Why incentives to the oil industry harm Brazil’s economy

. Jun 09, 2018
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Hello, and welcome to our Weekly Report. In this issue: Brazil’s stock market hurt by a strong U.S. Dollar, Why incentives to the oil industry harm Brazil’s economy. And the most important facts of the week.

The week in review

  • Economic Indicators. The effects of the 10-day truckers’ strike have begun to appear on Brazil’s economic indicators. The inflation rate
    for the month of May was 0.40% &#8211; above the market&#8217;s projection of 0.29%. Meanwhile, electricity consumption was down by 8.8%, and car sales dropped by 7.1%.</li> <li><strong>The rise of the USD.</strong> After the USD rose to almost BRL 4 on Thursday, Brazil&#8217;s Central Bank decided to intervene and spend USD 20bn in swap contracts. The effect was immediately felt, as the USD crashed 5% on Friday, closing the day at BRL 3.709. Markets predict that the bank will soon raise the benchmark interest rate from 6.5% to 7%, despite its promises not to do so. In the long-term, the BRL is expected to continue to lose value due to electoral uncertainties.</li> <li><strong>Oil &amp; gas. </strong>On Ivan Monteiro&#8217;s first week as <a href="https://www.investing.com/equities/petrobras-pn-historical-data">Petrobras</a> CEO, Brazil auctioned offshore drilling rights in four deepwater reserves (one of which received no bids). The government raised BRL 3.15bn, showing that the appetite for Brazilian oil reserves wasn&#8217;t affected by threats of government interference over oil prices.</li> <li><strong>Freights. </strong>Trying to pander to truckers who staged a crippling 10-day strike late in May, the government published a reference table of minimum freight prices &#8211; which infuriated transportation companies that hire truckers. The government then cut prices down by 20% but backpedaled after truckers threatened a new strike on Monday.</li> <li><strong>Corruption. </strong>Facing multiple corruption investigations, President Michel Temer was handed a break from the Supreme Court, which denied the Federal Police&#8217;s request to access his private telephone records. Mr. Temer is accused of having negotiated a BRL 10m bribe with the Odebrecht construction group in 2014. The Feds were given permission, however, to scrutinize the phone logs of two members of Mr. Temer&#8217;s cabinet.</li> <li><strong>Presidential race. </strong>A recent presidential poll showed far-right candidate Jair Bolsonaro to be comfortably in the lead, polling between 21% and 25%. According to the poll, which was conducted over the phone (which could limit its reach to poorer voters), Ciro Gomes is emerging as the &#8220;anti-Bolsonaro.&#8221;</li> </ul> <hr /> <h2>Brazil&#8217;s stock market hurt by a strong U.S. Dollar</h2> <p>Ibovespa’s performance over the past three months make this very clear: While the index fell by 10.5% between March 6 and June 6, its version denominated in U.S. Dollars crashed 26.6%. That is, when taking currency variation into consideration, Brazilian main stocks are worth on average only three-quarters of the value they had three months ago.</p> <p><img class="aligncenter size-full wp-image-16772" src="https://brazilian.report/wp-content/uploads/2018/06/57f5d028-a835-4105-a9bd-244e059e969d.png" alt="" width="1198" height="858" srcset="https://brazilian.report/wp-content/uploads/2018/06/57f5d028-a835-4105-a9bd-244e059e969d.png 1198w, https://brazilian.report/wp-content/uploads/2018/06/57f5d028-a835-4105-a9bd-244e059e969d-300x215.png 300w, https://brazilian.report/wp-content/uploads/2018/06/57f5d028-a835-4105-a9bd-244e059e969d-768x550.png 768w, https://brazilian.report/wp-content/uploads/2018/06/57f5d028-a835-4105-a9bd-244e059e969d-1024x733.png 1024w, https://brazilian.report/wp-content/uploads/2018/06/57f5d028-a835-4105-a9bd-244e059e969d-610x437.png 610w" sizes="(max-width: 1198px) 100vw, 1198px" /></p> <hr /> <h2>Why incentives to the oil industry harm Brazil&#8217;s economy</h2> <p>Just before the auction of drilling rights on deepwater oil reserves, the Brazilian government was in a celebratory mood. Sixteen companies, including the industry&#8217;s top players, had applied to take part in the auction &#8211; a record number. This interest is linked to a recent piece of legislation that changed taxation for oil companies.</p> <p>&#8220;Brazil has built a new ecosystem of attractiveness for foreign investors,&#8221; said Congressman Júlio Lopes, who sponsored the new legislation. The bill presented by Lopes &#8211; and approved by his peers &#8211; establishes that until 2040, the money invested in oil production in Brazil will generate tax exemptions &#8211; cutting taxes on profits and corporate income taxes.</p> <p>Paulo César Ribeiro Lima, a legislative consultor at Brazil&#8217;s House, however, warns that the bill will generate losses in revenue to the federal government &#8211; but especially to state and municipal administrations &#8211; of roughly BRL 1 trillion. He conducted a study to measure the impacts of the new law. The Northeastern region, the poorest in Brazil, will be the worst-affected by the new tax regimen.</p> <p><img class="aligncenter size-full wp-image-16773" src="https://brazilian.report/wp-content/uploads/2018/06/33b15814-80ad-47d0-ae25-9428a78b9e58.png" alt="" width="1096" height="464" srcset="https://brazilian.report/wp-content/uploads/2018/06/33b15814-80ad-47d0-ae25-9428a78b9e58.png 1096w, https://brazilian.report/wp-content/uploads/2018/06/33b15814-80ad-47d0-ae25-9428a78b9e58-300x127.png 300w, https://brazilian.report/wp-content/uploads/2018/06/33b15814-80ad-47d0-ae25-9428a78b9e58-768x325.png 768w, https://brazilian.report/wp-content/uploads/2018/06/33b15814-80ad-47d0-ae25-9428a78b9e58-1024x434.png 1024w, https://brazilian.report/wp-content/uploads/2018/06/33b15814-80ad-47d0-ae25-9428a78b9e58-610x258.png 610w" sizes="(max-width: 1096px) 100vw, 1096px" /></p> <p><img class="alignnone size-large wp-image-14492" src="http://brazilian.report/wp-content/uploads/2019/04/33b15814-80ad-47d0-ae25-9428a78b9e58-1024x434.png" alt="" width="1024" height="434" />For some small municipalities, tax revenue transferred by the federal administration is their main source of funds. When that source dries out, these administrations will have even fewer resources to implement public policies.</p> <h4>The argument in favor of the bill</h4> <p>While the new taxation law on oil companies will undeniably generate a loss of revenue for state and municipal administrations, some experts defend its necessity. The argument behind this line of thinking is that Brazil must accelerate the exploitation of its deepwater oil reserves &#8211; and cash in while <a href="https://brazilian.report/money/2019/10/21/infrastructure-fuel-prices-behaved-21st-century-brazil/">oil remains the most coveted energy source</a>.</p> <p>Petrobras doesn&#8217;t have the structure to do the job alone. And if the country waits too much time to drill, it could miss an opportunity, as new fuels could emerge in the near future.

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