Brazil’s yet-to-be-discovered oil fields to be privatized

Good morning! The government’s plans for oil reserves it hasn’t discovered yet. The fight for space in the Brazilian airline market. And the expected cuts to Brazil’s benchmark interest rate. Enjoy your read!

Brazil’s yet-to-be-discovered oil fields to be privatized

Since 2004, Brazil has been pleading with the UN to increase its maritime exclusive economic zone from 200 to 350 nautical miles. Last month, the country got its first win, with the UN publishing on its website that Brazil’s continental platform in the South would be increased to exactly those 300 nautical miles—an area of the size of Uruguay. But even before these requests granted, the government already had a plan to privatize the new oil fields it might have the right to exploit within the next two years.

Why it matters. Experts predict that the reserves in the region claimed by Brazil could increase the country’s oil and gas output, today at 15.9bn barrels, by as much as 50%. Government officials have called this region the “pre-salt mirror,” as it would be just as rich as the pre-salt deepwater reserves, which today provide the bulk of Brazil’s oil production. And this is in addition to the presence of minerals such as cobalt, manganese, gold, and nickel. 

Due to the limits to exploration imposed by international law, it remains impossible to fully assess the region with precision. But the projected wealth of the new region has already earned it the nickname “Blue Amazon” within the Brazilian military. Roughly 85% of Brazil’s oil, 75% of its gas reserves, and 45% of its consumed fish are in the ocean.

Slow process. While the UN declaration is a big step forward for Brazil’s ambitions, the other maritime areas demanded likely will not be approved before 2021. However, as Brazil lodged a claim for these areas to the UN, no other country can run studies there.

Fighting for Brazilian skies

The National Civil Aviation Agency today will begin the process of reassigning the 41 time slots (authorization to fly to and from airports) at São Paulo-Congonhas Airport that were used up until now by the near-bankrupt Avianca Brasil. Last week, the agency decided that Gol and Latam—the sector’s leaders—will only get the slots smaller companies choose not to take, as a push to reduce high market concentration.

Why it matters. Official data shows that airline ticket prices have jumped 31% since April. In the cities in which Avianca used to operate (the carrier has been suspended from flying as its financial woes compromised the safety of its operations), the increase was even bigger: 40%. The government expects that by bringing other players into the country’s 2nd busiest airport—along with allowing foreign carriers to operate—prices could go down.

Market concentration. The Brazilian airline market is highly concentrated, with Gol and Latam controlling 74% of Brazil’s domestic flights. Brazil’s airline market scores 3,250 points in the Herfindahl-Hirschman Index, which calculates the presence of monopolies. Anything north of 2,500 shows a highly concentrated sector.

Interest rates expected to start falling this week

With a slow economy and below-target inflation, markets expect Brazil’s Central Bank to start cutting the country’s Selic benchmark rate, from the current 6.5% a year (the lowest ever), where it has been since March 2018, to 6.25%. An announcement will be made on Wednesday—the same day the U.S. Federal Reserve publishes its decision on the country’s interest rates (leading investors to call it “Super Wednesday”).

Why it matters. Lowering the benchmark interest rate won’t improve low expectations for the Brazilian economy for the year, as it will only take effect from 2020. More than Wednesday’s decisions, markets will be looking at the minutes the bank will publish—which could indicate further cuts. That could change the dynamics of investment in financial markets, making riskier assets, like stocks, more attractive than certain bonds. 

In need of a pulse. Alberto Ramos, chief economist of Goldman Sachs in Brazil, to Folha: “The economy is too weak, there is too much idle capacity. Without cuts [in the interest rate], inflation will finish below target in 2020.” Estimates for the rate in 2019 are 3.78%, way below the 4.25% goal established by the Central Bank.

Also noteworthy

Deportation. Allies of House Speaker Rodrigo Maia are operating to repeal a decree signed by Justice Minister Sergio Moro allowing the country to summarily deport “dangerous” foreign nationals. The decree says that any foreigner under investigation in their home country can be expelled, without the need for a conviction, creating a sinister instrument for any government that disrespects rights and liberties. Congressmen labelled the move “authoritarian.” It is also a testament to Mr. Moro’s poor political timing—he is under heat after a foreign journalist started leaking his private messages. More on the decree.

2020. Eyeing the 2020 municipal elections, President Bolsonaro wants to reshape his Social Liberal Party. He joined the party in March 2018, for the sole purpose of running for the presidency, though he had never had a connection to it. Now, he wants a rebranding and more control over the group, which has not been very loyal to him in congressional votes. 

Green-Yellow Friday? The government is in talks with representatives of the retail sector to create a new date for massive discounts to stimulate consumption in September. The idea would be connecting the price cuts to Independence Day (September 7): a more patriotic version of Black Friday’s consumption frenzy.

Diplomacy. President Bolsonaro will move forward in his intention of naming his son, Congressman Eduardo Bolsonaro, as the new Brazilian ambassador to Washington DC, having already consulted the American government about it. Foreign Minister Ernesto Araújo (an ally of Eduardo within the administration) says he is “very sure” the Senate will confirm his name to the embassy.

Hackers. The case of the hackers who allegedly broke into the cell phones of up to 1,000 Brazilian authorities is set to be exploited politically by parties on both sides of the aisle. They want to use the hearings committee to investigate the political use of fake news alongside questioning the hackers. As the suspects were in possession of more money than their declared means would allow, parties want to know if they were hired by someone willing to target authorities.[/restricted]

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