Crisis in South America a problem for Brazilian exporters

. Nov 25, 2019
Crisis in South America a problem for Brazilian exporters Port of Ilhéus. Photo: Joa Souza/Shutterstock

Good morning! This week, we talk about Brazilian trade with South America. And the lack of consistent and efficient antitrust regulations. (This newsletter is for platinum and gold subscribers only. Become one now!)

Brazil’s exports to Mercosur at a low

Between January and October, Brazilian exports to Mercosur

countries (Argentina, Uruguay, and Paraguay) have dropped 33 percent from last year. A similar trend has been seen with other trading partners in South America—exports to the region as a whole are down 23 percent, with growth only among shippings to Peru and Colombia. And the outlook is rather bleak, as political turmoil has created uncertainties in Chile, Bolivia, and Colombia.</p> <div class="flourish-embed" data-src="visualisation/988037"></div><script src=""></script> <p><strong>Why it matters.</strong> Mercosur countries are the destination of USD 21 billion in Brazilian exports. These countries absorb 20 percent of Brazil&#8217;s manufactured goods, and 26 percent of the country&#8217;s products of high technological complexity—more than China, the U.S., or the European Union.</p> <p><strong>Not a surprise.</strong> For the first time in 16 years, Brazil will record a trade deficit with Argentina. Brazilian exporters saw this shift coming after the neighboring country&#8217;s massive financial crisis. With the Argentine Peso plummeting this year, consumers are buying much less—driving imports from Brazil down.&nbsp;</p> <p><strong>Bad blood. </strong>Brazilian industrialists fear that the poor relationship between President Jair Bolsonaro and Argentina&#8217;s President-elect Alberto Fernández (who takes office on December 10) might further complicate trade between the two countries. Since Mr. Fernández won the election in Argentina, late in October, the two sides reportedly haven&#8217;t spoken to each other—a first in Brazil-Argentina relations.</p> <p><strong>Braz-exit? </strong>Speaking to newspaper <em>Valor</em>, Brazil&#8217;s Foreign Minister Ernesto Araújo said that the Brazilian government is considering the possibility of leaving Mercosur if Mr. Fernández were to boycott the <a href="">Mercosur-EU trade agreement</a> signed earlier this year. It is not the first time the Bolsonaro administration has threatened to exit the trade bloc.</p> <hr class="wp-block-separator"/> <h2>Where competition is a problem</h2> <p>A <a href="">study</a> by the Organization for Economic Cooperation and Development (OECD) places Brazil as the Latin American country with the most number of cases of &#8220;hardcore cartels,&#8221; and the seventh-most in the world. The study takes into consideration cases of cartels with the participation of international groups that were punished by a country&#8217;s antitrust authority.</p> <p>The OECD questions <a href="">Brazil&#8217;s antitrust watchdog Cade</a> for applying very low fines in such cases. In the past, the organization has already recommended that Brazil changes its competition laws and restructures Cade.</p> <p><strong>Definition.</strong> &#8220;Hardcore cartels refers to anti-competitive agreements, concerted practices or arrangements by actual or potential competitors to agree on prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by, for example, allocating customers, suppliers, territories, or lines of commerce,&#8221; says the OECD.</p> <p><strong>Why it matters.</strong> A country&#8217;s crackdown on anti-competitive practices is an indicator of a healthy market and increases a country&#8217;s trustworthiness with investors.&nbsp;</p> <p><strong>Comparison.</strong> The U.S. leads the ranking with 24 cases of hardcore cartels—against Brazil&#8217;s 11 cases. But the countries differ in how long it takes for them to move against these practices, and the severity of punishment. Such schemes have lasted around eight and a half years in the U.S.—and got average fines of USD 140.7 million. In Brazil, they last over a decade, and the punishment is rather mild: USD 17 million, on average.&nbsp;</p> <p><strong>Sanctions.</strong> In Brazil, competition laws establish that fines should range from 0.1 to 20 percent of a company&#8217;s gross revenue in the year before the start of an investigation—meaning that long-lasting schemes become highly profitable. The OECD also claims Cade has no consistent methodology to calculate its fines—and often celebrates leniency agreements handing out hefty discounts to already low amounts.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Stocks of <a href="">New York-listed fintech PagSeguro</a> crashed 10.2 percent last week, after reporting lackluster Q3 earnings. Lower total payment volume (TPV) and a bump in investments on digital bank PagBank led to meager margins. On the flip side, competitor Stone Pagamentos—also listed in New York—closed the week up 9.2 percent, after reporting higher TPV and growing client numbers. For BTG Pactual bank, Stone is the top pick in the payments sector. Meanwhile, the bank slashed its target price for PagSeguro to USD 36 from 43, with a neutral recommendation.</p> <p><strong><em>— Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>How Black Friday has grown on Brazilians</h2> <p>Launched in Brazil in 2010, it took Brazilian retailers a few years before knowing how to play the Black Friday game. At first, they would raise prices leading up to the date, only to offer what consumers jokingly called &#8220;<a href="">everything for half of double-price</a>.&#8221; A few websites even developed tools to help customers monitor price changes in the recent past to know they are not being scammed. But now, as most retailers have learned not to cheat on their buyers, Black Friday has properly caught on. According to market research firm Ebit/Nielsen, 85 percent of e-commerce clients wait for Black Friday discounts before making a purchase.</p> <div class="flourish-embed" data-src="visualisation/987543"></div><script src=""></script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <p><strong>Parties.</strong> On Tuesday, the Superior Electoral Court will analyze whether to accept e-signatures on petitions to create new political parties. The process of starting a new party involves collecting the signatures of nearly 500,000 supporters across at least nine states—and the Alliance for Brazil party, launched last week by President Jair Bolsonaro, wants to use e-signatures. Electoral prosecutors are against the move, saying e-signatures don&#8217;t operate under the same database used by the Electoral Justice for dealing with voters&#8217; biometric data.</p> <p><strong>Uruguay.</strong> After an unprecedently balanced runoff presidential election, Uruguay has declared a technical tie between center-left candidate Daniel Martnez and his challenger, the center-right Luis Lacalle Pou. With 99.31 percent of ballots counted, Mr. Pou leads by 30,000 votes—with 35,000 still to be counted. If the lead is sustained, Uruguay will see a change of ruling coalition for the first time in 15 years. Mr. Pou&#8217;s campaign grew stronger thanks to rising violence levels and signs of economic strain. Unlike neighboring countries, however, Uruguay&#8217;s election has happened without hiccups or extreme polarization.</p> <p><strong>Supreme Court.</strong> On Wednesday, the Supreme Court will resume its trial about the limits on tax authorities to share taxpayer information with law enforcement. Only two of 11 justices have voted so far, with one arguing that tax authorities should be allowed to flag possibly illicit activity to prosecutors even before a court decision. Chief Justice Dias Toffoli, however, wants to impose boundaries. The outcome will directly affect Senator Flávio Bolsonaro, the president&#8217;s eldest son, suspected of running money-laundering schemes when serving as a Rio de Janeiro state lawmaker.</p> <p><strong>Congress.</strong> Tomorrow, the House&#8217;s Ethics Committee will decide whether or not to open an investigation against Congressman Eduardo Bolsonaro, who publicly argued that his father should employ the same strategies as the military dictatorship &#8220;if the left radicalizes.&#8221; He evoked the infamous <a href="">Institutional Act No. 5</a> (AI-5), enacted by the military regime in 1968 to give the president powers to dissolve Congress, impeach politicians, and suspend constitutional rights. The case could lead to his impeachment and will be a test to President Bolsonaro&#8217;s strength in Congress.</p> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <p><strong>Oil spill. </strong>Oil stains were <a href="">found</a> along the coast of Rio de Janeiro. Navy experts have collected samples to examine whether it comes from the same spill that has contaminated shores across all states in the Northeast.</p> <p><strong>Tax reform.</strong> In an interview with <em>Folha de S.Paulo</em>, <a href="">economist Vanessa Rahal Canado</a>, a special advisor to Economy Minister Paulo Guedes, said the government wants to tax dividends and stop allowing taxpayers to deduct health and education expenses from their income taxes. If these bills are indeed put forward, they are guaranteed to face enormous opposition—the former from business owners; the latter from middle-class voters. Brazil will hold municipal elections in 2020—and Congress is historically less willing to pass unpopular reforms when there are votes on the line.</p> <p><strong>Investments. </strong>Credit Suisse, UBS, JPMorgan, Goldman Sachs, BTG Pactual, and ratings agency Moody&#8217;s all released reports last week recommending investors to go after Brazilian assets. The rationale is that, with emerging currencies losing power against the U.S. Dollar, stocks in such markets are too cheap to be ignored. It helps that Brazil has not had to deal with violent street protests, unlike some of its neighbors.</p> <p><strong>Cannabis.</strong> Data from Euromonitor shows that the turnover of companies in the legal cannabis sector should go from USD 12 billion in 2018 to USD 166 billion in 2024 (or 20 percent of the alcohol sector&#8217;s revenue). With this market in mind, investment company Vitreo launched a new fund solely to invest in the sector, called Canabidiol Light, targeting small investors. The firm already had another cannabis-driven fund, but only for investors with at least BRL 1 million.</p> <p><strong>Left.</strong> With the support of former President Lula, member of Congress Gleisi Hoffman was re-elected as chair of the Workers&#8217; Party for another four years. Ms. Hoffman is a highly polarizing figure in the party and has taken many controversial—and politically inept—moves as party leader, such as attending the inauguration of Venezuela&#8217;s undemocratic president, Nicolas Maduro. After years of polarizing rhetoric, she now supports extending an olive branch to the center.</p> <p><strong>Bolivia.</strong> On Sunday, Bolivia&#8217;s interim president Jeanine Áñez passed a law to call for new presidential elections. The bill prevents Evo Morales—who was recently <a href="">ousted by a coup</a>—from running for a new term. This is the worst political crisis Bolivia has faced in two decades, following a period of prosperity under Mr. Morales. The indigenous leader-turned-president, however, used his popularity to amend the Constitution multiple times and perpetuate himself in power. Last week, his administration tampered with ballots to secure him a fourth term, say observers, which led to threats of a military coup—and his resignation.

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