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A pandemic 2020 is on its way to 2021. In some countries, the second wave is already underway. The lessons learned over the last few months have made it possible to relax restrictive measures, but without the immunization of a significant portion of the population, there is always uncertainty about new restrictions.

The good news is that vaccines are on the way. According to the World Health Organization (WHO), mass vaccination campaigns should begin within four to six months - in other words, in the first quarter of next year. Some countries, such as China and Russia, have brought forward the vaccination process and the United Kingdom starts vaccinating tomorrow. This already gives some predictability, which is essential for making investments.

Market projections indicate a fall of 4.5% in the GDP in 2020, as shown in Central Bank Focus Bulletin. Although this is still a bad result, it should be remembered that at the height of the crisis, economic analysts were pointing to a fall of more than 6.5%. For 2021, the same projections indicate GDP growth of 3.4%, a figure insufficient to return the economy to its pre-pandemic level, but which would represent an improvement on the difficult 2020 figure.

Even if subject to revisions, the projections for economic activity deserve attention because the evolution of credit and default is closely linked to economic growth. For example, a high and persistent increase in unemployment can impose difficulties on families, making them insolvent.

In 2020, while economic activity was suffering the impacts of the pandemic, credit reacted well, providing liquidity to businesses. This was partly due to the measures taken by private credit agents, the government and the monetary authority. Next year, however, the macroeconomic scenario will be decisive for the performance of this market and for mitigating the risk of default.

Overcoming the economic recession presupposes control of the Covid-19 outbreak and a minimum of normal life. Any short-term projection must take into account the evolution of the pandemic and hospital conditions. But it must also take into account the dynamics of the economy. Once the outbreak is contained, this is what will determine whether there will be a greater or lesser increase in activity.

Some questions: how, for example, can consumption be sustained without the injection of income from emergency aid? How to deal with the country's delicate fiscal equation? What can we expect from the basic interest rate? What about inflation associated with the devaluation of the real? And what about credit conditions and defaults? These are questions of the utmost importance, even in a scenario of normality.

According to report by the Secretariat for Economic Policy (SEP), According to the report, the impact of the end of the aid could be mitigated by the savings built up by families over the course of this year, allowing some sectors, such as services, to benefit from the last half of this year. The document also points out that, in the wake of the recovery and opening up of the economy, the resumption of employment could help restore the income lost throughout 2020, starting with the informal sector.

But the major point of attention is the delicate fiscal situation. Coping with the pandemic has caused public debt to reach a level of more than 90% of GDP. Given the size of the challenge we had to face, this increase was digested by the market. The problem is that if new measures put the debt on an upward trajectory, interest rates and confidence could be impacted, reducing the strength of the recovery.

The projections in the Focus Bulletin already indicate that the Selic rate should reach 3% per year in 2021, up from the current level of 2%. The data shows that the market expects a new cycle of basic rate hikes, but gradually and keeping interest rates still a long way from the levels seen in the last decade. In a scenario of greater fiscal disorganization, the fear is that interest rates will rise again sooner and faster than expected.

On the positive side, it is worth mentioning the approval of measures with the potential to reduce interest rates at the top and which could prove even more beneficial in a scenario of a more gradual increase in the Selic rate, narrowing the gap between the basic rate and that paid by companies and consumers.

The interest rate picture leads us to think about the outlook for the credit market in 2021. We'll take a closer look at the outlook for credit in the next article. For now, I would like to stress that the projections indicate a better 2021. As always, there are risks involved: the resurgence of the pandemic and the lack of fiscal control may impose some difficulties. The truth is that every reconstruction process has its challenges, but it is possible to complete this journey.

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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor