Senator Flávio Bolsonaro

Good morning! Senator Flávio Bolsonaro, the president’s eldest son, is under scrutiny. House Speaker dragged into kickback scandal. GDP growth estimates continue to shrink.

President’s son under scrutiny

A state court in Rio de Janeiro lifted Senator Flávio Bolsonaro’s bank secrecy—as well as that of 88 of his former aides. The ruling was signed on April 24 but only revealed yesterday evening. The president’s eldest son is suspected of running a money laundering scheme while serving as a state congressman in Rio. Investigators believe that his staffers were forced to surrender part of their salaries to the politician, which is illegal.

Investigators will scrutinize Mr. Bolsonaro’s bank statements dated between January 2007 and December 2018. Another major target of the probe is Fabricio Queiroz, the senator’s former advisor and driver. Last year, Brazil’s money laundering enforcement agency identified “atypical” cash transfers to Mr. Queiroz’s bank account, totaling BRL 1.2m in 2016—many coincided with the paydays of public servants in Mr. Bolsonaro’s cabinet.

The former aid also made 176 “suspicious” cash withdrawals—a strategy often used to conceal the source and recipient of the funds—and even signed a BRL 24,000 check to First Lady Michelle Bolsonaro. Flávio Bolsonaro denied any wrongdoing and called the investigation illegal, aimed at weakening his father’s administration. On Sunday, Mr. Bolsonaro declared he “trusted his aide too much,” showing what should be his line of defense: blaming Mr. Queiroz.

Ripple effects

Coupled with raising tensions between the U.S. and China, this piece of news will send shockwaves through the markets. Investors believe that the already embattled administration could further lose political capital in negotiating the pension reform with Congress.

Go deeper: Flávio Bolsonaro brings scandal to presidential palace

House Speaker dragged into kickback scandal

After signing a plea bargain agreement with a federal court, businessman Henrique Constantino, one of the owners of Gol Airlines, detailed kickbacks paid to high-profile politicians. The list includes House Speaker Rodrigo Maia and former President Michel Temer. The bribes were paid so Mr. Constantino’s ventures could get investments from funds managed by Caixa, Brazil’s largest publicly-owned bank.

Besides helping investigators, the businessman will pay BRL 70m in compensation to the government. He was indicted in October 2018 for allegedly paying over BRL 7m in bribes in return for roughly BRL 350m in low-interest loans. Owner of Brazil’s largest airline, Mr. Constantino used codes such as “booking a seat” for bribes, and “passenger list” for the names of the politicians he was supposed to pay off.

In response to the report, Speaker Rodrigo Maia denied all allegations. “[He] never paid me anything, it’s a lie. He can’t prove it and this will be another probe dismissed by the courts,” he said from New York, where he is taking part in an event about Brazil’s economic challenges.

GDP growth estimates continue to shrink

Yesterday, the Central Bank’s Focus Report—a weekly survey among top-rated investment firms—showed that markets have grown increasingly pessimistic about Brazil’s economic outlook. GDP growth forecasts have gone from 2.5% at the beginning of the year to 1.45%. Even the government, while trying to keep spirits up, is admitting to reality, and will revise its projection from 2.5% to something between 1.5 and 2%.

A weaker economy translates into less revenue for the federal government. And analysts believe in a further BRL 10bn budget cut, after the Economy Ministry already ordered BRL 30bn to be frozen. With the government’s apparent inability to pass reforms quickly, expectations for 2020 are also getting trimmed—capping a “lost decade,” in which GDP per capita will not have grown.

Meanwhile, Brazilian states are in a worse situation than the federal administration. Of the 27 states, 13 are expected to apply for the federal government’s financial aid plan. In exchange for up to BRL 40bn in loans that will give these states some liquidity, they will have to present a four-year austerity plan, including the privatization of assets.

What else you need to know today

Trade wars. Raising tensions between the U.S. and China pushed Brazil’s stock market to a 4-month low. The U.S. Dollar exchange rate broke the BRL 4 threshold yesterday, but closed the day at BRL 3.98. Today should be another tense day for markets. If the trade war continues to escalate, the world’s top 2 economies should slow down—which would heavily impact Brazilian exports. 

Not us. In an effort to detach its image from the failing Avianca Brazil, Avianca International will launch a new ad campaign on TV, newspapers, and airport billboards within the next three weeks. The idea is to show that the carrier’s parent company is in good financial shape and remains reliable for international destinations—even if its net profit has gone down by 99% in 2018. Revenue from Brazil amounts to 8% of Avianca’s global revenue.

Retail. Since 2016, French group Casino has tried to no avail to sell off Via Varejo, the umbrella company which controls household retailers Casas Bahia and Ponto Frio. Now, businessman Michael Klein—who owns 25% of Via Varejo—is reportedly teaming up with XP Asset Management to make a bid. Pricing, however, could be an issue. Via Varejo has gained 11% in market value, to be worth BRL 6bn..

Diplomacy. President Bolsonaro leaves for Texas tonight—and is set to return on Friday. His schedule includes meetings with former U.S. President George W. Bush, Texas Governor Greg Abbott, Dallas Mayor Mike Rawlings, and Republican Senator Ted Cruz. On Thursday, he will be honored by the Brazil-U.S. Chamber of Commerce.

Daily BriefingMay 14, 2019

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BY Gustavo Ribeiro

An award-winning journalist with experience covering Brazilian politics and international affairs. His work has been featured across Brazilian and French media outlets.