A revolution for the Brazilian state?

. Nov 06, 2019
President Jair Bolsonaro, Economy Minister Paulo Guedes, and Chief of Staff Onyx Lorenzoni present the new economic plan to Senate President Davi Alcolumbre.

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Good morning! We’re covering the bold new economic plan presented by Economy Minister Paulo Guedes. Brazil’s mega oil auction to take place today. And a crackdown on major debtors to federal authorities. (This newsletter is for platinum subscribers only. Become one now!)

Paulo Guedes wants a revolution for Brazil’s state

On Tuesday, Economy Minister Paulo Guedes presented

the Senate with a plan to completely overhaul the structure of the Brazilian state. It has been labeled by economists as the boldest such undertaking since the Real Plan, which created <a href="https://brazilian.report/money/2019/07/01/brazil-longest-lasting-currency-real/">Brazil&#8217;s longest-lasting currency</a>. Here are the main points of the project:</p> <ul><li><strong>Tax breaks. </strong>There would be a cap of 2 percent of GDP for tax exemptions (currently at 4 percent), which should give the government an extra BRL 150 billion in revenue each year.</li><li><strong>Spending. </strong>Laws or judicial rulings creating additional expenses would only be enforced if there is space on the budget.</li><li><strong>Civil servants.</strong> After declaring a state of financial emergency, administrations at all levels would be able to cut working hours and salaries of civil servants by up to 25 percent.</li><li><strong>Federation 1.</strong> Brazil would become a true federation. States and municipalities would have more autonomy (and receive an additional BRL 400 billion in 15 years), but would no longer have the federal government as the guarantor of their finances. From 2026 on, the government would not be able to bail out regional administrations.</li><li><strong>Federation 2.</strong> Municipalities with fewer than 5,000 residents which are unable to finance themselves (with less than 10 percent of revenue coming from local taxes) would be merged with neighboring cities. That would affect 769 towns—eliminating almost 20,000 public jobs.</li><li><strong>Funds.</strong> Public funds with suspended money would be used to repay public debt and then made extinct.</li><li><strong>Minimum spending.</strong> Today, administrations cannot lower their budgets for healthcare or education. Now, the plan is for minimum spending to be combined, that is, an increase in the healthcare budget could be compensated by a cut in education spending.</li></ul> <p><strong>Why it matters.</strong> The plan (if approved) would create stricter rules for elected officials in dealing with public finances. Today, 73 percent of municipalities have been evaluated as being in a &#8220;difficult&#8221; or &#8220;critical&#8221; financial situation, according to the Industry Federation of Rio de Janeiro.</p> <p><strong>Difficult.</strong> Mr. Guedes&#8217; plan is too bold to pass as is. Expect Congress to slash the proposal to cut down the number of municipalities (mayors and city councilors are the backbone of regional politics for congressmen), especially as Brazil holds municipal elections in 2020.</p> <p><strong>Minimum wage.</strong> The government&#8217;s plan would also mean that the minimum wage would not see any real increase until at least 2021. That could be a problem for the president&#8217;s popularity.</p> <hr class="wp-block-separator"/> <h2>Transfer of Rights: D-Day for the mega oil auction </h2> <figure class="wp-block-image"><img src="https://brazilian.report/wp-content/uploads/2019/11/oil-auctions.jpg" alt="oil auctions" class="wp-image-27209" srcset="https://brazilian.report/wp-content/uploads/2019/11/oil-auctions.jpg 715w, https://brazilian.report/wp-content/uploads/2019/11/oil-auctions-300x203.jpg 300w, https://brazilian.report/wp-content/uploads/2019/11/oil-auctions-610x414.jpg 610w" sizes="(max-width: 715px) 100vw, 715px" /><figcaption>Pre-salt reserves</figcaption></figure> <p>The highly anticipated auction of the so-called Transfer of Rights oil and gas reserves is scheduled for today at 10 am (Brasília time). According to some estimates, the fields to be sold off could contain up to 15 billion barrels of oil and gas—and could make Brazil one of the world&#8217;s top 4 oil producers.</p> <p><strong>Why it matters. </strong>The government expects to raise BRL 106 billion (over USD 26 billion), which would be a world record for any auction of the kind.</p> <p><strong>Doubts.</strong> In recent days, analysts have lowered expectations after two of the 14 qualified bidders (BP and Total) dropped out of the auction. Markets fear that the government&#8217;s urgency to raise money in the short-term will push Petrobras into making huge bids for the exploitation rights to two areas (valued at BRL 70 billion). That could prevent the company from repaying debts and cause it to fail to meet its financial goals for 2020.</p> <p><strong>Relief.</strong> State- and municipal-level administration are desperate for the auction. In dire financial straits, they will use their cut of the signing bonuses (15 percent will go to states, 15 percent to municipalities) to pay for overdue pensions and salaries.</p> <p><strong>Protests.</strong> A union representing oil workers filed a lawsuit to prevent the auction from happening. It claims the auction will &#8220;bring irreparable damage to public property.&#8221; Mines and Energy Minister Bento Albuquerque, however, claims that postponing the auction would cause Brazil losses of USD 22 billion in opportunity cost.</p> <hr class="wp-block-separator"/> <h2>Government plans to crack down on debtors</h2> <p>The federal government presented a bill to toughen up punishment on around 3,000 firms labeled as &#8220;persistent debtors.&#8221; Each of these companies owes more than BRL 15 million to the Federal Revenue Service. Combined, they deprive the government of BRL 30 to 40 billion per year.</p> <p><strong>Why it matters.</strong> To solve the many distortions in Brazil&#8217;s tax system, authorities must crack down on debtors which use the system&#8217;s loopholes to avoid paying taxes.</p> <p><strong>Mapping.</strong> The bill came after prosecutors mapped the companies in tax default and identified their debt profiles—separating those which are intentionally dodging taxes from companies that don&#8217;t have enough money to clear their slate.</p> <p><strong>Challenge. </strong>It is the first step toward collecting the debts—which has historically been a challenge for most administrations. Overdue federal tax liabilities currently add up to BRL 2.3 trillion. Over the last decade, however, only BRL 186 billion were recuperated.</p> <hr class="wp-block-separator"/> <h2>What else you should know today</h2> <p><strong>Car Wash.</strong> Yesterday, the Federal Police launched the latest phase of Operation Car Wash, subpoenaing former President Dilma Rousseff, former Finance Minister Guido Mantega, two former Senate presidents, and a member of Brazil&#8217;s Federal Accounts Court. They are suspected of embezzling BRL 360 million in association with meatpacking giant JBS. Of that money, BRL 35 million was allegedly used to bribe senators into supporting Ms. Rousseff&#8217;s re-election campaign in 2014. <a href="https://oglobo.globo.com/brasil/pf-pediu-prisao-de-dilma-mantega-eunicio-mas-fachin-negou-24063663">The Feds asked for her arrest</a>, claiming she could tamper with the investigation, but the Supreme Court denied the request.</p> <p><strong>Mining.</strong> In a report, the National Mining Agency said Vale committed a &#8220;serious negligence&#8221; by withholding information around the structural risks of the Brumadinho dam that collapsed in January, killing 252 people and leaving 18 missing. The agency has issued 24 notices against Vale, and will hand its report to federal authorities.</p> <p><strong>Energy.</strong> As a way to lure investors, the government said that it will not retain its &#8220;golden share&#8221; in Eletrobras—the country&#8217;s state-owned energy company. Present in previous privatizations, golden shares gave the government the power to veto any strategic moves.</p> <p><strong>Mint.</strong> President Jair Bolsonaro signed a decree ending the Brazilian Mint&#8217;s monopoly over printing Brazilian Real bills, passports, stamps, and producing coins. The move is the first step towards eventually <a href="https://brazilian.report/money/2019/09/09/privatization-alone-save-brazilian-mint/">privatizing the Mint</a>.</p> <p><strong>Libertadores.</strong> Protests in Chile led the South American Football Confederation to relocate the final match of the Copa Libertadores—the region&#8217;s equivalent to the Champions League. Instead of Santiago, the match will be played in Lima, Peru. It is the third-straight year in which a continental final has issues. In 2017, fans invaded the Maracanã stadium during the Copa Sudamericana final, and last year, the second leg of the Libertadores final was eventually played in Madrid, after violent scenes between fans of River Plate and Boca Juniors.

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