The Week in Review

Week of June 2-6 2014

The Week in Review

On The Economic Front Unemployment Source: IBGE Continuous PNAD According to the Brazilian Geography and Statistics Institute *By quarter

(IBGE), the National Quarterly Household Survey reported 8.0 7.9 on Tuesday that unemployment in Brazil rose to 7.1% in the 7.5 7.4 7.1 7.1 first quarter of 2014 compared to 6.2% for the fourth quarter 6.9 6.9 of 2013 and 7.9% for the first quarter of 2013. The jobless 6.2 rate climbed 0.9% in the first quarter of 2014. This latest

survey used a new methodology and a broader, more

Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 detailed sample from the six largest metropolitan regions. Q1/12 Industrial Output IBGE also indicated that in April, industrial production fell 0.3% from March, as output of capital goods and consumer durables dropped. It was the second consecutive decline in two months. Industrial output fell 5.8% year over year. Trade Balance The Brazilian trade balance recorded the lowest figure for the month of May in the last 12 years. According to the Ministry of Development, Industry, and Foreign Trade (MDIC), the country exported US$ 712 million more than it imported. Pew Research A new Pew Research Center Survey, Global Attitudes Project, indicates that 72% of Brazilians are dissatisfied with their country, compared to 55% just weeks before the mass protests began in June 2013. “Opinions about the national economy have changed even more dramatically over the last year. Two-thirds now say Brazil’s once-booming economy is in bad shape, while 32% believe the economy is doing well (good). In 2013, the balance of opinion was the reverse: a 59%-majority thought the country was in good shape economically, while 41% said the economy was bad. Brazilians are also concerned about the impact of the World Cup on their country, with 61% believing that hosting the event is bad because it takes money away from schools, health care, and other public services. On The Political Front Presidential Poll: According to a Datafolha poll of voters released on Friday, the percentage intending to vote for President Dilma Rousseff declined from 37% to 34% since the poll in May. The percentage supporting Senator Aecio Neves (PSDB/MG) fell from 20% to 19%, while the percentage for former Pernambuco state governor Eduardo Campos (PSB/PE) decreased from 11% to 7%. Importantly, 17% of voters indicated that they would cast blank ballots and 13% have yet to decide, so that fully 30% of the electorate currently does not support any candidate. Datafolha poll margin of error is of plus or minus 2 %. World Cup Security Following a series of protests and strikes weeks before the World Cup, the Rousseff Administration signed an agreement with the Federal Police to prevent more strikes during the tournament. The agreement calls for a 15.8% increase in wages for officers and clerks, with 12% to be granted immediately and the rest in January 2015. This amounts to a BRL$ 376 million increase in wages by January. Despite legislation prohibiting wage increases in an election year, the administration dodged legal questions by arguing that

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the increase was a part of negotiations initiated in 2012 with the Ministry of Planning. In another attempt to prevent mass strikes, President Rousseff offered military assistance to the World Cup host cities hoping to increase security. Brasília, São Paulo, Rio, Cuiabá, Curitiba, and Natal have already accepted the military’s help. Bilateral Relations According to David Rothkopf, Foreign Policy magazine publisher and former Under Secretary of Commerce for International Trade during the Clinton Administration, Brazil and the United States have a relationship marked by “mutual paranoia.” In an interview with Folha de S. Paulo, he said that “if Dilma [Rousseff] gets reelected, she has to rethink the relationship with Hillary Clinton or Jeb Bush, the favorite [candidates] to succeed [Barack] Obama. There are opportunities for cooperation in science, energy, and climate change.” (See more on Campaign Trail below). Campaign Trail With the party convention season officially kicking off this Friday (and wrapping up on June 30th), the campaign will be heating up just as the World Cup is getting under way on June 12th. The Labor Party (PT) convention is scheduled for June 21,st and the PMDB convention for June 10th. Dilma Rousseff will be confirmed as the presidential candidate and Vice President Michel Temer, a PMBD leader, as her running mate for the coalition ticket. For the main opposition parties, the PSDB convention scheduled for June 14th will nominate Senator Aécio Neves (MG) and also select his running mate. The PSB, whose convention will take place on June 28th and 29th, will nominate Eduardo Campos, former governor of Pernambuco state, to head the presidential ticket and former Environment Minister Marina Silva as his running mate. On Tuesday June 3rd, President Rousseff gave an interview to foreign correspondents in Brasília. In talking about her Administration’s tax cuts and current fiscal challenges, she said that new cuts are off the table. Quote: “The federal government has reached its limit.” She also said that she plans to meet Vice President Joseph Biden during his visit to Brazil for the World Cup and further mend ties with the Obama Administration. Quote: “I’m certain we can pick up our relations where we left off.” During “Roda Viva,” a televised interview on TV Cultura aired on Monday June 2nd, Senator Aécio Neves said that, if elected, he would reduce the number of cabinet positions, currently 39, and also gradually reduce inflation to the central target rate of 4.5%. Quote: “The center of the target must be sought out, and I think that’s possible in a period of a year-and-a-half to two years.” Eduardo Campos visited Vigário Geral, a Rio de Janeiro slum on Tuesday, where he said that as the popular dissatisfaction towards the Rousseff Administration grows, there is a trend of the governing coalition shedding some of its allies at the state level. Quote: “As the campaign season approaches, society will clearly distance itself from following the current path of change, [and] it is natural that the coalition will decouple from that change.” Cotton Case / Itamaraty Hacked According to Folha de S. Paulo, in a document leaked last week by hackers of the Ministry of Foreign Affairs’ e-mail and data system services, Brazil would be willing to accept financial compensation of US$ 400 million for cotton producers and in return, would not seek to open a new World Trade Organization panel against the United States. The agreement, purportedly under negotiation, would provide financial compensation to Brazilian cotton farmers for distortions believed to be caused by the new U.S. Farm Bill. Folha also reported that at a meeting held last week in Washington, Brazil requested US$ 800 million in compensation. However, the Brazilian Cotton Growers Association (Abrapa) stated that it would consider accepting US$ 400 million despite losses estimated to be upward of US$ 1.6 billion over five years. Task Forces Tax and Investment Fiscal War: On Wednesday, Senators from various parties met the Ministry of Finance Executive Secretary, Dyogo Oliveira, to discuss draft bill (PLS) 130/14. The bill addresses the BRL$ 55 billion in tax incentives granted yearly by the states. Senators want to accelerate the voting on the bill which aims to end the states’ tax disputes (Guerra Fiscal) before the Federal Supreme Court (STF) declares illegal all state tax incentives. During the meeting, they established that the National Council on Fiscal Policy (CONFAZ), which convenes the finance secretaries from the 26 states and the federal finance district, will

meet next week (pending confirmation) and a new report will be drafted on the bill. Senators also agreed to vote on the bill next week, before the June 12th World Cup kickoff. National Education Project: On Tuesday, Congress approved bill (PL) 8035/10 - National Education Project (PNE), which sets 20 goals for education over the next ten years in hopes of improving Brazilian educational metrics. Among the goals are: the eradication of illiteracy; increasing childcare facilities in high school, vocational education programs and public universities; universal school care for children 4-5 years of age; and increasing opportunities for full-time teaching for at least 25% of students in basic education. The main difference in the bill, compared to the previous plan that ended in 2010, is a minimal commitment of funding on public education equal to 10% of Gross Domestic Product (GDP), almost twice as much as the current budget (5.3%). The bill has still to be signed into law by President Rousseff. Trade and Regulation Comptroller General Security Policy: The office of the Comptroller General (CGU) published ordinance 1213/14, which establishes their Corporate Security Policy and also provides safety guidelines that must be observed by all public officials, employees, and if necessary, by visitors who have access to the office’s facilities. The ordinance also creates a Standing Committee on Corporate Security (COPESEG), to which the information relating to the implementation and enforcement of the Corporate Security Policy must be transferred. The COPESEG will be responsible for establishing security risk management of information and communications guidelines and procedures for including the implementation of a risk treatment plan, and establishing procedures and standards for the use of media, including mobile device, e-mail, and internet access. Super Simple: The House of Representatives approved bill (PLP) 237/12, which enhances the Federal program of tax incentives for micro and small businesses known as Simples Nacional or Super Simple. The system involves monthly tax and social security payments being collected through a single document, thus reducing bureaucracy for businesses. The approved text changes the criteria for companies to be included in the system. The eligibility rules are no longer established by category, but by revenue. The change allows any company that provides services and has earnings of up to BRL$ 3.6 million per year to join the special tax regime after their project is approved and sanctioned by President Rousseff. Companies that fit into the new system will be taxed according to a scale ranging from 16.93% to 22.45% of the monthly revenue. Also, an amendment made to the bill includes, among other industries, soft drink manufacturers, cosmetics, perfumery, and personal hygiene products and electronics in the program. The bill must be taken up by the Senate committees followed by a floor vote. Anti-Corruption: On Monday, the Office of the Comptroller General (CGU) issued a directive prohibiting federal public agents from accepting any invitations, tickets, transportation, or hotel offers to watch matches or participate in World Cup events. This CGU directive is consistent with the existing obligations of businesses under Brazil’s recently enacted Anti-Corruption Law (Lei 12,846/13). However, the directive allows officials to accept invitations or tickets in limited circumstances:  when distributed by the Public Administration as granted to it by FIFA, a FIFA subsidiary in Brazil, the Brazilian Organizing Committee, or Brazilian Football Confederation;  when received from personal family or friends who incur the costs with no connection to the recipient’s role as a public servant;  when received from public promotions or from a private consumer relationship and bearing no relationship to the recipient’s role as a public servant;  when the recipient is to attend or participate in events in his/her capacity as a public servant and with the approval of management; or  when issued by a government-owned company in furtherance of its operations or the public interest and provided no conflicts of interest exist.

Manaus Free-trade Zone: In a last round of voting, the House approved the proposed constitutional amendment (PEC) 103/11, which extends tax exemptions for 50 years for firms operating within the Manaus Free-Trade Zone. They will cover Industrialized Products (IPI), imported industrialized products (II), income tax (IR), and payroll taxes (PIS/COFINS). With the extension, the tax incentives will be extended from 2023 to 2073. The House also approved bill (PL) 6727/13, which extends for 10 years the benefits of the IT Law 8248/91, which grants tax deductions for companies that develop technology products. According to the bill, the IT industry will have an 80% Tax reduction on Industrialized Products (IPI) until 2024; 75% until 2026 and 70% until 2029. The law also requires IT companies to invest at least 5% of

gross sales in research and development. Both bills will be taken up by the Senate Committees to be followed by a floor vote. The Pulse Following Supreme Court Chief Judge Joaquim Barbosa’s retirement and under his successor Ricardo Lewandowski, the Court will likely focus on constitutional cases and still face the historical challenge of reducing its 56,000 case backlog

Joaquim Barbosa, the first Afro-descendant to be nominated to the Supreme Court and also to rise to the Court’s top job, last week announced his retirement effective at the end of this month. He will be succeeded by the current Deputy Chief Judge, Ricardo Lewandowski, first on an interim basis until November, and then for a two-year term, as prescribed by the Court’s fixed rotation schedule. Barbosa has a historical legacy in Brazil. As a young democracy, Brazil is noted for its social inequality and entrenched sense of impunity derived from a traditional perception that the “powerful” are above the law.

Barbosa helped change this perception. Nominated by former President Luiz Inácio Lula da Silva in 2003, he played a critical role as the rapporteur of the Mensalão trial, the country’s biggest corruption case that in 2012 convicted 25 politicians, bankers, and executives involved in a scheme to divert public funds to pay coalition parties for political support. Among those convicted in 2012 were José Dirceu, Lula’s former Chief of Staff, and José Genoino, former President of the governing Workers’ Party (PT) Following their conviction, 12 of the defendants appealed to the Supreme Court on technical grounds. Last February, with three new judges in the bench and against Barbosa’s will, eight defendants, including Dirceu and Genoino, had their sentences commuted. After that, Barbosa indicated that he would leave the Court before his compulsory retirement in 2024, when he turns 70. “Our penal system is very lax. It’s a system totally pro- suspect, pro-criminality,” the mercurial Barbosa told the Financial Times in 2013. “Everything conspires to ensure that criminal cases do not have any consequences.”

Without Barbosa, the Supreme Court is likely to focus more on constitutional cases rather than taking on politicians charged with wrongdoing. Key cases that could be considered include oil royalties revenue sharing among the states and certain provisions of the new Forest Code that benefit agribusiness. Among Lewandowski’s main challenges will be to expedite trials for the current 56,000 backlogged cases through the combination of technological advances and procedural improvements. The Supreme Court has already picked 750 main issues whose rulings could define the outcome of some 150,000 lawsuits in lower courts.

As for the National Justice Council (CNJ), a Judiciary body that has been active in setting targets to expedite judicial procedures in lower courts and to curb corporatism, and which it’s President is the Chief Justice of the Supreme Federal Court, it will likely keep pace to diminish the current national backlog of over 92 million lawsuits. However, without Barbosa, CNJ’s efforts will likely be slower in limiting benefits and fighting conflicts of interest among judges and relatives who work as lawyers.

It is also worth noting the importance of the Supreme Court’s composition following Barbosa’s retirement. His replacement will be nominated by President Dilma Rousseff, who has also nominated four other judges: Luiz Fux, Rosa Weber, Teori Zavascki, and Luís Roberto Barroso. Besides Barbosa, former President Lula also nominated judges Lewandowski, Carmen Lúcia, and Dias Toffoli. Former President José Sarney nominated judge Celso de Mello whose compulsory retirement will come in November 2015. Former President Fernando Collor nominated judge Marco Aurélio de Mello, whose compulsory retirement will come in July 2016, and former President Fernando Henrique Cardoso nominated judge Gilmar Mendes, whose compulsory retirement will come in December 2025. Thus, after installing this latest nomination to the court, 72% of the bench will have been nominated either by former President Lula or President Rousseff. New Chief Judge Lewandowski will also likely continue lobbying Congress to pass Constitutional Amendment Proposal (PEC 63/13), which creates additional benefits to the Judiciary and the Public Attorney’s office, both at the state and federal levels. If approved, the bill, which is opposed by the Rousseff Administration, could have a fiscal impact of as much as BRL$ 14 billion per year.