Can Brazil win the productivity race?
Brazil is losing in the productivity game against natural rivals such as India, China and South Korea and that has economists worried. “Stagnant productivity is a major problem for us,” said Lívio Ribeiro, an economist with the Brazilian Economic Research Institute (IBRE), at a recent conference. “Solving it demands more than just investment; it requires structural changes such as labor law reform.” An IBRE study released earlier this year highlighted some sobering data. Productivity gains for the overall Brazilian economy in 2018 were zero. In practical terms, that means output per hour for Brazilian workers was the same last year as in 2017. In fact, gains obtained in 2013 and 2014 have been entirely lost, with productivity now at the same level as in 2012 and down 2.7% from the peak year of 2014. Gains and losses have been uneven. “In 2018, agriculture and industry gained in productivity, but services lagged,” said IBRE economist Sílvia Matos, at a recent seminar. Agricultural productivity was up 1.1% while industry gained 1.3%, but services declined 0.6%. The problem is that services now account for 70% of Brazilian GDP and employment. Employment, in fact, may be one of the core problems when it comes to Brazilian productivity. According to the Brazilian Census Bureau (IBGE), a record 40 million Brazilians are currently employed in the so-called “informal” sector of the economy, mainly in services. According to the IBRE report, such workers receive poor training and little incentive for improving performance. Registered workers, the report’s authors note, are four times as productive as informal employees. The phenomenon is also contributing to rising inequality in Brazilian society, a factor which depresses consumption. Brazil’s Gini Index, a measure of socio-economic inequality, worsened in 2018 to its highest level in seven years, registering 0.6156. Scores closest to 1.0 indicate the highest levels of inequality. Investment is another problem. Brazil’s investment rate is now hovering at around 15% of GDP; it was over 20% a decade ago. Much of the gain in productivity, in any economy, is due to use of more efficient technologies, including in the services sector. But that requires investment in both hardware and training.
State of the Economy
Economic Activity Index declines for second month in a row.
The Brazilian Central Bank’s Economic Activity Index (IBC-Br) declined for the second month in a row in February, leading many economists to predict an overall decline for the nation’s economy in the first quarter. The index was down 0.73% in February versus January although it still managed a gain of 2.49% against February of 2018. In January, the index was down 0.31% against the previous month. February saw modest growth in industrial output, but retail sales came in flat and services declined. Economists at three major banks, Fator, Bradesco and Itau, altered their projections to include negative growth in the first quarter, citing stagnant wages and continued high unemployment. The estimates range from negative 0.1% to negative 0.2% in the first quarter of 2019 versus the fourth quarter of 2018. (see more)
Government offers concessions to truckers in hopes of averting strike.
Brazil’s government this week offered a series of concessions to the nation’s more than one million independent truckers in hopes of averting a potentially damaging strike. An 11-day strike last May caused severe fuel and food shortages in big cities and hurt industrial production. Truckers are still dissatisfied with low freight rates and high fuel costs. The government announced a R$500 million credit line for truckers along with R$2 billion in highway investments. The government also promised to reduce paperwork costs and offer a diesel-fuel discount card for truckers within 90 days. In a controversial move, President Jair Bolsonaro pointedly ordered state-run energy company Petrobras to roll back a 5.7% diesel price hike. Later, however, Petrobras announced a new hike at a little under 5%. Economy Minister Paulo Guedes said the administration was working on a plan to improve freight rates for truckers, possibly through tax cuts or other subsidies. Truckers reacted to the measures with skepticism. However, no date has been set for a strike or other job action. (see more)
Government presents 2020 budget guidelines as deficits persist.
The Administration of President Jair Bolsonaro this week presented to Congress a draft of its 2020 federal budget guidelines. The framework is austere by recent standards. The government proposes a 4.2% increase in the minimum salary, in line with expected 2019 inflation, to R$1,040 per month, only nominal increases in operational spending and no salary hikes for federal workers. Nevertheless, the budget will still produce a primary deficit of R$124 billion, down only marginally from the projected 2019 deficit of R$139 billion. As in the past, spiraling pension costs will continue to pinch government spending. The social security system is projected to produce a 2020 deficit of R$238 billion, up from R$218 billion this year. The budget guidelines are based on fairly optimistic economic projections, including 2.7% GDP growth and inflation declining slightly to 4.0%. The government must present detailed budget figures by August. (see more)
State of Business
- State-run oil company Petrobras last week announced completion of another purchase of its own overseas debt. The company said it bought back $2.28 billion in bonds from the market. The bonds were due in 2021 and 2025. Earlier this year, Petrobras bought back $3.9 billion of its own bonds. The purchases are part of an effort to use operating cash and asset sales to trim the company’s debt load.
- The advertising industry did not have a good year in 2018. According to data last week from the industry’s Executive Council on Norms (CENP), the 78 largest advertising agencies last year placed R$16.5 billion in advertisements for clients. That figure was only 0.6% higher than in 2017, lagging behind the nation’s 3.75% inflation rate. The survey covers virtually all types of vehicles for advertising, including newspapers, magazines, social media, television, radio and others.
- Who’s in and who’s out in Brazil this week? Brazilian Ambassador to the United States Sérgio Amaral has been re-assigned, according to a Foreign Ministry Amaral will become head of the Ministry’s São Paulo office. He has served as Brazilian envoy to Washington since 2016. The Estado news group last week named its advertising executive of the year. He is Francisco Custódio, head of the media division of the São Paulo-based Africa advertising agency.
- CNI, Brazil’s biggest steel manufacturer, last week issued $1 billion in overseas bonds, including $400 million in paper due in 2023 at a yield of 7.25% and $600 million in 2026 bonds at a yield of 7.875%. Proceeds will be used to pay off shorter term debt.
- São Paulo-based Terra Forte, one of Brazil’s biggest coffee exporters, last week filed for protection from creditors under laws similar to U.S. Chapter 11 bankruptcy. The company has approximately R$1 billion in debt, much of it held in U.S. dollars. The company suffered losses in recent years because of a stronger U.S. dollar and lower international coffee prices. Terra Forte has 60 days to present a recovery plan.
- Creditors last week agreed on a recovery plan for Livraria Cultura, one of Brazil’s largest bookstore chains. Creditors will accept discounts of up to 70% on debts, with payments of the remainder stretched out to as long as 12 years. The company holds debts of some R$285 million. Cultura filed for protection from creditors in October. The recovery plan, and its approval, were accomplished in near record time.
- In the Brazilian Stock Exchange’s first initial public offering of shares for 2019, sporting goods retailer SBF raised R$772 million. SBF owns the Centauro store brand. The company will use proceeds from the IPO to open news stores, enhance e-commerce channels and pay down debt.
U.S. Dollar: The Brazilian Real closed at R$3.93 to the dollar, down 2.3% on the week and 13% year-on-year. The Real weakened on delays in congressional action on a pension reform bill seen as critical for reducing government deficits. (see more)
Stocks: The Ibovespa index closed at 93,476 points, down 0.8% on the week but up 9.2% on the year. Investors pulled back on worries about the durability of Brazil’s economic recovery. (see more)
Interest Rates: The benchmark January 2021 contract closed at 7.06%, down from 7.12% the previous week on signs of continued tame inflation and stable base interest rates. (see more)
- Friday, April 19, Good Friday national holiday
- Thursday, April 25, Brazilian Central Bank release of monthly current account data, Brasília