🔮 Better rate outlook

Good morning! Today, Moody’s more bullish on Brazil. How unions have lost ground. And Lula’s electoral blunder.

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Moody’s changes Brazil’s outlook to positive

Moody’s on Wednesday reaffirmed Brazil’s long-term issuer and senior unsecured bond ratings at Ba2, two notches below investment grade. Meanwhile, the rating agency improved Brazil’s outlook from stable to positive.

 Why it matters. While not a rating improvement per se, Moody’s better outlook for the Brazilian economy reaffirms a certain optimism about the country and Finance Minister Fernando Haddad. Last year, both S&P and Fitch upgraded Brazil’s credit rating.

What they are saying. “Moody’s assesses that Brazil’s real GDP growth prospects are more robust than in the pre-pandemic years, supported by the implementation of structural reforms over multiple administrations, as well as the presence of institutional guardrails that reduce uncertainty around future policy direction,” the agency said in a statement.

• Yes, but … Moody’s flags the country’s “still relatively weak fiscal strength, given Brazil’s high debt burden and weak debt affordability, which remains sensitive to economic or financial shocks.”

Tailwinds. Working in Brazil’s favor is the fact that the country recently approved a sweeping reform to simplify its Byzantine tax code, which will make it easier for businesses to comply with the norms. According to the World Bank, companies in Brazil take around 1,500 hours a year just to adhere to current tax rules.

• Moreover, the country benefits from a strong external position, a flexible exchange rate, and an effective monetary policy regime. 

Headwinds. It remains to be seen whether the government will be able to meet its primary goals due to an increase in spending on social programs and Congress’ willingness to cater to corporate lobbies on matters such as tax exemptions. The government asked for more spending leeway in 2025 and could do the same for this year.

• Moreover, poor economic growth distinguishes Brazil from many of its peers. According to S&P, “the country has relatively high perceived corruption, weak rule of law and property rights, and growing insecurity.” It also has “a large public sector that relies on high taxes but invests very little.”

• Ratings agencies also say that Brazil’s implementation of reforms is far too gradual, which diminishes their positive impact in the short term.

Big picture. Brazil gained investment grade in 2008 only to lose in 2015, as the country plunged into its worst two-year economic crisis on record. The path back has been rocky, and it is uncertain how close the country is to its destination. 

• “Lower government debt would provide cushion to face unforeseen adverse shocks — a key characteristic of an investment-grade rating,” S&P noted in April.

You should also read:

• S&P upgrades Brazil’s credit rating

• Fitch keeps Brazil’s rating unchanged, with a stable outlook

Unions bust

As usual, President Luiz Inácio Lula da Silva of the Workers’ Party took part in Labor Day celebrations organized by unions in São Paulo. The event was underwhelming, with the president being the first to acknowledge that fact, while still on the stage. Lula blamed Márcio Macêdo, his secretary general, for the event’s poor attendance numbers.

• “This event was poorly organized; we didn’t make enough effort to attract the number of people we should be attracting, but anyway, I’m used to speaking to 1,000, to a million … but if it comes to it, I’ll talk just to [one person],” Lula said on May 1.

 Why it matters. More than simply poor organization, the Labor Day event may be a statement of how Brazil’s labor unions have lost their teeth in recent years.

What happened. The 2017 labor reform ended the mandatory union tax, by which every formal worker had to pitch in a day’s salary to their profession’s labor union, whether or not they were members. Removing this funding was a death blow to many unions.

• This has translated into fewer strikes by private workers. Moreover, the informal sector and the gig economy bring new forms of labor that do not align well with traditional unions.

Course correction? The Brazilian left has struggled to adapt to these new forms of labor. The biggest evidence is the government’s attempt to treat drivers who work on ride-hailing apps as traditional employees, something not even the drivers themselves want. 

• Ultimately, the government yielded and proposed a hybrid system in which some labor protections would be due to gig workers without changing their status as autonomous contractors.

Thought bubble. The labor movement was historically one of the strongest pillars of the Workers’ Party. However, this recent shift in the reality of labor relations is one of the reasons the party relates to voters in a broader sense. Lula’s clout is unquestionable, but that disconnection means he has no clear heir apparent.

Job market. A buoyant labor market has been one of this government’s core selling points. While Brazil’s unemployment rate rose to 7.9 percent in March, that was more due to seasonal reasons: more people were looking for work at the beginning of the year (which is positive).

• Meanwhile, average worker income has largely recovered from pandemic losses. Still, food inflation has eaten up those gains, worrying governments and unions alike.

You should also read:

• Brazilian gig workers are against a ruling to protect them

• Digital platforms continue to fail workers in Brazil

Lula jumps the gun

During Labor Day celebrations, President Lula made an electoral no-no: he explicitly solicited votes for Congressman Guilherme Boulos, who is in the race for mayorship in São Paulo. Lula said that those who voted for him in 2022 (the majority of voters in São Paulo city) should also pick Mr. Boulos in the October municipal elections.

 Why it matters. Brazil’s electoral laws forbid candidates from soliciting votes until the official start of campaigns, which for this year’s elections is August 16. 

What you need to know. Brazilian rules try to keep a level playing field, even if the regulations leave plenty of wiggle room for candidates (or “pre-candidates,” as they should be calling themselves at this time) to participate in unofficial campaign rallies. 

• Having the sitting president asking for votes at an event funded by Petrobras, a state-controlled company, could put Mr. Boulos in hot water, as it seems like a textbook example of violations such as abuse of political and/or economic power. His adversaries said they will seek punishment for Mr. Boulos.

• Last year, Brazil’s top electoral court convicted former President Jair Bolsonaro for hijacking the country’s 2022 independence bicentennial celebrations for political gain.

• In Mr. Boulos’s favor is the fact that he didn’t solicit votes himself.

State of play. Mr. Boulos is currently leading the São Paulo mayoral race, in a statistical tie with incumbent Ricardo Nunes. The left wants to make the election about Lula v. Bolsonaro, while Mr. Nunes is trying to win over voters with city beautification works.

Yes, but … Municipal races traditionally have very different dynamics from federal disputes, with voters more interested in issues such as policies for bus networks and daycare centers, as well as matters of city upkeep and maintenance. 

You should also read:

• Bolsonaro: Fifty shades of ineligibility

• A two-horse race in São Paulo?

Quick catch-up

Embraer is considering launching a new large commercial aircraft to compete with Airbus and Boeing, which would mark its entry into a market far greater and more profitable than its regional jet niche. A decision will be made only in 2025.

The São Paulo City Council will today vote on privatizing Sabesp, a public sanitation company. In the first round of voting, privatization passed by a 36-18 majority.

Vale has gotten some clarity about its CEO succession process. Eduardo Bartomoleo will not remain in his position, but will stay on as an advisor until the end of next year. A list of three candidates will be agreed upon by September 30, and the new CEO will be chosen by December 3.

Rio Grande do Sul, Brazil’s southernmost state, has declared a state of calamity due to heavy rainfall that has killed at least ten so far. Governor Eduardo Leite says the situation is evolving towards becoming the “worst tragedy” in state history in terms of material loss.

The Federal Accounts Court allowed several authorities to seal information on their use of Air Force jets for transportation. Many use them for personal reasons, drawing scrutiny towards the government. Better rate outlook

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