Government’s “big bang” turns into damp squib

support base in Congress Photo: Gearstd/Shutterstock

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Today: the government breaks its promise of a major economic plan. More mergers in Covid-19-hit Brazil. Pandemic set to push people down the social ladder. Delivery app invests in automation. 

No bang for Paulo Guedes

The government promised to launch a major plan today to foster economic growth by way of infrastructure projects

, job-creation programs, housing policies, and a boost in cash-transfer initiatives. It was presented as Economy Minister Paulo Guedes&#8217; &#8220;Big Bang,&#8221; and a way to show investors that the government has a plan for the post-pandemic situation, while also pushing for policies capable of soaring President Jair Bolsonaro&#8217;s electoral stock.</p> <ul><li>In the end, though, there will be no &#8220;bang&#8221; in Brasília today, as Mr. Guedes and the president were unable to agree on the specifics of the program. The main issue is Renda Brasil (Income Brazil), billed as a beefed-up version of cash-transfer program Bolsa Família. The Economy Ministry proposed a system with monthly payments of BRL 250 (USD 45), which is less than what Mr. Bolsonaro wants.</li><li>Additionally, Mr. Guedes wants to fund the new plan by cutting existing programs, including one that gives <a href="https://brazilian.report/power/2017/11/24/austerity-healthcare-farmacia-popular/">large discounts for medications</a> to around 31 million Brazilians. Mr. Bolsonaro said no.</li></ul> <p><strong>Why it matters.</strong> This is not the first time the government has failed to meet a deadline it has set for itself. But beyond exposing a true dilemma —&nbsp;the need to increase public spending while the administration is cash-strapped —&nbsp;this episode shows the lack of unity between the president and his economic tsar on important issues.&nbsp;</p> <ul><li>Moreover, it is proof that Mr. Guedes still hasn&#8217;t grasped how politics works. His solutions often involve rolling back benefits to workers or low-income families, measures that are hard to pass in Congress due to a lack of popular support — especially in a municipal election year such as 2020.</li></ul> <p><strong>Re-routing.</strong> The government plans to foster investments by pushing for changes in regulatory frameworks already being discussed in Congress. Bills updating natural gas trade, bankruptcy rules, and cabotage transportation should improve the Brazilian business environment, while also saving BRL 4 billion on <a href="https://brazilian.report/power/2020/08/19/brazil-2021-budget-can-belt-get-any-tighter/">next year&#8217;s budget</a>.</p> <ul><li>The Economy Ministry also wants to end a system that pegs around 70 percent of the budget to the minimum wage, which itself must be raised every year to match inflation. In a single year, that change could free up BRL 16 billion.</li></ul> <p><strong>Risks.</strong> Even if the government has a better-organized support base in Congress now, this delay seriously jeopardizes the chances of any economic plan passing in 2020. Lawmakers will soon turn their attention to municipal elections, causing Congress to essentially down tools. On the government&#8217;s side is House Speaker Rodrigo Maia&#8217;s fondness for a more business-friendly agenda. His term ends in February 2021, and his willingness to leave a meaningful legacy could make him go the extra mile to get better regulations approved.</p> <hr class="wp-block-separator"/> <h2>M&amp;A deals on the rise in Brazil</h2> <p>According to a <a href="https://static.poder360.com.br/2020/08/Relatorio-MA-Julho-2020.pdf">study</a> by consultancy PwC, there were 483 mergers and acquisitions in Brazil between January and July —&nbsp;a 4.5-percent increase from the same period in 2019. These deals have picked up since April, as a direct result of the coronavirus crisis.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3565517"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why it matters. </strong>According to PwC, M&amp;A deals have become a survival strategy in many cases, as companies &#8220;seek inorganic movements to continue their operations&#8221; and &#8220;reconstitute cash flow.&#8221;</p> <p><strong>Other reasons.</strong> A few other factors have played an important role in boosting M&amp;A deals in Brazil, such as a historically low benchmark interest rate, significant growth in the number of companies going public, easier access to credit for big players following stimulus programs by central banks, and the high capitalization of private equity funds —&nbsp;which are seizing upon firms&#8217; financial frailnesses to make good deals.</p> <p><strong>Foreign firms staying away.</strong> Proportionally, foreign players have never been so absent from the Brazilian M&amp;A market&nbsp;—&nbsp;they were present in only 25 percent of deals.</p> <p><strong>Not equally distributed.</strong> M&amp;A deals are highly concentrated, both geographically and in terms of economic sectors. Two-thirds of deals happened in the Southeast, and half of them were in the IT sector.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3565733"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <hr class="wp-block-separator"/> <h2>Climbing down the social ladder</h2> <p>For socioeconomic purposes, Brazilian society is divided into classes A to E, going from richest to poorest. The coronavirus crisis is set to push 3.8 million households into the D and E income classes, according to a study by consultancy firm Tendências. Meaning that 15 million Brazilians (the equivalent of the entire population of Somalia) will <a href="https://brazilian.report/business/2019/10/03/evolution-brazil-purchasing-power/">lose income</a> and have a family monthly income below BRL 2,500 (USD 445). By the end of the year, 41 million homes will be in the D and E classes.</p> <p><strong>Why it matters.</strong> Economists were already expecting D/E households to increase in number, as Brazil&#8217;s economy has yet to properly recover from the 2014-2016 recession. But the pandemic has made things much worse.</p> <p><strong>What is happening.</strong> The job market has severely deteriorated —&nbsp;with both formal and informal jobs disappearing. Unemployment rose 21 percent between May and July, touching 12.2 million people (not counting the millions who stopped looking for work due to the pandemic).</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3565674"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <hr class="wp-block-separator"/> <h2>iFood answers changing consumer behavior through automation&nbsp;</h2> <p>Food-delivery app iFood announced the acquisition of eComanda, an automation system that will allow its 212,000 partnering restaurants to integrate orders they receive in house and through the app on a single system. In a statement, the app company said it aims at reducing costs and improving efficiency —&nbsp;especially for small restaurants, a segment that got a boost during the pandemic.</p> <p><strong>Efficiency gains.</strong> Besides integrating operations, the system allows restaurants to digitally manage their finances, storage, register customers, and implement loyalty programs. The goal is to eliminate the need for restaurants to invest in their own systems to run their business.&nbsp;</p> <ul><li>iFood did not mention any potential gains for the platform itself. They also did not disclose the terms of the deal.&nbsp;</li></ul> <p><strong>Target audiences.</strong> Though iFood says the solution will help restaurants of all sizes, the goal is to make life easier for small businesses. The segment is taking up a larger chunk of the platform, as customers resort to food places closer to their homes.&nbsp;</p> <ul><li>From March to June, 2020, orders to small and medium-sized restaurants on iFood jumped by 44 percent, against a 29-percent increase in the same period of 2019.</li></ul> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Coronavirus. </strong>Brazil confirmed 17,000 new <a href="https://brazilian.report/coronavirus-brazil-live-blog/">Covid-19</a> infections on Monday, as well as 565 new deaths. The country&#8217;s total tallies are: 3.62 million cases and 115,309 deaths.</li><li><strong>Congress.</strong> Rio de Janeiro police charged Congresswoman Flordelis de Souza, an evangelical leader, with <a href="https://brazilian.report/power/2019/07/20/flordelis-congresswoman-evangelical-community-leader-murderer/">ordering the assassination of her husband</a> — also a preacher — in 2019. The House&#8217;s floor will decide on her suspension, but only the Ethics Committee (which has not operated since the beginning of the pandemic) has the power to impeach Ms. Souza. The opposition to Jair Bolsonaro is trying to use the case to reopen the committee, even if only through remote sessions.</li><li><strong>Taxes. </strong>The state government of São Paulo has announced that it won&#8217;t charge fees for the opening of new companies for the next 60 days. According to the state&#8217;s commerce registry, the number of new companies opened in July was 8 percent more than the previous year. However, as <strong>The Brazilian Report</strong> showed back in April, <a href="https://brazilian.report/business/2020/04/03/small-business-owners-next-firing-line-covid-19-crisis/">most new firms in Brazil are individual companies</a> with annual revenue of under BRL 81,000. These businesses are usually in more precarious positions, such as hairdressers, manicures, or street vendors of food and beverages.</li><li><strong>Social media.</strong> After threatening to &#8220;smash [a reporter&#8217;s] face in,&#8221; Jair Bolsonaro became the most-talked-about profile on Brazilian Twitter, with 2.4 million mentions on Sunday and Monday. Most users posed him the same question that ignited his tantrum: why did First Lady Michelle Bolsonaro receive BRL 89,000 in checks from a man accused of <a href="https://brazilian.report/power/2020/08/12/corruption-case-against-jair-bolsonaro-son-fabricio-queiroz/">laundering money within the office of the president&#8217;s eldest son</a>?</li><li><strong>Bailout.</strong> The lower house is expected to vote today on a BRL 4-billion plan to help bus companies in state capitals, metropolitan areas, and municipalities with more than 300,000 inhabitants. In many densely-populated cities, companies were forced to limit the occupancy of vehicles as a way of reducing the risks of coronavirus transmissions, further hampering the revenues of a sector that already had trouble making ends meet.

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