How much can you trust Brazil?

. Aug 21, 2019
money laundering construction sector brazil

This newsletter is for PREMIUM subscribers only. Become one now!

Good morning! The changes with Brazil’s money laundering enforcement agency. New rules for housing loans demand a leap of faith in Brazil’s macroeconomic scenario. The “black box” of the National Development Bank, BNDES. The meltdown of Oi Telecom. President Bolsonaro could drop his son’s nomination to the position of ambassador to Washington DC. (This newsletter is for platinum subscribers only. Become one now!)

How much can you trust Brazil?

Caixa, Brazil’s biggest state-owned bank,

announced new rules for housing loans in Brazil. The government says the new type of loans (which are optional) would replace the currently-used French amortization system (with rates up to 9.75% per year) for interest rates based on inflation, which could vary between 2.95 to 4.95%.&nbsp;</p> <p><strong>Why it matters. </strong>While the new system will make more expensive properties accessible to middle-class families (which could stimulate the construction sector), experts warn that it could be detrimental to buyers. That&#8217;s because if inflation rises, interest rates would balloon. Real estate loans in Brazil last for periods of up to 30 years, in general, which demands a huge leap of faith in the local economy.</p> <p><strong>Slow recovery.</strong> The construction sector is one of the thermometers of Brazil&#8217;s economic activity, as it is an industry that employs a lot, and absorbs less-qualified workers. The sector as a whole has struggled to get back to its pre-crisis standing. Revenue dropped from BRL 357bn in 2013 to BRL 280bn in 2017, the most recent data. And 827,000 jobs disappeared over that period.</p> <hr class="wp-block-separator"/> <h2>Bolsonaro changes money laundering enforcement agency</h2> <p>President Jair Bolsonaro signed off on the transfer of Coaf, Brazil&#8217;s money laundering enforcement agency, from the Economy Ministry to under the Central Bank. Immediately, the head of the agency (now called the Financial Intelligence Unit, or UIF) was fired, with Ricardo Liáo brought in as the new boss. The 64-year-old economist had worked in the agency since 2013.</p> <p><strong>Why it matters.</strong> The new rules now include loopholes to allow political appointments to the money laundering enforcement agency. It is worth remembering that Senator Flávio Bolsonaro, the president&#8217;s eldest son, is suspected of money laundering in an ongoing corruption investigation in Rio de Janeiro. Since last year, the Bolsonaro clan has fought tooth and nail to stop law enforcement from using financial information provided by the agency. Now, many fear this new UIF will be neutered.</p> <p><strong>Tentacles.</strong> Mr. Bolsonaro has tried to interfere with other government bodies that are investigating people in his close circle, such as the Federal Revenue Service and Federal Police. The moves have sparked outrage within these institutions, with servants promising to fight back.&nbsp;</p> <ul><li><strong><em>Go deeper: </em></strong><em><a href="">How Jair Bolsonaro has tampered with accountability institutions</a></em></li></ul> <hr class="wp-block-separator"/> <h2>The meltdown of Oi Telecom</h2> <p>One of the biggest telecom companies in Brazil, Oi has lost almost half of its market value over the last four stock market trading sessions. Yesterday alone, the company&#8217;s shares (OIBR3) dropped 27%. In our <a href="">Weekly Report</a>, reporter Natália Scalzaretto explained that the plunge is connected to poor Q2 results.</p> <div class="flourish-embed" data-src="visualisation/611759"></div><script src=""></script> <p><strong>Why it matters.</strong> With 37.5m clients in Brazil, Oi desperately needs a capital injection from shareholders. Last quarter, the company posted losses of BRL 1.6bn, 24% more than one year ago. Moreover, the telecom&#8217;s net debt jumped 24%, and its cash assets have been reduced by 31%. Among traders, there is a rumor that the government may pull Oi&#8217;s fixed-telephony concession and intervene in the company.</p> <p><strong>Silver lining.</strong> There is little cause for optimism in Oi. However, the company&#8217;s rapid deterioration could unclog a new legal framework for telecommunications in Congress, which is currently stalled. The project changes rules for fixed-telephony, allowing companies to set prices as they see fit. That would benefit Oi more than its competitors, as the firm is the most reliant on this segment among market leaders.</p> <ul><li><strong><em>Go deeper:</em></strong><em> <a href="">Brazil’s next revolution should come in telecoms</a></em></li></ul> <hr class="wp-block-separator"/> <h2>Government lifts lid on Development Bank jet loans</h2> <p>Yesterday, the National Development Bank (BNDES) released a list of 134 people who bought private jets with bank subsidies between 2009 and 2014. The move is aimed at tarnishing the image of the Workers&#8217; Party (which used the bank to help chosen companies build monopolies thanks to generous loans at low interests), but also aimed at future challengers of President Bolsonaro in 2022: São Paulo Governor João Doria and TV presenter Luciano Huck.</p> <p><strong>Why it matters.</strong> More than revealing corruption, the list sheds light on the Workers&#8217; Party&#8217;s disastrous strategies to stimulate the economy after the 2008 financial crisis. The loans, used to buy Embraer jets, were part of a BRL 44bn anti-recession plan to inject money into the economy and keep consumption going. These subsidies were supposed to be temporary, but became the norm—and help explain why Brazil was plunged into recession in 2014.</p> <p><strong>Problems.</strong> The stimulus program deserves criticism, but criminalizing those who took loans seem little more than political bravado. Moreover, it raises the question of whether or not the government had the right to lift the bank secrecy of those who took out the loans in the first place. In a recent article, Nobel-prize winning economist Joseph Stiglitz criticized what he called the political rigging of the BNDES.</p> <hr class="wp-block-separator"/> <h2>What else you should know today</h2> <p><strong>Embassy.</strong> President Jair Bolsonaro said he may reconsider naming his son Eduardo for the position of ambassador to the U.S., fearing that the Senate may reject his appointment. Meanwhile, Congressman Eduardo Bolsonaro is lobbying hard to strike down a law forbidding companies to both produce and distribute content. The law has impeded the AT&amp;T-Time Warner merger in Brazil, and U.S. President Donald Trump personally requested the president&#8217;s son for help, according to reports.</p> <p><strong>Environment.</strong> Over 50 NGOs banded together to file a request yesterday for Environment Minister Ricardo Salles be investigated for misconduct in office. They say their complaint is motivated by &#8220;the government&#8217;s complacency facing an increase of the number of Amazon fires this year.&#8221; The number of forest fires jumped 82% between January and August this year, in comparison to the same period in 2018.</p> <p><strong>Bolsonaro.</strong> The president&#8217;s Secretary-General, Jorge Oliveira, said Jair Bolsonaro should veto parts of a law approved by Congress to curb abuse of office among prosecutors and law enforcement. However, in order to avoid a full-blown confrontation with lawmakers, the president should present a new bill regulating the points he will veto. Mr. Oliveira called it &#8220;an alternative path.&#8221;</p> <p><strong>Justice.</strong> Fernando Haddad, runner up in the 2018 presidential race, was sentenced to four and a half years in prison by an electoral court. Mr. Haddad was found guilty of illegal campaign financing during his successful 2012 bid for São Paulo mayor. In February, a criminal court had dismissed the case. The politician will appeal the decision.&nbsp;</p> <p><strong>Violence. </strong>A 20-year-old man hijacked a bus yesterday morning in Rio. After holding 37 people hostage for three and a half hours, he was shot and killed by the police. Law enforcement said its decision came after the kidnapper stopped communicating with negotiators and threatened to burn down the bus. No hostages were hurt. Governor Wilson Witzel flew to the scene, where he celebrated and prayed with the hostages. President Bolsonaro said the death of a criminal shouldn&#8217;t be mourned.</p> <p><strong>Pride.</strong> Back in May 2016, Operation Car Wash lead prosecutor Deltan Dallagnol discussed marketing strategies for the probe with his peers and then-Judge Sergio Moro. This included the idea to build a monument to the Car Wash investigations. The idea didn&#8217;t prosper—and Mr. Moro warned the prosecutor that the move could &#8220;sound like pride.&#8221; The dialogues were leaked and published by <em>The Intercept</em> and <a href=""><em>Folha de S.Paulo</em></a> today.

Our content is protected by copyright. Want to republish The Brazilian Report? Email us at