Brazil ready to protect financial system against coronavirus spread
Brazil will announce steps to fight the coronavirus in the coming days at a time the economy is in deeper trouble than previously thought, Economy Minister Paulo Guedes said.
Guedes said Brazil should use the coronavirus crisis as an opportunity to accelerate the government’s economic reform plans, which include reducing the budget deficit and size of the public sector, simplifying the tax system, and ramping up privatisations.
Guedes said the country’s public health response to the outbreak will not damage its fiscal position and added that the central bank chief has assured him the financial system can weather the coronavirus crisis.
“A lot of anti-coronavirus measures will be announced between now and Monday. We are acting in 48 hours,” he told reporters, adding that the health crisis should dissipate in five to six months if the government takes the proper steps.
Guedes told reporters in Brasilia the country’s economy is essentially stagnating. But he said he spoke with central bank president Roberto Campos Neto who assured him that the financial system is safe after a historically volatile week for markets.
“He assured me that liquidity conditions are absolutely stable and will guarantee this stability in the market by providing liquidity,” Guedes said.
“He will soon announce measures to guarantee liquidity. He told me Brazilian banks are absolutely liquid, they are very comfortable,” Guedes added.
With global markets volatile this week as coronavirus fears mushroomed, Brazilian stocks had their biggest fall since 1998 and the real cratered below the historic 5.00 per dollar mark for the first time ever.
Guedes said that authorities are monitoring small and medium-sized banks, but denied that any are in trouble.
Some 135 billion reais ($29 billion) of reduced reserve requirements for banks, announced by the central bank last month, centers into circulation today, according to Guedes, adding that this will provide a cushion for the economy.
Guedes also repeated his mantra that Brazil must press ahead with the government’s economic reform agenda, which he called the only platform for sustainable, long-term investment and growth.
The airline stocks that suffered the most after US President Donald Trump barred continental Europeans from traveling to the United States do not even operate flights between those two regions.
Brazil’s largest airline, Gol Linhas Aereas Inteligentes, and its smaller rival, Azul, saw their shares tumble over 30% on Thursday, a record for each. Year to date, both companies’ New York-traded shares are down more than 70%.
To be sure, the world’s top 20 airlines’ shares are all deep in the red this year. But the two Brazilian carriers’ share price losses are in a league of their own.
It may seem surprising at first glance, because both are focused on domestic flights within Brazil and only Azul operates direct routes to the United States or Europe. Neither operates flights to Asia. In other words, they are not directly exposed to the worst travel disruptions.
But analysts say their negative performance is tied to Brazil’s broader economic woes and to a general panic over riskier, more volatile shares.
“You may have portfolio managers with clients who want their money back now,” said Stephen Trent, an analyst at Citigroup. “Emerging markets are risky, and airlines are riskier than other assets. There’s not a huge connection to their fundamentals.”
In addition, Brazil’s currency, the real, is the world’s fourth worst performing so far this year, a key pressure point for emerging market carriers who pay many fees in dollars.
“Anytime that the dollar goes up, that affects (over half) of our costs,” said Eduardo Sanovicz, who heads Brazil’s airline industry group ABEAR. “It’s not a positive thing.”
And no major stock exchange has fallen more than Brazil’s so far this year. Refinitiv data shows that Gol and Azul have been traded more than average in recent days.
“Gol and Azul are super liquid shares,” said Azul’s CEO John Rodgerson on Thursday. “And they are being used that way.”
But the carriers’ negative performance also highlights that the airline business in Brazil has struggled for years to be profitable, weighed down by a shaky economy, high labor costs, and a volatile currency.
Earlier Thursday, Azul reported a 2019 loss of 2.4 billion reais ($503 million), although the company said it would have turned a profit if not for charges related to the sale of old aircraft.
Economy Minister Paulo Guedes wants to use the crisis as an opportunity to accelerate government’s economic reform plans