business environment. Subscribe today to receive the latest insights on COVID-19 business impacts in your inbox every Thursday.
Read this week’s edition of The Lens below as you prepare your business for coming changes.
Brazil plunges into a political crisis amid COVID-19
Key Takeaways
- On Friday April 24, Justice Minister Sérgio Moro resigned, proclaiming that President Jair Bolsonaro aimed to meddle in Federal Police investigations on crimes allegedly implicating his sons. This triggered a political crisis of magnitudes not yet seen during the Bolsonaro administration.
- President Bolsonaro fired back against the allegations, claiming that they were baseless and issued his own accusations against ex-minister Moro’s conduct.
- This has sparked a major political crisis amid the coronavirus pandemic and trails other recent turbulence such as Bolsonaro’s recent firing of the popular Health Minister Luiz Henrique Mandetta.
- Brazil’s attorney general requested that the Supreme Federal Court launch an investigation into Moro’s allegations. If charges are filed, the House of Representatives will vote on whether to move forward with an impeachment trial.
- The fresh political risks led the Brazilian real to fall to record lows relative to the US dollar. Brazil’s stock market also took a nose-dive as investors weighed the possibility of an impeachment or other major political shift, such as the exit of market-friendly economy minister Paulo Guedes.
Our View
The exit of Bolsonaro’s most popular minister Sérgio Moro inevitably introduces a new element of uncertainty and downside risk to Brazil’s already-bleak economic outlook in 2020. However, an impeachment is far from being a foregone conclusion. The potential for such an event will depend on how much of Bolsonaro’s traditional support is eroded by Moro’s departure and the current economic and health crises. It will also depend on the conclusion of the investigation and Bolsonaro’s ability to engage in pork barrel politics to secure enough congressional support to block any impeachment procedures in the House. Although major uncertainty on these fronts remain, we currently see an impeachment during the pandemic as unlikely. Still, the risk remains, and the political turmoil will deepen the economic crisis. We also see a near-term departure of economy minister Paulo Guedes as improbable, considering that it would trigger an even sharper sell-off, which should prompt the Bolsonaro administration to reemphasize the minister’s prominence in economic matters.
Business Implications
Firms will need to brace for a period of heightened political uncertainty, making scenario planning and market monitoring a priority. Businesses should closely track President Bolsonaro’s popularity in the coming weeks to gauge whether his base has been meaningfully eroded by the crisis—a key signpost for the impeachment movement to pick up steam as well as an indicator of the eventual outcomes of current investigations. Whether Guedes’ economic autonomy is strengthened should also be closely monitored, as this will signal whether the minister is likely to remain. Finally, firms should prepare for a period of ongoing FX volatility and real weakness as the political noise will exacerbate major pressures from the COVID-19 pandemic.
Ramiro Sugranes, Senior Analyst for Latin America Research
FrontierView clients: Arrange an analyst briefing for further insights
Nigeria’s economy faces recession as oil revenues slump
Key Takeaways
- The global oil price collapse has prompted the federal government to slash its 2020 capex budget by 11.0% (N 312 billion) and make cuts to non-essential recurrent spending.
- On March 30, the Central Bank of Nigeria (CBN) allowed the naira NAFEX rate to fall from N360 per dollar to N390, the first depreciation in three years.
- A combination of land border closures and federal- and state-level lockdowns to combat the COVID-19 pandemic will remain in place until at least May 4. Lockdowns involve the banning of public gatherings of more than 50 people, school closures, bans on inter-state travel, and night time curfews.
Our View
Nigeria’s economy is forecast to shrink by 3.3% YOY in 2020. The government’s capacity to stimulate the economy will be limited given the sudden loss in oil revenues and its narrow non-oil tax base. Public spending priorities will focus on healthcare while investment projects—notably infrastructure—will be put on hold.
Business Implications
Land border closures will cause bottlenecks at the congested Apapa port, resulting in additional delays importing products. Lockdowns in Abuja, Lagos, and the industrial hub of Ogun State will severely hamper business activity, resulting in weaker demand across customer segments. The CBN’s attempts to maintain the naira’s new peg to the dollar will cause forex shortages to worsen. This will ultimately trigger another devaluation of the naira later in 2020, resulting in higher inflation that will cause planning headaches for firms and expose local partners to forex losses. Firms should consider offering flexible payment terms or business development support to local partners facing slower sales amid worsening dollar availability and rising logistics costs.
Matthew Kindinger, Senior Analyst for Sub-Saharan Africa
FrontierView clients: See our recent COVID-19 in SSA: Outlook Revisions for further insights
Mexico’s insufficient response to COVID-19 will deepen the recession
Key Takeaways
- Mexico’s outlook has rapidly deteriorated due to a worsening US outlook (we now expect US GDP to contract by 5.5%) and the government’s insufficient response to COVID-19. We have revised Mexico’s GDP forecast from -4.0% in March to -9.5% driven by lower exports (-3.5% YOY), investment (-10.0% YOY), and consumption (-9.0% YOY).
- In one month, the pandemic has already wiped out the 345,000 jobs created in 2019. Investment, which in January contracted by 9.2% YOY, will almost certainly plummet throughout the year not only because of the coronavirus, but in great measure because of the decision of the administration of President Andrés Manuel López Obrador (AMLO) to shut down the Constellation Brands brewery in Mexicali, following a flimsy “public consultation”.
- In this context, both from the standpoint of economic stimulus measures and virus containment, Mexico is falling behind its LATAM peers. On the economic front, AMLO has rejected the notion of fiscal stimulus, instead preferring to reshuffle government spending, worth around USD 25.6 billion, in an aim to finance AMLO’s flagship social programs and infrastructure projects. Regarding the virus containment, Mexico’s late actions, coupled with lower testing capacity (0.4 tests per 1,000 people), indicate that the country will dance “bachata” or a less effective “dance”, per Tomas Pueyo’s widely read article.
Our View
Mexico will suffer structural damage, followed by a U-shape recovery, because of the devastating effects of the pandemic and the lack of effective economic response by AMLO’s government. Firms should not expect a robust fiscal stimulus plan as the government remains fixed on not issuing debt to mitigate the blow companies are suffering amid a difficult environment.
Business Implications
The operating environment will remain challenging throughout 2020; thus, firms should adopt a holistic approach to scenario planning that considers extremely unlikely events on the domestic and international fronts.
Alejandro Valerio, Senior Analyst for Latin America
FrontierView clients: See our more recent Mexico: Outlook Revisions and LATAM Virtual Executive Roundtable for further insights
Increasingly low oil prices weakens Russia’s outlook further
Key Takeaways
- Russia’s economy is set to worsen further now, from forecasts of approximately -1.0% YOY growth to -2.0%, primarily due to our downward revision for oil prices and the resulting weak fiscal support to the economy.
- The lockdown on major cities is likely to be extended until the end of May, though social compliance with restriction measures is falling.
- While the ruble remains one of the worst performing currencies in the world this year, it stabilized around 75 to the US$ in recent weeks, likely buoyed by central bank interventions.
- Surveys on business and consumer sentiment indicate a severe downturn, as expected, though concerns arise about prolonged declines in demand well after the lockdowns are lifted.
Our View
The government’s unwillingness to dip further into its vast reserves and give greater direct support to the economy underlies our revisions downward for consumer spending and investment, particularly in the context of a very gradual recovery in Q3 that is behind the forecasted performance of most European economies. Assuming that prolonged low oil prices discourages any further state support to businesses in May, bankruptcies, high unemployment and weak wages will extend for months beyond the end of the lockdowns (expected by early June).
Business Implications
Demand is unlikely to recover notably until Q4, and a general revival of demand back to the pre-crisis period is unlikely until mid-2021. While B2B demand will recover more slowly, only after the global economy normalizes and consumer spending revives, export-oriented industries will improve ahead of the rest of the economy, providing some earlier opportunities. B2C firms should adjust their portfolios in light of the shrinking middle class and declining demand the rest of this year.
Mark McNamee, Practice Leader for Europe