Slow progress on vaccine distribution is threatening to hamper the effect of Brazil's aggressive economic stimulus measures, experts have warned.

In an effort to stave off the economic impact of the COVID-19 pandemic, Brazil spent heavily on stimulus measures. Most economists agree that those measures, which amounted to as much as 11.8% of GDP and resulted in new debt, helped to lessen the country's economic recession and set it up for a quicker recovery.

But now, analysts say the effects of these efforts may fade. Fiscal aid is winding down, even as immunization efforts remain in the early stages. On Jan. 17, Anvisa, the country's health regulator, approved the emergency use of Sinovac's CoronaVac, even though a domestic trial put its efficacy at just 50.4%. Anvisa also gave the green light to a vaccine from AstraZeneca, though Brazil is still awaiting the arrival of those vaccine doses.

"A victory for science. A victory for life. A victory for Brazil," Joao Doria, state governor of São Paulo, tweeted. The country has some 4.6 million doses of the Chinese product ready and is scheduled to begin inoculations in the coming days.

Brazil is among the countries hardest hit by the virus, with a reported 8.5 million cases and nearly 210,000 deaths as of mid-January; the number of daily case confirmations is still rising sharply, averaging 54,000 over the past week. Some of those new cases are tied to a new variant of the virus that appears to be spreading through the Amazon region.

"Brazil is way behind in terms of immunization ... If this continues to be the case, it could pressure economic recovery and turn into a much more difficult scenario for banks," Ceres Lisboa, a senior bank analyst with Moody's, said in an interview. "Confidence levels and risk appetite for banks could change."

To be sure, aggressive government aid was key for the economy to run on a more even keel in the last quarter of 2020. The economy grew 7.7% compared to the linked quarter, while the year-end expected recession for 2020 is estimated at 4.4%. However, experts warn the recovery could be derailed if delays in vaccination efforts begin to affect risk sentiment.

"The second coronavirus wave is increasing the number of deaths and hospitalizations, reinforcing the importance of vaccinating the population as soon as possible," Mario Mesquita, chief economist with Itaú Unibanco, wrote in a Jan. 18 report.

"The whole scenario for 2021 was one in which government spending came down but it was replaced by private-sector consumption and vaccination," Armando Castelar, an economist and professor at think tank FGV, said. "Obviously, that got complicated."

Castelar noted that compared to others, "Brazil is really behind the curve. Emerging markets generally are, but in Brazil, that is intensified by a lack of interest by the federal government."

Prior to the approvals, the past few months had seen a bitter dispute between the governor of São Paulo, Joao Doria, who places high hopes on Sinovac's CoronaVac, and President Jair Bolsonaro, who has openly voiced skepticism of the Chinese vaccine.

"That 50% [effective vaccine] ... is it any good or not?" the president said after trial results were released. State governor Doria accused Bolsonaro's administration of having "a taste for the smell of death."

Consumer loans, SMEs at risk as government aid dwindles

Political squabbles aside, delays in the vaccination process have already undermined prospects for steadfast recovery in Brazil. A central bank survey shows the market has already begun to trim growth prospects once again. It now expects GDP to grow 3.4% this year, down from 3.5% a month earlier.

The fragility of the economic recovery adds pressure to a private sector already on the defensive. Fiscal disbursements, as well as loan deferrals or state guarantees on loans to small and midsize companies, are no longer active. In this scenario, banks' willingness to lend might be severely restrained and credit risk could come under greater pressure.

"[Flexibility measures] will have been very positive if the GDP continues to gain traction. But it could be very damaging if we don't see a definition about vaccines, given it could lead to people losing their jobs again," Lisboa said.

In that regard, the second wave of the disease before vaccine campaigns are fully underway might trigger precautionary saving behavior once again. Among banking loan books, consumer lending portfolios look especially vulnerable to this risk.

"The problem lies in [welfare benefits] given to households that are not going to be there anymore," Lisboa said. "Consumption will decline for sure, and some SMEs could get hit. This would increase problems."

Nonetheless, bank analysts expect the damage during the first half of 2021 to be less severe than in early 2020. Roughly a year ago, banks took huge provisions as they braced for credit losses down the line, but the situation looks somewhat clearer now.

According to the Brazilian minister of health, the country has already inked purchase agreements for 350 million vaccine doses from several leading laboratories. Brazil, a tropical country with a sizable landmass, has developed a robust vaccination infrastructure, a reason for economists to be hopeful that now that a green light is secured, immunization could pick up speed right away.

However, analysts fear skepticism of the Chinese vaccine might be an obstacle.

"Vaccine infrastructure is already there," FGV's Castelar told Market Intelligence. "What is not clear, however, is whether people will be willing to get it."