Fiscal and Monetary Effects of the COVID-19 Outbreak: First Estimates

BRAZIL ECONOMICS - Report 20 Apr 2020 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Paula Magalhães

To defend against the economic effects of the pandemic, all countries – including Brazil – have been expanding public spending on health and income transfers to less advantaged people. This is a fully justifiable fiscal expansion, above reproach. In the Brazilian case, the country’s fiscal situation was extremely fragile when the crisis hit, while in the midst of a program of reforms aimed to satisfy the constitutional spending cap requirement. The reforms, which were dimensioned to stabilize the debt/GDP ratio that held sway until some two months ago, will now have to deal with a much higher ratio, meaning that at the end of the battle against the virus, the reform efforts will have to be intensified. In this report, we detail the fiscal measures already taken and present an exercise illustrating the debt dynamic. At the end, we analyze the possible effects on the slope of the yield curve due to the increase in the debt in 2020, and what are its monetary policy consequences and possible reactions to smooth out this occurrence.

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