How an unstable Brazilian currency hampers foreign investment

. Aug 14, 2019
brazilian currency unstable

Good morning! How an unstable Brazilian currency hampers foreign investment. The government could change the structure of tax, money laundering authorities. Automakers abandoning Argentina for Brazil. Enjoy your read! (This newsletter is for platinum subscribers only. Become one now!)

How an unstable Brazilian currency hampers foreign investment

Over the past decade, Brazil has been capable of

offering attractive infrastructure projects that lured foreign groups to the country. But one roadblock remains: the risk of the Brazilian currency. This is the potential for loss when an investor is exposed to foreign currency or foreign-currency-traded investments. Concession contracts, such as permissions to administer roadways funded mainly through toll fares, bring revenue in Brazilian Reais—but many infrastructure groups have debts in U.S. Dollars.</p> <div class="flourish-embed" data-src="visualisation/512253"></div><script src=""></script> <p><strong>Why it matters.</strong> Brazil is urging for more infrastructure investment—but the government doesn&#8217;t have the money, and major Brazilian construction companies are still in crisis after Operation Car Wash. Making the Brazilian economy more integrated with the rest of the world could bring more foreign direct investment.</p> <p><strong>Solutions.</strong> The government&#8217;s Investment Partnership Program is studying three alternatives to reduce the risk of Brazil&#8217;s currency:</p> <ul><li><strong>Dollarization.</strong> A study by the World Economic Forum on infrastructure financing in Brazil suggests the partial dollarization of tariffs in the electricity sector, among other moves. Energy generated by the Itaipu Dam is already being quoted in USD. In Colombia, toll fares on certain roads are partially dollarized already. This strategy could work in Brazil for railways that transport soybeans—as the entire chain is traded in USD. Sectors within the Economy Ministry, however, are resistant to the idea.</li><li><strong>Treasury.</strong> The government could cover additional costs if the BRL loses ground. However, it would get bigger payments if the Brazilian currency gains value against the USD.</li><li><strong>Hedge.</strong> Bank loans could have fixed exchange rates. Should the BRL lose value, the bank would absorb the loss. On the other hand, a weaker USD would create losses to the borrower. There are two issues here: how to protect banks from bleeding money, and how to avoid the risks of default if companies&#8217; debts balloon following a financial crisis.</li></ul> <ul><li><strong><em>Go deeper:</em></strong><em> </em><a href=""><em>Brazil’s longest-lasting currency turns 25 years old</em></a></li></ul> <hr class="wp-block-separator"/> <h2>Changes to tax, money laundering authorities</h2> <p>The government is expected to issue a provisional decree transferring the money laundering enforcement agency (Coaf) to the Central Bank. The institution was already transferred from the Economy Ministry to the Justice Ministry this year, before the move was canceled by Congress. The government is also mulling over transforming Brazil&#8217;s Federal Revenue Service into an agency similar to the IRS in the U.S.—with a director appointed by the president with a fixed term.</p> <p><strong>Why it matters.</strong> Coaf and the Federal Revenue Service have been under tremendous political pressure since Coaf flagged suspicious financial operations by none other than Senator Flávio Bolsonaro, the president&#8217;s son, and the tax authority began scrutinizing the finances of Supreme Court Chief Justice Dias Toffoli&#8217;s wife. In mid-July, Justice Toffoli ordered a halt of all probes based on data from Coaf or the Federal Revenue Service without judicial authorization. The problem is that these institutions flag suspect behavior that lead to opening investigations—not the other way around.</p> <p><strong>Reaction.</strong> Experts and members of both institutions have criticized the move, warning that there is a risk of making them politically rigged. According to Gil Castelo Branco, director of NGO Contas Abertas—which scrutinizes public spending—the role of Coaf and the tax authority in fighting corruption, organized crime, and money laundering is under threat.</p> <p><strong>Surrounded.</strong> In a rare confluence of interests, the three branches of government seem united in their desire to clip the wings of the Federal Revenue Service and Coaf. House Speaker Rodrigo Maia said on Monday that these authorities have committed excesses.</p> <hr class="wp-block-separator"/> <h2>Automakers abandoning Argentina for Brazil</h2> <p>Yesterday, Honda announced it will end car production in Argentina in 2020. Despite its timing, the move is not a direct reaction to the country&#8217;s primary elections—which placed the Kirchnerist ticket way ahead of incumbent Mauricio Macri. Honda will instead concentrate its production in Brazil, copying a move that has been made by other companies. After all, Brazil absorbs 65% of Argentina&#8217;s car exports.</p> <p><strong>Why it matters.</strong> Most automakers had divided their production lines in Mercosur, producing small cars in Brazil and SUVs in Argentina. But the Brazilian market has changed in the past decade, with consumers keener on purchasing SUVs as opposed to sedans. That has triggered a migration of production lines, one of many blows to South America&#8217;s second-largest economy. To make matters worse for Argentina, Brazil and Mexico celebrated a free trade deal on auto parts, making production in Brazil all the more attractive.</p> <p><strong>Honda.</strong> According to Honda&#8217;s statement, its Argentina factory will continue producing motorcycles. The company will initiate a voluntary redundancy program.</p> <hr class="wp-block-separator"/> <h2>What else you should know today</h2> <p><strong>Economic freedom.</strong> Yesterday, the House approved a reduced version of the government&#8217;s pro-business decree, famously called the &#8220;Economic Freedom Act.&#8221; The most controversial articles were removed, however, such as the possibility of giving employees one Sunday off every 7 weeks, and the provisions of bypassing labor laws in contracts with higher salaries. The bill now moves to the Senate. With the new labor legislation, the government hopes 3.7m more jobs will be created.</p> <p><strong>Protests 1.</strong> For the third time this year, students and teachers protested against the federal government&#8217;s cuts to the education budget. Acts were registered in 85 cities—but didn&#8217;t draw crowds as large as in May, when the first wave of protests began. More protests are scheduled for September 7, Brazil&#8217;s independence day.</p> <p><strong>Protests 2.</strong> The Brazilian Embassy in London was vandalized yesterday by activists urging Brazil to change its stance on environmental policies. Using red tape, they tagged slogans such as &#8220;no more indigenous blood,&#8221; on the building&#8217;s walls. The embassy issued a statement saying the right to protest is assured in democracy, &#8220;but the right to vandalize doesn&#8217;t exist in any country.&#8221;</p> <p><strong>Congress.</strong> Jair Bolsonaro&#8217;s Social Liberal Party (PSL) expelled <a href="">former-porn-star-turned-Congressman Alexandre Frota</a> for insubordination. To the surprise of most observers, Mr. Frota became one of the leading voices in this legislature, acting as his former party&#8217;s de facto whip in the pension reform vote—but his criticism towards the administration soured his relationship with party leaders. He has been courted by House Speaker Rodrigo Maia&#8217;s Democratas party, but should join the Social Democracy Party (PSDB). With one fewer seat, PSL is now the second-biggest party in the House, with 53 (one fewer than the Workers&#8217; Party).</p> <p><strong>Car Wash.</strong> The National Council of Prosecution Services reopened an investigation into Operation Car Wash lead prosecutor Deltan Dallagnol, based on his private conversations leaked by <em><a href="">The Intercept</a></em> and other outlets—exposing unorthodox (and sometimes unethical or borderline illegal) behavior by Mr. Dallagnol. If found guilty, his punishment could range from a warning to dismissal. Meanwhile, former President Lula filed a new habeas corpus request, questioning the fairness of his case&#8217;s prosecutors.

Don`t copy text!