Analysts unfazed as Brazilian Real hits record lows

. Feb 13, 2020
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We’re covering the positive impacts of the devaluation of the Brazilian currency. The latest cabinet firing. And the left-wing trying to make life harder for banks and big business.

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The Brazilian currency can’t stop falling. But that’s not necessarily a bad sign

The U.S. Dollar-Brazilian Real currency exchange continues to beat nominal records.

On Wednesday, the USD closed the day at BRL 4.35. This year, the Brazilian currency has lost 8 percent—more than any other in the world—fueled by a flight of foreign capital from low-risk, fixed-income assets in Brazil after the Central Bank slashed interest rates, thus reducing their profitability.</p> <div class="flourish-embed" data-src="visualisation/1385577"><script src=""></script></div> <p><strong>Why it matters.</strong> According to analysts, gone are the days where the currency exchange sat below USD 1 : BRL 2. A high USD might be the new normal for Brazil, analysts warn.</p> <p><strong>Half-full.</strong> Pablo Spyer, director at investment firm Mirae Asset, says this new reality is not a bad thing. &#8220;We had a stronger currency with high benchmark interest rates. Now, the USD is more expensive, but interest is lower. That&#8217;s a good trade-off.&#8221;</p> <p><strong>Credit. </strong>This new outlook has pushed local investors into buying riskier assets such as corporate bonds, which has been celebrated by credit-hungry companies. Until recently, a firm had to be strong enough to get loans in foreign banks or benefit from subsidized loans for credit. And lower interests also push many players to borrow from national banks—which would not happen in a not-so-distant past.</p> <p><strong>Foreign investors.</strong> Matheus Soares, an analyst at investment firm Rico, says foreign investors will return to Brazil if the economy shows stronger signs of bouncing back.</p> <p><strong>Guedes.</strong> Economy Minister Paulo Guedes minimized the currency drop, saying it is &#8220;good for everybody.&#8221; In November, he pulled a similar move, which <a href="">led investors into a sellout</a> that pushed the Brazilian Real to historic lows.</p> <hr class="wp-block-separator"/> <h2>Bolsonaro sacks chief of staff—names general for the job</h2> <p>After <a href="">slashing the responsibilities and powers of his Chief of Staff</a> over recent months, President Jair Bolsonaro decided to fire Congressman Onyx Lorenzoni from the job. The move was expected, as we had pointed out in our <a href="">January 31 Daily Briefing</a>. The president offered Mr. Lorenzoni&#8217;s office to Army General Walter Braga Netto—a high-ranking military officer who oversaw the <a href="">2018 federal intervention</a> in Rio de Janeiro&#8217;s public security system.&nbsp;&nbsp;</p> <p><strong>Why it matters. </strong>Mr. Lorenzoni was the last traditional politician among the cabinet members who work inside the presidential palace—usually those who are closest to the president. That could create an even bigger fissure between the Executive and Legislative branches.</p> <p><strong>Pattern.</strong> By picking Gen. Braga Netto for a job charged with providing a political liaison between the president&#8217;s office and Congress, Mr. Bolsonaro once again exposes his administration&#8217;s lack of political guidance. It is also a repeat of a recurring strategy from the president: in case of difficulty, he turns to military officers.</p> <p><strong>No change.</strong> The bright side of naming a military man as Chief of Staff is that he can keep the position as deflated as it is now. If he were to invite a politician, the president would be forced to restore some of the office&#8217;s powers.</p> <p><strong>Loyalty.</strong> Mr. Lorenzoni was the first relevant politician to endorse Mr. Bolsonaro&#8217;s presidential bid—back when he was still regarded as a joke candidate—but that wasn&#8217;t enough to keep him in the president&#8217;s good graces. As a consolation prize, Mr. Lorenzoni is likely to be appointed to the Citizenship Ministry—which could be a good opportunity for an ambitious politician, as the office oversees the Bolsa Família cash transfer program.</p> <hr class="wp-block-separator"/> <h2>The left could support early prison sentences … with a caveat</h2> <p>According to Congressman Paulo Teixeira, secretary-general of Workers&#8217; Party, left-wing groups in Congress could end up backing the proposal to allow prison sentences to be enforced after a single failed appeal. Back in November, the Supreme Court ruled that defendants can only be sent to jail <a href="">after exhausting all appeals routes</a>. There is a caveat, though: the left wants this rule to be applied not only for criminal cases, but also for cases in civil, labor, and tax courts.</p> <p><strong>Why it matters. </strong>This proposal would hit banks and big businesses—which benefit from seemingly limitless delays in the appeal system to dodge their responsibility for paying fines and compensation in civil cases.</p> <p><strong>Impunity.</strong> The Brazilian legal system allows skilled lawyers to use loopholes and countless appeal possibilities to keep their clients out of jail. Not rarely, cases reach the statute of limitations, simply letting defendants off the hook.&nbsp;</p> <p><strong>Lula.</strong> The idea of amending the Constitution to allow for prison sentences to be enforced early has a clear target: Luiz Inácio Lula da Silva. The former president spent nearly two years in jail following corruption and money laundering convictions but was benefited by the November Supreme Court ruling. In a bid to avoid Lula going back to prison, left-wing parties have imposed another deal-breaker condition: the possibility of enforcing sentences earlier can only encompass cases that have started <em>after</em> the law is signed.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Agribusiness.</strong> Brazilian agricultural exports totaled USD 5.8 billion in January—a 9.4-percent drop from one year ago. The number was primarily pushed down by the falling prices of Brazil&#8217;s main commodity products—but sales volumes were also down, by 2.2 percent. With Chinese demand for meat products increasing, the Asian giant accounted for 26 percent of Brazil&#8217;s agricultural exports, up from 23 percent a year ago).&nbsp;</li><li><strong>Politics. </strong>As we informed in <a href="">yesterday&#8217;s Daily Briefing</a>, Congress had reached a consensus and was set to strike down a presidential veto on budgetary laws—giving lawmakers unprecedented powers over government spending. That consensus, however, deteriorated when push came to shove, and Senate President Davi Alcolumbre decided to postpone the vote until after Carnival, in the first week of March.</li><li><strong>Violence.</strong> Brazilian journalist Léo Veras was <a href="">assassinated</a> by masked hitmen at his home in the Paraguayan border city of Pedro Juan Caballero. The town is separated from its Brazilian neighbor Ponta Porã by a mere street and as such is an important location in the smuggling of drugs into Brazil. Mr. Veras owned a website that published news stories about drug trafficking cases. Though he was technically killed in Paraguay, according to NGO Press Emblem Campaign, Brazil posted the 4th highest number of murdered journalists in 2019, with two such deaths.</li><li><strong>Cabinet.</strong> The Superior Court of Justice (STJ), Brazil&#8217;s second-highest judicial body, overturned a decision forbidding President Jair Bolsonaro from naming journalist Sérgio Camargo as head of the Palmares Foundation—an institution created to promote black culture. A trial judge found Mr. Camargo unfit for the office after he denied that there is racism in Brazil, and said “slavery was terrible but beneficial to descendants [of slaves].” While Mr. Camargo seems like the wrong person for the job, the decision seems the right one—cabinet nominations are at the discretion of the president.

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