Is Brazil’s Central Bank optimism around a recovery warranted?

. Jul 23, 2020
recovery brazil

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Brazil’s Central Bank is bullish on the country’s recovery prospects. But should it be? Plus, big moves in the telecom sector. And banks propose action in the Amazon.

BREAKING

Police in Rio de Janeiro launched an operation to arrest five people in connection with embezzlement in overpriced contracts between health organization Iabas and the City Hall of Rio de Janeiro. Iabas is also under investigation for irregularities in the installation and management of the city’s Covid-19 field hospitals.


Recovery: Beware of the ‘false V’

Central Bank Chairman Roberto Campos Neto

said during a live webcast that the Brazilian economy is showing promising signs and that a <a href="https://brazilian.report/newsletters/brazil-daily/2020/05/14/high-debt-levels-prevent-v-shaped-recovery-for-brazil/">V-shaped recovery</a> is a real possibility — even if it is not a &#8220;full V.&#8221; According to him, the bank&#8217;s forecast of a 6.4-percent plunge of Brazilian GDP this year is overly conservative, adding that access to credit will be a key factor in the recovery. &#8220;We have made enormous efforts to keep credit flowing,&#8221; he said.</p> <ul><li>Since reaching historic lows in April, confidence among <a href="https://brazilian.report/business/2020/04/03/small-business-owners-next-firing-line-covid-19-crisis/">Brazilian businessmen</a> has climbed back to levels that are closer to the pre-pandemic mood.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/3265401" data-url="https://flo.uri.sh/visualisation/3265401/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>But, but, but … </strong>The economic recovery depends on stopping — or at least controlling — the coronavirus spread. And, in Brazil, that hasn&#8217;t happened. States such as Amapá, Maranhão, Ceará, and Rio de Janeiro — which had lowered the number of severe cases and deaths — are now experiencing an uptick in hospitalizations.</p> <ul><li>On Wednesday, Brazil recorded a new high for daily cases: 65,339. The figures obliterated the previous record of 54,771. The virus has already killed 82,356 people, more than the total deaths from murder and traffic incidents in 2019.&nbsp;</li><li>Moreover, the &#8220;every-state-for-itself&#8221; mentality adopted in Brazil for dealing with the crisis has led to erratic responses, with strategies driven by hunches. Minas Gerais state has seen an avalanche of lawsuits filed as municipalities simply do not know which reopening rules they should be following.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/2641109" data-url="https://flo.uri.sh/visualisation/2641109/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why it matters.</strong> The rising number of hospitalizations could indicate the presence of a second coronavirus wave in these areas. The Organization for Economic Cooperation and Development (OECD) predicted a GDP contraction of as much as 9.1 percent in case a second Covid-19 wave hits Brazil by the end of the year.</p> <p><strong>Meanwhile.</strong> The Federal Accounts Court — an audit tribunal which monitors public spending — showed that the Health Ministry has used only 29 percent of its emergency coronavirus budget. Due to the hiccups in using available resources, the Federal Prosecution Office has opened an inquiry into possible federal omission.</p> <ul><li>Interim Health Minister Eduardo Pazuello was warned by members of the Health Minister that without social isolation&nbsp;—&nbsp;which the government never supported — the sanitary crisis could last for up to two years. &#8220;That would create a stress on the economy as big as, or worse, than lockdowns,&#8221; said aides, according to minutes from a meeting of the ministry&#8217;s emergency committee. The document was <a href="https://saude.estadao.com.br/noticias/geral,ministro-da-saude-foi-avisado-de-que-efeitos-da-covid-19-durariam-ate-2-anos,70003373144">leaked</a> to newspaper O Estado de S.Paulo.</li></ul> <p><strong>Benchmark.</strong> The U.S. offers a good snapshot of how an uncontrolled epidemic can hurt the recovery. &#8220;The New York Fed&#8217;s Weekly Economic Index (WEI) is reversing course, showing real-time, high-frequency economic data is again turning negative after climbing back from April and May&#8217;s coronavirus-driven swoon,&#8221; <a aria-label="undefined (opens in a new tab)" href="https://www.axios.com/newsletters/axios-markets-802b9c2b-8074-4189-850e-f46f3cff4016.html?chunk=0&amp;utm_term=twsocialshare#story0" target="_blank" rel="noreferrer noopener">writes</a> Axios&#8217; Dion Rabouin.</p> <ul><li>David Kelly, chief global strategist at JPMorgan Asset Management, said in a note to clients: &#8220;[I]n a pandemic economy, stimulus alone cannot trigger a full recovery.&#8221; Countries need to tame the spread of the virus.</li></ul> <p><strong>What to expect.</strong> Columnist Marco Harbich, a strategist at Terra Investimentos, <a href="https://brazilian.report/opinion/2020/07/18/brazil-new-strong-retail-results-dont-tell-the-full-story/">predicts a GDP plunge of around 7 percent</a> in 2020.</p> <hr class="wp-block-separator"/> <h2>Oi Telecom in exclusive talks on mobile infrastructure</h2> <p>Brazil&#8217;s fourth-largest telecom company Oi announced it has entered exclusive talks with Highline to sell its mobile telephony operations. The bidders — which made a better offer than competitors Vivo, TIM, and Claro — are a telecom infrastructure company owned by Digital Colony, the digital infrastructure investment platform of Colony Capital, Inc.</p> <ul><li>Highline owns assets valued at over USD 20 billion, but doesn&#8217;t operate mobile telephony anywhere in the world.</li></ul> <p><strong>Why it matters.</strong> If concluded, the acquisition of Oi&#8217;s mobile operations will make Highline the biggest independent telecom infrastructure company in the country. The exclusivity to negotiate runs until August 3 —&nbsp;but could be extended.</p> <p><strong>Neutral network.</strong> According to investment website Brazil Journal, Highline intends to operate Oi&#8217;s infrastructure in the concept of a &#8220;<a href="https://braziljournal.com/breaking-highline-entra-em-negociacao-exclusiva-para-comprar-oi-movel">neutral network</a>.&#8221; That would make it a competitor of telecoms when it comes to its client portfolio, but a service provider when it comes to infrastructure.</p> <p><strong>Remembering Oi.</strong> In court-supervised reorganization, Oi was handpicked to be a part of former President Lula&#8217;s program to build &#8220;national champions&#8221; by injecting billions of public money into domestic companies, turning them into global behemoths. Instead of a development project, the strategy proved to be a <a href="https://brazilian.report/business/2017/12/19/oi-telecom-crony-capitalism/">textbook example of how crony capitalism works</a>.</p> <hr class="wp-block-separator"/> <h2>Banks to wade into Amazon image crisis</h2> <p>Brazil&#8217;s three largest private banks — Itaú Unibanco, Bradesco, and Santander — presented Vice President Hamilton Mourão with an action plan for sustainable development in the Amazon region. The banks presented a list of priorities, including:</p> <ul><li>Stimulus to sustainable supply chains through low interest rates;</li><li>Infrastructure investments in sanitation, energy, and internet implementation;</li><li>Investments and partnerships for developing technologies to boost the bioeconomy;</li><li>Support for local leaders engaged in socioeconomic development projects.</li></ul> <p><strong>Yes, but … </strong>The banks have not disclosed how much they intend to invest. “We haven&#8217;t established a concrete basis in terms of [financial] assistance. We made our commitment to reduce illegalities, make progress in land regulation, and we put forward what we think would be important for them to think about in terms of funding bioeconomy projects, with better interest rates,” said Mr. Mourão after the meeting.</p> <p><strong>Why it matters.</strong> The Brazilian government is suffering from mounting pressure over its dismissive attitude toward deforestation. International investors have threatened to pull their money from the country unless they see a change in attitude.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Payments.</strong> The Central Bank will speed up the enrollment process for PIX, its instant payment system, with the launch being brought forward to October 5 rather than November 3. The bank&#8217;s chairman, Roberto Campos Neto, confirmed the news during a live webcast. PIX is part of the government&#8217;s effort to <a href="https://brazilian.report/tech/2020/07/10/tech-roundup-brazil-ready-ditch-printed-money/">digitize financial transactions</a> in Brazil.</li><li><strong>5G. </strong>Representatives of telecommunications companies have complained about the <a href="https://brazilian.report/power/2020/07/22/brazil-promised-tax-reform-overhaul-more-tweak/">tax reform proposal</a> submitted by Economy Minister Paulo Guedes on Tuesday, saying it will raise the sector&#8217;s tax burden by 2 percentage points to 48.7 percent. They claim that could stall investments and hinder Brazil&#8217;s implementation of 5G technology.</li><li><strong>Innovation. </strong>Brazilian startup Visto.Bio has launched an antiseptic liquid spray that is capable of eliminating the coronavirus from surfaces and clothes in 99 percent of lab tests. The product was selected by Singularity University as one of the world&#8217;s top 5 solutions against the pandemic for improving practical life. The startup has announced partnerships with gym chains, shopping malls, and fashion brands. One bottle of the spray costs BRL 150 (USD 29.30).</li><li><strong>Impeachment 1.</strong> Rio de Janeiro Governor Wilson Witzel has asked the Supreme Court to dissolve the Rio State Congress committee that is conducting <a href="https://brazilian.report/newsletters/brazil-daily/2020/06/11/impeachment-process-against-rio-governor-wilson-witzel/">impeachment proceedings against him</a> based on a technicality. Mr. Witzel is politically isolated, and pulling legal maneuvers might be his best — and perhaps only — shot at holding on to his office.</li><li><strong>Impeachment 2.</strong> Lawmakers in the southern state of Santa Catarina have opened impeachment proceedings against Governor Carlos Moisés. He is accused of illegally increasing salaries of prosecutors without consulting the State Congress. Mr. Moisés is Brazil&#8217;s third governor to face a possible ousting during the pandemic, after Rio&#8217;s Wilson Witzel and <a href="https://brazilian.report/power/2020/05/16/amazonas-politics-pseudoscience-make-covid-19-crisis-even-worse/">Amazonas&#8217; Wilson Lima</a>.</li><li><strong>2022 election.</strong> Former Health Minister Luiz Henrique Mandetta has held private talks about a possible presidential ticket including former Justice Minister Sergio Moro as his VP. Despite being less popular and less well-known among voters, Mr. Mandetta claims he has more political wit to handle rallies and meet-and-greet events. Mr. Moro&#8217;s camp, however, believes <em>he</em> should head the ticket.

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