POLICY MONITOR April 14– 17, 2014
The Week in Review
On The Economic Front Industry Confidence IndexFigures under 50 indicate negative Industry Confidence: The National 68.5 confidence
Confederation of Industry (CNI) Confidence 65.9 61.7 Rousseff Index fell from 52.5 in March to 49.2 in April, the Administration 57.8 lowest level in five years. According to CNI, 57.3 56.7 industry pessimism has spread among all Lula 53.1 Administration 53.3 sectors surveyed (see graph). 50,0 49.9 49.2 2015 Budget Guidelines Law: The Apr/ Administration sent the 2015 Budget Guidelines 14 draft bill (PLDO) to Congress on Tuesday. The PLDO is a guide for the development of fiscal Source: CNI budgets, including social security and government investment for the Executive, Legislative and Judicial branches, as well as state-owned companies. The draft bill indicates that in a second term, President Dilma Rousseff would adopt a more conservative fiscal policy, including increasing the target primary surplus from the current 1.9% to 2.5%, with expectations that annual inflation would fall to 5% and GDP growth will rise to 3%. The bill also calls for a 7.7% increase in the national minimum wage. The PLDO rapporteur Representative Devanir Ribeiro (PT/SP) expects a vote prior to the June 12 World Cup kickoff. Economic Activity: According to the Central Bank, growth in economic activity declined sharply in February. The IBC-Br index rose 0.24% compared to 2.35% in January, in part a likely response to the Central Bank’s ongoing effort to control inflation by raising the benchmark interest rate. Over the past year, it has been increased by 375 basis points to 11%. Given the economic slowdown, the bank has signaled that the monetary tightening cycle could be coming to an end. Retail Sales: According to the Brazilian Institute of Geography and Statistics (IBGE), retail sales jumped 0.2% in February mostly due to the strong 1.6% increase in demand for fuel, which also added pressure to Brazil’s domestic refining capacity. February's year-over-year retail sales jumped 8.5 percent. Inflation: The Central Bank’s weekly survey of market analysts registered an increase in inflation expectations, rising from last week’s 6.35% to 6.47% for the period ending December 31, 2014. It is the highest forecast since the Bank began publishing these numbers. Brazil targets inflation at 4.5% within a band of plus or minus two percentage points. Drought I: According to the National Grid Operator (ONS), the level of the Southeast and Midwest regional dams, which provide 70% of the country’s hydroelectric water storage, were at 36.8% of maximum capacity on Tuesday. Previous ONS projections indicated that for sufficient hydroelectric generation to be assured until 2015, water levels would have to increase to 43% of maximum capacity by the start of the dry season at the end of April. The Administration, which has dismissed the need to adopt power rationing, has signaled that it will wait until then to decide about possible new steps. Drought II: In São Paulo, the state water utility company Sabesp has made assurances that despite the critical level of the Cantareira reservoir system, which now stands at 12.3% of maximum capacity, there is no need for water rationing. However, a state anti-crisis task force recommends that Sabesp begin planning for a reduction in the water flow for the Greater São Paulo area, where the company supplies nine million consumers.
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On The Political Front 40 Presidential Poll: The latest Ibope poll shows that 37 Ibope Presidential Poll (%) President Rousseff has lost support for her re-election bid March 20 / April 17 and now stands at 37%. Support for Senator Aécio Neves, grew 1 point and is currently 14%. Former governor of 13 14 Pernambuco state Eduardo Campos’ support is unchanged 6 6 at 6%. President Rousseff would still win in the first round if the election were held today (See more in The Pulse below). Dilma Aécio Eduardo Campaign Trail: Former Pernambuco state governor Eduardo Campos confirmed that he will run as the Brazilian Socialist Party (PSB) candidate for president with environmental advocate Marina Silva as his vice-presidential running mate. The candidacy must still be formally endorsed at the PSB national convention in June. Quotes: “Brazil has missed strategic goals and macroeconomic fundamentals since 2010” said Campos. Silva added that “our quest is not a candidacy or election for its own sake…We want a political realignment to create a new political landscape in our country.” VP Biden and Games: Following the “Celebration of Sports Diplomacy” featuring the FIFA World Cup Trophy Tour at the State Department earlier this week, the White House confirmed that Vice President Joseph R. Biden, Jr. will go to Brazil for the World Cup in June. He will attend a U.S. national team game. Petrobras I: The Senate postponed the vote on the creation of a Petrobras probe (CPI) until after Easter. The Senate president, Renan Calheiros (PMDB) said there is no rush and that he prefers to wait for the Supreme Federal Court’s (STF) decision on the scope of the CPI. The STF will rule as to whether the investigation will include the alleged subway cartel in São Paulo state run by PSDB, and an alleged overpricing scheme in the construction of the Suape port in Pernambuco state, run by PSB, as Calheiros expects, or limited solely to Petrobras, as requested by the opposition. On Monday President Rousseff defended Petrobras in a speech at an oil tanker launch ceremony in Pernambuco. She devoted more than 30 minutes of the speech to the state-owned oil company, which is at the center of a political crisis. Rousseff stated that she will not back down from investigating any illegal acts or wrongdoing that Petrobras might have done, but she will not allow political interests to hurt the company's image. Quote: “We are committed…to punishing those who should be with the utmost rigor,” said Rousseff, adding that she will not remain silent on “the negative campaign” against Petrobras. “We cannot allow…efforts to tarnish the image of our largest company.” Petrobras II: Graça Foster, Petrobras CEO, testified at a Senate public hearing to address the purchase of the Pasadena refinery by Petrobras. Highlights: » Foster acknowledged that the purchase of the refinery " was not a good deal, " and stated that it resulted in a loss of approximately BRL$ 530 million; » She said that the Petrobras Board made the right decision considering the political-economic context, and the deal seemed necessary at the time to expand the company’s refining capacity; » “Between 2009 and 2011, refining margins fell because of the global crisis"...the Pasadena refinery was …“Initially a good project, but over time it demonstrated an increasingly low probability of return”; » In an attempt to deflect the focus on President Rousseff as the officer primarily responsible for the deal’s approval, Foster stressed that the purchase was approved unanimously by Petrobras’ Board of Directors; » The board members were not informed of two critical clauses: a minimum required 6.9% profitability clause for Astra Oil, a partner; and a put option (requiring Petrobras to purchase the remaining 50% of Pasadena in the event of a disagreement with Astra Oil); » Recently Petrobras received a buyout proposal for Pasadena, but since the refinery is under investigation it has not been included in Petrobras’ divestment plan; » Pasadena currently operates safely and has been profitable for the first quarter of 2014.
Car Wash Operation: On Wednesday, the Federal Police charged 46 people of financial crimes including money laundering and illegal exchange rate operations in the so-called Operação Lava Jato (Car Wash Operation). Among those charged is Paulo Roberto Costa, former head of supply and refining at Petrobras, who retired in 2012. Costa and money changer Alberto Yousseff are charged with operating the alleged US$ 4.5 billion scheme, along with construction companies contracted by Petrobras and politicians. The police are also investigating a related scheme in the Health Ministry. The Rousseff Administration says it is cooperating with the Police and wants the case to be solved.
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Task Forces Defense and Security » World Cup: The Administration says it is ready to assure that security conditions for the June 12th-July 13th soccer tournament are adequate. In 2012, the Ministry of Justice created the Special Secretariat for the Security of Large Events (SESGE), which is in charge through December 31, 2016 of planning, coordinating and executing security operations for the World Cup and the Rio Olympic Games. Each of the 12 World Cup host cities will have an operational command center with representatives of the Federal Police, Armed Forces, Fire Department and Civil Defense. Two central command headquarters will be located in Brasília and Rio de Janeiro. The security budget is BRL$ 1.7 billion. Brazil is also working in cooperation with the U.S., Germany, U.K., Netherlands, South Africa, Argentina and Poland to identify and prevent actions from terrorists and violent protesters. Quote: “The Cup has led to an enormous improvement of our security…Our Armed Forces will act as a deterrent positioned along the rear lines for containment. We will deploy the Federal Police and the Road Patrol and also have a partnership with all governors,” said Rousseff during a meeting with civil society and private sector leadership. During the World Cup and the Olympic Games, the Armed Forces will: » Work in all strategic areas, including stadiums, major hotels and the 32 training facilities; » Possibly exercise temporary duties in aerospace defense, airspace control, maritime, river and harbor areas, and cyber defense; » Focus special attention on terrorism prevention (chemical, biological, and nuclear weapons). Innovation: » Internet Framework Bill: On Wednesday, the Senate Committees on Science and Technology (CCT) and Constitution and Justice (CCJ) held a meeting to discuss the Internet Framework Bill (PLC) 21/14. Senators Zeze Perrella (PDT / MG) and Vital do Rego (PMDB / PB), rapporteurs for the project in CCT and CCJ, respectively, presented reports that favor the approval of the bill as it was received from the House. The vote on the bill was postponed until April 22nd so that Senators will have time to review the reports presented by the Rapporteurs. Senators of the governing coalition are advocating that the bill be approved on time in order for it to become law by the NETmundial event, which will be held in São Paulo on April 23 and 24. » NETmundial: The Global Multistakeholder Meeting on the Future of Internet Governance (NETmundial) released its Summary Document containing 188 contributions from stakeholders from around the world. The text contains recommendations that will be submitted to event participants to develop a broad consensus on the future evolution of the Internet. The document is divided into two sections: 1) Internet governance principles including: human rights; cultural and linguistic diversity; unified and unfragmented space; security, stability and resilience of the Internet; open and distributed architecture; open standards; enabling environment for innovation and creativity; and Internet governance process principles; and, 2) A roadmap to outline possible steps forward in the process for continuously improving the existing Internet governance framework, ensuring the full involvement of all stakeholders. The meeting is scheduled for April 23rd and 24th in São Paulo. Tax and Investment: » Tax reform: Provisional Measure 627/13, which alters important provisions of the taxation system of Brazilian multinationals overseas profits, was approved by the Senate on Tuesday in a symbolic voting session. The bill must next be approved by President Rousseff, who may veto some of the more controversial sections, possibly including: » Refis (tax debts refinance) extended to June 30, 2013; » Redefining the airport concession regime in the country; » Cumulative Regime of PIS / COFINS for law firms; » Extension of tax benefits for automotive ventures in the Midwest region; » PIS / COFINS Exemption for tires and tubes produced in the Manaus Free Trade Zone. » State debt: The draft bill (PLC) 99/13, which regulates the renegotiation of state and municipality debt, is waiting to be voted on by the Senate. The text aims to provide relief to states and municipalities that had their debt refinanced by the federal government. Politically the bill will likely improve relations between the federal government, states and municipalities because it retroactively reduces the index used to calculate interest on the debt. The change, however, could be considered fiscally unsound. Trade and Regulation: » Campaign Finance Reform: On Wednesday the Senate approved bill (PLS) 60/12, which prohibits firms or corporations from financing election campaigns. The bill must now be analyzed by House committees before being sent to the Senate president. However, it is not likely that the bill will be voted
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on in the House before the 2014 October presidential elections. The bill’s consideration comes amid the trial being held at the Federal Supreme Court (STF), which prohibits parties and candidates from receiving donations from the private sector. STF interrupted the trial analysis on April 2nd, but most of the ministers of the court (six in total) have already voted in favor of ending private donations. The Pulse Aécio Neves and Eduardo Campos are Rousseff´s main challengers in the Presidential election. Despite the desire for change among voters, they both face an uphill battle. As the incumbent, she has the largest coalition and enjoys support of former President Lula
Despite a clear desire for change, as suggested in a Datafolha poll indicating that 67% of voters want the next President to take different action from Dilma Rousseff (PT), the odds are still running high against the two main opposition candidates: Senator Aécio Neves (PSDB/MG) and the former governor of Pernambuco Eduardo Campos (PSB). As the incumbent, President Rousseff enjoys unique advantages that come with the largest political coalition such as far better media coverage and stronger campaign financing. Unlike in the U.S., the electoral system in Brazil establishes mandatory daily TV and radio airtime for all candidates, distributed according to their coalition size. Since President Rousseff will likely run with ten other parties plus her own PT, she will have unparalleled campaign broadcasting exposure (see graph). Still, Rousseff has lost some support in the polls. So, it is worth examining the strengths and weaknesses of her main challengers. Neves represents the clearest alternative to Rousseff and her economic policy. Credited with having brought economic stability via the 1994 Real Plan, Neves’ PSDB party is perceived to be committed to fiscal responsibility and pro-efficiency policies. Besides counting on the support of former president Fernando Henrique Cardoso, architect of the Real Plan, Neves is also being advised by former Central Bank President Armínio Fraga, who is facilitating meetings with key financial industry leaders. However, PSDB is also seen by many as elitist and out of touch with the lower socioeconomic classes, who have benefited from income redistribution programs under Lula and Rousseff. In addition, the PSBD is not fully united behind Neves, particularly long-time party leader and rival José Serra, formerly SP governor and a presidential candidate. Finally, the PSDB faces scrutiny over price fixing charges involving former SP state government officials and private suppliers of subway and train equipment from 1990 to 2007. Eduardo Campos and the PSB appear to be the clear underdog, but he still has strong Labor Party credentials as the former Minister of Science and Technology in the Lula Administration. Although Campos has blasted Rousseff, saying that “we have challenges in our public accounts” and that there is “a crisis of confidence in Brazil”, he has spared Lula from this criticism, declaring himself a “third-way” candidate, or one who acknowledges the legacies of both Cardoso’s and Lula’s achievements. Campos does have an important electoral advantage in his vice presidential running mate, former Senator Marina Silva, a green activist whose political career was born in PT. She left the PT in 2009 to run as the Green Party presidential candidate in 2010, receiving 20 million votes and nearly qualifying for a second round runoff against President Rousseff. However, Campos is still unknown to a large segment of the electorate. His lack of brand recognition and small airtime share are his main disadvantages. Neves and Campos, both considered to be market-friendly candidates, have agreed to a “non-aggression” pact. A formal opposition alliance, however, is unlikely for the October 5th first round. Neither Neves nor Campos can count on the support and engagement of Lula, a powerful political force in his own right who has been working tirelessly as mentor, campaigner and fundraiser for President Rousseff. Lula has advised Rousseff to counterattack increasing criticism against Petrobras and to defend the last 12 years of the PT administration. He has also publicly deflected the “comeback Lula” mantra born within his own party aimed at convincing him to replace her on the ballot. “Dilma is largely the best candidate for the job,” Lula said in a recent interview. A clearer political picture will not likely emerge until after July, when
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Brazilians begin to pay more attention to the elections following the party conventions and the World Cup. For now, Rousseff is still the clear frontrunner.
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