João Doria tries to get Chinese investment to São Paulo

Hello, you’re reading our Weekly Report. In this issue: What São Paulo Governor João Doria accomplished on his trip to China. Another look into the pension reform vote. How Brazilian markets perform this week. The main events of the week.

The week in review

Bolsonaro. The difference between President Jair Bolsonaro’s disapproval and approval ratings

reached a new high in August, per a poll done by XP/Ipespe. His disapproval rating rests at 38 percent, while his approval is 33 percent. At the beginning of his term, Bolsonaro had a 40-percent approval rating and a 20-percent disapproval rating according to the same pollsters.</p> <p><strong>Budget.</strong> Congress&#8217; Budget Committee approved the Budget Directives Law (LDO) on Thursday, raising the minimum wage in Brazil from BRL 998 per month to BRL 1,040. This slight bump only manages to cover inflation, without bringing any real gain to the minimum wage. This is expected to continue for the next two years, officially breaking with the policy of raising minimum salaries to match inflation and the previous year&#8217;s GDP expansion.</p> <p><strong>Probe.</strong> The Federal Prosecution Office has opened an investigation into the resignation of former Petrobras CEO Pedro Parente last year. The move followed a 10-day truckers&#8217; strike which forced the government to interfere with the company&#8217;s pricing policy, something Mr. Parente didn&#8217;t accept. However, the resignation was announced during trading hours—leading to a 15-percent drop in Petrobras share prices (or a BRL 40bn loss in market cap). Meanwhile, BRF (the company Mr. Parente later joined) saw its stocks rise 9 percent.</p> <p><strong>5G. </strong>Finnish telecom equipment maker Nokia expects Brazil&#8217;s upcoming auction of the 5G spectrum to be the largest in the world. Regulator Anatel is still deciding on the rules for the auction of four frequencies—scheduled for March 2020. Nokia began testing 5G technology in Brazil in February 2018 alongside TIM, the Brazilian subsidiary of Telecom Italia.</p> <p><strong>Oil. </strong>While the Brazilian government is taking heat for its stances on environmental issues, Infrastructure Minister Tarcísio de Freitas defended oil-drilling activities at the mouth of the Amazon River. He said Brazil must cash in before oil gets replaced as the world&#8217;s main energy source: &#8220;The stone age did not end for a lack of stones, just as the age of oil won&#8217;t be over for a lack of it. Everyone&#8217;s exploring. What are we waiting for?&#8221;</p> <p><strong>Lula. </strong>Since April 2018, former President Lula has been serving his prison sentence in the Federal Police headquarters in Curitiba, Paraná state. But, claiming logistical issues and elevated costs, the Federal Police requested Lula be transferred to a regular penitentiary, which was granted by a federal judge—allowing Lula to be placed in a collective cell. Just hours later, however, the Supreme Court overruled the move, keeping him in the Federal Police building.</p> <p><strong>Car Wash.</strong> The Car Wash task force in Curitiba, led by prosecutor Deltan Dallagnol, may be dissolved in September. The decision is in the hands of Prosecutor General Raquel Dodge. She is expected to keep the task force going, even after recent leaks showed Mr. Dallagnol&#8217;s efforts to use media outlets to smear her reputation.</p> <p><strong>Argentina.</strong> Tomorrow, Argentinian voters will go to the polls in the country&#8217;s primary elections, seen as a key gauge for the first round of<a href=""> Argentina’s presidential election in late October</a>. International investors are braced for a fresh bout of volatility in financial markets. Argentina is Brazil&#8217;s third-biggest trading partner and the outcome of the race, between incumbent Mauricio Macri and Peronist Alberto Fernández (who has Cristina Kirchner as his running mate) will certainly have ripple effects on this side of the border.</p> <h2>Pension reform finally leaves the House</h2> <p>The lower house approved the pension reform bill in a second roll call vote this week, sending the proposal to the Senate. Seen as the core of the agenda proposed by Economy Minister Paulo Guedes, many political observers expected the reform to move faster. However, this eagerness makes it easy to overlook that no previous pension reform has been approved quicker.</p> <div class="flourish-embed" data-src="visualisation/583597"></div><script src=""></script> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Brazilian markets lived an emotional rollercoaster this week, between the U.S.-China trade war and euphoria from pension’s reform approval. But one stock is being particularly harmed by the global environment: Suzano (SUZB3). Shares of the world’s largest pulp maker are down almost 20 percent in 2019, after it slowed production in order to cope with collapsing prices, lower demand, and higher cellulose inventories in China (its main buying market). The bad momentum for the commodity’s prices explains why investors have been so wary, but Q2 2019 earnings seem to have strengthened analysts’ bullish view of the company. </p> <p>Suzano recorded an above-expected EBITDA of BRL 3.1bn, BRL 700m profit, and reduced its capex projections to BRL 5.9bn in order to balance debt levels. Bettina Roxo, an XP Research analyst, reckoned that the cellulose market is still hard to predict, but maintained her “positive view of the supply/demand dynamics in the medium/long term, as there is a higher probability that the stocks will rise than fall.” According to Mirae Asset’s Pedro Galdi, the acquisition of Fibria remains a trump card on Suzano’s side—the merger has just been concluded and synergies are expected to be fulfilled by 2021. Both houses have recommended SUZB3 as a &#8220;buy,&#8221; with BRL 40 and BRL 41.64 price targets, respectively.</p> <p style="text-align:center"><em><strong>Natália Scalzaretto, TBR markets reporter</strong></em></p> <hr class="wp-block-separator"/> <h2>What will São Paulo Governor João Doria bring back from China?</h2> <p>Ever since taking office as governor of São Paulo, on January 1, João Doria began crafting his image as a future presidential candidate. He has traveled across Brazil, trying to improve his popularity in regions where his Social Democracy Party (PSDB) doesn&#8217;t poll well, while also trying to distance himself from President Jair Bolsonaro—despite having clung on him during the 2018 elections. João Doria has also sought to become more of a global player—as a president should be.</p> <p>A good example of this came last week, when Mr. Doria embarked on a trip to China, leading a group of 35 business owners in meetings in Beijing, Shiyan, and Shanghai. The trip makes commercial sense. São Paulo is reportedly the destination of 38 percent of Chinese exports to Brazil. The Asian giant also gets 12.4 percent of all goods exported by the state of São Paulo, including oil derivatives, plane parts, soybeans, and orange juice. Moreover, Chinese investment in Brazil continues to grow—and São Paulo&#8217;s plan for massive privatizations could be extremely attractive. </p> <script src="" type="text/javascript" charset="utf-8"></script> <p>Here is what was noteworthy in Mr. Doria&#8217;s trip to China:</p> <p><strong>Telecommunications.</strong> The highlight of the trip was announcing that Chinese telecom giant Huawei plans to build a USD 800m factory in the state of São Paulo. Flanked by Huawei executives, Mr. Doria said the company was geared to meet expected growing demand, following Brazil&#8217;s 5G spectrum auction, which should take place in March 2020.&nbsp;</p> <p>The new plant would produce smartphones, with the company already owning a factory making equipment for telecommunications infrastructure, employing roughly 2,000 people. The location of the new facility has yet to be determined.&nbsp;</p> <p>Huawei is making a second attempt to crack the Brazilian smartphone market, with three new flagship models. Back in 2014, the giant launched its first model in Brazil, but it failed to catch on. However, as <a href="">reporter Beatriz Farrugia wrote</a> in <strong>The Brazilian Report</strong>, don’t let its shortcomings selling smartphones fool you.</p> <p>According to the National Telecommunications Agency (Anatel), the Chinese giant has built roughly 70,000 of the country’s 86,000 operational radio antennas. These devices are responsible for transmitting 3G, 4G, and LTE frequencies to smartphones, modems, credit card machines … basically any device connected to a mobile network.</p> <p><strong>Transportation.</strong> The São Paulo government also announced that China Railway Construction Corporate (CRCC) is interested in taking part in the auction for the rights to build and manage Line 6 of the São Paulo metro system. China is considered one of the world&#8217;s most impressive cases of metro expansion. On the flipside, São Paulo has been notoriously slow to improve its urban transportation system. Line 4, which runs from the center of São Paulo out to the west zone, is among the best examples. The project was envisioned in the 1940s, construction began in 1994, and it was only partially inaugurated in 2010, remaining unfinished until today.</p> <h4 style="text-align:center">China&#8217;s metro expansion (1990-2019)</h4> <figure class="wp-block-image"><img src="" alt="" class="wp-image-21812"/></figure> <p><strong>Business office.</strong> In Shanghai, Mr. Doria opened an InvestSP bureau, the state&#8217;s first office to promote trade and investments, as well as technology exchanges in infrastructure, agriculture, healthcare, energy, education, and tourism.</p> <p><strong>Environment.</strong> Mr. Doria said that CRCC is interested in exploring cargo and passenger transportation on the Pinheiros River, in São Paulo. The project would include <a href="">depolluting</a> the river—which has a notorious <a href="">stench</a>. CRCC also plans to explore entertainment projects along the riverbanks.</p> <p><strong>Startups.</strong> The state&#8217;s economic development officer, Patrícia Ellen, signed a technical cooperation deal with the Beijing-based startup incubator Zhongguancun Innoway. The goal is to promote exchange between startups from both countries, fostering investments to companies based in the state of São Paulo.

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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.