Will lower interest rates revive Brazil’s economy?

. Aug 01, 2019
são paulo interest rates brazilian economy

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Good morning! Brazil’s Central Bank pushed the benchmark interest rate to a new all-time low. What does it mean for the economy? Brazil and the U.S. kickstart trade deal talks. More competition in the air travel business will lower fares. And earnings of some of Brazil’s major companies. Enjoy your read!

Will lower interest rates revive Brazil’s economy?

Brazil’s Central Bank lowered

the Selic benchmark interest rate from 6.5 to 6% a year—the lowest ever since Brazil established an inflation target, in 1999. The bank also indicated further cuts down the line (markets foresee the rate at 5.5% by the end of 2019). Meanwhile, the U.S. Federal Reserve cut down its target range from the first time in 11 years to between 2 and 2.25%.</p> <div class="flourish-embed" data-src="visualisation/555748"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p><strong>Why it matters.</strong> Many believe that the move could stimulate the sluggish Brazilian economy, with companies becoming more willing to invest and consumers more eager to spend, with credit becoming more affordable. However, other variables come into play, such as default rates and banking concentration. One negative impact is the possible depreciation of the Brazilian Real against the U.S. Dollar—the lower the difference between interest rates in both countries, the less attractive the Brazilian currency becomes. Lasting impacts on the economy will depend more on the macroeconomic reforms Congress is analyzing—which include pension and tax reforms on top of the list, but also new regulations on public sanitation and telecoms.</p> <p><strong>Positive signs. </strong>Yesterday, new unemployment numbers showed the rate of people out of a job down to 12.3%. While it remains high, the rate has slowly but continuously been lowered, which indicates a positive trend. Brazil&#8217;s statistics agency highlighted that half of the jobs created in the last quarter were in industries—which is always a good sign. &#8220;It is the first time formal job creation has observed a positive trend since 2014,&#8221; said the agency.</p> <ul><li><strong>Go deeper: </strong><a href="https://brazilian.report/money/2019/06/04/luxury-homes-brazil-millionaires/">Low-interest rates spur demand for high-end properties in São Paulo</a></li></ul> <hr class="wp-block-separator"/> <h2>Brazil and the U.S. kickstart trade deal talks</h2> <p>After meeting with U.S. Secretary of Commerce Wilbur Ross, Brazil&#8217;s Economy Minister Paulo Guedes said the two countries have officially begun negotiating a bilateral trade agreement. On the same day, President Donald Trump officially designated Brazil as a &#8216;major non-NATO&#8217; ally, making it easier for the country to purchase American-made weapons and defense equipment.</p> <h4 style="text-align:center">Brazilian exports to the U.S.</h4> <figure class="wp-block-image"><img loading="lazy" width="1024" height="573" src="https://brazilian.report/wp-content/uploads/2019/08/exports-br-us-1024x573.jpg" alt="" class="wp-image-21588" srcset="https://brazilian.report/wp-content/uploads/2019/08/exports-br-us-1024x573.jpg 1024w, https://brazilian.report/wp-content/uploads/2019/08/exports-br-us-300x168.jpg 300w, https://brazilian.report/wp-content/uploads/2019/08/exports-br-us-768x430.jpg 768w, https://brazilian.report/wp-content/uploads/2019/08/exports-br-us-610x341.jpg 610w, https://brazilian.report/wp-content/uploads/2019/08/exports-br-us.jpg 1224w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure> <p><strong>Why it matters.</strong> The U.S. is Brazil&#8217;s 2nd-largest trading partner—and a big buyer of manufactured goods. Increasing trade with the northern neighbor makes sense to Brazilian producers. However, discussions will be drawn out and difficult—as both countries are fierce competitors in the agriculture and biofuel sectors. Moreover, rules of the Mercosur customs union forbid Brazil from signing trade deals without the other member states (Argentina, Uruguay, and Paraguay) being onboard. The recent Mercosur-EU trade deal, for example, took over 20 years to come to fruition.</p> <p><strong>Pitfalls.</strong> Brazil&#8217;s Deputy Economy Minister for Foreign Trade Marcos Troyjo said it would be preferable to start negotiations with non-tariff areas, which would speed up the process.</p> <ul><li><strong>Opinion: </strong><a href="https://brazilian.report/opinion/2019/07/15/brazil-new-era-of-trade-deal/">What does Brazil need to enter a new era of trade deals?</a></li></ul> <hr class="wp-block-separator"/> <h2>Airlines: more competition, lower prices</h2> <p>The National Civil Aviation Agency has concluded the distribution of 41 time slots (authorizations to fly to and from airports) at São Paulo-Congonhas Airport that previously belonged to the near-defunct Avianca Brasil. Azul, Brazil&#8217;s 3rd-largest carrier, requested all 41, but only got 15. The rest were split between smaller companies Passaredo and MAP, though both must meet airport technical standards before they can operate.</p> <p><strong>Why it matters.</strong> Since Avianca was engulfed by crisis, air fares shot up. Flying from São Paulo to Brasília, for example, became 61% more expensive over the past year. Experts believe that the inclusion of new players in Congonhas—Brazil&#8217;s 2nd-busiest airport—will encourage competition and push prices down again. However, that shouldn&#8217;t happen in the short term. The 41 time slots, after all, represent only 8% of all those available in Congonhas, which will give newcomers much less firing power against market leaders Gol and Latam.</p> <ul><li><strong>Go deeper: </strong><a href="https://brazilian.report/power/2019/07/31/brazil-next-revolution-should-come-telecoms/">Brazil’s next revolution should come in telecoms</a></li></ul> <hr class="wp-block-separator"/> <h2>Corporate earnings Q2 2019</h2> <p>Mining giant <strong>Vale</strong> (<a href="https://www.investing.com/equities/vale-on-n1-historical-datahttps://www.investing.com/equities/vale-on-n1-historical-data">VALE3</a>) reported a USD 133m net loss over the last quarter, after a USD 76m profit one year ago. The company is still feeling the effects of the Brumadinho dam collapse on January 25, which killed 248 people. The adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) dropped by 20% in one year to USD 3.098bn.</p> <p>Fuel distribution company <strong>BR Distribuidora</strong> (BRDT3) published its first earnings report after being privatized last week. The company reported a net profit of BRL 302m in Q2 2019, up 15% from a year ago. While sales had a slight drop, net revenue finished the quarter up 1.9% from last year.</p> <hr class="wp-block-separator"/> <h2>You should also know</h2> <p><strong>Paraguay. </strong>Opposition parties have asked for the impeachment of Paraguayan President Mario Abdo Benítez for having &#8220;betrayed&#8221; the country. He signed a new deal with Brazil on the Itaipu dam, which essentially elevates Paraguay&#8217;s electricity costs by USD 200m until 2022. Meanwhile, President Jair Bolsonaro promised on Wednesday to help Mr. Benítez and to &#8220;be fair&#8221; with the neighboring country.</p> <p><strong>Prison massacre. </strong>Four inmates involved in the Monday prison massacre in Altamira (Pará) were killed while being transferred to the state capital of Belém. They were in a prison vehicle alongside 26 other inmates. The prisoners were wearing plastic handcuffs, from which the 9 considered responsible for the murders managed to free themselves. The state administration said the case was unforeseeable and that prison agents driving the truck didn&#8217;t hear anything.&nbsp;</p> <p><strong>Car Wash 1.</strong> New leaks of private messages exchanged by members of Operation Car Wash <a href="https://www1.folha.uol.com.br/poder/2019/08/deltan-incentivou-cerco-da-lava-jato-a-toffoli-revelam-mensagens.shtml">published</a> by <em>Folha de S.Paulo</em> and <em>The Intercept</em> show that lead prosecutor Deltan Dallagnol incentivized the task force to scrutinize suspicious financial operations of Supreme Court Chief Justice Dias Toffoli and his wife. However, the Supreme Court can only be investigated with authorization from … the Supreme Court. This could open a new chapter in the crisis of the operation—as justices are set to decide on whether to retry a case involving former President Lula.&nbsp;</p> <p><strong>Car Wash 2.</strong> Meanwhile, the operation launched its 62nd phase yesterday. The target this time was Walter Faria, CEO of the Petrópolis Group—a major brewery in the Rio area. His companies are accused of helping construction firm Odebrecht launder BRL 329m in exchange for money in offshore accounts. The Petropolis Group also served as a proxy to donate BRL 121m to politicians on Odebrecht&#8217;s payroll between 2008 and 2014.

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