Brazilian industry stuck ten years in the past

Author

Gustavo Ribeiro
April 03, 2019 • Reading Time: 7 minutes

Good morning. Brazilian industry stuck ten years in the past. Will the pension reform finally advance? Rio’s mayor face impeachment process. Government aiming for tax reform in May.

Brazilian industry stuck ten years in the past

The Brazilian Institute of Geography and Statistics (IBGE) published the latest figures of Brazil’s industry, and the numbers are not inspiring: the sector grew by only 0.7% between January and February (seasonally adjusted), below the already low 1% expectation. Today, Brazil’s industrial output is on par with 2009 levels and nowhere near the bonanza of 2010-2014.

A few factors contributed to the poor results in past months. The Argentinian crisis has lowered the demand for Brazilian manufactured goods—especially cars. Unpredictable events such as the May 2018 truckers’ strike and the January 25 Brumadinho dam collapse also played a role. The latter had a huge 

impact on the mining industry—pushing the result for extractive industries to -14.8%. But it would be a mistake to blame it entirely on the incident.

The fact is that the Brazilian economy is stuck in a vicious cycle. Growth is highly dependent on consumption. But, with a high unemployment rate, families are not buying more goods. Plus, businessmen and investors are wary of the government’s ability to resolve Brazil’s fiscal issues—which is holding investment back. This scenario makes the pension reform even more crucial.

Statistical “blackout”

After IBGE published negative unemployment figures last week (12.4%) and low industrial growth, the institute was heavily criticized by President Jair Bolsonaro, who questions IBGE’s reliability. Couple that with Economy Minister Paulo Guedes’ idea to carry out a slimmer version of the census in 2020, and you have a problem. The census is the most reliable data for drafting public policies. Having less data available would be damaging for years to come.

Will the pension reform finally advance?

Today, Economy Minister Paulo Guedes will talk before the House’s Constitution and Justice Committee—where the pension reform bill is stalled. In preparation, he met with 50 congressmen in an attempt to create a favorable momentum. However, Mr. Guedes’ efforts may not be enough to compensate for the president’s non-committal stance. “He made a political gesture that should be made by Jair Bolsonaro,” said one congressman.

Parties are afraid to support the unpopular reform and then be exposed by members of the government—including President Bolsonaro—on social media. Congressman Eduardo Cury, who is the favorite to become the bill’s rapporteur in the House, conditioned his support to a public commitment by the president. “If [he] helps, the reform will be done. If he helps,” said Mr. Cury.

Brazil faces municipal elections in 2020—and many House members will run for mayorships. The last thing they want is to be portrayed as responsible for passing a bill that will make retirement rules tougher on almost everyone. To force governors into committing, too, centrist parties want to push for a dangerous gamble: they would exclude state-level and municipal civil servants from the reform—which would certainly lead state finances to collapse.

Rio’s mayor face impeachment process

In a 35-14 vote, Rio de Janeiro’s City Council decided to open an impeachment process against Mayor Marcelo Crivella. He is accused of illegally extending advertising contracts without public bidding last year. Mr. Crivella now has 10 days to present his defense, and the council will conduct a 90-day investigation—meanwhile, Mr. Crivella will remain in office.

The move tells us more about the mayor’s unpopularity among voters—and especially councilors—than about his alleged wrongdoings. Such contract extensions are common (although illegal) in municipal administrations. The revolt is more to do with Mr. Crivella’s tense relationship with the City Council. Six months ago, he escaped another impeachment request—but 13 councilmen flipped this time.

There’s still time for Mr. Crivella to avoid an ousting. However, it will cost him. Councilmen are taking this opportunity to cash in and be handed cabinet appointments in the municipal administrations. But in a city which is almost bankrupt, the question is if Mr. Crivella will have anything to offer.

Government aiming for tax reform in May

Yesterday, President Jair Bolsonaro said his economic team is studying lowering corporate taxes, echoing promises made during the World Economic Forum to simplify Brazil’s tax framework and lower the burden on businesses. The government hopes to have a bill drafted and submitted to Congress by May—even before the pension reform passes.

The proposals of three economists are being analyzed, all based on the creation of a single, federal tax—the value-added tax (VAT)—which would replace several taxes that are changed individually. The new tax would be tested at a 1% rate—but the definitive rate would be established later.

On Twitter, Mr. Bolsonaro has said the government could also stop charging income taxes on companies, taxing profits and dividends instead. “Currently, Brazilian companies with profits over BRL 20,000/month pay 25% of income tax and 9% on their net profits,” said Mr. Bolsonaro.

What else you should know today

  • Oil & gas. Three groups made bids for 90% of Petrobras’ 4,500km gas pipeline network in the North and Northeast regions: the French-Belgian utility company Engie, the Mubadala fund (from the United Arab Emirates), and a consortium headed by Itausa (the parent company of Itaú, Brazil’s largest private bank). A deal is expected to be closed at around USD 9bn, and is a key move for Petrobras’ divestments plan. When signed, it will be the Brazilian company’s largest transaction ever.

  • History. While still in Israel, President Bolsonaro engaged in another attempt to rewrite history. He said Nazism was “obviously” left-wing, as Adolf Hitler’s movement was called the National Socialist German Workers’ Party and because state interventionism was a trademark of Nazi Germany. Historians overwhelmingly disagree with the president.

  • Stocks. São Paulo’s consumer protection service will fine Empiricus, an investment consultancy firm, for a recent get-rich-quick ad in which a 23-year-old woman claims to have transformed BRL 1,520 into BRL 1m in just 3 years. The ad worried regulatory authorities, and The Brazilian Report has shown why this statement is nearly impossible to be true. The fine could reach BRL 9m.

  • VP. Seven congressmen from Jair Bolsonaro’s party have sponsored a bill limiting the prerogatives of vice presidents, lieutenant governors, and deputy mayors—which would no longer take office in case of a vacancy of power. The bill was nicknamed the “Anti-Mourão amendment,” as Vice President Hamilton Mourão’s active agenda has made the president’s allies paranoid that he might be vying for the top office.

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