Public investment in Brazil at a 50-year low

Author

Gustavo Ribeiro
July 19, 2019 • Reading Time: 8 minutes

Good morning! In today’s issue: Brazil needs to boost investment to break the vicious cycle of poor growth rates. Revelations from a plea bargain could be devastating to big banks. Truckers threaten a new strike. Brazil’s meat sector booming after Chinese swine fever. Enjoy your read!

Public investment in Brazil at a 50-year low

With the Brazilian federal government battling huge deficits and state administrations nearly bankrupt, investment levels in Brazil have fallen to their lowest level in 50 years. In Q1 2019, the rate of investment has retracted to 15.5% of GDP, from 15.8% in the previous quarter. Just like public investment, private investment has also consistently dropped since 2013.

Why it matters. In 2018, 152 countries had investment levels higher than Brazil’s. Among experts, it is a sort of consensus that the trend must be reversed in order to foster growth. But private investors have been shy due to uncertainties surrounding the Brazilian economy—from the 2018 election to how reforms would pass in Congress. 

Hopes are that the recent progress of the pension reform might signal that Brazil will take the path of fiscal predictability in the near future, unclogging investment ventures. Secretary of Treasury Mansueto Almeida is not among them, saying that investments won’t pick up “in the next three to four years.”

Backdrop. The government has been continuously reducing public investment since 2014, a strategy that economists and ministers alike agreed was necessary. But NGO Contas Abertas, which tracks government expenditure, believes that its impact may have been more severe than anticipated by policymakers. 

Has Operation Car Wash finally gotten to big banks?

Details of statements made by Antonio Palocci—who served as Finance Minister under Lula—have been leaked to the press. They reveal that all big Brazilian banks donated a combined BRL 50bn to Workers’ Party political campaigns. In exchange, said Mr. Palocci, banks obtained privileged information, including being tipped off about future changes to the Selic benchmark interest rate.

Why it matters. For months, it has been rumored that revelations by Mr. Palocci—a major figure during the Workers’ Party era in power—would be devastating for banks. His statements now suggest that banks might have disguised bribes as registered campaign donations on a quid pro quo basis, in a reflection of what construction companies did (although at a smaller scale). Looking at the devastating effects Operation Car Wash had on construction companies, banks should be worried if this thread starts being pulled.

Caveat. It remains to be seen, however, if Mr. Palocci can substantiate his statements with evidence. Jailed since September 2016, the former minister has offered dirt on many high profile politicians, but has struggled to back his words.

Truckers threaten new strike

The new minimum freight pricing table published by the National Land Transportation Agency (ANTT) yesterday infuriated truck drivers. The dissatisfaction sparked the creation of several WhatsApp groups to push for a new strike on Monday, similar to what happened in May of last year. “This should be the minimum price, not a ‘minuscule’ one,” said one union leader. Disgruntled truckers complain that the calculations were based on costs without factoring in truckers’ salaries.

Why it matters. Over 60% of all cargo in Brazil is transported by trucks. If we exclude crude oil and iron ore, the rate spikes to 90%. Last year, truckers staged an 11-day strike that nearly paralyzed the country. In many urban centers, food and fuel shortages were registered. Millions of animals died of starvation, and the agribusiness sector as a whole lost tens of billions. 

Backdrop. Earlier this year, the government tried to pander to truckers (one of the president’s electoral bases), blocking a bump in diesel prices, and creating a system to allow truckers to pre-pay for their fuel. The sector sees Infrastructure Minister Tarcísio de Freitas as a respectful and effective negotiator, which may be to the government’s favor. The more political trucking leaders are waiting for him to speak on the new pricing table before backing a strike.

Chinese swine fever a salvation for BRF

After three straight years in the red, meat giant BRF should be back in the black in 2019, thanks to a swine fever outbreak in China. The Asian country’s hog herds, the world’s largest, has shrunk by 26% from June 2018, according to a survey of pig farms in 400 Chinese counties. Negative effects may be felt there for the next decade.

That scenario has pushed BRF stocks up by 50% since January (the stock market index rose by 19% in the same span). The company expects to have more plants cleared by Chinese authorities to export, and plans to invest BRL 170m to boost sales to Asia by at least 30%.

Vegan meat on a rise

Meanwhile, Brazil is joining in on the trend of “vegan beef.” Startup Fazenda Futuro, which produces vegetable-based meat, has just raised USD 8.5m in its first round of funding. The investment was headed by private equity fund Monashees and by Go4it Capital—a venture capital branch of the asset management company founded by Marc Lemann, son of investor Jorge Paulo Lemann (the owner of Burger King and Heinz).

Also noteworthy

Terrorism. The current issue of weekly magazine Veja features an interview with a leader of the Sociedade Secreta Silvestre (Sylvanian Secret Society, SSS), a self-proclaimed branch of the international eco-extremist organization “Individualists Tending to the Wild.” The group—considered to be responsible for three bomb explosions in Brasília—says it plans to assassinate President Jair Bolsonaro.

Stimulus. After intense lobbying from construction firms, the government decided to put its planned stimulus program, which would operate through the FGTS severance fund, on hold. Firms are against it as the fund is used to finance housing and infrastructure projects. Giving money directly to workers would reduce the companies’ share of the pie. The construction sector is key to the Brazilian economy, both because the country needs infrastructural upgrading, and because the sector generates many jobs for less-educated workers.

Ambassador Eduardo. President Bolsonaro reiterated his wish to name his son, Congressman Eduardo Bolsonaro, Brazilian ambassador to Washington D.C. Voters, however, have not been so fond of the move—65% of Brazilians disapprove it. 

Education. Stocks of medical education platform Afya—to go on an initial public offering at Nasdaq tomorrow—have reportedly been priced at USD 19 apiece. The price elevates the company’s IPO to USD 300m. In 2018, Afya had a BRL 334m turnover, and a BRL 120m Ebitda (Earnings Before Interest, Taxes, Depreciation, and Amortization). The positive news pushed stocks of other Brazilian education groups up, with Estácio gaining as much as 5.45%.

Layoffs. Until the end of the month, Ford will lay off roughly 750 workers in its plant in São Bernardo do Campo, in Greater São Paulo. Back in February, the company announced it would be closing the plant and abandoning the truck market in South America. A total of 3,000 workers are currently employed there.

Cinema. After almost being canceled due to a lack of funds, Anima Mundi—Latin America’s biggest festival of animated movies—is happening now in Rio de Janeiro. The festival was hit by the government’s decision to pull funding from Petrobras to many cultural projects but, thanks to crowdfunding campaigns and a few private investors, the festival managed to carry on. Anima Mundi arrives in São Paulo on July 24.

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