The economic team has intensified discussions around a proposal to reduce the Corporate Income Tax (IRPJ) as a way to follow the changes made in the US. Finance Minister Eduardo Guardia told President Michel Temer that as soon as the model to compensate for the cut of this tax is ready he will present him with the proposed bill to be sent to Congress, say people familiar with the matter. Mr. Guardia has been warning about the impact of a smaller corporate income tax in the US can have on the Brazilian economy, a move that is being followed by other countries. Officials fear that this change will lead companies based in Brazil to move their headquarters abroad, since today they pay 34% of IRPJ and Social Contribution on Net Profit (CSLL).


Source: Valor International

Internal political uncertainty and U.S. rising interest rates have caused a two and a half year high of the dollar to real exchange rate. The dollar’s appreciation, in turn, has caused concern regarding Brazil’s economic recovery – which has been driven by its internal market – given its pressure on inflation and the possible decrease in consumption as products become more expensive.

On September 5, the dollar hit a two and a half year high against the real closing at R$4,14 – the highest level since January 2016. Throughout the past few months, the dollar continued to rise and exchange offices were selling the tourism dollar – dollars sold directly to consumers – at R$4,32. Since January 2018, the dollar has appreciated 25% against the real.

On the international front, the dollar’s appreciation was caused by higher yields on U.S. Treasury securities which rose to 2% and continuous fear of a trade war between the U.S. and its trade partners. Additionally, the Federal Reserve may continue its interest rate increase to contain inflationary pressures due to economic growth – especially in U.S. retail sales. The concern is that an increase in retail sales may increase inflation, and in order to contain this increase, the Federal Reserve would likely increase interest rates even further.

High interest rates in the U.S. – deemed the safest market in the world – have the potential to attract resources from other emerging market countries, such as Brazil.

In Brazil, the appreciation of the dollar can also be explained by the continuous volatility in the presidential polls. Last week, the Superior Electoral Court (TSE) voted to deny Lula da Silva from running under the Clean Slate Law – as of the latest August poll, Lula was polling first with 39%. After the TSE decision, a new poll was published on September 5 without Lula; Jair Bolsonaro is now first with 22%, followed by Marina Silva 12%, Ciro Gomes 12%, Alckmin 9%, and Haddad 6%. Doubt remains as to whether the next government will make the necessary economic reforms to reach fiscal balance.

Alongside the dollar pressure, the Brazilian economy continues to underperform with 1.1% growth so far in 2018. This indicator is far worse than what was expected, causing economists at financial institutions to revise the GDP growth to 1.44% for 2018 – earlier in the year the expectation was 2.70%.

So far in order to intervene, the central bank has held a number of foreign exchange swaps, equivalent to the future sale of dollars. In its latest round, on August 30, the total offer was $1.5 billion.

On August 1, the central bank’s Monetary Policy Committee (Copom) decided to keep interest rates at 6.5%, signaling caution due to the volatility of the external scenario.

The Selic rate is used to keep inflation within its target to control prices of goods and services – when inflation is low the central bank lowers the Selic rate to boost economic activity, and when inflation is high, they increase the Selic to encourage people to consume less to remove reais from the market (sometimes increasing unemployment). Financial analysts project inflation at 4.16% for 2018.

Despite this volatile scenario, Minister of Finance Eduardo Guardia and Central Bank President Ilan Goldfajn believe that Brazil will not face the same difficulties as its neighbor, Argentina, since Brazil has low levels of foreign debt, high international reserves, opportunities to sell future dollar contracts, and stable foreign investment inflows.

The dollar’s appreciation has a direct impact on the pockets of Brazilians. Uncertainty in the presidential elections polls and a need for security has caused investors and Brazilian tourists to buy more dollars, which in turn increases the price of the dollar even more.

In addition, it causes an increase in prices of goods and service and puts pressure on inflation, as many parts of the final goods are imported using U.S. currency – especially true for the electronics industry as well as food such as bread and pasta since wheat tracks the price of the dollar. In addition, the price of oil is likely to continue to increase due to tensions between Iran and the United States. If the dollar rises too much too quickly, it creates concern of boosting inflation in Brazil – something that if relatively moderate would not be considered too negative given its low 2017 and 2018 rates.

Inflation may also be passed along to products that do not use imported parts as some goods are traded in dollars for export and Brazilian exporters will have to adjust their prices in order to make a profit.

In regards to tourism, the appreciation of the dollar comes with positive and negative effects. On the negative side, vacations for Brazilians looking to go abroad became extremely expensive. On the positive side, international travelers may be attracted to come to Brazil due to its weak real which in turn can boost the tourism industry activity and improve some parts of the economy.

Source: Seeking Alpha

Brazil’s stock market has more to give than take.

Analysts from some of the nation’s biggest banks are sticking to their optimistic calls after a harsh month for Brazilian assets which sent the benchmark index to its lowest level in 14 months in U.S. dollar terms. Stocks are cheap enough to justify buying even as a rout hits emerging-market assets and with an all-or-nothing election just a month away, they say.

Brazilian equities show a 109 percent upside if there’s a significant post-election fiscal adjustment and a 29 percent downside with no adjustments, in U.S. dollar terms, according to Bradesco BBI’s analyst Andre Carvalho.
“The case of Brazilian equities is particularly interesting, with very asymmetric potential returns,” Carvalho wrote in a Sept. 4 report. Bradesco BBI is overweight on Brazil and Chile in Latin America.
BTG Pactual and Itau BBA agree, even as market-favorite Geraldo Alckmin lags in polls with just with 9 percent of voter intention. According to a Datafolha survey from Aug. 22, former Army captain Jair Bolsonaro leads with 22 percent in a scenario that excludes jailed former President Luiz Inacio Lula da Silva, who has been banned from running due to a corruption conviction.
“We see a compelling risk-reward,” BTG Pactual analysts Carlos Sequeira and Bernardo Teixeira wrote in a Sept. 3 report. The bank believes the chances of a right- or center-right candidate winning the electoral race are around 60 percent.
Itau BBA is also maintaining its overweight recommendation, leaving its target for the Ibovespa unchanged at 83,700 by year-end as Brazil is trading at a discount to its historical average.

The Ibovespa traded at 75,045 as of 12:19 p.m. in Sao Paulo Wednesday, and is down 7.8 percent in the past month.

Source: Bloomberg

In the aftermath of the greatest political corruption scandal in Brazil’s history and the worst recession on record, the nation’s desire for a profound renewal is being met by a political elite digging in its heels.

It’s not just the leading presidential candidates, all of whom represent established parties and have been in politics for at least a decade, one of them for half a century.

Hundreds of candidates for Congress seek the security of their current jobs. Of the 513 lower house deputies, 402 — or 79 percent — are running for re-election, more than in 2014. Fifty-nine percent of the senators eligible for re-election will stand for office, the highest number since 2002.
“The elections of 2018 have already been sabotaged,” Samuel Emilio Melo, the national coordinator of Acredito, an organization pushing for political renewal, said, adding that party leaders who control the purse strings tend to prioritize “old chieftains”.
 The Carwash investigation does not seem to have deterred those who have fallen foul of prosecutors. At least 40 members of the lower chamber and 17 Senators who are under investigation want to renew their mandates, according to research by Jota, a website specializing in Brazilian legal affairs. And that protects them from being tried in any tribunal other than the Supreme Court.

Brazil’s election laws offer considerable perks to elected politicians, according to Antonio Augusto de Queiroz, from the congress’ in-house consultancy, DIAP.

“Candidates for re-election have comparatively huge advantages in comparison with those who aspire to take their place,” he said. As an example, Queiroz cited the fact that an elected politician can run without leaving office, a fact that automatically raises his profile above newcomers. The incumbent also has more access to party funds.

While incumbents may be digging in their heels, that doesn’t mean nobody is trying to unseat them. This year actually features the highest number of candidates running for the lower chamber: 8,332 are vying for just 513 places.

The legal impunity of Brazil’s politicians is notorious. One of the most striking cases involved Paulo Maluf, a former governor of Sao Paulo. Maluf’s decades-long career was full of controversy and accusations, but only in 2017 did the Supreme Court sentence him to seven years for money-laundering and order his mandate as a federal deputy stripped.

Various movements calling for political renewal have surged in recent years due to Brazilians frustration with politics as usual. Acredito, Portuguese for “I Believe”, has brought together 2,000 young people in 14 states and will run 30 candidates for the positions of state and federal deputy as well as for the Senate.

Though Melo believes there is little chance of serious change in these elections, he’s emphatic about what has to be done to ensure a higher turnover in future.

“What we need to do is to discuss with the next congress clear, transparent and meritocratic criteria so that there is a fairer distribution of the electoral fund,” he said.

Source: Bloomberg

A majority of justices on Brazil’s electoral court have voted to bar ex-President Luiz Inacio Lula da Silva from running in October’s presidential election, virtually ending his candidacy.

After several hours of debate late Friday, four of the seven justices had voted against da Silva’s candidacy and just one in favor. Two other justices were still to vote, but only a majority is needed for a ruling.

Da Silva is serving a 12-year-sentence for corruption and money laundering, but he’s the front-runner despite being in jail. Under Brazilian law, da Silva is ineligible to run because his conviction was upheld on an initial appeal.

Da Silva and members of his Workers’ Party had hoped the Supreme Electoral Tribunal, which makes final decisions on candidacies, would allow him to run.

Da Silva has long argued that he should be allowed to run because his conviction was a sham. Judge Sergio Moro convicted da Silva of trading favors with construction company Grupo OAS in exchange for the promise of a beach house apartment.