Postcards from Brazil: July 2018

Since the middle of last century, Brazil has chosen to develop its transportation infrastructure around roads and trucks, unlike other countries which have fostered railways and trains. This has made the country heavily reliant upon truckers.

A few years ago, the government decided to subsidize credit for those interested in purchasing trucks, offering interest rates deeply below market rates. This has boosted sales for truck manufacturers, and many people decided to work with transportation. Owning your own truck means independence, and only a special driver’s license is needed.

Fast forward a few years, and problems began to surface. The quality of roads across Brazil is poor, excess capacity in the freight market depressed transportation prices and a new liberal government decided to stop subsidizing fuel prices, further depressing margins. Truckers were not happy and threatened the government, but were disorganized.

With mobile technology (and a little help from some freight moguls), truckers were finally able to organize nationwide. They started a blockade on major thoroughfares across all states in the country, effectively bringing Brazil to a halt for almost two weeks.

The nascent recovery story was brought to a screeching halt. Apart from the desperate headlines caused by shortages in foodstuffs and medical supplies, activity levels dropped all over and inflation started rearing its head up again.

Source: Brazil Statistics Bureau

Brazilian analysts started revising activity down and inflation up, postponing the recovery. Some have even started to argue for a double dip recession — among tightening global liquidity and an important election later in the year, the last thing the country needed was a truckers’ strike.

Despite the sound logic, some important data points from June have started to clear the scenario. Important indices published by industry associations — for heavy vehicles flow, commerce sales and cardboard sales — have pointed to a full correction in June.

Sources: Industry Associations in Brazil (ABCR, Anfavea, Serasa-Experian, ABPO)

We acknowledge there’s a lot of uncertainty regarding economic data for the incoming months, but it seems the market’s initial kneejerk reaction might have been a tad overrated. Despite the clouds surrounding the upcoming elections, we remain optimistic on Brazil.