GDP results, 2020 budget: Where the Brazilian economy is heading

. Aug 31, 2019
GDP results, 2020 budget: Where the Brazilian economy is heading Jair Bolsonaro. Photo: Getty

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Hello! You are reading The Brazilian Report‘s Weekly Report. In this issue: The Brazilian 2020 federal budget—and its possible impacts on the economy. The million-dollar deforestation industry. Why has the Brazilian economy been so slow to recover. (This newsletter is for platinum and gold subscribers only. Become one now!)

The week in review

U.S. v. China. If Brazil allows Chinese companies to

<a href="">operate 5G frequencies</a>, the U.S. could re-evaluate its data-sharing agreements with Brazil. The warning was given by Robert Strayer, a deputy assistant secretary for Cyber and Information Policy at the U.S. State Department. The Donald Trump administration has raised concerns that Chinese hardware could have backdoors which would allow Beijing to monitor and control networks across the globe.</p> <p><strong>Amazon.</strong> After snubbing EUR 20m offered by G7 countries to help finance efforts against fires in the Amazon rainforest, President Jair Bolsonaro said he could accept the money—as long as the management of these funds was handled exclusively by Brazil. The Foreign Affairs Ministry then released a statement accusing global powers of &#8220;not even remotely&#8221; meeting a commitment made with the Paris Accords on Climate Change to raise USD 100bn for environmental compensation to emerging nations by 2020. So far, only <a href="">USD 5.2bn has been committed</a> to the &#8220;Green Climate Fund.&#8221;</p> <p><strong>Car Wash fund.</strong> An association of state security chiefs filed a petition to the Supreme Court asking that the Operation Car Wash fund—a BRL 2.5bn pile of money recovered by the anti-corruption probe from corrupt politicians and companies—be used to finance the construction of new prisons, helping to curb overpopulation. Meanwhile, some state authorities ask the money to be used to fight deforestation.</p> <p><strong>Pension reform.</strong> Senator Tasso Jereissati presented his report of the pension reform bill, making a few changes to the original text approved by the lower house. In order to speed up the legislative process, Mr. Jereissati will include these changes in a new bill, to run alongside the existing reform proposal. That&#8217;s because if the Senate were to add anything to the original bill, it would have to return to the House for a final vote before sanctioning.&nbsp;</p> <p><strong>Antitrust.</strong> Jair Bolsonaro appointed three new board members to Brazil&#8217;s antitrust authority Cade, which had been paralyzed since June 14 due to a lack of quorum. The new members were chosen in a negotiation with the Senate—as Mr. Bolsonaro needs the upper house&#8217;s support to confirm the appointment of his son Eduardo as ambassador to the U.S. However, the choices surprised markets, as none of them has any experience in antitrust matters.</p> <p><strong>Telecom.</strong> Shares of Oi Telecom (OIBR3) rose 21% on Friday after Senator Daniella Ribeiro presented, after six months of analysis, her report on the bill establishing a new framework for telecoms in Brazil. Ms. Ribeiro rejected most amendment proposals, defending rules that are favorable to operators—and avoiding further delays to the approval of the new legislation.</p> <p><strong>VC investment. </strong>Venture capital fund Kaszek Ventures raised USD 600 million to <a href="">invest in Latin American startups</a>. The move caps a recent rise in venture capital financing in Latin America. Almost USD 2 billion was invested in the region last year alone—from just USD 143 million back in 2011. The number of deals using venture capital also exploded, from 69 in 2011 to 463 last year.&nbsp;</p> <hr class="wp-block-separator"/> <h2>The million-dollar deforestation industry</h2> <p>Amazon deforestation is linked to myriad crimes, including corruption, slave labor, homicide, land-grabbing, and illegal logging. A recent study by Greenpeace shows that 90% of fires are meant to clear land for cattle ranching. According to federal prosecutors, this is a black market dominated by increasingly more sophisticated gangs. These groups can earn an estimated BRL 1m per 1,000 hectares that they torch (each hectare is the size of a football field). The graph below shows that in the state of Amazonas, there have never been so many fires registered by satellite imagery.</p> <div class="flourish-embed" data-src="visualisation/636908"></div><script src=""></script> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>News that retail giant Lojas Americanas could manage convenience stores owned by BR Distribuidora, Brazil’s largest fuel distributor, cheered investors on Friday. The potential is huge, including over 1,200 shops and 7,700 gas stations across the country. In its Q2 earnings report, BR signaled it was looking for ways to “capture value in the entire convenience chain.” For Guide Investimentos, the partnership is a win-win situation: “For BR, it adds know-how in terms of sales channels management, logistics, and storage, besides the high brand awareness. For Lojas Americanas, it is positive to expand to a new distribution channel and business model, enjoying the capillarity of BR’s stations.”</p> <p style="text-align:center"><em><strong>Natália Scalzaretto, TBR markets reporter</strong></em></p> <hr class="wp-block-separator"/> <h2>Understanding Brazil&#8217;s slow economic recovery</h2> <p>The Brazilian economy expanded 0.4% over Q2 2019, avoiding a technical recession. However, the results confirmed predictions that the economic recovery will remain sluggish. The GDP figures are a reflection of the fall of investments, the government&#8217;s poor fiscal situation, and a lack of trust in the Brazilian economy—a scenario that has persisted since Brazil sank into recession five years ago. We break the results down:</p> <h4>Fiscal issues</h4> <p>The slow economic growth this year can be explained by two factors that are linked: low investment rates and high public deficits (the government is Brazil&#8217;s main investor). A study by Fundação Getulio Vargas researchers shows that investment levels in Brazil are at their lowest in 50 years—from 20% of GDP between 2010 and 2014, to 15% since 2014. That explains why 90% of the world&#8217;s countries have grown more than Brazil since 2011.</p> <div class="flourish-embed" data-src="visualisation/636746"></div><script src=""></script> <div class="flourish-embed" data-src="visualisation/636754"></div><script src=""></script> <h4>Unemployment down, consumption up</h4> <p>Family consumption is the main driver of Brazil&#8217;s GDP. Over the past four quarters, this indicator has gone up by 1.5%, thanks to the slow downward trend of unemployment rates—from 12.7 to 12% since the beginning of the year. This recovery is fragile, though, as most job positions are informal, low-paying, and less productive.</p> <h4>Global scene</h4> <p>Despite being an insular economy, Brazil was affected by a global scenario of economic slowdown. Exports were down 1.6% in Q2 2019. Moreover, Brazil&#8217;s top 3 trading partners have dealt with issues of their own. China and the U.S. are in a trade war, while Argentina is yet again declaring a moratorium on its debts—and witnessing the meltdown of its reserves.</p> <h4>Trust levels</h4> <p>Consumers&#8217; and business owners&#8217; trust levels in the economy went slightly up over the past months, but remain lower than last year. These indicators are important, as they signal companies&#8217; willingness to invest.</p> <hr class="wp-block-separator"/> <h2>A look into the 2020 budget</h2> <p>The government presented on Friday its 2020 budget proposal, based on the Economy Ministry&#8217;s projection of a 2.17% GDP growth for next year (down from 2.74% in April). For many analysts, the government is in serious risk of a partial shutdown next year, with allocations for costing and investments at historical lows. Meanwhile, the so-called mandatory expenses (salaries, pensions, and benefits) have taken up 94% of the budget.</p> <div class="flourish-embed" data-src="visualisation/636801"></div><script src=""></script> <p>In 2020, the government should have BRL 89bn for discretionary expenses—which encompasses things such as electricity and water bills in public offices, grants for research, passport issuance procedures, among others. It would take, however, at least BRL 100bn for the administration to operate without hiccups.</p> <p><strong>Deficit.</strong> The government forecasts a BRL 124bn primary deficit. During the presidential campaign, Economy Minister Paulo Guedes had promised to end the public deficit within a year. That won&#8217;t happen during Jair Bolsonaro&#8217;s term—according to the government&#8217;s own projections.</p> <p><strong>Minimum wage. </strong>The new minimum wage could be the most unpopular measure by the Jair Bolsonaro administration in the short term. In nominal terms, it will raise from BRL 998 to 1,039—but that is good enough only to match inflation. The minimum wage is highly important for the government&#8217;s fiscal situation, as all pensions and benefits are based on it. According to the Economy Ministry, each BRL 1 bump means BRL 300m in extra spending.</p> <h4>What the government expects for the Brazilian economy</h4> <ul><li>Benchmark interest rate: 5.62%</li><li>USD/BRL: 3.79</li><li>Inflation rate: 3.91%</li><li>2021 deficit: BRL 68bn</li><li>2022 deficit: BRL&nbsp; 31.6bn</li></ul> <p>

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