Volatility is the new normal in Brazil

Good morning. Political volatility is the new normal in Brazil. Bolsonaro heads to Israel with a pickle. Brazilians lose faith in the economy. Brazil’s Navy chooses Embraer.

Volatility is the new normal in Brazil

After a horrendous Wednesday, Brazilian assets

made a recovery yesterday—following an apparent truce between President Jair Bolsonaro and House Speaker Rodrigo Maia. But investors should keep their seat belts fastened, as the markets are reacting more abruptly to the news coming from Brasília (positively or negatively), and the appetite for risk seen over the first quarter is unlikely to be repeated in the upcoming months. The Bolsonaro administration has eroded some of the trust in itself.

Despite Mr. Bolsonaro and Mr. Maia announcing they’ve buried the hatchet, the truce could be short-lived. Mr. Maia declined an invitation to join the president in taking part in an event of the military courts. In Brasília, nobody believes that the president will change his divisive demeanor. In private meetings with market operators, members of Congress warn that a watered-down version of the pension reform is the likeliest scenario.

The bill to overhaul Brazil’s expensive pension system has lurched forward in Congress, with a rapporteur being chosen at the House’s Constitution and Justice Committee—the very first step of the reform’s path. The chosen man—rookie Congressman Marcelo Freitas—however, is not someone fully onboard with the reform. Hours before being named rapporteur, he said police officers should be spared from austerity changes—which promises to bring more bumps on the road for what is supposed to be the government’s top priority.

Without pension reform, Brazil could enter as early as 2020. According to the Institute for Applied Economic Research (Ipea), there is no solution to Brazil’s fiscal imbalance that doesn’t include cuts in spending on pensions.

Bolsonaro heads to Israel with a pickle

President Bolsonaro is headed to Israel this weekend facing a bit of an issue: how will he keep his promise to move the Brazilian embassy from Tel-Aviv to Jerusalem? Mr. Bolsonaro made the pledge to pander to Evangelical groups in Congress, but faced an enormous backlash from big agro, which fears such a move could hamper Brazil’s halal meat exports to Arab-majority countries. The solution being studied by Brazilian diplomacy is to set up a business office in Jerusalem, instead.

Moving the embassy to Jerusalem would mean recognizing Israel’s claim over the city—not a savvy move trade-wise. Roughly 45% of beef and 40% of Brazil’s poultry exports are halal. After Mr. Bolsonaro repeatedly defended moving the embassy to Jerusalem, Saudi Arabia ordered an embargo on Brazilian poultry—citing technical reasons, however.

Historically, Brazil has been a defender of a two-state solution to the Israel-Palestine conflict. That is, until now. Foreign Minister Ernesto Araújo has declared Brazil will continually vote on Israel’s side in international forums such as the UN.

Brazilians lose faith in the economy

Both companies and consumers have lost confidence in the Brazilian economy, according to recent surveys carried out by think tank Fundação Getulio Vargas. This skepticism causes investment and consumption decisions to be postponed—which could cause further delays to Brazil’s economic recovery. In March, these confidence levels in the economy lost the gains recorded between November and January—thanks to the lack of political and economic results shown by the government.

The Consumer Confidence Index is down to its worst level since October—when the presidential race was still undecided. “Brazilians are disappointed with the slow recovery, after having projected better economic results for the start of 2019,” says Viviane Bittencourt, coordinator of the survey.

The government’s confidence in this year’s economic performance is also low. The Central Bank has reduced its GDP growth forecast from 2.4 to 2%. Besides the still-sluggish economy, which struggles to recover from the worst 5-year stretch in Brazilian history, the bank cites the Brumadinho dam collapse (which hit the mining industry hard), and a smaller grain harvest to justify its lack of optimism.

Brazil’s Navy chooses Embraer, ThyssenKrupp to build four ships

The Brazilian Navy selected a consortium made up of Brazilian planemaker Embraer and Germany-based ThyssenKrupp to build four corvette warships (to be delivered between 2024 and 2028), in a deal worth BRL 6.4bn. The bidding process was highly controversial, as the Navy used some fiscal maneuvers to escape the federal spending cap (which forbids the cash-strapped government to raise public spending above inflation).

The contract, however, was seen as pivotal to keep the Brazilian Navy operational into the next decade. The core of the country’s naval force is made up of three corvettes and eight slightly larger frigates—an already depleted fleet which could be cut in half by 2028.

The deal is a much-needed piece of good news for Embraer, which has recently sold its most lucrative division (building commercial jets) to Boeing, keeping its defense and executive jets divisions. The Navy deal should put to rest some of the skepticism about the financial health of the “old Embraer” in the long-term.

What else you need to know today

• Corruption 1. Former President Michel Temer will face trial for corruption in a case where his former aide was caught on video accepting a BRL 500,000 bribe from the owner of meatpacking company JBS. Mr. Temer denies being the recipient of the money. Last week, Mr. Temer was arrested in another corruption case—but released four days later. 

• Corruption 2.A group of Rio state lawmakers—including the former speaker of the state legislature, Jorge Picciani—was convicted for corruption crimes. Mr. Picciani received a 21-year prison sentence and will have to pay an BRL 11m fine. Rio’s biggest transportation businessman, Jacob Barata (a friend of Supreme Court Justice Gilmar Mendes), was also convicted yesterday of paying bribes to politicians.

• Science.Twelve scientists working in Brazil are on Clarivate Analytics’ list of the world’s most influential scientists. While the number remains low, it is a big jump from the usual 3 to 4 names. Brazil is currently ranked 32nd in science proficiency out of 60 countries.

• Exports.Meatpacker JBS is rushing to set up a halal poultry plant in Saudi Arabia. The world’s biggest poultry producer in the world, JBS has seen its positions in the Middle East threatened by barriers to Brazilian products.

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