Brazil’s Supreme Court voted 7-4 on Thursday to allow companies to outsource all types of jobs, a ruling that confirms the constitutionality of rules set last year under a law that was fiercely opposed by unions.

The decision will help employers resolve some 4,000 pending lawsuits against the outsourcing of core jobs in companies, cases that were based on an adverse ruling by a superior court in 2011.

The ruling was welcomed by business leaders who argued that outsourcing would create jobs and reduce Brazil’s high 12.3 percent unemployment rate.

The Sao Paulo group SindusCon-SP that represents 1,374 building firms said outsourcing was “indispensable” for the modern construction industry.

But the Força Sindical labor federation called the decision “nefarious” and said unrestricted outsourcing was a big setback for workers’ rights because it undermined collective bargaining and created second-class workers who would not enjoy benefits.


Source: Reuters

Brazil’s National Petroleum Agency (ANP) approved the participation of six companies in the country’s fifth subsalt production-sharing auction on September 28, the regulator said Wednesday.

BP Energy, China National Petroleum Corp. (CNPC), DEA Deutsche Erdoel, Qatar Petroleum, Shell and Total received the green light from the ANP’s Special Auctions Committee at a meeting earlier Wednesday, the regulator said.

The ANP received a total of 12 applications to participate in the sale, which will feature development rights for four areas in the country’s promising subsalt frontier, the ANP said. The Special Auctions Committee will review the remaining six applications at a future date, the regulator said.

Of the six companies who won ANP approval, only DEA Deutsche Erdoel does not currently hold any acreage in Brazil, it said.

The auction will take place amid growing uncertainty about future access to Brazil’s most prolific offshore region ahead of presidential elections in October. Several candidates have indicated they would like to return to a state-led model for development of the subsalt, which would be led by Brazil’s Petrobras and may include rescinding contracts held in auctions since September 2017.

The licensing sales followed a series of reform efforts that included allowing overseas players to operate subsalt fields sold under production-sharing contracts. Brazilian law previously required that Petrobras hold at least a 30% operating stake in all subsalt fields sold under the regime.

The changes were widely lauded by industry and generated record signing bonuses and profit-oil guarantees for the government in recent auctions, with the ANP estimating Brazil’s crude output will rise to 5.5 million b/d by the mid-2020s because of the investments generated by the sales.

The fifth subsalt production-sharing sale will feature the Saturno, Tita, Pau Brasil and Sudoeste de Tartaruga Verde areas, which are estimated to hold a total of 17 billion barrels of oil in place, according to the ANP.

Saturno and Tita are expected to generate the most competition after the areas were reconfigured from blocks removed from the fourth production-sharing sale and 15th bid round held earlier in 2018.

The Saturno subsalt prospect was combined with the Santos Basin S-M-645 block and includes two major prospects holding 8.3 billion barrels in place, the ANP said. The minimum profit-oil guarantee for the block is set at 17.54%, with the signing bonus for the area fixed at Real 3.125 billion ($761 million).

The Tita area, which was combined with the S-M-534 block, is estimated to hold 3.9 billion barrels in place. The minimum profit-oil guarantee for the area was set at 9.53%, with a signing bonus of Real 3.125 billion.

Industry officials expect ExxonMobil to make an aggressive play for the two areas after the company teamed up with Qatar Petroleum to buy the adjacent S-M-647 and S-M-536 blocks in the 15th bid round. That would avoid any future issues with unitization of oil fields that extend beyond the borders of each area.

Pau Brasil, meanwhile, is estimated to hold 3.9 billion barrels in place, the ANP said. Bidders will have to pay a fixed signing bonus of Real 500 million and offer the government a minimum profit-oil guarantee of at least 24.82%.

The Sudoeste de Tartaruga Verde area was estimated to hold 1.29 billion barrels of 27 API crude in place, the ANP said. Petrobras recently started output from the linked Tartaruga Verde Field, which will need to be unitized with Sudoeste de Tartaruga Verde.

Petrobras owns 100% of Tartaruga Verde and exercised its preferential right to hold at least a 30% operating stake in the winning bid group for Sudoeste de Tartaruga Verde.

The signing bonus for the area was set at Real 70 million, with a minimum profit-oil guarantee of 10.01%.


Source: S&P Global

Brazils National Petroleum Agency, or ANP, has adopted a new methodology to calculate the reference price used to subsidize domestic diesel prices, the latest move to create more transparency in the country’s domestic fuels market, according to Tuesday’s Federal Register.

The new calculation will go into effect August 31 and be used through the remainder of 2018, the ANP said.

The move is part of a series of changes implemented to provide greater transparency for the way domestic oil products are priced in Brazil after the country suffered through a 10-day strike by independent truckers in May. The strike nearly brought Latin America’s largest economy to the brink of collapse and may have tipped the country back into recession, according to economists.

The strike started after domestic diesel prices spiked amid an increase in international oil prices and a weakening in Brazil’s currency, the real. The government agreed to implement a Real 0.30/l subsidy on diesel prices to settle the strike, which included reimbursements to oil companies, fuel distributors and importers that participated in the subsidy program.

The methodology will include several changes adopted after oil companies and government entities suggested improvements in mid-August, including the use of Argus’ South America price quote for ultra-low sulfur diesel deliveries at the ports of Itaqui, Paranagua, Santos and Suape, the ANP said. In addition, the cost of port storage and transportation will now be included in the calculation, according to the regulator.

The new calculation will also include logistics and transportation costs between regions across Brazil, as well as separate distribution bases in Brazil’s Southeast and Center-West regions into two separate categories, the ANP said.

Prices will also be adjusted for foreign-exchange rates, which have been volatile in the run-up to Brazil’s presidential elections, scheduled for October. Brazil’s real weakened to its lowest level against the US dollar in three years last week because of political uncertainties surrounding the election.

The ANP also recently published an initial resolution to make the formation of domestic fuel prices more transparent, with the proposal the subject of a public audience scheduled for October 3.

The resolution would force oil refiners, biofuel producers and importers to publish how prices are formulated at the refinery gate or distribution point. Companies retaining a 20% market share or greater in specific regions will also be required to publish prices online.

The ANP expects the new regulations to open Brazil’s refining and distribution sectors to greater competition, including attracting new global players to one of the world’s largest markets for transportation fuels. Petrobras currently owns about 98% of the country’s refining capacity, but is attempting to sell off four refineries and lure China’s CNPC to complete construction of the idled Complexo Petroquimica do Rio de Janeiro, or Comperj refinery.

Brazil’s fuel distribution sector, meanwhile, is dominated by three major companies: Petrobras’ recently spun off BR Distribuidora unit; Shell and Cosan joint-venture company Raizen and publicly traded Ipiranga.


Source: S&P Global

Anyone who thinks that the world’s emerging market woes will be confined to the likes of Argentina, Turkey and Venezuela has not being paying attention to the brewing Brazilian economic and political crisis.

In particular, they have not noticed the dramatic swoon in the Brazilian currency. Since the start of this year, the Brazilian real has plunged by around 25 percent. That has taken it to levels last seen in 2016 in the depth of its worst economic recession in the last 70 years.

Sadly, especially at a time that the Federal Reserve is engaged in taking away the punch bowl that fueled the last emerging market economic boom by raising U.S. interest rates, there are three reasons to believe that Brazil could very well be on the road to a full-blown exchange rate crisis.

The first is that Brazil’s public finances are on the most unsustainable of paths. Not only is the country presently running a budget deficit of over 8 percent of GDP, it also has a public debt-to-GDP ratio that has already reached a dangerous level of around 85 percent.

With no economic policies on the horizon to halt Brazil’s rapid public debt build-up, it is far from clear that in a more challenging global liquidity environment, both domestic and foreign investors will be willing to meet the government’s large financing needs next year. Those needs are estimated to amount to a staggering $300 billion, or 15 percent of the country’s GDP.

While markets might not be as focused as they should be on Brazil’s shaky public finances, Brazil’s public debt vulnerability has not escaped the International Monetary Fund’s (IMF’s) notice.

In its most recent staff report, the IMF warned that a delay in implementing much-needed fiscal reforms, especially in the area of pension reform, would jeopardize the country’s debt sustainability.

The IMF also noted that, even under benign circumstances, within three years the country’s public debt-to-GDP ratio would approach 100 percent, and it could rise even higher should Brazil’s borrowing costs rise or its economy falter.

The second reason to expect that Brazil’s currency could slump even further in the months ahead is the country’s very unstable politics. This political instability has to raise serious questions about the country’s political willingness to restore order to its public finances and to get its moribund economy moving again.

With a corruption scandal at Petrobras, the state oil company, which has tainted much of Brazil’s political elite, support for centrist political parties has collapsed.

This raises the very real possibility that following Brazil’s October 6 presidential election, the country will be led either by a right-wing populist president, who will not enjoy congressional support, or by a far-left government that will take the country in the direction of fiscal recklessness.

A third reason to expect mounting pressure on the Brazilian currency in the months immediately ahead is the likely contagion from the worsening Argentine and Turkish exchange rate crises.

If those crises were indeed to deepen, they must be expected to accelerate the capital flow reversal out of the emerging market economies, which has already been evidenced since the Federal Reserve signaled a more aggressive path for its monetary policy normalization earlier this year.

Given the depth and liquidity of its asset markets, Brazil must be expected to be the first in line for any further reduction in investor exposure to the emerging markets.

A currency crisis in Brazil could be very much more damaging to the global economic outlook than a similar crisis in Turkey. After all, the Brazilian economy is around 2.5 times the size of Turkey’s, and it has a public debt level of around $ 1.75 billion.

Coming on top of the economic meltdowns in Argentina and Turkey, a full-blown Brazilian currency crisis could pose a real challenge to the global economic outlook.

Earlier this year, Fed Chairman Jerome Powell reassured us that somehow this time was different and that the emerging market economies would easily manage the Fed’s planned increase in U.S. interest rates.

Hopefully, he is closely monitoring the most recent emerging market currency slump and by now is less complacent about the fallout of Fed tightening on those economies. If not, the global economy should brace itself for yet another emerging market economic meltdown similar to of the 1998 Asian economic crisis.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.


Source: The Hill

Brazilian companies will need to look to capital markets instead of traditional bank loans for a substantial portion of their funding by early next year, as stricter international capital rules pressure lenders to cut balance sheets, a study found.

Brazilian banks must comply by January 2019 with the new Basel III capital requirements, conceived after the 2008 financial crash to force banks worldwide to hold more capital.

The research paper, by the asset management unit of Brazil’s largest private lender Itaú Unibanco Holding SA, found that corporate borrowing through bonds and other debt securities will need to grow by between 2 and 4.8 times the current level by 2022 to meet companies’ financing needs as banks are compelled to cut outstanding loans.

As a result, Brazil’s corporate debt stock is likely to soar to between 343 billion reais ($87.67 billion) and 799 billion reais by 2022 from 165 billion reais in 2018, the study found.

“Under Basel III, banks will turn to loans that require less capital expenditure, such as mortgages and payroll-backed credit, leaving companies to seek more financing in the capital markets,”, said Gerson Konishi, the Itaú Asset Management portfolio specialist who was responsible for the study.

In addition to requiring banks to boost their core capital ratio to 7 percent from 4.5 percent, Brazil’s central bank is also obliying them to set aside more capital for corporate loans. A loan to a large company is almost 2.5 times costlier to banks in terms of capital than mortgages, for instance, according to the central bank rules.

The situation will challenge Brazilian companies to get financing as the country’s capital markets lag not just developed countries but many other emerging markets. International bond markets are often expensive for Brazilian companies, which generally need to hedge foreign currency debts.

Bonds and equities sold by private companies comprised just 2 percent of Brazil’s gross domestic product between 2013 and 2015, a McKinsey study found, lagging countries such as Chile (6 percent), China (8 percent) and the Philippines (4 percent).

If companies cannot borrow through the capital markets, the economy could slow, the Itaú study found. The Basel III requirements are also likely to drive corporate borrowing rates higher if demand exceeds supply, according to the study.

Exacerbating the challenges, government financing sources like state development bank BNDES have also scaled back lending due to tight budgets.


Brazilian banks, including state-controlled lenders like Banco do Brasil SA, have already started cutting corporate loan exposure in favor of retail. Banco do Brasil’s corporate loan book shrank 3 percent over the latest year to 133.8 billion reais.

In a glimmer of hope for Brazil’s capital markets, which have suffered mainly from competition with sovereign bonds with high interest rates, investment funds have boosted holdings in real-dominated corporate bonds, said capital markets industry association Anbima director José Eduardo Laloni.

Corporate bonds held by investment funds surged 18 percent to 137.5 billion reais. That is still just a fraction of the roughly 4 trillion reais in assets under domestic funds’ management, most of which remains in government bonds.

Laloni said growth in capital markets will depend on Brazil’s ability to keep benchmark interest rates and inflation low. ($1 = 3.9122 reais) (Reporting by Carolina Mandl; Editing by Christian Plumb and David Gregorio)


Source: Reuters

Election polls this week showed a surge in support for jailed presidential candidate Luiz Inácio Lula da Silva, knocking the real amid fears this could translate into election victory for the leftist Workers’ party, blamed by many for the downturn in Brazil.

While Mr Lula da Silva’s corruption conviction will likely exclude him from the vote, the polls showed him potentially transferring enough votes to his likely replacement, Fernando Haddad, to give the former São Paulo mayor a strong chance in the two-round election.

Market volatility is likely to increase ahead of an election that many see as make or break for Brazil, Latin America’s largest economy, as it struggles to emerge from the worst recession in its history.

“We believe a weaker path for the Brazilian real in the coming weeks is very likely,” said Mario Castro, Latam strategist at Nomura, in a report, adding that Mr Haddad was the least preferred candidate in a survey of market participants.
The next president will need to push through critical reforms, such as reining in Brazil’s ballooning budget deficits and overhauling its expensive and unjust pension system, or risk allowing the economy to slide further into stagnation.

“We are assuming at the current rating level that actions will be taken” by the government, said Sebastián Briozzo, senior director at S&P Global Ratings. The agency has Brazil on a junk grade double B minus credit rating. “For the medium-term, we will need more profound measures.”

The latest polls show for the first time what many investors see as the nightmare scenario: the possibility of a showdown between the two extremes of Brazil’s highly polarised politics — Mr Haddad of the Workers’ party (PT) and far-right candidate Jair Bolsonaro.

Mr Haddad commands only about 4 per cent, well behind the other main candidates. But the polls revealed that support for Mr Lula da Silva has increased markedly, from 30 per cent in June to 39 per cent in August, according to pollster Datafolha.

Mr Lula da Silva is expected to be blocked by the courts from running and to step aside in favour of Mr Haddad by September 17, the cut-off date for parties to change their presidential candidates.

The polls show Mr Bolsonaro, a former army captain and congressman, in the lead in an election without Mr Lula da Silva, with about 22 per cent, up from 19 per cent in June. If he can maintain this support, he would likely make it into the second round.

Datafolha shows him as defeating Mr Haddad in the second round. But he would lose if he faced the other main candidates — environmentalist Marina Silva, leftwing candidate Ciro Gomes and the market favourite, centre-right Geraldo Alckmin.

Mr Alckmin, until recently the governor of Brazil’s wealthiest state, São Paulo, has so far lagged behind in the polls, but some argue it was too early to write him off.

On August 31, the parties will begin airing their television ads. Airtime is awarded based on the share of a candidate’s coalition in congress.

Mr Alckmin’s is by far the largest, giving him about 44 per cent. Next would be Mr Haddad, with 19 per cent. This will provide both with a powerful platform against Mr Bolsonaro, who has no coalition and precious little airtime, relying instead on social media.

“You have to wait for the polls that will come after the television advertising starts,” said Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center for Scholars in Washington. “Social media will be an important factor but the traditional means of TV advertising will continue to be very influential.”


Source: Financial Times

Since crashing through BofA’s “crisis indicator” 4.00 level, the Brazilian Real has gone into freefall, topping 4.09/USD today as markets continue to reprice to new leftist-victory election odds, and the central bank remains cornered on the sidelines.

As Bloomberg details, all this pessimism reflects what’s really an intense distaste for the Workers’ Party, known locally as the PT, among investors and business executives.

They see the government of former President Dilma Rousseff as largely responsible for bringing about the worst recession in a century before she was impeached, and her predecessor Luiz Inacio Lula da Silva as a crook. While the PT has put Lula forth as its candidate, it’s unlikely he will be allowed to run in October because of a corruption conviction. His probable replacement, former Sao Paulo Mayor Fernando Haddad, gets no more love from traders.

“Turkey and Argentina are examples of how disrupting it is for financial markets when investors lose confidence in policy direction and institutions,” said Tania Escobedo, a Latin America strategist at RBC Capital Markets in New York. “Lula’s PT party would represent this scenario, unless it moderates its views significantly.”

One specific concern is that a PT government might seek to unwind the efforts President Michel Temer made to shore up the budget after the country’s credit rating was cut to junk, including a push to overhaul the social security system.

Additionally, as Bloomberg notes, the slump in the Brazilian real has left the central bank between a rock and a hard place – let the spike in volatility run its course, or sell FX swaps and risk failing to curb a move tied to a repricing of election odds.

BCB has already sold near $43.5b of FX swaps this year, squeezing 1-month historical volatility down to 13.2% from 20.8% in mid-June amid FX crisis in Argentina and Turkey. Central bank governor Ilan Goldfajn reiterated several times that BCB may resume use of currency swaps if it considers the FX market to be dysfunctional.

Implied volatility is now back well above level seen in June and the currency is heading towards a record low, but market situation is still far from being considered “dysfunctional.” BCB needs to decide if it intervenes again on volatility spike and FX level, or if it leaves market repricing to end before making a move.

An unfavorable outcome in the presidential election as well as negative sentiment toward emerging markets globally could send the real to 5 per dollar, according to Win Thin, a strategist at Brown Brothers Harriman in New York.

“Whoever Lula backs would be the worst scenario,” Thin said. “We can assume that a lot of Lula’s support will flow to whomever he chooses to be his proxy.”


Source: ZeroHedge

The Brazilian real fell beyond 4 per dollar for the first time since February 2016 after news polls showed that market-friendly presidential candidates are lagging behind rivals in the run-up to the nation’s most tightly contested election in more than 30 years.

The currency led losses among global peers after the latest polls underscored voter support for the Workers Party of jailed former President Luiz Inacio Lula da Silva, who’s expected to be barred from running. His leftist party opposes changes to labor and pension policies that many investors say are key to trimming the budget deficit and getting Brazil’s financial house in order.

“Optimism for a market-friendly electoral scenario is waning,” said Danny Fang, an analyst at BBVA in New York who doesn’t rule out central bank intervention should the real keep falling. “There is still a lot of time, but polls basically haven’t changed much in recent weeks.”

Traders pushed down the value of Brazilian assets this year as election uncertainty and cuts to growth forecasts weighed on sentiment. The most dire warnings say Latin America’s largest economy may turn into the next Turkey if the left-wing party takes power again. Brown Brothers Harriman & Co. says the real could tumble to 5 per dollar. The Ibovespa stock index may lose more than a third of its value, according to the local hedge fund Rio Bravo Investimentos.

The real’s descent through 4 per dollar prompted speculation that the central bank, which typically steps in when the real depreciates faster than peers, will intervene to prop up the currency. In early June, BCB support pushed the currency to near 3.70 to the dollar. That same month, authorities suspended direct intervention via discretionary foreign-exchange swap auctions while making clear that dollar sales may resume if needed.

Investors are assessing how much support Fernando Haddad, the former Sao Paulo mayor who is Lula’s running mate, would capture from voters in case the former president is kept out of the race. An Ibope poll published last night showed that 60 percent of all respondents said they wouldn’t vote for Haddad if Lula is excluded. Market-friendly former Sao Paulo governor Geraldo Alckmin would capture just 7 percent of votes if Lula doesn’t run, according to Ibope. He’s lagging ex-army Captain Jair Bolsonaro, environmentalist Marina Silva and former Ceara state Governor Ciro Gomes.

“Markets are reacting to the reading that the second round may be Fernando Haddad against Jair Bolsonaro,” said Rio de Janeiro-based Alvaro Bandeira, chief economist at Modalmais, Banco Modal’s brokerage arm.

The real dropped 1.4 percent to 4.0282 per dollar at 3:36 p.m. in New York. The benchmark Ibovespa slid.

While Brazil stock valuations are attractive, “Top down is becoming more uncertain as we move closer to the elections,” said Bradford Jones, a money manager at Sagil Asset Management in London. “We are more positive on Mexico than we are on Brazil at this point.”

Source: Bloomberg

The Brazilian real led losses among Latin American currencies on Monday after an opinion poll showed the market’s preferred candidate in October’s presidential elections lagging far behind his rivals. The Real was down 0.76% and 15.98% in the eight months of the year.

Geraldo Alckmin, a center-right establishment politician backed by a broad centrist coalition, has only 4.9% of voting intentions, according to the survey by CNT/MDA.

Investors say bringing back Brazil’s investment-grade status hinges on pursuing structural reforms to stem the growth of public debt, a scenario that is looking increasingly unlikely.

Ricardo Gomes da Silva, head of currency trading at Correparti brokerage in São Paulo, said Brazilian markets will probably sell off whenever polls show Alckmin losing favor relative to other candidates.

The nation’s benchmark Bovespa stock index, however, fell only slightly as rising iron ore prices helped lift shares of miners and steelmakers, such as Vale SA and Cia Siderúrgica Nacional SA.
Also helping boost shares in CSN, as the steelmaker is known, was an announcement on Friday that it will pay 890 million reais in extraordinary dividends.

Other emerging market currencies also traded lower as investors took a cautious stance ahead of meetings between the United States and China later this week. Trade tensions between the world’s top two economies have dented demand for risky assets in recent months.


Source: MercoPress

Who can save Brazil’s lousy economy? For most investors, the answer is presidential candidate Geraldo Alckmin. Though his support among the public is less than 10%, according to polls. And he is not lighting the world on fire down there either. Alckmin is more of the same: a muddle through, following over two years of recession, a year of low growth, and a decade-long Petrobras scandal that brought Brazil to its knees.

The top candidate is a no-chance, jailed ex-president, Luiz Inácio Lula da Silva, and a firey congressman named Jair Bolsonaro who is more known for his attacks on Rio potheads and violent criminals. He is not known as an economic manager. The people who support him are family values, law-and-order types. Brazil could use some law and order. But considering we are talking about finance and markets here, the savior of Brazil’s economy will be elusive in this year’s election. There is no economic superhero coming to town this October.

Economic reforms such as changes to a ridiculously bloated public pension system are not popular. Investors have been waiting for these things to happen for years. It’s not happening.

In 2019, with some effort, the new administration might be able to meet the cap for growth in public spending and the primary deficit target of 1.8% of GDP.

Mario Mesquita, chief economist with Itau Unibanco, says his call for the primary deficit next year is 1.6% of GDP. These are the kind of numbers that Wall Street bond lords like to stare at.

In terms of additional spending cuts of about $2 billion, this relatively low figure even for Brazilian standards will probably be achieved through cuts in discretionary expenses instead of public pensions and social welfare programs.