Brazil latest country to launch digital currency plan

. Aug 24, 2020
Brazil latest country to launch digital currency plan Image: Enzozo/Shutterstock

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This week, Brazil’s go at a digital currency. What earnings reports tell us about the crisis. Plus, job figures begin to come back positive.

Brazil’s Central Bank wants to issue a digital currency

The Brazilian Central Bank continues its efforts to modernize and digitize the Brazilian economy.

After approving regulations for instant payment system PIX and green-lighting open banking, the monetary authority now plans to issue its own Central bank digital currency (CBDC).</p> <p><strong>What CBDCs are.</strong> According to the <a href="https://www.atlanticcouncil.org/blogs/econographics/the-rise-of-central-bank-digital-currencies/">Atlantic Council</a>, &#8220;CBDCs are the liability of the central bank, which means the government must maintain reserves and deposits to back them up, rather than a private bank. […] As decentralized digital currencies such as Bitcoin have become more popular, the world’s central banks are beginning to realize they need to get in the game or let the evolution of money pass them by.&#8221;</p> <div class="flourish-embed flourish-map" data-src="visualisation/3555971"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>The Brazilian case.</strong> The Central Bank launched a working group to identify potential risks for cybersecurity, data protection, and necessary regulations. They also want to evaluate the impacts of such an initiative on monetary and economic policies — as well as how a CBDC could work in tandem with recent digitization initiatives such as PIX.</p> <p><strong>Pros.</strong> Advocates believe that digital currencies foster the economy with faster and more convenient transactions, as well as being a secure means of payment. “Digital money makes life harder on criminals, from white-collar thugs to guys stealing cell phones on the street,” says João Marco Cunha, a portfolio manager at crypto-assets management firm Hashdex.</p> <p><strong>Cons.</strong> The European Central Bank released a <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2351~c8c18bbd60.en.pdf">comprehensive study</a> in January 2020 about the financial dangers of digital currencies. It says the structural or cyclical disintermediation of deposit collecting institutions (such as banks) “would facilitate runs out of bank deposits into central bank money in financial crisis situations.”</p> <ul><li>In other words, having digital money disconnected from banks could cause liquidity problems to the financial systems in panic situations. To avoid that, a “tier remuneration” system, with different interest rates, could be adopted in order to prevent the currency to be used as a value reserve, like gold.&nbsp;</li><li>Critics also point out that a CBDC would allow authorities to have more control over people’s data — weakening citizens&#8217; rights to bank secrecy. That is a no-no for data protection advocates. Recent moves by the federal government, such as the decision to create a single database for citizen data, are considered dangerous — especially under a far-right Bolsonaro administration. The MIT Technological Review says Brazil may be on a <a href="https://www.technologyreview.com/2020/08/19/1007094/brazil-bolsonaro-data-privacy-cadastro-base/?utm_source=ActiveCampaign&amp;utm_medium=email&amp;utm_content=Latin+America&amp;utm_campaign=Latin+America+%234">path to becoming a surveillance state</a>.</li></ul> <p><strong>How to do it. </strong>Increasing the country’s monetary base — that is, printing money — generates inflation and devalues a currency. For Mr. Cunha, ideally, the new digital currency would have a 1:1 ratio to physical money, thus avoiding monetary expansion. </p> <p><em>— with Natália Scalzaretto</em></p> <hr class="wp-block-separator"/> <h2>Companies performed better than expected during pandemic — but recovery remains uncertain</h2> <p>With the end of Q2 2020 earnings report season, we can assess how damaging the pandemic has been on Brazil&#8217;s publicly-listed companies. While the past quarter — the first that came fully during the pandemic&nbsp;—&nbsp;was objectively terrible, companies outperformed expectations. The results suggest that forecasts were too pessimistic, and that companies showed resilience. However, quarantine measures in Brazil were much laxer than in other countries, which helps to explain why the drop wasn&#8217;t <em>that</em> dramatic.</p> <p><strong>Why it matters.</strong> While some results are encouraging, it is no time for celebration. The Covid-19 pandemic is not controlled in Brazil, which creates a continuing scenario of uncertainty.&nbsp;</p> <p><strong>Winners.</strong> A few sectors were better positioned to deal with the pandemic, due to the nature of the crisis:</p> <ul><li><strong>E-commerce.</strong> Retailers with potent digital channels boosted sales as the in-person economy shut down. Like in China, consumers&#8217; demand rushed to online shopping, and digital retailers increased market value by up to 70 percent.</li><li><strong>Supermarkets.</strong> With consumers afraid of supply shortages, many stacked their carts. Also, with people eating more at home, their needs for food products skyrocketed.</li><li><strong>Construction.</strong> Considered an &#8220;essential&#8221; sector, construction continued through the quarantine — and the real estate industry heated up in São Paulo, the country&#8217;s biggest market. Moreover, with people working from home, demand for renovations soared.</li><li><strong>Healthcare.</strong> Health providers were faced with increased Covid-19 costs, being forced to take measures such as hiring new doctors. However, the steep drop in elective procedures during the pandemic offset much of these expenses.</li><li><strong>The &#8220;Big 2.&#8221;</strong> Petrobras and Vale — which account for 20 percent of Brazil&#8217;s benchmark stock index, were positive surprises. Despite the oil crisis, Petrobras showed it was capable of controlling costs, preserving its cash-generating ability during the pandemic. Meanwhile, Vale is reaping the benefits of a bump in demand for iron ore — its main production asset.</li></ul> <p><strong>Losers.</strong> Banks, shopping malls, and tourism-related companies got the short end of the stick, meanwhile. For banks, provisions had to be beefed up, with a higher risk of default. Malls are reopening, but customers are still wary to visit. And for tourism and aviation firms, recovery will be hard. Still, major airlines were able to renegotiate debts, bringing the sector some relief.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Oi Telecom is scheduled to host a meeting with its 50,000 creditors on September 8. However, two of its main creditors —&nbsp;banks Itaú and Banco do Brasil — are trying to cancel it, requesting a court injunction claiming that the gathering poses a Covid-19 transmission risk. A judge ruled that the meeting will take place remotely. Still, brokerage Guide Investimentos sees the banks&#8217; move as a possible obstacle to a new agreement between the company and creditors — which would unblock Oi&#8217;s plan to sell assets valued at BRL 22 billion, stopping the telecom operator from falling into insolvency.</p> <p class="has-text-align-center"><strong><em>Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>Brazil creates jobs again</h2> <p>Hirings in Brazil outnumbered layoffs for the first time since before the pandemic. The country recorded over 131,000 net jobs — still not enough to offset a net loss of over 1 million formal jobs in 2020. Economy Minister Paulo Guedes discussed a GDP contraction of only 4 percent this year (as opposed to initial forecasts of -10 percent), and said the numbers show a &#8220;Nike-swoosh-shaped recovery.&#8221; President Jair Bolsonaro added that &#8220;Brazil is going back to normal.&#8221;&nbsp;</p> <p>It might, however, still be too soon for a victory lap. Mr. Guedes&#8217; analysis seems not to account for the government&#8217;s program allowing companies to suspend contracts and reduce hours and salaries during the pandemic —&nbsp;which has either avoided 10 million layoffs or postponed them until the coming months.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3554895"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <div class="flourish-embed flourish-chart" data-src="visualisation/3554951"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>No more Mr. Nice Jair.</strong> After staying clear of controversy for two full months, President Jair Bolsonaro went back to his belligerent self on Sunday. Asked about checks worth BRL 89,000 paid by former fixer Fabrício Queiroz (under arrest for suspected money laundering) to <a href="https://brazilian.report/power/2020/08/12/corruption-case-against-jair-bolsonaro-son-fabricio-queiroz/">First Lady Michelle Bolsonaro</a>, the president threatened to &#8220;smash [the reporter&#8217;s] face in.&#8221; Social media exploded after the incident —&nbsp;with influencers, journalists, and politicians tagging the president&#8217;s official profile and asking the same question.&nbsp;</li><li><strong>Diplomacy. </strong>The U.S. government has reportedly requested support from Brazil to pass a proposal to reform the World Health Organization — <a href="https://brazilian.report/newsletters/brazil-daily/2020/07/22/brazil-joins-us-taking-wto-stand-against-china/">trying to ostracize China in the process</a>. European countries are wary of the initiative, criticizing U.S. President Donald Trump for announcing the U.S.&#8217; withdrawal from the WHO and cutting its funding, while at the same time trying to lead a reform within the institution.</li><li><strong>Health. </strong>Between March and June, the number of elective surgeries performed by the national public healthcare system dropped 61 percent from the average of the five previous years. But as social isolation measures are lifted, experts foresee an explosion in demand — as many patients see their health conditions worsening due to the postponement of their procedures — and a possible massive health crisis following the pandemic. The specialties that worry experts the most are oncology, cardiology, and psychiatry — areas in which patients&#8217; development is highly unpredictable.</li><li><strong>Left adrift.</strong> The outlook of the 2020 municipal elections doesn&#8217;t seem encouraging for the Workers&#8217; Party — Brazil&#8217;s main political force on the left. A study of multiple polls by website Poder360 shows that not a single candidate of what was once the strongest party in the country is favored to win in any Brazilian state capital. In 2016, the Workers&#8217; Party had already lost ground — and it doesn&#8217;t seem poised to regain it. As an opposition force, it has been a toothless group with no strategy to counter Jair Bolsonaro. All of the government&#8217;s crises were made by the government itself, with the left acting as passive bystanders in Congress. And <strong>The Brazilian Report</strong> showed this weekend, the <a href="https://brazilian.report/power/2020/08/23/lula-left-wing-response-bolsonaro-popularity-surge-poor-areas/">Workers&#8217; Party still has no strategy to prevent Mr. Bolsonaro&#8217;s advances</a> in its final stronghold of popularity: the poor Northeast region.</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Emergency aid.</strong> President Jair Bolsonaro said on Sunday that the government has no means to keep the BRL 600 emergency salary at the current price tag of BRL 50 billion a month. The effects of the program&#8217;s suspension or reduction will be unpredictable, as the aid represents <a href="https://brazilian.report/newsletters/brazil-daily/2020/08/19/paulo-guedes-cabinet-public-spending-coronavirus-poultry/">97 percent of all income among Brazil&#8217;s poorest 10 percent of people</a>. The government was set to deliver a proposal to extend the initiative last week, but has yet to come up with a solution. </li><li><strong>Strike. </strong>Workers of Correios, Brazil&#8217;s federally-owned postal company, will continue a strike that began one week ago. Unions complain that the company has rolled back their employee benefits and protest the government&#8217;s willingness to privatize the firm. But their leverage is not what it once was — with <a href="https://brazilian.report/tech/2020/08/21/how-brazilian-e-commerce-survives-postal-workers-strike/">e-commerce firms relying increasingly more on its private competitors</a>.</li><li><strong>Congress.</strong> After the government was “blindsided” by the Senate’s decision to unfreeze civil servant wages despite the current fiscal crisis, lawmakers in the lower house came to the administration’s rescue. With help from Speaker Rodrigo Maia, the government managed to build a sizable majority and uphold a presidential veto on pay raises to public servants in 2020 and 2021. </li><li><strong>Justice.</strong> In a 9-1 vote, the Supreme Court ruled that the government must immediately suspend any efforts to produce dossiers with personal information of citizens who declare themselves “anti-fascist.” The decision states something that should be obvious: the government cannot monitor citizens who are not under formal investigation. Almost 600 civil servants and law enforcement agents had their <a href="https://brazilian.report/power/2020/08/01/is-bolsonaro-launching-his-own-private-intelligence-agency/">private information compiled by the Justice Ministry</a>, and the secret document was shared with police departments across the country, as well as to the office of the president’s Chief of Staff.

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