Brazilian government strikes momentary truce with Congress

Author

Gustavo Ribeiro
May 22, 2019 • Reading Time: 6 minutes

Good morning! The momentary truce between Congress and the Brazilian government. Government could backpedal on gun decree. OECD slashes Brazil’s growth estimate, in make-or-break moment. (This newsletter is for platinum subscribers only. Become one now!)

Brazilian government strikes momentary truce with Congress

Good news from Brasília has been hard

to come by these days, but yesterday, markets were excited about what appeared to be a truce between Congress and the Jair Bolsonaro administration. The lower house decided to begin voting on the queue of provisional decrees which are set to expire next week, keeping the government from plunging into chaos.

  • Airlines: Yesterday, lawmakers confirmed the decree allowing full foreign ownership of airlines (the bill still must be voted on by the Senate before next Wednesday). The House also slashed a controversial article which forced airlines to reserve at least 5% of their flights for regional routes—catering to the companies’ requests. However, passengers will be allowed to check one piece of luggage without being charged extra (which could keep low-cost companies from setting up shop in Brazil).

  • Cabinet: The House is set to vote today on the decree establishing the current outlook of the presidential cabinet. Fearing a backlash, lawmakers also dropped their request for more politically-appointed offices.

  • Anti-corruption: Congress got its way in passing some provisions set to make fighting corruption harder on prosecutors. The money laundering enforcement agency (Coaf) will be removed from the Ministry of Justice and sent back to Economy. And fiscal auditors will no longer be allowed to report crimes to prosecutors.

Markets got excited yesterday, with the stock market rising by 2.76%. Caution is recommended, however, as the truce could be only temporary. Speaker Rodrigo Maia announced that his relationship with the government’s whip in the House is “beyond repair,” which could be an additional hurdle in an already rocky relationship between the executive and legislative branches.

Moreover, the House’s Constitution and Justice Committee should vote on the tax reform bill today, confirming that it won’t wait for the government’s input in what is the 2nd-most important point of the administration’s economic agenda.

Government could backpedal on gun decree

For the first time, the Jair Bolsonaro administration admitted to the possibility of altering the decree loosening up gun ownership rules in Brazil. The move comes after manufacturer Taurus announced that new rules allow citizens to purchase automatic rifles for military use—and that it was ready to provide them to the 2,000 people already on a waiting list.

Yesterday, 14 of Brazil’s 27 governors published an open letter against the decree—saying it would only enhance the country’s levels of violence.

The decree has been challenged at the Supreme Court by multiple actors. Justice Rosa Weber, the case’s rapporteur, gave President Bolsonaro until today to clarify several points of the legislation. The Solicitor General’s Office asked for more time—”to include any reviews” the government might still make.

OECD slashes Brazil’s growth estimate, in make-or-break moment

Citing trade tensions and political uncertainties as key inhibitors to global economic growth, the OECD has slashed its growth forecast for 2019 in the latest edition of its bi-annual Economic Outlook, published yesterday. For Brazil, the organization predicts 1.4% GDP growth—half of what was expected for 2019 a year ago.

The OECD sees two paths for the country. “If [political] uncertainty dissipates, [and the pension reform proposal passes,] domestic demand is projected to accelerate and unemployment to decline.” If austerity measures do get implemented, and the Brazilian economy becomes more integrated into the world, the country could grow by 2.3% in 2020.

However, the organization believes that if the government fails to pass its pension reform, the federal budget will blow up—and the administration won’t be able to respect the federal spending cap next year. For the long term, the OECD says Brazil will only get on the path of sustainable growth if it boosts productivity—which will require massive investments in education (a sector which has recently experienced budget cuts).

What else you need to know today

  • Petrobras. Brazil’s state-controlled oil company Petrobras is interested in exercising its right of first refusal on two areas in an auction of surplus oil from the so-called “transfer of rights” area. The auction, scheduled for October, could result in a signing bonus of nearly BRL 21bn. 

  • Credibility. Rating agency Fitch maintained Brazil’s credit rating at BB- yesterday, still deep into junk territory. The company based its decision on Brazil’s sluggish economy, difficult political environment, and high level of indebtedness. “A complete failure to advance with the [pension] reform cannot be discarded,” wrote Fitch’s Co-head of the Americas Sovereign Ratings Shelly Shetty, in a statement.

  • GDP. Fitch also slashed Brazil’s GDP growth projections from 2.1% to 1.5% this year, taking into account the impact caused by the financial crisis in Argentina and the January 25 Brumadinho dam collapse. It foresees 2.5% GDP growth in 2020, against its previous forecast of 2.75%.

  • Healthcare. The Supreme Court will resume a trial today on whether the government should be forced to paying for high-cost medication for patients of the public healthcare system. Every year, thousands of citizens sue municipal, state, or federal government to demand it pay for unaffordable drugs. In 2015 alone, the state of São Paulo spent the equivalent of USD 323 million on such medications, after judges ruled in favor of plaintiffs in over 18,000 cases.

  • Investments. Swedish vehicle manufacturer Scania announced BRL 1.4bn in investments for 2021 to 2024. The money will mainly be used to prepare the company’s plant in São Bernardo do Campo, in Greater São Paulo, to produce trucks and buses running on alternative fuels. Scania recently announced a partnership with Citrosuco, the world’s largest global producer of orange juice, to test a truck fueled by biogas or natural gas vehicles (NGVs).

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