The Focus bulletin of financial market expectations represents a first warning sign to Central Bank’s strategy of stopping interest rates hikes in May at 12.75% per year, compared with 11.75% per year now.
Interest rate projections for the end of the monetary tightening cycle remained at 13% per year. But inflation expectations have gone up again.
Not only the IPCA – Brazil’s official inflation index – forecast by analysts for 2023, which is the main target of the interest rate policy, worsened. The forecast for 2024 also went up, which represents a further deterioration in long-term expectations.
The median inflation projection for 2023 rose to 3.8% from 3.75%, compared to an inflation target of 3.25%. There are leading indicators that it may move higher. The average of the projections is at 3.84%, and the median of the analysts that have revised their forecasts in the last five days is already at 3.9%.
The combination that many analysts believe could lead the Central Bank to review its interest rate plans happened last week: the rise in current inflation has caused a deterioration in long-term inflation expectations.
Two new facts may have contributed to the deterioration in expectations. First, the clear signal from the Central Bank that it is willing to stop the tightening cycle unless inflation surprises upwards.
Second, on Friday the preliminary reading IPCA-15 for March was released, at 0.95%, higher than forecast by the market. Analysts are revising their bets for the month’s price index to above 1.2%.
In theory, this short-term surprise is unlikely to contaminate inflation in 2023 and even less so in 2024.
Central Bank President Roberto Campos Neto was asked last week why the market was betting on current inflation for March higher than the 1.02% variation estimated by the monetary authority.
He answered that this short-term pressure was due to a faster pass-through of fuel adjustments unveiled by Petrobras. For him, the stronger increase in the very short term is likely to be offset by lower inflation later on. Thus, when analyzing a group of months, the effects would compensate each other, to a good extent.
The Focus data, however, show that the market has not made this compensation, at least for the time being. The inflation projected by economic analysts for this year rose to 6.86% from 6.59% in one week.
According to market projections, the 12-month inflation will continue to rise until May, exceeding 11%. It will only fall back below double-digit levels in July.
This heavier current inflation is contaminating more distant years. The market forecast for the IPCA in 2024 rose to 3.20% from 3.15%, compared with a target of 3%. The average of the projections for inflation in 2024 already stands at 3.27%.
Exporters are choosing to keep hard currency abroad despite higher interest rates in Brazil. The internalization of funds has not materialized more than a year since the beginning of the tightening cycle. A survey by Valor Data based on data by the Foreign Trade Secretariat (Secex) and the Central Bank shows that the 12-month spread between physical exports and the contracted exchange rate is still at all-time high levels.
The data show that the so-called alligator mouth of the foreign exchange rate reached $70 billion by March 18, up 26% compared with the end of 2021. In September, the gap between shipped exports and the contracted commercial exchange rate was at $46.6 billion. In December, the spread totaled $55.6 billion, and in February it stood at $68.2 billion.
“Not necessarily all the funds used by Brazilian exporters are going to come. In the long run, there has to be a gap, since some money is poured into several services of large exporters abroad. So, this spread means less funds brought here,” said Marcello Curvello, the currency manager at ASA Hedge. “But today we see a contracted exchange rate much lower than the shipped one, which is not natural either. The normal thing would be it to run just a little below.”
He prefers to analyze the spread according to the balance of payments of the Central Bank, but says that, under any analysis, the gap remains very high. There are fewer reasons for such spread at the moment since a deleveraging push of large exporters has reached the targets and Brazil’s benchmark interest rate is at the highest level since April 2017, at 11.75% per year, he said.
In October, the Central Bank’s monetary policy director Bruno Serra Fernandes said in a public event that the monetary authority saw a “low commercial foreign exchange contracting in the recent period” that led to an “unusual” and “very relevant” gap in relation to the trade balance. According to him, this was due to the process of paying debts abroad and there was no relevant cash surplus of companies abroad that impacted the dynamics of the exchange rate.
Carlos Calabresi, the chief investment officer of Garde Asset Management, says that the gap, which began to widen in 2019, a move intensified in 2020 and 2021, was initially explained by the companies’ strategy of having cash available abroad in order to streamline flows to honor their debts. “But the exchange rate behaved so badly in the period, the volatility became so great, that companies began to diversify with investments abroad,” he said.
Nuno Martins, the head of structuring and sales at Bank of America (BofA), believes that companies with the largest export volumes maintain dollarized balance sheets and are mostly financed in hard currency, which implies fewer incentives to maintain large reserves in reais. He wonders whether the spread may have increased in recent months because the volume exported has grown with higher commodity prices, but the companies’ obligations in Brazilian currency have not grown in the same pace.
“I don’t think it is an issue related to a structural risk of Brazil, but the fact that companies are set up in such a way that cash management is less related to macro aspects and much more linked to risk management and balance sheet balance,” Mr. Martins said. “A company whose functional currency is the dollar manages its business in this currency. Therefore, it doesn’t make sense to amass reserves in a currency other than the dollar just to take advantage of higher interest rates.”
Mr. Calabresi, with Garde, expects a reversal of the phenomenon and notes that data has already improved given the higher interest rate regime. The monthly spread between physical exports and the contracted exchange rate fell to $3.8 billion in February from $5.5 billion in December, and the gap was at $4.7 billion in March until the 18th.
“The interest rate here is too high, the spread with the foreign exchange has gone up too much and the volatility has gone down a lot. We reached 18% of implied volatility from 16%, and inched closer to peers like the South African rand and the Mexican peso, with a volatility of 12% to 14%. You now have a worthwhile regime, while the cost of having dollars abroad increases,” he said.
The high interest spread has attracted foreign investors and is behind the appreciation of the real in recent weeks.
Mr. Calabresi also says that the internalization of funds is likely to contribute to an even greater drop in the foreign exchange rate. Garde, which holds short positions on the dollar, projects that the foreign exchange inflow will end the year at net $20 billion, but Mr. Calabresi says that “the flow to the stock exchange is so strong that we will probably have to revise this figure.” The most recent data from the Central Bank suggest a favorable foreign exchange flow of $9.5 billion this year.
Mr. Curvello, with ASA Investments, foresees a positive exchange flow of $25 billion and says that, in theory, it could be even higher if there were a greater internalization of funds from exporters. This could even contribute to a more substantial drop in the exchange rate, but the asset manager believes that the Brazilian currency will not appreciate much further. According to him, the fund today does not hold a forex spread bet on the real, but operates with a combined position with dollar sales and stock market purchases.
“We went to R$4.75 to the dollar from R$5.70 at the beginning of the year. At R$5.25, we thought it was a good size movement, so it was quite intense. I just think that the interest rate hikes by the Fed [U.S. Federal Reserve] does not match such a favorable scenario for emerging markets, with so much inflows,” he said.
Iana Ferrão, an economist with BTG Pactual, believes that the commercial flow is likely to increase this year due to the substantial increase in the balance of exports shipped because of higher commodities prices, but the gap is unlikely to be substantially reduced. “If we maintain a gap similar to that of 2022, we are talking about a trade flow of $30 billion, which is already much higher than last year,” she said.
BTG Pactual’s current expectation is that the trade balance will end the year positive at $75 billion. “We expect flow to Brazil to remain strong, not only because of commodities, which emerge clearly in the trade channel, but also for the financial channel, which has been the highlight at the beginning of the year.”
cars will have modular platforms, which can be adapted to different models — Foto: Divulgação/NBR
The NBR group, led by businessman Evandro Lira, is going to build an automaker of popular and compact vehicles made of fiberglass and carbon in Araripina, Pernambuco. The initial investment — which includes the renovation of a castor oil factory deactivated in the 1990s — is R$260 million in three years, but can reach R$1 billion in five years.
The cars will have modular platforms, which can be adapted to different models. “This allows a reduction of between 30% and 40% in costs, which substantially impacts the price for the final consumer,” NBR’s CEO Evandro Lira said.
According to Mr. Lira’s view, Brazil lacks mass-market models. The first to be manufactured by NBR will be a dune buggy-style vehicle, with a flex engine, which can, according to the customer’s wishes, have a closed top. The vehicle holds five people and has a trunk. “The decision was to reinvent a typical Brazilian model, from the 70’s, the dune buggy, which until today is only produced by hand, without an assembly line,” he said.
According to him, to adapt a common vehicle to the buggy model, an investment of at least R$80,000 on the part of the consumer is required. “With the product getting cheaper, we will serve well the Northeast region, which already has a natural demand for this style of beach car,” he said.
With prices between R$60,000 and R$80,000, the vehicles will be sold in stores to be opened in Recife, Natal, Fortaleza, Florianópolis and São Paulo, in addition to approved dealers.
Mr. Lira has a background in the service sector, with several traditional businesses in the restaurant sector in the states of Paraíba and Pernambuco. According to him, the NBR group is raising part of the funds with Banco do Nordeste and Sudene. “We are also negotiating with an U.S.-based fund,” he said.
The Araripina unit will have capacity to make 1,600 cars a month. During an event to launch the cornerstone of the factory on Thursday, in Recife, Mr. Lira said that the first car is expected to reach the market in 18 months. As of 2024, he foresees a R$94 million monthly turnover.
According to Mr. Lira, the company will work with engines from Brazil, China and India. As they are light vehicles, with a chassis made of fiberglass and carbon, the models could deliver 30% savings in fuel consumption compared to a traditional mass-market car. “In the future, we will work with hybrid and electric vehicles,” he said.
The distribution of the production will be done primarily by road, but may also rely on sea freight. The factory is located within a radius of 300 kilometers from seven states in the Northeast region, about 600 kilometers from the Port of Suape (Pernambuco) and 700 kilometers from the Port of Pecém (Ceará).
The unit, which will be supplied by a solar plant, will be built in an area of 29 hectares and have 30,000 square meters of built area. In the construction stage, the work is expected to employ 240 people. The operation is expected to start with 450 people working in two shifts.
The arrival of the automaker is expected to have a major impact on the economy of Araripina, whose GDP is estimated at R$1.3 billion a year – about 1.7% of the GDP of the entire state of Pernambuco. According to Mayor Raimundo Pimentel (Social Liberal Party, PSL), the city’s economy today is quite dependent on the production of plaster for civil construction.
The NBR group is negotiating a partnership with the government of Pernambuco and the S System, a group of tax-funded training entities operated by employers’ trade groups, to train up to 1,000 people in Araripina in the fields of fiberglass and carbon lamination, electrical, mechanical, assembly and bodywork.
ISA Cteep, a private-sector power transmission company, agreed to build the first large-scale energy storage project linked to Brazil’s National Interconnected System (SIN). The company signed a contract with a consortium that includes You.On Energia, a company specialized in energy storage systems, and TS Infraestrutura, which gathers engineering assets spun off from Toshiba.
The companies have not revealed the value of the agreement. The 30-megawatt project was approved by the electric sector regulator Aneel last year to expand the power grid in the coastal cities of São Paulo, Brazil’s most populous state. The R$146 million project is expected to start operating by the end of the year in Registro.
The location was chosen due to the high demand for electric power during the summer when tourists flock to coastal towns, said Rui Chammas, CEO of ISA Cteep. “In this region, we typically put in place special operations to ensure the quality of supply. We realized that it would be important to find a way to meet peak demand,” the executive said.
Aneel allowed ISA Cteep to have yearly revenue of R$27 million with the project. Batteries are being imported from China by You.On Energia.
China has the largest companies in terms of scale production of lithium-ion batteries, which means good quality and price, said Giorgio Seigne, CEO of You.On Energia. “There are American and European providers, but they are not competitive in terms of prices and delivery times. We hope that the local industry can provide batteries of the necessary size for a large-scale project in the coming years,” he said.
The batteries are being manufactured and are expected to arrive here by August. The earthmoving works are expected to end by April, and the companies expect to start laying cables by May. Companies have already contracted all the equipment, said Helder Torres, the chief commercial officer of TS Infraestrutura. “We are talking about a very fast deployment project, in a pandemic and war scenario, so we have to be very efficient,” Mr. Torres said.
TS Infraestrutura will make the project’s protection and control panels in its factory in Curitiba, Paraná. “We will be responsible for integrating and controlling the batteries to take information to the substation. This is the first integration in Brazil of a protection and control system between the substation and the storage system,” Mr. Torres said.
The executives believe that new storage projects will emerge in the country from this first effort. According to them, the growth of renewable power sources, with the energy transition, will require such solutions. This happens because renewable sources like solar and wind depend on weather conditions to generate energy, so batteries are a way to store the power generated to be released when the weather is unfavorable.
“One way to expand the share of renewable sources in Brazil’s power generation mix is by giving them greater predictability. A non-dispatchable, non-predictable renewable source, when combined with a storage system, becomes dispatchable, that is, more widely used by the national system operator. So there is a quality improvement in what is delivered by a renewable source,” Mr. Seigne, with You.On, said.
Energy storage can also be a less polluting solution for supplying electricity in systems not connected to the Brazilian grid, he said. Such systems, located mainly in the North region, are mostly supplied by diesel generators, which are more expensive and polluting.
ISA Cteep may seek opportunities to develop new battery projects, the company’s chief executive said. “This first work will be a barometer for future projects, because it will bring knowledge and experience. With the growth of renewable energies, we will need solutions that ensure reliability, regularity and quality in the power supplied. This undoubtedly includes the capacity of the system to store energy,” Mr. Chammas said.
The 14.86% drop of the dollar against the real this year leaves no doubt that the market has been putting in prices the expressive interest differential between Brazil and the United States, which is expected to remain at high levels.
Although the Federal Reserve (Fed) has started a process of monetary tightening and now indicates a possible acceleration of the pace of interest rate increase, the Selic policy interest rate in double digits and still on an upward trajectory guarantees the exchange rate the possibility of the real to remain at more appreciated levels in the short term — although risks to this scenario remain on the radar.
In just one year, the Selic abandoned the historic low of 2% and is now at 11.75%. At the same time, in the United States, interest rates are in the range between 0.25% and 0.5%. And even in the real interest rate universe, the difference between the two countries’ monetary policy is quite high. While the real interest rate expected for one year in the U.S. is negative around 4%, the Brazilian real rate has levels around 7%.
And it is based on this context that the real appreciates against the dollar. Higher interest rates in Brazil have favored strategies in which investors raise funds abroad at lower rates and invest money in the country, known as carry trade. Last week alone, the dollar dropped 5.37% against the real and ended Friday’s trading session at R$4.7466, the lowest level since March 11, 2020.
“I can’t say I’m surprised. I’ve been waiting for this movement since the end of last year,” says Gustavo Menezes, macro manager at AZ Quest with a focus on foreign exchange. He notes that, with the Selic at 2% in mid-2020, the interest rate differential was “completely displaced”. “As we carried out the normalization of interest rates, there was no immediate effect because inflation rose very strongly and, thus, we were not able to practice a positive real interest rate. Now, the adjustment is being made and, looking ahead, we have a very positive real interest rate.”
Mr. Menezes notes that, even if the inflationary scenario remains challenging, the real interest rate should remain at high levels in Brazil, which maintains the perspective that the exchange rate appreciation may have even more space ahead. “At the same time, our pair, the dollar, has a very negative real interest rate, despite the pricing of interest rate hikes on the American curve. It’s as if they had to control inflation in the circumstances that we lived through last year,” he says.
The intensity of appreciation of the real against the dollar has been surprising. In the highs of the year, the dollar reached R$ 5.7245. “It’s an expressive movement, which seemed dammed up. The exchange rate has come a long way and there is still room to appreciate, but perhaps not to the same magnitude. For now, we don’t see room for [appreciation of the real] to stop,” he says.
From an “ugly duckling”, the real showed a stronger performance than most other emerging market currencies. Year-to-date, the dollar accumulates a drop of 2.26% against the Mexican peso; of 7.64% in relation to the Colombian peso; 8.53% against the Chilean peso; and 8.75% compared to the South African rand.
“The stars have aligned and fundamentals are justifying the lower price. It’s a pretty big move and all factors are in its favour”, says Daniel Tatsumi, currency manager at ACE Capital. In addition to the interest rate differential, commodity prices, whose rise proved to be quite expressive, especially after the start of the war in Ukraine, have also been influencing the real appreciation against the dollar.
In addition to commodities and interest in favor of a more appreciated exchange rate, the growth differential is starting to show more positive signs, which provides additional support for the appreciation of the real. “We expected a contraction of about 0.5% in GDP, but we revised it and now we see a number closer to [growth of] 1%. And, with the interest rate differential, the exchange rate movement has more to go,” says Mr. Tatsumi.
ACE’s view is even translated into long positions in reais, that is, bets that the Brazilian currency will further appreciate. “When we looked at what would make the currency better, we checked everything. Terms of trade, growth, interest differential and even the taxes, with a super positive collection.”
When looking at slightly longer terms, market economists opt for a slightly more cautious tone regarding the future behavior of the exchange rate. However, in recent days, in the wake of the more positive view of market agents with the real, exchange rate estimates have also been revised.
Itaú Unibanco, for example, cut its average exchange rate forecast to R$5.25 per dollar from R$5.54 per dollar, as it expects the real appreciation window to last longer than previously expected. In relation to the end of the year, the bank kept the dollar forecast unchanged at R$ 5.50.
“The main driver is the Selic, which has been rising throughout last year and before most other emerging markets. This, of course, helps the currency to attract capital flows to Brazil. And the flow of dollars to Brazil has been stronger,” observes economist Julia Gottlieb, with Itaú.
Data released on Friday by the Central Bank show that, from the beginning of the year to March 18, the foreign exchange flow had a net inflow of $9.446 billion. The result already exceeds the positive balance for the entire year of 2021 ($6.134 billion).
Bank of America’s strategists Claudio Irigoyen and Christian Gonzalez Rojas maintain an “optimistic” bias with the real, although they emphasize that political discussions can affect the behavior of the exchange rate as the elections approach. Strategists expect the dollar to end the first half at R$4.90 and to close the year at R$5.25. Before, BofA’s expectation was that the American currency could end 2022 at R$5.30.
In addition to factors such as the interest rate differential and the terms of trade, JGP’s chief economist Fernando Rocha, draws attention to the fact that the universe of emerging markets is relatively small and has been reduced even further. “Markets with depth are few.”
Mr. Rocha recalls that the conflict hit Eastern Europe and Russia hard and points out that Turkey has faced a difficult environment, with capital control measures. “Brazil is physically far from the conflict, it is a producer of food, iron ore and has high interest rates. When it all comes together, we are attractive,” he says.
For him, the flow is what may determine the direction of the exchange rate. “The interest rate will remain high at least throughout the year and Brazil is a commodity producer. It could be that the flow continues and the exchange rate gets even lower,” he says. For him, the dollar may fall to levels between R$4.20 and R$4.30 depending on the flow. “Remuneration is so good that we are starting to move in that direction [of appreciation of the real].”
Mr. Rocha believes that the intensity of the Fed’s monetary tightening process may also interfere with the exchange rate dynamics ahead. In addition, he cites an internal JGP study that, in general, the dollar weakens when the Fed starts to raise rates and only begins to strengthen at the end of the cycle, and then U.S. fixed income serves as a factor of capital attraction. “If the Fed starts to make a very strong pace, it can change the balance a little bit. But, so far, the interest rate differential remains very favorable to Brazil,” says the economist.
The effects of the Russian invasion of Ukraine on commodity prices have prompted a wave of upward revisions in bank and consultancy forecasts for this year’s trade surplus. The new estimates in many cases show the prospect of a new record balance in 2022, with projections reaching more than $80 billion. An expected slowdown in the global economy, the greater appreciation of the real against the dollar and the fall in the terms of trade, however, differentiate this year’s scenario from that of 2021, highlight experts, which maintain some projections with a surplus still below $50 billion in the year, although they also followed the upward trend of revisions after the war started.
In a scenario released this month, already considering the effects of the war, Itaú Unibanco updated its trade surplus projection in 2022 to $74 billion from $67 billion. With a similar estimate, Bradesco projects $75 billion, compared to an estimate of $61 billion published in February. If the banks’ projections materialize, the trade balance will have a new historic milestone this year. Last year, with export values driven mainly by the rise in iron ore, it reached a record $61.4 billion, according to the Secretariat of Foreign Trade (Secex).
AC Pastore has estimates that indicate even larger surpluses in two scenarios. A more optimistic one, with a surplus of $95 billion for the year, for a scenario in which the war would affect world growth, but the volume of global trade would not be so impacted and would grow 6% in 2022, as estimated by the International Monetary Fund, at the beginning of the year, explains Paula Magalhães, chief economist at the consultancy. In an “alternative” scenario in which the impact of the war on trade is greater, the estimated surplus for the Brazilian trade balance drops to $85 billion. Both scenarios consider calculations based on Secex criteria.
The projections, says Ms. Magalhães, consider favorable effects on the balance of the high prices of commodities exported by Brazil, mainly foodstuffs. The various factors that influence the estimates, such as new supply shocks, whether due to the war or due to new waves of Covid in China, she says, are being monitored and the estimates are expected to be readjusted as the conflict evolves and its effects.
Bradesco’s new estimate also considers the effects of commodity prices. In a release by the bank, economists Rafael Martins Murrer and Fabiana D’Atri point out that until the third week of March, the balance accumulated a surplus of $10.1 billion, a result about $3 billion above the same period in 2021. The war in Ukraine, which began on February 24, they say, intensified the upward movement of commodities such as oil, natural gas, wheat, nickel, soybeans, corn and iron ore.
The bank points out that Brazilian trade is likely to be impacted by the Russia-Ukraine conflict, but direct exposure to these countries is low. The biggest exposure to Russia, ponder the bank’s economists, is in fertilizers, since we import about 85% of all fertilizers consumed domestically and 25% of this total is of Russian origin, used mainly for soy planting. This, however, would be a risk for the next season, since the current one has already been planted, even though there is a stock of the product that was not used in the current season.
Some experts in foreign trade, however, signal caution in relation to the effects of rising commodity prices. For Silvio Campos Neto, with Tendências, there is expectation of a more dynamic performance of exports, although imports are likely to feel part of the global inflation. Tendências highlights the high uncertainty regarding the duration of the conflict and its consequences. For now, the surplus expected for this year, he says, is $61.8 billion, in an estimate already revised against the $58.5 billion projected until the beginning of March.
The scenario for this year has important differences compared to last year, when iron ore prices reached the historic peak and ensured a record trade surplus, says economist Livio Ribeiro, partner at the BRCG consultancy.
José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB), highlights that one of the differences this year is in import prices, which began to grow more rapidly in the last months of 2021 and maintain a strong pace at the beginning of 2022, which should pressure imports upwards and the balance downwards. For him, the effects of commodity prices on exports can also be restricted, in part because higher base 2021 iron ore prices limit average price growth this year and could see export volume affected by China’s slowdown. Soybean prices have increased, but we will have limited shipments due to the crop failure, he says. “And we also don’t know if oil will have the breath to continue rising or stay at current prices.” New preliminary estimates by the AEB point to a surplus of $49 billion for the year. The initial projection was $34.5 billion.
Lia Valls, a research associate at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV), highlights the declining trend in terms of trade, more recently accentuated by the faster rise in prices for imports than for exports. The terms of trade in the first two months of the year, she points out, were 13.5% below the same period last year, according to data from the Indicator of Foreign Trade (Icomex) released by Ibre.
Average import prices in January and February of this year grew 33.9%, twice the rate of 15.9% in which average export prices fluctuated. “And the rise in import prices is not restricted to commodities, but also affects non-commodity items,” she points out. According to Icomex data, average commodity prices of imports, in the same period, increased 51.8% while non-commodities grew 32.2%.
These high import prices also in non-commodity goods make the debate more complicated and require more care, points out Mr. Ribeiro. “The memory of this import acceleration tends to be longer as it reflects the pass-through of costs in industrial goods.”
When this is added to the appreciation of the real against the dollar and a deceleration of the world economy expected as a result of the war, although the impact is still uncertain, says Mr. Ribeiro, it is not very obvious that this set of vectors is positive for the balance. More contained than the market average, BRCG projects a surplus of $45 billion in revision in the last week, compared to $38 billion in the previous estimate.
The more recent global prices rise, as in wheat and oil, says Ms. Valls, adds to ongoing pressures since 2021 and represents new cost shocks to inflation in Brazil. At the same time, she says, there is a global trend towards protectionist measures to discourage exports and ensure food security, which could also lead to further supply shocks. She cites Argentina, which raised export taxes on soybean meal and oil, and Indonesia, with restrictions on the sale of palm oil.
After a period of reduced prices as the pandemic took air tickets to the lowest level in 20 years in 2020, airfares surged again. The average price of air tickets sold in the local market in 2021 was R$494.01, up 19.28% compared with 2020 and 2% compared with 2019, data by the National Agency of Civil Aviation (Anac) show. Airline executives, however, unanimously say that prices are bound to rise even more as oil skyrocketed driven by the Ukraine-Russia war.
This was the highest percentage increase seen in a year since 2008, when there was an increase of 37.82%, ANAC said. The 94% jump in the average price of jet fuel last year compared with 2020 levels was one of the main factors for the rise in airfare, in addition to the growth in demand.
In the case of Anac data, which compiles all tickets sold, the advance of the average ticket compared with 2019 underlines a change in the profile of tickets (with longer routes) than of price normalization – which is still below before the pandemic.
When analyzing last year’s data, the yield (that is, the amount paid by the passenger to fly one kilometer) was R$0.372, up 17.7% compared with 2020. However, the value is still 10% below that of 2019.
Although on average the tickets have not recovered, the consumer’s feeling that prices are higher is a reality and can be seen in the numbers. Last year, yields of up to R$0.300 represented 48.5% of the total. In 2020, this percentage was 58.9%. Yields of up to R$0.500 represented 70.6% in 2021, compared with 77.8% in 2020.
Meanwhile, tickets with a yield above R$1 (the most expensive ones) represented 10.1% of what was sold in 2021, compared with 7.4% a year earlier. In other words, the data show that fewer people could buy cheaper tickets (below a yield of R$0.3 and R$0.5) while more people bought more expensive tickets in 2021 than in 2020.
Gol was the company with the highest percentage of increase in tickets sold, 25.9%, followed by Azul Linhas Aéreas, with a 17% rise, and Latam, with an increase of 12.4%. However, Azul was the company that presented the highest average value of the air ticket, of R$562.66. Gol and Latam followed, with an average of R$481.76 and R$444.90, respectively.
In the international market, the air fare charged on flights to Europe had a reduction of less than 0.1%, with an average value of $643.11. Flights to Asia had an average fare of $960.07, a 3.3% drop.
Despite the weak real against the dollar, the expectation is that the variation of oil prices will impact aviation fuel only in the coming weeks. There is an estimate of a rise between 25% and 30%, according to airline executives.
Even without this effect, company yields are already quite high. At Gol, for example, the indicator is currently about 30% above pre-pandemic levels.
Even without this effect yet at the pump, the yields of the companies are already quite high. At Gol, for example, the indicator is currently about 30% above pre-pandemic levels. The airline industry has achieved a victory with the exemption of social taxes PIS and Cofins on jet fuel. This is an important step, but would have little practical effect on costs since the biggest villain on the tax side is sales tax ICMS, according to the Brazilian Association of Airlines (Abear).
Brazil will probably end 2022 with an unemployment rate of at least 11%, representing about 12 million people unemployed — and without recovering the real income from work, currently damaged by the growth of inflation. This is what specialists consulted by Valor predict.
Analysts with Tendências, XP, Ativa, LCA and Fundação Getulio Vargas (FGV) unanimously say that economic projections has deteriorated this year, and the same happened with the conditions necessary for a sustainable recovery of employment. On top of a more unfavorable macroeconomic environment, the activity is likely to suffer direct and indirect negative effects from an unexpected factor – the war between Russia and Ukraine –, such as higher inflation, economists note.
And they warn: the continued increase in the workforce and the need for families to raise income due to the loss of purchasing power with rising prices will stimulate even more people to look for a job, putting upward pressure on the unemployment rate this year.
At the beginning of 2022, the labor market gave a positive sign, with a decrease of 0.9 percentage points in the unemployment rate in the quarter to January, to 11.2%, according to the Brazilian Institute of Geography and Statistics (IBGE).
For Lucas Assis, an economist at Tendências Consultoria, this decline does not guarantee a continued improvement in employment by the end of the year. A concerning factor released by IBGE, he said, is the already significant number of people — 6.9 million —who want to work more hours to increase income but cannot. This is because the current pace of the economy does not encourage companies to increase hours worked.
Tendências projects zero economic growth in 2022. And he did not rule out still lower world growth and damage in global supply chains of inputs due to the conflict in Eastern Europe. “This [context] may restrain the intention of investments and the impetus of hiring in the country,” he said, suggesting programs to tackle unemployment, especially among young people.
Rodolfo Margato, an economist at XP, also sees zero GDP growth, and adds that any sustainable improvement of the Brazilian labor market is hindered by structural problems. “We have a high informality rate, above 40% [of the employed population], higher than the average of the emerging countries, and low average professional qualification,” he said. As a result, jobs with low qualifications pay less and, consequently, do not help to increase labor income continuously and sustainably.
“It is difficult to imagine a reversal of income trajectory in real terms [in 2022],” he added. This month, IBGE also unveiled that, even with lower unemployment, in the quarter ending in January the real usual income from work (discounting inflation) fell 1.1% compared to the previous quarter; and fell 9.7% compared to the same quarter of the previous year.
In Mr. Margato’s analysis, a solution to improve the labor market, in the long term, would be to combine continued investments in professional training within an environment with balanced macroeconomic indicators.
The importance of the economic scenario in the employment results was also mentioned by Étore Sanchez, the chief economist of Ativa Investimentos. For him, the effect of the weak economy on employment in 2022 may lead to an unemployment rate of 12.5% by the end of the year — that is, about 13 million unemployed. “The outlook is so bad for growth this year that the labor market will end up reflecting this,” he said, also projecting zero GDP this year.
In general, the labor market reacts with a lag in relation to economic activity, said Bruno Imaizumi, an economist at LCA. But he acknowledged that, today, the situation is different. “In 2022, the labor market is tied to the economic scenario, which is deteriorating.”
The analyst also does not see much room for recovery of jobs because, besides the weaker economy not favoring such action, this movement has already happened in 2021, after cuts in 2020 due to the pandemic. In February 2020, the employed population was 94.7 million, and in December 2021, 95 million, he said.
“We will continue with unemployment rate at this high level,” he said. Mr. Imaizumi also pondered that the picture could be less unfavorable with structural solutions, such as more programs focused on professional qualification.
Rodolpho Tobler, an economist at FGV, agrees. For him, “it is impossible to imagine an unemployment rate below double-digit levels” with structural problems in the labor market, such as high informality and low professional qualification. Like the other specialists, he pointed out that since 2016 the country has not seen an annual unemployment rate below 10%. This resulted in a high level of unemployed people for a long period of time without generating income from work and, thus, “curbing” robust growth in the economy.
“And the war [in Ukraine] can amplify these problems [in employment],” he said. He stressed that the conflict is a factor in raising prices, inhibiting consumption, and thus driving even weaker activity — which hinders job openings.
Marcelo Marangon and Fernando Iunes — Foto: Carol Carquejeiro/Valor
Citi is Brazil’s ninth-largest bank by assets and the second-largest foreign one, but has outlined a plan to speed up in the country. The bank led by Marcelo Marangon has set the goal of expanding revenue by 50% in three years. To do so, it will invest more than $50 million in technology and hire 300 people – the bank now employs 1,900 people here.
Citi has also hired Fernando Iunes, a former Itaú BBA executive, as vice-chair of its investment bank. Mr. Iunes will strengthen a business in which Citi plans to advance, and foresees a very positive performance this year despite the fewer IPOs expected. Last year, the U.S.-based bank institution ranked sixth in revenue of investment banks in Brazil, according to Dealogic.
“Brazil is Citi’s seventh-largest market in wholesale banking, and we have a footprint in 95 countries. We have a growth ambition like we have never had, even in a challenging scenario, with elections, war, the transformation of the financial market, several factors,” Mr. Marangon said.
In moments of global crisis, the value of the bank’s global presence becomes even clearer, he said.
The bank has not yet released its official results for 2021, but the CEO says – without elaborating – that the profit was the highest in 10 years. The assets reached R$130 billion, up almost 30% year over year. He recalled that after the sale of the retail operation to Itaú, unveiled in 2016, the bank increased threefold its assets in the country and improved profitability. “This shows that the focus on wholesale banking made perfect sense.”
Better known for serving multinationals and large groups, Citi has decided in recent years to advance in the corporate segment, which includes companies with revenues from R$250 million to R$5 billion. This base has 1,200 clients, and the goal is to attract 1,000 companies more.
The expansion, however, does not represent greater risk taking. “We are going to increase our share of wallet and bring in new clients within the target market that has already been defined. We will not add unnecessary risk to our portfolio.” The bank’s total portfolio exceeded R$36 billion in the middle of 2021.
According to the executive, the scope has not changed, but the bank wants to attract a larger portion of a group that it estimates to have between 3,500 and 5,000 companies. He said that credit provisions dropped substantially in 2021 and does not anticipate a significant increase this year. “We are not changing the established prerequisites. And this is key for achieving resilient results,” he said.
Of the $ 50 million in planned investments in technology, a good part will be destined to cash management and treasury to improve services. Later on, the bank does not rule out using this structure to prospect smaller companies as well.
The immediate scenario is not easy, with rising inflation and interest rates, a sluggish economy, and the volatility of an election year. However, the bank sees opportunities in the country. “Despite the pandemic, the difficulties we have seen in the global supply chain and now the war, we see a positive outlook for Brazilian companies,” Mr. Iunes said.
The executive’s mission will be to strengthen the relationship with companies to capture these opportunities. With a tougher market, Citi is betting on infrastructure projects, many of them linked to recent concessions and the sanitation sector. “There is still the migration to a new low-carbon economy and we need to continue supporting clients in this regard, regardless of the macro scenario,” Mr. Iunes said.
This year, Citi took part in key secondary offerings, such as those of meatpacker BRF, power company Equatorial, Havaianas flip-flop maker Alpargatas, and the block trade of NotreDame Intermédica. Last year was already a record year for the bank, with 26 equity operations, 15 mergers and acquisitions and 46 debt issues.
Mr. Marangon acknowledged that the number of share offerings in the market as a whole is likely to be lower this year, but says that Citi wants to continue gaining market share. In addition, the number of M&A deals is expected to rise. “Obviously, there will be some slowdown, but they will continue to happen. We have a very large pipeline of deals. The long-term trend remains very positive,” Mr. Iunes said.
At the same time, Citi also expects to increase twofold, in three years, the $10 billion under management in private banking.
The elections this year pose challenges. However, according to Mr. Marangon, more important than the candidate who leads the polls is the vision about fiscal responsibility. “If we have a campaign that focuses on Brazil’s strategic plan, on the fiscal situation, on investments, we see no reason for it to avoid, postpone any type of investment, under the microeconomic standpoint. The macro is more complex.”
On the other hand, the executives’ view is that the war in Ukraine may increase the relative importance of Latin America in the portfolios of global investors. Mr. Iunes says that, besides commodities, some countries in the region, such as Brazil, have better governance standards.
With this, Citi sees the flow of foreign capital coming into the Brazilian market as lasting. “We have 67% of foreign investor custody, so we have a privileged view of the flows. There was a very strong inflow into bonds and equities, and at the moment we continue to see a strong flow into Brazil. Even long-term direct investment is likely to see a substantial increase this year. We project around $50 billion,” Mr. Marangon said.
Brazil will join the World Trade Organization’s agreement on trade in civil aircraft. With this, it will cease to be the last relevant aircraft producer outside this understanding that eliminates import tariffs in the segment.
The decision to join was confirmed by Lucas Ferraz, foreign trade secretary of the Economy Ministry, who is in Geneva in meetings with partner countries. Now the mandate for the negotiation must be approved by the Commerce Strategy Council, in a cabinet meeting headed by President Jair Bolsonaro.
The agreement entered into force in 1980 and has 33 signatory countries. Most WTO agreements are multilateral, meaning that all 164 member countries participate. This understanding is part of plurilateral agreements, signed by a restricted number of countries.
It provides for the elimination of import tariffs levied on civil aircraft and products in the sector, such as aircraft engines, their parts and components, flight simulators, and so on.
Embraer always wanted Brazil’s participation in this agreement, the secretary said. In the aeronautical sector, there is a strong insertion of global value chains, as 90% of the value of an airplane is typically imported content.
Brazilian exports and imports in this sector total $40 billion, Mr. Ferraz said. The import duties involved are virtually zero in Mercosur.
“It is important for Brazil to participate because, besides having access to other markets with zero tariffs on exports, it gives legal security for the opening of its market,” Mr. Ferraz said.
On the other hand, the secretary confirmed that joining the Information Technology Agreement (ITA), which eliminates tariffs on covered products and can reduce prices for consumers, remains on the radar. Yet, this topic involves changes in Mercosur’s Common External Tariff (TEC). “The conditions are not yet given for joining, but it is in our plans,” he said.
Last year, Laos became the first least developed country to join this plurilateral agreement.
At the time, a representative of the European Union (EU), Hiddo Houben, highlighted that Laos made the right choice and used Brazil as an example in the other direction.
He cited “academic evidence that countries that join the ITA agreement increase their market share of Information Technology products.” And added: “Brazil, for example, has not joined the ITA and its share of the world market for IT products has declined since 1994, 1995. So joining the ITA is a good thing in order to become competitive in manufacturing the products that are covered by the agreement.”
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/f/c/IA2AZeRtqV3izVE291Lg/nbr-carro-divulgacao-nbr.png)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2021/X/S/W4sfD5RleBLCuzn1psNQ/fernando-rocha-jgp-leo-pinheiro-valor.jpg)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/Q/A/6OABDsQO25p8wA2rEPNw/28bra-100-bala-a4-img01.jpg)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/1/E/6Egcb8QKqBY4iw0DS7lg/210322-20citi-20057.jpg)
