A perfect storm is brewing in Brazil

May 17, 2019 • Reading Time: 6 minutes

Good morning. The picture doesn’t look good for Brazilian economy. Government investment at lowest in a decade. The risk of another Vale dam collapse.

Economy: a perfect storm is brewing in Brazil

Bearish economic forecasts, persistent unemployment, and a government seemingly in disarray. The picture doesn’t look good for Brazil and markets have become increasingly fed up with the administration, which has been, to this point, unable to get its flagship reforms approved by Congress. On Thursday, the São Paulo stock exchange index fell to below 90,000 base points for the first time since January, and the Brazilian Real crashed as low as 4.0411 per USD.

Meanwhile, hopes for even lower interest rates (a move to stimulate consumption and investments) were crushed by Central Bank President Roberto Campos Neto, who said he won’t sacrifice inflation control for boosting growth. “There is no

country in the world with low inflation, low interest rates, anchored inflation expectations, and a messy fiscal situation. It just doesn’t exist,” he added.

Economy Minister Paulo Guedes tried to boost expectations, saying that the heads of the House and Senate promised to approve the pension reform bill within 60 days—which would “totally change expectations towards the country.” However, as Fitch pointed out yesterday, the pension reform alone won’t be enough to put Brazil back on the path to growth.

As if a dreadful economic scenario and uncertain political landscape weren’t enough, the government must battle corruption allegations involving the president’s son—who is accused of being the ring leader of a corruption scheme in Rio de Janeiro—and the Tourism minister, who is suspected of siphoning BRL 2m from electoral funds. It is alarming that impeachment talks have already started to be heard in Brasília hallways.

Government investment at lowest in a decade

The federal government closed Q1 2019 registering the lowest level of investment in at least 13 years. Between January and March, BRL 6.2bn was invested—only 0.35% of the GDP—a direct result of the government’s cost-cutting efforts (which, in fairness, began long before the current administration took over).

The current investment rate is one-quarter of what was invested in Q1 2014, when the government invested 1.48% of the GDP. In the definition used by the Public Treasury, investments are expenses that will produce or generate assets for the public good. That includes renovation works or equipment purchases, for example.

The government’s lack of ability to invest creates a vicious cycle in Brazil—as the country’s biggest buyer, the government is responsible for encouraging economic activity in Brazil. When it cuts investments, it hinders Brazil’s ability to grow—which in turn diminishes tax revenue, making investments even harder to obtain.

The risk of another Vale dam collapse

Mining giant Vale has informed public prosecutors of structural problems with another iron ore dam located just 134km from Brumadinho,where a dam of the same kind collapsed in January, killing 240 people and leaving 32 others missing. The structure of the mine is moving and, if that process continues, it could rupture between May 19 and 25. Prosecutors ordered the company to keep the local population up to date with the risks and impacts of a possible collapse.

Early in February, sirens went off at the site, after a third-party safety auditor refused to attest to the dam’s stability. In March, the structure was rated under the maximum degree of risk. Tomorrow, Vale will stage a simulated evacuation process in nearby municipalities, in order to prepare them for the worst-case scenario.

After the news broke, Vale shares on São Paulo’s stock market plummeted, closing the day down 3.2%.

What else you need to know today

  • Lula. The case that earned Lula his second corruption and money laundering conviction has been filed at a court of appeals. The former president was found guilty of accepting a country house in São Paulo state as a kickback from construction companies. If the conviction is confirmed, Lula would no longer be eligible to leave prison after September—when he is set to qualify for house arrest after serving one-sixth of his current sentence.

  • Corruption. More details have surfaced on the testimony given by one of the shareholders at Gol Airlines to public prosecutors, after he signed a plea bargain deal. Henrique Constantino said Brazil’s biggest carriers—Gol, Latam, Azul, and Avianca—created a BRL 2.5m fund to illegally finance 5 political parties, including Democratas (which controls both congressional houses) and the Workers’ Party, which won 4 of the last 5 presidential elections. Airlines wanted “a good relationship with the political class.”

  • Oil & gas. In Dallas to escort President Jair Bolsonaro, Mines and Energy Minister Bento Albuquerque said Exxon Mobil is interested in investing in Brazil. The government has declared its intention to privatize 8 of 13 publicly-owned oil refineries and end Petrobras’ monopoly over the sector. With a capacity to process 2.2m barrels a day, the state-controlled company has a 99% market share of oil refining in Brazil.

  • LGBT. Brazil has registered 141 deaths of LGBT people this year, according to NGO Grupo Gay da Bahia. The real numbers, however, are likely to be higher, as the NGO bases its study on what is reported by the press. Despite the data showing that Brazil is one of the most dangerous places for an LGBT person to live, levels have also stabilized from last year, suggesting that despite President Bolsonaro’s homophobic rhetoric, his electoral win has not legitimized homophobic violence.

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