Historic drought threatens Brazil’s economy

Rio de Janeiro (AFP)

The worst drought in almost a century that hit two key regions in Brazil is wreaking havoc on dams and crops – and threatening the emerging pandemic recovery of Latin America’s largest economy.

Months of meager rain have shrunk rivers, their banks cracked and parched, and usually sprawling reservoirs reduced to puddle networks in southeastern and midwestern Brazil.

The dry spell in this large, economically crucial part of the country is damaging two important sectors: hydropower, on which Brazil relies almost two-thirds of its electricity capacity, and agriculture, which is fueling recovery from the economic defeat of Covid-19 last year.

And there are no signs of rain: winter in the southern hemisphere is typically dry in both regions.

Experts say the drought in the south is mainly caused by La Nina, the cyclical cooling of surface temperatures of the Pacific Ocean.

“We are facing a ‘dry season’ that will actually last a year and a half to two years,” said Pedro Luiz Cortes, professor at the Institute of Energy and Environment at the University of Sao Paulo.

In the Midwest, the drought is being driven by the destruction of the Amazon rainforest, experts say.

Deforestation has reduced the clouds generated by the Amazon, which drain precipitation across much of South America.

In central western Brazil, the destruction has resulted in a lack of rainfall for almost a decade.

This problem – part of the larger problem of climate change – risks becoming “chronic,” Cortes told AFP.

– filling pressure –

The drought is affecting the production of Brazil’s hydropower plants, most of which are located in the two regions.

The average water level in the reservoirs of the dams concerned has fallen by 32 percent.

Last week, the National Water and Sanitation Agency (ANA) declared the Parana River basin, the heart of Brazil’s hydropower capacity, to be “critically short of water resources” by November.

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The move allows the agency to temporarily change water legislation, despite saying it did not expect to introduce rationing for human consumption or irrigation “for now”.

In order to increase their reserves, power plant operators want regulators to relax the requirements for the amount of water they have to discharge through their dams.

But that would lower the river level further, which would affect the transportation and agriculture sectors, which need the water to move boats and irrigate crops.

In order to avoid another painful rationing of electricity in 2001, the government of President Jair Bolsonaro is trying to obtain more electricity from thermal power stations.

But “even when combined with other sources, such as the growing wind power sector, it would be difficult for thermal power plants to make up for the lack of hydropower if energy consumption increases significantly as the economy recovers,” said Cortes.

The timing could hardly be worse: Brazil’s economy, which had shrunk by a record 4.1 percent last year, finally returned to pre-pandemic levels with stronger than expected growth of 1.2 percent in the first quarter of 2021.

Now rising electricity prices are fueling inflation, which economists believe could undermine the recovery.

Brazil’s annual inflation rate was 8.1 percent last month, well above the central bank’s target range of 2.25 to 5.25 percent.

To add to price pressure, the National Electric Energy Agency (ANEEL) imposed an additional tax of 6.24 reais ($ 1.25) per kilowatt-hour on consumers for June due to lack of water at hydropower plants – the highest extraordinary surcharge ever .

“The industry has already been hit hard by rising input costs, and rising electricity prices are just an added challenge,” said the economist Andre Braz of the Getulio Vargas Foundation.

– Ag in danger –

The drought is also damaging key agricultural states at a time when the agricultural sector has driven Brazil’s economic recovery with growth of 5.7 percent in the first quarter.

The country’s sugar cane, coffee, orange, corn, and soy crops are all threatened and driving prices up.

Run-through costs for animal feed will also drive up poultry and pork prices, Vargas said.

As if the aftermath of the drought wasn’t enough, epidemiologists warn that Brazil could also face a brutal new surge in Covid-19.

“The economic recovery could really be hurt,” said Sergio Vale, chief economist at MB Associados.

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