Infrastructure is now the hot Story in Brazilian Commodities

The man in charge of Brazilian sugar giant Cosan Ltd. has little interest in talking about the sweetener. These days, he’s all about railways, writes Bloomberg in its latest report. Cosan is controlled by 69-year-old Rubens Ometto, one of the sixty most powerful men in Brazil.

The business that gave life to Cosan — the world’s biggest sugar-cane operation — has been stuck in the doldrums following years of depressed global prices and government policies that curbed the expansion of cane ethanol in Brazil. In stark contrast, the commodity powerhouse is ready to invest “tens of billions” in a plan that will reshape how the nation’s crops get transported, Chief Executive Officer Marcos Lutz said.

“Brazil infrastructure is now the hot story in commodities,” the 49-year-old executive said in an interview with Bloomberg at Cosan’s headquarters in São Paulo.

The South American nation — with its vast swaths of arable land along with abundant water resources and ample sunshine — is already the world’s biggest exporter of agricultural goods from beef to soybeans, and expansion is likely to continue, Lutz said.

That means even more pressure on infrastructure and logistics that have seen chronic problems under the weight of the farm boom. “We see a clear opportunity that derives from a long winter of under-investment,” he said.

Railroad that will Connect Port Terminals in the Northern and Southern Regions.

Cosan has been at the center of Brazil’s push for investments in train transportation. President Jair Bolsonaro’s government is seeking to double the country’s railway capacity through concessions that will demand about R$25 billion (US$6.3 billion) in capital expenditures over the next few years.

Last month, Cosan-owned Rumo SA won a first auction to complete and operate 955 miles (1,537 kilometers) of railroad that will connect port terminals in the northern and southern regions. The railway is planned to be the eventual spine in a network of lines sprawling across key crop-producing states.

Rumo is also in the final stages of a concession renewal process. The terms include more than doubling the annual capacity of the railway known as Malha Paulista, which connects Brazil’s largest port to the nation’s agricultural heartland. Rumo will spend as much as R$ 15 billion in CapEx through 2023, while “several” other investment opportunities are being considered, Lutz said.

“We’re talking about investments of a magnitude that have never been seen in Brazil’s railway sector,” he said.

The bet has won over investors. Rumo’s market value has jumped fourfold since April 2016 to about $7 billion, the most among global peers. The rail operator is now worth more than Cosan SA, the Sao Paulo-listed company that controls the group’s energy businesses, and its bonds trade above par. Both units are under Cosan Ltd., which is listed in New York.

 

Source: The Rio Times

As Latin America Goes Right, Can China Keep Its Footing?

Although the future of China’s engagement with Latin America seems bright, many Chinese politicians and academics have been somewhat pessimistic about the recent stunning comeback of the Latin American right. The recently elected president of Brazil, Jair Bolsonaro, has gladly accepted the moniker of the Brazilian Trump. The presidents of Argentina and Chile, Mauricio Macri and Sebastián Piñera, are business moguls-turned-politicians who came into office with liberal economic strategies while praising the virtues of carrying business tactics into the job of governing.

For most Chinese, ideology does play a special role in their mindset. Many senior diplomatic officials got their start during the old days of the so-called pink tide, when many governments leaned left, and are not pleased by the current political environment in the region.

Whatever the case, it seems unlikely that Latin America’s newly elected right-wing governments will veer too far to the right, at least not too much on economic matters. In spite of whatever each country’s political system does, China should still keep its delicate relationships with those regional powers in Latin America, either politically or economically.

Meanwhile, the ideological affinity between China and Venezuela is one of the strategic elements of China’s foreign policy. Becoming friends with leftist governments sometimes drags China into endless trouble. The Venezuelan case is the best example. Although they noted the worrying trends in Venezuela, some Chinese researchers felt China’s economic and diplomatic interests would not be adversely affected because China needs a large quantity of Venezuelan oil and has the money to pay for it. Now Venezuela is in chaos, and President Nicolás Maduro finds his legitimacy challenged. As the China expert Matt Ferchen recently wrote in Diálogo Chino, “Venezuela remains an important test case for how Chinese researchers as well as government and business officials understand, or misunderstand, political risk in Latin America and beyond.”

China’s policies toward Latin America will have to adapt to new political realities in the region, in which the respective governments work together to create a mutually beneficial relationship and achieve common development.

 

Source: Americas Quarterly

Delays to Brazil pension reform will slow IPO market: Itau executive

Any delay in passing pension reform in Brazil is likely to slow the pace of initial public offerings in the country, Itaú Unibanco Holding SA’s head of Global Markets and Treasury said on Tuesday.

Brazil’s Congress is mulling the government’s pension reform proposal, which many view as crucial to stabilizing the country’s rickety public finances and kick-starting growth in Latin America’s No. 1 economy.

Speaking in Sao Paulo, Christian Egan said “there may be room” for follow-on operations from companies with higher valuation levels.

“It’s case-by-case, but IPOs would be unlocked much faster (with the reform approved),” he said.

Egan said there is great interest from foreign investors in Brazil, who are awaiting the for the passing of the pensions overhaul to invest, particularly in areas like infrastructure.

Also on Tuesday, Brazil’s government reached a deal with lawmakers, paving the way for a congressional committee to vote on its pension bill later in the day, boosting investor sentiment and lifting local financial markets.

 

Source: Reuters

Brazil pension reform is constitutional, congressional committee votes

Pension reform in Brazil cleared a congressional hurdle late on Tuesday, a sign that the government may be garnering political backing for its most important economic proposal, legislation whose passage has not been at all certain.

After a lengthy debate, the lower house’s Constitutional and Legal Affairs Committee (CCJ) approved the bill’s constitutionality by 48 votes to 18, paving the way for it to be analyzed and discussed by a lower house special commission.

Brazil’s spending on social security is among the highest in the world, and a radical overhaul was a key proposal of President Jair Bolsonaro’s election campaign. But the government had lost momentum on the pension legislation recently, and economic data suggests the economy is flagging, perhaps even shrinking.

Brazilian markets had already rallied on Tuesday ahead of the vote, cheered by the fact that the vote was going ahead at all, after it was postponed last week when even some of the government’s allies in Congress raised objections to it.

Bolsonaro’s government made several minor changes to the bill late on Monday to win over lawmakers, but CCJ committee member Marcelo Freitas insisted that the bill’s targeted savings of just over 1 trillion reais ($255 billion) over the next decade had not been diluted.

 

Source: Reuters

Brazil’s Campos Neto says controlling inflation trumps boosting growth

Brazil’s central bank is focused on keeping inflation under control, not targeting growth, even though the economic recovery has undershot expectations and risks remain to the downside, central bank chief Roberto Campos Neto said on Wednesday.

Speaking at a conference in New York, Campos Neto said he expects pension reform will be approved, and if it is done properly, Brazil’s currency, the real, will probably strengthen “not because we want to, but as a consequence.”

“The mission of the central bank is not to achieve growth, it’s to achieve inflation,” Campos Neto told an XP Investimentos conference on Brazil.

Annual inflation at 4.58% in March was well above forecasts and the highest in two years, figures on Wednesday showed.

“For us, the main job is to keep prices stable and expectations well anchored. We are not going to take a risk on that, but I understand there is a balancing act happening,” he said.

Campos Neto also said he expects Congress to pass social security reform, which the government hopes will save over 1 trillion reais ($261.23 billion) over the next decade, restore public finances and revive economic growth.

The fiscal challenges facing Brazil are threefold, he said: passing pension reform, capping public sector salaries, and reducing the interest rate burden on the country’s debt load.

If fiscal reforms are done “properly”, the real will likely strengthen as a result. But asked if this means the central bank will sell FX reserves to slow any currency appreciation, Campos Neto said policymakers will have to analyze the impact on reserves policy.

He also reiterated that the central bank has no target for the real, but said it monitors liquidity and market functioning. The central bank is working toward simplifying the foreign exchange market to make it easier and quicker for foreigners to transact in Brazil, and that the aim is to see the currency become fully convertible in time.

 

Source: Reuters

Brazil economy minister defends pension reform in heated hearing

Brazilian Economy Minister Paulo Guedes on Wednesday put up a vigorous defence of the government’s proposed pension reform, insisting it is critical to fixing the country’s “doomed” social security system but opening the door to some concessions.

In often heated and combative exchanges with lawmakers at Brazil’s Constitutional and Legal Affairs Committee (CCJ), Guedes said the proposals were progressive, would reduce inequality, and were urgently needed to address Brazil’s “inescapable” fiscal problems.

The hearing’s confrontational atmosphere, however, weighed on Brazilian markets, on fears political infighting may hold up deliberations on the bill. Stocks fell 0.9 percent, the real weakened and interest rates futures rose.

Elmar Nascimento, lower house whip for the DEM party, the government’s main ally in Congress, said in a tweet that Guedes may have to come back to the committee to fully explain what the impact of the new rules will be.

“The government needs to intensify its efforts to convince lawmakers and the public that reforms must reduce (pension) benefits,” Nascimento said.

Guedes recognised that proposed changes to rural, elderly and disabled workers’ pensions are a sensitive issue, adding that the role of Congress would be to weigh those concerns and act on them.

He also defended the introduction of private retirement accounts, which he called fairer and more helpful for boosting economic growth, citing the example of Chile’s system.

“It’s important to understand that our system is financially doomed, no matter the government in power,” Guedes told the CCJ.

President Jair Bolsonaro’s plans aim to save over 1 trillion reais ($260 billion) over the next decade through a range of reforms including raising the minimum retirement age and making workers contribute to the system for longer.

Bolsonaro and Guedes have been heavily criticized for not reaching out to lawmakers to build the political consensus needed to secure the bill’s passage through Congress.

Guedes has tried to strike a more conciliatory tone lately, but that was not in evidence on Wednesday.

“Venezuela’s better! Venezuela’s good!” Guedes responded sarcastically in a heated exchange with deputies who had shouted down his praise for Chile.

“Speak up! I can’t hear you!” Guedes goaded ironically, before shouting and finger-pointing later in the session.

Guedes insisted that his role in pension reform is only to put forward the proposals, not to enter the political debate.

The government needs at least 308 of the 513 lower house deputies to approve the reforms, sending them to the Senate. A survey run by transparency group Atlas Politico on Wednesday showed that the government currently has the support of 171 deputies.

 

Source: Reuters

Brazil trade surplus narrows to $4.99 billion in March as imports rise

Brazil posted a trade surplus of $4.99 billion in March, the Economy Ministry said on Monday, significantly smaller than the same month a year ago thanks to a strong rise in imports.

The trade surplus last month fell 22.3 percent to $4.99 billion from $6.42 billion a year ago, although that was up more than a third from February’s surplus of $3.67 billion.

Exports totaled $18.12 billion, down 1.0 percent from March last year, while imports totaled $13.13 billion, up 5.1 percent from the same month last year, Economy Ministry figures showed.

All else being equal, a shrinking trade surplus is a drag on economic growth. Last week, Brazil’s central bank cut its 2019 growth forecast to 2.0 percent from 2.4 percent, noting that net trade is expected to shave 0.2 percentage points off overall growth.

Foreign trade secretary Lucas Ferraz said on Monday he expects Brazil’s trade surplus this year to total $50.1 billion, on exports of $245.9 billion and imports of $195.8 billion.

That would be the third largest surplus on record, Ferraz noted, but crucially it would be some 15 percent down from last year’s surplus of $58.66 billion, and 25 percent down from the year before that.

The data for March showed a 13.0 percent jump in imports of capital goods, including autos, while commodities exports rose 7.9 percent. Exports of manufactured goods fell 6.5 percent.

 

Source: Reuters

Green lights for emerging markets get brighter

Emerging markets have started 2019 well due to a sharp U-turn in monetary policy around the globe and an easing of trade war tension between China and the US. The Fed and ECB’s change in monetary policy was initiated after the ‘blood bath’ in markets in December 2018. This shift has redirected flows from higher yield expectations across developed markets to yield hunting in emerging markets. Stabilisation in the USD in early 2019 versus its sharp strengthening in 2018 has been a big positive driving force for emerging markets despite lots of other persistent risky issues: the China-US trade deal has not been agreed yet, keeping intrigue for emerging markets sentiment; (geo)political turbulence is still in place for Hungary, India, Kazakhstan, Poland, Russia, Turkey and Ukraine. Many economic issues should be solved locally in 2019, for instance in Brazil and China.

In line with markets, we remain confident that the China-US trade deal will be agreed later in Q2 19. Any withdrawal from the current ‘trade talks journey’ by either counterparty would weigh immediately on emerging market sentiment. After US President Donald Trump has dealt with US-China trade, we could see his attention shifting to starting a trade war with the EU. If this happens in May 2019, the biggest losers would be the Central and Eastern European economies. Market expectations are still in favour of Germany’s economic pickup in Q2 19, which is fuelling the Czech, Hungarian and Polish economies, but Trump’s auto tariff idea would spoil the sentiment overnight.

Economic growth in emerging markets is set to slow down less than expected on easing monetary conditions. Given stabilisation in currencies across many emerging markets, accelerated inflation is set to calm down in H2 19, allowing emerging markets’ central banks to follow a change of monetary stance in developed countries. We have seen the first shoots of monetary easing in China and India in Q1 19. We also see tentative signs of a bottom in China (PMI, metals), which has eased concerns about a hard landing in the country. Other Asian economies are likely to follow the pattern very soon, while Russia, South Africa, Turkey and Brazil could join the cuts later in 2019, helping economic expansion in particular looking ahead to 2020.

We now see many yellow lights in the emerging market risks heat map becoming green, while the green lights are becoming even greener. However, there is still a risk that a possible new TRY crisis will put the brakes on the appetite for emerging markets in H1 19.

 

Source: FXSTREET