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Brazilian bonds outperform emerging-market peers

Even though international markets deteriorated recently, the current advantage of a pro-market presidential candidate in Brazil is helping the country’s bonds outperform its emerging market peers in October. The trend will depend on global patterns and investor appetite for higher-yielding assets, analysts say. “There was an adjustment of positions after the first round, but foreign investors are still cautious because of the international scenario,” says Sérgio Vailati, the XP Investimentos partner in charge of offshore investments. Still, the average yield of ten-year sovereign bonds of six emerging markets grew 0.320 percentage point until October 11, while the return of Brazilian bonds fell 0.283 point in the period – bond yields move in the opposite direction of demand.

 

Source: Reuters

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Brazil Won’t Bounce Back Fast After Election, Adviser Says

Even with the right economic policies it will take the winner of October’s presidential election time to put Brazil back on track, Persio Arida, economic adviser to one of the market-favorite candidates, said in an interview.

Gaping budget deficits that require sweeping reforms to spending and taxation alike will take at least two years, said Arida, who advises former Sao Paulo Governor Geraldo Alckmin in his bid for the country’s top job. A bill to cut pension benefits must be approved by Congress and will take time to have an impact on public accounts, he said.
Arida’s view contrasts with that of Paulo Guedes, top economic adviser for the leading candidate, far-right former Army captain Jair Bolsonaro. Guedes says the primary fiscal deficit can be reduced to zero in one year.
Arida says Brazil’s economic situation isn’t comparable to that of 2002, when financial markets boomed when fears that then front-runner Luiz Inacio Lula da Silva would abandon sound economic policy proved unfounded after his election.
“The challenge is much bigger today,” Arida told Bloomberg News in a phone interview. “The economy is not in good shape.”
Persio Arida, 66, holds a Ph.D in economics from the Massachusetts Institute of Technology, was briefly president of Brazil’s central bank in the 1990s, and helped craft the Real Plan that slayed hyperinflation. As a member of a far-left guerrilla group in the 1970s, he was arrested and tortured under the military dictatorship.

Not only does the Brazilian state spend poorly but it also taxes inefficiently, he added, focusing not on income or added-value taxes as text books suggest but on a series of unwieldy levies that stifle productivity.

With single-digit support in opinion polls, Alckmin significantly trails Bolsonaro and the leftist candidate Fernando Haddad, who has replaced Lula as the Workers’ Party candidate.

 

Source: Bloomberg

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Brazil Keeps Rate at Record Low But Cautions of Higher Risks

Brazil’s central bank kept its key rate at an all-time low but cautioned of growing risks to inflation amid doubts over economic policy following presidential elections and global trade disputes.

The bank’s board, led by its President Ilan Goldfajn, on Wednesday left the benchmark Selic unchanged at 6.50 percent, a stimulus it considered necessary given weak economic growth.

“This stimulus will begin to be removed gradually if the outlook for inflation at the relevant horizon for the conduct of monetary policy and/or its balance of risks worsen,” the central bank said in the statement accompanying its decision.

In addition to the burgeoning global trade war and concerns over emerging markets, risks to structural reforms have also increased and affect investor expectations, the bank said. All of the market-friendly candidates are trailing by a wide margin in opinion polls ahead of October presidential elections.

A winner not committed to reforms would cause “the currency to worsen, making the central bank raise the Selic earlier than expected,” said Newton Rosa, chief economist at Sul America Investimentos. “Perhaps even this year, after the election.”

Brazil’s currency has lost roughly 20 percent of its value this year. Yet unlike central banks in Turkey or Russia that hiked interest rates following a selloff in emerging markets, Goldfajn has so far stood pat.

The industrial, retail and services sectors contracted recently, indicating that demand has weakened ahead of contentious presidential elections, in which few candidates have presented convincing measures to tackle the country’s wide budget gap.

During his tenure, Goldfajn has won investor praise for making central bank communication more transparent, taming inflation and taking the Selic to a record low from 14.25 percent. He has become more cautious in recent months as policy makers weigh an increasingly feeble economy and below-target inflation on one hand and, on the other, a currency sell-off that could stoke price increases down the road.

Brazil’s economy is now expected to grow 1.4 percent in 2018, down from a 2.7 percent estimate at the start of the year, according to a central bank survey.

For the first time this year, the central bank included a question about the source of financial market turbulence in a survey it sends to analysts before each key rate decision. Specifically, it asked economists if they think recent volatility can be attributed more to international or domestic factors.

Tumultuous Elections

Brazil’s presidential race is becoming increasingly polarized between far-right lawmaker Jair Bolsonaro and Fernando Haddad, the chosen successor of leftist icon Luiz Inacio Lula da Silva. While Haddad’s Workers’ Party has spooked investors with pledges to undo austerity measures, financial markets have slowly warmed up to Bolsonaro, whose top adviser advocates free-market enterprise. If no candidate wins more than 50 percent of the vote on Oct. 7, there will be a run-off on Oct 28.

In spite of the currency depreciation, Brazil’s consumer prices fell in August amid a drop in food and transport costs. Analysts surveyed by the central bank see inflation at or below target through 2020.

If that outlook changes, the central bank signaled its poised to act, said Isabela Guarino, an economist at XP Gestao de Recursos, a Sao Paulo-based fund manager.

“The highlight here is their indication that they could increase interest rates if the balance of risks worsens.”

 

Source: Bloomberg

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Court majority blocks ex-president in Brazil

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.

Source: NZHERALD

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Surging support for Brazil’s Lula da Silva unnerves markets

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

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Brazil’s Economy: is there any hope?

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.

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The Economic Advisers Behind Brazil’s Presidential Candidates

Brazil in October will hold general elections, which according to Itau BBA investment bank are the most uncertain since the country’s return to democracy in 1985. Here are the top presidential candidates and their respective economic advisers.

* Luiz Inacio Lula da Silva (Workers’ Party – PT)
Adviser: Marcio Pochmann is an economist who graduated from the Federal University of Rio Grande do Sul, a former president of Ipea, the Institute of Applied Economic Research, and currently works as a professor at the University of Campinas.
* Jair Bolsonaro (Social Liberal Party – PSL)
Adviser: Paulo Guedes has a doctorate from the University of Chicago and founded Banco Pactual SA in the 1980s. He is currently president of the administrative board of Bozano Investimentos and an Ipea director.
* Marina Silva (Sustainability Network – Rede)
Advisers: Eduardo Giannetti & Andre Lara. Giannetti is an economist and philosopher who studied at the University of Sao Paulo, while Resende is a former director of the Central Bank and former director of the state development bank BNDES. He’s currently a professor at the Insper business school.
* Ciro Gomes (Democratic Labor Party – PDT)
Adviser: Mauro Benevides is an economist trained at the University of Brasilia. He served as finance secretary when Gomes was governor of Ceara, and developed the economic program of Gomes’ 2002 presidential bid. He’s also a former state congressman and currently works as a professor at the University of Ceara.

* Geraldo Alckmin (Brazilian Social Democracy Party – PSDB)
Adviser: Persio Arida is a University of Sao Paulo-trained economist who earned his doctorate at MIT. He is also a former president of the Central Bank and worked on the Plano Real, the monetary stabilization plan of the mid-1990s.

Source: Bloomberg

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How Brazil’s Economic Recovery Got Run Off the Road: QuickTake

Just as Brazil’s recovery appeared to be taking hold, the country got bogged down. A 10-day strike by truckers over fuel pricing caused a crippling nationwide shutdown and was resolved only when President Michel Temer’s administration gave in to numerous demands, from cheaper fuel to a change in the leadership of the state-run oil company Petrobras. The cost: billions of reais in taxpayer money and a weakened government with a tarnished reputation for fiscal rigor.

1. Why was the strike so damaging?

It underscored how weak and unpopular the government is. Before Temer, the Brazilian government would intervene to cap the cost of fuel, hurting profits at Petrobras. Under Temer’s watch, Petrobras let the market dictate fuel prices, which helped the company but hurt Brazilian motorists when they filled their tanks. That’s what prompted truckers to block Brazil’s highways in protest. Temer’s responses — slashing the cost of diesel and forcing out the widely respected Pedro Parente from Petrobras — revealed a willingness to jettison fiscal discipline in return for political survival. A significant and vocal minority exploited the turmoil to call for military rule.

 2. What does this mean for the economy?

Even before the strike, and its disruption to supply chains, economists had been steadily lowering their growth forecasts for 2018. (In the survey published on June 4, growth was expected to be 2.18 percent, more than a half-point lower than the outlook a month earlier.) Unemployment remains stubbornly high, around 13 percent, and investment has started to tail off as investors fret about this year’s wildly unpredictable elections. Now that the truckers have achieved virtually all their aims, the risk is that the government could face further strikes in other parts of the economy and further protests over fuel prices.

 3. How might this affect the election?

The turmoil of recent weeks is likely to help extremist candidates and hobble centrist ones in national elections slated for October, which were already looking wildly unpredictable. Temer, who took office in 2016 after the impeachment of Dilma Rousseff, isn’t running; the leader in many polls is former President Luiz Inacio Lula da Silva, who is in jail and will likely be barred from running due to his corruption conviction. Jair Bolsonaro, the far-right ex-army captain currently polling second to Lula, offered strong supporter for the protesters and appears to be the main beneficiary. But leftists like Ciro Gomes may also gain from criticizing the government’s market-driven fuel-price policies. Reformist candidates associated with the Temer administration appear unlikely to make much headway with an angry electorate.

4. Could the Temer administration fall before the elections?
It’s unlikely, but possible. Ninety-six percent of Brazilians criticized Temer’s handling of the strike, and his approval ratings have long languished in single figures. For the third time in the past year, he’s under investigation for corruption, this time into allegations he received bribes in exchange for favoring contractors at maritime ports. New discoveries could lead the prosecutor to press charges once again. As his power ebbs away, his support in Congress is drying up, though he still appears to have the votes to avoid impeachment. Brazil’s political and economic elite want to reach the elections without further turmoil.
5. Could the military intervene?

That’s very unlikely. The growing calls for military intervention are mostly an expression of Brazilians’ frustration with their country’s democratic institutions after years of rising crime, recession and corruption scandals. The armed forces are also increasingly visible in public life. An army general was appointed in February to the defense ministry for the first time since the military dictatorship, and the Temer administration has deployed the armed forces frequently to help enforce public security in Rio de Janeiro. The military was also used to help break up blockades during the truckers’ strike. But senior military commanders have ruled out the possibility of an intervention.

Source: Bloomberg

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Truckers’ strike highlights ‘a dangerous moment’ for Brazil’s democracy

Brazilians were spooked by the 10-day protests – and the mistrust of the country’s political class has led to increasing polarisation

A nationwide trucking strike over fuel prices in Brazil finally came to an end last week after 10 days of chaos in which roads were blockaded, South America’s biggest economy suffocated, and the CEO of Brazil’s state-controlled oil company was forced to resign.

Supplies are back in the shops, and trucks back on the roads. And yet, things are far from normal.

Brazilians were spooked by the ease with which the truckers brought the country to its knees, and by their calls for “military intervention” – a euphemism for a military coup.

“This strike showed that the country has extreme fragilities,” wrote economic commentator Miriam Leitão in her blog for O Globo newspaper.

But instead of looking for ways to prevent it happening again, Brazilians are digging into entrenched positions.

There has been little debate over why the country is so dependent on road transport. Instead, Brazilians argue over when and how state-controlled oil company Petrobras should set fuel prices – the cause of the strike – and whether it should make money for its shareholders or swallow losses for the benefit of the nation.

Brazilians can’t even agree on what the dictatorship was. Many “interventionists” mistakenly believe there was no corruption under the military.

And others point out that hundreds of regime opponents were executed and thousands more viciously tortured under the repressive regime that ran the country for two decades until 1985.

Amid a growing sense that Brazil is adrift, a poll by the Datafolha polling institute found that 87% of Brazilians supported the strike – but rejected tax rises or spending cuts to pay for the fuel subsidies that eventually resolved it.

The cash-strapped conservative government of Michel Temer found the money by cutting investment elsewhere, including for health and education – a move likely to increase social tension in a country where poverty is on the rise.

“We have watched a flirtation with collective suicide,” wrote rightwing commentator Reinaldo Azevedo, who compared Brazilians heading to the polls in October’s congressional and presidential elections to lemmings heading for a clifftop.

Leftist commentators are equally alarmed. “It is a dangerous moment,” said Laura Carvalho, a professor of economy at the University of São Paulo. “This is related to the economic crisis, the political crisis, the corruption scandals.”

The 2016 impeachment of Workers’ party president Dilma Rousseff – who was removed for breaking budget rules amid widespread anger over an enormous corruption scheme – was seen by some as a justified action against a corrupt government.

But a recent poll 48% said they thought the controversial process was a coup.

And since then, Temer and his ministers have been embroiled in even more spectacular scandals.

“This foments this idea that a military regime could in a way alter, transform this system,” Carvalho said. “It is a response of total disbelief.”

The only politician likely to benefit from all of this is Jair Bolsonaro, an extreme rightwing lawmaker who has praised the military regime but has not faced serious graft allegations – and who flip-flopped on his support for the strike.

That Petrobras is central to Brazil’s latest nightmare is no surprise.

The corruption scandal that eventually felled Rousseff began with allegations that her political allies had received kickbacks from inflated contracts the company signed with contractors.

The allegations quickly spread to engulf the country’s political class, but also hit Petrobras, which was unable to complete two new refineries that would have allowed Brazil to produce more gasoline and diesel.

Rousseff’s administration forced Petrobras to sell gasoline and diesel below international prices to keep inflation down, costing it billions of dollars in revenue. Under Temer, the company swung in the opposite direction and started raising prices daily as the international cost of oil soared.

On Friday, the company’s CEO, Pedro Parente, resigned, in a move that was celebrated by labour unions but lamented by financial markets. Petrobras shares tanked.

Industry experts said the company should have showed more “sensitivity” in its price rises.

But sensitivity has been drowned out in an atmosphere of increasing polarisation.

Left and right hurl insults at each other over social media like rival supporters at a soccer game. Meanwhile, economists are slashing their growth forecasts for an economy only just limping out of recession.

“The strike and calls for military intervention are a wake-up call,” said Ilona Szabó, co-founder of Agora! (Now!), a new centrist group propagating “evidence-based public policies”. Szabo argued that too many people are looking for simplistic solutions to complex problems.

“Brazilians are crying for change but it’s not yet clear that they are prepared to put the public interest in front of private gain. Instead of rolling up their sleeves and building a common project they are clamouring for a saviour, a strongman, who can deliver the country from ruin,” she said.

Source: The Guardian

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Brazil pension reform lacks votes in lukewarm Congress

The overhaul of Brazil’s social security system to reduce its burden on the government’s overdrawn accounts still does not have enough support for Congressional approval, the cabinet minister in charge of political affairs said on Thursday.

The pension reform bill is the cornerstone of President Michel Temer’s efforts to reduce Brazil’s budget deficit and is due to be put to a first vote in the lower house in the week of Feb. 19.

But Temer does not have the votes and many lawmakers in his coalition are reluctant to be seen backing an unpopular austerity measure ahead of the October general elections.

 Speaking to business executives in Rio, Minister Carlos Marun said that “many” lawmakers are undecided about voting for the pension bill, which has to be approved twice in each of the chambers by a three-fifths super majority. In the lower house, that requires at least 308 votes of the 513 members.

On Tuesday, Marun told reporters that the government had “close to 270 votes guaranteed” and was working around the clock to convince more lawmakers to back the bill.

Marun said the government was open to suggestions on how to “improve” a bill that has already been diluted to make it more palatable to Congress, reducing its impact on fiscal savings.

A document obtained by Reuters this week indicated that the government is working on 88 uncommitted Congressmen and has asked businessmen to help convince the wavering lawmakers on the need to pass the bill to recover the country’s credit ratings.

A poll published on Wednesday showing how unpopular Temer is will not help win over politicians in an election year. The survey by pollster Datafolha said 70 percent of Brazilians view his government as bad or terrible.

 Temer held off putting the bill to a vote in December for lack of support, delaying it until after the Christmas-to-Carnival Congressional recess that ends next week.

The delay increased market skepticism over Brazil’s ability to rein in a deficit that caused the loss of its investment grade credit rating.

Source: Reuters

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