Less bureaucracy for foreign banks entering Brazil

. Sep 30, 2019
central bank Brazil's Central Bank

Good morning! This week, we cover the new banking rules making it easier for foreign banks to set up shop in Brazil. Plus, the future of Operation Car Wash. Brazil’s suicide epidemics. What you need to know going forward this week—and the most important facts of the past few days. (This newsletter is for platinum and gold subscribers only. Become one now!)

Less bureaucracy for foreign banks entering Brazil

By way of a presidential decree

issued on Friday, the government has authorized the Central Bank to arbitrate the opening of foreign financial institutions in Brazil, as well as approving increases of ownership interest of foreign individuals and companies in Brazilian financial institutions. Until now, any such move depended on presidential authorization.</p> <p><strong>Why it matters.</strong> The move reduces bureaucracy in Brazil&#8217;s banking sector, making decisions of whether or not a new player is allowed to enter the Brazilian market more technical and less political, given the powerful banking lobby in the capital city. The move could help reduce <a href="https://brazilian.report/money/2018/08/13/brazilian-banks-profits/">market concentration</a> in the Brazilian banking system—often singled out as the main culprit for the prohibitive interest rates imposed on Brazilian consumers, even after years of record-low benchmark rates established by the Central Bank.</p> <div class="flourish-embed" data-src="visualisation/722974"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p><strong>Ground rules.</strong> The rules according to which the Central Bank will decide whether to allow a foreign bank to enter Brazil are yet to be defined by the National Monetary Council and the Central Bank.</p> <p><strong>Timetable. </strong>The move had been announced by former Central Bank President Ilan Goldfajn in the first days of the Jair Bolsonaro administration, but it has taken ten months for it to come to fruition.</p> <p><strong>Not only major reforms.</strong> The bank&#8217;s current president, Roberto Campos Neto, has defended that Brazil should not focus its energy exclusively on the macroeconomic reforms like that of the pension system or of taxes. Measures to foster competition could be the driving force of economic activity in Brazil, in his opinion.</p> <h2>The future of Operation Car Wash</h2> <p>This week, the Supreme Court is set to conclude a trial that could push several Operation Car Wash-related cases back to trial courts. So far, a majority of 7-3 believes that defendants collaborating with law enforcement are part of the prosecution team—which means that other defendants should have more time to present their closing arguments. One of the accused set to benefit from this interpretation is former President Lula—who could now be released from jail.</p> <p><strong>Why it matters. </strong>The case represents a dilemma between anti-corruption efforts and the defense of due process, regardless of the circumstances. In Brazil, public opinion and law enforcement alike believe that overstepping the boundaries of the law can be tolerated if it is for the &#8220;greater good.&#8221;&nbsp;</p> <p><strong>Effects. </strong>Members of Operation Car Wash say the decision, when confirmed, will be a death-blow to the anti-corruption probe, as many convicted felons would benefit from a technicality. That interpretation, however, is far from a consensus among experts. What is certain, however, is that the Supreme Court will once again contribute to enhance legal insecurity in Brazil.</p> <p>This is a case filled with gray areas: justices are voting on something that is not established in the penal code, but is instead an interpretation of what due process <em>should be</em>. In order to reduce insecurity, some justices are proposing this new interpretation should only take effect for future cases, excluding those which have already gone to trial. However, at least two defendants have already had their cases sent back to trial courts based on this interpretation, making any cut-off point difficult to establish.</p> <p><strong>Momentum.</strong> This is arguably the biggest crisis faced by Operation Car Wash. To make matters worse, in an interview to <em>Veja</em> magazine, former Prosecutor General Rodrigo Janot said he had planned to assassinate one Supreme Court Justice (before turning the gun on himself) for his attempts to fustigate the operation. The statement casts an even greater doubt over the credibility of the operation—as it was apparently headed by someone with murderous tendencies.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Gol Airlines&#8217; shares (<a href="https://www.investing.com/equities/gol-pn-es-n2-historical-data">GOLL4</a>) fell almost 7 percent on Friday after Delta announced it will sell its 9-percent stake in the company to invest in rival Latam, to become a leader in five of Latin America&#8217;s six main markets. As we <a href="https://brazilian.report/money/2019/09/27/delta-latam-airlines-deal-brazil/">explained</a> on <strong>The Brazilian Report</strong>, Gol will remain under pressure in the short term, but the company is well-positioned to attract another strong partner for international flights—with American Airlines emerging as a natural favorite.</p> <p style="text-align:center"><em><strong>Natália Scalzaretto</strong></em></p> <hr class="wp-block-separator"/> <h2>Brazil&#8217;s suicide epidemics</h2> <p>According to health authorities, Brazil is the country with the highest rate of people with anxiety-related problems, at 9.3 percent. That is reflected in a skyrocketing number of cases of self-inflicted injuries (including self-harm and attempted suicide), which are up 536 percent in the past eight years. Cases between people of 15 to 29 years old make up almost half of the total number of cases. In April, the government launched a national plan to prevent suicide and self-harm—making it mandatory for schools to report such cases. This initiative, however, has yet to be regulated.</p> <div class="flourish-embed" data-src="visualisation/723032"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <p><strong>Reforms.</strong> Senate President Davi Alcolumbre has promised that the pension reform bill will be voted on by the floor on Tuesday, after being postponed last week. Mr. Alcolumbre guarantees that the delays won&#8217;t impact the initial plan of passing the proposal before October 15. The strategy in the Senate is to approve a text similar to the one which passed in the House, in order to speed up the process, and then propose changes in a separate bill. Members of the opposition—who are in the minority—are gambling on amending this separate bill to enforce less strict rules for retirement.</p> <p><strong>BNDES.</strong> Members of the parliamentary investigation committee (CPI) charged with scrutinizing the activities of the Brazilian Development Bank (BNDES) will also investigate the U.S. dealings of the Batista family, the owner of the world&#8217;s biggest animal protein-processing group. Congressmen will meet with the U.S. Department of Justice, the Securities and Exchange Commission, and members of the U.S. Congress. The Batistas are suspected of using loans at low interest rates from BNDES to finance illegal deals abroad—such as purchasing National Beef Packing Co., Smithfield Foods, Swift, and Pilgrim&#8217;s Pride.</p> <p><strong>Biofuels.</strong> The state of Goiás, Brazil&#8217;s second-largest ethanol producer, risks losing out on at least BRL 1.3 billion in future investments for biofuel production. The Goiás state legislature wants to end the 60-percent tax break enjoyed by ethanol plants—which could severely hamper their financial health. Of the state&#8217;s 35 plants, 13 are under court-supervised reorganization, and many would be unable to pay their dues should their tax breaks end. The sector makes up 7 percent of Goiás&#8217; GDP and 5 percent of its tax revenue. But for lawmakers, the state&#8217;s role of &#8220;giving incentives to the segment is long over.&#8221;</p> <p><strong>Abuse of office.</strong> On Friday, President Jair Bolsonaro vetoed several points of the Abuse of Office Act passed by Congress. The move allowed the punishment of judges who order the arrest of defendants outside of the scope of the law, or disrespect the rights of attorneys. A national union of judges filed a lawsuit at the Supreme Court against the vetoes. In Congress, lawmakers could also join forces to strike them down. The law was approved to forbid many of the tactics used by Operation Car Wash, which have been considered &#8220;excessive&#8221; by the political class. Meanwhile, law enforcement agents call the law a &#8220;gag order.&#8221;</p> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <p><strong>Petrobras.</strong> A fire broke out at a Petrobras refinery in São José dos Campos (two hours away from São Paulo) yesterday. It damaged tanks with products used for the production of asphalt and fuel oil. By yesterday evening, the fire had been controlled, but not put out. Authorities are investigating the causes. No one was harmed.</p> <p><strong>Oil. </strong>Since September 2, Brazil’s environmental agency is monitoring the appearance of oil stains along the Northeast coast. So far, 53 municipalities in eight states have registered the presence of oil on their waters or on the beach. Petrobras says the substance is crude oil—which is <em>not</em> produced in Brazil. However, authorities still don’t know where the oil might have come from. The most probable explanation is that the oil stains come from a ship that cleaned its tank in the ocean—and that currents brought it to the Brazilian coast.&nbsp;</p> <p><strong>Rio de Janeiro. </strong>Governor Wilson Witzel called his state&#8217;s murder rates &#8220;genocide,&#8221; and said he plans to take the matters to the UN. Mr. Witzel defended closing Brazil&#8217;s borders with ten countries and imposing sanctions against nations from which illegal guns enter Brazil—notably, according to him, Paraguay, Bolivia, and Colombia. However, Mr. Witzel is adamantly against federal action in the state&#8217;s security apparatus. He has been accused of using his state police to crack down on areas dominated by drug traffickers—but at the same time turning a blind eye to regions controlled by urban militias.</p> <p><strong>Federal Police. </strong>In January, Sergio Moro took over as Justice Minister promising a merciless crackdown on organized crime. However, during his first six months in office, the Federal Police carried out only 204 operations—the lowest number since 2014 (when Operation Car Wash was first launched). The Justice Ministry said that the low numbers are a consequence of a 10-percent reduction in the force&#8217;s staff—and that the number of operations launched does not necessarily reflect the number of investigations being prepared.</p> <p><strong>Social media. </strong>WhatsApp (Brazil&#8217;s most popular mobile app) banned at least 1.5 million Brazilian accounts between October 2018 and September of this year. The accounts were shut down for being used as bots to spread falsehoods and hate speech. These numbers come as Congress is poised to investigate the use of social media platforms to spread fake news for political gain, summoning representatives of big tech companies such as Facebook, YouTube, and Google. Last week, news website <em>UOL</em> showed that 80 percent of a propaganda network used against adversaries of President Jair Bolsonaro was still active on WhatsApp.

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