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.

Brazilian ‘Trump’ Shakes Up Election Race By Campaigning As Illberal Outsider

A right-wing, Trump-like populist, tough on law-and-order but with apparently few answers to the country’s economic ills, is leading the polls in Brazil’s presidential election race, appealing to many Brazilians tired of the ineptitude and corruption that has become synonymous with the political establishment.

In one of the most unpredictable electoral contests for years, seen by pundits as a battle between left- and right-wing candidates, Jair Bolsonaro, a former army captain-turned-congressman, is making serious strides. Long on the edge of politics on account of his controversial views, he is polling at around 20 percent – several points ahead of his nearest rival – in the run-up to the October ballot, notably receiving significant support from the country’s influential farming and evangelical Christian lobbies.

With many establishment politicians discredited by a long-running investigation into an alleged bribes-for-contracts affair involving the state oil company, Petrobras, and also blamed for the worst economic recession since the 1930s, Bolsonaro has seized the opportunity to break through into the political mainstream. His anti-corruption and tough law-and-order rhetoric – he proposes more powers for the security forces and easing gun laws to deal with soaring crime – resonates with large numbers of Brazilians.

However, Bolsonaro’s illiberal remarks have alarmed democrats. He has defended Brazil’s former military dictatorship and in April the attorney general said he promoted hate speech by attacking women, homosexuals, black people, indigenous Brazilians and foreigners. Some commentators suggest Bolsonaro could stoke social conflict if elected. The prospect of a right-wing populist, compared by some to Donald Trump, at the helm of the world’s eighth-largest economy is being taken seriously. It comes at a time when many Brazilians are losing faith in democracy. Polls have reportedly shown that over a third would support a coup to deal with crime and corruption.

Yet his chances of winning may be limited by two important factors. Though Bolsonaro has a much bigger social media profile than his rivals, he needs TV exposure in the run-up to the ballot, as political broadcasts remain a powerful campaigning tool. A member of the small Social Liberal Party, he will have to start building coalitions to be allocated sufficient airtime to reach out to Brazilians, many of whom are undecided. Moreover, he could yet be eclipsed by a left-wing rival because a sizeable proportion of floating voters will back whichever candidate is endorsed by the jailed former socialist president Luiz Inacio Lula da Silva, still very popular despite his conviction for corruption.

Bolsonaro’s emergence coincides with Brazil’s stuttering economic recovery. Beleaguered center-right president Michel Temer’s attempts to resuscitate the economy have flagged as he fights off bribery allegations. Though he denies them, the claims have contributed to his plunging opinion poll ratings, leaving him the least popular Brazilian president on record.

Temer, in power since the impeachment of Lula’s socialist successor Dilma Rousseff for manipulating government accounts two years ago, has introduced some significant reforms – including long-term caps on public spending. But he has failed to overhaul the country’s bloated pension system and his ambitious privatization programme has received a setback, with plans to sell off the state power company, Electrobras, meeting Congressional resistance.  Temer has helped to steer Brazil back to growth, yet he has struggled to close the gaping budget deficit and inflation and unemployment are stubbornly high.

The president, who is unlikely to stand for re-election, saw his stock fall even lower recently when he was forced into a climb-down over a national truckers’ strike staged in protest at rising diesel prices, resulting from subsidy cuts. The industrial action in late May, supported by Bolsonaro, paralyzed the country, prompting Temer to reinstate the fuel subsidies. While the strike, backed by many Brazilians angry about the price rises, further undermined the president’s authority, it boosted Bolsonaro’s fortunes.

Yet Bolsonaro’s intervention raises questions about his economic credibility.  So far, there is little sign of a strategy for dealing with the country’s financial problems. From what is known, he has previously opposed the privatization of state companies, backs commercial agriculture and mining on indigenous reservations, favors gradual reform of the pensions system and has expressed concern that the country’s biggest trading partner, China, is too active in the Brazilian economy.

More recently, Bolsonaro has softened his tone on China, describing Beijing as an “excellent partner”, and has appointed a free-marketeer as his main economic adviser – investment banker Paulo Guedes, an advocate of sweeping privatization to pay off some of the country’s public debt. However, the appointment is puzzling, as it is unclear whether Bolsonaro has had a change of heart on sell-offs or is just trying to soothe investor nerves. There are indications that a number have been encouraged by the enlistment of Guedes, seemingly hopeful he might encourage neo-liberal reforms. Realistically, Bolsonaro will probably have to make some accommodation with pro-business Congressmen in order to govern effectively.

With a fragmented electoral field, all the signs are that the upcoming poll will go to a run-off – and the possibility of a populist victory is fuelling uncertainty. Questions remain over the country’s economic trajectory under Bolsonaro while there are concerns a Lula-endorsed candidate may worsen the country’s stagnation. Such outcomes will worry Brazilian moderates and may galvanize them into rallying behind a centrist, establishment figure in an anticipated second round of voting. That could mean Brazil struggling along for another few years. But perhaps it is now the case of ‘better the devil you know’.

Pre-Salt Reserves Bring Energy Giants Back To Brazil Despite Lingering Risks

On October 27, 2017, new auction rounds for the eight pre-salt blocks in Brazil were launched. As the Brazilian government approved a new regulatory framework for the bidding process to allow more investors, 14 foreign companies and two Brazilian entities were qualified to participate in the auction.

As a result of the auction, The National Agency for Petroleum, Biofuels and Natural Gas (ANP) awarded six offshore blocks to Shell, Brazilian state-run Petroleo Brasileiro (Petrobras), and Statoil. This generated BRL 6.15 billion (about USD 1.9 billion) in signature bonus and BRL 760 million (about USD 234.8 million) in investments. The ANP also announced that two more auction rounds for pre-salt layer fields are planned in 2018 and in 2019. ExxonMobil (USA) took eight blocks of pre-salt reserves in the recent auction in April 2018, whereas Petrobras took six blocks.

Moreover, the new regulatory and economic changes in the Brazilian oil and gas sector have brought more transparency on future investments in the pre-salt reserves, incentivizing foreign investors such as ExxonMobil (USA) and Statoil (Norway) to invest again in Brazilian energy projects. The improved regulatory framework ended the mandatory participation of Petrobras as “the sole operator in pre-salt”, creating new opportunities for other investors.

A bright future, but risks abound

The future of the Brazilian oil and gas sector, and subsequently the Brazilian economy, is positive. In 2017, the oil and natural gas sector accounted for 11 percent of Brazil’s GDP, and keeps on growing. With a recovered economy, the Brazilian government claimed that Brazil has become the largest oil producer in Latin America, and that the pre-salt reserves has been regarded as “one of the most promising oil reserves in the world.” The Brazilian government thus expects the auction to yield investments of about USD 36 billion for the next 10 years, and would create about 500,000 direct and indirect jobs. This development in the oil and gas sector provides an optimistic outlook for many Brazilian states’ economy that depend on oil production, as “the exploration of [the pre-salt] areas should generate BRL 400 billion in royalties and taxes over the next 30 years.” This development could invite more economic and social development in Brazilian states that have suffered from the recent dire economy.

As corruption, fraud, and bribing remain pervasive and ongoing problems in Brazil, the investors will look to Brazilian President Michel Temer’s administration to reinforce new regulatory and economic laws to mitigate these risks in the oil and gas industry and in Brazil as a whole. Indeed, Reuters indicated on April 17, 2018 that President Temer launched a series of policy changes to “tempt investors to return to Latin America’s No.1 economy.” The President aimed to cut restrictions on oil and gas production by eliminating the exclusive rights of Petrobras in operating pre-salt oil fields.

However, despite the positive developments in the oil and gas sector, there are persistent political risks that investors must be wary about. These risks include judicial insecurity, high-level corruption, reputational damage, expropriation and nationalization with the involvement of Petrobras, and contract uncertainty. For instance, an October 27, 2017 Financial Times article reported that a federal judge issued an injunction to block the October 2017 auction, a political move sought by the leftist Workers’ Party. While the auction was briefly suspended, the injunction was overturned. However, this recent play provides a cautionary tale for investors, as judicial and political insecurity can undermine the progress of the auctions and pre-salt reserves investments. Along with these issues, the upcoming presidential elections could reverse Temer’s policies and new regulatory framework.

Petrobras and ongoing security crises in Brazil

In addition, according to the Brazilian government, Petrobras “now has the freedom to choose which [pre-salt auction] blocks it will participate in.” The new regulatory framework of the pre-salt reserves has thus allowed Petrobras to gain more autonomy for its strategic management and investment in the oil and gas industry. Increasing the state-owned oil and gas company’s influence and power over one of Brazil’s essential sectors for economic growth may be too early for Petrobras. As the company remains entangled in the biggest corruption probe in Brazil’s history, investors remain cautious of political and judicial development around the company.

This scandal has had a disastrous impact on Brazil’s economy, as investors strayed away from the country for a few months and stock prices dipped quickly in 2014. Overall, this issue was a staggering setback for Brazil’s political, social, and economic growth and worsened the already-existing grievances in country. It took several years for Petrobras to recover from the scandal, as it became the world’s most indebted oil company and reported revenue growth only by 2017. The ongoing investigation and its impact on the public and private sector in Brazil remain a rampant issue that investors, policy makers, and international organizations should continue to monitor.

In addition to the aforementioned political and operational risks, investors must also take into account worsening security risks. In the past five years, Brazil’s security status quo has deteriorated, as over 55,000 people were killed in 2015 due to a surge in police strikes, street crime, violent protests, and armed conflicts between the Brazilian security forces and organized criminal organizations. A vacuum of instability and violence in various cities across the country has persisted since 2015, and along with civilian unrest and excessive responses from Brazilian security forces, drug trade, arms trafficking, robbery, extortion, and kidnapping activities have soared. The rampant corruptions in the government and security forces, and endemic economic and social instability have undermined the Brazilian government’s ability to effectively tackle security crises.

Alicia Chavy graduated from Georgetown University’s School of Foreign Service with a Bachelor of Science in International Politics. As originally appears

WTO Condemns Brazil Industrial Policy: Brazilian Government Discusses New Subsidies Rules

According to the WTO, Brazil’s industrial programs are inconsistent with the international agreements signed by the country, in addition to providing prohibited subsidies.

Brazil’s industrial policy in check

The European Union’s (DS472) and Japan’s (DS497) disputes against Brazil’s industrial policy benefits are close to a conclusion. After almost four years since the beginning of the processes, the World Trade Organization (WTO) Dispute Settlement Body released the Panel’s report of the cases this past August, and argued that seven Brazilian programs that sought to promote technological innovation and boost exports do not comply with the Organization’s rules.

One of the main complaints was against the tax exemption granted to automotive companies that produced a percentage of their products locally. This would represent a disguised subsidy and distort international competition.

The Panel concluded that Brazil should withdraw all illegal subsidies within 90 days of the final text’s approval. On September 29th, the Brazilian government appealed to the WTO report on both cases. If the panel’s report is confirmed and Brazilian government does not comply with the WTO’s recommendation, parties could retaliate against the country. This could have direct impacts on companies doing business in Brazil.

The future of Brazilian industrial policy

The Brazilian government must now reassess its industrial policy during one of the country’s worst political and economic crises. For two years in a row, Brazil’s GDP has contracted by more than 3%. This in turn has helped drive the unemployment rate of to 13.7%. This economic contraction complicates Brazil’s ability to comply with the WTO’s requirements.

On the one hand, industrial policies have the objective of promoting innovation and productivity. On the other, policies aimed at alleviating the economic crisis should reduce government spending and increase public revenues.

The government will have to think of alternatives to tax breaks to spur industrial development, all with minimum intervention. The new policy will have to follow a more functional development policy, simplifying taxes and reducing the cost of doing business in Brazil, while supporting innovation and creating a proper environment for companies to invest in this kind of activity.

This is no easy task, especially given Brazil’s unstable economy and political scene. This task is further complicated by the lack of attention that the private sector has paid the WTO ruling thus far – even though it will need to be a major partner in drafting legislation, the public sector has largely remained uninterested in the rulings.

The Brazilian government’s ability to carry out these policy changes is further hampered by its entanglement in several ongoing corruption scandals. The government has spent the last 5 months focusing on defending President Michel Temer against two charges on corruption presented by the Attorney’s General Office. Temer’s refusal to resign has had a high cost for the country, and postponed the approval of highly important proposals for a faster economic recovery.

Now, for the next following months, the government will have to articulate to approve several unpopular measures, such as the pension reform, the postponement of salary readjustment for civil servants, and the end of benefits for several sectors. Additionally, the constant corruption scandals revealed by several plea bargains under negotiation by top politicians arrested and the upcoming 2018 presidential elections. Temer’s cabinet will continue to be affected by scandals, and changes might affect the continuity of the undergoing policies.

Starting in around April 2018, the runup to the October 2018 general elections, will further complicate the government’s agenda and make difficult to approve any proposal. It is important to note that any ministers that intend to run for the elections will have to leave their positions.

If the Minister of Development, Industry, and Trade, decides to run for instance, the ministry might be left without a clear leadership until 2019. Something that would reduce political influence in the draft of the new policy, however, without someone ahead of the ministry, the final decision over the policy would be postponed.

A new policy might take longer than expected

Brazil’s appeal of the WTO’s ruling will postpone the final decision against the programs at least 2018. Brazil might also benefit from the number of processes currently under analysis at the WTO and their constant delays – the WTO already broke all deadlines for the final report on the Brazilian cases.

The Trump administration’s recent attempt to block the appointment of new member to the Appellate Body exacerbates the likelihood of further delays. The Appellate Body is already operating with five members instead the normal seven, and will be down to four in December.

If the block continues and no new members are appointed, the delays might increase even more. This delay would allow Brazil to maintain the current policies while the appeal is processed, and would provide the government with more time to work on a long-term and sustainable industrial policy.

Amid major reformscorruption scandals, and elections, the industrial policy reformulation might not have the attention it needs to comply with the demands of the WTO. There is a high chance that any changes will have to be postponed to the next administration.

This exposes Brazil to a medium term risk of retaliatory sanctions from other countries. It is important to note, however, that this retaliation is not an immediate action and it has to be submitted to the WTO and takes a while to be settled. Without the possibility of counting on the government to focus on the discussion, the private sector and the civil society will have to participate actively in the draft of the new programs to promote innovation and productivity in the country.


Juliano Griebeler 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.

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.

How to Buy Into Brazil’s Tech and Internet Boom with ETFs

Brazilian equities are not having the best of times this year. Even after posting seemingly handsome gains of 19.7% in YTD 2017 according to the performance of the MSCI Brazil Index, the country lags far behind the MSCI indices of its Latin America peers Chile (36.3%) and Peru (31.4%) as well as the broad MSCI Emerging Markets Index (30.7%). Being that Brazil was the standout performer of 2016 for Latin America, the pace would have been difficult to maintain.

2017 was nonetheless expected to be a big year for the country having been bogged down in political upheaval and economic scandal, but corruption issues have continued to plague the economy as well as the stock market.

While financials continue to dominate the portfolios of broad-based large and mid-cap focused funds investing in Brazil and have done most of the heavy lifting in the gains seen in 2017, companies in the information technology space can be an interesting proposition going forward.

For those investors who want to take the exchange-traded fund (ETF) route to investing in the country’s tech companies, the following funds can be considered (we have also included the telecom services sector in these calculations).

ETF options

There are eight funds listed on US exchanges which are dedicated to investing in Brazilian equities. Three of them (BZQ) (BRZU) (UBR) are leveraged, hence we’ve removed them from this review as they may not suit the needs of the majority of investors.

Upon analyzing ETF options, it became clear that in order to partake in the tech and internet segment in Brazil, investors will need to go small in terms of market-cap if they want to have a bigger share of the segment.

VanEck Vectors Brazil Small-Cap ETF (BRF): The fund tracks the performance of the MVIS Brazil Small-Cap Index and is invested across 59 holdings. The information technology and telecom services sectors form a combined 9.2% of the fund’s portfolio – by far the largest exposure among ETFs investing in Brazilian equities.

Three companies comprise the information technology sector – TOTVS S.A. (TTVSF), Linx S.A. (LINX3.SA), and Sonda S.A. (SONDA.SN). Of these, TOTVS has the highest exposure and has done quite well this year. Oi S.A. (OIBRQ) – the sole holding from the telecom services sector – has outperformed the sector.

Though the ETF seems relatively small, with only $113 million in assets, it is the largest one investing in small-caps from the country and has posted strong gains in excess of 50% in YTD 2017. Its net expense ratio is 0.6%.

iShares MSCI Brazil Capped ETF (EWZ): The largest fund on US exchanges providing access to large and mid-cap Brazilian equities has only a small exposure to tech stocks. However, combined with telecom stocks, the fund provides the second highest exposure (~5%) to these sectors combined after the BRF.

Traditional heavyweight Cielo S.A. (CIOXY) is the sole holding from the tech sector while Telefônica Brasil S.A. (VIV) and TIM Participações S.A. (TSU) comprise the telecom services sector.

With $6.8 billion in assets, the EWZ is the go-to fund for investing in Brazil. Though it does not invest into up and coming companies from the tech and internet segments, it can provide a starting point for investing in large-cap stocks from the country.

iShares MSCI Brazil Small-Cap ETF (EWZS): Another small-cap fund, the EWZS has $80 million in assets, is invested across 64 holdings, has an expense ratio of 0.6%, and has higher exposure to stocks from the information technology sector (4.6%) compared to its large-cap cousin, the EWZ (2.1%).

Similar to the BRF, TOTVS has led gains from the information technology sector, but the EWZS does not invest into the telecom services sector.

KraneShares Emerging Markets Consumer Technology ETF (KEMQ): This fund is a new option for investors looking for an exposure to the tech and internet segments in Brazil.

The KEMQ was launched on October 12, 2017 so it does not have any performance track record to speak of. However, in this very short span of less than a month, Brazilian equities, which form 7.7% of the fund’s portfolio, have emerged as the second highest contributor to the fund behind those from South Korea.

Of the four Brazilian companies whose stocks the fund is invested in, only one (Cielo S.A.) is a pure tech company, the other three are in-between consumer discretionary and tech companies. Of them, B2W CIA DIGITAL (BTOOY) and Somos Educação S.A. (SEDU3.SA) have helped Brazil climb to the second spot in terms of geographic contributors to the funds performance.

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.

Amazon Is Quietly Moving Into Brazil — These Are Its 3 Biggest Competitors

Brazil ranks 10th in world retail

The e-commerce industry in Brazil (EWZ) (BRAQ) (BRZU) ranks 10th in the world in size. With a population over 200 million, a large consumer base comprised of an outsized share of millennials, and rising median household incomes, this Latin American (ILF) economy offers the perfect playing field for e-commerce businesses.

Amazon to expand in Brazil

US-based e-commerce platform Amazon (AMZN), the world’s leaders in online retail sales, first set foot in Brazil five years ago. However, its product offering never extended beyond books. This is about to change though. The company is now looking to expand its offerings in the country, which until now had been delayed on account of high taxes and infrastructural setbacks in Brazil.

Over 61 million Brazilians currently shop online, and this figure is forecasted to reach 87.8 million by 2020 (chart above). Retail e-commerce sales in Brazil amounted to $16.58 billion in 2016, and this figure is expected to at least double by 2021. An interesting point here is that about 49% of digital buyers in Brazil made cross-border purchases in 2016, according to PFSweb, Inc. This helps build the case for multinational e-commerce players such as Amazon (AMZN), which are already positioning themselves to tap into this opportunity. is listed on the NASDAQ GS stock market under the ticker AMZN. The stock is up 29.68% YTD (as of October 26) and boasts a $468.6 billion market capitalization. In financial year 2016, the company reported an ROIC of 7.25%, operated with an EBITDA margin of 9.05%, and a gross margin of 35.09%. EPS growth rate for the company was reported at 290.7%. The company earned a whopping $136 billion in global retail website revenues in 2016.

So, before the mammoth retailer commits to a much-anticipated expansion in Brazil, it is worthwhile to take a quick look at its 3 biggest competitors already cashing in on the Brazil’s massive online consumer base.

The 3 e-retailers in Brazil bracing for an Amazon (AMZN) assault

  1. MercadoLibre (MELI)

MercadoLibre Inc. (MercadoLivre in Portuguese) is Latin America’s leading e-commerce technology company.  The website allows businesses and individuals to list items and conduct sales and purchases online in either a fixed-price or auction format.

Listed on the NASDAQ GS stock market under the ticker MELI, MercadoLibre commands a market capitalization of $10.1 billion and is up 46.7% YTD (as of October 26). The stock currently trades at a P/E of 61.01. Forward P/E (as of 12/17) for MELI is estimated at 84.6. Analysts who reviewed the stock from a buying perspective have rated the stock 3.59/5, comprising 35.3% BUY, 58.8% HOLD, and 5.9% SELL recommendations.

For the 2016 financial year, the company reported an ROIC of 18.72% and operated with an EBITDA margin of 24.88%, and a gross margin of 63.58%. EPS growth rate for the company was reported at 18.9%. The company earned $455 million in revenues from its marketplace business in Brazil in 2016.

  1. B2W Companhia Digital (BZWHF) (BTOW3.SA)

B2W Companhia Digital engages in the e-commerce business through a digital platform in Brazil. The company offers through its website, products including books, CDs, DVDs, IT equipment, electronic equipment, perfumes, and clothing.

Listed on the Brazilian stock market under the ticker BTOW3, the stock commands a market capitalization of $3.1 billion and is up 126.2% YTD (as of October 26). The company’s US-listed ADR, BZWHF is up 151.7% YTD (as of October 26). For the financial year 2016, the company reported an ROIC of 3.48% and operated with an EBITDA margin of 7.6%, and a gross margin of 19.91%. EPS growth rate for the company was reported at 16.6%. The company earned $2.5 billion in revenues from its e-commerce business in 2016.

Analysts who reviewed the stock from a buying perspective have rated the stock 3.13/5, with 25% BUY, 56.3% HOLD, and 18.8% SELL recommendations.

  1. Magazine Luiza (MGLU3.SA)

Magazine Luiza S/A operates a multichannel retail platform of mobile, website, and physical stores. The company offers e-commerce services and retails a wide range of electronics, toys, power tools, and houseware products. Magazine Luiza develops big data, machine learning, and other technologies to remove friction from the retail process.

Listed on the Brazilian stock market under the ticker MGLU3, the stock commands a market capitalization of $3.8 billion and is up 395% YTD (as of October 26). The stock currently trades at a P/E of 54.91. Forward P/E (as of 12/17) for MELI is estimated at 34.66. For the financial year 2016, the company reported an ROIC of 17.02% and operated with an EBITDA margin of 7.13%, and a gross margin of 30.74%. The company earned $2.7 billion in revenues from its retail business in 2016.

Analysts who reviewed the stock from a buying perspective have rated it 4.43/5, with 71.4% BUY, and 28.6% HOLD recommendations.

These Are The 25 Emerging and Frontier Market Countries Offering Dedicated ETFs

For an investor interested in getting exposure to frontier and emerging markets, there are 78 ETFs available which help one invest across the universe. Of these 78 funds, three are focused on frontier markets. These funds are not country-specific but can be sector-focused or thematic.

So for broad-based exposure, an investor has a lot of options. But what about single-country exposure?

In the previous article, we had presented a graph which plotted the number of ETFs dedicatedly investing into frontier and emerging market countries.

Taking that information, along with a few other numbers, the number of frontier and emerging market countries, not including stand alone countries, which have dedicated ETFs stand at 25. Meanwhile, the total number of countries classified as frontier or emerging (along with standalone countries) by MSCI stands at 57.

The graph above provides a breakdown of the 85 ETFs which track these 25 frontier and emerging market countries.

For this purpose, we have included sector-focused and thematic funds along with broad based funds investing across market caps. Leveraged funds have also been considered.

China well represented, but what about others?

Unsurprisingly, China dominates the list, accounting for 31 ETFs out of the 85 considered for this analysis. India and Brazil are a distant second and third respectively. The top five countries offering the most ETFs available on the US market account for 67% of the total number of single-country ETFs across the frontier and emerging market universe.

This is broadly similar to the geographic portfolio composition of the three largest emerging market ETFs – the Vanguard FTSE Emerging Markets ETF (VWO), the iShares Core MSCI Emerging Markets ETF (IEMG), and the iShares MSCI Emerging Markets ETF (EEM). The top five countries weigh-in at 70-73% of their portfolios.

China is well represented with large-cap funds like iShares China Large-Cap ETF (FXI), small-cap funds like Guggenheim China Small Cap ETF (HAO), all-cap funds like Guggenheim China All-Cap ETF (YAO), currency-hedged funds like Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (ASHX), and funds investing based on investable market indices like SPDR MSCI China A Shares IMI ETF (XINA), apart from sector-based and thematic funds also available for US investors.

India and Brazil are also quite well-represented, though they don’t have sector-focused funds dedicated to them.

However, most others barely get enough coverage.

For instance, though South Korea forms nearly 15% of the EEM and IEMG, there are only six funds tracking it, two of which are currency hedged and one is leveraged. Neither the MSCI Korea Index nor the MSCI Korea 25/50 Index invest in small-caps but still cover about 85% of the market. Both are comprised of 112 constituents.

There is an MSCI Korea IMI Index, which has 448 constituents and covers about 99% of the Korean equity universe, but no ETF tracks it. There are no sector or thematic funds either.

Taiwan is another case in point. Though it forms 12-16% of the assets of EEM, IEMG and VWO, it has only two funds dedicated to it. The MSCI Taiwan 25/50 Index, which is tracked by the bigger of the two funds – the iShares MSCI Taiwan Capped ETF (EWT) – covers about 85% of the free-float market cap with 89 constituents as compared to the MSCI Taiwan IMI Index, which is comprised of 390 stocks and covers about 99% of the market.

Further, while South Korea has 46 indices in its home market, Taiwan has 37, according to Bloomberg data. Thus, there may be some opportunity there for sector or thematic coverage.

Compared to China, these are certainly smaller markets, and may not require dedicated sector funds, but a more broad-based exposure could be interesting given their diversity and size amid the ex-China emerging markets universe.

South Korea and Taiwan are still relatively major markets though. There are many countries which have even lower representation. Let’s look at these in the next article.

These Six Countries Hold 87% Of US Treasuries Amongst Emerging Markets

The US Treasury Department releases a report known as the Treasury International Capital (TIC) which breaks down the holding of securities – both foreigners holding US securities and US investors holding overseas securities.

The August 2017 edition of the report, which contained data as of June 2017, showed the following holding break-up between emerging markets and others.

A few caveats about the chart: Its comprised of only those emerging markets which were among the 34 nations individually outlined in the report. Thus, the remaining which were not outlined specifically, would be under the ‘others’ classification.

Also, we’ve restricted ourselves to the emerging markets universe as defined by MSCI and are not considering nations classified as ‘developing’ by the United Nations. This, thus leaves out countries such as Cayman Islands and Bermuda from our consideration as emerging markets.

What chunk of the overall pie?

The graph below details the percentage holding of the 12 emerging market countries whose holdings of US Treasuries were specified in the TIC report.

Of all the outstanding US Treasuries held by foreign countries, China owns a little less than one-fifth and is ahead of the pack by a proverbial mile. Brazil, the second largest investor in US Treasuries among emerging market nations, is a distant second, holding less than a twentieth of the total outstanding amount of $6.2 trillion.

The following graph illustrates this in absolute terms.

China, holding US Treasuries worth $1.1 trillion, towers above its emerging market peers. In fact, even if we were to consolidate the holdings of the 11 other individually identified emerging markets in the TIC report, it would not add up to China’s holding.

When looking at the entire universe of emerging markets holding US Treasuries, which amounts to $2.2 trillion, China’s share would be 51.7%.

The top five emerging markets – China, Brazil, Taiwan, India, and Russia, would account for 82.6% of all US Treasuries holdings in the emerging markets universe. All these countries hold over $100 billion in US Treasuries each. If we add the sixth largest holder among emerging markets – South Korea – to the mix, the percentage would go up to 87%.

There were also some interesting trends that came out of the report. We’ll look at these in the next article.

The 5 Brazilian Stocks Hit Hardest By Latest Political Corruption And Bribery Scandals

Political crisis spooks Brazil’s stock markets

Brazil’s stock markets plunged in the last two months after reports of a scandal by the President Michel Temer. State-owned companies Petrobas, Centrais Electricas Bras and Banco do Brasil were hit the most as political turmoil sent assets lower.

Now Brazil is pushed into a deeper political crisis after accused President Temer became the country’s first head of state to be formally convicted of corruption while in power. The Attorney General of Brazil’s Supreme Court charged Temer with taking million of dollars as a bribe from the country’s meat packing company JBS. This charge comes less than a year after Dilma Rousseff, the previous President, was ousted on criminal charges.

Shares of the iShares MSCI Brazil Capped exchange-traded fund (EWZ) have tanked 5% since May 18 and have underperformed the iShares MSCI Emerging Markets ETF (EEM). Fund flows to Brazil however continue to remain undeterred as investors consider this dip as an attractive entry point. 

Worst hit stocks

In the past three months, the worst performing Brazilian stocks were JBS SA (JBSS3), Naturas Cosmeticos (NATU3.SA), Mahle Metal Leve (LEVE3.SA), Centrais Electricas Bras (ELET6.SA) and Petrobas (PETR3.SA).


JBS (JBSS3), Brazil’s largest meat-packing company has been slapped with $3.36 billion fines to settle allegations of bribery. JBS is at the center of the latest political corruption probe that was triggered in May. Shares of the company have tanked 21% since May 18 and 34% YTD.

The company’s shareholders have turned to Banco Bradesco’s investment banking unit to dispose off some assets in order to raise money to settle the fines. These hefty penalties have spooked investors and led to a one-third decline in the company’s stock price in 2017 so far. Market capitalization of JBS has declined by 21% since May 18.

The largest shareholder in JBS – the Batistas – are considering selling off Fábrica de Produtos Alimentícios Vigor SA and sportswear and shoemaker Alpargatas SA to raise funds to pay off the fines.

Naturas Cosmeticos

Naturas Cosmeticos (NATU3.SA) stock price has declined 27% over the past three months and 13% over the last one month alone. The company trades on the Sao Paulo Stock Exchange and has a market capitalization of $3.1 billion.

Natura has also invested in compliance systems in the last two years to adhere to Brazil’s Clean Companies Act and control corrupt acts by employees.


Petrobas (PETR3.SA), Brazil’s state-run oil company, has been engulfed in corruption scandals since 2014 that have cost the company nearly $13 billion in the past five years.

The company was charged $2.1 billion in fines in 2015 and $833 million in March 2017 for manipulating oil prices. It also had impairment losses of $14.8 billion. The loss reflects the decreasing value of the company’s assets resulting from the drop in oil price, project delays and other factors. In early 2015, the company formed a compliance team of nearly 350 employees to prevent further instances of corruption.

These corruption scandals have put pressure on the company’s balance sheet at a time when it is already battling low oil prices. To improve cash flow, it cut its workforce by 20% and reduced capex by 32%. Further, it sold off assets to reduce its debt load including a natural gas pipeline system with Brookfield Infrastructure.

Shares of the company are down 11% YTD and 8.4% over the last three months alone. Consequently, the state-run company has lost 15% of its market value during the year so far. Petrobas’ ADRs also trade on the New York Stock Exchange under the ticker PBR-A. 

Centrais Electricas Bras

Centrais Electricas Bras (ELET6.SA) is the Brazilian state-controlled utility provider engaged in the generation, distribution and transmission of power through various companies like Electrobas holdings, CGTEE, Chesf, Eletronorte, Eletronuclear, Eletrosul, Furnas, Amazonas Energia, Distribuicao Acre, Distribuicao Alagoas, Distribuicao Piaui, Distribuicao Rondonia, Distribuicao Roraima and Itaipu Binacion.

Even though shares of the company are down 36% YTD, it is expected to gain significantly from the Brazilian government’s plan to revamp the power sector. Brazil’s government is planning to overhaul power sector regulations by 2018 leading to lower taxes and promote foreign investments in the sector.

Centrais Electricas Bras trades on the Sao Paulo Stock Exchange (IBOVESPA) with a market capitalization of $6.1 billion. In the last three months, shares of the company have lost 16%.

Mahle Metal Leve

Mahle Metal Leve (LEVE3.SA) is a Brazilian auto parts manufacturer engaged in production and manufacturing of  pistons, bearings, connecting rods, valve train systems, air and liquid filter systems, industrial filters among other products. MAHLE Metal Leve provides components for vehicle manufacturers such as Volkswagen, Audi, BMW, John Deere, Porsche, Opel, Toyota, Ford, General Motors, Mercedes-Benz, Fiat, Renault, Peugeot, MWM-International, Cummins, Scania, Volvo, Caterpillar and Perkins, among others.

The company’s stock has declined 18% over the past three months and 13% over the last one month making it one of the worst performing Brazilian stocks. The company’s market capitalization has fallen by 18% year to date. The company trades on the Sao Paulo Stock Exchange (IBOVESPA) and has a market capitalization of $689million.


Brazilian stocks are currently at steep discounts with the MSCI Brazil Index trading at average one-year forward PE ratio of 18x.

CIA Estadual De Geracao (EEEL3.SA), Centrais Electrics Bras, CIA De Transmissao De Ene (TRPL4.SA), CIA Paranaense De Energi (CPLE6.SA), Magnesita Refratarios (MAGG3.SA) and JBS are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 1.4x, 2.1x, 2.2x, 4.7x, 5.2x and 5.4x and are trading at the steepest discount to their peers. Meanwhile, Movida Participacoes (MOVI3.SA), Springs Global Participacoes (SGPS3.SA), Lojas Americanas (LAME4.SA), and Eletropaulo Metropoli (ELPL4.SA) are currently the most expensive stocks in Brazil.