Inflation was already giving consumers a headache. In the months ending in January, the IPCA-15 , preview of inflation, closed at 10, 76%, according to the IBGE. And it will give more complication after the invasion of Ukraine by Russia, started on Thursday (24).
The war in Ukraine caught the world at an unfavorable moment from an economic point of view, says Caio Megale, chief economist at XP Investimentos: “There is inflationary pressure on the demand side, disruption in production chains remains and commodities are rising ”.
One of the main impacts should come from the commodities side. Both energy and agriculture should be more pressured. Russia is the world’s third largest producer of oil and the second largest of natural gas, supplying almost 40% of the input consumed by Europe. In grains, Russia is the world’s largest wheat exporter and Ukraine is the fourth largest, in addition to being the third largest corn seller.
According to economists Fernanda Mansano and Lorena Dourado, a reduction in the supply of several commodities will be visible, exerting additional and continuous pressure on prices.
“Now, with the Russian invasion of Ukraine, markets are pricing in a scenario of stagflation – that is, , faster inflation accompanied by a reduction in the pace of economic activity”, complement the XP analysts.
War in Ukraine puts pressure on oil and fuels
According to André Vidal, oil and gas analyst at XP, the oil market was tight, with low inventories and high demand. With the escalation of the conflict between Russia and Ukraine, there will be upward pressure on prices.
“What can help is a nuclear deal with Iran, as this extra offer can provide relief prices, as well as the use of strategic reserves by the United States”, says Vidal.
Even so, the scenario creates pressure on fuel prices in Brazil. Vidal says that Petrobras was not immediately readjusting prices because one of the mitigating factors was the appreciation of the real. But, sooner or later, the state-owned company will have to promote an increase in the price of gasoline and diesel due to statutory implications.
“We still see Petrobras’ bylaws protecting the company from subsidizing the fuels, as in the past, with the pass-through of the escalation in the price of Brent a matter of time”, he evaluates.
Leopoldo Vieira, political analyst at the platform for investors TC, recalls that the rise in oil also influences the price of transport and food, two themes that are very relevant in the budgets of the lower and middle classes.
How agribusiness and food prices might react to the war in Ukraine
The agro and food analyst at XP, Leonardo Alencar, points out that the conflict comes at a sensitive time for the field: “We had a drop in production in southern Brazil, years in a row of adverse weather limiting the increase in supply for most products ”.
Russia and Ukraine account for 17% of world corn exports and 28% of wheat. Food companies, which depend on wheat imports, could be more affected. Brazil produces just over 60% of the wheat it consumes; the rest must be imported.
Another factor that can impact agribusiness is the import of fertilizers. Prices are already rising due to supply risk and cost pressure. “This can limit the technology in the field”, highlights Alencar.
Pedro Serra, research manager at Ativa Investimentos, says that the price of fertilizers is always something to be monitored and currently constitutes a medium-term risk for agribusiness companies listed on B3, the Brazilian Stock Exchange.
“However, it is worth remembering that fertilizer volatility does not usually have a short-term effect on the results of these companies , since they usually buy these products well in advance”, he says. Greater impacts could happen if the situation is not resolved by the end of the year.
War in Ukraine will have macroeconomic impacts, but Brazil may suffer less
Megale, chief economist at XP, does not believe that the inflation target for this year, which is 3.5% with a tolerance of 1.5 percentage points, will be reached. This is the second year in a row that this has happened. “Convergence was left for later”, he evaluates. The median of inflation projections for 2022, according to the Focus report, from the Central Bank, is at 5, 56%, already outside the target .
This shock may force the Central Bank to keep the basic interest rate high for longer, which may affect economic activity even more. The midpoint of financial institutions’ expectations for GDP growth in 2022 is only 0.3%, according to Focus.
One unknown is the behavior of the exchange rate, which had been appreciating against the dollar. According to Megale, the real had been benefiting from the high price of commodities and the flow of capital to emerging countries. And, in an environment of greater tension, investors tend to direct resources towards safer assets, such as US or European Union government bonds, or even to gold, which since the beginning of the month has appreciated by 20%.
Exchange volatility is expected. “It will not be BRL 4, 50, as the fundamentals indicate, nor BRL 5, 50, as was”, says Megale.
XP believes that Brazil should suffer less for being a major producer of commodities. The brokerage also believes that Brazil can benefit from a positive flow of investors by reducing exposure to Russia, which has the common characteristic of being an emerging market with a lot of focus on commodities. “Brazil continues to be a liquid and robust market”, says the economist.