An escalating corruption scandal rocks Brazil

Mary Anastasia O’Grady – The Wall Street Journal, 04/15/2015

Former Brazilian presidential candidate Aécio Neves speaks for a lot of his compatriots when he says President Dilma Rousseff’s Workers’ Party (PT) used stolen funds to defeat him in Brazil’s runoff presidential election in October.

In an interview in Lima last month I asked Mr. Neves—who is president of the Social Democracy Party of Brazil (PSDB)—whether he lost the election because the socialism of the hard-left Ms. Rousseff had greater appeal to Brazilians than his more market-oriented platform.

He denied the possibility. He lost, he told me, because of “organized crime.”

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Would Brazil Impeach President Rousseff?

Dimitra DeFotis – Barron’s, 11/20/2014

Demonstrators in Brazil, mad about bribery allegations at state-controlled Petrobras, have sent a message to the English-speaking world with one word: impeachment.

The energy company investigation is still expanding, and was at center stage during the October election that returned President Dilma Rousseff to power, by a narrow percentage, over the market-friendly Aecio Neves. But the scandal has stretched from Petroleo Brasileiro (PBR) to political parties and beyond, including building companies that have concessions for major infrastructure projects.

Petrobras shares rose more than 2% today, lifted in part by a 1.5% jump in the price of Brent crude oil, the international benchmark. Shares of telecom Oi (OIBR) rose 5.6% following a big hedge fund purchase. The iShares MSCI Brazil Capped ETF (EWZ) closed the day up 0.3%.

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Brazil Aims to Put Eike Batista Behind Bars

Denyse Godoy – Bloomberg, 11/13/2014

Less than three years after President Dilma Rousseff dubbed Eike Batista “the pride of Brazil,” prosecutors are trying to send the former billionaire to prison for alleged insider trading in a trial set for later this month. If they succeed, Batista will be the first person in the nation to serve time for that crime in the 13 years since such activity was outlawed.

“Insider trading is clearly widespread in Brazil,” says David Riedel, president of Riedel Equity Research in Greenbrae, Calif. “There is a consistent pattern of leaking. But the problem is not the laws—it’s that they aren’t enforced.” Of the 11 biggest mergers and acquisitions in Brazil in the past two years, at least seven of them were reported by newspapers and news agencies before the official announcement was made, according to data compiled by Bloomberg News. The stock of real estate developer Brookfield Incorporações skyrocketed 21 percent on Jan. 23 on rumors its parent company would take the unit private. That deal was announced four days later.

Other kinds of information have leaked as well. The benchmark Ibovespa stock index surged on Sept. 16 as speculation spread that an upcoming poll would show market-friendly presidential candidate Aécio Neves gaining voter support. The poll, released two hours after the market closed, confirmed just that. (Neves lost a runoff election to Rousseff on Oct. 26.)

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Why Brazil looks expensive compared to the BRIC nations

Stephanie Johnson – Market Realist, 11/12/2014

Looking at the price-to-earnings (or P/E) multiple for Brazil over the last two years, equity shoppers may find that Brazil became a bit more expensive. Brazilian equities have been selling at 15–20x their earnings in the last two years. The valuations become clearer when we compare Brazil to its closest emerging market counterparts—Russia, India, and China.

The above chart compares Brazilian equity valuations with those of other emerging countries—like Russia, China, and India—over the last two years. Comparing the economies in the Brazil, Russia, India, and China (or BRIC) nations, Brazil is the more expensive or overvalued economy—compared to China and Russia.

However, part of the recent surge in Brazilian equities can be attributed to the four yearly elections in Brazil. This year the elections were in October. Markets surged partly on the expectations of a change in presidency from Dilma Rousseff—chief of the Worker’s Party—to Aécio Neves da Cunha—chief of Brazil’s Social Democracy Party. Brazil’s economic conditions hadn’t changed much. The conditions got worse during Rousseff’s first tenure as president—starting in 2011.

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Brazil Analysts Raise Benchmark Interest Rate Forecast for 2015

Mario Sergio Lima – Bloomberg, 11/3/2014

Brazil economists raised their 2015 benchmark rate forecast after the central bank last week boosted rates for the first time since April.

Analysts raised their estimate for the 2015 year-end Selic to 12 percent from 11.50 percent, according to the Oct. 31 central bank survey of about 100 analysts published today. The analysts also lowered their estimate for economic growth this year to 0.24 percent from 0.27 percent the previous week.

Policy makers unexpectedly raised the key interest rate last week in an effort to curb inflation still hovering above the government-set target. Re-elected in a tight race on Oct. 26, President Dilma Rousseff is preparing to name a new economic team to revive an economy that slipped into recession in the first half of the year.

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Investors in Brazil Have Reason to Celebrate Dilma Rousseff

Lewis Braham – Barron’s, 11/1/2014

Want proof that investors behave irrationally? Look no further than Brazil. In recent weeks, Brazilian stocks have gyrated wildly, based merely on polls as to which presidential candidate—left-wing incumbent Dilma Rousseff or right-wing challenger Aécio Neves—would win. Meanwhile, the financial outlook for Brazil’s businesses largely hasn’t changed.

The so-called Dilma dump seems ridiculous in retrospect. During this year’s second quarter, the iShares MSCI Brazil Capped exchange-traded fund (ticker: EWZ) gained 8.2%, largely on hopes that Rousseff would be ousted. Then, in the third, it fell 9% as she gained in the polls. Then it bounced around like a yo-yo during the elections, gaining 4% on Friday, Oct. 24, with a Neves poll bump, and falling 5% on Monday after Rousseff was victorious.

The question is: How much damage can Rousseff do that investors aren’t already aware of? Her Workers’ Party has been in power for 12 years. Rousseff merely perpetuated many of its pre-existing social-welfare policies during her first term, and these have largely been successful. They are credited with lifting 40 million people—about a fifth of Brazil’s population—out of poverty in the last decade. Meanwhile, this September’s 4.9% unemployment level was a record low for the country.

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Brazil: what to expect from the new ‘old’ government?

Susanne Gratius and Magdalena Segre – The FRIDE Blog, 10/30/2014

Dilma Rousseff has been re-elected as President of Brazil after a much disputed second round of elections, held on 26 October 2014. Winning almost 52 per cent of the vote, the incumbent Rousseff of the Workers Party (PT) defeated the social democratic PSDB candidate Aécio Neves, against a backdrop of economic stagnation and widespread discontent with the political system. After a decade of social progress, Rousseff’s message of a ‘new cycle of transformation’ appealed to voters more than the uncertainty of more liberal economic change promised by Neves.

Now the question is what might Rousseff’s new presidential term (four years) hold for Brazil? Despite promises, only partial changes can be expected in a country that moves very slowly compared to a rapidly changing regional and global environment. Political and economic stagnation is a major risk. An atomized Congress (some 28 different political parties) will further hinder the consensus-building promised by Rousseff.

So far Rousseff’s record is mixed, at best. During her first term, the president was unable to implement urgently needed reforms to sustain continued economic growth and provide better services to citizens. In the last twelve months inflation increased to 6.7 per cent, while economic growth for 2014 is projected to be almost stagnant, at less than 0.3 per cent.

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Brazil’s big problem is Rousseff’s past

Misha Glenny – Financial Times, 11/2/2014

Given the decline in Brazil’s fortunes in the past two years, President Dilma Rousseff has pulled off a striking political coup by persuading voters to re-elect her, albeit with a reduced majority. The markets, however, do not appear convinced.

Her economic record since 2012 has been weak, to put it diplomatically. Although battered by global economic winds, India and China are nowhere close to the technical recession Brazil is now experiencing.

Inflation has crept above the 6.5 per cent target set by Ms Rousseff’s government. Having experience hyperinflation in the 1980s and 1990s, Brazilians are highly sensitive to this indicator. Last year inflation was behind the rising cost of public services, above all transport; the increase in fares in São Paulo and Rio were a leading cause of the protests that shook the Brazilian elite.

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Rousseff says Brazil will recover, avoid credit downgrade

Walter Brandimarte – Reuters, 10/28/2014

Newly re-elected President Dilma Rousseff said on Tuesday that the Brazilian economy will recover in her second term and avoid a downgrade of its credit rating.

In television interviews two days after narrowly defeating market darling Aecio Neves, Rousseff repeated her offer to sit down with business leaders to hear their views on the state of the economy and discuss changes in policy.

Earlier on Tuesday, a senior analyst at Moody’s Investors Service said the ratings agency was in no rush to decide whether to cut Brazil’s rating but could act quickly if it determines that Rousseff is not making significant changes in her second term.

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Brazilians close their eyes and hope for the best

Rogério Simões, CNN – 10/27/2014

Uncertainty normally comes with the new. This year’s Brazilian presidential elections, though, have been like no other. After Sunday’s polls gave President Dilma Rousseff, from the left-wing Worker’s Party (PT), another four-year term with a narrow margin of victory, Brazilians embarked on a guessing exercise about what her next government will look like.

On the surface it doesn’t seem a vote for change, but the President knows it should be. There were exuberant celebrations in the PT camp and frustration in the faces of supporters of the defeated centrist candidate, Aecio Neves, from PSDB. But no one could say for sure what the result means for the next four years.

Since massive street protests in June 2013 called for change in Brazilian politics and economy, that word has been around in almost every political statement — including Rousseff’s victory speech on Sunday night. As she addressed supporters in Brasilia, the President said she had not forgotten the message from the streets. “The most repeated word in these elections has been ‘change’. And I know that I have been re-elected to make the big changes the Brazilian society demands.”

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