Spotlight: Inflation pressure causing headaches in Brazil

Hopes that inflation would be more controlled in Brazil this year have been fading day by day, with rising internal and external tensions fueling concerns among business and political leaders.

"The pressures on oil prices caused by the war between Russia and Ukraine are rapidly undermining inflation expectations. Given this scenario, it's very unlikely that the Brazilian government won't intervene in the economy to control certain prices. We need to recognize that this isn't a normal situation, it's an effect of the war," Andre Perfeito, chief economist at brokerage Necton, told BNamericas. 

Inflation in Brazil climbed to nearly 10.1% and hopes that prices would decline this year in response to a vigorous cycle of base rate hikes by the central bank are vanishing.

Inflation is projected to end this year at 5.65%, according to the most recent survey of 100 economists by the central bank. By comparison, at the start of this year, the survey put the average inflation forecast at 5.03%.

"Inflation expectations in the survey carried out by the central bank are out of date. It's now more correct to say that inflation this year will be above 6%," added Perfeito.

While prices last year were severely affected by the COVID-19 pandemic, which impacted global supply chains, the main pressure now is the war in Ukraine, which has led to rapid hikes in commodity prices, particularly oil, but the impacts are spreading and generating more concern.

POLITICAL ISSUES

Brazilian President Jair Bolsonaro (pictured) sees the persistent inflation pressure as one of the main threats to his campaign to win reelection in the October 2022 presidential election.

These concerns have led Bolsonaro's government to review the fuel price policy established by state-run oil firm Petrobras, which currently follows international prices.

“The [oil] barrel is at US$120, [Petrobras'] parity with the international price is wrong. This is being discussed once again to find a solution," Bolsonaro said on his official social media accounts, underlining that he is debating the issue with his economic advisers.

According to experts, even with Petrobras working to bring its prices into line with international levels, gasoline prices in the domestic market are still around 30% lower than international prices. 

Because of the lack of political room to allow a 30% increase in fuel prices, Bolsonaro and his economic advisers are working on a strategy to create a temporary fund to subsidize Petrobras prices and prevent the company's cash flow from being affected.

Brazil is a major oil producer, but due to the low quality of the oil produced, the country is forced to import better quality oil to supply its domestic market, leaving the country exposed to variations in international prices.

CONCESSIONS AGENDA

The inflation pressures are no longer solely the concern of political leaders and economists, as the business sector is also becoming worried about the impacts on their operations.

Even infrastructure players see the sustained price rises as a risk to some existing concession contracts and think that the government's agenda of upcoming concessions could also be threatened.

In recent years, some companies have returned their concession contracts, mostly supported by claims that projected demand has not materialized. However, hikes in costs have now become a major problem too.

"The biggest challenge for new concessions and existing contracts at present is the rapid increase in costs. Materials linked to asphalt production have seen a price spike in the last 15 months. [The cost of] asphalt oil cement has increased 70% since the beginning of the pandemic, while cumulative inflation in the period was around 15%," said Marco Aurélio Barcelos, president of Brazilian highway concessionaires association ABCR.

The passenger rail transport sector is also facing difficulties.

"Growing inflation impacts ongoing projects, as it increases the cost of equipment and project construction costs may be higher than originally planned," Joubert Flores, president of passenger transport association ANPTrilhos, told BNamericas.