Experts give their prescriptions for Brazil as the commodity boom ends

March 27, 2015

Joe Leahy – Financial Times, 3/25/2015

Brazil’s economy has slowed sharply. The brakes were applied by the end of the commodity supercycle that occurred in the first decade of the 21st century combined with rapid credit growth.

The debate in Brazil has returned to the vexed question of how to make one of the world’s most inward-looking economies more competitive.

The answer lies in improving education, streamlining taxation, simplifying bureaucracy in general, and fixing infrastructure. But beneath these concepts are complex questions that run as deep as Brazilian politics and culture itself.

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What Investors Think About Brazil Political & Currency Risk

March 27, 2015

Kenneth Rapoza – Forbes, 3/27/2015

Michael Reynal, portfolio manager at the $287 million RS Emerging Markets Fund (GBEMX) puts it this way: “Politics are ruining a good investment story in Brazil.”

It has oil. It’s the No. 1 orange juice exporter, coffee exporter, sugar exporter, iron ore exporter, beef exporter and the No. 2 soybean exporter. It has a diverse economy and strong banks. It has a growing consumer class and they’re constantly aching to spend like crazy North Americans. Nobody cares.

A colossal corruption scandal involving Petrobras and the ruling Workers’ Party has hundreds of thousands protesting in the streets. Two weeks ago, some of them even called for impeachment. And this week, a polling firm called MDA showed that more than 59% of respondents think president Dilma Rousseff should be impeached.

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Brazil uncovers multibillion-dollar tax fraud at Finance Ministry

March 27, 2015

Anthony Boadle – Reuters, 3/26/2015

Brazilian authorities on Thursday said they uncovered a tax fraud scheme at the Finance Ministry’s tax appeals board that may have cost taxpayers up to 19 billion reais ($5.96 billion).

The news came in the midst of a multibillion-dollar corruption scandal at state oil company Petroleo Brasileiro SA , known as Petrobras, that has rattled Brazil’s political establishment and weighed on the fragile economy.

In the latest case, federal police inspector Marlon Cajado said companies bribed members of the CARF, a body within the Finance Ministry that hears appeals on tax disputes, to get favorable rulings that reduced or waived the amounts owed.

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Brazil’s Economy Expanded Slightly in 2014

March 27, 2015

Jeffrey T. Lewis and Rogerio Jelmayer – The Wall Street Journal, 3/27/2015

Brazil’s economy posted in 2014 its worst performance by far under President Dilma Rousseff’s administration, a blow to her prestige as her government works to regain credibility with markets and pass an austerity program through Congress.

The country’s gross domestic product grew just 0.1% in 2014 from 2013, and expanded 0.3% in the fourth quarter from the third, Brazil’s statistics agency said Friday. GDP shrank 0.2% in the fourth quarter of 2014 from the same period a year earlier.

The agency changed the way it calculates GDP starting in the fourth quarter, including activities such as investment in research and development for the first time, to bring the methodology more in line with international standards.

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Brazil: At breaking point

March 24, 2015

Samantha Pearson – Financial Times, 3/20/2015

Emilio Pastore normally spends the weekend visiting his elderly parents or taking a quiet bike ride in the countryside around São Paulo. But last Sunday the 50-year-old systems analyst printed out a banner with the slogan “no more lies” and took to the streets for the first protest of his life.

The multibillion-dollar corruption scandal engulfing state-controlled oil company Petrobras and President Dilma Rousseff’s ruling coalition was too much to bear, he says.

“Corruption has escalated from random cases to a state strategy — it now seems to be the official source of party funds, from the small-town mayor all the way up to the nation’s president,” he says. “We’ve had enough.

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Brazil’s Biggest Banks Caught In Petrobras Dragnet

March 23, 2015

Kenneth Rapoza – Forbes, 3/22/2015

Fifteen banks will join Petrobras next week, April 3, in a New York court to explain how they did nothing wrong when selling $98 billion worth of the Brazilian state oil company’s bonds to American investors.

Of the 15, lawyers representing the investment banking divisions of Itau and Bradesco will appear before New York judge Jed Rakoff in hopes to escape the scandal.

Petrobras is currently in the middle of its worst, and most embarrassing moment in its history. A massive corruption scandal involving its construction partners and ruling party politicians is threatening to take down members of congress. Last weekend, hundreds of thousands of Brazilians took to the streets in protest against Petrobras and the Workers’ Party. Some called for the impeachment of president Dilma Rousseff.

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Brazil’s fall from grace of its own making

March 23, 2015

Financial Times, 3/22/2015

Brazil is in crisis. Earlier this month, more than 1m protesters took to the streets to voice their discontent. Much of the country suffers water rationing following a long drought. Petrobras is engulfed in an epic corruption scandal that saw up to $10bn embezzled from the oil company. The economy is likely to shrink this year and perhaps next year as well, which would be its worst performance since 1931. Approval ratings for Dilma Rousseff, the president, have slid to 13 per cent, the lowest on record. It seems only yesterday that the country was feted as the new best thing. So its fall from grace has been spectacular. Sadly, the situation is likely to get worse still. The central question is whether Brazil’s institutions hold as it does.

A large part of the blame lies with Brazil itself. For much of the 2000s, it enjoyed an unprecedented commodity boom. This bolstered its terms of trade, swelled government revenues, boosted domestic wages and propelled a domestic credit boom. When investors clamoured to buy into Petrobras’s 2010 $70bn equity offering — the world’s largest — Brazil really did seem to be o melhor país do mundo, the best country in the world. In reality, it was riding the steroid fix of a credit boom in which Brazil reaped the benefits of globalisation without any of its disciplines. Now the process is going into reverse.

The collapse in the currency, down almost a third against the dollar in just six months, is a dramatic repricing of the economy. But the trade-weighted real exchange rate, which adjusts for inflation, is still higher than its 20-year average. Unit labour costs are also higher, in dollar terms, than in 2010. So the currency is likely to weaken more.

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