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Economic Reform Monitor
Market view of prospects for the Temer Government’s proposed reforms:
The Temer Government won a couple of important battles this week in its war against the shackles of the past that restrict the country’s economic development. Firstly, Congress passed the Temer Government’s important bill on Labour Reform legislation was passed in Congress, as discussed in our news clips below. The bill still has further Congressional hurdles to surmount before it becomes enacted. But this vote showed the extent of Congressional support that the Temer Government might expect for the crucial upcoming Pension Reform vote. The Pension Reform will enable the Federal Government to trim its spending to more reasonable levels over the next decade and will require a slightly bigger majority in Congress (a further 12 votes) than that obtained on the Labour Reform vote. But, based on the strength of this week’s Labour Reform vote, analysts and the Government believe that Congress also will be convinced to pass the Pension Reform.

Secondly, the relative failure of the General Strike on Friday 28th April further reinforced the Temer Government’s confidence in its own ability to successfully pass its Pension Reform bill without further dilution of its clauses. The alleged purpose of the General Strike was to rally popular support against the Labour and Pension Reforms of the Temer Government. The fact that the organisers of the strike had to resort to brute force and pickets to stop people from getting to work suggests that there was little popular support for their aims at the onset of the strike. The Trade Unions, who organised the strike, represent a minority of the population, seeking to preserve pension and other privileges relative to the poorer segments of the population. The General Strike largely failed, for the majority of businesses opened as usual. The Temer Government is not a popular or populist government and the organisers used strong-arm tactics, including the burning of buses and destruction of public and private property, to simulate popular revolt against the Government and its economic reform proposals. However, these tactics appear to have backfired and to have reduced the already weak support for the organisers among the population at large, even though the Temer Government itself remains in the doghouse.

The forward looking economic indicators below are selected from the Brazilian Central Bank’s (BCB) Focus Report of 28th April, a weekly survey of the expectations of the players in the Brazilian Financial markets. On the whole, the projections remain practically unchanged and moderately positive. Until this week, their stoic performance over the last month in the light of heavy political turmoil was worryingly reminiscent of Paul Samuelson’s quip on the fallibility of markets when he noted, in 1966, that “Wall Street indices predicted nine out of the last five recessions”. But after this week’s events, the Temer Government probably thinks that the markets had got it right all along. The predictions endorse the Government’s view that it should be able to push through the reforms. Of course, the Government still has a lot to do before the reforms are enacted.

Market Indicators

2017 rolling forecast

2018 rolling forecast

Medium
Term
Trend

4 Weeks ago

This week

Direction

4 Weeks ago

This week

Direction

Annual Inflation:IPCA %

4.10

4.03

4.5

4.30

Year end rates US$1=R$

3.25

3.23

3.40

3.38

Average Interest rates SELIC %

10.38

10.28

8.75

8.56

GDP growth %

0.47

0.46

2.5

2.5

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Trade Surplus US$ billions

50.07

53.15

41.9

41.1

Foreign Direct Investment
US$ billions

75

78

74.5

80

Getting better all the time
The feel good factor in Brazil also got a boost this week. Not that many in Governments throughout the land would have been appreciative of it. The Brazilian Congress and Senate, at Federal, State and Municipal levels, are notoriously indifferent to public opinion. However, in a sudden and unexpected outbreak of legislative fervor, the Federal Senate bowed to pressure from the population and passed two bills in one day that met with the approval of the population at large.

One of these is a project against the “abuse of authority” by public officials. Originally, the Senate had intended to use this to inhibit the Police, Prosecutors and the Courts from investigating corrupt practices, its own and those of other politicians. However, the Senate ended up passing the bill after removing most of the clauses that would have achieved its original objectives. On the same day, the Senate also passed a bill ending court privileges for the ruling classes. The bill removed some 35,000 politicians and officials from what in practice has been immunity from being tried for crimes and corruption charges while in office.

Both bills still need to go through Congress, where they might be changed before becoming enacted. Analysts still query the motives of this burst of altruistic legislation. But for now the population is basking in self-congratulatory satisfaction that its representatives finally heard their voice.

Market trends & Business news

Due to the General Strike, which meant that many people had been unable to get to work on 28th April, this has been the third shortened week in a row in Brazil. Next week includes the 1st May holiday, so it is almost as if Brazil has introduced the 4-day week, although temporarily. But business has crammed a lot of activity into the last week. The selection of this week’s news reveals that:

  • The Temer Government has taken a great step towards implementing its proposed and much-needed economic reforms;
  • The Brazilian economy shows encouraging signs of gradual improvement and of growing investor confidence in long-term projects; and
  • The EU and the Mercosul Free Trade Area are making progress on Trade Agreements.

 Here are the stories that illustrate these trends:

  • The economy gets a fillip from Congress’s approval of labour reform legislation: Congress passed the Temer Government’s labour bill by a handsome majority of 296 votes to 177, after stiff opposition and moments of tension. The legislation still has to go through Senate before becoming law. Its principal thrust is to permit employers and employees to override existing labour legislation should they agree to do so. However, a significant number of articles in the existing law were also changed. With these changes, the Temer Governments hopes to avoid the huge number of labour nuisance cases which plague business and clog up the courts in Brazil (some 4 million per year or, reportedly, 95% of all labour suits in the world). Compulsory Union levies were also abolished. Commentators expect that this will reduce the astonishing number of 11,257 Labour Unions in Brazil (UK: 137 listed and 13 unlisted Unions). Most of these exist merely to capture the compulsory levy equivalent to one day’s salary of each employee, who also are compulsorily Union members. Now that Unions will have to earn their members’ spontaneous support, analysts expect that only the truly engaged, representative Unions will survive. Overall, the reforms are expected to encourage employment by making it cheaper to create jobs and by making it easier to optimise productivity through more rational work arrangements compatible with an internet age. – The Rule Book is dead. Long live the Rule Book.
  • BNDES signals Q1 2017 expansion of credit for Capital Goods Sector: Ms Maria Silvia Bastos Marques, President of the Brazilian Development Bank, BNDES, informed that the finance of capital goods had increased by 32% in Q1 2017, in comparison with the same period in the prior year. She added that in the first quarter of this year there also had been a 25% increase in demand for infrastructure finance. She believes that these are indicators of a return to growth of the Brazilian economy: “This growth did not take place in the previous year. These signs started to happen in 2017.” – The present is pregnant with the future. (Voltaire)
  • Transmission auctions successfully concluded with discounts on Permitted Annual Revenues: 31 of the 35 lots on offer at the Transmission lines auctions were successfully granted. The successful bids together represent investments of £3.2 billion approximately. Bidders competed by offering the lowest charges to customers, Permitted Annual Revenues (RAP). The average discount on the RAP by the successful bidders was surprisingly large at 36.5%.  Credit Suisse analysts noted that “the Companies must be counting on significant discounts on forecast capital expenditure, or on bringing forward the start date of operations so as to obtain decent returns.” This certainly is the case of successful bidders EDP, Energisa and Alupar who have already informed the market that they expect to conclude the construction of the lines at a lower cost than estimated by the Industry regulator. Claudio Brandão, Director of Corporate Finance for Energisa, explained in a teleconference that “the savings are attributable to optimisation of line routing, and to the combination of equipment to be used. In other words, they are made viable by engineering.” – It’s a job for the professionals.
  • Exclusive auction for Alternative Energy: The Federal Government has announced that it looking at the possibility of launching alternative energy auctions in September. These auctions will focus on power reserve generated from alternative sources such as wind, solar, Small Hydro Electric stations and bio-energy. The intention is to offer three types of contracts for delivery in 2020, 2021 and 2022. – Alternative plans.
  • Agreement with Rotterdam Port could create hub port for North East Brazil: The Port of Pecém in the State of Ceará in North East Brazil has signed a Memorandum of Understanding with the Port of Rotterdam. The agreement is part of an ambitious growth plan to set up the Pecém Port as “the port of entry for the region” according to Mr Damilo Serpa, President of Cearáportos, the company that manages the port of Pecém. The agreement establishes that Rotterdam could eventually become a shareholder in the Pecém Port complex. – The Dutch ship comes in.
  • Bank profits set to rise in Q1 2017: Following 4 consecutive quarters of reducing profits, the Big 4 banks in Brazil are expected to report some  £3.7 billion of net income for the first quarter of 2017. On average, analysts believe that Itaú, Bradesco, Banco do Brasil and Santander should report net income some 21% higher than reported for the same quarter of the previous year. The improvement is attributable partially to the improved economic environment. But it was also due to the fact that Q1 2016 was the low point in bank performance, when they had written off bad debts resulting from the sinking of Sete Brasil, a failed Oil & Gas platform start up company sponsored by the previous Federal Government and funded by Big 4 bank loans. – Throwing off the dead weight!
  • Foreign Direct Investment into Brazil tops US$86 billions in last 12 months: US$24 billion of this was in Q1 2017 alone. The Brazilian Central Bank (BCB) announced that it was positively surprised at the strong performance of inbound investments (even stronger than the current Focus Group full year predictions for 2017 and 2018 shown above). This phenomenon has contributed towards the BCB’s currency management program, strengthening the Brazilian real and helping reduce the Foreign Exchange exposure of Brazilian companies in the quarter.  – They will come and build it.
  • China is involved in 37% of takeovers in Brazil during 2017: Chinese companies have stepped up investment in Brazil. Through 17th April this year, they have become the principal Foreign Direct Investor in Brazil, having spent US$5.7 billion on takeovers, more than even Brazilian investors, according to UK consultants Dealogic. So far this year, Chinese investment in Brazil has been 15% of total Chinese Foreign Direct Investment. Much of this is in the area of infrastructure and natural resources, areas in which Brazil needs significant investment. – A good opportunity is seldom presented, and is easily lost (Chinese proverb).
  • Carrefour Brazil net income for 2016 increased by 38%: This is welcome news for Carrefour as the Group plans to make an Initial Public Offering of shares in its Brazilian operations later in the year. – Carrefour, meilleur chaque jour!
  • JTI to produce Camel cigarettes in Brazil: Japan Tobacco International (JTI), which already sells Camel and Winston cigarettes in Brazil, is to set up its first factory in Brazil. The initial investment will be around  £20 million. The new factory, to be located in Santa Cruz do Sul, a tobacco growing area in South Brazil, will substitute product imported from Germany. Diego Luchessa, General Manager of JTI Brazil stated “The Company has already invested £125 million in Brazil since 2009 and the installation of our first plant in the country represents an important step for us.”– Import substitution.
  • Share prices of Brazilian cosmetics firm Natura rise on announcement of possible acquisition of L’Oréal’s retail chain, The Body Shop: Share prices of Natura rose by almost 3.3% on news that the cosmetics firm was partnering with private equity funds to bid for The Body Shop business. L’Oréal had put up the business unit for sale in February. Bloomberg has now reported that L’Oréal had placed Natura on the list of bidders in the next bid round. – Softening the bath water.
  • Visa takes Brazilian Fintech startups to Silicone Valley: Visa has announced the names of 5 Brazilian startups that are to take part in its first program for acceleration and incubation in Silicone Valley for the Brazilian Fintech projects. – It’s a small world.
  • EU and Mercosul aim to reach heads of agreement on a Trade Deal by December 2017: Susana Macorra, the Argentine Foreign Minister, announced that the Southern Cone Free Trade Area, Mercosul, and the EU would exchange tentative offers of trade concessions in September. She expects that this would lead to a pre-deal being announced in December 2017. – Baby steps.

This summary contains a selection of Business News from Brazil’s Markets for information purposes only and does not constitute any basis or recommendation for taking specific business decisions. Readers are recommended to seek appropriate counsel from their legal and business advisors before taking any business decisions.

For further information please contact Fabrício Soares, Business Development Manager at Britcham Brazil: fsoares@britcham.com.br