The risks in Venezuela for Brazil

Good morning! This issue: The risks in Venezuela for Brazil. Economy Minister’s quest against tax breaks. Auctioning Avianca airlines assets.

The risks in Venezuela for Brazil

For the past few days, Venezuela has been engulfed by even more turmoil and uncertainty—as forces opposing President Nicolás Maduro staged a botched coup and Venezuela saw waves of violent protests (which have already claimed 5 lives). With the opposition calling for a general strike next week, Brazil’s northern neighbor seems to be edging closer than ever to a civil war. Which could have severe consequences for Brazil.

Border. First, the inflow of migrants would dramatically enhance—with great impact on Roraima, Brazil’s northernmost state. Authorities say that Venezuelan families already account for 10% of beneficiaries of cash transfer program Bolsa Família in that state. Not to mention the potential strengthening of criminal organizations—which could enhance drug trafficking between the two countries.

Economy. An armed conflict in South America should also hamper investments across the region, adding to an already existing perception of instability.

Trade. Venezuela could become this generation’s proxy war—with Russia and China backing Mr. Maduro, and the U.S. in the opposition’s corner. The U.S. has kept a great deal of economic influence, but China has put forward hundreds of billions of dollars in infrastructure projects. Being at odds with either U.S. or China would certainly not be in Brazil’s best interests.

Within the Brazilian government, military officers are against an intervention—while ideological zealots are not. President Jair Bolsonaro tweeted that any action would be “decided EXCLUSIVELY by the Brazilian President.” According to the Constitution, however, military operations abroad must be approved by Congress.

Go deeper: Failed coup in Venezuela raises questions for Brazil

Economy Minister’s quest against tax breaks

Tax exemptions have proven to be a big drain of revenue for the federal government. In 2018 alone, BRL 293bn were waived. And the problem is not only that some sectors pay fewer taxes. To compensate, the government ends up overtaxing segments with less lobbying strength in Congress. Economy Minister Paulo Guedes wants to slash BRL 102bn in tax benefits by 2022 (the equivalent of 1.5% of the GDP).

Mr. Guedes intends to include a rule in the government’s 2020 budget proposal (to be presented to Congress by August) to establish that Brazil must reduce, every year, the equivalent to 0.5% in tax breaks. However, he has been coy about which subsidies will be in the fireline—a move to avoid facing opposition from organized lobbies before he presents his proposal.

Brazil’s biggest source of tax exemptions is currently the Simples Nacional system—a simplified taxation structure available to companies with up to BRL 4.8m in annual revenue.  It was initially thought to serve micro- and small-sized companies, but now ends up serving almost all businesses, except for large corporations, generating exemptions of BRL 75bn. The government’s economic team has already defended restrictions to Simples Nacional.

Auctioning Avianca airlines assets

Azul, Gol, and Latam have been eligible to participate in the auction of Avianca airlines assets—scheduled for May 7. Azul, however, has declared it has no intention to take part in the auction, as the company has grown disgruntled with the process. The company had signed a non-binding deal to purchase Avianca’s assets for USD 105m.

But a move by Gol and Latam—in association with Elliott Management Corp., an investment fund which owns 70% of Avianca’s debt—changed the rules. Elliott decided to split Avianca into 7 new companies, each housing different assets of the company, such as planes, airport slots (173 of them), employment contracts with crew, and its frequent flyer program (which has over 6m users). Gol and Latam are set to offer USD 70m each for one of the units being sold.

Brazil’s antitrust authority has voiced its concerns about the process, which will make a market already presenting very high levels of concentration even more undiluted. Gol and Latam control two-thirds of the air travel market in Brazil—and already own 87% of slots in São Paulo-Congonhas airport and 63% in Rio’s Santos Dumont.

Go deeper: Weaker currency boosted tourism in Brazil, but took its toll on airlines

Brazil posts USD 6bn trade surplus

Due to a drop in imports (-1.2%), Brazil registered a USD 6bn trade surplus in April—the second-highest ever recorded during that month. Since January, Brazil has accumulated a USD 16.5bn surplus—but overall trade is down 1.9% (or USD 128bn) when compared to the January-April period of 2018.

According to Trade Intelligence Undersecretary Herlon Brandão, three main factors explain a drop in revenue from exports: lower soybean prices, the effects of the Argentinian crisis on Brazil’s auto industry, and a lower amount of iron ore being sold (a reflection of the shutdown of several Vale mines, following the January 25 Brumadinho dam collapse).

What else you need know today

Breaking news. Veja magazine reports this morning that Human Rights Minister Damares Alves has informed President Bolsonaro she is set to resign. Ms. Alves has reportedly received death threats since taking office, and is always escorted by armed guards. 

Holocaust. State judges in Rio de Janeiro have confirmed a 2016 verdict forbidding the exposition, sale or promotion of Adolf Hitler’s book ‘Mein Kampf’ in the state. As the book preaches racism and encourages attacks on minorities, it goes against a Brazilian law forbidding racial prejudice in Brazil.

Pensions. The government has finalized its ad campaign to lower the unpopularity of the pension reform. The motto of the ads will be that those who earn more will pay more. And the communication effort includes a change in Economy Minister Paulo Guedes’ lexicon: instead of calling his individual pension plan a “capitalization system,” it will now be called the “guaranteed savings system.”

Subject. Government leaders in Congress are worried about social media attacks by President Bolsonaro’s supporters against center-right parties—a heterogeneous group known as the “Big Center.” With 250 seats (out of 513), these parties are pivotal to approving any amendments to the constitution, which require 60% of votes in both congressional houses). On May 1, Congressman Paulinho da Força—a member of the Big Center—defended a watered-down version of the reform to “prevent [Mr.] Bolsonaro’s re-election.”

Industry. The Brazilian Institute of Geography and Statistics will today publish the official numbers of industrial production for March. Economists expect a 0.7% retraction, due to slow demand both internally and from abroad. Against March 2018, the reduction should be of 4.8%. The calendar was also not helpful—as Carnival was in March this year, the month had fewer business days than usual.

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