How the coronavirus infected Brazil’s currency

. Oct 02, 2020
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Today, we talk about how the coronavirus infected Brazil’s currency. A sizable portion of the country says their life improved under Bolsonaro. And tax collection finally goes up in Brazil.

Failed coronavirus response caused Brazilian currency crash

The U.S. Dollar is approaching its lowest level in 27 months,

with many in Wall Street swarming with <a href="https://www.reuters.com/article/usa-markets-dollar-analysis-idUSKBN25S3KN">bearish forecasts</a> for the greenback. But not even that has helped the Brazilian Real to gain any ground. As a matter of fact, the Brazilian currency is the worst-performing in the world this year, having lost around 40 percent against the USD since January.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3899599" data-url="https://flo.uri.sh/visualisation/3899599/embed" aria-label=""><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why the currency is melting down.</strong> According to Edward Moya, a market analyst at foreign exchange company Oanda, a failed coronavirus response is one of the main reasons for the continued weakening of the Brazilian currency. &#8220;The economic crisis that followed the sanitary emergency forced the Central Bank to keep interest rates at all-time lows — leading foreign investors to pull their assets from the country,&#8221; he told <strong>The Brazilian Report&#8217;s</strong> Lucas Berti.</p> <ul><li>So far, Brazil has confirmed 4.8 million coronavirus infections (third-highest in the world), and 144,680 deaths (second-highest).</li></ul> <p><strong>Also this. </strong>The government&#8217;s flirtation with breaking fiscal responsibility rules has also shaken markets. President Jair Bolsonaro seems determined to create a new welfare program, but how he plans to finance such an initiative remains uncertain. </p> <ul><li>On Monday, the administration played with the idea of not paying <em>precatórios </em>— a form of government IOUs — in order to free up money for welfare. Since then, foreign funds are dropping purchase orders of these papers in the secondary market. One market analyst summed up the feeling among investors: &#8220;if the administration is willing to propose defaulting on its IOUs, what would keep it from defaulting on government bonds or the public debt?&#8221;</li></ul> <p><strong>Remembering.</strong> Earlier this year, Economy Minister Paulo Guedes said the foreign exchange rate would only exceed the level of USD 1 : BRL 5 if the government &#8220;<a href="https://economia.uol.com.br/noticias/redacao/2020/03/12/guedes-dolar-r-5.htm">screwed up a lot</a>.&#8221; On Thursday, the rate closed at USD 1 : BRL 5.64.</p> <ul><li>According to consultancy Tendências, unless the government makes an undisputed commitment to austerity, the currency exchange rate will creep closer to BRL 6 by the end of the year.</li></ul> <hr class="wp-block-separator"/> <h2>4 in 10 Brazilians say life improved under Bolsonaro</h2> <p>A new survey by pollster PoderData shows that 37 percent of Brazilians believe their lives have improved since Jair Bolsonaro came to power. Meanwhile, 28 percent say things have gotten worse.</p> <ul><li>The poll reinforces the perception that Mr. Bolsonaro&#8217;s popularity hinges on the coronavirus emergency salary. The rate of people saying their situation improved is higher among those with no stable income (58 percent) and inhabitants of Brazil&#8217;s poorest areas (58 percent in the North; 50 percent in the Northeast).</li></ul> <p><strong>Why it matters.</strong> Elections in Brazil are usually defined by people&#8217;s immediate economic situation. If the government manages to maintain the current feeling among the population, Mr. Bolsonaro will be a head-and-shoulders favorite for re-election in 2020.</p> <p><strong>Yes, but … </strong>It will be hard to sustain welfare policies for two more years. Brazil&#8217;s debt-to-GDP ratio is at all-time high (88 percent) and the government was already forced to half the emergency aid to just BRL 300 (USD 88) a month until the end of the year. This explains the administration&#8217;s desperation to come up with a new welfare plan.</p> <hr class="wp-block-separator"/> <h2>Tax revenue up for the first time in six months</h2> <p>The Brazilian federal government <a href="https://static.poder360.com.br/2020/09/Arrecadacao-AnaliseMensal-agosto-2020.pdf">raised BRL 124.5 billion</a> in taxes over the month of August. When discounted for inflation, the amount represents a 1.33-percent increase when compared to the same period of last year — the first time that happened since the beginning of the pandemic. According to the Federal Revenue Service, three factors explain the trend:</p> <ul><li>A recovery of economic activity. Experts believe that the fall in the Brazilian GDP this year will be less steep than initially expected —&nbsp;the Institute for Applied Economic Research (Ipea) raised GDP growth expectations from -6 to -5 percent;</li><li>A cut in taxes on credit operations;</li><li>Collection on taxes that had been suspended as a stimulus policy to offset the economic effects of the coronavirus crisis on companies.</li></ul> <p><strong>Exemptions.</strong> Tax breaks amounted to BRL 10.6 billion in August, up 30 percent from August 2019. Half of that is due to payroll tax cuts — a measure also enacted due to the pandemic. The benefit is set to last until 2020, but Congress is deciding whether to extend it until December 2021.&nbsp;</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Biden.</strong> President Jair Bolsonaro launched another jab at U.S. presidential candidate <a href="https://brazilian.report/power/2020/07/14/trump-biden-election-us-presidency-mean-bolsonaro/">Joe Biden</a> — who had said during a debate that he would lead an effort to pressure Brazil into taking action against Amazon deforestation. After talking about Brazil&#8217;s &#8220;sovereignty,&#8221; Mr. Bolsonaro talked about protecting the country from &#8220;foreign interest&#8221; through &#8220;<a href="https://brazilian.report/podcast/2019/08/14/brazil-capable-protect-amazon/">prepared Armed Forces</a>.&#8221;</li><li><strong>Supreme Court.</strong> During a live Facebook broadcast, President Jair Bolsonaro confirmed that Federal Judge Kássio Nunes is his pick to fill the <a href="https://brazilian.report/newsletters/brazil-weekly/2020/09/28/bolsonaro-to-make-first-supreme-court-pick-in-brazil/">upcoming Supreme Court vacancy</a>. But the judge&#8217;s political connections infuriated the president&#8217;s online support base and many allies have urged him to change his nomination — influential televangelist Silas Malafaia called the pick &#8220;shamefully absurd.&#8221; Many in the president&#8217;s entourage say a change of heart could happen if the pressure continues.</li><li><strong>Oil and gas.</strong> The Supreme Court granted Petrobras the right to slice up its assets among subsidiaries in order to speed up privatizations. Congress had complained that the move was a way to circumvent the Legislative branch&#8217;s powers to block privatizations of parent companies owned by the government. As part of its divestments program, Petrobras wants to sell eight of its 13 oil refineries by 2021, hoping to raise around USD 8 billion in the process.</li><li><strong>Jobs.</strong> The government plans on extending the possibility of companies suspending <a href="https://brazilian.report/business/2020/09/24/brazils-unemployment-rises-as-isolation-goes-down/">employment contracts</a> or reducing staffers&#8217; hours and pay for another two months. With the decision, the program will have a total duration of eight months. The government compensates workers with part of the income they lose via suspensions or cuts — but the Economy Ministry says the aid should not be prolonged into 2021.</li><li><strong>Elections.</strong> The Supreme Court is expected to end its trial on whether or not political parties will have to adopt a quota system to fund the campaigns of black candidates, in accordance with their proportion. For instance, if 20 percent of a given party&#8217;s candidates are black, they must receive 20 percent of campaign financing. A majority of justices agree that the quotas should be enforced immediately, in next month&#8217;s municipal elections.

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