Is Brazil’s construction sector ready for a comeback?

Author

Gustavo Ribeiro
February 13, 2019 • Reading Time: 8 minutes

In today’s issue: Is Brazil’s construction sector ready for a comeback? 

Is Brazil’s construction sector ready for a comeback?

After four years of stagnation, Brazil’s construction sector could finally be set for a comeback. At least according to the National Confederation of Industry (CNI). Three factors are crucial for any potential return to strength: (1) controlled inflation, which makes costs more predictable and increases people’s purchasing power; (2) low interest rates, which stimulate access to credit; and (3) higher price ceilings for subsidized housing loans, which should boost residential projects.

But these factors alone are not enough to promote a robust growth rate in a sector that has lost 21% of its size between 2012 and 2017. The sector lobbies for a more comprehensive infrastructure program. And, as the government remains cash-strapped, concessions and privatizations could be the force behind such projects—in line with what the new administration defends.

Brazil’s construction sector had its heyday in 2010—when it grew by 13%. During that period, the country enjoyed a combination of access to long-term credit, heavy public investment, and a booming economy. In 2012, however, families already started suffering an elevated level of debt—which reached 46% of their income by 2015 and curbed consumption.

Carving up power in the Senate

The Brazilian Senate is set to elect the presidents of its 13 permanent committees today. The newly-elected Senate President Davi Alcolumbre negotiated a deal with all parties, distributing seats to 11 of the 16 parties in the upper house of Congress (two parties will share the lead of one committee).

With 13 seats, the Brazilian Democratic Movement (MDB) party got three committees—including the most important of all: the Committee of Constitution and Justice (CCJ), the only committee which analyzes every single bill before it goes to the floor. MDB was the losing party in the hectic battle for the presidency of the Senate and could have been a roadblock to Mr. Alcolumbre’s agenda if it didn’t receive enough power. Senator Simone Tebet will lead the committee, which is another blow to veteran Renan Calheiros—who beat Ms. Tebet for the MDB nomination for Senate President, but trailed Mr. Alcolumbre in the actual vote.

  • Why this matters: Every bill must pass through permanent committees before being voted on by the floor. This is where bills get the first reactions from interested parties—and the first amendments. Committee chairpersons are able to sit on a bill and prevent it from passing if he/she chooses, making these seats so coveted. They are issue-based, with topics ranging from taxation to agriculture to public safety. In the Senate, there are 10 committees.

  • Go deeper:Why is Brazil’s Congress so fragmented?

Ruralists 1-0 Paulo Guedes

From his hospital bed, President Jair Bolsonaro delivered Ministry of the Economy Paulo Guedes his first defeat in the new government, announcing onTwitter the decision to increase import taxes on powdered milk from the European Union and New Zealand. The move compensates a February 6 decision to end anti-dumping duties that had been enforced since 2001. According to the rural caucus in the House, the new tax could reach 42.8%.

Mr. Guedes took the loss by saying that his energy is focused on approving a pension reform. A new draft (with a minimum retirement age at 62 for men and 57 for women) has been presented to him by his economics team, and will soon be analyzed by the president. But the pension reform promises to put rural producers once again at odds with Mr. Guedes—who wants to end tax breaks and pension benefits to the sector that costs Brazil’s social security system BRL 7bn each year.

Paulo Guedes has been considered the reason why market operators so blindly supported Mr. Bolsonaro during the 2018 campaign—despite the president’s state-oriented economic track record. The powdered milk issue is only one battle—but if it becomes a trend, markets could pull the acritical support they have offered the administration so far.

Vale had budgeted costs and death toll of possible collapse

An internal memo of mining giant Vale had estimated in October 2018 how much it would cost, how many people would die, and possible environmental effects of a collapse of its Brumadinho dam—which burst on January 25, killing at least 165 people. The document is being used by prosecutors to request immediate action from Vale to prevent new such incidents.

The company had already detected indications of erosion in the dam’s wall, and it knew that over 100 people would die in the case of a daytime collapse. Still, it chose not to relocate offices and a cafeteria that were located just below the residue reservoir. In financial terms, an incident would cost over BRL 1.5bn. The company has suspended operations that produced 51m tons/year (10% of Brazil’s entire output), which could reduce its earnings by USD 1.2bn.

Vale defends itself by saying that no study attested to the fragility of the dam. However, safety inspectors told investigators the company coerced them into signing off on stability reports despite glaring signs of problems. Besides a criminal investigation in Minas Gerais, the company will also face two parliamentary investigation hearings committees (CPI).

What else you should know

  • Scandal.Sources say Secretary of Government Gustavo Bebianno’s days in the cabinet are numbered after an illegal campaign financing scandal hit Jair Bolsonaro’s Social Liberal Party—of which Mr. Bebianno was chairman during the election. The president reportedly ordered Mr. Bebianno to cancel all appointments and is expected to fire him.

  • Petrobras. Swiss investment bank UBS raised Petrobras’ rating from ‘Neutral’ to ‘Buy’—after a June 2018 downgrade, following a truckers’ strike that made the government slash diesel prices. “We believe Petrobras has a bright future as long as the controlling shareholder [which is the government] keeps it independent and it continues to divest,” says UBS in a document to investors. 

  • Homophobia.Brazil’s Supreme Court is expected to rule today on a pair of cases that could determine whether homophobia and transphobia should be considered criminal offenses, on a par with racism and femicide. Brazil is one of the most dangerous countries for LGBTQI people—NGOs claim that 320 gay or trans people were killed last year in the country.

  • Women’s rights. Senators have revived a 2015 bill to ban abortions in any situation. Currently, women are allowed to abort only in cases of rape, when the mother’s life is at risk, and when the fetus has no brain. The new bill would create “the guarantee of life from conception” and will be debated in the chamber.

  • Media.The future of Abril, Latin America’s largest publishing house and editor of Veja and Exame magazines, is at risk. The company was sold in December, but a negotiation around its BRL 1.6bn debt (BRL 90m in labor obligations) is more determining to its future. Creditor banks reportedly rejected the investors’ proposals for acquiring the debt. If a deal is not made by March, the company could have its bankruptcy declared and two of Brazil’s main magazines risk shutting down.

  • Storms.One week after tropical storms flooded several areas in Rio de Janeiro and killed 6 people, the state is once again on alert for new strong rainfall today—many areas reportedly have sandbags already in place (see map). Three meteorological phenomena are contributing to the formation of powerful storms in the Rio area. Authorities are setting up a crisis cabinet to deal with potential complications.

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