Despite rising profits, companies aren’t investing more

In today’s issue: Despite rising profits, companies aren’t investing more. Can the government suppress the crisis? Brazilian middle-class buying more real estate.

Despite rising profits, companies aren’t investing more

Brazilian companies have seen their profitability go up—while interest rates and companies’ cost of capital went down. Still, companies’ investments are not increasing at the level which would be expected in such a favorable scenario. According to Fipe (the Institute for Economic Research), this is down to doubts regarding the government’s ability to pass the pension reform, coupled with a high idle capacity leftover from the recession.

Economist Carlos Antonio Rocca, a Fipe board member, believes that investments will have to come from the private sector, as Brazil’s public administrations are close to bankruptcy. This puts the country in an almost binary situation: either the country passes austerity reform and the economy takes off, or the economy will tank once more.

For Economy Minister Paulo Guedes, the sheer unpredictability of rules in Brazil is also a big deterrent to investors. In that aspect, Mr. Guedes seems to at least have the support of Supreme Court Chief Justice Dias Toffoli, who has filled the court’s first-term docket with a laundry list of tax- and labor-related cases in which the government is involved—and which are worth BRL 50bn.

• More on this:Why does Brazil have so few retail investors?

Can the government suppress the crisis?

President Jair Bolsonaro has planned an intense schedule this week to try and take attention away from the political crisis affecting his government. The administration is in big trouble after Secretary-General Gustavo Bebianno was accused of siphoning money from his party’s electoral fund. By submitting the anti-crime bill (a set of changes to the penal code) and the pension reform to the Congress, Mr. Bolsonaro hopes to hijack the news cycle in his favor.

Mr. Bebianno is expected to be fired today, after a week-long public exchange of barbs between him and Carlos Bolsonaro—one of the president’s sons. Columnist Mauricio Lima (Veja magazine), wrote that Mr. Bebianno has warned the government he holds compromising documents against the president. Over the weekend, Mr. Bebianno posted not-so-veiled threats on social media, but then said to the press “it is time to cool [his] head off.”

Mr. Bebianno’s exit from the government further strengthens the military officers at the government’s higher echelon. He should be replaced by retired General Floriano Vieira Neto—giving the military all cabinet positions within the presidential palace, with the exception of the Chief of Staff position, currently occupied by Congressman Onyx Lorenzoni.

Go deeper: Who is Gustavo Bebianno?

Brazilian middle-class investing more real estate

After a few years of caution, the Brazilian middle-class is back on the market—with real-estate investments advancing by 15% in 2018. The rise was propelled by Brazilians using their savings to finance new housing. In 2018, that type of borrowing amounted to BRL 57bn—a 33% jump from 2017, but still way below 2014 levels, when BRL 113bn from savings were invested.

The markets’ trust in the improvement of the economy has helped push down long-term interest rates, which are key to calculating banking fees for real-estate loans. Six months ago, contracts mature in 2029 brought interest rates of 12%—now, the fees for these same contracts are at 9%. Real estate associations believe that if the austerity reforms pass, the banks’ appetite for risk will grow exponentially, thus pushing interest rates further down.

But a side effect of that return of the middle-class to the real estate market is a probable hike in prices (especially in big cities)—as the construction business has slowed down over the past four years.

What else you should know

• Infrastructure. Two Chinese infrastructure giants (CCCC and China Railway) have joined forces to fight for the rights to build a 12km bridge connecting Salvador (Bahia) to Vera Cruz. The project, which was initially conceived in 1960, is worth BRL 5.3bn. The bidding process is expected to take place in the second half of the year.

• Mining. One city in the region of Belo Horizonte was put on alert due to the risk of collapse of another dam owned by Vale. About 110 people were removed from their homes. Since the January 25 collapse of a Vale dam in Brumadinho (the second in three years), communities neighboring dams have lived under stress of fear of a new collapse.

• Assets. Former Finance Minister Eduardo Guardia has been announced as the new partner and head-executive at investment bank BTG Pactual Asset Management—he takes over on July 1. BTG manages BRL 184bn in assets, and has been involved in recent corruption scandals—senior partner André Esteves was arrested (and later released) suspected of involvement in an Operation Car Wash-related scheme.

• Pensions. In 2005, there were 58 retired state-level civil servants for each 100 still in activity. In 2017, that ratio reached 88-to-100, which makes state administrations the biggest stakeholders when it comes to the pension reform. Still, Economy Minister Paulo Guedes has reportedly decided on less-controversial measures on state-level pensions for public servants. Governors are trying to change his mind.

The post Despite rising profits, companies aren’t investing more appeared first on The Brazilian Report.