The risk of a government shutdown in Brazil

. May 06, 2019
first steps bolsonaro government President Jair Bolsonaro took office on January 1st.

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Good morning! With little money to spare, the government could face a shutdown soon. Breaking down Jair Bolsonaro’s TV interview. Rising tensions between U.S., China to affect Brazil.


The risk of a government shutdown in Brazil

President Jair Bolsonaro could face a government shutdown in his first year in office. The problem is the so-called “golden rule,” which stipulates that Brazil may only increase its debt to pay for investments—the money can’t be used for basic expenses, such as wages. Breaking this rule is an impeachable offense.

</span></p> <p><span style="font-weight: 400;">To avoid it, the government must convince Congress to approve a BRL 248bn increase to its debt ceiling—a demand that was already included in the 2019 budget proposal, drafted by the previous administration. Without that additional money, however, there will be no funding for these so-called basic expenses, which include social security benefits.</span></p> <p><span style="font-weight: 400;">For the past 30 years, Brazil&#8217;s basic expenses have grown at a faster pace than the GDP—mainly due to pension spending on a rapidly aging population. Last year, a proposal to eliminate the golden rule was struck down by Congress, which interpreted it as a government attempt to get a free license to spend.</span></p> <p><span style="font-weight: 400;">Now, the Bolsonaro administration has two ways out: it either gets public banks to pay back transfers from the Central Bank earlier than expected, or it manages to get the debt ceiling raised. Otherwise, we are looking at a partial shutdown in the second half of the year—something which has become more and more likely to happen, as the administration struggles with the pension reform and refuses to negotiate with parties.</span></p> <p><span style="font-weight: 400;">Go deeper: Brazilian government could run out of money</span></p> <hr /> <h2>The president&#8217;s interview</h2> <p><span style="font-weight: 400;">Yesterday evening, television station SBT broadcasted an interview with President Bolsonaro. The station, known for its fondness of sitting government, regardless of ideology, didn&#8217;t throw Mr. Bolsonaro any curve balls. As a matter of fact, presenter Silvio Santos (who owns SBT) proactively defended the government&#8217;s pension reform bill, &#8220;without which inflation will be back,&#8221; he said.</span></p> <p><span style="font-weight: 400;">Mr. Bolsonaro said his reform bill will &#8220;help the poor&#8221; and that &#8220;it is the opposite of what left-wing politicians have been saying about it.&#8221; The president also used the platform to pander to Congress, complimenting House Speaker Rodrigo Maia and Senate President Davi Alcolumbre—whom he called a &#8220;personal friend.&#8221;</span></p> <p><span style="font-weight: 400;">But the interview wasn&#8217;t all business. The president talked about his star sign, his marriages, his wife and children. And Mr. Bolsonaro also suggested to the millions of viewers that he doesn&#8217;t need medication against sexual impotence.</span></p> <p><span style="font-weight: 400;">Go deeper: Could CNN Brasil become Jair Bolsonaro’s Fox News?</span></p> <hr /> <h2>Rising tensions between U.S., China to affect Brazil</h2> <p><span style="font-weight: 400;">Yesterday, U.S. President Donald Trump said on Twitter he will raise tariffs on USD 200bn of Chinese goods, as talks on a trade deal with the Asian country are moving &#8220;too slowly.&#8221; Asian stock markets opened on a heavy down (-5.58% in Shanghai), which contaminated markets across the globe (S&amp;P 500 futures are down 1.74%). In Brazil, that is a recipe for an ugly day. The USD could begin the trading session around the BRL 4 mark.</span></p> <p><span style="font-weight: 400;">(Truth be told, external problems are not the only factors—the troubled local political scene is also to blame.)</span></p> <p><span style="font-weight: 400;">If there is anyone in Brazil who could gain from the turmoil, it will be commodity exporters. A report by the National Confederation of Industry (CNI) shows the country raised exports to China by USD 8.1bn in 2018, as American goods became more expensive due to the trade war between the two major global powers. Overall exports to China amounted to USD 64.2bn, a 35% jump from the year before.</span></p> <p><span style="font-weight: 400;">Soybean exporters earned USD 7bn more in 2018, while beef sales experienced a USD 600m bump. Producers of corn, cotton, orange juice, and some auto parts also benefited from the trade war. However, CNI had projected a 77% increase in exports to China, which proved to be overly optimistic.</span></p> <hr /> <h2>What else you need to know today</h2> <p><span style="font-weight: 400;">Energy. Despite Brazil&#8217;s sluggish economy and high operational costs, the country was the 6th-biggest destination of renewable energy projects in 2018. Acquisitions in the sector amounted to USD 6.6bn, according to consultancy GrantThornton. That&#8217;s 2.6% of the USD 253bn invested worldwide last year. As investors consider Brazil a high-risk destination for investments, they usually want bigger returns—of at least 10%. </span></p> <p><span style="font-weight: 400;">May blues. Over the past few years, May has been a dreadful month for Brazil&#8217;s stock market. The last positive month of May happened in 2009. Last year, the May slump was due to the truckers&#8217; strike. In 2017, a recording of then-President Michel Temer negotiating a bribe nearly overthrew the government. The year before, it was Dilma Rousseff&#8217;s impeachment. And in 2019? It could be the pension reform, if the government fails to protect the core of its proposal.</span></p> <p><span style="font-weight: 400;">Tourism. The Serra Gaúcha, Brazil&#8217;s wine country in Rio Grande do Sul, could receive BRL 200m from the National Civil Aviation Fund for a regional airport in one of the country&#8217;s top touristic destinations. Studies began in 2014, after the expansion of the local airport of Caxias was declared inviable.</span></p> <p><span style="font-weight: 400;">Border. Justice Minister Sergio Moro is set to propose—with the support of the government&#8217;s military wing—a BRL 53m project to buy equipment to monitor Brazil&#8217;s border in 8 states. The government also wants to integrate authorities operating at the border, such as the Federal Police, customs agents, road patrols, and even diplomatic services. Mr. Moro has said, time and time again, that cracking down money laundering networks is the best way to counter drug trafficking gangs in the country</span></p> <p><span style="font-weight: 400;">Corruption. Mario Rodrigues Jr., president of the National Land Transport Agency (ANTT), is under federal investigation. He is suspected of pocketing bribes from a contractor of Valec—a state-owned company which administers railways. He faces charges of corruption, money laundering, and embezzlement.

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The risk of a government shutdown in Brazil 

President Jair Bolsonaro could face a government shutdown in his first year in office. The problem is the so-called “golden rule,” which stipulates that Brazil may only increase its debt to pay for investments—the money can’t be used for basic expenses, such as wages. Breaking this rule is an impeachable offense.

To avoid it, the government must convince Congress to approve a BRL 248bn increase to its debt ceiling—a demand that was already included in the 2019 budget proposal, drafted by the previous administration. Without that additional money, however, there will be no funding for these so-called basic expenses, which include social security benefits.

For the past 30 years, Brazil’s basic expenses have grown at a faster pace

than the GDP—mainly due to pension spending on a rapidly aging population. Last year, a proposal to eliminate the golden rule was struck down by Congress, which interpreted it as a government attempt to get a free license to spend.</p> <p>Now, the Bolsonaro administration has two ways out: it either gets public banks to pay back transfers from the Central Bank earlier than expected, or it manages to get the debt ceiling raised. Otherwise, we are looking at a partial shutdown in the second half of the year—something which has become more and more likely to happen, as the administration struggles with the pension reform and refuses to negotiate with parties.</p> <ul> <li><strong>Go deeper:</strong> <a href="https://brazilian.report/money/2018/12/29/brazilian-government-money-2020/" target="_blank" rel="noopener noreferrer"><em>Brazilian government could run out of money</em></a></li> </ul> </td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnButtonBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnButtonBlockOuter"> <tr> <td class="mcnButtonBlockInner" align="left" valign="top"> <table class="mcnButtonContentContainer" border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <td class="mcnButtonContent" align="center" valign="middle"><a class="mcnButton " title="POWER" href="https://us16.admin.mailchimp.com/campaigns/preview-content-html?id=308027" target="_self" rel="noopener noreferrer">POWER</a></td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnTextBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnTextBlockOuter"> <tr> <td class="mcnTextBlockInner" valign="top"> <table class="mcnTextContentContainer" border="0" width="100%" cellspacing="0" cellpadding="0" align="left"> <tbody> <tr> <td class="mcnTextContent" valign="top"> <h2>The president&#8217;s interview <a id="2" name="2"></a></h2> <p>Yesterday evening, television station SBT broadcasted an interview with President Bolsonaro. The station, known for its fondness of sitting government, regardless of ideology, didn&#8217;t throw Mr. Bolsonaro any curve balls. As a matter of fact, presenter Silvio Santos (who owns SBT) proactively defended the government&#8217;s pension reform bill, &#8220;without which inflation will be back,&#8221; he said.</p> <p>Mr. Bolsonaro said his reform bill will &#8220;help the poor&#8221; and that &#8220;it is the opposite of what left-wing politicians have been saying about it.&#8221; The president also used the platform to pander to Congress, complimenting House Speaker Rodrigo Maia and Senate President Davi Alcolumbre—whom he called a &#8220;personal friend.&#8221;</p> <p>But the interview wasn&#8217;t all business. The president talked about his star sign, his marriages, his wife and children. And Mr. Bolsonaro also suggested to the millions of viewers that he doesn&#8217;t need medication against sexual impotence.</p> <ul> <li><strong>Go deeper: </strong><a href="https://brazilian.report/power/2019/04/09/cnn-brasil-bolsonaro-fox-news/" target="_blank" rel="noopener noreferrer"><em>Could CNN Brasil become Jair Bolsonaro’s Fox News?</em></a></li> </ul> </td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnButtonBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnButtonBlockOuter"> <tr> <td class="mcnButtonBlockInner" align="left" valign="top"> <table class="mcnButtonContentContainer" border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <td class="mcnButtonContent" align="center" valign="middle"><a class="mcnButton " title="MONEY" href="https://us16.admin.mailchimp.com/campaigns/preview-content-html?id=308027" target="_self" rel="noopener noreferrer">MONEY</a></td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnTextBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnTextBlockOuter"> <tr> <td class="mcnTextBlockInner" valign="top"> <table class="mcnTextContentContainer" border="0" width="100%" cellspacing="0" cellpadding="0" align="left"> <tbody> <tr> <td class="mcnTextContent" valign="top"> <h2>Rising tensions between U.S., China to affect Brazil <a id="3" name="3"></a></h2> <p>Yesterday, U.S. President Donald Trump said on Twitter he will raise tariffs on USD 200bn of Chinese goods, as talks on a trade deal with the Asian country are moving &#8220;too slowly.&#8221; Asian stock markets opened on a heavy down (-5.58% in Shanghai), which contaminated markets across the globe (S&amp;P 500 futures are down 1.74%). In Brazil, that is a recipe for an ugly day. The USD could begin the trading session around the BRL 4 mark.</p> <p>(Truth be told, external problems are not the only factors—the troubled local political scene is also to blame.)</p> <p>If there is anyone in Brazil who could gain from the turmoil, it will be commodity exporters. A report by the National Confederation of Industry (CNI) shows the country raised exports to China by USD 8.1bn in 2018, as American goods became more expensive due to the trade war between the two major global powers. Overall exports to China amounted to USD 64.2bn, a 35% jump from the year before.</p> <p>Soybean exporters earned USD 7bn more in 2018, while beef sales experienced a USD 600m bump. Producers of corn, cotton, orange juice, and some auto parts also benefited from the trade war. However, CNI had projected a 77% increase in exports to China, which proved to be overly optimistic.</td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnImageBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnImageBlockOuter"> <tr> <td class="mcnImageBlockInner" valign="top"> <table class="mcnImageContentContainer" border="0" width="100%" cellspacing="0" cellpadding="0" align="left"> <tbody> <tr> <td class="mcnImageContent" valign="top"><a class="" title="" href="https://brazilian.report/podcast-brazil/2019/04/24/brazil-deal-china-relations/" target="_blank" rel="noopener noreferrer"><img class="mcnImage" src="https://gallery.mailchimp.com/6ffdbe3b440df0fd3e02996af/images/75bd3d7d-c0cd-4d4a-ac0e-7785d5fe43b7.png" alt="" width="564" align="center" /></a></td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnButtonBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnButtonBlockOuter"> <tr> <td class="mcnButtonBlockInner" align="left" valign="top"> <table class="mcnButtonContentContainer" border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <td class="mcnButtonContent" align="center" valign="middle"><a class="mcnButton " title="NOTEWORTHY" href="https://us16.admin.mailchimp.com/campaigns/preview-content-html?id=308027" target="_self" rel="noopener noreferrer">NOTEWORTHY</a></td> </tr> </tbody> </table> </td> </tr> </tbody> </table> <table class="mcnTextBlock" border="0" width="100%" cellspacing="0" cellpadding="0"> <tbody class="mcnTextBlockOuter"> <tr> <td class="mcnTextBlockInner" valign="top"> <table class="mcnTextContentContainer" border="0" width="100%" cellspacing="0" cellpadding="0" align="left"> <tbody> <tr> <td class="mcnTextContent" valign="top"> <ul> <li><strong>Energy.</strong> Despite Brazil&#8217;s sluggish economy and high operational costs, the country was the 6th-biggest destination of renewable energy projects in 2018. Acquisitions in the sector amounted to USD 6.6bn, according to consultancy GrantThornton. That&#8217;s 2.6% of the USD 253bn invested worldwide last year. As investors consider Brazil a high-risk destination for investments, they usually want bigger returns—of at least 10%. <a id="nw" name="nw"></a></li> <li><strong>May blues.</strong><strong> </strong>Over the past few years, May has been a dreadful month for Brazil&#8217;s stock market. The last positive month of May happened in 2009. Last year, the May slump was due to the truckers&#8217; strike. In 2017, a recording of then-President Michel Temer negotiating a bribe nearly overthrew the government. The year before, it was Dilma Rousseff&#8217;s impeachment. And in 2019? It could be the pension reform, if the government fails to protect the core of its proposal.</li> <li><strong>Tourism.</strong><strong> </strong>The Serra Gaúcha, Brazil&#8217;s wine country in Rio Grande do Sul, could receive BRL 200m from the National Civil Aviation Fund for a regional airport in one of the country&#8217;s top touristic destinations. Studies began in 2014, after the expansion of the local airport of Caxias was declared inviable.</li> <li><strong>Border.</strong><strong> </strong>Justice Minister Sergio Moro is set to propose—with the support of the government&#8217;s military wing—a BRL 53m project to buy equipment to monitor Brazil&#8217;s border in 8 states. The government also wants to integrate authorities operating at the border, such as the Federal Police, customs agents, road patrols, and even diplomatic services. Mr. Moro has said, time and time again, that cracking down money laundering networks is the best way to counter drug trafficking gangs in the country</li> <li><strong>Corruption.</strong><strong> </strong>Mario Rodrigues Jr., president of the National Land Transport Agency (ANTT), is under federal investigation. He is suspected of pocketing bribes from a contractor of Valec—a state-owned company which administers railways. He faces charges of corruption, money laundering, and embezzlement.

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