Despite risk of recession, interest rates should hold

Author

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

Despite risk of recession, interest rates should hold

At 6 pm today, the Central Bank’s Monetary Council will announce Brazil’s benchmark interest rates for the next 45 days. Despite the risk of recession (that is, two straight quarters with negative growth), the bank is not expected to lower rates—a common strategy to foster investments. According to Itaú Unibanco, the Central Bank won’t change the Selic rate until there is “more clarity around the economic reforms—especially the pension reform.”

Nevertheless, a downward bias is building rapidly. The Brazilian economy remains sluggish, with investments at a worrisomely low level. The country’s GDP shrank in the January-March period (the first contraction since 2016). And indicators for May and April give little hope that the trend could be reversed in the short term.

In the end, the committee’s debate will center on how serious policymakers think the slowdown is—and how confident they feel that inflation has reached its upper limit. Unlike its international counterparts which are often concerned with economic growth, Brazil’s Central Bank’s mission is to keep inflation rates within the target band set by the government. Back in May, the bank’s president, Roberto Campos Neto, said Brazil could not trade growth for inflation control. “It has been done in the past—and it hasn’t worked.”

Real interest rates

Despite the Selic benchmark rate being at an all-time low of 6.5% a year since March 2018, Brazil’s real interest rates remain among the world’s highest. Credit card rates, for instance, hover around 300% a year. Over 77% of households are exposed to credit debt—a major deterrent to growth in a country where the economy is 85% based on domestic consumption and industry.

Amid new leaks, Moro talks to the Senate

Justice Minister Sergio Moro is expected to attend the Senate’s Constitution and Justice Committee at 9 am this morning, to discuss the leaked conversations he had with prosecutors while acting as a judge of Operation Car Wash cases. The messages show Mr. Moro quarterbacking the prosecution, which is illegal. His line of defense, however, is to say that the messages were obtained through the criminal actions of a hacker—who could have doctored them.

Last night, news website The Intercept published a third batch of leaks. A series of conversations from April 2017 shows Mr. Moro going against the prosecutors’ decision to investigate center-right former President Fernando Henrique Cardoso shows. “I think it’s questionable, as it ticks off someone whose support is important,” wrote the former judge at the time. Collaborating defendants mentioned kickbacks paid to the former president’s campaigns in 1994 and 1998 at least 9 times during the investigation.

Mr. Moro is set to face a tough crowd today. Since Operation Car Wash started, in 2014, politicians from both sides of the aisle have complained about its excesses—and now have the chance to take on the probe’s poster boy. Trying to get senators In his corner, Mr. Moro asked for the support of the rural caucus.

Brazilian universities not what they used to be

According to the latest edition of the QS University Rankings, Brazil has 19 institutions among the world’s top 1,000. All of them, however, had worse scores this time around. The study shows a drop in graduates’ employability, quality of teaching, performance of academic research, and attractability for foreign professors and students. And, according to QS, the trend is for things to get worse, due to massive budget cuts in the last few years. “Brazil’s status as a regional leader in research is in jeopardy,” said QS director Ben Sowter. The only Latin American institution in the QS rankings’ top 100 was the University of Buenos Aires.

On the same day, British specialized magazine Times Higher Education published its own ranking of universities across the world—rating 150 institutions from 12 countries. According to THE’s ranking, the Pontifical University of Chile has dethroned the University of São Paulo as Latin America’s best-rated. Brazil, however, held 6 of the region’s top 10 positions.

Brazilian research has been recognized abroad. The country is the 13th-largest producer of research publications, and its “citation impact”—a measure that analyzes how relevant research is for other studies—has increased 18 percent from 2011 to 2016. Meanwhile, we can cite the Sirius synchrotron as an example of disruptive scientific work. Also, a type of bandage developed by the Federal University of Ceará, using tilapia fish skin, will be tested in space by NASA.

But budget cuts have proved to be crippling. Universities claim that, without the money, they won’t be able to provide fundamental operational services such as water, energy and cleaning. While financial woes have always been the norm in Brazil, students and teachers claim the cuts promoted by Jair Bolsonaro are based on ideology, and not economics.

Also noteworthy

Gun control. In a 47-28 vote, the Senate floor repealed President Bolsonaro’s decrees to loosen gun control laws in Brazil. The decrees will only truly be dismissed if the House of Representatives follows suit—although there has been no indication when or if this may happen. Mr. Bolsonaro pleaded to the House, asking it to preserve “Brazilians’ right to self-defense.” Experts, however, praised the decision, saying the Senate showed independence on a matter that impacts the lives of millions.

Prosecution. The National Association of Federal Prosecutors has issued its three-name list with the prosecutors who have most support of their peers to become the next prosecutor general—the current term of incumbent Raquel Dodge ends in September. The list, however, is not binding—the president may choose any prosecutor he deems fit, and few believe he will follow the prosecutors’ recommendation. Most think he will name Ms. Dodge to two more years in office.

Aviation. Avianca airlines’ assets should be auctioned on July 10, said a Bankruptcy Court in São Paulo. The company will be split into seven new ones, isolating its debts from the most valuable assets—notably time slots to fly to and from Brazil’s main airports. Latam and Gol have pledged to pay USD 35m each for one of the new companies to be created. Azul and Passaredo are the other carriers expected to bid for the assets.

Odebrecht. The long list of creditors of Odebrecht—the former construction behemoth now under court-supervised administration—amounts to 65 pages. Besides public banks, another group stands apart from the rest: a pool of 42 executives who were among the signatories of a massive plea bargain deal with Operation Car Wash. The company owes them a combined sum of BRL 438m in unpaid bonuses. Odebrecht will try to lower debts by up to 90%, say analysts.

Party boy. The new president of BNDES (the National Development Bank), Gustavo Montezano, has a conviction for damaging two gates in a condo he lived in São Paulo. In October 2015, he wanted to party within the condo’s premises alongside 30 guests (among whom was Congressman Eduardo Bolsonaro)—but the group acted in an “uncivilized way,” as the case’s judge said. Mr. Montezano settled on a BRL 25,000 payment.

Murder. The husband of Congresswoman Flordelis dos Santos was murdered on Sunday, in what the family is calling a botched robbery. But the police believe the man, an Evangelical preacher, was killed after a family feud. Police believe the murder weapon was a pistol owned by the congresswoman’s son, Flávio Rodrigues (the victim’s stepson). He was arrested on Monday in a domestic violence case.

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