Brazil no longer one of most reliable countries to invest

Author

Gustavo Ribeiro
May 08, 2019 • Reading Time: 8 minutes

Good morning! Brazil no longer one of most reliable countries to invest. Presidential cabinet at risk. Asia roadshow seeks to increase exports by USD 59bn.

Brazil no longer one of most reliable countries to invest 

The Foreign Direct Investment Global Index, put together by consultancy firm A.T. Kearney, measures investors’ confidence in international markets. It lists the 25 places they deem as the best to put their money. For the first time since the index’s first edition in 1998, Brazil is not even on the list. As a matter of fact, no South American country is. “Investors may be concerned about ongoing economic and political uncertainty in the region, although relatively robust FDI inflows in 2018 indicate that many investment opportunities still exist,” says the report.

Brazil had been sliding down the ranking in recent years. Between2010 and 2014, the country featured in the top 5. But Brazil has hit 12th, 16th, and 25th in the last three years. That reflects decreasing levels of foreign investment in Latin America’s biggest market. Brazil received USD 6.8bn in FDI in March 2019, a drop of 13% from one year ago.

Last year, A.T. Kearney cited Brazil’s “sheer size” as a reason for it to continue being an enduring destination for FDI. This seems not to be enough anymore. “The great political uncertainty of recent years, with Dilma Rousseff’s impeachment, the 2018 elections, and issues related to Operation Car Wash created a negative environment,” says Mark Essle, an A.T. Kearney partner in Brazil. The country is also hurt by a shortage of liquidity, infrastructure problems, and a complicated tax system.

Developed markets dominated the ranking, with 22 of 25 positions. For the 7th consecutive year, the U.S. topped the ranking. The biggest climbers in the ranking were Denmark (rising 6 spots), Spain (4), Austria and Belgium (3 each).

Presidential cabinet at risk

When presidents take over and reshape the cabinet—changing the number of ministries or their attributions—they must do so by passing new legislation. And they usually do it through provisional decrees, which have the same value as regular decrees—they come into force immediately—but they must be approved by Congress within 120 days, or else they lose their validity. After stepping in as president, Jair Bolsonaro reduced the number of ministries by merging several of them. And now, it is unclear whether the changes will stick.

Mr. Bolsonaro’s provisional decree will expire on June 3. Usually, that’s a safe margin for any government to confirm the changes and move on, but as the sitting administration is staging a tug of war with Congress, parties are threatening to let the decree expire. In theory, that would change the outlook of the government back to what it was under former President Michel Temer. But we would be in uncharted waters—and the full implications remain unknown.

The president agreed to recreate two ministries, which were traditionally used as pork-barreling tools by parties—the Ministry of Cities and Ministry of National Integration—which oversee infrastructure projects with great visibility for politicians. Allies in Congress would appoint the new cabinet members.

But parties are still reticent to fully back the government. The decree’s rapporteur in the Senate has asked the government to move Brazil’s money laundering enforcement agency from the Ministry of Justice (headed by former Operation Car Wash judge Sergio Moro) back to the Ministry of the Economy, among other requests.

Bolsonaro’s new gun decree

Yesterday, President Jair Bolsonaro signed a new decree to further loosen gun ownership laws. Earlier this year, he had already signed a measure on the matter, though it had limited effects. This time, the president has made it easier for gun collectors to purchase, store, and carry firearms. Here are the main changes:

Import restrictions have been lifted—even when a similar product is available in Brazil.

Collectors will be able to carry loaded guns. Before, that was only possible in shooting clubs. Also, the limit for ammunition purchases goes from 50 to 5,000 bullets per year.

People in rural areas will be able to bear arms within their properties—and permits will be tied to the owner, not the gun. Meaning that people with multiple firearms will no longer need several permits. And ownership transfer will become simpler.

Human rights groups have criticized the decree, especially the changes concerning people in rural areas, where violence could dramatically increase.

Asia roadshow seeks to increase exports by USD 59bn

Agriculture Minister Tereza Cristina has embarked to Asia for a 16-day trip, during which she will visit Japan, China, Vietnam, and Thailand. A defender of rural producers, Ms. Cristina goes with the mission of generating deals that will increase Brazilian agricultural exports to these markets, which today add up to USD 41bn—USD 36bn of which going to one country alone: China.

According to the National Agriculture Confederation, there is potential to more than double the quantity of exports. The organization believes that 97 products could be expanded, such as tobacco, cotton, corn, timber, and sugar. In Japan, rural producers expect exports to jump from USD 2bn in 2018 to USD 19bn in the next few years.

Brazilian soybeans not as competitive

A recent study shows that it costs more to produce soybeans in Brazil than it does in Argentina and the U.S., the country’s fiercest competitors. The average cost of a typical Brazilian farm is of USD 291.70 per ton. In the U.S., the cost goes down to USD 163.80 per ton—and in Argentina, to just USD 157. Even with Brazil having two annual harvests, the country’s profitability margins are slimmer than its competitors. Over the past decade, production costs went up 3%, while gross revenue increased 2.8%

What else you need to know today

OECD. During his March trip to Washington and meeting with Donald Trump, Jair Bolsonaro negotiated dropping Brazil’s prerogatives as an emerging nation in the World Trade Organization in exchange for U.S. support to join the OECD, a “club of rich nations,” which would provide a much-needed image boost among investors. But the U.S. hasn’t kept up its end of the bargain, with diplomats remaining silent about the inclusion of new members during an OECD meeting in Geneva. 

Pensions. In just four years, the pension system deficit in Brazilian states nearly doubled, reaching BRL 88bn last year. Despite this dreadful fiscal situation, there is a growing movement in Congress to keep state pensions out of the reform proposed by the government—unless governors become vocal advocates for the bill. Federal congressmen don’t want to take the political hit for the austerity measures.

Petrobras. Brazil’s state-controlled oil and gas company posted BRL 4bn in net profits after Q1 2019—a drop of 42% from one year ago, and below markets’ predictions. These results, however, are largely due to a change in how Petrobras does its books, as the company has adopted international financial reporting standards. Otherwise, profits would have been hovering around BRL 5.3bn.

Uber. Brazilian Uber drivers have adhered to today’s international protest against the app’s poor working conditions and low pay. Drivers from dozens of Brazilian cities (Uber is present in almost 100), including Brasília, São Paulo, and Rio, will turn off their apps for 24 hours. The São Paulo App Drivers Association expects 50% of professionals to join the stoppage. On Friday, Uber will hold its initial public offering and could be valued at USD 100bn.

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