How Brazilian courts cripple public finances

. Apr 26, 2019
Brazil Supreme Court Justice system Brazil’s justice Lula Supreme Court Trial Lula’s trial public finances Brazil's Supreme Court. Photo: Valter Campanato/Abr

Good morning! How Brazilian courts cripple public finances. How much will Brazil actually save with the pension reform? Petrobras changes bylaws to speed up divestments.

How Brazilian courts cripple public finances

In a 6-4 vote, the Supreme Court decided that companies buying inputs produced in the Duty-Free Zone of Manaus are entitled to record credits on manufactured goods tax. The decision will lower federal revenue by BRL 10-16bn. With that money, it would be possible to increase the Bolsa Família cash-transfer program by 50%, or federal infrastructure investments by 60%.

The Duty-Free Zone of Manaus (the only one of its kind in Brazil) was created in 1967 by the military dictatorship to promote industrial development in the heart of the Amazon. Instead, it ends up fostering fiscal maneuvers. Many companies with complex production chains open up subsidiaries in Manaus to produce basic goods—and generate tax credits for the parent company, which is often located in a more developed area.

</span></p> <p><span style="font-weight: 400;">One of the arguments used by Supreme Court justices is that the duty-free zone helps preserve the rainforest, as local populations have jobs and wouldn&#8217;t need to destroy the forest for financial gain. A recent study, however, points out that if industry jobs in Manaus doubled, that would reduce deforestation by 0.6%. There are certainly cheaper ways to preserve the forest—one of them being bumping the Environment Ministry&#8217;s budget, which today stands at BRL 4bn.</span></p> <p><span style="font-weight: 400;">Go deeper: </span><a href=""><span style="font-weight: 400;">Why is Coca-Cola threatening to leave Brazil?</span></a></p> <hr /> <h2>How much will Brazil actually save with the pension reform?</h2> <p><span style="font-weight: 400;">After trying to seal the data on the studies and calculations that serve as the base for the pension reform, the government disclosed its data—bringing much bolder numbers than those initially cited: the estimation is of BRL 1.2 trillion of savings over 10 years, 15% more than previous announcements. But there&#8217;s a catch: the numbers are based on the decade of 2020–2029 decade, instead of 2019–2028. As the reform will have a progressive effect, the impact looks bigger in longer time spans.</span></p> <p><span style="font-weight: 400;">Moreover, the government&#8217;s numbers don&#8217;t account for what it will cost to change the current &#8216;pay as you go&#8217; system to a capitalization model. The Ministry of the Economy said that it&#8217;s because the reform bill doesn&#8217;t include the model change, and that it would be implemented by a subsequent piece of legislation. Fair enough—but it will still cost money and affect the pension reform savings.</span></p> <p><span style="font-weight: 400;">President Bolsonaro irritated his economic team when he told journalists that the minimum accepted savings was BRL 800bn over 10 years—lowering the bar before congressional debates had even begun. At the same time, the president increased the pressure for bold reform, saying that the Argentinian crisis was sparked by a half-hearted pension overhaul.</span></p> <p><span style="font-weight: 400;">Yesterday, Speaker Rodrigo Maia chose the names to preside over the House&#8217;s special committee on the reform and the bill&#8217;s rapporteur. He handpicked Marcelo Ramos (Amazonas) and Samuel Moreira (São Paulo), respectively—two center-right congressmen with political ability and more technical profiles.</span></p> <p><span style="font-weight: 400;">Go deeper: </span><a href=""><span style="font-weight: 400;">Brazil’s long-awaited pension reform proposal, explained</span></a></p> <hr /> <h2>Petrobras changes bylaws to speed up divestments</h2> <p><span style="font-weight: 400;">Brazil&#8217;s state-controlled oil and gas company </span><a href=""><span style="font-weight: 400;">Petrobras</span></a><span style="font-weight: 400;"> approved on Thursday a change to its bylaws which allows for the sale of subsidiaries without shareholders&#8217; consent. A green light from the board of directors will suffice. Backed by the government—the company&#8217;s controller—the move was opposed by the holders of 25% of Petrobras&#8217; capital.</span></p> <p><span style="font-weight: 400;">Yesterday, President Bolsonaro argued in favor of privatizing the company&#8217;s refineries, a move to enhance competition in a market 99% controlled by Petrobras. He also admitted to the possibility of a &#8220;wider privatization strategy.&#8221; Privatizing Petrobras&#8217; refineries is anything but simple. To avoid replacing a state-controlled monopoly for a private one, the government will have to conduct the sale of refineries carefully.</span></p> <p><span style="font-weight: 400;">&#8220;The government will have to craft rules forbidding the same economic groups from taking over multiple refineries. There will be a lot of protests, claiming that &#8216;Brazilian oil belongs to Brazilians,&#8217; but the most strategic thing right now is to have oil at competitive prices,&#8221; said Vladimir Fernandes Maciel, coordinator of the Mackenzie Center of Economic Freedom, to <strong>The Brazilian Report</strong>&#8216;s Natalia Scalzaretto.</span></p> <hr /> <h2>What else you need to know today</h2> <p><span style="font-weight: 400;">Meat. Meatpacking group BRF will undergo a major overhaul on its board of directors. Former Petrobras CEO Ivan Monteiro has resigned as chief financial officer due to medical reasons. For the moment, Chief Operating Officer Lorival Nogueira will take on Mr. Monteiro&#8217;s job. On July 17, though, he becomes the company&#8217;s CEO, replacing Pedro Parente (another former Petrobras CEO). </span></p> <p><span style="font-weight: 400;">Income taxes. Roughly half of Brazil&#8217;s taxpayers haven&#8217;t declared their income tax returns yet—the deadline is April 30, 11:59 pm. All residents in Brazil must declare their taxes—even if you are not a Brazilian national. If you need help declaring your taxes as an expat, click here to learn how to do it—and learn how to avoid double taxation.</span></p> <p><span style="font-weight: 400;">GDP. According to MacroSector, an economics consulting firm, Brazil&#8217;s agribusiness sector will shrink 2.28% from last year, to USD 285bn. Crops will generate revenue only 0.51% bigger than in 2018, as global stocks should remain stable. As the sector is responsible for roughly 20% of the Brazilian economy, MacroSector forecasts a GDP growth for the country of 1.4% this year—way below the average of top-rated firms, currently at 1.71%.</span></p> <p><span style="font-weight: 400;">Electoral Justice. President Jair Bolsonaro is making his first nomination to a superior court—he decided to pick Sérgio Banhos for a seat on the Superior Electoral Court (TSE). Mr. Banhos already serves as a substitute judge. Supreme Court Justice Rosa Weber, who presides over the TSE, had lobbied for former Solicitor General Grace Mendonça to get the job.

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