Back to work for Brazil’s Congress

. Feb 03, 2020
congress Photo: Vanessa Volk/Shutterstock

This week, we cover Congress’ return from vacation. The external shocks that could plunge Brazilian markets this week. How Brazilian markets performed. Also, what you should be looking out for this week—and the most important facts of the previous seven days.

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Congress is back. What to expect in 2020

February marks the start of the legislative calendar in Brazil—and Congress will have plenty on its plate this year.

After passing the pension reform and the anti-crime bill in 2019, the main issues to be discussed are two other major reforms: one simplifying Brazil&#8217;s tax system, and another overhauling its civil service structure.</p> <p><strong>Why it matters.</strong> Both reforms are pivotal for Brazil to regain growth and are the main priorities of Economy Minister Paulo Guedes.</p> <p><strong>Tax reform.</strong> A committee in Congress has already started to work on the matter, analyzing a proposal to unify several taxes on goods and services and simplify Brazil&#8217;s labyrinthine tax framework. House Speaker Rodrigo Maia also defended a reorganization of income taxes, without changing the tax burden, however. The Economy Ministry is expected to present its suggestions on the matter soon.</p> <p><strong>Administrative reform.</strong> The government wants to end the stability enjoyed by civil servants—often pointed out as a reason for their low productivity. It also wants to be able to reduce salaries, which has put civil servants&#8217; lobbying organizations on alert. President Bolsonaro says this proposal &#8220;still needs some polishing,&#8221; which could delay its passage through Congress.</p> <p><strong>Roadblocks.</strong> The conditions in Congress for reforms are less than ideal:</p> <ul><li>Both matters are extremely complex, and Brazil will hold municipal elections in October 2020. That means Congress will only work as normal in the first semester. After that, congressmen will engage in local races, making sure their allies will win mayoral and city council positions—which will allow them to build a support network for their own re-election pushes in 2022.</li><li>Moreover, passing such deep reform takes a lot of political support—and President Bolsonaro has had a rocky relationship with Congress. Not to mention the fact that he <a href="https://brazilian.report/newsletters/brazil-daily/2019/10/09/jair-bolsonaro-psl-crumbling-ruling-party/">imploded</a>—before abandoning—the Social Liberal Party (PSL), which has the second-largest bench in the House.</li><li>Congressman Rodrigo Maia finishes his term as House speaker on January 31, 2021. Negotiations around the candidates to replace him are also expected to demand much of the parties&#8217; energy in the second half of the year.</li></ul> <p><strong>Also on the docket. </strong>Back in November, Mr. Guedes had presented a bold plan to <a href="https://brazilian.report/power/2019/11/06/paulo-guedes-wants-completely-reform-brazilian-state/">essentially reshape the state</a>. That agenda, however, will be put on the back-burner, especially as it also proposes a reduction in the number of municipalities—a non-starter for an election year.</p> <hr class="wp-block-separator"/> <h2>Markets: a week of turbulence ahead</h2> <p>The Brazilian Foreign Trade Association believes the coronavirus outbreak (declared a <a href="https://www.who.int/emergencies/diseases/novel-coronavirus-2019">global emergency</a> by the World Health Organization) should plunge Brazil&#8217;s exports by <em>at least</em> 3.5 percent this year. The outbreak will slow down China&#8217;s economy, as Beijing is ordering the suspension of several economic activities in an attempt to contain the spread of the disease.</p> <p><strong>Exposed.</strong> Brazil&#8217;s over-dependence on commodity exports makes the country particularly vulnerable to oscillations in the global economy. So far, the most visible impact of external shocks is the deterioration of the Brazilian currency.</p> <p><strong>Why it matters.</strong> Mounting uncertainty should affect the Brazilian economy in a year in which the country was expected to regain its growth rhythm.</p> <div class="flourish-embed" data-src="visualisation/1314202"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p><strong>Oil &amp; gas.</strong> Petroleum shipments from Latin America to China were halted last week. No sales for March were recorded in Brazil or Colombia—and unsold cargo is piling up. No shipments for February have been canceled so far, however. There is no data on the impact of these developments, but China accounted for 72 percent of Petrobras&#8217; oil exports between January and September 2019 (latest available data). The U.S. came second, with only 11 percent.</p> <p><strong>Asia.</strong> In the first trading session after the Lunar New Year break, markets in mainland China plunged, with the Shanghai Composite index tumbling nearly 8 percent. While the losses could have been worse, they should affect Western markets.</p> <p><strong>Iowa caucuses.</strong> The race to decide who will be U.S. President Donald Trump&#8217;s Democratic opponent starts today, with the <a href="https://brazilian.report/business/2020/01/31/iowa-caucus-bernie-effect-brazilian-markets/"></a><a href="https://brazilian.report/business/2020/01/31/iowa-caucus-bernie-effect-brazilian-markets/"></a><a href="https://brazilian.report/business/2020/01/31/iowa-caucus-bernie-effect-brazilian-markets/"></a><a href="https://brazilian.report/business/2020/01/31/iowa-caucus-bernie-effect-brazilian-markets/"></a><a href="https://brazilian.report/business/2020/01/31/iowa-caucus-bernie-effect-brazilian-markets/">Iowa caucuses</a>. The race is wildly unpredictable, but Senator Bernie Sanders appears to be in the lead, according to <a href="https://projects.fivethirtyeight.com/2020-primary-forecast/iowa/">FiveThirtyEight&#8217;s poll aggregator</a>. Mr. Sanders has been a vocal critic of President Bolsonaro—who has shown, time and again, his <a href="https://brazilian.report/power/2020/02/02/iowa-caucus-us-elections-biden-bernie-trump/">desire to see Mr. Trump get four more years in office</a>. Mr. Sanders was also seen by Wall Street as a socialist with &#8220;crazy ideas,&#8221; and a win in Iowa could rattle markets—also impacting Brazil.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Investment bank BTG Pactual has upgraded its target prices for stocks of sugar and ethanol producers: São Martinho has shifted to BRL 32 (previously at BRL 25.07) and Adecoagro, listed in New York, has gone to USD 14 (once USD 7.47). The decision comes as the federal government stimulus program RenovaBio comes into force. In analysts&#8217; view, though “RenovaBio now comes more as a mechanism that limits the downside potential for ethanol producers rather than one that will boost prices in the long run,” it is now possible to establish a long-term view for the companies.&nbsp;</p> <p><em>—Natália Scalzaretto</em></p> <hr class="wp-block-separator"/> <h2>Labor market in Brazil remains in crisis</h2> <p>New data on Brazil&#8217;s labor market was published on Friday, showing that more Brazilians are living on a minimum wage (BRL 998, or USD 233). In four year, the number of people in that situation has increased by 1.8 million—to 27 million people. Currently in Brazil, nearly one-quarter of people of working age are either out of a job or underemployed.</p> <div class="flourish-embed" data-src="visualisation/1315069"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <p><strong>Interest rate. </strong>The Central Bank&#8217;s Monetary Policy Committee meets on Tuesday and Wednesday to set Brazil&#8217;s benchmark interest rates for the next 45 days. Markets foresee a moderate cut—from 4.5 to 4.25 percent a year. Until very recently, analysts expected the announcement to be followed by the bank stating that cuts would be over—for now, at least. However, with the uncertainty raised by the coronavirus outbreak, some analysts believe the bank could announce this week that they plan to go even lower by the end of the year.</p> <p><strong>Industry.</strong> On Tuesday, we will know Brazil&#8217;s industrial output in 2019—and there is little hope for positive news. In November, the sector shrank by 1.2 percent from the previous month (and 1.3 percent from last year). Moreover, <a href="https://brazilian.report/tech/2020/01/31/tech-brazil-expand-healthcare-industry-digital-payments/">high- and medium-complexity goods</a> (such as vehicles, auto parts, planes, machinery, and medicines) accounted for just 32 percent of Brazil’s transformation industry’s exports in 2019—the lowest rate since 1995.</p> <p><strong>Inflation.</strong> On Friday, the Brazilian Institute of Geography and Statistics publishes January&#8217;s inflation rate. Prices rose sharply in December, as soaring Chinese demand for beef pushed costs up—but that rise has eased this year. The IPCA-15 index—which is seen as a predictor of the official inflation rate—was 0.71 percent. Analysts surveyed by the Central Bank expect the rate to close the year at around 3.5 percent.</p> <p><strong>Strike.</strong> Over 7,000 oil industry workers have joined a nationwide strike, according to unions that represent 12 percent of Petrobras&#8217; employees. They protest the state-run company&#8217;s decision to change the uninterrupted shift table of alternating workers. Petrobras called the strike &#8220;unreasonable&#8221; and plans to take the matter to courts.</p> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <p><strong>Deficit.</strong> Brazil&#8217;s budget deficit in 2019 was at BRL 95 billion—or 1.31 percent of the GDP. While the federal government remains far from getting back to black, it was the best result in six years. Budget surpluses are important because they allow the government to reduce indebtment levels—freeing up space for more investments. In 2019, public debt soared to BRL 4.2 trillion (USD 992 million), the highest ever recorded.</p> <p><strong>Apps v. workers. </strong>A labor court in São Paulo dismissed a request to impose <a href="https://brazilian.report/business/2019/12/19/brazil-moves-regulate-gig-economy-worse-workers/">employer responsibilities on food delivery app iFood</a>. In practical terms, the decision denies iFood’s delivery drivers the right to monthly deposits into a severance fund—accessible in the case of redundancy—insurance against workplace accidents, a guaranteed Christmas bonus, paid vacations, among other benefits.</p> <p><strong>Rain.</strong> Severe storms and <a href="https://brazilian.report/newsletters/brazil-weekly/2020/01/27/panic-minas-gerais-rainfall-causes-46-deaths/">widespread flooding</a> through the southeastern states of Minas Gerais, Espírito Santo, and Rio de Janeiro have claimed at least 57 lives. Two main ingredients caused the disaster: (1) in January, rainfall was three times more than the average for the month in Minas Gerais, and (2) since 2012, the federal government—and local administrations—has dramatically reduced its budget for natural disaster prevention.</p> <p><strong>Coronavirus 1.</strong> On Sunday, the Brazilian government announced it will repatriate roughly 50 nationals who are in the Chinese city of Wuhan—the epicenter of the coronavirus outbreak. The Foreign Affairs Ministry said they will have to undergo a quarantine period—but a date for the repatriation has yet to be set. Just two days earlier, President Bolsonaro said the government wouldn&#8217;t bring anyone home unless &#8220;everything was in place.&#8221; He said he had to prioritize the 210 million people in Brazil over the &#8220;few dozens in China.&#8221; After pledges on social media, however, the government changed its position.</p> <p><strong>Coronavirus 2. </strong>Brazil currently investigates 12 suspected coronavirus infections, but no case has been confirmed so far. That should only be a matter of time, infectious disease expert Rosana Richtmann told our <a href="https://brazilian.report/podcast/2020/01/29/explaining-brazil-93-coronavirus-real-risks-brazil/"><em>Explaining Brazil</em> podcast</a>—&#8221;but Brazil&#8217;s high temperatures this time of the year do not favor a widespread outbreak,&#8221; she says.

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