How Will Dollar Appreciation Against the Real Impact Brazil’s Economic Recovery?

Internal political uncertainty and US rising interest rates have caused a two and a half year high of the dollar to real exchange rate. The dollar’s appreciation, in turn, has caused concern regarding Brazil’s economic recovery – which has been driven by its internal market – given its pressure on inflation and the possible decrease in consumption as products become more expensive.

On September 5, the dollar hit a two and a half year high against the real closing at R$ 4,14 – the highest level since January 2016. Throughout the past few months, the dollar continued to rise and exchange offices were selling the tourism dollar – dollars sold directly to consumers – at R$ 4,32. Since January 2018 the dollar has appreciated 25% against the real.

International and domestic factors

On the international front, the dollar’s appreciation was caused by higher yields on U.S. Treasury securities which rose to 2% and continuous fear of a trade war between the US and its trade partners. Additionally, the Federal Reserve may continue its interest rate increase to contain inflationary pressures due to economic growth – especially in US retail sales. The concern is that an increase in retail sales may increase inflation, and in order to contain this increase, the Federal Reserve would likely increase interest rates even further.

High interest rates in the US – deemed the safest market in the world – have the potential to attract resources from other emerging market countries, such as Brazil.

In Brazil, the appreciation of the dollar can also be explained by the continuous volatility in the presidential polls. Last week, the Superior Electoral Court (TSE) voted to deny Lula da Silva from running under the Clean Slate Law – as of the latest August poll Lula was polling first with 39%. After the TSE decision, a new poll was published on September 5 without Lula; Jair Bolsonaro is now first with 22%, followed by Marina Silva 12%, Ciro Gomes 12%, Alckmin 9%, and Haddad 6%. Doubt remains as to whether the next government will make the necessary economic reforms to reach fiscal balance.

Alongside the dollar pressure, the Brazilian economy continues to underperform with 1.1% growth so far in 2018. This indicator is far worse than what was expected, causing economists at financial institutions to revise the GDP growth to 1.44% for 2018 – earlier in the year the expectation was 2.70%.

Brazilian Central Bank

So far in order to intervene, the Central Bank has held a number of foreign exchange swaps, equivalent to the future sale of dollars. In its latest round, on August 30, the total offer was $1,5 billion.

On August 1, the Central Bank’s Monetary Policy Committee (Copom) decided to keep interest rates at 6.5%, signalling caution due to the volatility of the external scenario.

The Selic rate is used to keep inflation within its target to control prices of goods and services – when inflation is low the Central Bank lowers the Selic rate to boost economic activity, and when inflation is high they increase the Selic to encourage people to consume less to remove reais from the market (sometimes increasing unemployment). Financial analysts project inflation at 4.16% for 2018.

Despite this volatile scenario, Minister of Finance, Eduardo Guardia, and Central Bank President, Ilan Goldfajn believe that Brazil will not face the same difficulties as its neighbour, Argentina, since Brazil has low levels of foreign debt, high international reserves, opportunities to sell future dollar contracts, and stable foreign investment inflows.


The dollar’s appreciation has a direct impact on the pockets of Brazilians. Uncertainty in the presidential elections polls and a need for security has caused investors and Brazilian tourists to buy more dollars, which in turn increases the price of the dollar even more.

In addition, it causes an increase in prices of goods and service and puts pressure on inflation, as many parts of the final goods are imported using U.S. currency – especially true for the electronics industry as well as food such as bread and pasta since wheat tracks the price of the dollar. In addition, the price of oil is likely to continue to increase due to tensions between Iran and the United States. If the dollar rises too much too quickly, it creates concern of boosting inflation in Brazil – something that if relatively moderate would not be considered too negative given its low 2017 and 2018 rates.

Inflation may also be passed along to products that do not use imported parts as some goods are traded in dollars for export and Brazilian exporters will have to adjust their prices in order to make a profit.

In regards to tourism, the appreciation of the dollar comes with positive and negative effects. On the negative side, vacations for Brazilians looking to go abroad became extremely expensive. On the positive side, international travellers may be attracted to come to Brazil due to its weak real which in turn can boost the tourism industry activity and improve some parts of the economy.

Overall, an increase in the price of the dollar is set to delay economic recovery in Brazil, especially as safe countries like the United States become more attractive to investors.


Lorena Valente is an Associate at Promontory Financial Group, an IBM company.

Pre-Salt Auctions: Brazil’s Oil Industry Is Back In Business

Four years after the first pre-salt auction in 2013, Brazilians have a reason to celebrate. The country raised 6,15 billion reais ($1.88 bn) in the second and third rounds of auctions, proving that the country can still attract foreign investors.

In November 2007, state-owned oil firm Petrobras discovered large amounts of oil in the earth’s pre-salt layer, off the coast of Sao Paulo and Rio. These resources are located beneath about 4,000 meters of salt, sand and rock. The discoveries were seen as a turning point that would allow Brazil to emerge as a major oil producer.

Ten years later, investment and development in these pre-salt areas is still lagging. However, the recent auction rounds of eight pre-salt blocks, which hold an estimated 12 billion barrels of oil, prove that the country is moving in the right direction. The firstround, in the Libra area, came in October 2013. It took place under the previous auction model, which stipulated that Petrobras serve as the sole operator with a minimum 30% stake.

New rules and competing views

Due to significant energy reforms, the 2017 auctions are more market friendly and open to foreign investment than the previous auctions. The new rules for the auctions going forward are: 1) Petrobras is not required to be the sole operator in pre-salt production projects; 2) revision to local content rules; and 3) expansion of Repetro (Special Customs Regime applicable to the export and import of goods used in the exploration and drilling for oil and gas reserves). These pro-market regulatory changes have ultimately driven greater international interest in Brazil’s pre-salt blocks.

Currently, there are two competing views of how best to structure oil contracts with foreign corporations to maximize profit for Brazil. Under the concession model, the company that offers the highest signing bonus to the government is awarded the contract. Under the production sharing model, the company that offers the highest percentage of oil profits to the government is awarded the contract.

In general, foreign companies favor the concession model, viewing it as less complicated.Rodrigo Maia, the Speaker of the House, has expressed that he plans to arrange a full review of the current production sharing regime, as he believes that a concession regime would earn the government more revenue.

It is still unclear which model will earn the Brazilian government more revenue. While the initial payout under the concession model is higher than under production sharing, upcoming payments to the government in both cases are highly dependent on future oil production, prices and consumption.

Pre-salt auctions

The auction on 27 October was delayed due to a federal judge’s injunction, which claimed the auction would cause a loss to public assets. However, supporters such as the Minister of Mines and Energy, Fernando Coelho, expressed that it was a “tremendous success” upon completion.

The Brazilian National Agency of Petroleum, Natural Gas, and Biofuels (ANP) offered eight pre-salt blocks, in the Campos and Santos basins, and raised 6.15 billion reais, 20% less than the expected 7.75 billion reais. Two of the eight available blocks did not receive offers. Eleven companies from nine countries won blocks, while Petrobras and Shell each won three of the six as part of consortiums.

Two American companies participated, although only one won a block, and three Chinese companies won with consortiums. The number of foreign companies in the auction was surprising, given the current low price of oil, indicating that pre-salt areas remain attractive to foreign companies due to their potential for high productivity.

Under the current production-sharing regime, there is a fixed signing bonus for each area. The Brazilian government awards the contract to whoever offers the highest percentage of profit-oil above the required signing bonus. The percentage of profit-oil exceeded 200% of the minimum requirement, making the auction a success not only due to the high signing bonus, but also because of the level of foreign investment captured.

Furthermore, even though two areas did not receive offers, this high percentage means the government will be able to collect more revenue in the future. The ANP predicts that the eight blocks will generate U$36 billion in investment and U$130 billion in royalties. The profits and income taxes generated from production will help with the government’sfiscal problems and create jobs for the local population.

Regulatory success

Brazil produces 2.6 million barrels of oil per day and is aiming to almost double that amount to 5 million by 2027, making it the world’s fourth largest oil producer at current rates of production. The ANP expects that all the wells offered in these auctions should enter production stage within 5-7 years from the auction date and that the blocks that did not receive offers will be auctioned off at the next opportunity.

Currently, foreign firms are responsible for 21% of total production of oil and liquefied natural gas (LNG) in Brazil, and their participation is expected to increase to 30% in 10 years. Despite this, Petrobras’ significant role in the auction indicates that it is unlikely to lose its predominance in Brazil’s oil sector. Still, the auction showed that the regulatory changes have been well received by the market and that foreign firms are once again willing to invest in Brazil.

Lorena Valente is an Analyst at Global Risk Insights. As originally appears at:

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

How Market-Friendly Are Brazil’s 6 Presidential Candidates?

Brazil’s resilience has been put to the test in the last couple of years. The country has faced its worst economic recession, the impeachment of President Dilma Rousseff, and corruption accusations against its current president, Michel Temer. The 2018 presidential election is set to be the “election of hope” for the people of the country, but so far the race is wide open. GRI’s Lorena Valente gives a rundown of the candidates and their views on the economy.

2018 election outlook

The first round of the presidential elections will take place on 7 October 2018 and a potential run-off would occur on 28 October 2018. All 513 Chamber of Deputies congressmen and 54 out of 81 senators will also be elected in 2018.

In a country with mandatory voting, a polarized electorate, and well-known figures and outsiders running for president, the results are still unpredictable. If the economy maintains low inflation, low interest rates, and higher employment, then a more market friendly and pragmatic candidate may win.

The two key factors influencing the outcome will be whether moderate voters are able to unify behind one name, and if Lula will be able to run.

On 30 October, the pollster Ibope released its latest numbers for the 2018 presidential elections, even though not all candidates are yet official. Leading the polls is former president Lula with 35% of the voting intention, followed by Jair Bolsonaro 13%, Marina Silva 8%, Geraldo Alckmin 5%, Luciano Huck 5%, Joao Doria 4%, and Henrique Meirelles at an impressive 0%.

This in turn yields a couple of scenarios. The first, a run-off between Lula and Bolsonaro, would yield unpredictable results. In a second scenario without Lula, Bolsonaro and Silva would tie with 15%, followed by Huck 8%, Alckmin 7%, Doria 5%, and Meirelles with 1%.

Candidate profiles

With the election less than a year away, the market is starting to express its preference for candidates Henrique Meirelles, Joao Doria, and Geraldo Alckmin. If any of these three is elected, the stock market is expected to rise and the currency to remain stable. Conversely, if Lula is elected, 96% of investors polled by XP Investments believe the stock market will fall sharply and 98% bet on the devaluation of the real.  Even Bolsonaro is currently polling at decent levels with the market, proving that at this point, anyone is better than Lula.

Luiz Inacio “Lula” da Silva, 71 (Car Wash)

Party:  Worker’s Party (PT – left)

Profile: The former president of Brazil ruled under the good old days of a commodity boom and inherited the positive impact of President Fernando Cardoso’s policies. He would later make Dilma Rousseff his successor. While he was able to lift many out of poverty during his two terms, he is largely blamed for Brazil’s economic recession, given his uncontrolled spending.  On 12 July 2017, Lula was sentenced to nearly 10 years in prison for passive corruption and money laundering – he is also a defendant on six other ongoing cases.  It is still uncertain if he will be able to run due to legal restrictions. If Lula’s sentencing is confirmed by the TRF4 before 15 August 2018  – the day parties register their candidates – he would technically not be able to run under the Clean Slate Law. However, there are still enough unknowns that Lula’s candidacy can’t be ruled out: there may be changes to the Clean Slate Law; the Judiciary could alter the rules around sending to prison individuals who are condemned by two courts; and the TRF4 judges may not resolve the case in time. Meanwhile, Lula is in full campaigning mode, rallying big crowds and threatening to “defeat neoliberalism”.

Economic views: Lula has a history of increasing the role of the state. During his presidency he focused on creating social programs, such as Bolsa Familia, however, his uncontrolled spending accelerated a fiscal imbalance that later caused Brazil to lose its investment grade.

Market friendliness rating: 2 out of 5 (with 5 being the most market friendly)

Marina Silva, 59 (Third Time’s a Charm)

Party: Rede Sustainability (Rede – center left)

Profile: The former Worker’s Party senator, and Minister of Environment under Lula, finished third place in both the 2010 and 2014 presidential elections under a “green platform”. While she did well in previous elections, many believe she lacks durability in the political sphere. Due to size of her party she is likely to have very little TV and Radio campaign time, which may hurt her visibility. Silva has not yet announced her candidacy but there is speculation that to improve her chances, former president of the Supreme Court, Joaquim Barbosa, could join her ticket as vice president.

Economic views: Silva has previously run on platforms where the environment and sustainability are the priority – believing that the economy should bend to favor those policies. She has been vocal about being against the pension reform that many see as fundamental for balancing the country’s budget.

Market friendliness rating: 2.5 out of 5

Jair Bolsonaro, 62 (Brazil’s Donald Trump)

Party: Social Christian Party (PSC – right)

Profile: The congressman that has served in congress for 27 years released his candidacy through the PSC but is expected to switch to Patriot (PEN – right) by March 2018. Bolsonaro is known for extremist opinions on guns and God, public security, hardline law and order, and adoration toward the military dictatorship (1964-1985).  He was captain of the Armed Forces during the 1964 revolution. Recently, he was accused of making sexist comments to a congresswoman.

Economic views: Bolsonaro has publicly expressed that he is not knowledgeable on economic issues. Nevertheless, since starting his presidential pursuit he has said that he favors a liberal economy with little intervention from the state and an independent central bank. He will likely rely on whoever is chosen to join his economic team.

Market friendliness rating: 3 out of 5

Geraldo Alckmin, 64 (Brazil’s Hillary Clinton)

Party: Brazilian Social Democracy Party (PSDB – center right)

Profile: The current governor of Sao Paulo represents the establishment and is very well liked in his state; however, he is not well known in the rest of Brazil and lacks charisma. In 2006 he lost to Lula in the presidential election by a landslide. Alckmin has been able to improve security in the state of Sao Paulo dramatically since taking office. His party is currently divided between him and his colleague, Joao Doria (below) on who should run under the PSDB ticket. A nomination from the PSDB is likely to come by early January. The intention of vote toward Alckmin and Doria is probably interchangeable – if one doesn’t run, the votes for the other should transfer.

Economic views: Alckmin has proven himself as a great administrator of the richest state in Brazil – Sao Paulo accounts for around 33% of Brazil’s GDP. In 2006, he ran under a platform that emphasized a balanced budget and encouraged initiatives to foster small and medium enterprises to boost economic growth.

Market friendliness rating: 4 out of 5


Joao Doria, 60 (The Market’s Best Friend)

Party: Brazilian Social Democracy Party (PSDB – center right)

Profile: The current mayor of Sao Paulo is a successful businessman and millionaire that has marketed himself as the voice “anti-Lula”.  His years in the private sector have led him to favor business friendly policies and reforms.  So far, he has sworn loyalty to Geraldo Alckmin, who he claims is his political Godfather, and says he will not run for president. However, Doria has been seen in talks with other parties in case he doesn’t get the PSDB nomination, particularly the Democratas (DEM – center right).

Economic views: Doria has expressed his support for little state intervention to increase efficiency. In Sao Paulo, he has set up an expansive privatization plan that also encourages concessions and public private partnerships. He has also set up presentations to foreign companies in order to emphasize all the good opportunities for private investment in the city.

Market friendliness rating: 4.5 out of 5


Henrique Meirelles, 71 (The Man Behind Brazil’s Recovery)

Party: Social Democratic Party (PSD – center)

Profile: The current minister of Finance and former president of Brazil’s central bank is the voice behind Brazil’s economic recovery and is highly in favor of pension reform to start the effort to fiscal balance. Meirelles is well established in the private sector as the former global president of BankBoston. Right now Meirelles has not officially launched his candidacy and has claimed that his focus in on recovering the Brazilian economy while he is still minister of Finance. If the economy continues to go well he has a good chance, however, his support for an unpopular pension reform may deter people from voting on him. He has expressed that he would be honored to receive a presidential nomination from his party.

Economic views: Throughout his career he has demonstrated the pillars of economic liberalism. Meirelles favors an independent central bank, balanced budget, privatizations, efficiency, and has worked relentlessly toward controlling inflation. Additionally, he fully supports the reduction and simplification of taxes as well as pension reform.

Market friendliness rating: 5 out of 5

Footnote: The surprise candidate

Luciano Huck, a TV presenter and businessman, has started to market himself as dedicated to transform the country. Even though he has not announced his candidacy, he is in talks with the DEM and the Popular Socialist Party (PPS – center left). He is well known for his liberal economic and social views and is liked by people who want something new.


Lorena Valente is an Analyst at Global Risk Insights. As originally appears at:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

What Needs To Happen For Brazil To Get Pension Reform Passed?

While Brazil’s economy shows signs of sustained improvement, the government needs to implement a substantial pension reform to counter the fiscal risk generated by an aging population.

Current state of Brazil’s economy

After two years of economic recession, the Brazilian economy is finally showing signs of recovery amidst a continuous political crisis. Since officially taking office in August 2016, President Michel Temer has prioritized the implementation of a broad austerity package to include spending cuts and a series of reforms meant to stabilize Brazil’s fiscal position and promote greater economic growth.

As of October 2017, Brazil’s inflation rate is at a low 2.54% and is expected to close 2017 at 3.06%, while its interest (Selic) rate is currently at 7.5% and expected to drop to 7% by the end of 2017 as monetary easing continues. At the same time, the dollar has remained stable around R$3.16 – R$3.24, the commercial balance is positive, and the stock exchange has reached an all-time high of 76,000 points. Consumption has finally picked up again and unemployment has dropped from 13.7% in March 2017 to 12.6% in October. Due to these positive economic trends, Gross Domestic Product (GDP) is expected to grow 0.73% in 2017 and 2.5% in 2018.

While Brazil’s macroeconomic indicators are promising, especially compared to its 2015 numbers (inflation at 10.67%; Selic at 14.25%; dollar at R$3.91), they alone cannot mend the 7.2% drop in GDP from 2015-2016. In order for the Brazilian economy to return to long term sustainable growth and establish fiscal balance, the government must address a pension reform.

Fiscal problems

In 2017, Brazil ran a R$159 billion primary deficit – R$20 billion above its previous target. Fiscal imbalance occurs when government expenditure exceeds revenue generated from taxes and concessions, among others. Even though low inflation means higher purchasing power for the consumer, it also means that government tax revenue suffers. Because the government’s spending level is set and revenues have been lower than expected, its accounts don’t match.

To mitigate the current fiscal problem, the government approved a Constitutional Amendment (PEC) that capped year-on-year spending increases at the inflation level from the previous year. For instance, in 2018 spending can only increase around 3% in relation to 2017 (3% being expected inflation at the end of 2017).

According to Minister of Planning, Dyogo Oliveira, pension payments, which account for 57% of primary spending and 13% of its GDP, must be reformed in order to address the fiscal imbalance.

Brazil’s urgent need for pension reform

The already high cost of pensions along with Brazil’s aging population means that soon the government will simply not be able to pay. According to the Brazilian Institute of Geography and Statistics, in 2060 the elderly will represent one third of the population, and as a result pension spending will increase to 23% of GDP. To continue paying retirees while investing in other areas, the government must pass pension reform.

While the original pension reform framework was more robust, the Executive Branch and the Minister of Finance have expressed that they would accept a watered-down versionthat only includes three points: minimum age, duration of contribution, and transition rule.

Initially, the reform aimed at addressing the discrepancy between public servants and private sector retirees – the former receive seven times more benefits than the latter. It costs the government almost the same amount to take care of 32.7 million private sector people, compared to just 980,000 public servants. However, Temer faced a tremendous amount of pressure and had to give up his attempt to create a more equal pension reform.

In the watered-down version, the most important point is that it establishes a minimum retirement age of 65 for men and 60 for women, with a requisite 35 years of contribution for men and 30 for women in order to receive benefits. This would cut the deficit by forcing government employees to retire later, allowing for more government revenue and less pension expenditure. However, this would obviously be unpopular with the general population. Unfortunately, while economists agree that pension reform is needed for economic growth, the government has not effectively messaged this to the public and in so doing hurt its odds of passage.

Obstacles to pension reform

Following the 26 October Chamber of Deputies vote to bar a second set of charges against President Michel Temer for obstruction of justice and racketeering, pension reform should now be the next priority item on the agenda. But many congress members believe that Temer has expended all of his political power and will become a lame duck president for the rest of his term.

Further, even if the bill is put to vote in the Lower House many congress members have expressed reservations, because voting for such an unpopular bill will have negative repercussions during their 2018 reelection campaigns. Additionally, congress does not seem too keen on voting on a reform that might affect colleagues in the judiciary, federal police, armed forces, not to mention their own retirement.  The pension reform’s window of opportunity is rapidly closing as it is unlikely that such a reform would be voted on in 2018 due to the election year.

On the other hand, the current leadership has no intention of running for reelection in 2018 and has indicated that it is ready to apply the necessary political pressure to pass the reform by the end of 2017. Even if the final reform package is a watered down version of its former self, it will at least show investors and financial markets that the country is serious about its fiscal management. As is, the pension system is unsustainable in the medium and long-term.

What now?

Because pension reform is a Constitutional Amendment (PEC) it requires 308 votes out of 513 in the Lower House and 48 out of 81 in the Senate. The PEC would need to be approved by two-thirds of the Lower House by the end of November and, once approved, it would move to two votes in the Senate which must occur by 22 December 2017 – the last day of the legislative year. Minister of Finance, Henrique Meirelles, believes the pension reform will come up in the second half of November for a vote in the Lower House.

Pension reform will not only allow the government to sustain the retirement of future generations, but will also show financial markets that the government is committed to fiscal management. Only then will rating agencies start to think about increasing Brazil’s investment grade, which hasn’t been positive since 2011.

Domestic and foreign investment is desperately needed to boost productivity and create jobs in a country that lacks in infrastructure and human capital. Without it, the disparity between spending and revenue levels will continue to generate a deficit and eventually decrease investment and cause capital flight, while also increasing interest rates due to the higher risk premium, inflation, and unemployment.

Brazil must move towards sustainable long-term economic growth. The country cannot afford to wait much longer to make a change, as it has proven over time that there is no such thing as too big to fail. If the pension reform is not approved now, the next president will have to push for a much tougher reform in 2019.



This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.