The resurgence of currencies across Latin America

. Jul 29, 2020
The resurgence of currencies across Latin America Image: André Chiavassa/TBR

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We’re covering the rally of Latin American currencies after the first coronavirus shock. The struggles of planemaker Embraer. And the bold projections for Brazil’s agribusiness.

Are Latin American currencies bouncing back?

Throughout July, the main Latin American currencies

have recovered some of the massive losses against the U.S. Dollar they accumulated throughout the first half of the year. The best-performing currencies in the period were the Chilean Peso (+6.68 percent in the month) and the Brazilian Real (+5.81 percent) —&nbsp;with the Argentinian Peso being the sole exception, falling -2.3 percent since July 1. In Argentina&#8217;s case, however, the currency crisis predates the pandemic, as the country struggles with a debt crisis — <a href="https://brazilian.report/latin-america/2020/05/25/argentinas-long-debt-default-history-imf/">entering default territory</a> in May for the ninth time in its history.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3317532" data-url="https://flo.uri.sh/visualisation/3317532/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why it matters.</strong> For importers, governments, and companies with debts in foreign currency, this bounceback lowers inflationary pressures. Also, a weaker U.S. Dollar stimulates capital inflow to emerging markets.</p> <p><strong>What explains the curve?</strong> &#8220;The V-shaped economic recovery that was supposed to happen in the U.S. never did and the Fed will be forced to keep rates low for even longer,&#8221; Edward Moya, an analyst at Canadian-based foreign exchange company Oanda, tells <strong>The Brazilian Report</strong>. As cases continue to grow in the U.S., the world&#8217;s strongest currency should continue on a downward slide. Globally, USD has fallen 8 percent from its 2020 peak against a basket of currencies, close to its lowest level since 2018.</p> <ul><li>&#8220;While Latin America has struggled with Covid-19, the broad rebound with emerging currencies is pushing upwards even the most beat up ones. I expect the Chilean Peso to perform nicely as their economy seems like they will benefit from renewed infrastructure spending, which will require lots of copper [Chile&#8217;s main exporting commodity],&#8221; he adds.</li></ul> <p><strong>Volatility as the new normal.</strong> The Brazilian Real will likely remain one of the more volatile currencies as the latest moves are mainly attributed to U.S. Dollar fundamentals. Brazil is still vulnerable to short-term weakness due to its high unemployment rate, new elevated levels for public deficit, and uncertainty regarding the coronavirus crisis.</p> <ul><li>&#8220;The Chilean and Colombian Pesos remain the top picks for Latin America currencies.&nbsp; Both economies were much stronger before the pandemic and seem to be in a better position in handling the virus,&#8221; says Mr. Moya.</li></ul> <hr class="wp-block-separator"/> <h2>Embraer restructures in push for survival</h2> <p>The year 2020 has been tough on Brazilian planemaker Embraer. In April, <a href="https://brazilian.report/newsletters/brazil-weekly/2020/04/27/amid-pandemic-bolsonaro-creates-pandemonium-brazil/">Boeing terminated its USD 4.2-billion purchase</a> of Embraer&#8217;s commercial jet division, claiming the São José dos Campos-based company failed to meet requirements of the deal — Embraer disputes that claim and has filed a lawsuit in the U.S. seeking compensation. But the blow was followed by the coronavirus, which sparked the worst crisis the <a href="https://brazilian.report/business/2020/07/19/amid-pandemic-mysterious-airline-set-to-launch-in-brazil/">aviation industry</a> has ever seen. The company has changed four vice presidents and one director since June —&nbsp;but changes will become more dramatic.</p> <p><strong>Why it matters. </strong>In Q1 2020, Embraer recorded BRL 1.2 billion in net losses, a 694-percent jump from Q1 2019 results.</p> <p><strong>By the numbers. </strong>In H1 2020, Embraer delivered 31 aircraft, against 73 over the same period in 2019. Sales shall take a nosedive this year, and experts warn that it might take at least three years for activity to regain pre-pandemic levels.</p> <p><strong>Uncertainty.</strong> Even before the pandemic, half of Embraer&#8217;s 5,000-plus staff of engineers was reportedly left partially idle, after concluding huge projects —&nbsp;such as the development of the E2 commercial line and the <a href="https://brazilian.report/newsletters/brazil-daily/2019/09/04/kc-390-brazil-brand-new-military-plane/">KC-390 cargo plane aircraft</a>. Moreover, the company spent BRL 485 million in separating its commercial jet division as part of the doomed Boeing deal —&nbsp;money that would have been welcome now.</p> <p><strong>Layoffs in sight.</strong> In 2017, consultancy firm McKinsey drew a restructuring plan simplifying the planemaker&#8217;s structure for better financial results. The plan was only partially followed at first, but should now be resumed.</p> <ul><li>Embraer has suspended contracts, reduced workers&#8217; hours and launched a voluntary redundancy program — which was not accepted by unions due to not being generous enough. But the company has yet to announce major layoff plans, making it an outlier in the aviation sector. Boeing and Airbus, for instance, announced they will each slash over 15,000 jobs.</li></ul> <hr class="wp-block-separator"/> <h2>Brazil&#8217;s grain production to grow 27 percent in next decade</h2> <p>The Brazilian Agriculture Ministry has published projections for the sector over the next decade, foreseeing major jumps in productivity. According to the estimates, Brazilian grain production should jump from its current level of 250 million tons per year to 318 million tons — a 27-percent increase. Meanwhile, planted area should only rise 17 percent.</p> <ul><li>By the end of the decade, Brazil expects to account for 52 percent of the world&#8217;s soybean exports and one-third of global poultry exports. The ministry also highlights that fruit production should spike, which will benefit family producers, one of the backbones of the country&#8217;s food production.</li></ul> <p><strong>Why it matters.</strong> Agribusiness is responsible for 21 percent of Brazil&#8217;s GDP and 20 percent of the country&#8217;s jobs, according to government data.</p> <p><strong>Meat.</strong> Brazil&#8217;s protein production will increase by 6.7 million tons between 2020 and 2030, to around 34.9 million tons per year.&nbsp;</p> <p><strong>Sustainability. </strong>The biggest challenge for the industry will be developing more sustainable practices. As of now, Brazil&#8217;s major producers still don&#8217;t fully trace their supply chain, and often rely on the use of illegal deforested areas.</p> <ul><li>A study entitled “<a href="https://science.sciencemag.org/content/369/6501/246">The rotten apples of Brazil’s agribusiness</a>,” published in the latest issue of Science magazine, shows that up to 22 percent of Brazilian soybean exports — and 17 percent of beef exports — which leave the Amazon and Cerrado biomes and head to the European Union may have been produced on illegally deforested land.</li><li>The EUR 230-billion fund Nordea Asset Management, which is part of northern Europe’s largest financial services group, has scrapped Brazil&#8217;s meat producer JBS from its portfolio, due to its links to <a href="https://brazilian.report/podcast/2020/07/16/explaining-brazil-podcast-deforestation-is-bad-for-business/">farms involved in Amazon deforestation</a>. The decision concerns all funds, not only those labeled ESG (“environmental, social, and governmental” standards).</li></ul> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Jobs.</strong> Brazil has closed 1.2 million formal jobs over the year&#8217;s first six months. Some analysts celebrated the fact that the pace of job losses has slowed down, taking it as a sign of recovery. However, employment figures don&#8217;t show the full extent of the job crisis facing Brazil, as millions of people have simply stopped looking for a new position for fears of the coronavirus — or believing there are no jobs available.</li><li><strong>Oil and gas. </strong>Brazil&#8217;s state-owned oil giant Petrobras informed markets in a securities filing that it had published a prospectus aiming for the sale of its stake in an exploratory block in Colombia&#8217;s Guajira Bay — part of its years-long divestment plan. In a separate filing, the company said it has paid USD 3.5 billion in debt from its revolving credit lines and that it has used USD 8 billion from its credit lines to offset the effects of the coronavirus pandemic.</li><li><strong>UBI-ish. </strong>Congressmen from the Socialism and Liberty Party (PSOL) presented a bill to create a &#8220;<a href="https://brazilian.report/power/2020/05/31/ubi-could-brazil-launch-universal-basic-income/">permanent minimum income</a>&#8221; of BRL 600 to families with per capita earnings of up to BRL 500 per month. The benefit would continue even after the pandemic as a way to reduce poverty levels in Brazil — which have increased in recent years.</li><li><strong>Operation Car Wash.</strong> Prosecutor General Augusto Aras said on Tuesday that he will fight to &#8220;fix the direction&#8221; taken by Operation Car Wash — the anti-corruption task force Mr. Aras says has become a &#8220;separate beast&#8221; from the rest of the Federal Prosecution Service, and which he calls a &#8220;punitivist black box.&#8221; For some weeks now, Mr. Aras has taken more control over the task force, including accessing all documents collected in six years of investigations&nbsp;— information containing an estimated 1 petabyte (the equivalent of 500 billion pages of standard typed text or 745 million floppy disks). Investigators, however, accuse Mr. Aras of trying to clip their wings and <a href="https://brazilian.report/power/2020/07/02/brazil-operation-car-wash-the-end-seems-near/">undermining anti-corruption efforts</a>. This might be the case where both sides have a fair point to make.

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