▶️ Back to GDP growth

Good morning! Today, the latest GDP figures. What’s going on with the rise of bankruptcy protection filings. And the Mantega effect on Brazilian stocks.

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Brazilian economy grows after two sluggish quarters

Brazil’s gross domestic product walked sideways in the second half of 2023, with growth rates close to zero. But the economy came back to life at the start of this year, growing by 0.8 percent from Q4 2023 and 2.5 percent annually. Both numbers came slightly above market expectations measured by Bloomberg.

 Why it matters. In annual terms, all segments of the economy grew: industry (+1.9%), services (+2.3%), and agribusiness (+6.4%).

What they are saying. Despite a very positive number, agribusiness is not performing as well as it was in recent years, according to Rebeca Palis, the GDP survey coordinator at the Brazilian Institute of Geography and Statistics. Exports have been underwhelming, “with most of the output being driven by internal demand.”

Positive. One positive was the increase in investments, leveraged by a rise in imports of capital goods, software development, and construction. On the other hand, Ms. Palis recalls that the production of capital goods is still in negative territory in annual terms.

Rio Grande do Sul. The Q1 GDP reading does not yet factor in the effects of the devastating floods hitting Rio Grande do Sul, the country’s southernmost state. The crisis began late in April and will start to be assessed in Q2 numbers.

• Rio Grande do Sul is Brazil’s fourth-largest economy, accounting for 6.5 percent of the national GDP. However, it accounts for more than 8 percent of the country’s manufacturing output.

The Brazilian Report will bring further detail about Brazil’s GDP results during the day. Follow our coverage.

Small companies in hot water

The number of bankruptcy protection filings in Brazil has reached an eight-year high according to data from credit protection agency Serasa Experian. And more than 68 percent of companies entering bankruptcy protection are small businesses.

 Why it matters. Small businesses made up for 80 percent of the new formal jobs created in Brazil last year.

What’s happening? Thousands of companies are still feeling the economic effects of Covid, as health restrictions brought the operations of many businesses to a halt. During that time, owners took on tons of credit. However, the Central Bank jacked up interest rates from 2 to 13.75 percent between 2021 and last year as a way to tame inflation, making borrowing costs prohibitive to many.

• The Central Bank has since started a process of monetary easing, bringing benchmark interests down to 10.5 percent. But the pace of cuts has slowed, and the rate could be parked at its current level for longer depending on the economic scenario.

Forecasts. Markets’ median forecast for the year-end interest rate has risen sharply over the past month, from 9.63 percent four weeks ago to 10.25 percent now.

Glass half-full. Not all is bad, though. As deputy editor Fabiane Ziolla Menezes explained, default rates among businesses have stabilized in recent months. That may indicate that the growing number of bankruptcy protection filings may be linked to business owners growing more aware of the instrument, helping many avoid going under.

Life line. The Luiz Inácio Lula da Silva administration has been obsessed with credit since taking office, although it was initially focused on addressing the ballooning levels of family indebtedness (and even this initiative came up short of its initial goals). 

• In April, the government launched an initiative targeting small companies. Experts, however, warn that just making credit more widespread may be a way to kick the problem further down the road rather than a structural solution.

Oops, he did it again

Stock prices of Braskem, Latin America’s biggest petrochemical group, took a hit on Monday after former Finance Minister Guido Mantega told Bloomberg the government has approached him with an offer to join Braskem’s board of directors — and that he would accept the offer if shareholders approve.

• State-controlled oil giant Petrobras, which is now under the government’s firm grip after a CEO swap, owns 47 percent of Braskem.

Context. Mr. Mantega is the longest-tenured finance minister in Brazilian history, serving between 2006 and 2015 — spanning the presidencies of Luiz Inácio Lula da Silva and Dilma Rousseff. He is considered to be one of the chief architects of the 2015 recession, for leading a disastrous economic policy that caused the public debt to balloon and eroded market trust in Brazil.

• Mr. Mantega was also targeted by Operation Car Wash, having been accused of pocketing millions in bribes. Those accusations led to his brief arrest, but the Supreme Court later nullified parts of the investigation into him.

• Earlier this year, share prices of mining giant Vale suffered after rumors that the government wanted to use its influence in the company to make Mr. Mantega the next Vale CEO. After double-digit stock value drops, Mr. Mantega abandoned the idea.

 Why it matters. Mr. Mantega has been a loyal servant to Lula and his Workers’ Party, which is why the government is trying to find a way to compensate him. But investors worry that the use of major companies controlled (even if just partially) by the government is lowering the governance guardrails Brazil put in place in recent years.

Quick catch-up

A study by the World Weather Attribution suggested that in today’s world — which is 1.2oC warmer than pre-industrial times — events such as the Rio Grande do Sul floods are two times more likely and around 6 to 9 percent more intense.

In a meeting with senior government officials, President Lula reportedly admitted that his lack of engagement with Congress contributed to his administration’s defeats in recent important votes. He vowed to meet with his negotiators on a weekly basis from now on.

 Porto Alegre’s international airport is unlikely to be operational before December, the company that runs the facility said. The airport was flooded late in April and was initially expected to be reopened by May 10.

A new Datafolha poll suggests that voters in the city of São Paulo are getting more polarized — with right-wing voters outnumbering those leaning left (28 to 21 percent). Voters who are poor, evangelical Christians, and less educated tend to lean more to the right.

Brazil has got a new chief electoral justice, Cármen Lúcia. The Supreme Court justice is known for having a much lower profile than her predecessor, fellow Justice Alexandre de Moraes — who took a highly proactive stance in the battle against electoral disinformation (sometimes to a fault, according to many experts).

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