How Brazil shuns its main trading partners

. Nov 09, 2020
biden bolsonaro "Make Brazil Great Again." Jair Bolsonaro and U.S. National Security Advisor Robert O'Brien. Photo: Marcos Corrêa/PR

This newsletter is for PREMIUM and STANDARD subscribers only. Become one now!

This week, we talk about the state of relations between Brazil’s Bolsonaro and U.S. President-elect Joe Biden. And what banks’ earnings reports say about the economy.

Bolsonaro keeps mum about Biden win

After days of a drawn-out counting process in key states, American TV networks finally called the U.S. presidential election on Saturday,

declaring Democratic candidate Joe Biden as the winner. But neither President Jair Bolsonaro or Foreign Minister Ernesto Araújo have issued any statement congratulating the president-elect, being the only South American nation — besides Suriname — to do so.</p> <ul><li>After Mr. Bolsonaro <a href="">pledged &#8220;loyalty&#8221; to Donald Trump</a> last week, the message from the Brazilian government is that the country will wait for an &#8220;official&#8221; result, as Mr. Trump plans to <a href="">challenge the election outcome</a> in court. The same stance has been adopted by <a href="">Mexico</a>, as the border country wants to &#8220;avoid friction with Washington during the transition.&#8221;</li></ul> <p><strong>Why it matters.</strong> The U.S. is Brazil&#8217;s second-biggest trading partner, and Mr. Bolsonaro is actively worsening relations with Joe Biden, the man who will lead the U.S. for the next four years.</p> <ul><li>When elected, Mr. Bolsonaro had promised to lead Brazil into &#8220;pragmatic foreign relations.&#8221; He has done anything but — electing a <a href="">friendship with Donald Trump</a> as his number 1 foreign policy goal, to the detriment of Brazil&#8217;s relationship with its top 3 trading partners (China, the U.S., and Argentina).</li></ul> <p><strong>China.</strong> After adopting a <a href="">friendlier stance with China</a> last year — even <a href="">visiting</a> the country — Mr. Bolsonaro has trained his guns on Beijing in 2020. His latest wave of attacks concerns the potential coronavirus vaccine produced by Chinese pharmaceutical company Sinovac Biotech.&nbsp;</p> <p><strong>Argentina.</strong> The Brazilian president has still yet to meet with Argentinian President Alberto Fernández. They have exchanged harsh words and members of the Bolsonaro administration constantly repeat that <a href="">Mercosur relations</a> are &#8220;not a priority.&#8221;</p> <p><strong>Consequences of shunning Biden. </strong>As Mr. Bolsonaro tries to keep Joe Biden at arm&#8217;s length, the Argentinian president has spotted an opportunity to make his country the U.S.&#8217;s preferred partner in South America. &#8220;This is our chance to become the region&#8217;s stabilizing force,&#8221; said one member of the government, <a href="">quoted</a> by Buenos Aires newspaper Clarín.</p> <ul><li>When it comes to China, the government propels the notion that the Asian giant depends more on buying Brazil&#8217;s agricultural goods than Brazil relies on selling them. In recent months, however, Chinese consumers have started to <a href="">turn to other selling countries</a>, such as the U.S. and Argentina.</li></ul> <p>🎧 <em><strong>Listen to:</strong> <a href="">Biden or Trump — what changes for Brazil?</a></em></p> <hr class="wp-block-separator"/> <h2>What Brazilian banks’ earnings reports tell us about the economy</h2> <p>Last week, Brazil&#8217;s &#8220;Big 4&#8221; banks published their Q3 earnings reports. They managed to recover some of their Q2 losses but, given the uncertainty of the macroeconomic scenario and the imminent end of stimulus policies, banks are likely to remain conservative with their moves until the future is clearer.</p> <p><strong>By the numbers.</strong> Compared to Q2, profit growth rates were stunning: Bradesco (30%), Itaú (nearly 20%), Santander (83%). The sole exception was Banco do Brasil, with a meager 5.2% quarter-on-quarter growth in profits.</p> <ul><li>When compared to 2019 levels, however, Brazil&#8217;s banks are still lagging behind. The Big 4 combined for a profit of BRL 15.5 billion (USD 2.89 billion) in Q3 2020, 19 percent below Q3 2019. Return on Equity (ROE, a measure of profitability) sat at 13.6 percent, the fourth smallest on record, according to consultancy Economática.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/4288116"><script src=""></script></div> <div class="flourish-embed flourish-chart" data-src="visualisation/4288170"><script src=""></script></div> <p><strong>Silver lining.</strong> Earnings reports hinted at signs of structural recovery in the economy: credit for small- and medium-sized companies is up, as are agricultural credit and mortgage loans, meaning that Brazilians are becoming more prone to invest.</p> <ul><li>Eduardo Guimarães, a stocks expert at Levante Investimentos, says the results give the impression that “the worst is behind us, even if improvement remains lackluster.”&nbsp;</li></ul> <p><strong>Caution.</strong> In cases such as Itaú&#8217;s, lower provisions helped boost profits above estimates. But this will likely be short-lived. “Banks will be conservative in Q4 because they don’t know what will happen with the economy or whether the coronavirus emergency aid — which is helping to reduce default rates — will continue. Also, there is little incentive to boost profits in 2020, as the Central Bank limited the distribution of dividends.”</p> <ul><li>Banco do Brasil was a textbook case of a conservative approach, increasing provisions by 40 percent in the quarter.&nbsp;</li></ul> <p><strong>Going digital.</strong> All major banks made an effort to show progress in their digital transformation, by purchasing new assets — Santander Brasil acquired digital brokerage Toro Investimentos — reporting higher usage of their smartphone apps, or even closing branches. Mr. Guimarães believes that the pandemic “showed banks they can live without branches, so they sped up their digital transformation, but it’s not as fast as it should be.”&nbsp;</p> <p><em>— with Natália Scalzaretto</em></p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Itaú Unibanco wants to sell a 5-percent share of its stake in brokerage firm XP and create a spin-off company to hold the rest of its share in the digital company. The sale would considerably beef up Itaú Unibanco’s cash position, as since the bank made its investment in XP, its market value jumped from BRL 12 billion to roughly BRL 130 billion.&nbsp;</p> <p class="has-text-align-center"><strong><em>Marco Harbich</em></strong></p> <hr class="wp-block-separator"/> <h2>In-person voting could scare off anti-Bolsonaro voters</h2> <p>As we explained earlier this year, the Brazilian voting system is a <a href="">health hazard</a> in coronavirus times — as in-person voting is the only available option. This could lead to even lower turnouts country-wide, and some opinion polls suggest that conservative voters could be overrepresented on November 15: those who support President Jair Bolsonaro tend to dismiss the dangers of showing up at polling stations.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4288590"><script src=""></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Election 2020. </strong>Next Sunday, Brazilians head to the polls to elect their new mayors and city councilors. Turnout could be historically low, as a lack of interest for partisan politics combines with sanitary risks imposed by the pandemic. Furthermore, the health and economic crisis has shifted attention away from local races. A study by the International Institute for Democracy and Electoral Assistance (International IDEA) shows an <a href="">increase in abstention rates</a> in 26 of 41 elections worldwide.</li><li><strong>Coronavirus.</strong> Brazil&#8217;s coronavirus figures this weekend were the lowest in months — but mainly because five states were unable to update their tallies. Amapá, in the north, has endured a power outage for six days now, while Brasília, São Paulo, Minas Gerais, and Paraná couldn&#8217;t access their federal coronavirus dashboards after multiple government systems were <a href="">hacked</a> (more below).</li><li><strong>Economy.</strong> On Friday, the Central Bank will publish its Economic Activity Index (IBC-Br) for September. The measure is considered to be a predictor of the official GDP, and analysts at Credit Suisse estimate 1.2-percent growth from the previous month (but a 1.4-percent drop from this time last year). Data on the performance of retail (Wednesday) and services (Thursday) sectors should be a testament to the strong Q3 recovery in economic activity, according to bank Bradesco.</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>5G.</strong> Brazilian authorities were informed that the country&#8217;s top four telecom operators (Vivo, Claro, TIM, and Oi) declined an invitation by the U.S. Embassy in Brasília for a meeting about 5G set to be held today. The Trump White House has tried to <a href="">pressure Brazil into banning China&#8217;s Huawei</a>, using carrots (the promise of a USD 1-billion investment in the country) and sticks (threats of &#8220;economic consequences&#8221; for Brazil). </li><li><strong>Hacking. </strong>The Federal Police and a group of information security experts are investigating a hack of the Superior Court of Justice. An unknown group infected the network of Brazil’s second-highest judicial body on November 3, and the court has been inactive since. Today, part of its activities will resume. Using backup drives, the court&#8217;s IT department was able to recover data on over 220,000 currently active cases.</li><li><strong>Corruption. </strong>New reports shed light on the details of a <a href="">money-laundering scheme</a> that was operated by Senator Flávio Bolsonaro — the president&#8217;s eldest son — during his stint as a Rio de Janeiro lawmaker. Prosecutors have provided courts with text messages and bank statements that would prove their claims against the senator, increasing the pressure over the presidential family.</li><li><strong>Amazon.</strong> With Brazil suffering mounting pressure over Amazon deforestation, the Senate is working to reactivate the so-called “<a href="">Amazon Parliament</a>,” a multilateral forum formed by the nine countries across which the rainforest spreads. Almost two-thirds of the Amazon Basin are within Brazilian borders, making the country pivotal for the success of any multilateral body on the issue.

Read the full story NOW!

Our content is protected by copyright. Want to republish The Brazilian Report? Email us at