Could drought threaten economic recovery in Brazil?

Brazil map

With about 70% of Brazil’s energy coming from hydropower units, the country’s dependence on hydro “is emerging as a threat to its economic recovery this year,” according to BNamericas.

“I am focused on assessing the risks of the hydrologic issue in economic activity. Recently, I did a GDP revision from a projected expansion of 3% to 4% for 2021, but the risks generated by drought now seem like a real and serious threat to economic activity in the second half,” Banco Mizuho’s chief Latin America Strategist Luciano Rostagno told BNamericas.

With the lowest level of rainfall in 91 years, the federal government has created a commission to create a water preservation plan for the reservoirs of the main hydroelectric dams to avoid power shortages.

“For now, it seems unlikely that the drought affecting Brazil will hit hydropower production hard enough to cause disruptions to electricity supply and broader economic activity. But the drought does pose a risk to the outlook for inflation (and possibly the public finances too), which might make the central bank more inclined to raise interest rates further than we currently expect,” Capital Economics wrote in a note.

The central bank recently raised the benchmark interest rate from a record low 2% to 3.5%.

Meanwhile, watchdog Aneel activated the red flag tariff, as water reserves at hydroelectric power plants have fallen to historic lows. When production at hydro plants – whose energy is cheaper – is favorable, Aneel activates the green flag and the yellow or red flags (level 1 or 2) in a context of low water availability.

In 2020, the economy contracted 4.1% due to the pandemic. Forecasts for this year were revised upward to around 4% as the COVID-19 pandemic seems to be dissipating.

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