The Brazilian capital market has become attractive again as a funding alternative for companies, after a slowdown period from late March to early June caused by the political crisis. Estimates point to some R$20 billion to R$25 billion in new bond offerings in the second half. Of that, about R$8 billion to R$10 billion are likely to be issued under Law 12,431, which provides tax exemptions for individual investors who buy securities meant to fund projects that are mostly in infrastructure.

Yet banks don’t rule out the possibility of a higher volume than the R$25.9 billion of the first half — of which R$1.5 billion were raised with tax-exempt bonds. There was a 16.3% year-over-year growth in the total raised in the first half.

“The issuance of bonds and certificates of agribusiness receivables [CRA] are likely to top the R$70 billion of last year,” says Rafael Noya, head of debt market operation at Santander Brasil. The bank has more than 15 mandates of offerings being carried out, including CRA.

Among the ongoing offerings, the ones standing out are from Petrobras (R$5 billion), construction company MRV (R$700 million) and a R$1.5 billion issue by Arteris to finance its investments in the Footwear Highway, which it won in an auction this year.

In July, at least R$3.5 billion were raised via bonds. Autoban, a concessionaire that operates highways Anhanguera and Bandeirantes in São Paulo, for example, has just concluded a R$716.5 million offering in infrastructure bonds. “The [mainly political] uncertainty in May had made us hold back some transactions,” says Felipe Wilberg, head of fixed income at Itaú BBA.

On the side of demand, there was also higher interest for riskier assets both by individual and institutional investors, because of the monetary easing, which made the benchmark rate Selic fall to a single digit, and of the lower volume of bank securities, such as real estate and agribusiness letters of credit (LCI and LCA), which offer tax exemption to individuals. “Banks are issuing debt at lower rates and volumes,” says Paulo Laranjeira, head of local fixed income at Bradesco BBI, since they have high liquidity.

A proof of the growing demand from investors is the reduction of the share of intermediaries and participants in the offering in the bonds’ subscription, which fell to 34.6% in the first half from 87.9% a year earlier.

The second half also tends to be marked by the increase of infrastructure bonds. There is a significant demand for this type of debt security mainly from electricity distributors. In late June, the Ministry of Mines and Energy published an ordinance simplifying the process for these companies to issue tax-exempt bonds.

From now on, investment projects considered for the issuance of tax-exempt bonds may consider annual investment values, as part of the distribution development plan. Before, the companies had to file with the ministry each project separately, which delayed approval. “This considerably increased the volume of issues from the distributors,” Mr. Laranjeira, with Bradesco BBI, says.

Some financing transactions for the power-transmission projects won in auctions held last year are likely to begin coming to market this year, says Alberto Zoffman, head of project finance at XP Investimentos.

BTG is structuring about six issues of tax-exempt bonds. There is a R$600 million offering under way for a project of transmission lines with 14-year maturity, which will have a guarantee from BNDES, the national development bank.

Investor demand for higher returns, and therefore riskier assets, has also enabled the issuance of debt by companies with ratings a little below AA, which was concentrating the offerings. Movida, the second-largest car-rental company in the country, controlled by JSL group, raised R$400 million this month in its first bond issue. With maturities in three and five years, the offering, coordinated by BTG Pactual and with restricted distribution, was rated A+ and drew demand two times higher than the amount offered, which contributed to a cost reduction. The security maturing in 2020, for example, was priced at CDI [the benchmark short-term market rate] plus 1.55%, while the maximum rate was 2.5%. “There was a drop of about 150 basis points in the spread of the corporate debt issues in relation to the offerings held last year,” says Daniel Vaz, head of local debt market at BTG Pactual.

MRV Engenharia is one company getting better conditions on the market now. The company has a R$700 million issue and offers in one series, with maturity in three years, a remuneration of CDI plus 1.4%. In an offering early this year, for the same maturity, it paid CDI plus 1.5%, and the Selic rate at that point was at 12.25% and has now fallen to 9.25%.

Even though the domestic market continues with plenty of liquidity for the purchase of these securities, Mr. Noya, with Santander, doesn’t expect a sharper drop of these issues’ rates. “The room for a drop has already diminished, and below this level the risk/return starts to be asymmetrical,” he says.


Source: Valor Econômico

Despite greater uncertainties due to the political crisis, economic indicators disclosed before the JBS plea bargain accusing President Michel Temer apparently show no significant harm to activity even though the economy continues recovering very slowly and erratically. Consumer spending showed more consistent improvement in June, driven by both lower inflation and interest rates, but the manufacturing industry’s reaction seen in the previous two months seems to have cooled down in June.

According to economists, leading indicators show economic activity continuing on a slow trajectory of recovery in the period, although at an insufficient pace to avoid another GDP contraction in the second quarter.

Júlio Mereb, a researcher at the Brazilian Institute of Economics at Fundação Getulio Vargas (Ibre-FGV), thinks the impact of the worse political environment on the economy was modest in June. Uncertainty remains high, making business people more fearful, but more positive news for the government last month with the passage of the labor reform softens the political shock on activity.

Mr. Mereb says that the leading indicators’ performance points to “between neutral and positive” behavior of economic activity in June, on average. For retail, the expectation is positive, while the manufacturing industry is likely to return some of the gains seen in the previous month.

For Luiz Castelli, with GO Associados, the retail sector has benefited from both falling inflation and interest rates; the temporary effect of withdrawals from inactive accounts of the Workers’ Severance Fund; and the labor market’s stabilization. However, the political crisis seems to have caused an adverse effect on the manufacturing industry in June, but that does not change the favorable outlook for the sector. “Volatility in activity continues, with no stronger recovery trend,” says Mr. Castelli, who estimates a 0.1% decline in GDP in the second quarter.

On the retail side, few indices have come out so far but those already known indicate that sales rose in June, Mr. Castelli ponders. He mentions vehicle sales measured by Fenabrave (dealership association), which rose 1.8% (seasonally adjusted) — the fifth gain in a row — while store sales calculated by credit bureau Serasa Experian advanced 1.2% compared with May.

The Brazilian Association of Supermarkets (Abras) said on July 27 the industry’s sales increased 2.71% in the 12 months through June 2017. With the seasonal adjustment of Tendências Consultoria, sales rose 1.6%.

Tendências forecasts that restricted retail (excluding automobiles and construction material) expanded 0.5% between May and June, while broad sales would have increased 2%, boosted by the auto industry.

June data suggest manufacturing contracted, although July may help recover some of that loss according to the Brazilian Economic Institute of business school FGV (Ibre/FGV), based on its monthly survey of the sector. As for the automotive industry, car sales had been rising, but July broke with the trend of higher daily turnout from the previous two months.

Between the first business day of the month and the 26th of July, 146,000 new passenger cars and light-utility vehicles were registered. Since the last three days of the month usually feature strong sales, industry sources expect the market to reach around 181,000 in July. If confirmed, it will mean a 3.4% expansion from July 2016.

Although better than a year ago, daily sales declined from the previous weeks. The daily average this month until Wednesday was 8,100 vehicles. Forecasts of better sales later in the month would put the daily average at 8,600. The daily average in July 2016 was 8,300 units. But the pace had picked up in June with an average of 9,000 units a day.

The auto industry hopes for an improvement from now on. In addition to lower rates, consumers have been accepting well the new launches. But given the uncertain environment, carmakers, which a month ago had raised output and export forecast for 2017, preferred caution and declined to change domestic forecasts. They kept the projection of 4% growth from 2016. But the National Association of Vehicle Manufacturers (Anfavea) raised its production forecast to 21.5% growth from 11.9% thanks to buoyant exports.

Anfavea, which brings together automakers operating in Brazil, vehicle production in June totaled 212,200 units, including cars, light commercial vehicles, trucks and buses, up 15.1% from the same period last year. The seasonally adjusted data from GO Associados, however, show a 9% decrease in June compared with May.

Other negative signs from the manufacturing industry’s activity include corrugated cardboard shipments, which fell 0.3% in June month over month (also seasonally adjusted by GO Associados). Traffic flow of heavy vehicles on highways was 0.7% lower, according to the Brazilian Association of Highway Concessionaires (ABCR) in partnership with Tendências Consultoria. And the Federation of Industries of the State of São Paulo (Fiesp) announced on Thursday that its Activity Level Indicator (INA) shrunk 0.7% from May.

“There is no way for the industry to escape the negative [territory] in June,” says Mr. Castelli of GO Associados. He expects a 0.9% reduction in the segment’s activity compared with May when the indicator rose 0.8% and a 1.1% increase in April. On average, production is likely to stay close to zero between the first and second quarters, Mr. Castelli estimates.

For LCA Consultores, activity continued showing a few incipient signs of improvement during the second quarter. “Several coinciding activity indicators have been showing a continuing recovery (albeit slow and irregular) of the economy,” a trend that becomes more evident in consumer indices, LCA economists wrote in a report.

João Morais, of Tendências Consultoria, says the political environment’s deterioration tends to affect more investment-linked sectors, the first in the economy to contract in periods of greater uncertainty. “For spending and activity as a whole, the political crisis’ impact tends to be reduced.” The spending reaction is recent and has occurred at a fairly gradual pace, albeit consistent, he says. Central Bank’s credit data for June reinforced a slightly positive perception on consumer spending, Mr. Morais says.

Loan consultations with the Brazilian Development Bank (BNDES), a kind of barometer of business interest in new investment, totaled R$10.2 billion, while May saw R$10.5 billion and March saw R$11.5 billion, this year’s peak month so far. June results were bolstered by retail and services, which sought information on R$4.5 billion worth of loans, up 161% from the previous month and also the most significant monthly level for the sectors since December 2014.


Source: Valor Econômico

Mining reforms decreed by Brazilian President Michel Temer are likely to pass Congress, a legislative leader told on the 26th of July, despite opposition from an industry trade group.

The revisions to the mining code, announced on July 25, would raise government mining royalties. But officials said they would also cut industry red tape by creating a new regulatory agency and speeding up approvals.

Temer, who is under investigation for corruption, has argued that changes across many sectors of the economy are necessary to shore up government finances as Brazil emerges from its worst recession on record.

The mining reforms must be approved by Congress within 90 days to take permanent effect. Royalties would not rise until November.

“I don’t think the mining measures will be hard to approve quickly,” said Beto Mansur, deputy leader of the government’s coalition in the lower legislative house, a role akin to the majority whip in the U.S. House of Representatives.

“It’s a proposal for modernizing the sector, I think it will be a very positive thing.”

Deputies were unlikely to oppose the measures since 65 percent of royalty revenue goes to municipal governments, and members of Congress will rely on local mayors to campaign on their behalf going into the 2018 elections, Mansur added.

Analysts also predicted that the reforms would win easy approval.

The only possible hiccup would be if a second corruption charge is leveled against Temer, which could distract Congress when it would otherwise be considering the reforms, said Thiago de Aragão, Brasilia-based director for consultancy Arko Advice.

Temer is expected to survive a congressional vote set for next week on whether a corruption charge against him warrants a trial before the Supreme Court.

Frederico Marques, head of the Brazil-Canada Chamber of Commerce and a lawyer experienced on mining deals, said he opposed raising royalties although he supported the reforms in general.

Gil Clausen, chief executive of Canada’s Brio Gold Inc which owns three mines in Brazil, said the rise in gold royalties was an “unfortunate development” that would raise costs by the equivalent of $12.50 per ounce of the mineral at current prices. The changes were long anticipated, however, Clausen added.

“The commitment of the government to streamline and expedite the analysis and issuance of permits and licenses is positive,” he added.

The domestic mining industry body IBRAM has harshly criticized the mining measures, calling them inflationary and saying they would hurt the competitiveness of Brazilian minerals on the international market.

Source: Reuters Brazil

After a preliminary court order on July 25 overturned the increase in social contributions PIS and Cofins over fuels, the minister of Finance, Henrique Meirelles, said the government could hike another tax to provide the necessary revenues, in case the Federal Justice of the Federal District upholds its provisional ruling. The Office of the Attorney General of the National Treasury (PGFN) said it would appeal.

Mr. Meirelles reiterated that the increase in PIS/Cofins would be “more efficient” for the moment than raising other taxes, but that it would be substituted, if necessary. He said the court decisions will be “strictly” followed, but added he believed the government would be capable of altering the ruling.

He said the interpretation both of the Office of the Federal Attorney General (AGU) and the PGFN is that such tax hike can be made via presidential decree and doesn’t need the 90-day period to come into force. These were the two arguments accepted by the justice to forbid the tax increase.

Attorney General Grace Mendonça defended the legality of the raise by decree and said the AGU would appeal already on the 25th of July. “We will try and overturn the decision as quickly as possible. The entire action of the president was based on the legislation in effect and he acted strictly within the legal authorization,” she said.

Ms. Mendonça said the legislation allows such increases by presidential decree as long as obeying the legal cap. “And the president obeyed the legal cap,” she said.

Planning Minister Dyogo Oliveira also said the government would argue that the regime it proposed was optional, without obligation for companies to accept the new form of taxation.

“These are the decisions the justice will take. What we have said is that the PIS/Cofins regime is an optional regime. So, companies, say, that are submitted to this elective regime may not opt for this,” he said.

Asked about the fact that filling stations are passing on to end consumers a higher increase than expected by the government, Mr. Oliveira said such move needed to be “analyzed by the consumer defense bodies.”

Mr. Oliveira explained that, in addition to the proposed regime (with the collection of a specific rate, of a value per liter sold), the normal regime is based on the collection of a percentage over the sale price.

“As it happens, this percentage ends up being higher than the optional regime. So, actually, the taxation here occurs at the refinery, at the distributors,” he said. “So, they evidently have no reason not to opt for the ‘Ad rem’ rate that was established. That’s why our issue is that the legal basis is of an optional regime and not of an increase in the legal tax rate.”

One source explained that the government argues the existence of a specific law addressing the special regime of PIS/Cofins over fuels. This legislation establishes a margin for increase and reduction of the contributions’ rate. Since the raise proposed by the government is within the cap set by law, there would be no unconstitutionality in the measure and it wouldn’t be necessary to obey the 90-day period.

Such constitutionality for “state needs” is questioned by a study of Marco André Ramos Vieira, legislative consultant to the Senate and member of the tax and financial group of the Law Division of the upper house of Congress. The study also disputes the immediate pass-through of the tax hike by gas stations to consumers. This is because producers and importers of fuels pay the PIS and Cofins only once, without it being levied on the direct sale to consumers.


Source: Valor Econômico

Banks may gain more time to sell the properties and other assets they got as collateral for unpaid loans. The way these lenders deal with such assets has gone almost unnoticed in provisional measure (MP) 784, which addresses leniency agreements between financial institutions and the Central Bank.

As the crisis worsened, the five largest banks in the country have become big property owners, because of the inventory of enforced collaterals. At the end of the first quarter, Banco do Brasil, Itaú Unibanco, Bradesco, Caixa Econômica Federal and Santander had approximately R$10 billion in assets not meant for their own use, such as properties, machinery and equipment, according to their financial statements.

The prior rule stated that banks had up to a year to shed these assets after taking them, period that could be extended by two more years. With the change, a National Monetary Council (CMN) resolution will now define such deadline, which could be altered at any moment depending on market conditions. The rule also allows the Central Bank (BC) to authorize the acquisition of properties not meant for their own use in situations banks consider appropriate.

The idea is to avoid that, at times of crisis like the current one, banks be forced to sell the assets — especially properties — at any price to comply with regulatory deadlines, which brings negative impacts both for the lender and for the property market. “The prior rule was inadequate because it forced the sale of properties not meant for their own use in at most three years, even if the real-estate market were unfavorable,” the BC press office said in a note.

Even if the CMN increases the timeframe, banks are likely to maintain the plans of selling the assets taken as collateral as soon as possible. “In most cases, it makes no sense to maintain these assets in the balance sheet, which consume capital and have maintenance costs, but the flexibility brought by the new rule is positive,” says the executive of a large bank.

To accelerate the sales, banks changed how they collect, enforce collaterals and sell properties and other assets. On-site auctions have been practically abolished and now are all online, for example. At a large bank, the average timespan for resale of properties fell by half, to five from ten months. In the case of vehicles, the period of time for the sale fell to 57 from 100 days, on average.

Although nimbler, the banks are not managing to reduce the inventory of assets taken because of high default rates. In some cases, they are agreeing to roll over the debt in order not to deal with the costs of enforcing collaterals, one executive participating in debt renegotiations says. Eyeing this market, funds specialized in distressed assets are targeting properties held by banks.

The provisional measure is in effect, but needs to be passed by Congress. The MP text received a total of 97 amendments. One, by Deputy Valdir Collato (Brazilian Democratic Movement Party, PMDB, of Santa Catarina), calls for the removal of the paragraph that addresses assets not meant for use by the financial institutions. There is also a direct action of unconstitutionality to overturn the MP at the Federal Supreme Court.

In addition to the possibility of the measure being altered or rejected by Congress, there is also a legal issue to be handled. Since the prior rule was regulated by a complementary law, in a more conservative view, the change could not be made via MP.


Source: Valor Econômico


The scandals involving conglomerate Odebrecht and other companies in Latin America were a catalyst for the creation or modification of anti-corruption laws in the region. Argentina, Mexico and Peru want to hold companies accountable. Ecuador and Colombia are seeking new legislation.

The move stems from public pressure and is part of a broader regional context, says Thomaz Favaro, an analyst at Control Risks. “In the last two years, Latin American society has been more alert to corruption cases, and this has to do with the economic slowdown. During lean times, there is a growing concern about resources that were once abundant.”

While in Peru the Odebrecht case has triggered a debate and pressured the justice system to hold politicians and companies accountable, in others, as in Argentina, the change of government was crucial to bringing anti-corruption laws to Congress, Mr. Favaro said.

Peruvian officials have recently detained former president Ollanta Humala and his wife on suspicion of receiving illegal money from Odebrecht. An arrest warrant has been issued for former President Alejandro Toledo but since he lives in the US, Peru is requesting his extradition. The scandal threatens to hit even President Pedro Pablo Kuczynski, who was Finance minister and followed bids involving the Brazilian company.

The cases have prompted Peru to pass a law on corporate accountability for corruption, which came into effect earlier this month. The law provides fines of up to 2 million soles ($617,000), shutdown of the company’s facilities and definitive cancellation of licenses or concessions. Regulation on the application of measures should be set in less than 60 days.

Until then, there is a decree that provides the punishment for companies that admit wrongdoing, explains a lawyer who has worked with the Peruvian Public Prosecution Office on Odebrecht’s leniency agreement. “The decree, however, discourages companies from collaborating with the judiciary,” the person says. “The only company currently barred from signing contracts with public authorities is Odebrecht. Peruvian companies, no matter how much they appear in the plea bargains, are not investigated.”

Last week, Mexico implemented the National Anti-corruption System and the General Administrative Responsibilities Law, which provides fines on individuals and corporations accused of corruption. The penalties include fines from 75,000 Mexican pesos ($4,300) and shutdown of companies accused of forgery, bribery or misuse of funds for collusion with authorities.

In addition, the system creates autonomous agencies to monitor public spending and the figure of the Special Prosecutor against Corruption, under the Office of the Prosecutor General.

In Argentina, the Senate began discussing earlier this month a bill that makes companies accused of corruption accountable, including bribery cases abroad. Today, the Argentinian legislation establishes criminal responsibility only for individuals. The new law, already passed in the Chamber of Deputies, provides fines of 1% to 10% of the company’s gross annual revenue and bans participation in public bids for ten years.

The new law’s passage in Congress, Mr. Favaro points out, was made possible by the change of government. Former President Cristina Kirchner, facing charges of fraud and money laundering, did not prioritize the issue. “Since taking office, President Mauricio Macri has improved the legal framework in the anti-corruption battle, such as the plea agreement law, sent to Congress late last year.”

If on one hand there is a political environment favorable to new legislation, says Bruno Brandão of NGO Transparency International, on the other there’s lack of a regulatory framework for leniency agreements with companies such as Odebrecht. “This can be used as an excuse not to investigate high-level politicians.”

In Ecuador, President Lenín Moreno created last month the Transparency and Fight against Corruption Front, made up of 13 jurists, academics, former ministers and diplomats. The group will be responsible for proposing anti-corruption mechanisms in the public and private sectors, as well as presenting proposals for public policies and anti-corruption laws. The scandal involving Odebrecht, which signed a leniency agreement in the country, hit Vice President Jorge Glas, whose uncle is under house arrest accused of wrongdoing.

Authorities in the Dominican Republic, the other country where Odebrecht made leniency agreements in Latin America, have not made progress on legislation. Thousands of people protested this month to demand the trial of President Ricardo Medina, whose campaign would have received illegal money from the company, and request that Odebrecht stop operating in the country. “It’s a movement that deserves attention. The last time so many people took to the streets to protest was against the US invasion of the country in 1965,” Mr. Brandão, with Transparency International, says.

Despite Odebrecht being accused of giving slush funds to the campaign of Colombian President Juan Manuel Santos, the country has not officially started debating anti-corruption policies. The Green Party gathers until the 25th of July signatures for a referendum that should bring some proposals. The issue should be in the spotlight in the 2018 elections.

In Venezuela, where Odebrecht has paid $98 million in kickbacks and is accused of giving slush funds to campaigns of former President Hugo Chávez and opposition leader Henrique Capriles, Prosecutor General Luisa Ortega is seeking the investigation of former ministers. The country, now plunged in a political and economic crisis, does not envisage legislation against corruption.

In Panama, although there are laws punishing individuals, a Control Risks report states that “anti-corruption laws are not perceived to be strictly enforced.” As a result, the document notes, “corruption in different spheres of government will continue to be an obstacle for foreign companies that want to operate in the country.”

In January, Panama’s Prosecutor General Kenia Porcell filed a complaint against 17 people accused of receiving bribes from Odebrecht, three of whom were government officials. The children of former President Ricardo Martinelli are suspected of having received bribes from the company, which is prohibited from participating in bids in the country.


Source: Valor Econômico

The government announced another spending cut of R$5.9 billion this year, increased social contributions PIS/Cofins over gasoline, diesel and ethanol and made clear it would do whatever necessary to end the year delivering the R$139 billion primary budget deficit it promised. By reaffirming his commitment to the fiscal target, President Michel Temer wanted to preserve the political capital he still has with the market forces that support him amid the crisis engulfing his administration.

The additional cut, which raises the frozen allocation to R$44.8 billion was decided on June 20 as a “temporary” measure until the government manages to get one of the non-recurring revenues with which economic officials expect to settle this year’s expenditures. They include the sale of Caixa Seguradora, an insurance unit, and the concession of Lotex, of scratch-off lottery tickets.

Despite having a primary-deficit target apparently loose, the loss of revenues so far this year has been of R$35 billion, compromising the efforts to comply with that goal. Revenues have been short of expected either because inflation fell more than anticipated or because Congress hasn’t passed the measures submitted by the executive branch. The provisional measure that rollbacks payroll-tax cuts, for example, was not even voted and may expire next month. The legalization of undeclared assets held abroad and the new program for settlement of tax debts will not yield what was expected.

By raising fuel taxes, the government, according to decree signed by President Temer, expects to obtain R$10.4 billion this year and something close to R$26 billion in 2018.

Even though the government postponed raising taxes as much as it could, the minister of Finance, Henrique Meirelles, said on the 20th of June that the measure was necessary because of the drop in tax receipts and the recession inherited from the last few years. “Corporate earnings … reflected the losses accumulated in the last two years that are being amortized this year,” he said. For him, the most important is being preserved: fiscal responsibility.

The hike comes into effect immediately and will represent a price increase at the pump of about 8%, according to official prediction.

The PIS/Cofins levied on gasoline more than doubled, to R$0.7925 from R$0.3816 per liter. On diesel, the increase was to R$0.4615 from R$0.248. In the case of ethanol, the raise for producers was milder, to R$0.1309 from R$0.12, but for distributors it went from zero to R$0.1964.

In the federal government’s bimonthly report of revenues and expenditures, to be released on June 21, it will become evident that the core of the public deficit is in social security, the official stressed. Whereas the National Treasury is expected to produce a R$45 billion surplus this year, the National Social Security Institute (INSS) will have a R$185 billion deficit. That doesn’t consider the deficit of the pension system for public servants.

After the Constitution and Justice Committee (CCJ) of the Chamber of Deputies approved a report rejecting the charge of passive corruption against Mr. Temer, economic officials believe the situation is more favorable for the government to resume negotiating the pension reform and begin voting the proposal in August. Mr. Temer took back control of the process, one official said, because who will have to ensure attendance of 342 deputies to vote against the report in favor of Mr. Temer on the floor is the opposition. The clouds, therefore, begin to clear, making possible to advance in the pension reform, that official reckons.

While they manage the shortfall in tax receipts, government officials go deeper in studies about the structural change of taxation. It is more than clear to the Federal Revenue that the national tax system is more centered on the manufacturing industry, whereas the sectors growing more are of services, exports and agriculture.

Economic officials expect the tax reform to move from talk to real life and correct this deficiency, taxing more the income than the goods produced by those sectors.

The tax burden fell two percentage points of GDP in recent years. It started losing strength in 2010 because the model in effect, not because of the slower pace of activity.

For the government, it is not clear that the raise of fuel taxes and the additional spending cut end the measures of fiscal nature to settle the federal accounts this year. This will only be solved when it is more certain of the amount that will come in extra revenue.

The National Treasury was counting, for example, on R$2.5 billion from the debt restructuring of the Galeão airport, which the National Civil Aviation Agency (ANAC) hasn’t completed.


Source: Valor Econômico

After a pause to reassess the political crisis’ effect over the economy, financial markets are convinced that not only are the conditions to continuation of monetary easing preserved, they have become even more evident. This view explains a revision of analyst expectations for the Selic base interest rate, with forecasts going as low as 7%, something not seen since the fateful May 17, day of the JBS owners’ plea bargain.

Of 37 economists consulted by Valor, 34 expect the Monetary Policy Committee (Copom) of the Central Bank to cut the Selic rate by 100 basis points at its next meeting, which ends on June 26. That would take it to 9.25%. Three expect a smaller cut, of 75 basis points. For the end of this year, 12 foresee the Selic between 7% and 7.75%, with the number of those expecting the rate at that range by the end of 2018 rising to 17. Most (16 firms) project an 8% rate late this year, same level of the median in the Central Bank’s Focus survey. For this year, the highest projection, 9%, is mentioned only by one economist. For 2018, the highest projection is 8.5%.

In the survey preceding the Copom’s May meeting, only one economist was forecasting a Selic at 7%. Before that, in April, when the political crisis had not erupted and a revival of growth was starting to take shape, no one mentioned such a low rate.

The risk that both the Central Bank and economists saw at that moment was that the political instability, with effects over the governability and the government’s capacity of implementing reforms, put pressure on the exchange rate and froze investments to the point of compromising the room for the monetary easing to continue as expected. Not surprisingly, the Central Bank left a message of caution in the Copom meeting of May, indicating it could slow the pace of rate cuts to 75 basis points.

Local deterioration, however, ended up producing a slower economic recovery, something with direct impact on inflation expectations. At the same time, the international environment, more favorable to risk because of signs from the most important central banks that global liquidity will continue aplenty, led to a strengthening of the real, which is good news for inflation.

This combination of elements explains the projections for the Extended Consumer Price Index (IPCA) of the consulted economists, which range from 2.9% to 3.6% this year and from 3.8% to 4.6% in 2018.

Tomas Brisola, chief economist of Bahia Asset, is one who changed his forecast for the Selic, to 7% from 8% at the end of this year, largely because of the view that the current crisis is disinflationary. In his prediction, the GDP is likely to grow only 0.2% this year and 1.7% in 2018. What could be the inflationary portion of this wave of instability — the exchange rate — was compensated by the international scenario, which has become even more benign for emerging assets and is securing the drop of the dollar against the real.

For BNP Paribas, another element that contributes to anchor inflation expectations is the change in the inflation target, lowered to 4.25% in 2019. This fact, together with the disinflationary effects of the crisis and the currency stabilization, led the French bank to review its Selic projection in late 2018 to 7.5% from 8%. For late 2018, BNP maintains its projection of Selic at 7%.

More cautious, Sérgio Vale, chief economist of MB Associados, expects a Selic at 8.25% by the end of 2018, but doesn’t rule out some rate hike next year. That is because of political risks that may potentially devalue the Brazilian currency next year and impact inflation, especially at a moment of not-so-favorable food inflation, higher growth, more fiscal risk and lower targets in the two following years. “I don’t buy the idea of stable rates during the entire year of the election, especially in such uncertain election year,” he says.


Source: Valor Econômico

The opening of the Brazilian payments market, which began in 2010 with the industry’s commitment to end the exclusivity between card brands and merchant acquirers, is still stumbling on commercial binds. Large banks and their related acquirers — the payment processors responsible for capturing card transactions — have been creating some hurdles to the growth of competition, especially in the market of advances on receivables to merchants.

The Administrative Council of Economic Defense (Cade), Brazil’s antitrust agency, has launched an administrative probe into the alleged refusal by banks Banco do Brasil and Bradesco, shareholders in Cielo, and Itaú Unibanco, which controls Rede, to make advances on the portfolios of receivables of competing merchant acquirers, including Stone, Global Payments and PagSeguro.

The acquirers pay merchants for the sales charged on credit cards in up to 30 days. It is common for merchants to use such payments flow as means of obtaining a bank line of credit, in the form of advances on the receivables.

Despite a February 2015 Central Bank rule establishing that all banks must be capable of providing advances on receivables of any merchant acquirer, in practice, the Cade says, there are indications that large banks would be claiming difficulties to attest such payment flows in the case of smaller acquirers, rather favoring companies from their same group.

The Cade also states that the leading merchant acquirers, controlled by the large banks, would be hindering the access to their roster of receivables to smaller banks, which prevents them from offering advances on the payments. The handover of the schedule of receivables is made through a bilateral agreement between the acquirer and the bank who holds the “domicile” of the payments.

Moreover, the bank that gets the payments for the merchants is locking the entire flow of receivables, preventing the merchants from seeking better rates for their advances at other lenders.

The Brazilian acquiring market is highly concentrated. Cielo, Rede and Getnet, which belongs to Santander, command together a share of about 90%.

Agreements that the Cade signed with Cielo and Rede this year already show some progress in relation to the Central Bank regulation, in terms of increasing competition. In early April, the regulator reached a deal with Itaú Unibanco and its card brand Hipercard setting a deadline for the end of exclusivity between the brand and Rede, the payment processor of the same group. In late June, the Cade reached another deal with Elo, card brand controlled by Banco do Brasil and Bradesco, this time to end its exclusivity with Cielo, the acquirer of the same banks.

According to the Cade, exclusive relations between card brands and certain merchant acquirers prevent one same point-of-sale terminal to capture transactions with all cards issued on the Brazilian market. In practice, this forces merchants to sign contracts with the acquirers linked to those card brands.

The agreement with Hipercard and Itaú has duration of two years, with deadlines and targets set for other acquirers to capture Hipercard transactions.

In the deal with Elo, the Cade established four windows for the certification of acquirers, beginning on July 31 and going through March 2018. For the first window, Elo has already certified Rede and Getnet. “We are already working on certifying several other acquirers,” says Eduardo Chedid, Elo’s president.

Abecs expects full acquiring programs to be offered already this year. With them, one single company captures, processes and settles the card transaction.

Another object of agreement with the Cade refers to the use of PIN entry devices. According to the regulator, about 55% of the card transactions in Brazil are captured through point-of-sales terminals that only accept card brands certified by the acquirer that owns the devices, whereas 40% are captured by PIN pad devices that permit the inclusion of several acquirers and should accept all cards linked to those companies. The rest includes e-commerce, mobile payment and others.

According to the Cade, Cielo and Rede were limiting the inclusion of their competitors’ cryptographic keys, enabling the devices only for the two acquirers. Now they will have to open their devices to other acquirers that offer them reciprocal treatment.

Banco do Brasil says it provided all clarifications requested by the Cade and affirms it adopts banking practices based on the free option of their clients to use of products and services. Cielo, Rede, Itaú Unibanco and Bradesco didn’t provide comments. The Central Bank informed through a spokesperson that the banks authorized to operate are under their supervision and therefore subject to penalties established in Provisional Measure 784, regarding potential violations of the Central Bank or National Monetary Countil regulations.


Source: Valor Econômico

The government intends to resume in August a set of policies to increase competition in the airline sector that were stalled by the political turmoil that erupted with the testimonies of Joesley Batista and other JBS executives. The agenda has at least five initiatives: a cap on sales tax over aviation fuel, end of the limit to foreign capital in airlines, the Brazil-US open-skies pact, a new round of airport privatizations and the beginning of the activities of “Asas” — subsidiary of state airport operator Infraero, with 49% stake held by Germany’s Fraport, to provide services in the regional aviation.

“Our goal is to have this agenda fully implemented already in 2017,” said the national secretary of Civil Aviation, Dario Rais Lopes, in an interview.

Evaluating that President Michel Temer is finally out of the ropes, after his victory in the Chamber of Deputies’ Constitution and Justice Committee against charge made by the Office of the Prosecutor General, Palácio do Planalto sources already see room to accelerate the policies.

The unfreezing of the actions is likely to begin with the analysis in the Senate of a bill that sets at 12% the maximum Tax on Circulation of Goods and Services (ICMS) that can be charged over aviation fuel. Twenty-one states currently charge higher ICMS rates. São Paulo, the most important place for aircraft refueling, charges 25%.

The proposal has already been approved by the Economic Affairs Committee. The Senate speaker, Eunício Oliveira (Brazilian Democratic Movement Party, PMDB, of Ceará), promised the government to put the bill as the first item on the list of votes on the floor as soon as the legislative recess ends. Its passage requires majority of two-thirds of the senators — 54 votes.

If this measure passes, airlines have committed to creating 70 flights per day departing from the Southeast region to destinations in the North, Northeast and Central-West. “Many operations become economically viable,” argues the president of the Brazilian Airlines Association (Abear), Eduardo Sanovicz. “Big cities that have three daily flights may have six or seven. Interior cities that had services interrupted may return to the routes map.”

Mr. Oliveira suggests this vote may compensate an increase of as much as R$200 million in the airlines’ annual costs. That is the impact estimated by Abear for the coming into force of a law passed last week that regulates the activities of airline workers. In addition to raising the minimum number of monthly days-off for pilots and flight attendants, the new legislation may reduce the work hours.

Aviation fuel accounts for more than 30% of the airlines’ operating expenses. A survey conducted by international consultancy Roland Berger at 383 airports around the world put the price of fuel in 41 Brazilian airports at the top of the ranking, with a final price, including taxes, between $4.29 and $5.85 per liter.

The official plans also include passing in the Chamber of Deputies the bill that eliminates the current cap of 20% for foreign investment in airlines. The proposal left the Palácio do Planalto with a request of urgency, but lost such fast-track nature last month, amid difficulties to coordinate the allied base amid the charge against Mr. Temer. The government leader in Congress, Deputy André Moura (Social Christian Party, PSC, of Sergipe), intends to put the matter to vote next month.

Another important matter for the sector that was frozen in recent months is open-skies pact with the US. Without coming into force, the limit of 301 weekly flights that each side has the right to allocate to their airlines remains intact. Currently airlines are not close to reaching that cap, but American companies believe in a medium-term recovery and want to be shielded from future barriers.

The White House already has 120 such treaties with other countries. The pact with Brazil was signed in 2011 by former President Dilma Rousseff and has been green-lighted by three committees of the Chamber of Deputies, but now stumbles on an irony: left-wing parties, led by the Workers’ Party (PT) of Ms. Rousseff, have been insistently blocking its vote on the floor.

The Chamber speaker, Rodrigo Maia (Democrats, DEM, of Rio de Janeiro), has adopted as a rule the consideration of international agreements only on Thursdays. The opposition avoids providing quorum for the analysis of a matter to which it has shown to be against. One possibility is to change the day of voting. “There is no regimental impediment. The problem is political, of talks with party leaders,” says Deputy Pedro Vilela (Brazilian Social Democracy Party, PSDB, of Alagoas), sponsor in one of the committees, who is favorable to the agreement. “It would be a beneficial measure for the Brazilian consumer,” he says.

There is one aspect not much commented in the pact: the US Federal Trade Commission only analyzes mergers of airlines with companies of the sector whose countries of origin have the open-skies policy in effect with Washington. This may pose hurdles to the unification of operations, for example, of Delta Air Lines with Gol — in case of end to restrictions of foreign capital in Brazil.

In regional aviation, which will have R$230 million for investments this year, a reinforcement announced since 2012 will finally come off the drawing board. On August 25, the contract for the creation of “Asas” will be signed. It is a private partnership between Infraero (51%) and Fraport to provide services at regional airports.

A new round of airport privatizations is also on the radar. The council of the Investments Partnerships Program (PPI), which hasn’t met since March, will get from the Ministry of Transports a proposal to hand over to the private sector two blocks of airports.

According to the Civil Aviation secretary, one block would be formed by assets in Mato Grosso — Cuiabá, Rondonópolis, Sinop, Alta Floresta and Barra do Garça. Another would encompass a group of airports in state capitals of the Northeast. The doubt is if Recife, the largest of the region still maintained by Infraero, would be part of the package. “The concessions agenda was hurt [by the crisis], but it is not lost,” Mr. Lopes says.

To him, if the government launches the next concessions by mid-August, it would still be possible to hold the auctions and sign the contracts by the end of 2018. “Otherwise, it is better not to do [a new round] than doing in a rush and more subject to errors,” he says.


Source: Valor Econômico