Recession drives 5.4m into extreme poverty

Poverty levels rose significantly during the recession after falling for nearly a decade. According to a new study by the Institute of Labor and Social Studies (Iets) obtained exclusively by Valor, a little over 9 million Brazilians fell below the poverty line in 2015 and 2016 as employment and incomes deteriorated. Around 5.4 million of them fell into extreme poverty.

The portrait cross-referenced data from the Synthesis of Social Indicators released Friday by the Brazilian Institute of Geography and Statistics (IBGE) and historical data from the National Household Sample Survey (Pnad). Income levels followed World Bank and IBGE guidelines: per-capita income of $1.90 a day for extreme poverty and $5.50 a day for moderate poverty (R$133.72 and R$387.07 a month, respectively).

IBGE reported Friday that 52.2 million people were living below the poverty line in 2016, or 25.4% of the population. Those in extreme poverty numbered 13.4 million or 6.5% of the population. Yet IBGE did not disclose comparable data from past years, due to questionnaire changes in late 2015. Iets cross-referenced the income thresholds and created an equivalent series with some methodological differences.

According to Iets researcher Samuel Franco, who prepared the calculations, about 40 million people rose from moderate poverty from 2004 to 2014. Not even the 2008 financial crisis stopped the process, he says. “The destruction ran from 2014 to 2015. That’s when the crisis started hurting incomes and causing unemployment, pushing workers to informal jobs. The construction industry’s job losses, for instance, affected many workers,” he says.

World Bank economist Francisco Ferreira reached similar conclusions. He says the share of the population in extreme poverty rose to 6.5% in 2016 from 4.1% in 2014, reaching the highest level since 2007. Moderate poverty rose to 25.4% from 22.1% of the population in 2016, the highest since 2011. He says the trend is worrying but also warns the extreme poverty figures may be inflated.

“People who lost jobs and are reporting zero income to the IBGE may be living off some savings or with family help,” the World Bank economist says, adding that despite the recent deterioration not all poverty reduction victories during the economy’s “golden decade” were erased. “The glass-half-empty is that we regressed; the half-full glass is that not all achievements were lost.”

The number of families not receiving any social assistance increased in 2016 to 7 million, raising concern at the United Nations Food and Agriculture Organization (FAO) and putting the country at risk of returning to its Hunger Map monitoring malnutrition levels across the world.

“If Brazil doesn’t resume sustainable growth and reinvigorates the job market, simultaneously to an adjustment in income transfer values, we risk returning to the Global Hunger map,” warns José Graziano da Silva, the general-director of FAO, which has released the map since 1990. Mr. Graziano headed the team in 2001 that created Brazil’s Zero Hunger plan, whose lauded efforts helped him rise to the leadership of FAO.

Brazil left the Hunger Map in 2014 when for the first time less than 5% of Brazilians were consuming fewer calories than necessary to avoid malnutrition according to UN standards. According to FAO, Brazil had 2 million families surviving with less than R$133.72 a month in 2016, who didn’t earn any welfare that year.

Children and adolescents were hurt the most by rising poverty. Half of the 42.2 million people aged between zero and 14 were living in poverty in 2016, according to last week’s IBGE data. Celia Lessa Kertenetzky, a researcher with the Economics Institute at the Federal University of Rio de Janeiro (UFRJ), says the higher poverty rate of a nation’s youth is particularly tragic and compromises its future.

“Considering the number of children and adolescents living with impoverished families, we are compromising the future. Several studies show the negative outcome of having been raised in poverty, regarding higher chances of having a worse education and precarious jobs with low pay, generating more impoverished families,” she says.

According to the Synthesis of Social Indicators, the long crisis rapidly increased the number of Brazilians aged 16 to 29 years who do not work or study to 25.8% in 2016 or 11.6 million. Sixty-one percent of them are not even looking for work due to low expectations.

IBGE also portrayed the nation’s structural and historical inequality. Over half of the nation’s most impoverished lived in the Northeast (24.7 million). The worst states were Maranhão (52.4%), Amazonas (49.2%) and Alagoas (47.4%), where black or brown women are more likely to be single mothers. They numbered 7.4 million in 2016, and 64% of them had poverty-level incomes.

Experts warn that poverty is rising just as fiscal crises weaken the social safety net. Bolsa Família, the federal government’s conditional-cash program, did not grow this year. Some states suspended local handouts like Renda Melhor in Rio, which also sought to raise living standards for the state’s most unfortunate.

Mr. Kertenetzky says the country will have to grow with well-paid jobs and by keeping up with successful social programs while offering a good education.

Source: Valor Econômico

Companies to pack IPOs in beginning of year

Investment bankers will have much shorter vacations this year, if they have it at all. Even though Burger King closed on Thursday the 2017 season of stock offerings, the end of this year’s crop will barely be felt inside banks. Bankers are already working on next season’s IPOs and follow-on offerings.

The fear that the presidential election may hinder the offerings has been making banks advise companies to hurry and bring their placements to the market by May, before the announcement of the candidates. Because of this, the year is likely to begin busy.

For now, the list of IPO candidates include telecom operator Algar Telecom, pharmaceutical company Blau, bank Inter and retailers Centauro and Ri Happy, but the executives predict that more names will come out, both for debuts on the stock market and for follow-on offerings.

Banks so far have between R$4 billion and R$10.5 billion in offerings in the pipeline for January to March, period in which companies can still use third-quarter earnings statements in their stock pitches. At the top of the estimates, that figure is quite similar to the beginning of this year’s, when companies raised R$10.3 billion.

Given the uncertainties that the next year promises, not all banks feel comfortable in predicting how many offerings there will be in 2018. Those daring enough to make a call forecast a year not as good as 2017, but still busy. This year, stock offerings raised R$42.9 billion, which makes 2017 the best year for share issuance since 2009, when they raised R$47.1 billion. The figures don’t include the giant capitalization of Petrobras in 2010, worth over R$100 billion.

For 2018, Bank of America Merrill Lynch and BTG Pactual estimate about R$35 billion in offerings. Bradesco, which doesn’t dare going so far in its projections, forecasts R$10.5 billion in the first quarter. This doesn’t mean, however, that the bank is counting on a weak year. “Because of the presidential election, this is a binary year. We may have either a very productive year or not,” says Leandro Miranda, head of investment banking at Bradesco BBI. The only certainty that banks now have is that the first few months will be busy.

In addition to the political issue, whoever decides to move ahead in this beginning of the year may also benefit from investors’ greater appetite for risk. “After a good 2017 for the Brazilian stock market, investors don’t want to risk anymore in the end of year. But in 2018 the game begins again. Investors must return to the circuit to seek returns,” says Fabio Nazari, head of capital markets at BTG Pactual.

Cuts in the benchmark interest rate throughout this year are also likely to help improve corporate earnings, since their debt costs will fall. This tends to make them more attractive to investors, drawing more foreign funds to the country.

Yet the path still has many uncertainties in addition to the elections. They include how the pension reform’s postponment will affect the market mood from now on. “This is a decisive factor [to attract investors]. The passage of the [pension] reform this end of year or early next year would cause demand,” said Rodrick Greenlees, head of investment banking at Itaú BBA, before the government delayed the vote to February 19.

Only on the next few days, says Alessandro Zema, head of investment banking at Morgan Stanley in Brazil, it will become clearer what the investors’ reaction to the vote postponement will be.

The good news is that companies should begin tapping the market with the goal of expanding, either organically or through acquisitions. “Most of the companies’ deleveraging process has been done. Now they start seeking funds with other goals,” says Marcelo Millen, chief of capital markets at Credit Suisse.

Source: Valor Econômico

Real-estate developers see a brighter 2018

Real-estate developers will end 2017 with more launches and sales than last year, but earnings of several companies are still under pressure due to weak operating performance in recent years. Considered a year of recovery for the sector, 2017 was also marked by cash generation among many companies and by creditors’ approval of judicial recovery plans of PDG Realty and Viver Incorporadora. The market expects the operating improvement to consolidate next year, but reflected only in the 2019 balance sheets.

“This year was of transition and adjustment. In 2018 there will be effective cash generation and, due to the industry’s cycle, earnings will start recovering by 2019,” says Santander’s real-estate analyst, Renan Manda.

Developers avoid setting targets for launches in 2018, but some of them such as EZTec and Tenda expect raising projected sales (VGV). Until September, the launch of publicly traded companies increased 28%, and net sales rose 25%, according to Valor data. Seasonally, the fourth quarter is the most heated for the industry.

Sales started to show improvement in the second quarter, Mr. Manda says. Most developers were able to generate cash in the third quarter as the number of deliveries fell, pushing down contract cancellations. Cash generation tends to keep growing in 2018 and help cut debts.

“Inventories have been falling every quarter. Sales are starting to pick up,” says another industry analyst, although he also warned that prices probably would stay flat next year because companies reduced launches faster than they cut inventories. Mr. Manda, with Santander, also expects prices to keep stable or follow inflation. “I don’t expect any price pressure,” he says.

Next year will present a more favorable environment for the middle-class and high-middle-class income ranges, and also for developers working with government housing program Minha Casa, Minha Vida, says Luiz Mauricio Garcia, a senior real-estate analyst with Bradesco BBI. But the segments will recover “from different levels.”

“The low-income segment has a better supply-demand balance,” says the Bradesco BBI analyst. A new expansion will only occur when employment indicators improve. “Low income concentrates nearly 80% of demand,” Mr. Garcia says.

Developers focusing on middle-class and luxury properties will benefit from macroeconomic shifts and more readily available mortgages. “Net sales increased as cancellations fell. Gross sales also tend to improve,” says the Bradesco BBI analyst, who stresses that they still are one of the most challenging markets.

Developers are already recovering in São Paulo but not in Rio de Janeiro’s market, says Brasil Brokers president Claudio Hermolin. “Launches sold faster in São Paulo this year than in 2015 and 2016, but were still slow in Rio,” he says. The executive points out São Paulo properties are still selling slower than in 2013 and 2014.

Flávio Amary, president of developer trade group Secovi-SP, expects launches and sales to rise in the city next year but declines to provide a specific forecast. “The scenario is pointing to a better market,” he says. Launches of residential properties in São Paulo could rise between 5% and 10% this year, Mr. Amary says, with sales increasing from 20% to 25%. Early this year, Secovi-SP estimated growth between 5% and 10% for both indicators in 2017.

For Rubens Menin, president of the Brazilian Association of Real Estate Developers (Abrainc), the industry’s biggest challenge now is housing credit. “We hope LIGs [covered bonds] take off in 2018. The securities were regulated in August, and the Central Bank is considering the rules,” Mr. Menin says.

Abrainc’s president believes LIGs will complement the Workers’ Severance Fund (FGTS) as funding sources for the industry. “LIGs could surpass R$200 billion in three to four years,” Mr. Menin says. LIGs are covered by both the lender who issued them and a property portfolio big enough to back the entire issue.

According to Gilberto Abreu, president of the Brazilian Association of Mortgage and Savings Entities (Abecip), mortgages financed by savings accounts will rise 15% in 2018. Abecip estimates that mortgages financed by savings funds will total R$45 billion in 2017, from R$47 billion last year. When FGTS loans are taken into account, the overall new mortgage balance this year is R$117 billion, from R$116 billion in 2016.

“Banks will grow more interested in mortgages over the upcoming months but nothing compared to the peak in 2014, says Santander’s Mr. Manda.

Ricardo Ribeiro, vice-president of Direcional Engenharia, expects state-owned lender Caixa Econômica Federal to set the tone of 2018. “If Caixa is unable to keep lending to mid-standard developers, it will get very tough,” the executive says. He is also concerned about potential lending restrictions in Minha Casa, Minha Vida to families earning more than R$4,000 a month.

Caixa is the largest mortgage lender in Brazil and needs to adjust its capital ratio to Basel III rules.  The Senate passed with a few changes a bill allowing FGTS to help capitalize the bank. The proposal still needs to pass the Chamber of Deputies again and would let Caixa swap about R$10 billion in 15-year bonds issued to FGTS with perpetual notes. Mr. Ribeiro says the mid-income sector faces good prospects if the issue is solved and savings accounts start getting net inflows again.

Source: Valor Econômico

Brazil government still eyeing pension vote next week: minister

The Brazilian government is still working toward holding a lower house vote on its landmark pension overhaul bill next week, Finance Minister Henrique Meirelles said on Wednesday, contradicting earlier remarks by a senior senator.

Romero Jucá, the government’s leader in the Senate, had earlier said that lower house lawmakers had agreed to delay the vote on the unpopular bill to February, close to next year’s presidential and parliamentary elections.

Source: Reuters

Credit card market starts growing again

Having declined for several quarters in a row, the number of active credit cards of some of the largest banks in Brazil is starting to bounce back. The economy’s revival and even the arrival of new players in this market were some factors leading to the increase of total active cards in the third quarter.

In the period, Itaú saw its total number of active cards rise to 28.8 million from 28.7 million. Even if it is a small increase, it represents the first growth since the fourth quarter of 2014, when it expanded to 36.7 million from 36.4 million. Since then, all quarters were of declines.

Banco do Brasil had a similar situation, with total cards rising to 16.7 million from 16.5 million. Before that, the latest expansion had been in the second quarter of 2016.

Caixa Econômica Federal had four years of contraction, but managed to reach 7.6 million cards in September, which compares with 6.5 million a year earlier. Bradesco and Santander declined to provide their figures, but the latter informed its number of credit cards remains stable.

Until 2016, the latest data provided by the Central Bank, the number of cards issued by banks stood at 148.8 million. Such base, however, was showing quarterly contractions since the beginning of 2014. Experts say the trend now is of growth, but slow.

Data from the Brazilian Association of Credit and Service Cards (Abecs) also show a recovery this year. Their cards purchased R$189 billion in the third quarter, up 7.6% from the same period of 2016 and almost twice the growth of the same period last year.

“With a somewhat better economic scenario, with consumers buying again, banks can’t run the risk of losing this movement, so we can expect stronger issuance [of cards] now,” says Vitor França, consultant. He explains that even though banks are stricter in extending credit — since delinquency rates grew sharply during the crisis — they are likely to invest again in credit cards. This is because in this product, even if the client doesn’t use revolving credit or pay interest in payment plans, banks gain with annual fees and interchange fees charged at every purchase paid with card.

Marcelo Miranda, executive manager of payment methods at Banco do Brasil, agrees with Mr. França’s view. He says the economic recovery is likely to increase the number of cards already in the fourth quarter because of the holiday shopping season. “People plan trips, vacation, end of year. In addition to dates like Christmas and Black Friday, which are important for consumption, and the 13th salary [a mandatory year-end bonus]. So, traditionally the seasonality of this quarter is strong,” Mr. Miranda says.

Itaú also believes the number will continue growing based on indicators of economic recovery. Marcelo Kopel, executive officer in charge of cards, says the trend is for the number of cards to accompany the market. “The greater the economic stability, the more confidence consumers will have and thus the demand may grow,” he says.

This market, however, is different from what it was when the crisis began. Currently there are fintech companies that offer credit cards that may be obtained digitally and offer advantages such as no annual fee or cash back. Nubank, maybe the most popular among the fintech cards, alone has more than 2.5 million clients. Trigg, launched this year, intends to end 2017 with 50,000 users, but says it has already received more than 370,000 requests.

Mr. França, says the arrival of these new players tend to benefit consumers, since banks also start offering products with more rewards to gain clients’ loyalty. “We have the new players that encourage banks to continue gaining ground. From the point of view of issuance, if the bank doesn’t try and put its card in the client’s hand, another will do it. So I see banks intensifying this competition, seeking alternatives,” the consultant says.

An example of this search for new products was Itaú’s launch of Credicard Zero last week. The new card has no annual fee and offers discounts in purchases of products from partner shops. Mr. Kopel says the launch is part of a strategy. “The development of this product was differentiated; we built each feature of the card in partnership with clients. We structured groups of multidisciplinary professionals who don’t stop developing new features. It is being a success. In few days since the launch, we have already received thousands of requests for the new card,” he says.

Banco do Brasil also stresses the focus now is to invest in the client’s experience. In addition to offering loyalty programs and special offers for cardholders, the bank has been betting on technology, issuing cards with near-field communication and allowing their use inside digital wallets for mobile payments.

“Our application has near-field payment, the client can pay with reais or points. The Ourocard cards are also in Samsung Pay and now in Android Pay too,” Mr. Miranda says. He points out that 2017 was a year to improve the client’s experience, but that the “portfolio is constantly changing.”

He also says that the decline in the number of cards was because adjustments in search of operational efficiency and greater caution of people amid the crisis. When a customer doesn’t use the card and makes little use of the checking account, he says, the plastic may become inactive. For the bank, this action represents savings, especially with the royalties that cease to be paid to the card brands.

“We have been improving this process and the base was diminishing. Another explanation [for the decline in the number of cards] was the macro issue. We saw that clients, especially at the base of the retail, became cautious about credit, with increase in unemployment and drop in income. They want to preserve the credit card for an emergency, which lowers demand for them,” he says. Mr. Miranda says, however, that the trend is for this “equation” to turn positive, since the process of operational efficiency is already “mature” and the demand is back.

Mr. Kopel, with Itaú, also attributes the declines to the economic situation. “We went through moments of instability in the economy and high unemployment levels. Since the card market is related to people’s purchasing power, this situation ends up influencing a decline in credit cards,” he says, adding that the return of consumer confidence makes the demand grow again.

Source: Valor Econômico

PIS-Cofins reform to affect only manufacturing industry

Because of the services industry’s strong backlash, the government has decided to alter its proposal to reform social contributions PIS and Cofins, one high-ranking economic official says. Now, the changes will only be valid for the manufacturing industry, which already pay the two taxes in the non-cumulative regime, that is, with the discount of credits in the stages prior to production.

The services industries — including schools, universities and hospitals — will continue in the cumulative regime, paying a percentage over their revenue, without the use of credits. The government expects that in the future, “when we find an adequate environment,” the new rules will be extended to the services sectors, the same official says. “Now, who is submitted to the cumulative regime will remain in it,” the authority says.

This way, in this new scenario, the tax credits for the manufacturing industry will be expanded, as will the credits, for the sector to have a faster refund. “A good part of the economy will benefit from the changes,” the source says. “We will give more dynamism to who needs dynamism, to who exports, for example.”

Today, companies that pay the contributions under the non-cumulative regime can only get credit for the PIS and Cofins paid over inputs they use in the production process. With the new legislation, the right to the credits will be expanded. Any good or service may be object of credit, regardless of their application or destination (consumption or production). One government goal is to simplify the taxation of PIS and Cofins, responsible, according to the economic official, for 80% of all tax litigations at the federal level.

The government wanted to submit the PIS reform to Congress in the first half of this year, and later the Cofins reform. President Michel Temer even said the proposal would be sent to Congress by the end of May. Then, the submission was pushed back to the second half. Now, the government has decided that the reform will not affect companies that pay the two contributions under the cumulative regime.

Still in 2015, during the tenure of Joaquim Levy in the Ministry of Finance, the government announced its intention of revamping these two taxes levied over consumption, whose revenues correspond to about 4% of GDP. The idea was to create a Value Added Tax, which would absorb the two taxes, levied in a non-cumulative way over all sectors, even services.

In 2016, the government preferred to make the change in phases. First, it would send to Congress a provisional measure with the PIS changes. The strategy was to test the rate chosen to avoid excess and observe potential problems. The goal was to maintain the same level of revenues. Only after that test, which would give security to the tax authority and to taxpayers, the government would also make changes in the Cofins legislation.

Service companies reacted against the proposal of PIS and Cofins reform with the argument that they would may much more taxes, because, unlike the manufacturing industry, they don’t have much credit from previous stages to deduct. With that, the reform has stalled.

Source: Valor Econômico

Divergences in government hold back new bankruptcy bill

The bill of the new Bankruptcy Law has been shelved at the Office of the Chief of Staff and runs the risk of not being sent to Congress. Although it was treated as priority by Finance Minister Henrique Meirelles, who even announced in September and November the proposal’s submission to lawmakers, the bill has several points that the presidency dislikes, reason for which it has no timeframe to move forward.

This impasse is already causing discomfort among economic officials, who consider the proposal one of the most important microeconomic reforms. Their view is that if the proposed regulation were already in effect, situations such as that of telecommunications company Oi could be solved much more rapidly.

At the Chief of Staff’s Office, however, there are doubts about the bill’s efficacy. The view is that, the way it came from the Finance Ministry, the proposal brings more benefits to the federal government and creditors than to companies in financial difficulties or bankruptcy reorganization. That is why it is being left aside.

Officially, aides to Chief of Staff Eliseu Padilha only say an analysis of reports on the bill made by other government bodies is under way. Yet there is no information about what these bodies would be or how long it would take for the analysis to be concluded.

One hypothesis raised in the backrooms is that political issues, like the possibility of Mr. Meirelles’s candidacy for president, would be affecting Mr. Padilha’s willingness to push the measure forward. Even because officials who work on the matter would have already answered more specific questions about the bill.

From the technical standpoint, there are disputes about the notion that the bill would only help the government and strengthen the other creditors too much. Officials say the government would indeed have some benefit, but it would not be anything exaggerated and out of the standard, and that in the case of creditors the greatest benefit would be the possibility for them to present a recovery plan in case of no agreement between the parties. Today, the law limits that right to the debtors.

Under the Finance Ministry’s bill, companies, for example, would gain more time to settle their tax debts and could even use tax losses to pay, but government would also be able to file for the liquidation of a company under bankruptcy reorganization. Officials argue that, because it is one of the biggest creditors of companies, the participation of the Federal Revenue in the proceedings would make the bankruptcy reorganization more efficient. This is because the tax agency has better capacity to identify moves like equity depletion, something that would give more transparency and hinder questionable actions by the debtors.

Another initiative stated in the bill’s draft is to allow local judges to replicate in Brazil decisions taken by their foreign peers, accelerating the proceedings and strengthening national creditors.

The new law would also address the regulation of out-of-court reorganization proceedings. In this matter, the main change would be the suspension for 120 days of the enforcement of any debt collection, which would represent an important breathing room for the company in its reorganization attempt. That period would be divided into 60 days for negotiation and pursue of the necessary number of creditors to bind dissident creditors to the agreement and 60 days to enable, certify and implement the plan.

Source: Valor Econômico

Brazil cuts rates to all-time low, hints at smaller February cut

Brazil’s central bank cut interest rates to an all-time low on Wednesday and hinted at another, smaller reduction in February, but urged caution as major fiscal reforms hung in the balance.

The bank’s nine-member monetary policy committee, known as Copom, cut the benchmark Selic rate by 50 basis points to 7.00 percent, capping a 725 basis-point decline since October 2016. The move was widely expected by economists in a Reuters poll.

In a statement announcing the decision, the bank said it could make another, smaller rate cut at its next meeting in February, reinforcing expectations of a 25 basis-point reduction as the end of the rate-cutting cycle draws near.

Still, the Copom “views this guidance as more susceptible to changes in its baseline scenario and balance of risks than in previous meetings,” it said in the statement. “Going forward, the Committee judges that the current stage of the cycle recommends caution in conducting monetary policy.”

The remarks highlighted uncertainty about Brazil’s gradual economic recovery as the government struggles to pass austerity measures and inflation remains stubbornly below an official target.

Lawmakers have resisted an overhaul of Brazil’s bloated social security system, though the government’s coalition in the lower house of Congress expected a vote on the legislation by Tuesday. Ratings agencies have said the bill is key to determining the country’s sovereign credit rating.

“Our reading is that policymakers are waiting to see if the government manages to pass pension reforms ahead of the Christmas break,” Capital Economics chief emerging markets economist Neil Shearing wrote in a report. “If it does, a final 25 basis-point cut in the Selic seems likely. If it doesn‘t, today’s cut will probably be the last in the current cycle.”

Most economists surveyed by Reuters last week expected a 25 basis-point cut in February. A sizeable minority expected the bank to stand pat, while some bet on another 50 basis-point reduction.

Those forecasting further cuts cited mounting evidence that inflation will end the year below the bottom end of the official target range for the first time in two decades. Inflation expectations for 2018 are below the target’s midpoint.

Lower rates could help Latin America’s largest economy gain momentum after its deepest recession in decades and bolster a long-awaited rebound in corporate investments.

Source: Reuters

Supreme Court maintains doubt over labor debts’ inflation adjustment

The long-running discussion about what index should be adopted in the inflation adjustment of awards in labor lawsuits seems far from ending, despite the fact that the labor reform, in effect since November, had defined it as the Reference Rate, or TR, an interest rate used to adjust the return of investments such as savings accounts. On Tuesday, the Federal Supreme Court (STF) gave its green light for labor courts to continue using the Special Extended Consumer Price Index (IPCA-E), decision that may have ripple effects, impacting companies’ reserves.

This year, the gap between the two indices has narrowed — the TR has so far accumulated 0.6%, while the IPCA-E stands at 2.56%. But this difference once was of more than ten percentage points, in a period of high inflation. And since the lawsuits claim work-related sums not paid in the past, those high indices may be applied.

The STF ruling came in a judgment on Tuesday of a complaint filed by the National Federation of Banks (Fenaban), which represents midsize lenders. The trade group questioned in the STF’s 2nd Panel a decision taken by the Superior Labor Court (TST) in 2015 that defined the adoption of IPCA-E rather than TR to adjust labor debts.

Even before the STF ruling, the Regional Labor Court (TRT) of Rio Grande do Sul had already announced it would maintain the index most favorable to workers. At its first meeting on the labor reform, it approved a decision to bar the TR. The judges considered paragraph 7th of article 879 of the Consolidation of Labor Laws (CLT), included by the reform, as unconstitutional.

Lawyers are waiting for the publication of the Supreme Court’s ruling to have an idea of its reach and how it can be applied by other judges. Even though the trial in principle didn’t get into the merit of the constitutionality of adopting the TR to adjust labor debts, the decision serves as warning to companies.

“The Supreme Court hinted with the ruling to the possibility of the TST decision prevailing,” says Luiz Marcelo Góis, lawyer. Even if the labor court’s ruling predates the new law of the reform, Mr. Góis believes the basis that the TR doesn’t adjust the value of the money, regardless of where it is defined, is likely to be upheld by the TST.

Mr. Góis says he fears this will lead to more rulings for the unconstitutionality of the TR based on the TST decision, which was suspended since October 2015 because of a provisional order of Justice Dias Toffoli, who handled the complaint (RCL 22012) judged by the Supreme Court. “There is a stronger sign than there was before about the possibility of the IPCA-E prevailing,” he says.

Rosana Muknicka, labor attorney, says what was holding back the TST from applying IPCA-E was the Supreme Court’s provisional order. But now there is a new fact which is the definition in law for the TR. “Now we have a specific law that must be followed.”

She says the STF could even adopt the IPCA-E from 2015 until November of this year, but after that it should decide for the TR. “I hope the labor judges don’t begin applying the Supreme Court ruling that was about ‘precatórios’ [payment orders issued by the public sector to follow judicial decisions] to bar the new law, as the TRT of Rio Grande do Sul already did,” Ms. Muknicka says.

The Fenaban attorney in the case, Maurício Pessoa, says it is necessary to wait for the publication of the ruling to evaluate what appeal is possible. For him, despite the opinion of some justices during the trial, the Supreme Court didn’t get into the merit of the discussion and it would not be possible to say the court considered the TR unconstitutional for the adjustment of sums related to labor lawsuits.

What was in discussion, he adds, was only the fact that the TST had extrapolated its competence by applying the STF ruling that excluded the TR as index to adjust precatórios in the ruling over direct actions of unconstitutionality (Adins) 4357 and 4425.

The Supreme Court is only expected to address the adjustment for inflation of labor debts per se in case appeals from the federal government and the municipality of Gravataí are admitted in the case trialed by the TST. “I am convinced that nothing has changed with this ruling. We need to wait and see the publication of the ruling and how the judiciary’s behavior will be,” Mr. Pessoa says.

The indices’ switch may have a significant impact, says labor attorney Caroline Marchi,. That is because the adjustment is applied since the due date of the claimed payment, for example, of overtime hours.

Ms. Marchi has been recommending companies to set aside reserves for those amounts in the regions, such as Rio Grande do Sul, that have guidance to application of the IPCA-E. In São Paulo, she says, few judges have been adopting the IPCA-E.

The discussion can still drag on for many years until there as a Supreme Court ruling on the merit, says Mr. Góis. Until then, judges are likely to apply adjustments according to their views. For him, the TR should prevail because in labor lawsuits, in addition to adjustment for inflation, there is interest of 1% a month, or 12% a year.

“It is true that the interest has one purpose and the monetary adjustment has another, but if you think of an appreciation of the money of 12% added to 6%, 7%, a labor lawsuit becomes a better option than any investment,” Mr. Góis says.

Source: Valor Econômico

Brazil and Mexico advance on talks to expand bilateral trade

Brazilians are finally close to being able to export fresh beef and pork to Mexicans, lovers of this type of protein. The barrier imposed by Mexico, under the claim that Brazil can’t ensure its cattle are free from foot-and-mouth disease, may soon be lifted. And, in addition to meat, there is room to increase exports of corn, cosmetics, and cars, among other products, free of customs duties.

The green light is being given by bMexican businesspeople who are advising the administration of Enrique Peña Nieto in negotiations with Brazil. And they are in a hurry. They are proposing that talks be completed by the first quarter of 2018, before the campaigns for presidential elections in the two countries go full steam. Mexico holds elections in July; Brazil, in October. The risk of politicizing trade agreements is considerable.

In the medium term, a greater opening to Brazilian products has to do with Mexico’s realization that it needs to diversify its suppliers and buyers, reducing its big and historical dependency on the US. Part of the Mexican business community still fears that the free-trade agreement with the US and Canada, NAFTA, will be destroyed by American President Donald Trump. NAFTA is likely to survive, even if modified, but Mr. Trump’s threats are making Mexican companies seek other alternatives.

It is in that context that Brazil and Mexico, the two largest countries in Latin America, with 60% of the region’s GDP and 50% of its population, may increase their bilateral trade, which is still puny. This year through October it reached $7.1 billion, up 18% year-over-year.

“We are interested in opening our market to Brazil,” says Rafael Nava Uribe, president of the international section for South America of Comce, the influential Mexican association that represents 2,000 exporters and importers. He participates in Cuarto de Junto, a group of 200 private-sector representatives that advises the Mexican government in trade negotiations with other countries. In practice, the government takes proposals to Cuarto de Junto and if the group accepts them, the government goes back to the negotiating table to define its position.

Comce’s director-general, Fernando Ruiz Huarte, also insists that Mexico needs to diversify its trade relations. “It is not healthy to sell 80% of our products to one single market,” he says, referring to the US.

Corn, a Mexican staple, is one example of its dependency on the US. Mexico buys from the US 98% of the corn it imports. Last year, American farmers exported $17.7 billion in corn to Mexico — five times what the US exported in 1994, when NAFTA went into effect. Given Mr. Trump’s constant threats of killing NAFTA, the Mexican government has been reacting. Deputy Economy Minister Juan Carlos Baker recently told the Financial Times that he was considering the possibility of opening the market to corn produced in Brazil and Argentina. The commodity would enter Mexico without a customs duty.

Brazil and Argentina had big corn crops this year, which helped them increase their sales through September to Mexico by 11% over the full 2016 volume. That volume is still small in comparison with what the US sold — American exports totaled 10.5 million tonnes in September, whereas Brazil sold 100,800 tonnes. But Mr. Baker signaled that the market can be opened up, and that negotiations with Brazil are more advanced than with Argentina. Mr. Baker said the price of Brazilian corn is very competitive. But so far, US producers don’t seem worried, and they see Brazil and Argentina merely taking advantage of a small window made possible by this year’s big harvest.

“Mexican businesspeople are opening their eyes to Brazil, and Brazil is going through a favorable moment,” says João Marcelo Galvão de Queiroz, chief minister of the Brazilian embassy in Mexico, referring to the bumper grain crop. He laments that Brazil is still not exporting fresh beef and pork, which Brazilians have been requesting for close to a decade.

For Brazil to be able to do that, Mr. Nava of Comce, sees two paths. One would be replicating the model applied to Uruguayan meat. “Uruguay is not entirely free of foot-and-mouth disease, but we buy meat from them. What we do is to have our inspectors there, who clear the beef,” Mr. Nava says. He points out that this ends up making the meat more expensive, but it is a way of getting into the Mexican market, dominated by American beef. The other alternative is to use the instrument of “mutual recognition,” where Brazil accepts Mexican meat, and vice versa. “Even if Mexico doesn’t export meat to Brazil, and it will probably not export, it would be a way for us to buy meat from Brazil,” Mr. Nava says. He points out that Mexico’s resistance to accepting beef coming from a country not entirely free of foot-and-mouth disease is due to a tragedy that occurred in the 1940s, when the disease practically led to the sacrifice of all of Mexico’s cattle herd. “This stuck in our memory.”

Brazil already is a big exporter of chicken, be it fresh or frozen, to Mexico. But the exports are limited to a quota, because of the pressure from local producers. “Brazil uses nearly 100% of the quota. It is a new market, which didn’t exist four years ago,” Mr. Queiroz says. This quota, open to other countries, expires this month and it is not known what the Mexican government will do. According to the Organization for Economic Cooperation and Development (OECD), by 2021 Mexico will be the world’s fourth-largest meat importer, after Japan, China, and the United States.

Since 2002, Brazil and Mexico agreed to trade, without paying import duties, 800 products or tariff positions – a small number. In 2015, the two countries decided to expand that agreement. So far, another 1,200 products have been added to the negotiated list. They include chemical products for PET bottles — an important input for Coca-Cola Femsa, the largest Coca-Cola bottler in the world — and cosmetics, which may benefit, for example, the operations of Natura, which has been in Mexico for more than a decade, with a sales force numbering 200,000 people.

The two countries are still negotiating 2,000 additional products — beef and grains are in this group, considered more sensitive. “In the end, I believe we will reach a total of 5,000 products on the new list,” Mr. Nava says. Sugar and coffee, he adds, are unlikely to ever enter. Mexico exports these two commodities and will likely want to protect local production. But he argues that if it is not possible to settle on 5,000, the agreement should encompass fewer products and the negotiations be finished by March. “Then, in 2019, we reopen the discussions, already with the new elected governments.”

The automotive agreement, which allows the trade of cars and auto parts at zero import duties since 2002, is also on the tables of the Brazilian Foreign Ministry and the Mexican Secretariat of Economy. In its original version, there were no quotas, and trade was free. But in 2015 Brazil asked for quotas and complained that used cars that Mexico imported from the US were taking away sales from Brazilian entry-level cars.

Mexico then began demanding that used cars coming from north of the border had a certain limit of CO2 emissions. This way, the imports fell from about 1 million cars in 2014 to 50,000 a year later. The quota system has an end date: March 2018. “Since the Brazilian government has so far not asked to maintain quotas, we believe trade will be freed again,” Mr. Nava says, pointing out it is a managed trade, since the carmakers that have plants in Brazil also operate in Mexico. He estimates that, when the quotas expire, exports of vehicles and auto parts may increase by at least 10% in 2018.

Also on the table of the Brazilian negotiators is a request from Mexico for the creation of a mechanism for controversy resolution, avoiding the possibility of disagreements between companies ending up in the courts. With regard to this issue, Brazil has been saying it accepts the proposal, as long as this mechanism doesn’t require changes in Brazilian legislation. Mexican businesspeople are also suggesting the adoption of the “ventanilla única,” or “single window” – that is, a way to cut red tape for exporters or importers by having a single counter to handle all the necessary documentation.

 Source: Valor Econômico