Brazil budget deficit rises to record in 2016, within target

Brazil budget deficit rose to a record high in 2016 but stayed within the government’s target, the central bank said on January 31st, reflecting the dire state of the country’s finances prior to the approval of a federal spending ceiling.

The primary budget deficit, which excludes interest payments, stood at 70.737 billion reais ($22.7 billion) in December and 155.8 billion reais in 2016, the bank said.

“The result was the largest for a calendar year in the central bank series, which shows how challenging our situation is,” central bank economist Fernando Rocha told journalists at a news conference to comment on the numbers.

The overall budget deficit, which includes interest payments, was 562.8 billion reais in 2016, equivalent to 8.93 percent of gross domestic product.

Net debt as a percentage of GDP rose to 45.9 percent in 2016 from 35.6 percent in 2015 and is expected to climb further to 46.4 percent in January, Rocha said. Gross debt increased to 69.5 percent of GDP from 65.5 percent in 2015 and is forecast to reach 70.2 percent in January.

The government’s target for the primary budget deficit in 2016 was 163.9 billion reais. For this year, the government aims for a deficit of 143 billion reais as it looks to take the economy out of recession and restore its investment-grade credit rating.

($1 = 3.1049 reais)

Source: Reuters Brazil

Brazil’s oil regulator to list subsalt areas for auction

Brazilian regulator ANP plans to present a list of subsalt offshore exploration areas by early February for the government to consider auctioning at the end of the year as part of what the agency’s new head called a historic opening of the nation’s oil sector.

Décio Oddone, who took the job this month, said in an interview that the second auction in 2017 for areas in the coveted offshore oil region known as the subsalt would “offer areas with distinct characteristics.”

There was a report on January 19th that a second subsalt auction was planned for this year, in November, and that the government expected it to generate the most revenue of any in 2017.

The first auction, expected in the first half of this year, will offer areas next to existing discoveries already in development. The November auction will be for new exploration areas.

Without giving specifics, Oddone said the areas auctioned in November would vary in their risk profiles. Some have already been extensively mapped and studied, while others are higher-risk.

This year’s auctions, an effort to lure foreign investment in a sector that for much of the past decade has been the object of protectionist policies, will be the first since 2013 for the subsalt area, where giant discoveries were made starting about a decade ago.

They are also part of a broader planned opening of the industry, which will bring rule changes and more frequent auctions in coming years.

Oddone said the aim was to attract a broad spectrum of bidders by offering cheaper exploration prospects in different auctions to complement the subsalt areas which, due to the technical know-how and billions of dollars needed to develop them, tend to only attract major companies.

The terms of the contracts accompanying the auctions will also be standardized and simplified.

“The idea is that the contracts are attractive, simple and objective,” Oddone said. “We will try to hone the contracts for the auctions this year.”

Together with a massive divestment program by state-run oil company Petroleo Brasileiro SA, the auctions represent the biggest opening in the domestic sector’s history, he said.

“In a few years, we will have a dynamic market in Brazil, with various companies in the subsalt, in the wider offshore areas and onshore.”

Source: Reuters Brazil

Brazil’s jobless rate ends 2016 at 12 percent with 12.3 million unemployed

Brazil’s jobless rate rose to a new record high in the fourth quarter as companies continued to cut staff after two years of a deep recession, government data showed on January 31st.

Brazil’s jobless rate rose to 12.0 percent in the three months through December, equivalent to 12.3 million people, the government’s statistics agency IBGE said.

The unemployment rate was slightly above market expectations in a poll, which forecast a jobless rate of 11.9 percent. It stood at 11.8 percent in the third quarter.

Wages discounted for inflation rose 0.8 percent from the third quarter to 2,043 reais ($658.20) a month on average.

Brazil’s unemployment rate has risen steadily after the country plunged into its worst recession in history. Separate government data showed earlier this month that companies cut more than 2.8 million payroll jobs over the past to years.

Economists with São Paulo-based research firm Rosenberg & Associados expect the unemployment rate to continue rising in 2017 as the pace of job creation will probably be insufficient to meet the rising number of people looking for jobs in a scenario of growing confidence but still slow economic recovery.

“Our expectation is that the unemployment rate will reach 13.4 percent in the first quarter and 13.2 percent in the second,”, they wrote in a research note.

Source: Reuters Brazil

Bankruptcy filings for big Brazil firms seen hitting another record

A growing number of large Brazilian companies will seek protection from creditors in 2017, hitting a record for a third straight year due to a harsh recession and tight credit conditions, bankers and lawyers said on January 30th.

New bankruptcy filings from companies with annual revenue surpassing 50 million reais ($16 million) are expected to top the 227 requests last year, as publicly listed homebuilders and energy companies may seek in-court reorganizations, they said.

On a report from November 3rd it was shown that PDG Realty SA Empreendimentos e Participações (PDGR3.SA) was considering seeking creditor protection if banks do not refinance the homebuilder’s maturing loans. PDG has repeatedly denied such a decision.

A bankruptcy lawyer who asked for anonymity to talk about the situation said PDG is not the only residential developer that could file for bankruptcy protection before June.

While declining to elaborate on the potential case, the lawyer said the inability of both builders to sell assets to raise cash could speed up their processes.

Last year, a record 1,863 Brazilian companies – most of them oil equipment, construction and manufacturing firms – requested court protection from creditors, about 45 percent more than in 2015, according to data from Experian Plc’s (EXPN.L) Brazilian unit. Rating agencies have warned that the risk remained high of more firms facing cash crunches.

For homebuilders, which have struggled with weak demand, sales cancellations and high borrowing costs, “we could see a few in-court reorganization cases in the first half alone,” said Gilberto de Abreu, president of mortgage lending group Abecip.

The outlook presents lingering risks to banks and investors such as pension funds that lent to or bought debt from a myriad of commodity, industrial and services companies earlier this decade after years of robust growth in Latin America’s largest economy.

Lenders have cut borrowing costs in recent years and extended maturities for corporate borrowers. Some analysts have said banks may have to refinance or renegotiate terms on more than 100 billion reais in loans over the next 12 months.

Source: Reuters Brazil

Brazil to open airlines, agricultural land to foreign buyers: sources

President Michel Temer will propose legislation to lift restrictions on foreign ownership of airlines and agricultural land in Brazil as he strives to pull the economy out of a two-year recession, government sources said on January 30th.

Temer’s center-right government plans to send Congress a bill allowing 100 percent foreign ownership of airlines, though investors will be obliged to help expand regional flight services, two sources said.

The government will soon propose a bill lifting a ban on foreign investors buying agricultural land in Brazil, on the condition that 10 percent of any purchase is destined to land reform to benefit landless farmers and peasants, said a presidential aide who was not authorized to speak on the matter.

Temer last year vetoed an aviation bill that would have allowed full foreign ownership of local airlines in an agreement with senators who wanted inclusion of measures to boost regional aviation. The new draft will do just that.

“The initial idea is to reopen regional routes that were abandoned so that they get regular flights again,” a source with knowledge of transport policy said on condition of anonymity.

Foreign companies currently can hold up to a 20 percent stake in Brazilian airlines. U.S. carrier Delta Air Lines Inc has 9.48 percent of Gol Linhas Aéreas Inteligentes SA, Brazil’s largest domestic airline.

Counting international routes, the main airline operating in Brazil is TAM, which merged with Santiago, Chile-based Latam Airlines Group SA to become Latin America’s largest carrier.

Two other carriers, Avianca Brasil and Azul Linhas Aéreas, are controlled by foreign owners with Brazilian citizenship.

Attracting investors to buy into Brazilian airlines might not be easy due to jet fuel taxes and falling domestic traffic due to the recession. Despite huge market shares, Brazilian carriers have struggled to make a profit.

Plans to open up land to foreign purchases again, however, are bound to draw plenty of investors in Brazil’s expanding agribusiness industry that is seeking new partners.

Brazil restricted the sale of land to foreign investors in 2010 due to concerns that countries such as China could take control of large segments of arable land in the midst of a super commodity boom.

Companies in Brazil’s commodities sector have pushed to review the rules to allow more investment to flow into the country, especially in the pulp, paper and ethanol sectors.

Source: Reuters Brazil

Maersk weighs sale of Brazil oil and gas assets

A.P. Moller-Maersk (MAERSKb.CO) is considering selling its oil and gas business in Brazil as the shipping giant’s energy group narrows operations in a restructuring, its chief executive said.

While the group has given itself two years to decide on the exact strategy, Maersk Energy is clearly focusing on its two major developments that are planned to start production in 2019 — Culzean in the UK North Sea and the Statoil-operated Johan Sverdrup in the Norwegian North Sea.

“We have said that we will focus on fewer geographies and certainly in the North Sea. Norway and the U.K. will be an area of focus for Maersk Oil,” Maersk Energy CEO Claus Hemmingsen told Reuters, speaking on the sidelines of the GE Oil and Gas annual meeting in Florence.

Maersk’s assets in Brazil’s offshore Campos basin — a 20 percent stake in the Wahoo field and a 27 percent stake in Itaipu assets — appear “on the fringe” of the company’s portfolio, Hemmingsen said.

“It is not being marketed but we are looking through the portfolio.”

The current value of the assets was unclear. The Danish company acquired three Brazilian blocks from SK Energy for $2.4 billion in July 2011 but in 2014 sold its stake in one and wrote down the value of the business by $1.7 billion.

Maersk is in the midst of a major restructuring to shift the company’s focus to its transport and logistics businesses and separate its energy business in the face of a drop in income.

Maersk Energy also plans to break up its oil and gas exploration and production business, known as Maersk Oil, and its three other services businesses — drilling, supply services and tankers, he said.

“We have three service companies of which many are top quartile if not leaders in their sector. We have three service companies that are all global. We have no intention to limit their presence in their global markets.”

“However there is little to speak of in terms of synergies so we actually believe three stand-alone companies will be the best outcome. That could be achieved by mergers or de-merging them, that has yet to be decided. ”

Source: Reuters Brazil

Brazil sees opportunities if Trump pursues protectionism: minister

Brazil has an opportunity to strengthen ties with Pacific and European nations that could be targeted if U.S. President Donald Trump pursues protectionist policies, the Brazilian trade minister said on January 26th.

In an interview , Trade Minister Marcos Pereira pointed to Mexico, a longtime competitor for trade and investment in Latin America, as one of the countries that could develop stronger commercial relations with Brazil.

Tensions between Mexico and the United States have risen since Trump took office, with the U.S. president saying he intends to renegotiate the North American Free Trade Agreement and build a wall on the U.S.-Mexico border. Mexican President Enrique Pena Nieto on January 26th scrapped a planned summit with Trump.

Pereira also said he hoped Chile and Peru would gravitate toward Brazil and the South American trade bloc Mercosur now that Trump has pulled the United States out of the Trans-Pacific Partnership.

He added that Trump’s political ascent and arrival in the White House has prompted the European Union to show greater interest in concluding a trade agreement with Mercosur that has been under discussion for 15 years.

At the same time, Brasilia is hoping Trump does not restrict U.S.-Brazilian trade. The United States is Brazil’s second-largest trading partner after China and the largest market for its manufactured goods, including commercial planes.

“So far, Brazil has not appeared in Trump’s sights,” Pereira said. “I think Brazilian manufacturers will not be hurt and that our trade discussions with Washington will continue to advance.”

Brazil may not be on Trump’s radar because it buys more from the United States than it sells there – running a $646 million deficit last year – and is not drawing investment that threatens U.S. jobs.

‘BUSY YEAR’

Mired in its worst recession in a century, Brazil is keen to expand its exports and stands ready to pick up the slack in trade with countries that face setbacks in their access to the U.S. market.

Trade with Mexico, Latin America’s second largest economy after Brazil, has the potential to grow as the U.S.-Mexican relationship sours.

“We see this as an opportunity to expand trade and hope they have the same view,” Pereira said. “It would be good for Brazil and especially good for the Mexicans who are under pressure.”

The minister also came away from the World Economic Forum in Davos last week convinced the EU is keener than ever to reach a deal with Mercosur.

He said an agreement could be agreed politically by early next year, leaving thorny issues such as French and Irish resistance to lower agricultural barriers to be worked out later.

Brazil is in free trade talks with the European Free Trade Association that groups non-EU states Norway, Iceland, Switzerland and Liechtenstein, as well as with Canada.

The Trudeau government in Canada has also signaled it wants to negotiate a solution to a dispute over subsidies for plane-maker Bombardier that Brazil has threatened to complain about to the WTO, Pereira said.

“It is going to be a busy year with lots of talks between these players to deal with the protectionism that is coming … given the stance of the new U.S. president,” he said.

Source: Reuters Brazil

Brazil plans flexible iron ore royalty rate of 2-4 percent: report

Brazil’s government plans to introduce a bill to set a flexible royalty rate for iron ore that would be between 2 percent and 4 percent depending on international prices for the steelmaking raw material, Broadcast reported on January 26th.

The current iron ore royalty rate is 2 percent.

In an interview with Broadcast, the real-time news service of newspaper Estado de S.Paulo, Mines and Energy Minister Fernando Coelho Filho said the government plans to review the country’s mining royalty scheme as part of a wider reform of the sector.

The ministry’s press office was not immediately able to confirm the information.

Brazil has been in the process of reforming its mining code since 2009, with a bill put to Congress in 2013. That proposal, which has been stalled due to Brazil’s political crisis and a collapse in commodity prices, sought to double iron ore royalty rates to 4 percent.

Coelho Filho has previously said he wants to break the current bill into three pieces whose passage can more easily be negotiated through Congress.

Most of the details of exactly what the revised proposal will seek to change are still unknown, though the three strands of legislation will focus on a new regulator, government revenue from the industry and wider rules governing mineral extraction.

Source: Reuters Brazil

Brazil plans to privatize Sao Francisco river transfer

Brazil is studying private operation of the long-delayed Sao Francisco river transfer that will bring water to four states in the drought-stricken North East of the country when it is completed this year, a government official said on January 27th.

President Michel Temer will visit the project on January 30th to open the third of six pumping stations on one of the two canals that will carry water from the Sao Francisco River to the states of Ceará, Pernambuco, Paraiba and Rio Grande do Norte.

The 470 kilometers of canals have taken a decade to build, and cost overruns have trebled to more than 8 billion reais ($2.5 billion). The government hopes water will flow down the first canal by March to bring relief to Campina Grande, a city of 350,000 that is close to running out of water.

“We have commissioned studies to see if a private-public partnership would be viable to operate the canals,” said a spokesman for National Integration Minister Helder Barbalho, who is responsible for the project.

Brazil’s federal water agency, ANA, has begun public consultations to work out how much each of the beneficiary four states should pay the operator for the transfer service. The government plans to reduce its costs by having a private operator.

Business newspaper Valor Economico reported on Friday that preliminary government estimates put the cost of operating the canals and nine pumping stations at 320 million reais a year.

The controversial Sao Francisco river transfer was promised in 2006 by former leftist President Luiz Inacio Lula da Silva as a solution to the chronic water shortages in his native North East, now into the sixth year of a severe drought.

The western canal will supply Ceará, the state hardest hit by the drought, but it will not start up before August due to the need to contract a new builder. The previous engineering firm, Mendes Junior, abandoned the project when it was implicated in a massive bribery and political kickback scandal in 2014.

Critics of the project maintain that it will drain water from the Sao Francisco river, Brazil’s longest, which has fallen to critical levels.

Farmers complain the water will go first to thirsty urban centers for human consumption before it can be used to irrigate agriculture or water cattle.

Source: Reuters Brazil

Brazil’s inflation falls to lowest in nearly three years

Brazil’s inflation rate slowed more than expected in mid-January, falling below 6 percent for the first time in nearly three years and reinforcing market bets on steep interest rate cuts by the central bank.

Consumer prices as measured by the IPCA-15 index rose 5.94 percent in the 12 months to mid-January, slowing from an increase of 6.58 percent in mid-December, government statistics bureau IBGE said on January 19th.

Economists in poll had expected an inflation rate of 6.06 percent.

Prices rose 0.31 percent from mid-December, up from an increase of 0.19 in the previous month. That was the lowest monthly rate for mid-January since 1994.

Yields on rate futures fell as traders saw an increasing likelihood that the central bank will continue cutting interest rates at a brisk pace this year, sending them to single digits from the current 13 percent.

“I can’t rule out a rate cut of 100 basis points at the next central bank meeting, although the most likely scenario still is for another 75-point cut,” said Cristiano Oliveira, chief economist of Banco Fibra.

The central bank cut interest rates by 75 basis points last week, in a sharp move that surprised most economists. The IPCA-15 numbers show the bank is on the right path, central bank governor Ilan Goldfajn said at the World Economic Forum in Davos, Switzerland.

Inflation is expected to hit the official target of 4.5 percent by June. Policymakers will decide by then on the inflation goal for 2019, and the rapid inflation drop should allow it to reduce its target for the first time in more than a decade, according to economists on a poll.

A measure of price increases among services providers that excludes volatile items such as airfares rose 6.09 percent in the 12 months through mid-January, down from an increase of 6.47 percent in mid-December.

That measure is closely watched by the central bank as services prices are more directly influenced by monetary policy than others.

Below is the result for each price category:

mid-January mid-December

– Food and beverages 0.28 -0.18

– Housing -0.22 -0.28

– Household articles -0.23 -0.52

– Apparel -0.18 0.57

– Transport 0.71 0.79

– Health and personal care 0.48 0.43

– Personal expenses 0.76 0.63

– Education 0.18 0.07

– Communication 0.49 0.08

– IPCA-15 0.31 0.19

Source: Reuters Brazil