Senate set to take center stage in the remainder of 2019

and . Aug 03, 2019
calamity Senate set to take center stage in remainder of 2019

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Good morning! In this week’s issue: The Senate is set to take center stage in Brazilian politics. Deforestation data becomes new battleground for President Bolsonaro. How markets performed this week. And the main facts of the week.

The week in review

Economy. Brazil’s Central Bank started what could be

the first of multiple cuts to the Selic benchmark interest rate, taking it down to 6%. The move aims at making credit cheaper, thus stimulating investments and consumption. Recent unemployment data, which shows a positive downward trend in the number of Brazilians out of a job, could also help break Brazil&#8217;s recent vicious cycle of stagnation. However, long-term effects on the economy will only come after reforms of the pension and tax systems pass in Congress.</p> <p><strong>Trade.</strong> Brazil and the U.S. have officially begun negotiating a bilateral trade agreement. The Brazilian government wants to start discussing non-tariff areas, which would be easier to settle as Brazil cannot sign deals on tariffs without having other Mercosur nations on board. Brazil and the U.S. are competitors in several international markets—notably agriculture—which could make reaching consensus difficult.</p> <p><strong>Energy.</strong> Brazil and Paraguay signed a new deal in May on the rights to purchase energy produced by the bi-national Itaipu dam, though the news of the agreement only broke recently. Paraguayans were infuriated by the terms of the deal, as the country agreed to pay an extra USD 200m each year for electricity. To avoid an impeachment trial, Paraguayan President Mario Abdo Benítez pulled out from the deal (with which Brasília agreed). Itaipu accounts for 15% of the energy consumed in Brazil—but Economy Minister Paulo Guedes wants to reduce the country&#8217;s dependence on it.</p> <p><strong>Petrobras. </strong>Brazil&#8217;s state-owned company Petrobras has reported BRL 18.8bn in profits over Q2 2019—the best quarterly result in its history. The main drive was the sale of a pipeline network to a French-Canadian consortium for BRL 33bn. CEO Roberto Castello Branco informed that the company concluded USD 15bn of divestments in June, and said that &#8220;much more is to come.&#8221;</p> <p><strong>Riots.</strong> Just two months after a deadly prison riot in Brazil&#8217;s North, 57 inmates were killed in a penitentiary in Altamira, in the state of Pará. Sixteen victims were beheaded and 36 were asphyxiated following a fire in a cell block. Over the past two and a half years, a series of riots have left 227 inmates dead—continually exposing the inhumane conditions in Brazil&#8217;s prison system, which is wracked by overpopulation and lack of basic infrastructure.</p> <p><strong>8 reasons why. </strong>In its studies to propose the privatization of Correios, Brazil&#8217;s state-owned postal service, the Jair Bolsonaro administration listed eight reasons for pulling the trigger. These include: a history of corruption, constant strikes and poor-quality services, the fact that it has not paid dividends to the treasury since 2014 despite benefiting from tax breaks of BRL 1.6bn—and the fact that, unless the company is sold now, it will become a rotten asset.&nbsp;</p> <h2>Amazon deforestation numbers</h2> <p>The destruction of the Amazon rainforest has made international headlines this week, with both <em><a href="">The New York Times</a></em> and <em><a href="">The Economist</a></em> warning about the long-term effects of President Jair Bolsonaro&#8217;s lack of commitment to environmental policies. He contested official data on deforestation, which showed an 88% increase in June compared to one year ago—and fired the head of the agency responsible for the numbers. Environment Minister Ricardo Salles said the data is not wrong, but added that the true numbers are consolidated once a year. This is true. However, monthly alerts—while less accurate than the yearly data—should be used as warning for worrisome trends. Mr. Salles also promised to hire a new system, that would allow daily deforestation monitoring.</p> <div class="flourish-embed" data-src="visualisation/561719"></div><script src=""></script> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Boosted by the sale of a major pipeline network, Petrobras reported record profits in Q2 2019: BRL 18.8bn. More than the actual operational results—which were below consensus—investors and analysts got excited about the prospects. The state-owned company may not be deleveraged yet, but CEO Roberto Castello Branco&#8217;s indications that Petrobras will continue selling non-core assets and focusing on the more profitable oil exploration business, ramping up extraction from the pre-salt area, pointed in the right direction. &#8220;We await big changes in Petrobras&#8217; capital structure during the divestment process, especially with the sale of some of its refineries,&#8221; wrote Mirae Asset&#8217;s Pedro Galdi in a note to clients.</p> <p style="text-align:center"><strong><em>Natália Scalzaretto, TBR markets reporters</em></strong></p> <hr class="wp-block-separator"/> <h2>Senate set to take center stage in the remainder of 2019</h2> <p>The first half of 2019 in Brazilian politics was dominated by the House of Representatives. Power struggles between House Speaker Rodrigo Maia and President Jair Bolsonaro regularly made headlines, while the lower house took center stage in negotiations to push through a much-awaited pension reform.</p> <p>However, with lawmakers back at work after their mid-year recess, attentions are set to switch to the upper house of Brazil&#8217;s Congress, the Senate.</p> <p>Despite a fiery and controversial election for president back in January, the Senate spent the first seven months of 2019 out of the spotlight, but is now set to grab headlines with a full agenda of major issues between now and December. Here are some of the big topics to look out for in the Senate:</p> <ul><li><strong>Pension reform. </strong>Once the lower house completes its approval of the <a href="">pension reform</a>, the proposal will be sent across the hall to the Senate. It is expected that support for the bill will be even stronger in the upper house, but pressure from other institutions could lead to delays or controversial changes to the reform.</li><li><strong>Tax reform.</strong> Next in line for Brazil&#8217;s major macroeconomic reforms concerns an overhaul of the country&#8217;s convoluted tax system. Proposals from the legislature involve combining a number of federal, state, and municipal taxes into a single &#8220;Goods and Services Tax.&#8221; The Senate, with heavy links to state governments, will be key in this process.</li><li><strong>Eduardo Bolsonaro.</strong> President Bolsonaro has indicated he will nominate his third son Eduardo to the post of <a href="">Brazilian ambassador to Washington</a>. Any such appointment will have to be confirmed by the Senate, posing a potential point of conflict between the upper house and the president.</li><li><strong>Prosecutor General.</strong> Likewise, the Senate will have to confirm another, more important appointment later this year. The term of Prosecutor General Raquel Dodge comes to an end in mid-September, and it will be up to Jair Bolsonaro to nominate her successor. If the president chooses someone too unorthodox, the Senate may intervene.</li></ul> <p>The important point to bear in mind is that all four of these key issues are expected to occur almost simultaneously, increasing the potential for fallouts and delays, but also for plenty of horse-trading. For instance, senators could hold out for changes in the pension or tax reforms, conditioned to their approval of Eduardo Bolsonaro as ambassador to the U.S. It is set to be a torrid remainder of 2019 for the Senate.

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