In debt, Brazilian firms could miss out on economic recovery

. Jan 08, 2020
debt brazilian companies Image: Romolo Tavani/Shutterstock

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Good morning! Today, we talk about how big Brazilian companies could miss out on Brazil’s recovery due to their high debts. Plus, how Brazil’s relationship with Iran is developing after the Middle Eastern country attacked U.S. bases in Iraq. And Bolsonaro refuses to “tax the sun.” (This newsletter is for premium subscribers only. Become one now!)

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Debts could see companies miss out on Brazil’s recovery

The number of Brazilian companies that have filed for court-supervised reorganization—similar to Chapter 11 in the U.S.—

between May and October 2019 increased 18 percent when compared to the same time span in 2018. Not only are more companies in trouble, but their debts are higher, too. According to consultancy firm Alvarez &amp; Marsal, companies in the top 20 of reorganization filings have debts adding up to BRL 242 billion—up 62 percent from December 2018.</p> <p>Even excluding Odebrecht, the construction behemoth that skews the overall data, the debt growth of the top 20 would be 10 percent.</p> <div class="flourish-embed" data-src="visualisation/1202655"></div><script src=""></script> <p><strong>Why it matters.</strong> Half of the top 20 reorganization filings are from companies in the construction and energy sectors. As Brazil&#8217;s economy starts to pick up, local players could remain hamstrung by their debts and <a href="">miss out on the party</a>, leaving foreign firms to profit from the recovery.</p> <p><strong>Car Wash effect.</strong> In 80 percent of cases among the top 20 filings, the company is involved in corruption scandals. According to Alvarez &amp; Marsal, this shows how corruption became a central part of these firms&#8217; way of doing business. Once that element was removed—or at least restricted—by Operation Car Wash, they lost their most important &#8220;competitive edge.&#8221;</p> <p>&#8220;I think it will be hard for them to get out of court-supervised reorganization and recover access to credit. We&#8217;re seeing plans with highly aggressive debt renegotiation proposals, which tend to deteriorate a company&#8217;s relationship with markets,&#8221; Alvarez &amp; Marsal&#8217;s director in Brazil, Leonardo Coelho, <a href="">told</a> newspaper <em>Valor</em>.</p> <p><strong>Side effect.</strong> In sectors such as telecoms or sugar &amp; ethanol, the struggles of small players have led to an increasing market concentration in the hands of more-structured companies.</p> <hr class="wp-block-separator"/> <h2>Brazilian diplomat to meet with Iranian officials today</h2> <figure class="wp-block-image"><img src="" alt="iran Qassem Suleimani" class="wp-image-29929" srcset=" 1000w, 300w, 768w, 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><figcaption>Funeral of Qassem Suleimani in Tehran, Jan 7, 2020. Photo: Saeediex/Shutterstock</figcaption></figure> <p>After a meeting on Sunday, Brazil&#8217;s chargée d&#8217;affaires in Tehran, Maria Cristina Lopes, will speak again today with Iranian officials. Relations between the two countries were shaken by Brazil&#8217;s automatic backing of the <a href="">U.S. assassination of top Iranian military official Qassem Soleimani</a> on January 3. In a statement, Brazil praised the U.S.&#8217;s &#8220;fight against terrorism.&#8221;</p> <p><strong>Changing tune.</strong> Since then, President Bolsonaro moderated his rhetoric, and said on Tuesday that &#8220;[Brazil has] and will continue to have trade relations with Iran.&#8221; He added: &#8220;Has Iran adopted any measure against us? I don&#8217;t think so.&#8221;</p> <p><strong>Bottom line.</strong> Despite an initial rift, Brasília does not believe in economic retaliation from Tehran. The Brazilian embassy has reportedly received word that Iran wants a pragmatic relationship with Brazil. Other countries, especially from Europe, had much harsher reactions to the escalation of tensions between the Middle Eastern country and the U.S.</p> <p><strong>Why it matters.</strong> While Iran is only the 23rd-biggest destination of Brazil&#8217;s overall exports, the country is the fourth-biggest importer of Brazil&#8217;s agribusiness sector. In 2019, Iran imported USD 2.2 billion in food products—3 percent of the sector&#8217;s exports.</p> <hr class="wp-block-separator"/> <h2>Bolsonaro goes against economic team on solar power tax</h2> <p>President Jair Bolsonaro decided to go against the advice of his economic team and called off a proposal to <a href="">end subsidies to small solar power producers</a>. Mr. Bolsonaro called the move &#8220;a tax on the sun&#8221; and has forbidden any government official from speaking about it.</p> <p><strong>Context.</strong> The discussion was being led by the National Electricity Agency (Aneel), which had proposed a timetable to do away with these benefits by 2030. According to Aneel, the program created in 2012 has already fulfilled its role, which was to allow for the development of the industry and reduce the cost of the equipment used to generate one’s own electricity. Furthermore, Aneel says that the subsidies given to consumers who generate their own power are funded by the rest of the Brazilian population, which has faced successive increases in electricity bills in recent years.</p> <p><strong>Why it matters.</strong> According to Aneel, if maintained, these benefits would cost BRL 23 billion over the next 15 years. It is also further proof that President Jair Bolsonaro&#8217;s decision-making process is more based on hunches than data-backed conclusions.</p> <p><strong>Not that popular.</strong> Today, around 100,000 homes and companies generate their own energy in Brazil, a number much lower than those seen in China, India, Germany, the U.S., and Australia, for example. Over 90 percent of these consumers in Brazil use solar panels to generate their own power.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <p><strong>Agro.</strong> The Agriculture Ministry lobbied for—and received—a provision in the 2020 budget for five new agriculture-focused commercial attachés to Brazilian embassies around the world. They will be located in the UK, Italy, Peru, Singapore, and China, where Brazil will now have two such positions.&nbsp;</p> <p><strong>VP.</strong> The 66-year-old Vice President Hamilton Mourão was submitted to cataract surgery on Tuesday. His press service said the procedure went &#8220;without any problem whatsoever.&#8221; The VP will travel to Antarctica next Monday to represent President Bolsonaro in the inauguration of new facilities at Brazil&#8217;s Comandante Ferraz South Pole Base—and should return to Brasília two days later.</p> <p><strong>Aviation.</strong> According to the latest annual report by British aviation consultancy OAG, Brazil has nine airports ranking among the world&#8217;s most punctual. Guarulhos International Airport, Brazil&#8217;s busiest, was the country&#8217;s best-rated—coming fourth in the category &#8220;Major Airports.&#8221;</p> <p><strong>Terrorism.</strong> Brazil&#8217;s Foreign Affairs Ministry has initiated the process to get fugitive businessman Eduardo Fauzi extradited from Russia to Brazil. He is the main suspect in the petrol-bombing of the headquarters of Porta dos Fundos—a comedy troupe that released a Christmas special featuring a gay Jesus character. Mr. Fauzi was a member of the Integralist movement, a group dating back to the 1930s with links to <a href="">Italian fascism</a>.</p> <p><strong>Dengue fever.</strong> The year 2019 had the <a href="">second-highest number of confirmed dengue fever cases</a> since the government forced states to report all incidents back in 1990. The Health Ministry has not yet finished tabulating the year&#8217;s numbers, but between January 1 and December 7, over 1.5 million cases had been registered—most in the states of São Paulo and Minas Gerais. That is a spike of almost 600 percent when compared to 2018, and experts say that fighting the dengue virus is becoming more difficult, with new strains being identified, thanks to the rise of Zika and Chikungunya—all transmitted by the same <em>Aedes aegypti</em> mosquito.

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