Chinese companies invest US$55 billion in Brazil over 10 years

Investments made by Chinese companies in Brazil over the last 10 years amounted to US$55 billion, according to a survey conducted by the Brazil-China Business Council (CEBC).

The study, quoted by Brazilian newspaper Estado de São Paulo, considers the investment made by companies between 2007 and 2017 in about 115 confirmed projects, already carried out or under execution.

In 2017, 27 projects were confirmed by Chinese companies in Brazil, with a combined investment of US$8.8 billion, which exceeded the US$8.4 billion figure recorded in 2016, and was a record since 2010.

China’s commercial consul in Sao Paulo, He Jun, said Chinese investment growth was the result of a combination of growing interest from Chinese entrepreneurs in diversifying business, bilateral relations and greater Brazilian demand for privatisation of state-owned enterprises.

Most of the investments made by Chinese companies in Brazil in 2017 went to the electric sector, with more than US$6.0 billion invested, with companies such as Shanghai Electric and Spic Pacific Energy moving to operate hydroelectric projects.

Companies that had entered Brazil in previous years, such as China Three Gorges and State Grid, have said they had made further capital injections to modernise their assets.

The same study reveals that after three consecutive years of growth, Chinese companies’ investments in Brazil decreased in 2018, according to preliminary data, with only 28% of announced investments confirmed, which the CEBC considers a consequence of political instability in Brazil this year.

From January to October, Chinese investments of US$1.5 billion in 14 projects in Brazil were confirmed, comapred with expected investments of US$5.4 billion with the addition of unconfirmed announcements.

Source: MACAUHUB

Brazil central bank holds rates, hints it may take longer to hike

The Brazilian central bank on Wednesday held interest rates at an all-time low, as widely expected, and hinted that it will hold off from raising them for longer than expected.

The bank’s nine-member monetary policy committee, known as Copom, kept the benchmark Selic rate at 6.50 percent for a sixth straight meeting. All 35 economists polled by Reuters had expected the bank to stand pat.

In a statement, the bank pointed to growing risks that an underwhelming economic recovery may curb inflation. Concern eased that disappointment over structural reforms could weigh on the Brazilian real BRBY.

The document omitted language that the bank could tighten policy if the outlook “worsened.” Still, it maintained an assessment that upward risks outweigh downward risks, suggesting only marginal changes to the outlook.

“It seemed previously that the central bank was biased to the upside in terms of rates. Now the outlook is more balanced,” JGP Gestão economist Fernando Rocha said.

Rocha had previously forecast that a first hike would take place in October 2019, but said he could postpone that to early 2020. That is largely in line with a view shared by most of the economists polled by Reuters before the central bank meeting.

nly four of 33 economists who replied to an extra question expected the bank to hike rates before the second half of 2019, while six predicted it would stand pat until 2020. All 20 who participated in both that and the previous poll either kept or lowered their rate forecasts.

Double-digit unemployment has kept a lid on wage hikes, which could allow policymakers to maintain economic stimulus as the economy recovers.

In November, inflation slipped below the bank’s targets for this year and next. Previously, the bank forecast that inflation would peak in the second quarter of 2019, so it may have been caught by the latest releases.

Investors also grew less fearful of a currency selloff after far-right lawmaker Jair Bolsonaro, a law-and-order former army official, won the presidential elections.

Bolsonaro has pledged to enact painful reforms to close a budget deficit, particularly a social security overhaul that his predecessor Michel Temer failed to pass in Congress. But that plan could face rough sledding due to contradictory statements from within his own team, while his reputation for denigrating minorities could alienate some lawmakers.

Once again, the bank stressed that maintaining rates slow will hinge on passing “necessary reforms and adjustments.”

Source: Reuters

What Businesses Should Know About Brazil’s New President

On October 28th, Jair Bolsonaro of Brazil’s Social Liberal Party (PSL) defeated Fernando Haddad of the Worker’s Party (PT).

Bolsonaro, a candidate coming from the far-right of the political spectrum, picked up 55% of the vote. This outcome can largely be attributed to three factors: Brazil’s lethargic and largely jobless economic recovery, a decline in public security, and a strong and sustained anti-corruption wave first instigated by the unprecedented Lava Jato investigation.

The most important of these factors was the lack of a strong economic recovery following the end of Brazil’s recession in 2017, the deepest in its history. Through September of this year, Brazil’s economic activity index showed that the overall economic output in the country remained 6.5% below where it stood at the same point in 2014. In the last twelve months, Brazil’s unemployment rate has eased just barely from 12.4% to 11.9% (mostly driven by individuals leaving the labor force rather than finding jobs), while investment, which contracted by 14% YOY in 2015 and 12% YOY in 2016, climbed by just a meager 4.3% YOY.

These economic trends were then exasperated by both a deteriorating security situation across Brazil’s major cities, driven by rising unemployment itself in addition to cuts to public security funding, and a strong anti-corruption wave. Both of these forces clearly favored Jair Bolsonaro, the ex-army captain who was perceived to be the “cleanest” of the candidates. (His opponents, Fernando Haddad and PSDB candidate Geraldo Alckmin, were both indicted for corruption and money laundering the month prior to the election.) Bolsonaro also portrayed himself as a strong-man capable of bringing order to the country via policies such as the liberalization of arms for private citizens and greater permission for police to use deadly force to stop crime.

To understand where Brazil’s economy will go following the election of Jair Bolsonaro, it’s necessary to first understand why the economic recovery to date has been so lethargic. This can largely be laid at the feet of one monumental failure of the current government under President Michel Temer: the lack of a comprehensive pension reform.

As it stands today, the World Bank estimates that Brazil’s debt to GDP ratio, which currently stands at approximately 75%, would rise to above 150% by 2030 without a significant fiscal adjustment led by reform to the country’s existing pension benefits. This bleak outlook, and the continued lack of clarity around a potential fix, is the major driver of why financial institutions have yet to aggressively increase lending and why businesses appetite for new investment has remained muted.

Jair Bolsonaro was the only candidate in the run-off election that supported a reform of the pension system, which may be why, despite his bombastic rhetoric on campaign, yields on Brazil ten-year treasuries fell by more than two percentage points and the currency ratio appreciated from 4.1 (Brazilian real to USD) to 3.62, between September and the day following the final electoral outcomes. (Since then, though, both indicators have moved slightly in the opposite direction, largely due to global market conditions). This demonstrates falling inflation expectations and a stronger outlook for growth, as markets believe he will likely achieve what others could not, and thus return the country to a steadier path of economic expansion.

There are still fundamental concerns over whether Bolsonaro, once being sworn in on January 1st, will pursue some of his potentially more destabilizing policy proposals, such as liberating gun ownership or reducing restrictions on the exploitation of delicate areas in the Amazon rainforest for economic gain. While my firm Frontier Strategy Group is forecasting growth in Brazil at 3.0% in 2019 up from 1.6% in 2018, we believe both Bolsonaro’s extreme position on some subjects, and perhaps more importantly his lack of experience in a position of true power, are risks to his ability to sustain the political support necessary to pass the reforms that Brazil needs. Likewise, political miscalculation have proven to come with heavy consequences for the country’s past leaders, with just two of the four directly elected presidents under the current constitution having actually completed their last terms in office (and one of those who did is now imprisoned for corruption and money laundering).

Our forecasts suggest that while Bolsonaro is likely to pass pension reform in 2019 (both raising the retirement age and also reducing benefits), he is unlikely to make dramatic inroads into addressing other ills of the market, such as its burdensome tax system, its challenging labor code, or its underfunded infrastructure. And despite some of his past statements, we also don’t see Bolsonaro as an immediate threat to Brazil’s democratic institutions.

Bolsonaro did not win with as much popular support as it might first appear — he took 55% of the valid votes, but just 43% of the total electorate after considering blank votes and abstentions. He also does not have the sustainable super majority in Congress needed to pass constitutional amendments without significant efforts at coalition building (which require 308 votes in Brazil’s lower house and 49 votes in the Senate – in rather two votes through each body). While Bolsonaro’s party picked up 44 additional seats in the lower house, to hold 52 total seats, there remain 30 parties in Congress, making coalition building a matter of constant horse trading.

For all of the differences between Bolsonaro and his predecessors, he will face many of the same governing challenges that they did.

While there are many factors across the world driving economic volatility and uncertainty — Brexit, U.S.-China trade tensions, currency upheaval in markets such as Argentina and Turkey — that could result in more populist events over the next few years, or at least anti-establishment forces coming to power, we could also easily see a further push back against these forces.

That is to say that the forces that brought Bolsonaro to power in Brazil cannot be read as indicative of a cohesive global trend. In fact, as we have seen, Bolsonaro’s rise in Brazil was the result of a combination of largely unique domestic factors: an economic recession driven largely by domestic factors, rising insecurity, and a sustained anticorruption wave ignited by an unprecedented investigation targeting the country’s most powerful individuals.

In that sense, while companies should not be worried about an underlying global trend lending itself to the election of highly unpredictable heads of state, the case of Brazil clearly demonstrates the need for continued application of scenario-based planning across high stakes markets to ensure the ability to rapidly adjust to downside risks, but also take advantage of sudden emergence of new opportunities.

Source: Harvard Business Review

Brazil’s economic hopes on Bolsonaro’s shoulders

Global investors seem thrilled at the prospect of Jair Bolsonaro taking over the Brazilian presidency on 1 January, says Sandra Rosa in Finanz und Wirtschaft. The benchmark Ibovespa index has gained a fifth since his election victory began to look likely in the autumn. The hope is that the new leader will continue the business-friendly structural reforms of his predecessor Michel Temer. But the optimism looks wildly overdone.

Brazil has been in “an economic funk for the better part of a decade,” says Bloomberg. The economy’s state has been a result of “heavy-handed government meddling in private industry, a sprawling pay-for-play corruption scandal, and political gridlock that allowed the budget deficit to balloon”. To get state spending and debt, now worth around 80% of GDP, under control the government would have to pass some radical reforms.

A crucial move would be to address an overgenerous and unjust public pension system that is key to the country’s debt problem. Temer failed to get enough votes to push through pension reforms. Bolsonaro would need 60% of votes in Congress to implement them. “Turkeys, however, tend not to vote for Christmas,” says Amundi’s Yerlan Syzdykov in the Financial Times. The cuts would be unpopular, so this is “a mission impossible.” Meanwhile, Bolsonaro’s cabinet has already started “backtracking” on selling off state companies.

Bolsonaro may also be tempted by a Trump-style stimulus to boost growth, but with the annual overspend already at 7% of GDP, there is no fiscal room for manoeuvre. And let’s not forget, says Rosa, that the military, which is far from business-friendly, is likely to play a large role in Bolsonaro’s government. Brazil’s stockmarket rally is on borrowed time.

Source: MoneyWeek

“Sky Is The Limit” For Brazil/US Relations, Says Brazil’s Future Minister of Foreign Affairs

“The sky is the limit for the bilateral relations between Brazil and the United States,” during the Bolsonaro administration. That’s how ambassador Ernesto Araújo, the president-elect’s nomination for Minister of Foreign Affairs (a seat equivalent to the Secretary of State in the United States), described his expectations for the relationship between both countries.

During the first public function after his nomination, Araújo said that the meeting between Bolsonaro and National Security Advisor John Bolton last week made it clear that “there was a qualitative jump [in the relationship] that will allow us to accomplish things that previously were unthinkable.”

Araújo said that for many years there was a ceiling that prevented the US-Brazil relationship from moving forward, caused by the “lack of a common worldview between the Brazilian and American governments.”

“For the first time in many generations, the great moment, one that Brazil dreamed of having, of building a special relationship, an alliance with the United States, has arrived. We have the opportunity of building this relationship from a common worldview,” Araújo also said. “Now we go beyond a formal community of values and democracy, to a community of feelings.”

Among the priorities, Araújo cited the United States’ support for Brazil joining the Organisation for Economic Co-operation and Development (OECD) – the Americans have been blocking Brazil’s candidacy – and finalizing a decades-long negotiation for a deal to end double taxation among the two countries.

Source: Folha de Sao Paulo

Navy admiral named Brazil’s Minister of Mines and Energy

Brazil’s President-elect and former army captain, Jair Bolsonaro, has named a Navy admiral as his Mining and Energy Minister. This appointment marks the eighth member of the armed forces to  Bolsonaro’s government and the 20th Minister appointed so far.

Bento Costa Lima Leite de Albuquerque Junior (60), the current head of Brazilian Navy’s nuclear and technology development program, was born in Rio de Janeiro, and has been with the institution since 1973.

The new Minister will be tackling offshore oil licensing rounds and planned energy privatizations in his new job, according to a Twitter post from Bolsonaro’s son, Carlos Bolsonaro.

The government-led transition team is already taking part in talks to free up billions of barrels of offshore oil reserves for development by foreign oil companies.

Some oil industry executives criticized Albuquerque’s lack of experience in the sector, the current Mining and Energy Minister, Moreira Franco, welcomed the appointment and described the upcoming minister in a tweet as “very well prepared for the technical and command responsibilities of the sector.”

While Bolsonaro hasn’t yet provided specifics of his view for the mining sector, there are expectations for deregulation of the industry, but some of his past statements have activists up in arms.

He has said he may withdraw from the Paris climate accord if it means sacrificing sovereignty over the Amazon, an ecosystem with worldwide ecological significance. Asked about the indigenous reserves in the area, he has declared he won’t add even a centimetre to them.

Climate scientists say Bolsonaro’s intention to open the Amazon for greater development could make it impossible for Latin America’s largest nation to meet its reduced emissions targets in the coming years.

Other examples conservationists are worried about include Bolsonaro’s criticism of the country’s environmental agencies for blocking or taking too long to approve mining and energy projects. He has promised to reduce the wait time to license small hydroelectric plants to a maximum three months, rather than the decade it can sometimes take.

The Mines and Energy Ministry was one of the last to be defined. It is not yet known who will lead the Ministry of the Environment.

Together with being the world’s top iron ore producers, Brazil hold large reserves of bauxite, manganese and potash. It’s also Latin America’s No. 1 oil producer.

 

Source: Mining.com