BRAZIL: A LOOK BACK ON 2019 AND WHAT TO EXPECT IN 2020

The year 2019 was marked by the beginning of Jair Bolsonaro's administration, together with the expectations and doubts that surrounded him. Throughout the electoral process, most polls indicated that Bolsonaro, if he reached the second round, would be defeated by any other opponent. A Reserve soldier, with a controversial parliamentary career, emerged as Outsider and in a party with little representation in Congress until then. Bolsonaro was elected, beat Lula's candidate in the second round and became the 38th President of Brazil. In addition to Bolsonaro, attention was also divided between two important names: Paulo Guedes and Sérgio Moro. The first, PhD from the Chicago School and former financial market acquaintance, one of the founders of Banco Pactual, Faculdade Ibmec and Bozano Investimentos, was appointed to fill the position of Minister of Economy. Guedes recommended technical names to his team such as Salim Mattar, founder of Localiza, who was responsible for leading the Privatization Secretariat of the new Government. The second, Sérgio Moro, one of the leaders of the largest anti-corruption operation in Brazilian history, was called to lead the Ministry of Justice.

The high expectations were surrounding the Social Security Reform, since social security expenditures represent an additional 50% of the Federal Government's expenses and, according to studies by the rapporteur of the process in the Chamber, could reach 82% in 2024 if nothing were done. Also in the first quarter of 2019, Bolsonaro handed over the Social Security PEC to the Chamber of Deputies. In October, the text was approved in the second round by the Senate plenary and is now being enacted in the Chamber. With the reform, the Government expects to save up to R$ 1 trillion over the next 10 years. Other reforms, such as the Administrative and Judiciary reforms, are on the agenda for 2020/21. Advances like this in the economic area were reflected in the main Financial Market indices. On June 19, the Bovespa index broke the 100,000 point barrier and closed the day at 100,303, the closing record so far. With the data updated up to December 16, the index accumulated an increase of 23% in 2019.

Source: B3Some political crises in the Government related to the exchange of ministries and internal discussions in the President's party, added to the unfavorable external political environment, the trade war between China and the United States, the democratic crisis in Bolivia and the election of a left-wing government in Argentina were responsible for the environment of greater volatility in the domestic market. As a result, the dollar reached historic closing highs, reaching R$ 4.25 — a devaluation also driven by low interest rates. At its last COPOM meeting, the Central Bank cut Selic by 50bps, which today stands at 4.5% p.a., the lowest level since 1997.

Source: ANBIMAThe scenario for 2020 is positive, although the projected GDP growth is lower than that observed in the last cycles of economic growth, it is a healthy growth from a fiscal point of view, based on austerity and driven by investments from the private sector. Observing the CNI data and comparing the level of utilization of the installed capacity of the industry during the last boom cycle in the Brazilian economy, it is possible to observe that there is room for us to return to growth and production without generating inflationary pressures, guaranteeing the maintenance of interest rates reais at current low levels. In relation to the dollar, the market expects it to remain above R$ 4.00. Uncertainties about the external scenario and low interest rates are the main factors that support the price of the currency at this level.

Source: CNI, FCP Projections

Source: IBGE, Bacen and Focus ReportOn the Mergers and Acquisitions (M&A) side, according to data from PwC, 530 transactions were disclosed by August 2019, a volume 29% higher than the same period in 2018. The IT sector led the number of transactions, accounting for 154 in total, followed by the Public Services, Auxiliary Services, Financial, and Retail sectors, which accounted for 50, 44, 43, and 29 transactions, respectively.

Source: PWCFor 2020, the scenario for the M&A market is also positive, as the reforms unlock the business environment and make both local and foreign investors increase the level of confidence in relation to Brazil and decide to make investments through the acquisition of companies. Low interest rates help to catalyze this market, as they facilitate the financing conditions of these operations. In addition, the dollar at current levels and projected for the market next year also comes in to add up, since part of the resources of these operations come from other countries. The resumption, carried out in a responsible manner, is slow. There is also an extensive pipeline of reforms and privatizations, but everything suggests that we will start a new upward economic cycle in 2020. It is a consensus among economists that the “bottom of the well” has already been reached and that, all the more constant, there are several reasons to be optimistic about the coming years.ARTICLE WRITTEN BY THOMAZ FONSECA — ASSOCIATE FROM FC PARTNERSGo to our site: http://www.fcpartners.com.br