BRAZIL IN TRANSITION. Presentation to Finnish Latin American Trade Association. by Jan R. E. Jarne, Chairman

Transcription

1 BRAZIL IN TRANSITION Presentation to Finnish Latin American Trade Association by Jan R. E. Jarne, Chairman

2 DIMENSIONAL CHALLENGES OF EMERGING COUNTRY Brazilian territory: 8,514,877 km² EU territory: 4,442,773 km² Brazil market: 206 MM people + Another 200 MM in South America

3 BACKGROUND SCENARIO

4 4,00 TIMES OF UNCERTAINTY 3Q ,76 1Q ,52 2,00 0,00-2,00-4,00 4Q ,55 2Q ,40 3Q ,64 4Q ,31 1Q ,78 2Q ,96 3Q ,53 1Q ,43 2Q ,58 3Q ,87 4Q ,46-6,00 GDP Mar 17 th, 2014 Lava Jato begins Oct 26 th, 2014 Dilma is reelected Sep 9 th, 2015 Loss of Investment Grade 4Q ,76 Dec 2 nd, 2015 Impeachment process begins Aug 31 st, 2016 Dilma is impeached Dec 15 th, 2016 PEC 241

5 DILMA S LEGACY Build-up to re-election in 2014 resorted to State interventionist policies (to prologue growth): Tax exemptions Reduce interest rates and expand government credit Price controls on energy (electricity and oil) Results: unsustainable economic situation: High inflation and unemployment Widening fiscal deficit Growing public sector debt Worst recession with no investment Loss of political support with unraveling of corruption scandal Impeachment of office on grounds of fiscal irresponsibility

6 2016 YEAR OF ECLIPSE Second year of steep economic recession World Olympics in Brazil while impeachment process of President Dilma in final phase of judgment Post impeachment, nationwide municipal elections with Labor Party suffering major defeat President Temer assumes interim government (next elections in 2018) Forging of new Party alliances shifting from left/center to center/right Lava Jato investigations and indictments continue in full force

7 POLITICAL PARTIES CENTER LEFT PCdoB PSTU PCB PCO PSOL PPL PMDB PDT PSDB PTB PRB PT PSB PTC PEN PMN SD PSDC PSL CENTER LEFT CENTER RIGHT PPS PMB PROS PR PTdoB PV PSC REDE PRP PTN PSD DEM PP PHS PRTB NOVO RIGHT

8 POLITICAL PARTIES CENTER LEFT PCdoB PSTU PCB PCO PSOL PPL PMDB PDT PSDB PTB PRB PT PSB PTC PEN PMN SD PSDC PSL CENTER LEFT CENTER RIGHT PPS PMB PROS PR PTdoB PV PSC REDE PRP PTN PSD DEM PP PHS PRTB NOVO RIGHT Dilma s political base

9 POLITICAL PARTIES CENTER LEFT PCdoB PSTU PCB PCO PSOL PPL PMDB PDT PSDB PTB PRB PT PSB PTC PEN PMN SD PSDC PSL CENTER LEFT CENTER RIGHT PPS PMB PROS PR PTdoB PV PSC REDE PRP PTN PSD DEM PP PHS PRTB NOVO RIGHT Temer s political base

10 POLITICAL SCENARIO Municipal Elections PMDB PSDB PSD PP PSB PDT PR DEM PTB PT

11 POLITICAL SCENARIO Municipal Elections PSDB PT

12 POLITICAL SCENARIO Political party system 35 of which 26 represented in Congress. Another 56 being formed Coalisions - Before Impeachment and After Cleavage between Legislative x Executive Branches Heightened by impeachment process and Lava Jato Interim government until end 2018 Political Reform agenda

13 ECLIPSE Corruption Scandal Change Political Alliances Change Economic Policies

14 TEMER S CHALLENGES

15 TEMER S CHALLENGES Short mandate until 2018 presidential elections Restore economic balance and growth Sow new political alliance in face of continued corruption investigations Introduce economic Reforms with Congressional support Temer s low popularity rating (good 10%) Corruption scandal process interfering in congressional approvals: Congressmen looking to safeguard personal and party interests Using Congressional approvals as bargaining chip Weakening government alliances Risk of draft bills, especially publicly sensitive pension reform

16 TEMER GOVERNMENT PRIORITIES First Priority: REDUCE PUBLIC SECTOR DEFICIT Reverse increasing fiscal deficit, cause of increase in Public Debt/GDP Congress approved Temer s bill to ammend the Constitution (PEC) Caps federal expense increases to previous year s inflation rate over 20 year period (possible revision after 10 years) Congress approved primary fiscal deficit of R$139 Bi in 2017, reversing trend pointing to over R$200 Bi deficit

17 TEMER GOVERNMENT PRIORITIES Second Priority: PENSION SYSTEM REFORM to limit deficits in public accounts and provide long-term viability of pension system Benefit payments/gdp: 3.3% (1991); 8.1% (today); in 40 years 17% (projected) Distortions of current system: unsustainable with aging population Brazil ranks 13 th among 86 countries in pension expenditures, yet 56 th in terms of age group over 60 years Pension deficit represents 40% of total government spending Public sector privileged beneficiaries

18 TEMER GOVERNMENT PRIORITIES Brazil system based on 30 years of contribution; no minimum age. Average retirement age is 58 x today s life expectancy at birth of 75.5 years New law (under debate in Congress): Stabilize pension expenditures at 9%/GDP Establish minimum age of 65 for both genders Transition by scaling minimum age brackets over 20 year period Special regime for military, police, teachers, and rural workers Proposal facing resistance from state governments Government needs 3/5 vote to pass bill in Congress

19 OTHER REFORMS Labor reform: first moves Brazil world Champion in labor claims Labor courts are paternalistic, partial, and interventionist 60 year Labor Law under review to address legal insecurity of employer Government approved law of outsourced, temporary labor services which has been in discussion for 10 years 100 points under consideration, including reducing minimum 44 hour work week and obligatory labor union dues Political Reform (under consideration) Campaign funding Open x closed slates Barriers Immunity from lower courts

20 ECONOMIC PERFORMANCE

21 RECESSION Worst since 1901 GDP (%) 2014/ / / / / / /1942 0,0 1,0-6,8-6,3 Source: IBGE DECOMTEC/FIESP -4,3-3,8-1,4

22 RECESSION Brazil s recession is due to domestic causes Emerging Advanced Brazil

23 NEGATIVE PERFORMANCE Mostly felt by transformation industry 16,0 15,0 14,0 13,0 12,0 11,0 10,0 15,2 GDP participation of transformation industry (%) 13,8 14,1 13,9 13,4 13,4 12,7 11,7 11,5 86,0 84,0 82,0 80,0 78,0 76,0 74,0 72,0 70,0 Industry installed capacity in use (%) 85,2 84,8 84,083,9 84,3 83,2 80,2 76,4 73,9 Source: IBGE DECOMTEC/FIESP

24 January 2012 April 2012 July 2012 October 2012 January 2013 April 2013 July 2013 October 2013 January 2014 April 2014 July 2014 October 2014 January 2015 April 2015 July 2015 October 2015 January 2016 April 2016 July 2016 October 2016 January 2017 NEGATIVE PERFORMANCE Unemployment rate doubled in 2 years to 13% adversely affecting Family Consumption and Investment (GFCF) Unemployment rate (%) ,2 8,0 6,0 4,0 2,0 0,0-2,0-4,0-6,0-8,0 Growth of the consumption of families (%) 5,7 6,1 6,36,26,06,3 5,9 4,8 4,0 4,2 3,53,7 4,0 3,5 3,5 2,9 2,9 2,8 2,3 2,3 1,0-0,1-1,5-3,9-4,2-5,1-5,5-5,2 Source: IBGE DECOMTEC/FIESP

25 NEGATIVE PERFORMANCE Investments shrunk with falling aggregate demand Source: IBGE DECOMTEC/FIESP

26 POSITIVE PERFORMANCE Evolution of agribusiness GDP participation Source: CEPEA - USP

27 EXTERNAL ACCOUNTS The economic challenges are domestic. The external situation is comfortable with floating FX policy Trade Balance supported historically by Brazil s prominent position in agribusiness TRADE BALANCE (US$ billion) Agribusiness Other General

28 EXTERNAL ACCOUNTS Current Account deficits covered by foreign investment inflows est Current Account (74.2) (74.8) (104.2) (59.4) (23.5) (22.8) FDI Source: Central Bank of Brazil (US$ Bi) International reserves cushion of US$370 Bi External debt: US$331 Bi (5/16), of which US$270 Bi was longterm, mostly private sector

29 FISCAL BUDGET

30 PRIMARY DEFICIT Drop in consumption and tax exemptions reduced revenue intake whilst Dilma s government spending continued growing above inflation Total Tax waivers 2015/16: R$196 Bi %GDP:

31 PRIMARY DEFICIT Budgetary Law ( LDO ) set 2017 Primary Deficit at R$139 Bi based on 1.6% growth (not attainable) Today running R$58 Bi over limit Presently government considering: Sale of ( 4 hydro power concessions) R$10 Bi Increase in taxes (PIS/Cofins, CIDE) - possibility Reversing tax exemptions granted on payroll to 50 sectors by Dilma s government R$ 5 Bi Blocking expenses (decreed suspension) R$ 40 Bi But revised (April 2017) upwards 2018 Primary Deficit from R$79 Bi to R$129 Bi

32 FISCAL REFORM Objective: reach primary surplus by 2020 Reverse increasing public sector Debt/GDP from 77% to 74% in 2027 Simplification of tax system: Extinguish 7 Federal taxes, State circulation tax, and Municipal service tax Substitute for 3 taxes Major challenges ahead: 12 States project primary deficits, totaling R$33 Bi in ,000 municipalities (90%) sustain R$100 Bi debt with Social Security System

33 RECOVERY

34 CONFIDENCE IN BRAZIL S ECONOMY RETURNING Source: CNI

35 RECOVERY Initial signs of recovery from recession: February first month of 35,000 new jobs after 20 months of layoffs Banks report diminishing number of companies in credit recovery Inflation falling rapidly from peak 10% to below 4,5% mid target Central Bank reducing base interest rates from 14,25% to one digit Agriculture will increase almost 8% with record grain crops irrigating the economy Extraction industry growing petroleum 3%; mining 6% New season of privatizations of roads and airports, and renewed interest in O&G concessions with more flexible rules Car sales picked up after long doldrums

36 RECOVERY Economists project 1% growth this year and 2.5% in 2018 based on following sign of bottoming out: First gain in jobs after 20 months of unemployment increases Banks reducing incremental provisions for bad debts R$35 Bi of inactive FGTS employee accounts being released by government 220 MM ton record grain crop will increase GDP agriculture sector close to 8%, irrigating the economy and reducing inflation of food stock Inflation projected under 4.5% target mid range, resulting in 2.5% increase in family income, thus consumption Central Bank base interest rate expected yearend at 8.5% down from current 12% Resumption of investment in infrastructure privatizations and offshore oil concessions

37 RECOVERY GDP Source: EIU March 2017 Focus Report of Central Bank of Brazil (next slide) (Projections of approx 100 financial market analysts)

38 RECOVERY

39 RECOVERY Recovery not faster due to: Unemployment still creeping to peak near 14 MM by mid year Consumer spending after improvement in employment High unutilized capacity holding back investment Uncertainties regarding political leaders under investigation affecting speed of reform approvals State governments still in crisis

40 CORRUPTION SCANDAL

41 OPERATION LAVA JATO World s largest corruption scandal since Italy s Mani Pulite Primary Focus: Petrobras and 28 construction companies Crimes: active and passive corruption, money laundering, false transactions, tax evasion, formation of criminal organization, illicit political donations Prosecution / Investigation: Ministry of Justice, Attorney General s Office, State prosecutors, Federal Police, Supreme Court, regional lower courts (judge Moro of Curitiba), Federal Revenue Bureau warrants for search and seizure, temporary and preventive detention and coercive measures, indictments Politicians and senior government officials have privileged forum of Supreme Court Supreme Election Tribunal debate about what characterizes illicit campaign funding

42 OPERATION LAVA JATO Beginning: PT labor party ideology to perpetuate power and political isolationism Co-opting party allegiances with monetary contributions State economy and intervention by weakening regulatory agencies Put into practice: Factioning of Petrobras Departments (production, services, transportation, international) influenced by leading political parties of government coalition (PT, PMDB, PP) Odebrecht Case: epitome of operational sophistication Special department structured to handle campaign monies, illicit bribes Control offshore bank (Antigua), accounts in several jurisdictions, backup servers in safekeeping facilities ( hosting ) in Switzerland USA and Swiss combined penalties US$3.5 Bi: largest foreign bribery resolution

43 OPERATION LAVA JATO Legal conduct: Implication of ex president Lula and about 25% of Congressmen imprisoned prominent politicians: Governor of Rio, ex-secretary of State Dirceu (20 years), President of the Chamber of Deputies (Cunha 15 years), ex-minister, and first sentencing of political party (R$2.3 Bi) Sentenced company owners and management, financial operators, intermediaries, service providers (campaign managers) In Curitiba Federal Court - 92 convicted and 29 acquitted, where 36 criminal cases in progress General Accounting Office has investigated over 400 persons with rights to privileged forum of Supreme Court, part closed for lack of sufficient evidence, and 16 complaints Supreme Court no condemnations of politicians; currently 4 defendants About 200 plea bargains signed or in negotiation Largest construction companies signed leniency agreements

44 OPERATION LAVA JATO Effects: Political backlash, public dissent, legislative paralysis Loss of investor confidence adding to recession 6 largest construction companies layed off over 300,000 workers General interruption of construction sites, and prohibition to bid public contacts Odebrecht s Extended Scope: governments in 12 countries; involving other sectors (dams, ports, highways, urban transport, etc.) Positive: Brazil sets example of facing up to corruption with functioning government institutions, popular backing and media

45 OPERATION LAVA JATO Update of latest: Odebrecht Testimonials (77 plea bargains): Supreme Court authorized inquiries to investigate 98 politicians, including: 8 Ministers, 3 Governors, 24 Senators, and 39 Deputies Presidents of both Houses of Congress 16 political parties Total equivalent of US$3.3 Bi in illicit payments Supreme Court sent 201 cases for investigation at lower courts Including 3 former presidents and 2 ministers of finance Involves political elite and challenges 3 branches of government to continue working diligently Neither accusations nor condemnations, but authorizations to investigate and summons by Federal Police to testify

46 TRADE RELATIONS

47 EU-MERCOSUL ASSOCIATION AGREEMENT Negotiations began in 1999 Trade Policy Committee XXVII round, Buenos Aires, March 2017 Progress made in 15 groups (chapters) Significant progress in all texts of the different chapters Achieved objective to have common negotiating text in every group Trade in Goods: main disagreement remain Mercosul's proposals regarding preferences (GSP) as EU base rate, maximum tariff value, and EU proposal for prohibition of export duties. Sensitivities on agricultural sectors remain. EU has also offensive interests on important sectors like dairy, olive oil, wines and spirits. Expected concessions on meat and ethanol. Customs and Trade Facilitation: agreement on ten articles, and ongoing efforts regarding electronic customs data exchanges Public Procurement discussions also made substantive progress Constructive climate of intentions to close by end of this year Next round in Brussels in July, preceded by an inter-sessional meeting of Trade Part in Buenos Aires

48 EU-BRAZIL BI-LATERAL TRADE RELATIONS EU and Brazil established diplomatic relations in 1960 building on close historical, cultural, economic and political ties Brazil s trade accounts for 1/3 of EU's total trade with LatAm region Brazil holds 55% of entire EU Investment stocks in LatAm EU is largest foreign investor in Brazil (~ 68% FDI flows received by Brazil in ) EU is Brazil's foremost trading partner (19.5% total trade) Brazil is EU s 10th trading partner, immediately after India (1.9%) Brazil is single largest exporter of agricultural products to EU (50%), as well as fuels and mining products (18.5%)

49 WHY DO BUSINESS WITH BRAZIL

50 WHY INVEST IN BRAZIL? Nutshell: Macro sense: Diversified economy and rich in natural resources Large domestic Market and interiorization ( MATOPIBA ) Good demographic profile Geopolitical stability and no terrorism Democratic institutions with independent Judiciary system, crime investigations and alert press (recent proof) Opportunity: Moment of transition with return to market oriented policies Renewed privatizations and investments in infrastructure Assets are undervalued and economic growth is returning Sectors of high growth potential (renewable energy, technology, etc)

51 PEEK AT 2018 Growth: 2.5% Inflation: stable at 4.5% level Unemployment: diminishing Carry-over of Reform programs from 2017 Fiscal Policy: continued Monetary Policy: flexible with lower interest rates Elections towards center of political spectrum

52 THANK YOU