Brazil trade with U.S. sees worst result in 11 years

The most notable change in Brazilian foreign policy since the election of President Jair Bolsonaro in 2018 has been the country’s full alignment with the U.S. However, this shift in allegiances has yet to result in any concrete gains for Brazil — in fact, bilateral trade with the U.S. has just seen its worst result in 11 years. Between January and September of this year, accumulated trade between the two countries hit USD 33.4 billion, a 25 percent drop from the same period in 2019. 

Regardless, the U.S. remains Brazil’s second-largest trading partner, accounting for 9.7 percent of Brazilian exports and 12.3 percent of revenue. Only China detains a larger slice, buying up over one-third of Brazil’s exports.[restricted]

According to data from the American Chamber of Commerce in Brazil (AmCham Brasil), 2020 is shaping up to end with a Brazil-U.S. trade deficit of between USD 2.4 and 2.8 billion — the worst result in five or six years. The findings are presented in AmCham Brasil’s latest Brazil-U.S. Trade Monitor, published this week.

Sluggish trade: pandemic to blame?

The AmCham Brasil report singles out three leading factors to explain the sharp downturn in bilateral trade. “The combination of the severe effects of the economic crisis caused by the [Covid-19] pandemic, the fall in global oil prices, and trade restrictions in specific sectors – such as the steel industry, account for a large part of the contraction in bilateral trade,” explained AmCham Brasil’s executive vice president, Abrão Neto.

Mr. Neto went on to say that the delayed effect of the pandemic on imports was due to the customs clearance of orders made and shipped before the crisis continuing to be carried out in the early stages of the pandemic. Furthermore, a large part of Brazil’s trade with the U.S. is made up of intra-company exchanges, which may have taken some time to reflect the drop in demand.

“It was a severe blow for bilateral commerce, but our assessment is that the worst is behind us,” said Mr. Neto. AmCham Brasil is confident in the recovery of international goods and services trade, and of the demand this will bring to Brazilian and U.S. exporters.

Amid the unforeseen Covid-19 crisis, another factor set to reclaim importance is the trade war between the U.S. and China. “This will continue for some time and the entire world is factoring it into the equation as a variable,” said Mr. Neto. However, it is stressed that tensions between the two countries are unlikely to be specifically crucial in Brazil-U.S. relations, but it will have an effect on global trade as a whole.

In September of last year, the International Monetary Fund (FMI) predicted growth of just 0.8 percent for the global economy in 2020, as a result of the China-U.S. trade war. This, of course, was before the Covid-19 pandemic came to decimate all forecasts for this year.

Difference between the U.S. and China

Brazil’s export portfolio to the U.S. — with 87.2 percent comprising products with higher added value — goes some way to explaining the fall in trade seen in 2020. For instance, the trend is drastically different in Brazil-China trade, which saw an uptick due to agricultural commodities.

The one commodity that did have an influence on Brazil’s trade balance with the U.S. was oil, prices of which have yet to return to pre-pandemic levels after collapsing in March. In total, oil and fuel make up for 8.9 percent of all Brazilian exports to the U.S.[/restricted]


“Mystery seeds” in the post: brushing scam or international bioterrorism?

In the 1956 sci-fi classic “Invasion of the Body Snatchers,” alien plant spores fall from space and grow into large seed pods, each one capable of reproducing a duplicate copy of every human on Earth. Today — without the alien doppelgangers — frightened Brazil’s agricultural authorities warn that a similar phenomena could be in progress, after hundreds of suspicious, unsolicited packages containing mysterious seeds were sent to Brazilian homes through the post.

At least 258 samples of seeds have been turned in to authorities in all but two Brazilian states, and the Agriculture and Health Ministries have launched a joint investigation to discover whether these seeds are possible invasive plants or weeds which could be harmful to Brazil’s agribusiness, as well as finding out who is sending them — and why.[restricted]

A federally-run lab in the Center-West state of Goiás analyzed some 25 packages — finding three types of fungi, as well as different types of bacteria and live mites.

Scientists warn that four packages included possible plague agents that are still non-existent in Brazil, alerting the public that the seeds should not be planted — or thrown into the garbage.

According to Brazilian authorities, the packages appear to have been sent from four undisclosed Asian countries — though several contained Chinese postmarks — and were first reported in August by residents of the southern state of Santa Catarina. 

The seeds arrived alongside deliveries of goods purchased online, presented as an added free gift. In some cases, the package of seeds was labeled as “jewelry.” In a matter of weeks, similar reports cropped up across the country.

The Chinese Embassy in Brasília said in September that a preliminary inspection by the China Post found evidence of defrauded postal stamps. “The shipment of seeds is forbidden or restricted to member countries of the Universal Postal Union. China Post rigorously follows those rules and forbids the postal transportation of seeds,” said the embassy, in a statement.

Bioterrorism or online scam?

The unsolicited packages have also been sent to people in several other countries, including the U.S., Canada, and Portugal. 

Back in July, the Animal and Plant Health Inspection Service at the U.S. Department of Agriculture (USDA) launched an investigation into the phenomenon, alongside the Department of Homeland Security’s Customs and Border Protection and other federal agencies.

The USDA has yet to find anything ominous about the packages — though experts are only beginning their analysis of samples.

So far, authorities are working with one leading possibility: that the packages are linked to a common e-commerce scam known as “brushing.” This type of fraud involves online vendors setting up accounts in a stranger’s name, then sending their products to an unsuspecting recipient. They then use this account they’ve set up to write fake ‘verified reviews’ in a bid to improve their seller ratings. 

On many marketplaces, such as Amazon, vendors must include tracking codes for shipped goods — therefore, the scam only works if a package is physically sent. In this case, scammers use small throwaway items, such as seeds. 

This explains why authorities have been coy regarding the ploy as attempted bioterrorism.

For the recipients, though, it raises concern about their data — such as full name and address, at the very least — being easily retrievable online by malicious enterprises.

Importing seeds to Brazil

Brazilians are able to buy seeds from foreign vendors — but they must undergo a rigorous and long clearance process, which goes through the Agriculture Ministry.

However, it is quite common for people to buy seeds or small plants, being unaware of the rules and having their shipment seized by the authorities.

According to Correios, Brazil’s federally-run postal service, the number of apprehended packages weighing up to 2 kilos jumped from roughly 2,000 last year to 5,000 in 2020.[/restricted]


Brazilians turn from buying property to invest in real estate trusts

For generations of Brazilians raised under the prospect of skyrocketing inflation and the forfeiture of savings accounts in the 1980s, purchasing a property to rent out in your golden years was seen as the ultimate retirement goal.

Fast-forward to 2020 and the prospect of a much more stable economy than the turbulent 1980s and the lowest benchmark interest rates of all time have once again kickstarted Brazilians’ dreams of becoming property moguls. As a result, Brazilian real estate investment trusts (FII, in Portuguese) are enjoying their heyday. [restricted]

The number of investors in these assets jumped from 121,000 in December 2017 to over a million in August 2020 — and 99 percent of them are retail investors, according to data from the B3 stock exchange. Such booming growth has attracted the attention of major players and, by the end of September, brokerage XP had its first FII Summit — a digital conference with some of the biggest fund managers to discuss the market prospects for these assets. 

Juliana Pedroza, the head of Investor Relations at Habitat Capital Partners credits this astounding popularity to a combination of factors: the lowest benchmark interest rates in history drew increased attention to variable income assets (such as FIIs), which was supported by the increasing availability of information on new financial products.

Also, FIIs allow investors to gain exposure to the real estate market using less money than they’d have to spend to buy a property — without having to worry about administering homes or tenant agreements — and they can enjoy a much more diversified portfolio. 

“Brazilians like to invest in real estate, it’s a historical tradition. FIIs are an evolution of this way of investing,” she told The Brazilian Report

Investing in real estate: a change in mentality

Despite the rationale of FIIs being an easy way to invest in real estate, it is quite a different matter to owning a house or commercial property. First of all, there are multiple kinds of funds: ones that own or manage properties and gather income on rent, funds that invest in real estate companies and bonds, and funds that invest in other funds. Second: these are variable income assets. 

The latter is probably the hardest concept to grasp for newcomers, as a large part of the appeal of FIIs is that they are known for paying out monthly dividends, income-tax-free — a market practice that many investors believe will be the equivalent of the steady rent income that leasing property can provide. 

“When you own a property, real estate agents won’t show up at your door every day telling you the house’s market value. But you can consult the value of an FII and this is daunting. Some investors are uncomfortable with a 30 percent loss, as we had during the peak of the crisis,” explains Ms. Pedroza. 

The Covid-19 crisis affected FIIs differently. While the benchmark index for these funds is down by an overall 12.8 percent this year, those funds that are focused on shopping malls suffered even a tougher blow, as was the example of General Shopping e Outlets do Brasil Fundo de Investimento Imobiliário FII, which has seen 45-percent since last this time last year.

For Ms. Pedroza, the need for a diversified portfolio is a big lesson learned from the crisis. “The big advantage of FIIs is that you can be positioned in many kinds of assets. But you need information, investors must know they may even have a negative return.”

Room to grow

Despite the astonishing expansion in the past few years, FIIs still have a lot of potential for growth. The market cap of FIIs in Brazil reaches BRL 103 billion (USD 18.5 billion), but the equivalent REITs in the U.S. are valued at a total of USD 1.17 trillion.

Ms. Pedroza believes that the Brazilian market has the capacity to absorb new product offers and already existing funds may recover as the economy reopens gradually and companies return to office work.

Another opportunity seems to be on assets focused on responsible investing and ESG (Environmental, Society and Governance) principles. As of August, Brazil got its first such fund, FII Biotic, which will invest in a startup hub in capital city Brasília. The fund aims to raise capital for a technology hub in the city. According to newspaper O Estado de S.Paulo, the first fundraising round is scheduled for this year and aims to raise up to BRL 2 billion of a total of BRL 5 billion. 

“[ESG funds] tend to grow in the next two to three years and there are resources available for that, but now we need to develop the assets for the funds to invest,” said Ms. Pedroza.[/restricted]


Brazilian markets buoyant about recovery, despite Covid-19 chaos

The Covid-19 pandemic has pushed the Brazilian economy into one of its worst periods of recession, with GDP expectations for 2020 hitting -9.1 percent, according to the International Monetary Fund. However, amid this pessimism from global actors, expectations from the market are far more favorable. The latest forecasts show a slide of “just” -5.04 percent for the year, suggesting that investors in Brazil are more bullish about Brazil’s post-coronavirus recovery.

This trend of optimism kicked off in September. According to confidence indexes measured by think tank[restricted] Fundação Getúlio Vargas (IBRE-FGV), business owners in both industry and commerce are already placing more trust in the economy than they did before the pandemic began. In fact, when analyzing industry alone, the 106.7-point confidence index is the highest for September.

For outside observers, this refreshed level of confidence may come as a surprise. Over 1,000 Covid-19 deaths were recorded in Brazil on Wednesday, and some major cities are weighing up new lockdowns amid a resurgence of the virus spread. In reality, however, Brazil has been forced to live with the pandemic, out of a mixture of necessity and careless denialism propagated by President Jair Bolsonaro and his allies. 

According to IBRE-FGV economist Rodolpho Tobler, Brazil’s recovery is being propped up by the federal government’s emergency salary program, which paid out BRL 600 (USD 106) in monthly aid to the unemployed and informal workers. “[The program] promoted an increase in income and supported some form of economic activity,” he tells The Brazilian Report. Indeed, the emergency benefit had significant and near instantaneous effects on the Brazilian population. Almost overnight, 13.1 million Brazilians were lifted out of poverty, causing a direct impact on their purchasing power. 

Eye on a vaccine

The next phase of Brazil’s economic recovery appears to be inextricably linked to the success of at least one of the several potential Covid-19 vaccine projects underway, many of which are now in phase three clinical trials. Speaking to The Brazilian Report, economist and Mackenzie University professor Jefferson Prado says that the expectation of a future vaccine alone is key to reinstill trust in the economy. This, in a short-term scenario, could allow services sectors to resume their activities and have more people circulating on the streets.

When the money dries up

A major factor in Brazil’s recovery equation concerns the future of the emergency coronavirus aid program. Deemed as being painfully expensive for the federal government, the monthly benefits have already been cut in half to BRL 300, and the program will expire completely come the end of the year.

According to government data, over 67 million people in Brazil currently receive monthly coronavirus benefits. “Depriving them of [this aid],” says Mr. Tobler, “could add to the growing trend of unemployment,” which hit 13.8 percent in late July, meaning 13.1 million Brazilians are currently out of work.

“For the months to come, the recovery scenario must be maintained, but there is still a lot of uncertainty around its sustainability: mainly due to consumer caution, the worsening of the labor market situation, and the end of the government’s aid programs,” Mr. Tobler adds. [/restricted]


Brazilian labor courts not ready to deal with remote work

The Brazilian economy is steadily reopening and returning to something closer to normality in the wake of the Covid-19 pandemic. That said, most companies are unlikely to ever return to their “default” working practices. As we explained in our July 20 Weekly Report, most Brazilian companies — even those that have returned to office activities — are set to keep some of their employees working from home permanently. At the very least, firms are likely to include remote work in a form of employee-rotation system to mitigate the risk of in-company coronavirus spreads.

While remote work has allowed thousands of companies to keep their activities ticking over in exceptional times — [restricted]and shown bosses that some processes are in fact more efficient when done out of the office — many studies suggest that working at home is taking its toll on the labor force. [restricted]When not in the office, some superiors have expected their employees to be available at all times, making workdays longer than usual. 

“People are joining more meetings, answering more unscheduled calls, and having to deal with more messages than before the pandemic,” read a Microsoft study published last week.

This scenario creates regulatory uncertainties, with potential future litigation between employees and companies in labor courts. Disconcertingly, Brazil’s Superior Labor Court (TST) appears to be unprepared for this possibility. The Brazilian Report asked the court if it has been sought out to handle cases related to remote work, or if it is preparing to arbitrate in such situations.

The TST simply replied that it has no information of the sort.

Remote work in Brazilian law

Brazil’s labor legislation has included provisions related to remote work since 2011, stating, for instance, that distance work activities are equatable to in-person employment for all necessary legal purposes. 

In the 2017 labor reform pushed through by then-President Michel Temer, remote work is defined as “the provision of services predominantly outside of the employer’s premises (…) which does not constitute external work.” These legal changes also blocked the possibility of overtime payments for those working from home.

As may be gleaned from these vague and perhaps contradictory definitions of remote work, labor courts are set to receive a wave of complaints basing themselves on holes or inconsistencies in Brazil’s telework regulations.

Not everyone can work from home

A recent study by the Anísio Teixeira Institute of Studies and Educational Research (Inep) shows that the nationwide shift toward remote work will not be a universal one, with research coordinator Geraldo Góes affirming that the results show the “reality of Brazilian inequality.” According to the study, working from home is an opportunity predominantly offered to more qualified and high-ranking workers, largely white women.

“Of course some jobs, such as farming or shop work, cannot be carried out remotely, but what we have clearly seen is that the higher the level of study or qualification, the more likely the person will remain working from home,” says Mr. Góes.

The prevalence of remote work also runs along state lines. “The larger the state’s income per capita, the more remote work there is,” the researcher explains. Indeed, the three states with the highest average incomes — the Federal District, São Paulo, and Rio de Janeiro — are also home to the most employees working from home.

This works in the opposite direction as well, with the northern state of Pará having among the lowest per capita incomes, and the lowest numbers of remote workers.[/restricted]


Railway project delays and corruption keep Brazil off the tracks

Along with a large part of the world, Brazil adopted railway transport at the end of the 19th century, importing British technology, designs, and materials. The first Brazilian railway began operations in 1854, located in the interior of São Paulo state, before the mode of transport spread countrywide. The peak of Brazil’s rail network came during the presidency of Juscelino Kubitschek (1956-1961), reaching 32,287 kilometers before the military dictatorship began eradicating railways deemed to be “deficient.”

As a result, at the end of the 1980s, Brazil had practically no passenger railways, despite its huge size and population. The only long-distance train line of the sort connects the southeastern cities of Belo Horizonte and Vitória and is operated by mining company Vale.[restricted]

Of the approximately 30,000 km of railway lines in Brazil, 29,000 km are privately owned. To give an idea of the relative insignificance of railways in the company, only 5.4 percent of Brazil’s industrial production is transported by train; 75 percent is moved on roads, according to Fundação Dom Gaspar.

The impacts caused by a truck driver’s strike in 2018 laid bare Brazil’s dependence on roadway transport and sparked a public debate on the need to expand the country’s railway system. However, little has changed since. Flawed planning, an absence of political will, lack of funds, and corruption have all kept Brazil from getting back on the tracks.

The northeastern pipe dream

The federal government’s most recent gamble in the field of rail transport is the so-called Transnordestina line, which is not a particularly novel idea. The endeavor seeks to develop cargo logistics in the Northeast region, taking a line through 81 municipalities in three states, starting from Eliseu Martins in Piauí and heading toward the ports of Pecém, in Ceará, and Suape, in Pernambuco.

The project began with an official ceremony in June 2006, when then-President Luiz Inácio Lula da Silva laid the cornerstone in Missão Velha, in Ceará. The plan was for trains to be in operation by 2010, with an investment of BRL 4.5 billion — BRL 10.8 billion (USD 1.9 billion) in today’s money.

However, since it began, the project has been a mix of hope and dashed ambitions. Hope, for what the new railway could represent for the Northeast, Brazil’s poorest region. Disappointment, on the other hand, for the constant interruptions and complaints of misused funds.

The Transnordestina (Transnortheast) project is a private endeavor — led by steel-maker Companhia Siderúrgica Nacional (CSN) — but it is funded with public money. So far, work stoppages have occurred due to legal issues, squabbles among CSN partners, and a lack of money from the government. Construction has already swallowed up BRL 6.9 billion — over half of the total forecast — but only 30 percent of the project has been completed. There is no guarantee that the remaining BRL 4 billion will be released to finish construction.

In 2017, the Federal Accounts Court (TCU) blocked all federal government entities from sending funds to the endeavor until they received detailed projects and budgets from CSN. Two years later, part of construction resumed on the stretch of rail between the states of Piauí and Ceará, but work remains stopped in Pernambuco, where the majority of the future railway is located. In that state, two segments of the track have been completed, between the cities of Trindade, Salgueiro, and Custódia. For much of the unfinished project, definitive routes have not even been finalized and there is no guarantee of funds for this to take place.

In Ceará, works were divided into 11 blocks. So far, work has only been done on two of them. Since resuming construction in 2019, the project is already grinding to a halt once again.

As a result of these constant delays, the Brazilian Land Transport Agency (ANTT) issued a proposal to the Infrastructure Ministry in March that would determine the termination of the railway’s concession contract. In other words, the regulatory agency wants new deals to be signed before work may continue. The ministry has yet to reply and has shown no indication of doing so soon.

A railway 35 years in the making

While the Transnordestina project has been plagued with delays and controversy, it pales in comparison to the problems encountered with the Ferrovia Norte-Sul (North-South Railway), which was drawn up 35 years ago as the new backbone of Brazil’s railway network. However, since its inception, the project has suffered from flawed execution and design, as well as a large helping of corruption.

Announced in 1985, the line was initially projected as a 1,550 km track between Açailândia in the Northeast to Anápolis in the Center-West state of Goiás. The awarding of the contract was shrouded in controversy, with allegations of being rigged to favor the winning construction firms — which, three decades later, would find themselves in the middle of Brazil’s largest corruption scandal in history, uncovered by Operation Car Wash.

Over time, the planned construction grew and grew, eventually turning into a hypothetical 4,500 km line linking Brazil’s North and South regions. However, 35 years since it was conceived, only one-quarter of the project has been completed, and the finished tracks are seldom used. According to state-owned company Valec Engenharia, Construções e Ferrovias — in charge of the Norte-Sul railway — BRL 12.5 billion has been invested in the project so far. 

According to investigations, much of the corruption that hindered the progress of the Ferrovia Norte-Sul is down to the fact that the entire grand operation is controlled and overseen by Valec. Beyond simply coordinating the works, Valec is also in charge of operating the railway, setting prices and essentially auditing itself. Unsatisfied with the freight charges demanded by the state-owned firm, agricultural companies and other producers have opted to continue hiring private trucking firms to transport their output to ports. Beyond this, it didn’t take long for investigators to find proof of public money being embezzled by Valec executives.

The biggest such corruption scheme was led by engineer and politician José Francisco das Neves — commonly known as Juquinha das Neves — who led Valec between 2003 and 2011. Last May, Juquinha and six other people became defendants in a case accusing the group of overpricing contracts in the stretch of railway that passes through Goiás, Juquinha’s home state. Investigations showed that construction companies formed a cartel to rig prices and offer anti-competitive proposals to give the impression that auctions were being conducted fairly. Public prosecutors estimate that this scheme caused losses of over BRL 76 million to the public coffers.

Government gambling on private concessions

Today, the Norte-Sul railway project is split into three parts. In March 2019, at the beginning of the Jair Bolsonaro administration, two of these segments were awarded to Rumo Logística in a 30-year non-renewable contract costing BRL 2.7 billion — 100.29 percent more than the minimum bid of BRL 1.3 billion.

The remaining segment was surrendered by Valec back in October 2007, which awarded it to mining giant Vale. The firm was the only interested party in the auction, paying the minimum price of BRL 1.5 billion.

Researchers in mobility have long complained about Brazil’s lack of railway projects that involve passenger transport. Experts consulted by The Brazilian Report say that the Transnordestina and Norte-Sul initiatives could go far beyond simply transporting cargo, without the need for significant further investment.

One such specialist, Marcelo Dourado, laments the poor decisions made by Brazilian authorities concerning public rail transport. “Brazil is the only continent-sized country without a national passenger rail network. It’s also the only continent-sized country that reduced the size of its railway network over the last century. This is deplorable from all points of view.”[/restricted]

Business Coronavirus

Brazil’s unemployment rises as isolation goes down

Back in April, our Explaining Brazil podcast discussed the risks of a “job apocalypse” in Brazil. While data supporting that analysis has appeared — in June, more than half of Brazilian workers were out of a job — the full effects of the coronavirus crisis on the job market will only be felt in the coming months, as Brazilians continue to leave self-confinement in droves and pursue new jobs. 

Unemployment figures [restricted]only account for people who are actively looking for a job. And due to health concerns and a depressed economy, millions out of work did not even bother to look for a position that — in all likelihood — would not exist in the first place. Now, as Brazil’s coronavirus curves appear to show a slowdown in the spread of the disease, the scenario has shifted. Between July and August alone, 1.3 million people joined the workforce and unemployment rates climbed to 13.6 percent.

When compared to May — when quarantine restrictions were at their strictest — the rate of workers out of a job jumped by almost 28 percent.

Meanwhile, just one-fifth of the Brazilian population (42.5 million people) stayed home last month, according to the August edition of the National Household Sample Survey – Covid-19, published by Brazil’s official statistics agency IBGE. In July, 49.1 million were in isolation.

Brazil’s informal workers were hit the hardest by the pandemic, as the in-person economy all but shut down for the best part of three months. Street vendors and self-employed people were deprived of most of their income overnight. 

On top of that, a survey by credit reporting agency Boa Vista SCPC shows that bankruptcy requests jumped 71 percent in June 2020 when compared to the same period last year. And courts are bracing themselves for an even bigger wave of businesses going under.

Key takeaways from Brazil’s latest unemployment survey

  • Isolation. Less than 8 percent of Brazilians with college degrees self-isolated in August — a rate that jumps to 35 percent those with lower levels of education. This can be explained by the fact that most of the job cuts that happened in recent months affected less-skilled workers — while people in higher positions have largely returned to their normal working routines.
  • Informality. Little by little, street markets are reappearing and as most economic activities resume, informal workers may find making a living less challenging than before. “Informal jobs are the first to be cut — but also the first to bounce back,” said IBGE’s deputy director Cimar Azeredo, when disclosing the data.
  • Gender. Women make up 51 percent of Brazilians of working age. In August, however, they accounted for just 41 percent of employed workers and 43 percent in the overall workforce (that is, when informal jobs are factored in as well). Women also make up over one-third of Brazil’s informal workers.
  • Race. Fifty-nine percent of Brazilian informal workers are black or multiracial, though these groups make up 55 percent of the total population. As we have shown, informal jobs are usually more precarious, and provide workers with little to no social protections and labor rights, while also paying lower wages. States with high human development indexes have consistently low informality rates.[/restricted]

Brazilian airports move closer to privatization

Potentially the most thrilling and striking commercial flight one can take is departing from Rio de Janeiro’s Santos Dumont Airport and landing one hour later in Congonhas Airport in São Paulo. Taking off from Santos Dumont, in the center of the Wonderful City, aircrafts bank around the picturesque Guanabara Bay, passing Sugarloaf Mountain and the Christ the Redeemer statue, giving passengers an aerial view of this geographically improbable city.

On approach to São Paulo — South America’s biggest city — planes descend into an apparently endless blanket of high-rise buildings. As the only airport in the city proper, landing in Congonhas can be a bit of a white-knuckle ride. After negotiating around corporate towers and apartment buildings, pilots finally can bring the craft down on the runway.

Now, these two airports — among Brazil’s busiest — are moving closer to being sold off to private companies.[restricted]

Despite being scheduled for March or April 2021, the invitation for studies for the seventh round of Brazilian airport auctions is set to be published at the beginning of October. This latest wave of sales includes Congonhas Airport in São Paulo, and Santos Dumont Airport in downtown Rio de Janeiro.

The publication will be brought forward after a request from Infrastructure Minister Tarcísio de Freitas, as revealed by newspaper Folha de S. Paulo and confirmed by The Brazilian Report after consulting Mr. Freitas’ staff. The ministry is keen on avoiding any delays to the timetable of the seventh round of auctions, in line with the guidelines of concession processes that precede it.

The sixth round includes 22 Brazilian airports grouped into three regional blocks: South, Center-West, and North. According to the Brazilian Civil Aviation Agency (Anac), before the coronavirus crisis hit, these terminals accounted for 11 percent of passengers travelling nationwide, with 23.9 million arrivals and departures Brazil-wide in 2019.

Meanwhile, the seventh round includes a total of six airports, with final auctions tipped to take place at the start of 2022. Once the project is complete, Brazil will be one of the few countries in the world where practically all airports are run by the private sector, a sell-off frenzy set to raise a total of BRL 239 billion (USD 43.3 billion), according to the government.

Airports demand investments

The government’s move towards privatization comes at the most uncertain time. The aviation industry has been one of the worst-hit sectors by the Covid-19 pandemic — with most flights grounded for months. Airlines such as Aeromexico, Latam, and Avianca have filed for Chapter 11 bankruptcy. Other players are buried in debt — and a bailout plan has yet to become a reality. Meanwhile, private companies running airports around the country fear collapse and demand government investments. 

The Infrastructure Ministry’s Civil Aviation Secretariat forecasts that the coming rounds of airport concessions will demand investments of BRL 8.8 billion. A large part of this amount is set to come from the block including the Congonhas and Santos Dumont airports, with BRL 2.4 billion. 

Neither Congonhas or Santos Dumont are compliant with a series of international norms and the rectification of these problems are deemed to be expensive and difficult to carry out — which explains the forecast of high investment demands. Improving the infrastructure of both airports could involve the construction of new runways, a possibility which is yet to be discussed with technicians and the Department of Space Control.

Congonhas is a regional airport located in a heavily populated neighborhood of São Paulo, flying to major cities around the country. Santos Dumont is also located in Rio’s city proper. Known colloquially as an airbridge, the route between Congonhas and Santos Dumont transports more passengers than anywhere in Brazil.  

Government says pandemic doesn’t affect plans

When the Covid-19 pandemic began, studies for the sixth round of airport concessions were filed at the Federal Accounts Court (TCU), but these analyses were all carried out with a pre-coronavirus attitude in mind, despite the fact officials were aware they would need alterations to account for the drop in demand. ​

However, Infrastructure Minister Tarcísio de Freitas has stressed that the transfer of 43 airport terminals administered by the Brazilian Airport Infrastructure Company (Infraero) would not be affected by the negative impacts of the Covid-19 pandemic. “We’re gonna rock the sale of airports!” Mr. Freitas declared, during a live social media broadcast.

The initial concession plan foresaw Congonhas and Santos Dumont remaining under Infraero’s control, as a way of keeping the state-owned company and it’s regional airport network alive. A change in the strategy means the pair will be the last properties to be sold off.

The current government changed the rules for airport concessions, altering the total of shareholder control of the terminal on behalf of the private buyer. The first block, sold in 2012, foresaw Infraero staying on as a partner with 49 percent control. The argument was that this rule would allow Brazil to hold on to its sovereignty, yet it demanded constant investments while the state-owned company hemorrhaged revenue.[/restricted]


Booming sugar exports and quick harvest could spell trouble for ethanol

Booming international prices and a weakening currency led Brazilian mills to increase sugar production by 32 percent in the 2020-2021 harvest, making the country the world’s biggest producer for the second year in a row. Now, as more and more cane becomes sugar, and the dry weather speeds up the harvest, the country risks reducing the safety margin for ethanol production in 2021, according to experts. 

Data from sugar mills association Unica shows that sugarcane crushing reached 415.1 million tonnes by the end of August — 3.8 percent more than the same period in 2019-2020, despite a slowdown in the second half of the month caused by rains in São Paulo state.[restricted]

According to Bruno Lima, sugar and ethanol analyst at consultancy StoneX, the increasing appetite for Brazilian sugar exports and the dry weather are encouraging producers to move forward with a final push before the end of the harvest in October. As a result, there will be less surplus sugarcane — cana bis, as it is known in Brazil — in the fields to support an early start of the 2021-2022 crushing season in March. 

“When crushing speeds are high, you have less leftover sugarcane for the next harvest. Our estimates are that ethanol stocks will reach 1.5 billion liters by late March, compared to 1.9 billion liters in the previous season. We may have a price peak at this time,” Mr. Lima tells The Brazilian Report

The National Supply Company (Conab) expects Brazil’s ethanol production to drop by 14.3 percent, to 30.6 billion liters over the course of the harvest. 

Any price hikes, however, depend on the recovery in fuel consumption after the end of social isolation measures and will be capped by gasoline prices, he adds. As ethanol is less energy-efficient than gasoline, local drivers will not buy it unless the price is 70 percent lower than gasoline. 

With sugar beet crops suffering from jaundice in Europe, Thailand’s production halved, and Índia’s harvest hindered by Covid-19, benchmark sugar prices remain high, which suggests the production mix will remain slanted toward sweetener for the time being. 

Recent measures by the Brazilian federal government have also made sweetener more advantageous for local producers. On Monday, President Jair Bolsonaro announced the U.S. government had increased sugar import quotas from Brazil by 80,000 tons, reaching a total of 310,000 tons. The deal, however, came two weeks after Brazil extended tax exemptions for U.S. bioethanol until December, which may push prices down for a while.  

For Eduardo Leão de Sousa, Unica’s executive director, a potential increase in ethanol production is owed to “a scenario of demand for sugar and bioethanol.” In an emailed statement, he added that the mix may be quickly altered if there is a need to do so, and stressed that producers are committed to the targets established in the National Biofuels Policy. 

Monitoring by StoneX, however, stoked concern about how much leeway there is to shift production, 57 percent of sugar exports for next year are already sold or pre-priced. 

First rice, now sugar? Not quite

Despite a 120-percent increase in sugar exports in August, to a monthly record of 3 million tons, Brazilian experts refute any expectation of a shortage in the domestic market, as has now been the case with rice.

According to Mr. Leão de Sousa, domestic consumption hovers around 10 million tons a year, however, “in five months of harvest, we produced over 25 million tons of sugar and crushing is still ongoing — not to mention the harvest in the Northeast, which starts right now”, he notes. 

From January to August, exports surpassed 15 million tons — 57 percent more than the same period of 2019. Meanwhile, Conab predicts Brazil’s sugar production to hit a record of 39.3 million tonnes in the 2020-2021 harvest — 35.6 million coming from Brazil’s Center-West, Southeast, and South regions, known collectively as the ‘Center-South.’ 

Per StoneX calculations, exports from April to August were enough to keep stocks at a reasonable level. However, “from October to March, the Center-South area has to export more than we have ever done in history” to avoid high stocks from pressuring prices, says Mr. Lima. 

The extra push, he says, happens precisely when the harvest is beginning in the northern hemisphere. “Traditionally, the export seasonality is lower in this period. Will there be so much demand from now on?”, he asks.

International benchmark prices suggest so. In New York, prices rose 7 percent in the week from September 11 to September 18, off the back of concerns with dry weather in principal producing areas and forest fires.  

Unexpected factors

Abroad, crop failure in Thailand leading to the smallest production in 10 years was already on producers radar since the beginning of the year, say experts. Still, the Brazilian output may be required to fill other unexpected gaps. 

In the European Union, where France’s sugar beet crops were attacked by jaundice and Germany’s suffered from dry weather, sugar production is set to fall to 16.1 million tons, down from around 17 million in 2019.

In India, another major producer, Covid-19 is the issue: the harvest there is largely manual and the uptick in infections may prevent workers from travelling and delay production

India’s situation is being closely monitored and has not entirely been factored into current prices, says Mr. Lima. “There are fears that, if Covid-19 cases increase too much in India, we may have a scenario that is not in the game right now. It will impact not only production, but also logistics. They may not be able to export if they close the ports.”[/restricted]


The town that asbestos built

Asbestos is classified as a carcinogenic substance by the World Health Organization (WHO) over 45 years ago, completely banned in Europe since 2005, and forbidden in over 60 countries and five Brazilian states. But the 32,000 inhabitants of the town of Minaçu apparently have yet to receive the memo. Located in the north of the state of Goiás, some 365 kilometers from the capital Brasília, this municipality was born, grew, and continues to rely on asbestos to sustain its economy.

Minaçu is home to the only asbestos factory in Latin America — the third-largest in the world, smaller than plants in China and Russia. With its non-stop production, it is responsible for 13 percent of all the asbestos sold around the world, and half of what is consumed in Brazil.[restricted]

As was once the case in most of the world, asbestos is mixed with cement and used largely in the construction of roofs and water tanks, with an estimated 50 percent of Brazilian homes containing asbestos.

The use of asbestos in buildings is a result of its excellent electric insulation and heat resistance, but inhaling asbestos fibers can provoke lung cancer in humans, leading it to be outlawed in large parts of the globe.

Indeed, the production and sale of asbestos in Brazil were prohibited by a Supreme Court decision in 2017. However, mining company Sama — controlled by concrete firm Eternit, which runs the Minaçu plant — managed to obtain an injunction to continue production until the court decision was published and made unappealable, which occurred in 2019.

But one month after Sama was forced to close and fire its 400 employees last year, Goiás Governor Ronaldo Caiado sanctioned a state law permitting the extraction of asbestos in Goiás, even though the production, sale, and use of products containing the minerals is outlawed nationwide. The local legislation stated that the extracted asbestos could only be used for export, following international transport standards. 

Soon after, Sama went straight back to work in Minaçu, initially claiming it only intended to process the 24,000 tons of asbestos stockpiled at the time of the federal ban.

“A severe offense”

The National Association of Labor Prosecutors (ANPT), which went to court against the state of Goiás to contest the 2019 law, classified the local legislation as “a severe offense” against the jurisdiction of the Supreme Court. “It’s unthinkable for a law deemed unconstitutional by the Supreme Court to simply come back to life. Though the Goiás law exists, the federal declaration of unconstitutionality comes long before this,” said the ANPT, in a statement.

“The asbestos industry had a period of little over a year, until February 2019, to unload its stocks, terminate contracts, and all of this was tolerated by the Supreme Court by way of an injunction from Justice Rosa Weber. There is no longer any leeway for the exploitation of asbestos,” added the association.

Asbestos mining firm donated millions to politicians

Sama began work on the Cana Brava mine in Minaçu in 1967 when the surrounding town did not even exist. Since then, the company has been at the center of social life in the municipality, as well as having a notable presence in the politics and economy of the state of Goiás.

Sama pumped millions of reais into election campaigns at all levels of government and, in return, elected officials have fought the mining firm’s corner in legislative issues. The prime example of this is Governor Caiado himself, who received BRL 300,000 (USD 55,000) from the company for his race for a Senate seat in 2014. The funds were passed through state branches of the Democratas political party — which Mr. Caiado controls in Goiás.

In that same year, Sama gave BRL 2.3 million (over USD 420,000) to politicians from a wide array of parties, on all ends of the spectrum. When added to the total donations made in 2010, the company donated the amount of BRL 3.8 million to various candidates, not just in Goiás.

A study carried out by University of São Paulo geography Ph.D. Fábio de Macedo Tristão showed that Sama invested BRL 1.2 million over 2004, 2008, and 2012 in the campaigns of candidates for mayor and councilor in five cities: Minaçu, Goiânia, and Anápolis in Goiás; Poções and Bom Jesus da Serra in the northeastern state of Bahia, where the company operated over 50 years ago.

Poisoning accusations

A subsidiary of the Eternit group since the 1990s, Sama is accused of causing the sickness and death of employees in Goiás and the Northeast of Brazil, where it was operational between the 1940s and 1960s. The firm was sentenced to pay BRL 500 million in damages after having left residues which contaminated an undetermined number of people in the towns of Bom Jesus da Lapa, Caetano, and Poções, in the state of Bahia.

In turn, until the beginning of the 2000s, Eternit was controlled by French group Saint-Gobain, which sold the company as soon as asbestos was made illegal in France. Since then, Eternit has been under the control of notable individual investors such as Lírio Parisotto — the owner of a fortune estimated at over USD 1.4 billion — Luiz Barsi — with speculated wealth in shares of BRL 1 billion — and Victor Adler, who is one of the leading individual investors in Banco do Brasil. Messrs. Barsi and Adler retain almost 20 percent of the company’s shares.

Rare-earth elements the new solution

While Sama and Eternit are playing for time with the morose Brazilian court system, the town of Minaçu is seeking new alternatives to save its economy. The state of Goiás granted a series of environmental licenses to mining research firm Serra Verde Pesquisa e Mineração, which will explore the presence of rare-earth minerals in the municipality.

“As of now, the company may hire staff. That is one of the demands I always make, of serving the local labor force. We are responding quickly to the needs of the population of Minaçu, and I owe this to the government’s team, which has taken the cause onboard,” said Governor Caiado.

The final step was taken on May 21, with the authorization to remove local vegetation in the region where the company will set up its facilities. Said vegetation will be “replaced with care and following recommendations from the Secretariat of the Environment and Sustainable Development.” 

“The ore that is extracted from Minaçu will once again create jobs, income, and quality of life for the local population. With complete respect for the environment, ensuring citizens will have access to jobs, which is the greatest social program in the world,” Mr. Caiado reinforced.

Serra Verde Pesquisa e Mineração has promised to invest around BRL 580 million in the region, creating over 1,500 direct jobs and 6,000 indirect positions. The company applied for licenses in 2013 and was expected to begin operations in 2017, which did not occur. Previously, the firm had already invested USD 70 million in the region, for research about the minerals present in Minaçu.

Rare-earth elements are a group of 17 chemicals used in the industry which can be utilized in various forms, such as producing high-power magnets for wind turbines and electric cars, catalysts for the oil industry, medical equipment, lasers, and superconductors.

The announcement that Serra Verde would be allowed to set up in Minaçu took place immediately after the Sama plant was closed. Governor Caiado made a point of visiting the municipality and handed over the licenses in person.

Now, Brazil has a chance to stand out on the international scene, with the rare-earth element deposits in Minaçu being among the largest in the world — competing with China. In this process, Serra Verde has an important quality: its techniques of exploitation and extraction can obtain the elements without harming the surrounding environment, as promised by the company and the Goiás government.[/restricted]


What has Vale learned after multiple disasters?

In 2012, human rights abuses and environmental transgressions earned Brazilian mining giant Vale the inglorious title of the “worst company in the world” by Swiss sustainable development group Public Eye (previously called the Berne Declaration). Vale is the world’s largest iron ore and nickel producer, but it also is in the phosphate and nitrogen industry, as well as copper, coal, manganese, and alloys.

By any standards, its laundry list of crimes should mean significant legal consequences. But for the Brazilian economy, Vale is simply too big to fail. Now, in the wake of Brazil’s worst mining disaster, Brazilian federal prosecutors are running up against a company seemingly still unwilling to make significant changes.[restricted]

In 2019, the Brumadinho dam collapse unleashed a deadly torrent of mining waste that killed at least 270 people and displaced thousands. It was the worst environmental disaster in Brazilian history — and Vale’s second dam collapse in less than four years. In 2014, a different collapse killed 19 people and literally buried entire villages.

The Brazilian Report has shown that, in both cases, Vale ignored its own data about the state of its dams and avoided minor investments that might have prevented both tragedies — or, at least, reduced their impact. 

Now, 18 months after Brumadinho, federal prosecutors in Minas Gerais believe the company has failed to make real changes and are seeking a court order to remove Vale executives accused of disregarding safety procedures. Given its importance to the Brazilian economy, Vale has little incentive to make real changes.

Vale: a history filled with controversy

Vale was created in 1942, as part of former President Getulio Vargas’ development plan — which also included state-owned oil giant Petrobras. Originally one of the biggest firms in Brazil, it would be reborn as a private corporation in 1997. 

To this day, the USD 3.3-billion price tag is considered by many as “too cheap” for a deal. There are credible accusations that many assets were not included in the company’s valuation process, and many others were undervalued. Bradesco, the bank responsible for the evaluation, took control of Vale a year later and the company’s first director, Roger Agnelli, was a former Bradesco executive.

Defenders of the process, however, point out that Vale’s private era improved management, and boosted financial results. As a result, the company now pays USD 4.5 billion in taxes and royalties per year.

Since then, the company has been mired by controversy. 

In the 2000s, it was one of the Workers’ Party’s darlings. Alongside construction company Odebrecht, meat-processing firm JBS, and telecommunications operator Oi, it represented what the Luiz Inácio Lula da Silva elected as “national champions” — companies that would receive massive inflows of public cash in order to expand Brazilin capital in the developing world as the brand of a “new, global Brazil.”

But even during its boom years, Vale faced accusations of criminal negligence and labor abuses, not only in Brazil but across the world. They include mining disasters in Canada, a country with much tougher regulations than Brazil.

In countries with weaker accountability mechanisms, the company’s rap sheet seems even worse. 

In Mozambique, Vale relied on the work of some 2,500 Filipino workers subjected to slavery like conditions. On top of unfair wages, workers were forced to live in overcrowded compounds with inadequate healthcare, and even food shortages. Other foreign workers from neighboring countries like Zimbabwe, Zambia, and Malawi faced similar abuses. 

The envisioned idea of South-South development preached by Lula didn’t actually result in much development in Mozambique, but saw significant returns for Vale.

The Brumadinho aftermath

In the aftermath of the Brumadinho disaster, a task force was appointed to look into Vale’s safety procedures and suggest appropriate changes. Eighteen months have gone by, and federal prosecutors are launching a number of new lawsuits, claiming that the company has still only made cosmetic changes.

According to State Prosecutor Eduardo Antonio Dias, a member of the Brumadinho task force, Vale’s corporate policy “is disrespectful of human rights” and “shown itself to be a continuous risk to society, to the population, and to communities that live close to its operations.” 

Prosecutors ask Vale to pay out BRL 54 billion in damages for the Brumadinho disaster, but the company has a powerful ally in battling these demands: the federal government, which has no interest in seeing a company of this size in hot water.

Meanwhile, the company is facing two other civil lawsuits. Vale has already paid out USD 2.6 billion to the victims of Brumadinho and has provisioned around USD 3.4 billion for disbursement. In April of this year, Brazil’s National Mining Agency said it would halt operations in 47 dam sites that failed to comply with industry standards, including at least 25 owned by Vale.

And the effects of the disaster will linger for generations. According to a new research paper on the long-term health impacts of the disaster, published by journal Health Economics, the disaster significantly reduced birth weight and increased infant mortality.

Despite all this, the company’s credit ratings have been upgraded by Fitch Ratings from BBB-minus to BBB — and the company will distribute more than USD 2 billion in dividends this year, after suspending such payments to shareholders in 2019, following the Brumadinho disaster.

Fait said its new rating “reflects steps taken by Vale over the past 18 months that have lowered the risk of future dam failures and the implications upon the environment and people in the surrounding community should they occur.” Vale share prices rose 4 percent last week in the São Paulo stock exchange, showing that, for markets at least, Vale has already done enough.

Federal Prosecutors and the victims of Brumadinho, however, think justice has yet to be served.[/restricted]


Food inflation triggers warning for Bolsonaro

Food prices must be at the top of a list with the many economic variables a Brazilian president must be attentive to — as they weigh disproportionately on the poor and spark disgruntlement among a significant proportion of the electorate. Jair Bolsonaro knows this — and all the alarm bells have rung in Brasília as official inflation data was released today. The overall rate shows a rate of mere 0.7 percent since the beginning of the year, on pace to finish 2020 far below the government’s 4-percent target.

But Brazilians are beginning to feel the rise in food prices, which fuels pessimism about the economy. A recent survey by pollster Datafolha shows that 70 percent of low-income citizens believe prices will continue to rise in the near future. In reaction, Mr. Bolsonaro asked vendors to prove their patriotism and reduce their margins to “next to zero” in order not to overburden poor consumers.

But why is the specter of inflation haunting Brazil again in the middle of a pandemic?[restricted]

For economist Victor Beyruti, an economist at Guide Investimentos, rising inflation is the result of the reopening process of the economy, coupled with monetary and fiscal stimulus. “This price hike tends to be momentary,” he told The Brazilian Report. He added that he “still believes in a very benign scenario for price formation in the economy.”

The inflation rate is not the same for all Brazilians

While the data should not be enough to force interest rate increases from the Central Bank, Brazilian households certainly have more than enough reasons for concern.

August’s IPCA rate was boosted mainly by two sectors: transports and food/beverages. The latter alone saw a bump of 0.78 percent. Economists point out that with the pandemic, Brazilians are eating more at home, pushing prices up. Tomatoes are now 13 percent more expensive and milk prices have jumped by nearly 5 percent since the start of the pandemic.

“The problem with this data is a product of social factors, as the spike has a bigger impact on low-income populations. Especially since many of the products which suffered a wider variation comprise Brazil’s basic basket of goods,” says Mr. Beyruti.

Food prices have taken a huge toll on lower-income families. IPC-C1 index, which measures inflation on households who earn up to 2.5 times the minimum wage, rose by 0.55 percent in August — and 3.08 percent over the past 12 months, according to think-thank Fundação Getúlio Vargas. 

The reason — food prices.

The rice crisis

One of the products which saw the largest increase in prices was rice — a staple of t Brazilian tables. In August alone, a bag of rice was 30 percent more expensive, due to multiple factors such as demand variations and lower-than-usual production.

According to the National Supply Company, rice crops extended over an area 2.1 percent small in the 2020-2021 harvest when compared to the previous season. This trend has also hit the stock market, during a moment in which the country was expected to reach an export record of 1.5 million tons.

On Tuesday, Agriculture Minister Tereza Cristina claimed that there will be no shortage of rice in the local market. “The price is high now, but we will bring it down. By the grace of God, we’ll have a super harvest next year,” she promised. Still, many supermarkets have imposed quotas for consumers — a typical move when vendors anticipate shortages.

The National Supply Company expects a 7.2-percent growth in the rice production, to a total of 12 million tons for the 2020-2021 harvest. Meanwhile, the government is analyzing a pledge from the major players in the supply chain to scrap import taxes on rice from members of Mercosur — the South American trade bloc. 

The move could increase local supply, but is unlikely to offset one of the key factors for the current situation: China’s appetite for Brazilian commodities. The Asian superpower is benefiting from the Brazilian Real’s 40-percent devaluation this year to beef up its food stocks, depleted by the Covid-19 crisis and its trade war with the U.S. 

The ghost of hyperinflation continues to haunt Brazil

Jair Bolsonaro’s pledges to supermarket owners to reduce their margins and freeze prices might have struck too close to home for Brazilians over 40 — who lived through the hyperinflation crisis of the 1980 and early 90s. In those years Inflation rates reached the astronomical heights of 80 percent a month — with supermarket products changing prices multiple times a day. Between 1986 and 1993, Brazil changed its currency five times. That remains one of the reasons Brazilians have the habit of shopping for their groceries monthly, and why the country cares so little for coins, which were literally worthless.

Government economic plans of the time usually involved freezing prices — and then-President José Sarney asked citizens to help authorities monitor store behavior, with each Brazilian becoming a “price auditor.”

One of the worst moments of this crisis, however, would come on March 16, 1990 during the presidency of Fernando Collor de Mello, when the government launched an ill-fated inflation-stabilization control program that involved freezing 80 percent of all private financial assets — including people’s savings accounts — for 18 months. An estimated USD 100 billion was confiscated, representing 30 percent of the Brazilian GDP at the time.

Millions of Brazilians became penniless overnight. As expected, droves of account owners flocked to their banks to try and withdraw all the money they could, while companies simply couldn’t afford salaries anymore. In some regions, enraged Brazilians drove their cars into a branch after being told they couldn’t touch their own savings.

Despite the radical plan, inflation rates would get back to the double digits in just three months. It would only be with the creation of the Brazilian Real that the country would finally tame inflation and achieve a measure of economic stability.[/restricted]


New law cuts open the Brazilian cheese market

Brazil isn’t typically seen as a go-to destination for cheese nuts. Unlike France, the British Isles, or Italy, with their centuries-old traditions, cheese in the vast majority of Brazil is an afterthought. Supermarkets typically stock plasticky, pasteurized mozzarella, the mild and uninteresting queijo prato, or sachets of grated imitation parmesan. Imported European cheese is ignored or prohibitively expensive.

The saving grace of Brazil’s cheese culture, however, comes from the south-eastern state of Minas Gerais, particularly in the regions of Serro and the Serra da Canastra, where countless cheeses are produced that can rival much of the production of the European heavyweights. Canastra and Serro cheeses, for example, are protected by the Brazilian Historical and Artistic Heritage Institute (Iphan).[restricted]

However, the problem is that the vast majority of Minas Gerais cheese producers were hamstrung by sanitary legislation for decades, being literally illegal to sell their cheese over state lines. The law stated that any product made using raw milk could not be traded outside of its state of origin — meaning that the only cheese that made it out of Minas legally was pasteurized, paling in comparison to the taste and quality of the real thing, which was often sold clandestinely.

This changed in June 2018, with the entry into force of a law loosening rules on the inspection of cheeses, charcuterie and lunch meat. In short, oversight on these products was transferred to state authorities, and a special “Art” seal was created to regulate artisanal products.

Even so, these independent cheese producers complained that the legislation did nothing to help their small businesses and they were forced to continue to sell their products on the fringes of the law. This should change, after new rules implanted on August 19. The novel regulations will now benefit approximately 30,000 producers in 600 municipalities in Minas Gerais, who will now be able to sell their cheese to other Brazilian states.

One of the major faults of previous legislation was that only one variety of cheese from Minas Gerais was properly regulated and permitted for production and sale — now, a multitude of traditional types, made with different kinds of milk, will be given the green light.

The legislation will also allow for the use of different production and maturation techniques which were previously heavily restricted. The Minas Gerais Agricultural Research Company (Epamig) is already carrying out several experiments in the state to improve the quality of production and maturation of traditional Minas cheese, analyzing tests with different ingredients and control of maturation conditions.

International fame

While you may not yet have tasted or even heard of cheese produced in Minas Gerais, rest assured that the global cheese opinion leaders are full of praise for some of the stunning varieties made in Brazil’s Southeast. In the 2019 Mondial du Fromage competition held in Tours, France, 59 Brazilian kinds of cheese won medals — 50 of them came from Minas Gerais, of which three were awarded in the top 40 ‘Super Gold’ category.[/restricted]

Business Coronavirus

Covid-19 makes life even harder for Brazilian interns

Before the Covid-19 pandemic hit Brazil, the situation for young professionals joining the job market was already far from ideal. After emerging from what was then the worst recession in Brazil’s history, the country was grappling with double-digit unemployment levels and a growing amount of unregistered informal labor. The coronavirus crisis has come along to make this outlook even worse, while also dismantling one of the most common entryways into professional careers: paid internships.

The São Paulo Company-School Integration Center (CIEE São Paulo), a non-profit organization focused on student internships, noted a [restricted]fall of nearly 36 percent in internship vacancies for the first half of 2020. When analyzing the data through a regional lens, the plunge in opportunities hit 42 percent in Brazil’s Center-West region.

A tentative recuperation has been underway since, but results for August are set to remain 40 percent below pre-pandemic levels, according to CIEE’s national operations superintendent, Marcelo Gallo. “We are seeing a recovery since June, but it’s not going to be V-shaped,” says Mr. Gallo. 

As we have explained on The Brazilian Report, these figures corroborate the hypothesis that the Covid-19 is creating a lost generation in Brazil

Implications for the job market

While being first and foremost an important early step on the career ladder, internships also serve as teaching and networking opportunities for young professionals, meaning that the loss of these positions may result in stunted career growth across the job market. Mr. Gallo also points out that a lack of availability of internships may delay graduations, with students temporarily dropping out of education until positions become available.

For education companies, this can be a big deal. Kroton, one of the biggest private higher education firms in Brazil, the dropout ratio jumped from 6.8 percent in Q2 2019 to 8.1 percent a year later. Cogna group, Kroton’s holding, ended the second quarter with losses of BRL 140 million, a 152 percent drop versus 2019 results.

Furthermore, these programs in Brazil work as crucial sources of income. A recent CIEE study with over 17,000 Brazilian students found that two-thirds contribute to their household income using their remuneration from internships, which average at around BRL 700 (USD 130) a month — roughly two-thirds the national minimum wage. Students use this money to help pay for tuition fees, transport, and meals.

According to Brazilian law, students are allowed to work for up to 30 hours a week on paid internship contracts that may last for up to two years. While they are regulated by law, internships are not classified as formal employment, meaning students are not entitled to workers’ benefits typically found in registered contracts. As a result, companies do not need to pay severance to interns, nor pay social security taxes on their salaries, leading many firms to prefer internship programs as a form of cheap labor. 

Transition to a new normal

For Mr. Gallo, the offer of internships should pick up as the economy recovers, which he conditions to the distribution of an effective Covid-19 vaccine. But with the rise of remote working appearing to be a permanent trend, the model of internship programs will have to undergo adjustments.

“We believe that the best working model for interns is a hybrid one, with remote and in-person activities so they can interact with colleagues and supervisors, as this social relationship is important for their professional development,” notes Mr. Gallo. 

Lawmakers are also trying to remediate the development losses caused by Covid-19. Senators Mara Gabrilli and Rodrigo Cunha have recently proposed a bill to extend internship contracts from two to three years for as long as the public health emergency persists. 

“Many youngsters will lose nearly a year of their lives. It is only fair that the deadlines are extended so they can recover from the losses and get life back to normal,” wrote the senators.[/restricted]


Brazil makes concessions for U.S., despite cuts on Brazilian steel quotas

Traditionally, Brazil’s trade policy — along with almost all dealings with foreign countries — has been based on the principle of reciprocity. Raise tariffs on Brazilian goods? Expect the same to happen in return. However, this long-held credo is being cast aside during the Jair Bolsonaro government, with the Foreign Affairs Ministry led by anti-globalist Ernesto Araújo happy to make concessions to Donald Trump’s U.S. As we explained in this morning’s Daily Briefing, Mr. Araújo is pushing for a 90-day renewal of Brazil’s tax-free quota for foreign ethanol, benefiting U.S. producers — just days after Donald Trump’s White House imposed reduced import quotas on Brazilian semi-finished steel.[restricted]

According to President Trump, the measure came as a result of the slowdown of the U.S. steel industry, due to the dwindling demand during the coronavirus pandemic. Brazil’s Foreign Affairs Ministry says it is confident quotas will be lifted as economic conditions improve.

Import quotas allow Brazilian producers to sell their products to the U.S. tariff-free up to a given volume. Since 2018, the U.S.’s steel and aluminum import tariffs have risen to 25 percent, going against the rules of the World Trade Organization (WTO).

In justifying the measure announced on Friday, Mr. Trump proclaimed that shipments of steel from domestic producers fell 15 percent in the first six months of the year, and that the capacity utilization rate of U.S. firms in the sector was below 70 percent on a year-to-date basis from August 15. 

“Moreover, imports from most countries have declined this year in a manner commensurate with this contraction, whereas imports from Brazil have decreased only slightly.”

The price of steel in the U.S. fell 12 percent this year, because the Covid-19 pandemic crushed demand across all related sectors, from home appliances to civil construction. At a steel sector conference last week, American executives said that the recovery process is likely to take between one and two years. 

However, among representatives of the private sector and members of the Brazilian government, the U.S.’s aggressive move is largely down to the proximity of presidential elections in that country. They highlight that Mr. Trump’s decision on Friday was a gesture to the steel industry, which comprises important Republican Party backers and could boost his re-election chances. Throughout his term, the president has been keenly tuned to the message of protecting American jobs to the detriment of foreign imports.

Sharp Q4 downturn

Brazil is the world’s 12th largest exporter of steel products and the U.S. is its biggest market. Brazilian steel sales to the U.S. add up to an average of USD 2.6 billion a year, and around 85 percent of the total volume consists of semi-finished steel used as raw materials for American industry. In the other direction, Brazil imports around USD 1 billion in metallurgical coal and USD 4.3 billion in machinery and equipment every year from the U.S.

The Aço-Brasil Institute, representing steel producers in the country, says that the restriction will result in a sharp fall in sales for Q4 2020, from 350,000 tons to 60,000. Since April, Brazil has been working with a quota system estimated at 3.5 million tons per year, adopted in the place of a 25-percent increase in import taxes on Brazilian steel.

CNN Brasil reported that U.S. pressure on Brazil to adopt new quotas began in June, when U.S. Trade Representative Robert Lighthizer telephoned Ernesto Araújo, asking the country to voluntarily restrict its sales to the U.S. due to the reduced demand for steel caused by the pandemic. After consulting with the private sector, Mr. Araújo replied that contracts had already been signed for Q3 2020.

The Foreign Affairs Minister did not comment on these talks, but Aço-Brasil confirmed that negotiations have been in place for the last month to formalize the reduction of quotas. 

December trade talks

Brazil has already exported 90 percent of its annual quota, with restrictions now falling upon the remaining 350,000 tons to be shipped — now, only 60,000 tons may be exported, the future of the other 290,000 will be discussed in December.

In a joint statement on Saturday evening, the Foreign Affairs and Economy Ministries affirmed that, despite the reduction, tariffs on intra-quota steel would remain at zero. The same statement confirmed that the two countries will negotiate once more in December.

“The Brazilian government upholds the firm expectation that the recovery of the U.S. steel sector, the frank and constructive dialogue on the issue — to be resumed in December — and the exceptional quality of bilateral relations will allow the full reinstatement and the increase of trade levels of semi-finished steel,” read the statement, banking on Brazil’s perceived ‘special relationship’ with Donald Trump’s White House.

Measure contradicts President Bolsonaro

Belief in the existence of this ‘special relationship’ increasingly appears to be one-sided, as was exemplified in a brief meeting between President Jair Bolsonaro and President Donald Trump in September of last year, at the UN General Assembly.

While the Brazilian leader blurted out an “I love you!” to his U.S. counterpart, Mr. Trump replied: “it’s nice to see you again.”

In June of this year, in another attempt to show his closeness to Donald Trump, Mr. Bolsonaro said he had spoken to the White House and asked for an increase in export quotas of Brazilian semi-finished steel. Last week, he claimed he had solved the issue.

“Some months ago there was news that the American president was going to tax our steel and the press criticized me. I held my tongue for almost 30 days. Obviously I spoke with Mr. Trump, and 30 days later tariffs on our steel were not raised.”[/restricted]


Worst. GDP. Ever. What does the future hold for Brazil?

We all knew it would happen, but now it’s official: Brazil is once again in recession. Just a handful of years after barely emerging from its longest economic slump on record, Latin America’s biggest economy finds itself back in the red once more, as a direct result of the coronavirus pandemic. The Brazilian Institute of Geography and Statistics (IBGE) announced GDP fell an eye-watering 9.7 percent in Q2 2020 — just above market expectations but still the worst quarterly result ever recorded.

Elsewhere, industry shrank 12.3 percent in the three months ending in June, followed by a 9.7 percent drop in the crucial services sector. Agriculture was the sole silver lining, rising 0.4 percent in comparison to Q1.[restricted]

However, these disappointing results reflect the eye of the Covid-19 storm, from which economists consulted by The Brazilian Report believe the country is emerging.

“The result could actually have been much worse and the Brazilian economy is recovering faster than expected,” says Sergio Vale, chief economist at MB Associados. “That makes room for a lower-than-expected yearly drop.” Mr. Vale revised his yearly GDP predictions from a 6-percent contraction to 4.8 percent after today’s announcement.

Indeed, entering into recession had already been priced into the local market, and the benchmark stock index Ibovespa largely ignored the IBGE’s announcement, focusing instead on promises by President Jair Bolsonaro and Economy Minister Paulo Guedes to submit a public service reform by the end of the week.

Furthermore, the GDP figures come one day after the government submitted a miserly budget proposal for 2020, boosting investors who feared Brazil may break with public spending rules and increase its debt. By noon on Tuesday, Ibovespa had risen 2.2 percent.

“The GDP result was already expected,” says Marco Harbich, a strategist at Terra Investimentos and columnist at The Brazilian Report. “What matters from now on is the [government’s] commitment toward balancing the public accounts.”

Silver linings

As is often the case during Brazilian economic hardship, agribusiness stood as the solitary bright spot in a disappointing Q2 performance. The sector grew 1.2 percent year-over-year off the back of booming harvests, lower forex rates, and increasing demand. Mr. Vale adds that the Brazilian economy is highly dependent on commodities, meaning the positive momentum for the sector creates more dynamism for the entire agribusiness chain.

Lower interest rates, meanwhile, have created the conditions for resilience in the construction industry. In Q2, it saw a drop of 5.7 percent, which, while steep, far outperformed industry as a whole. Meanwhile, real estate activities rose 0.5 percent in Q2, corroborating this tentatively positive outlook, says Lucas Carvalho, an analyst at Toro Investimentos.

“As civil construction is a labor-intensive sector, this shows the possibility of faster recovery than previously expected,” he says.

Economists unanimously point toward the importance of the government’s emergency coronavirus aid program in preventing an even more severe drop in consumption. The BRL 600 (USD 112) monthly payments have become increasingly important in the revenue of Brazilian families; in July, the entire amount paid out by the federal government in benefits surpassed the salary losses suffered due to the pandemic.

Therefore, despite plans to reduce the monthly stipends to BRL 300, continuing the program until the end of the year will help support the economy in the coming months.

Recovery prospects

Since 2017, Brazil’s fragile recovery has been sustained by family consumption. Thus, the reduction to emergency aid and the weak job market spell trouble ahead. GDP figures showed proof of growing insecurity, as families’ saving ratio jumped to 15.5 percent ahead of 13.7 percent last year.

According to economists, Brazil is now faced with the task of fostering investments in order to survive, but the prospects are challenging. In the quarter, the investment rate fell to 15 percent, versus 15.3 percent a year before. Gross fixed capital formation — another important bellwether for investments in the productive sector — fell 15.2 percent in the same comparison. 

It is unlikely that such a boost will come from the government. As seen in the budget proposal delivered to Congress yesterday, the federal administration will only have BRL 96 billion available for discretionary expenses in 2021, which includes investments.

Such a scenario highlights the dire need for reform. “I believe that approving reforms will allow the government to increase investments. Reforms are essential to bringing growth back,” says Mr. Harbich. 

Mr. Carvalho believes that a reform of Brazil’s tax system would be especially important to attract both domestic and foreign investments, having a positive impact on industry and services. However, that depends on the ability of the Jair Bolsonaro administration to deliver the reforms on time.  

“The Economy Minister has promised to deliver reforms several times and now he’s overwhelming Congress with proposals that delay the process. Moreover, those are too complex discussions for online votes, and this is an electoral year,” highlights Mr. Vale. “The unstable macroeconomic environment will be more evident in 2021, especially with a government that is increasingly focused on elections and underperforming in the economy.”[/restricted]


Quarrel over social welfare policies leaves Brazil’s market rattled

After publicly scolding Economy Minister Paulo Guedes earlier this week, President Jair Bolsonaro gave him until Friday to present a new version of ‘Renda Brasil’ — a federal cash-transfer program that would replace and expand the world-renowned Bolsa Família scheme. Mr. Guedes’ initial proposal — involving scrapping other social benefits in order to fund the new policy — was shot down by the president, who complained that he “wouldn’t take money from the poor to give it to the paupers.”

This provoked jitters in the market and Friday is set to be a rocky day for investors as the deadline approaches. Over the past 18 months, the Economy Minister has made a habit of missing due dates — but this time, analysts fear that the wedge between Messrs. Guedes and Bolsonaro might be growing, with the political and social need for increased public spending clashing with the government’s lack of funds.[restricted]

As our August 25 Daily Briefing explained, the government’s military wing has pushed for a major plan to foster growth by way of infrastructure projects, job-creation programs, new housing policies, and beefed-up cash transfers to vulnerable populations. But the president and Mr. Guedes — a quintessential deficit hawk — were unable to agree on the specifics of the program. The Economy Minister has stressed the government’s need to respect the federal spending cap, which limits public expenditure increases only to meet inflation of the previous year. 

Even orthodox economists have said the cap did not factor in the possibility of a pandemic-related crisis, saying that austerity measures right now could lead to a humanitarian crisis. The government’s emergency aid payments have accounted for 97 percent of the revenue for Brazil’s poorest 10 percent. They have also made President Bolsonaro more popular than ever.

Agonized markets want Guedes in charge

The anticipation for the announcement has rocked markets — observed in the sheer volatility of Brazil’s benchmark stocks index this week. 

Rumors about the government’s proposal have bounced around the country’s financial districts, with information often being intentionally leaked by the government to test the waters. One plan would see Bolsa Família’s monthly payments increase from the current level of BRL 190 to BRL 250 (USD 45) per family. That would come with a price tag of BRL 22 billion per year, which the Economy Ministry plans to fund by cutting a program offering free and discounted medication to treat the population’s most common health conditions — mainly diabetes, hypertension, and asthma.

Camila Abdelmalack, chief economic at Veedha Investimentos, explains that markets would welcome a welfare policy capable of increasing consumption, but says that Renda Brasil — as it is currently being designed — would include more families and more money, which creates a need for increased fiscal room. “That’s why the markets are wary […], because the government has no money to fund [this new program],” she tells The Brazilian Report.

In an attempt to create a social legacy for the Bolsonaro administration and comply with the spending cap, Renda Brasil is said to include several proposals to limit public spending and reshape the federal budget. The goal is to make it more manageable than it is today, with over 90 percent of funds earmarked for so-called ‘mandatory expenses,’ which involves salaries and pensions.

Another important point is the possibility of unpegging benefits from the minimum wage, which is annually raised according to the inflation rate. That alone could free up to BRL 16 billion.

Marco Harbich, a strategist at Terra Investimentos and columnist at The Brazilian Report, says the ultimate goal is “to invest without poking holes in the spending ceiling, which would send a message of zero fiscal responsibility to foreign investors.”

Fears of a federal spending spree have affected Brazil’s 5-year Credit Default Swaps (CDS), considered as a measure of a country’s likelihood of default. CDS jumped from 212.800 points on August 26 to 223.000 points on August 27.

The government needs cooperation from Congress 

Lowering public spending and changing the way the budget works are only a few of the proposals that would require congressional approval. However, they would require constitutional amendments, which need a two-thirds majority in each congressional chamber in order to pass.

For political scientist Leandro Gabiati, a director at Dominium Consultoria, the government’s coalition is strong as ever — but that doesn’t mean it will be easy to approve such a broad set of policies. Even less so considering the municipal elections later this year.

“If the government manages to be more organized, it shouldn’t have a tough time with economic matters in a liberal-leaning Congress. But lawmakers are shifting their attention from parliamentary issues to municipal elections, in the short-term, and the races for House Speaker and Senate President, in the long run. That leaves little room for debate,” he tells The Brazilian Report.

Does Guedes stay or go?

For the past week, rumors about a rift between Jair Bolsonaro and Paulo Guedes have once again surfaced. However, hearsay has so often been mixed up with genuine information — Mr. Guedes is not a popular figure in Brasília (or even within the administration, for that matter), and many of those who spread rumors about his imminent departure are those who would fancy themselves to replace him as the government’s economic tsar.

Since the first moments of the Bolsonaro administration, talk of a Guedes-Bolsonaro schism have been rife. But the cabinet minister has stayed put, and claims he has no plans to resign.

Regardless, the scuttlebutt never fails to rattle markets, given Mr. Guedes’ position as guarantor of the sitting government. He is seen as the only thing preventing the administration from ballooning spending without regard for austerity guidelines. Unless, of course, another deficit hawk were to get the keys to the economy in his absence.

“If his replacement — were Mr. Guedes to leave — was someone like Central Bank Chairman Roberto Campos Neto, nothing changes. It would be a signal that a pro-market tradition would continue, despite President Bolsonaro’s own personal beliefs,” says Mr. Gabiati.[/restricted]


Lack of black leadership in Brazilian startups reduces opportunities

When Sergio All, a black Brazilian entrepreneur in the advertising business, tried to take out a loan to upgrade his firm’s equipment many years ago, he was turned down by his bank, despite having been a client for years. The bank failed to provide an adequate reason as to why he was rejected. Indeed, the ‘no’ received by Mr. All is a recurring phenomenon across Brazil. According to a survey published in 2019, developed by Pretahub in partnership with JPMorgan and Plano CDE, one-third of black entrepreneurs in Brazil reported being turned down for loans for no reason. 

However, that ‘no’ was the spark that eventually led to the creation of Conta Black, a Brazilian fintech focused on addressing financial exclusion for the segments of society historically denied access to the banking system.[restricted]

Founded in 2017, Conta Black now has around 10,000 clients, targeting individuals from Brazil’s C, D, and E socio-economic classes, corresponding to lower middle-class and below. In order to open the digital account, clients are not submitted to a credit score analysis, which other banks — both traditional institutions and fintechs — generally require. 

The Global Findex Research, conducted by the World Bank in 2017, estimated that around 30 percent of Brazilian adults still do not have bank accounts. One of the premises of Conta Black is precisely to be as accessible as possible, seeking to integrate the share of Brazilians that are excluded from traditional banking services, as co-founder Fernanda Ribeiro explains to The Brazilian Report.

“The first version of Conta Black, back in 2017, was not an app, it was home banking, focused on the population that does not own smartphones and couldn’t download mobile applications to use the service,” she recalls. Today, Conta Black does operate through a smartphone app, but the company has a constant concern to keep the software as lightweight as possible. 

The push for black leadership 

For Ms. Ribeiro, who is also the president of NGO AfroBusiness Brazil, the presence of black professionals — as well as women and people with disabilities — in leadership and decision-making roles in fintechs and startups has a direct impact on making the segment more diverse, affecting who these services will reach, and how.

But the financial sector itself still stands in the way of diversity, as black entrepreneurs and business owners continue to have difficulty accessing credit.

This was one of the motivations behind founding AfroBusiness Brazil, which Ms. Ribeiro defines as a “network of entrepreneurs, micro-entrepreneurs and self-employed profissionals.” Today, the NGO connects 8,000 business owners around the country. 

The aim is to create networking and connections seeking to “economically emancipate the black population,” she says. In the discussions, black entrepreneurs reported a similar situation as Sergio All had faced years before. 

One of AfroBusiness Brazil’s fronts of action is to connect black entrepreneurs to each other — to foster the circulation of so-called ‘black money’ — but also to connect these entrepreneurs to larger companies. In this process, the people sitting on the other side of the table were generally white. 

“When we spoke to the people responsible for purchases, when we looked at the leadership, it was generally composed of white people. The people on the decision board were generally white,” says Ms. Ribeiro. “And when we looked into the overall employees, black people were there as interns on what we call the ‘factory floor,’ rarely in leadership roles.” 

Making space of black leadership in startups

The process of promoting and increasing diversity in fintechs is ongoing, but there is a long road ahead. While there are plenty of upcoming initiatives developed by black professionals for black professionals, the startup and fintech segment still has work to do to foster changes from the inside out. 

Since 2019, Brazilian fintech Nubank has an initiative called NuBlacks, defined as a “community to share experiences, to welcome and to create an environment for discussion and experiences related to afro-Brazilian culture,” according to the company’s website. 

But more important than generating discussions is to generate negotiations, by having goals and a dedicated budget, says Ms. Ribeiro. “When I say money, I mean many different things. First, investment in startups, in businesses led by black people. Then, investments in a more diverse value and supply chain, investments in educational programs within companies and investments to bring black professionals into leadership roles,” she explains.

Another bottleneck mentioned by Ms. Ribeiro is the lack of data on diversity within fintechs and startups, making a more precise diagnosis of the situation difficult. Recently appointed to the role of head of diversity in the Brazilian Fintech Association (Abfintech), she plans on proposing a comprehensive survey of the segment as one of her first actions.[/restricted]


Brazilian retail investors set to have access to global stocks

Brazil’s lowest-ever benchmark interest rates propelled the number of individual investors trading on São Paulo’s B3 stock exchange to triple to almost 3 million in the past twelve months. Not even the pandemic sell-off and the fact that benchmark stock index Ibovespa remains in the red have scared the newcomers away. At the same time, new Brazilian investors are becoming keener on diversifying, which fuels regulatory responses to make markets more accessible, including foreign assets. In the latest move in this direction, the Brazilian Securities Commission (CVM) has decided to allow ordinary retail investors to purchase Brazilian Depositary Receipts (BDRs) as of September 1. [restricted]

These are negotiable instruments traded on B3 and backed by shares of foreign companies. 

Previously, only qualified investors with more than BRL 1 million in net worth had access to these stock equivalents of global giants such as Alphabet, 3M and Coca-Cola. Now, regular Brazilian investors will also be able to increase their exposure to foreign economies and get protection from local market swings, as BDR prices also take forex rates into account.

In a press statement, CVM chairperson Marcelo Barbosa said the new rule “provides investors and issuers with more freedom, in the wake of a growing demand for portfolio diversification and lower interest rates.”

However, it is important to note that it might take a little longer for BDR trading to be available for all investors, as B3 will require approval from the securities commission to change its internal regulations. According to newspaper Valor, stock exchange managers believe this could happen by the end of September, but no dates have been confirmed. Also, brokerages need time to include the assets in their home broker systems.    

In a recent column, Levante Investimentos stocks expert Eduardo Guimarães considered the availability of BDRs to be a “second wave of growth in the share of variable income in Brazilians’ net worth,” despite minor timing issues.

Fishing in a tiny pond

According to data by Economatica, the average daily trading volume of BDRs has been on the rise in 2020, reaching BRL 59.8 million per day — a 267-percent increase on 2019’s daily average. In March, volumes peaked at BRL 75 million. The vertiginous devaluation of the Brazilian Real this year has bolstered BDRs’ performance, but volumes spiked 190 percent even in USD terms. 

Nevertheless, the BDR market remains far less active than Brazilian stocks. As a comparison, AMZO34,’s BDR — which Economatica rates as having the highest liquidity — trades only BRL 3.7 million per day; meanwhile, negotiations of shares of domestic retailer Magazine Luiza top BRL 1 billion during the busiest trading sessions. 

It is worth mentioning that BDRs are often more expensive than Brazilian stocks. AMZO34 was worth BRL 8,700 as of August 17, and a standard lot currently consists of 10 BDRs. B3 is reportedly considering the creation of a fractional market to make these assets more accessible.  

As reported by magazine Exame, B3 will use market makers — institutions that trade their own stocks to provide liquidity to developing markets — to boost BDRs. Still, analysts believe that it may not be enough, especially considering that many brokerage companies are directly offering accounts to Brazilians in the U.S. 

“It helps to have a market maker, but liquidity will always be bigger abroad. So, the variation of BDRs will never be exactly like the stocks themselves. It’s subject to what investors are willing to pay,” said analyst Victor Savioli. 

In his report, Mr. Guimarães points out liquidity as an issue, saying it may take a little longer for BDR trading to pick up steam. He also mentions that there may be language barriers, and investors could be overwhelmed with the vast array of options available. Still, he believes that the appetite for technology stocks such as the FAANG group (Facebook,, Apple, Netflix, and Google) and the increased access to financial education may drive up the demand over time. 

What’s next for investors?  

Companies such as Guide Investimentos — one of the largest independent brokerage firms in Brazil — have already pledged to make BDR trading available on their home broker platforms and publish theoretical portfolios for clients who wish to invest in them. 

Also, the changes mean Brazilians will have access to local tech companies that preferred to be listed abroad, with the most famous case being financial services firm XP, Inc. In December, when the company became publicly traded in New York, it was heavily criticized for not allowing the majority of its customers to become shareholders. Later on, it created a fund offering its shares to meet the demand. According to XP, Inc.’s Chief Financial Officer Bruno Constantino, the company will list its BDRs on B3 as soon as possible, reports InfoMoney.  [/restricted]