Category Archives: Politics

Should you buy Brazilian stocks right now?

Brazil is in a very binary situation right now and that’s bringing huge volatility. Brazil’s current crisis is a fiscal one. That’s what caused the huge drop up until 2015. The labor party added a lot to the social networking in its 12 years in power and did not do the reforms the country needs, most notably, the pension plan reform. Pension plan deficit represents already 2.8% of the GDP, without change and with an aging population, this number will be unsustainable in as soon as 5 years. The labor party did have its merits in the beginning by taking a lot of Brazilians out extreme poverty but the lack of political power and will to make the reforms, coupled with huge corruption, erased most of its merits. So, comes 2016 and everything changes? Stock market and currency jumps and interest rates go down. The economy must have improved, right? Wrong! The only thing that improved was the expectation. With the rumors and subsequent consolidation of Dilma’s impeachment, the new president, Temer, who has in congress support what he lacks in popularity, was doing all the necessary reforms to the economy. The GDP has not improved yet, but the perspective is great and the price is right.

Then, comes corruption again and now it implicates Michel Temer. Stocks go down 10% and currency another 7%

Short after, markets start to recover thinking that, with or without Temer, the government base in the congress will be the same and the reforms will happen.

Then the binary dilemma: economy will continue to improve if these reforms pass and that seems to be the scenario both with the current president or with one replaced by the congress. In Brazil, if a president and vice president are impeached after two years in power, the replacement is chosen by the congress until the next election. However, there’s strong popular movement and even a proposed constitutional amendment to do direct elections right now and not wait until 2018. If that happens, you could see the labor party or other extremist come up strong and drop the stock market and currency further.

So, will this “diretas já” movement happen? It’s possible. The country is in big disbelief with the political representatives and not without reason. The curious part is that the direct election is what would be the most harmful to the economy and therefore, the population.

Bottom line: if you are looking at the long term: more than 5 years, this is probably a good time to buy. But in the next two years, except a lot of volatility or just remain neutral altogether (my position right now). If you are looking for hedge, you can consider BZQ, an ETF that seeks daily results that correspond to twice (200%) the inverse of the MSCI Brazil Index

Brazil is out of recession. But should you buy it?

President Michel Temer and economic ministers will celebrate the growth of 1% of the Gross Domestic Product (GDP) in the first quarter of this year, compared to Q4 of 2016, excluding seasonal factors. When they do this, they will actually be celebrating the growth of agriculture and foreign demand (exports). Domestic demand – household consumption and investments – continued to fall and with worse results than expected.In the economists’ estimates, GDP would grow, on average, 0.9% in the first quarter of 2017 QoQ, in the seasonally adjusted series. Here, the recorded growth of 1% was slightly higher. But economists predicted 9.4% growth in agriculture and the GDP brought a rise of 13.4%. In industry, the result was also better, of 0.9% against a forecast of 0.8%. The services sector remained stable, but the expectation was a growth of 0.3%.

It is on the demand side that the GDP has been more frustrating. Economists projected the first increase (of 0.4%) after eight consecutive quarters of falling household consumption. The IBGE indicated, however, a further retraction of 0.1%, postponing the recovery. And the investment retreat was much deeper than expected. Estimates indicated a small decline of 0.3%, but the reality was cruel and the figure was negative at 1.6%. All comparisons are QoQ, minus the seasonal effects.

Weak domestic demand is also clear in trade data, down 0.6% from the end of last year.

The government may even celebrate the outcome, but from the standpoint of indicating a domestic recovery, GDP in the first quarter was worse than expected. And the political crisis and the signal issued yesterday by the Monetary Policy Committee (Copom) that the interest rate down trend will slow down, act to further delay the good news, so long awaited.

Brazilian Government Announces Economic Package with 12 Measures

President Michel Temer announced on Thursday (15) a new economic package with measures to stimulate the economy. Also taking part in the announcement were the house or representative’s president, Rodrigo Maia (DEM-RJ), Senate’s President Renan Calheiros (PMDB-AL), Finance Minister Henrique Meirelles and the Minister of Planning, Dyogo Oliveira.

Temer started the announcement saying that the goal is to stimulate growth and reduce unemployment. Before announcing the measures officially, the president commented on the approval of the PEC 241, which limits spending increases for the next 20 years, approved on Wednesday.

According to Temer, “these reforms aim to increase the growth of the Brazilian economy. We never ignored the difficulties that we would have when we took over the government, but we are succeeding in advancing these topics.”

Despite being positive for the economy, these 12 measures are seen as a desperate way to try and deviate the attention from the corruption investigations that are currently hitting Temer’s government right in the core. In any case, the measures are positive. To them:

Tax Debt Negotiation

Finance Minister Henrique Meirelles was responsible for giving more details on each of the measures. The first provides for tax debt negotiation for companies with debts due through November 30. Meirelles said that “any tax debt” is eligible, including social security. For debts that are being questioned in the Court, it is necessary to prove the desistance of the lawsuits.

“The program allows tax negotiations for companies that are preparing to grow again, as macroeconomic adjustment is under way,” said Meirelles.

Guaranteed Property Letter

Another measure, according to Meirelles, is the regulation of the “Letra Imobiliária Garantida”, an instrument of funding for real estate credit. The objective is to broaden the supply of long-term credit for civil construction.

Meirelles said that this type of bond, being both secure and long-term, is an “important alternative source for real estate lending and increases the supply of long-term lending to the industry.” This measure will have to go through public consultation and then be regulated by the National Monetary Council (CMN).

Improvement in the “positive register”

Meirelles also announced the improvement of the positive credit rating, which allows the creditor to analyze the person’s history. Membership becomes automatic, and exclusion has to be requested. The goal is to reduce credit risk and make room for lower interest rates for good payers.

Credit measures

Meirelles says another measure is to allow price differentiation according to the mode of payment. Such a change allows retailers to charge different prices depending on the payment mode used, ie different prices if the customer pays cash or credit card, which is currently prohibited by law. He recalled that it is common for stores to give discounts for purchases made in cash, but not the same on credit cards.

Reduction of card interest

Another measure presented by Meirelles is the reduction of interest rates on the credit card charged to the consumer and the term of payment to the merchant. The minister says the regulation should be submitted within 10 days.

Bank spread

According to the finance minister, the government is also proposing the creation of the electronic duplicate with the objective of reducing the so-called “spread” of the banks (difference between the rate of funding, close to the basic rate of the economy, at 13.75%/ year today, and the rate charged to bank customers).

“We want to create a central registry of duplicates, credit card receivables and allow the granting of credit with a lower guarantee, which increases the security for creditors and the supply of credit for small and medium-sized enterprises, with lower interest rates. “, he said.

Reduction of bureaucracy

On the issue of de-bureaucratization, Meirelles says that they will simplify the payment of labor, social security and tax obligations through a system called eSocial. The objective is to reduce the time spent by companies to fill declarations, forms and books and the redundancy of information provided to the tax authorities. The deadline for implementation in all companies would be July 2018.

Refund of taxes

Another proposal is to simplify the procedures for restitution and compensation of the taxes administered by Receita (Brazilian IRS), including the compensation between the social security contribution and other taxes.

Business Start-up

Meirelles says another measure will reduce the time to open ventures. A national network for simplifying the registration and legalization of companies and businesses will be implemented.

Competitiveness

The government also announced measures to speed up purchases and sales in foreign trade. According to Minister Meirelles, a single web-accessible portal will be created to forward all documents and data required for business transactions with other countries.

“The idea is to cut import and export procedures by 40 percent”, he said. The implementation period for exports is until March 2017 and for purchases from abroad until the end of next year.

BNDES

Following this, the Minister of Planning, Dyogo Henrique de Oliveira, spoke about other measures. The first deals with the increase from R$ 90 million to R$ 300 million the limit to access the BNDES credit for micro, small and medium enterprises.

Companies with up to R$ 300 million in revenues can also renegotiate debts of operations of up to R$ 20 million with the BNDES. Therefore, companies can seek cheaper interest rates, based on the Long-Term Interest Rate (currently at 7.5% per year).

According to him, the total volume of refinancing is estimated at R$ 100 billion, which will “increase the liquidity of companies”.  “Today, companies are suffering from a great deal of liquidity,” said the Planning Minister.

For large companies, with revenues above R$ 300 million per year, operations included in the Investment Support Program (PSI) may be refinanced. “These refinanced amounts will be with BNDES’ own resources, but with funds with TJLP (Long-Term Interest Rate) funding, with a lower cost”, he said.

FGTS

Another measure announced is the distribution of half of the profits in the FGTS to the workers. “That is to say, when there are profits, part of them will continue to be deposited and the other half will be made available to the worker to pay debts or make a different use”, he said.

Still on the FGTS, he announced the gradual reduction of the additional fine of 10% – which is paid by employers at the time of dismissal of employees, on top of the 40% that goes to employees. According to him, the idea is to reduce that 10% at the rate of one percentage point a year to relieve the entrepreneurs.

EWZ: Ibovespa has its best semester since 2009 and US$ drops 18.6% versus the Brazilian Real

Brazilian’s most traded stock ETF in the US, EWZ soared 46.5% in the same 6 months:

EWZ-6-Months

In the beginning of the year, the perspective for the Brazilian market was not good with the country in recession and inflation sky rocketing. However, in the middle of February, the inflection started fueled by a global recover in commodities prices and an improvement in the expectations for the economic policies, which became known as the impeachment rally.

Besides, the downside event of the semester, the Brexit, was followed by an unexpected help which were the speculations that central banks all over the world will stimulate their economies to face market volatility. On Friday, the president of England’s central bank, Mark Carney, said that the growth in the UK will slow down in the next months and additional interest rate cuts and other measures of monetary ease will be necessary.

Sure, Brazil is not out of the woods yet and the new government still has lots to do to recover the economy. However, the better economic climate has started to translate into improvements in the confidence:

Consumer and Industry Confidence in Brazil

Besides the more favorable political environment, what is also helping in this confidence growth is the fact that some economic indicators are improving, albeit still very bad: IBC-Br, Industry and Services.

Brazilian Retail Sales up 0.5% MoM in April

Brazilian retail sales volume in April increased 0.5% MoM but fell 6.7% YoY, both worse than market expectations, according to IBGE (Brazilian Institute for Geography and Statistics). Although in the monthly comparison, most of the sectors have recorded an increase, it was not enough to reverse the downwards trajectory, still visible in the annual comparison of past months. 

Therefore, we continue with a negative bias to the sector’s performance in 2016, we do not know when sales will have the strength to reverse the negative trend, given:

  • The uncertain political scenario, which makes difficult the turnaround on the confidence and economic growth. 
  • Rising unemployment Rate
  • Low and expensive offer of credit

On the other hand, we have signs that the worst may be behind, since the decrease in retail sales in January was 10.3% YoY

Brazilian Steel Industry in Survival mode for the Foreseeable Future

The Brazilian steel industry has seem better days. If we look at the three stocks traded as ADRs in the NYSE, we can see the depth of their agony in the last ten years:

Gerdau (NYSE:GGB):

Gerdau - Brazilian Steel Industry Agony in the last 10 years
Gerdau – Brazilian Steel Industry Agony in the last 10 years

Companhia Siderúrgica Nacional – CSN (NYSE:SID):

SID - Brazilian Steel Industry Agony in the last 10 years
CSN – Brazilian Steel Industry Agony in the last 10 years

Usiminas (OTC:USNZY):

Usiminas - Brazilian Steel Industry Agony in the last 10 years
Usiminas – Brazilian Steel Industry Agony in the last 10 years

In the 27th Brazilian Steel Congress, held by the Brazil Steel Institute, industry executives said that the moment is still of high pressure and explained their survival strategies. As a common theme, they all mentioned exports will be the way to survive in the short term.

Benjamin Steinbruch, shareholder and president of Cia. Siderúrgica Nacional (CSN), said he believes the internal market is “the future” of the sector. It is necessary that the government create mechanisms to ensure that competitive conditions are the same as in other countries. He also complained about the high interest rate in the country today.

Questionable government policies in recent years have led to an impoverishment of the country. “It is the highest impoverishment through which a nation has been, without a war”, he said.

The new president of Usiminas, Sergio Leite, explained that the focus of the moment is survival – in the next three to five years this will be the order of the day. Meanwhile, calls for government priority to a program for the processing industry in the country. “Restructure and adapt businesses to market reality [is needed].” The “bottom” is already approaching, but recovery will take time, he said.

André Gerdau Johannpeter pointed out that the current crisis in the sector was announced. For some time, he said, we have been discussing the pressure that the Chinese excess capacity would have on the Brazilian market. According to the president of Gerdau, this oversupply from China will impact even on the next five to ten years.

“In the short term, what we can do is to seek export. There will be no domestic recovery”, Gerdau said. “Without exports, the picture is dramatic: layoffs and closed plants. In the medium and long term, we need structural competitiveness, changes in labor laws and taxes”, he added.

The event also brought experts on China and foreign trade, which said that the recognition of the Asian country as a market economy by the World Trade Organization (WTO) could distort the steel industry and other sectors in the world.

Usha Haley, professor at the University of West Virginia, said Chinese mills have access to cheap and easy capital, while receiving large subsidies from the local government. She believes that Chinas’s ultimate goal is just to increase production and, while maintaining employment and guaranteed volumes in the domestic market, be able to become a major exporter of the material.

Despite the gigantic fall in stock prices over the last 10 years, it’s hard to get positive on this industry. Sure, after so many years of oversupply and depressing costs, one could expect a turnaround and, in fact, all three ADRs are sharply higher in 2016. However, a more consistent recovery seems to be far for this industry.

What to Expect for Brazilian Interest Rate in 2016

Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.

Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible  to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.

According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.

And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.

Brazil mulls emergency loan to Rio de Janeiro ahead of Olympics

By Alonso Soto and Marcela Ayres

BRASILIA (Reuters) – Brazil is considering an emergency loan to the cash-strapped state of Rio de Janeiro as it prepares to host the Olympic Games in less than two months, according to two senior government officials familiar with the situation.

The loan would be guaranteed by the state’s participation in local companies and could be extended to the states of Minas Gerais and Rio Grande do Sul, which are struggling to pay employees and pensioners as a crippling recession reduces tax revenues.

“These states need cash injection. There is no other way,” said a member of the government’s economic team who asked for anonymity in order to speak freely. “These loans will be backed by states’ assets such as banks, utilities, gas and sanitation companies.”

Eligible states would transfer their stakes in government-led companies to the federal government, which could in turn sell them to private investors as it did during the last states’ debt restructuring in the late 1990s, the source said.

Rio’s main state-controlled company is its water and sewer provider Companhia Estadual de Aguas e Esgotos do Rio de Janeiro, commonly known as Cedae.

The city of Rio de Janeiro has enough money to complete the infrastructure for the Olympics, but a financial crisis at the state level threatens to disrupt public services during one of the world’s biggest sporting events, which starts on Aug. 5.

The oil-producing state, hit hard by the recession and drop in crude prices, faced its worst ever public health crisis this year when unpaid doctors and nurses walked off the job at hospitals and clinics were left without essential supplies such as syringes and disinfectants.

The Rio Olympics, the first held in South America, also has been marred by political turmoil that led to the suspension of the president and an outbreak of the mosquito-borne Zika virus that has been linked to brain malformation in babies in Brazil.

The amount of the emergency loans will depend on how much debt relief the government can give other states also in fiscal distress, another source involved in the talks said.

On Thursday, several Brazilian states seeking relief from debt that amounts to 11.2 percent of Brazil’s gross domestic product resumed talks with the government of interim President Michel Temer.

This creates a tricky situation for Temer, who in May replaced suspended President Dilma Rousseff while she stands trial for allegedly breaking fiscal rules. Providing relief to the states could exacerbate a fiscal crisis that has cost the country its hard-won investment grade rating late last year, driving up borrowing costs.

Temer’s government has rejected a proposal to pardon state debt payments for two years and lower interest rates retroactively, according to state representatives who met with finance ministry officials on Thursday. More meetings are scheduled for next week.

The finance ministry press office declined to comment. The finance secretary of Rio de Janeiro could be not be reached for comment.

Rio de Janeiro’s finances have deteriorated so much that the state missed debt payments to a French development bank and the Inter-American Development Bank last month. Moody’s Investor Services called the event a “credit negative for all of Brazil’s states.”

The state ramped up its payroll during years of high oil prices, expecting that royalties on massive crude discoveries off its coast would keep its coffers full.

Now the state is cutting social programs, eliminating secretariats and raising taxes to plug an expected budget deficit of 19.9 billion reais ($5.91 billion) this year.

Rio Grande do Sul-state Finance Secretary Giovani Feltes confirmed the negotiations for the loans, which he said will be used only for investment, but will give his state a much-needed breather.

“This loan will not go to current expenditures because the law doesn’t allow us to use loans to pay our employees,” Feltes said in a phone interview. “Obviously this (loan) would improve out fiscal situation.”

Brazil taps ex-Bunge boss Parente as Petrobras CEO, replaces Bendine

Brazil’s interim President Michel Temer named Pedro Parente chief executive officer of state-led oil company Petroleo Brasileiro SA on Thursday as his government tries to kick-start a shrinking economy and shore up the debt-laden oil producer.Parente, an engineer, former Bunge Ltd executive and one-time chief of staff to former President Fernando Henrique Cardoso, replaces Aldemir Bendine, according to the president’s office. Bendine had been running Petrobras, as the company is known, for the last 15 months.

Petrobras did not immediately reply to a request for comment on the appointment.

Parente, 63, will be charged with efforts to rescue Petrobras from financial crisis brought on by low world oil prices, crippling debt and a massive corruption scandal.

Parente is best known for his role as chairman of the Brazil unit of agribusiness and commodities-trading giant Bunge Ltd from 2010 to 2014. Bunge is Brazil’s largest grains exporter.

The appointment also marks Parente’s return to Petrobras after 14 years. He sat on Petrobras’ board under former Brazilian President Cardoso. Parente was a key player in opening Petrobras to competition and international investment after the Cardoso administration ended Petrobras’ monopoly over exploration and production in 1997.

From 1999-2002 he also served as Cardoso’s chief of staff and managed a severe energy crisis that required electricity rationing and the quick building of supplementary power stations. He also helped manage a reduction of the government’s stake in Petrobras.

The Petrobras he will take over, pending approval by the company’s board of directors, will be quite different than the one he left. Petrobras invested $4.91 billion in 2002, Parente’s last year on the board. A decade later Petrobras was investing nearly $50 billion a year and despite major cutbacks still plans to spend $19 billion this year.

Despite the nearly ten-fold increase in investment, Petrobras has struggled in recent years to increase domestic oil production as much as expected, missing annual targets for 12 straight years.

Meanwhile, its total debt soared faster than output to about 450 billion reais, or nearly $130 billion, at the end of the first quarter from 33 billion reais ($9.32 billion) in 2002. Petrobras is now the most indebted oil company in the world. Plans to sell $14 billion of assets have stalled, forcing more cuts.

Temer, who replaced suspended President Dilma Rousseff last week while she faces an impeachment trial, chose Parente on Monday, according to a report on the Web site of the O Globo daily newspaper.

Brazil’s president Dilma Rousseff is impeached

• The impeachment vote is still going on in the country’s lower house, but the ruling Workers Party has conceded defeat, reports Reuters. At the moment, of 412 votes cast, 307 have voted to impeach President Rousseff, and 101 have voted against. A total of 344 are needed to send the process over to the Senate.• For those wondering what’s taking so long, house members vote one-by-one, with each making a small speech alongside.

• Once in the Senate, a simple majority would be enough to put Rousseff on trial, a decision expected in May. Were the trial to be approved, Rousseff would be suspended from office, and former (but no more) ally Vice President Michel Temer would take over.

• Brazil’s stock market, of course, has put together a powerful rally this year on hopes for Rousseff’s removal. That is looking more like a reality at the moment.