Breaking down Brazil’s “coronavirus budget”

. May 11, 2020
Breaking down Brazil's coronavirus budget House Speaker Rodrigo Maia. Photo: Najara Araujo/Ag. Câmara

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This week, we break down Brazil’s coronavirus “War Budget.” The investigation into Jair Bolsonaro. The impacts of the oil crisis on the Northeast.

Brazil’s new “War Budget,” explained

Congress has officially passed the so-called “War Budget,” a coronavirus-related measure that essentially

splits the federal budget into two, creating a new separate financial plan for Covid-19 spending. This &#8220;parallel&#8221; budget will not be bound by existing fiscal responsibility rules that typically block the government from increasing public debt on regular expenses. The bill also allows the Central Bank to provide businesses with bailout packages.&nbsp;</p> <p><strong>No limits. </strong>The government will be allowed to enhance public spending to deal with costs related to the pandemic without worrying about the legal limitations usually placed on spending. The so-called &#8220;Golden Rule&#8221; — which forbids the administration from borrowing money to pay debts — will be suspended for the duration of the pandemic.</p> <ul><li>However, the Economy Ministry must present Congress with a monthly report listing all of its Covid-19-related budget operations.&nbsp;</li></ul> <p><strong>Liquidity. </strong>The Central Bank can now also purchase corporate bonds, which may help to manage debts and provide liquidity in a market squeezed by the crisis. But the government should be wary about issuing currency to fund such operations. This tool was widely used in the past and is considered to be one of the main causes of Brazil&#8217;s hyperinflation crisis of the 1980s. Moreover, these are higher-risk assets, especially as Congress determined that small- and medium-sized firms should be prioritized.&nbsp;</p> <ul><li>To minimize risks, lawmakers established that bonds must have at least a BB-minus rating by one of the three main agencies: Fitch, Moody’s, and S&amp;P.</li><li>The Central Bank must disclose and detail all operations on a daily basis, as well as submit monthly accountability reports to Congress.</li><li>The bank must also set conditions to buy these assets. Some were already in the bill, such as forbidding the money to be used for paying dividends, wage increases, or bonuses for executives.</li></ul> <p><strong>Bidding process. </strong>The government is no longer required to ensure “competition and equality of conditions for all competitors” in public bidding processes, but should aim for it &#8220;when possible.&#8221;</p> <ul><li>Restrictions are lifted on companies that may be awarded government contracts, allowing firms with a history of tax evasion or with overdue federal debt to take part in bidding processes for as long as the crisis lasts.</li></ul> <p><em>—&nbsp;With Augusta Saraiva and Natália Scalzaretto</em></p> <hr class="wp-block-separator"/> <h2>An important week for Jair Bolsonaro</h2> <figure class="wp-block-image"><img loading="lazy" width="1024" height="683" src="" alt="Bolsonaro supreme court down Brazil's coronavirus budget" class="wp-image-38826" srcset=" 1024w, 300w, 768w, 610w, 2048w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>President Jair Bolsonaro (left) and Supreme Court Chief Justice Dias Toffoli. Photo: Marcos Correa/PR</figcaption></figure> <p>This week will be pivotal in the investigation by the Federal Prosecution Office into President Jair Bolsonaro. He could face indictment requests for corruption, obstruction of justice, and influence peddling for allegedly trying to interfere with Federal Police probes and gain access to classified reports about people in his inner circle.</p> <p><strong>Why it matters.</strong> If the Prosecutor General presents charges that are accepted by Congress —&nbsp;which is a big if — Mr. Bolsonaro would be suspended from office for six months and only finish his term if acquitted.</p> <p><strong>Context.</strong> On April 24, former Justice Minister Sergio Moro resigned from the cabinet, claiming the president was trying to appoint a new Federal Police Chief from whom he could “receive information about investigations.” Mr. Moro also said the president publicly threatened to fire him unless he got his way, during a filmed cabinet meeting.</p> <p><strong>Subpoenas. </strong>Between Monday and Thursday, three cabinet members, six Federal Police detectives, and a congresswoman will testify in the case.</p> <ul><li>The Supreme Court has also subpoenaed the full recording of the meeting mentioned by Mr. Moro, and finally obtained the video after several attempts by the government to release only parts of it, claiming that national security matters were discussed in the meeting. However, <em>Folha de S.Paulo&#8217;s</em> Thaís Oyama reported that the <a href="">real reason the government was so reluctant</a> about releasing the video is because it contains Education Minister Abraham Weintraub calling the Supreme Court &#8220;11 sons of bitches.&#8221;</li></ul> <p><strong>Quid pro quo?</strong> Mr. Bolsonaro is reportedly considering Prosecutor General Augusto Aras for a seat on the Supreme Court. This information has been leaked to the press precisely when Mr. Aras is presiding over the most potentially damaging investigation into the president so far.&nbsp;</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>The Central Bank Economic Policy Committee will publish on Tuesday the minutes from its last meeting, which resulted in Brazil&#8217;s benchmark interest rate being slashed from 3.75 to 3 percent. Investors will evaluate which signals the bank is giving for future moves. The consensus as of now is that the committee could promote further cuts of 0.5- to 0.75-percentage points. Brazil&#8217;s interest rates are already at their lowest point in history.</p> <hr class="wp-block-separator"/> <h2>The oil crisis will hit Northeast hard</h2> <p>The nosedive in oil prices should cause an 18-percent reduction in revenue from oil royalties received by cities in Brazil&#8217;s Northeast. That represents a drop in BRL 200 million (USD 35 million) to what is already the country&#8217;s poorest region. To make matters worse, Petrobras has deactivated dozens of shallow-water platforms in the Northeast — and will halt land activities, as well. While the move makes sense business-wise — and only affects 1 percent of the company&#8217;s output — it could cause a crisis in municipalities where the economy revolves around the oil industry.</p> <iframe title="The oil crisis will hamper revenue in Brazil's poorest region" aria-label="Map" id="datawrapper-chart-67hMQ" src="" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="585"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(a){if(void 0!["datawrapper-height"])for(var e in["datawrapper-height"]){var t=document.getElementById("datawrapper-chart-"+e)||document.querySelector("iframe[src*='"+e+"']");t&&(["datawrapper-height"][e]+"px")}}))}(); </script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Financial aid.</strong> Last week, Congress approved a plan for the government to help states to weather the Covid-19 crisis. Economy Minister Paulo Guedes argued that the aid should be conditioned to freezing the budget for civil servants&#8217; wages —&nbsp;but lawmakers added a long list of exceptions to that rule. President Jair Bolsonaro has promised to veto the exceptions, leaving only those points supported by Mr. Guedes. Such a move, however, could deepen the crisis between the president and other branches of government.</li><li><strong>Rescue.</strong> The government should make a decision around plans to bail out airlines and energy distributors —&nbsp;two sectors heavily hit by the crisis. Power companies should get between BRL 10 and 13 billion, while airlines will receive up to BRL 7 billion. As a condition, companies might have to issue bonds. The rescue operation will be a joint effort between the National Development Bank (BNDES), private banks, and investors.</li><li><strong>GDP.</strong> On Wednesday, the Central Bank will publish the Economic Activity Index (IBC-Br) for March. The index is considered to be a predictor of the official GDP, and will shed more light on how the Covid-19 has truly affected many sectors of the economy.</li><li><strong>Survey/tests.</strong> Pollster Ibope will begin its boldest operation ever on Wednesday, carrying out 33,000 rapid tests for Covid-19 (and interviews) in a single day. The company was hired by the government to survey the advance of the coronavirus in the country by way of a total of 100,000 tests and interviews,&nbsp;but the operation has raised many questions. It will give Ibope — a private firm — private health information on 100,000 Brazilians. Moreover, why should a polling company be responsible for carrying out medical procedures?&nbsp;</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Lockdown.</strong> Several municipalities entered lockdown last week. In most cases, however, people didn&#8217;t abide by the rules. In Belém, a street market was just as crowded as normal. Governors accuse President Jair Bolsonaro&#8217;s anti-social distancing rhetoric of confusing citizens about the need to stay home.</li><li><strong>Essential jobs.</strong> An adamant defender of reopening the economy, President Jair Bolsonaro has found a way to circumvent states&#8217; authority over quarantines. He has issued decrees increasing the list of activities deemed as &#8220;essential,&#8221; and therefore outside of the scope of lockdown measures.</li><li><strong>Economy.</strong> In March, Brazilian industry suffered a <a href="">9.1-percent decline in output</a> — the biggest slide since the May 2018 truckers&#8217; strike. The drop is a direct result of the coronavirus crisis, as companies shut down factories, suffered from input shortages, and saw their clients disappear.</li><li><strong>Radicalism.</strong> Pro-Bolsonaro supporters staged yet another anti-Congress, anti-Supreme Court protest in Brasília. Meanwhile, a group called &#8220;Brazil&#8217;s 300&#8221; has raised BRL 67,000 in a crowdfunding campaign to offer &#8220;military training&#8221; to people willing to join &#8220;<a href="">an army that will annihilate the left and corruption</a>.&#8221;

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