After 44 years in operation, the São Simão hydroelectric plant will undergo modernization. The Hydro division of GE Renewable Energy and SPIC Brasil, a subsidiary of State Power Investment Corporation of China (SPIC), signed a R$700 million contract for the modernization of the plant’s generating units and auxiliary services.
The contract provides for the supply of equipment for the turbines, generators and auxiliary systems, in addition to the entire project engineering and integration, assembly and commissioning of the six generating units.
Claudio Trejger, CEO of GE Renewable Energy’s Hydro division in Latin America, told Valor that a new bid was made and the consortium led by GE – with the support of Powerchina – won.
“This asset is more than 40 years old, and every plant with more than 30 years old is already subject to some modernization to ensure availability for another 40 or 50 years and bring best digital practices in line with the present day,” he said.
Under the contract, GE Renewable Energy is responsible for 70% of the works. The execution of the project is expected to last nine years, with scheduled shutdowns of the generating units in order to update the systems and leave the plant more time available. Spic Brasil’s chief executive, Adriana Waltrick, believes that the investment in the plant is key as the company has goals for a transition to clean sources energy.
“The modernization prepares the São Simão hydroelectric plant for the future, reinforcing the efficiency and reliability of our main renewable power generation asset in the country, which is being equipped with the most modern technology,” she said.
Located between the municipalities of Santa Vitória (state of Minas Gerais) and São Simão (state of Goiás), São Simão is fundamental for Brazil’s energy security. With an installed capacity of 1,710 megawatts, the plant could power around 6 million homes.
The hydroelectric plant belonged to Companhia Energética de Minas Gerais (Cemig) and GE was already in talks for modernization, but there was change in the company’s strategy to sell assets and the contract was cancelled.
In 2017, the Brazilian Electricity Regulatory Agency (Aneel) held a concession auction. SPIC Brasil won São Simão’s concession in the following year after a bid of R$7.18 billion. The Chinese company also committed to a robust modernization plan of around R$1 billion.
The plant has six generating units with 285 MW each, in addition to a reservoir capable of storing 2.54% of the reservoir volume of the Southeast/Central West System. Ms. Waltrick also highlights the importance of the project for an energy-consuming region, in a context of growing energy demand.
“The plant is located in an important and strategic electro-energy flow region, and is an important source for Brazil’s power generation system,” Mr. Waltrick said.
Ms. Waltrick says that there is a first planning phase of a year and a half of engineering, development and integration, before starting work at the plant.
“The downtime per machine is 10 months. We will replace some parts of the turbine and we will recover or manufacture others, then there is the assembly and testing. We will stop one machine a year,” she said.
Mr. Trejger points out that it is not a repowering process, since the plant will not have an increase in power. With an additional investment, this could be done. “The plant has six machines, but the civil construction was made to have ten machines and could add another four…In the future, it is possible to increase the generation capacity of the power plant at the end,” he said.
GE is also working on the modernization of Ilha Solteira (3,444 MW) and Jupiá (1,551 MW), owned CTG Brasil, and sees a market for modernization and repowering, since the current Brazilian hydroelectric segment has important plants operating for more than 70 years and in need of retrofit. In addition, the last auction with medium and large hydroelectric plants was held in 2013 and currently the Electric System Expansion Plan does not foresee new plants due to environmental reasons.
Rodrigo Moreira and José Berenguer — Foto: Silvia Zamboni/Valor
XP intends to strengthen its hand in the space it considers less busy in the corporate segment: that of companies with cash surpluses rather than those that require credit – and typically provide better returns to banks.
After revenues in the segment reached R$850 million last year, compared with zero three years earlier, the platform plans to go a long way in the so-called “middle market,” which brings together businesses with revenues above R$200 million. XP was born making only investments and now boasts R$815 billion under custody.
XP, with about 50,000 clients in its portfolio and R$65 billion under custody in this segment, plans to reach 400,000 companies by 2025 and increase revenues with the segment tenfold by then. Last year, net funding was close to R$30 billion. To expand its base, XP bets on independent financial advisers connected to the platform, which have been adding specialized labor. Of the 500-people commercial team, 90% comes from the external channel.
Since it went public on Nasdaq, at the end of 2019, XP has said that people in Brazil are leaving large banks behind, a move still in its earlier chapters. Yet, XP itself became a bank by setting up the infrastructure of services existing in the old-school financial firms. This created the conditions to move beyond investments. Now the firm wants to repeat in the corporate business what it achieved among individual clients.
“[Corporate] clients who are purely investors are not the main targets [of banks]. They are not the ones who pay the highest spread because they have more bargaining power, they are not so dependent on credit, the bank does not get a ‘cross sell’ so easily,” said Rodrigo Moreira, a partner at XP who leads the corporate business since 2019, after a decade at Itaú. “Banks don’t have a broad suite of products in the portfolio for investment clients. It’s an easier arena for us to fight in.”
By starting with the investment end, XP follows the same logic that helped it scale up services to individuals. This approach includes a platform open to third-party products and a technological overhaul that matches the regulator’s agenda with the advent of open banking to foster competition, said José Berenguer, CEO of Banco XP. “The banking segment will be part of our services, but we will work to connect other providers to our platform. We try to have simple contracts and price appropriately as we do not have to shoulder fixed costs,” he said, referring to distribution through independent financial advisers.
The base is the investment account, since the XP bank account for companies is not yet transactional, Mr. Berenguer said. The firm expects to increase the power of attraction when this stage is over, something expected for later this year. The executive says it is reasonable to estimate that at the current growth rate, the segment will double in size every 18 months.
According to the executive, this customer group is poorly served in traditional bank branches, which depends on credit, pay expensive rates and is the first to suffer in crises. “It is the first credit that disappears,” Mr. Berenguer said.
Offering unsecured credit is not, however, in the original script of Banco XP. “We have also been doing it, but it is not the flagship. Many credits are collateralized [with investments], but our role is also to teach how to take credit, to have a financial life more adequate to the reality of the budget, of the companies’ income,” he said.
Mr. Moreira believes that over time credit will become important for XP as a whole. “Will it be the most important line? Only time will tell, but it is unlikely to happen in the short term.” He says that the company already has some structures where it takes some risk, combining investment collateral. The most likely is to move into some kind of working capital, with export financing lines, with the use of derivatives and treasury operations.
When mapping the universe of entrepreneurs or executives in leading positions in the companies, XP counted about 150,000 clients within its own base, Mr. Moreira said. This has been the starting point. There is synergy with the public served in private banking, of high-net-worth individuals and families.
The economic activity fell 1.4% in January compared to December, according to GDP Monitor — an indicator calculated by think tank Fundação Getulio Vargas (FGV) to measure the monthly evolution of the economy, unveiled on Monday.
Claudio Considera, the economist in charge of the readings, says that the result indicates stagnation in the economic activity in early 2022. This is because there are no signs of robust reaction in key segments of the economy, such as household consumption and services economy — the latter representing more than 70% of the GDP.
According to him, Brazil does not have, at the moment, conditions for sustainable growth this year, and is expected to end up with a variation close to zero in the GDP in 2022, compared to last year. “We have today a perfect picture of a totally stagnant economy,” the specialist said.
FGV also unveiled that, in the GDP Monitor, the economy grew 1% in the moving quarter ended in January, compared to the one ended in October 2021. Compared to January last year, the economy grew 1.2% in January this year, with expansion of 2% in the quarter ending in January, compared to the same period in the previous year.
Mr. Considera said, however, that those increases are favored by the low base of comparison, referring to last year, and do not represent the economy accelerating at the beginning of 2022.
This is because the faster advance of vaccination against Covid-19 only happened in mid-2021, when the gradual reopening of the economy began to take place, as people went back to work and restrictions on circulation were eased. Immunization against the disease started in Brazil only in January last year — a month in which the economy, especially in the commerce and service sectors, was operating at a weak pace, hampered by the pandemic, and was strongly affected by social distancing measures designed to contain contagion.
On the demand side, one factor that help form the current moment of weaker activity is the weakening of household consumption at the beginning of the year, Mr. Considera said. In the GDP Monitor, in January, household consumption fell 1.3% compared to December last year.
There was an increase of 2.2% compared to January 2021, but the analyst said that the use of a low base of comparison influenced upwards the high results seen in the indicator in January 2022. In the moving quarter ended in January versus the one ended in October, household consumption grew only 0.8%.
“Household consumption is falling, and now with higher inflation it will be even harder to grow,” he noted, adding that higher inflation leads to lower real household income. “We are not seeing any sign of improvement [in family consumption],” he said.
Another aspect Mr. Considera mentioned was the Russia-Ukraine war, which has led to a surge in the price of oil abroad and to increases in fuels in Brazil. As long as the war goes on, the price of a barrel of oil in the foreign market may remain high, making prices soar in the Brazilian domestic market, he said.
On the demand side, the services sector is not showing good signs on the margin either. In January, this activity fell 1.7% compared to December last year in the GDP Monitor.
According to Mr. Considera, the factors at the moment indicate that the country does not show the necessary conditions to grow above 1% a year in 2022. “I don’t see conditions to strongly grow this year. We are expected to have a very weak growth of 0.6%, 0.7% [in the 2022 GDP],” he said.
GreenYellow wants to expand in electric mobility, energy storage and digital services in Brazil. The goal is to complement activities in energy efficiency and distributed solar generation, fields in which the subsidiary of the French group Casino has been operating here since 2013, said Roberto Zerkowsky, the company’s country head.
GreenYellow expects to invest R$350 million in the country this year. “The novelty for 2022 is the horizontal portfolio,” Mr. Zerkowsky said.
The company will bring to Brazil starting this year the charging solutions for electric vehicles offered in France, where it has more than 250 electric charging stations in operation. The focus is on projects that support electric mobility. According to the executive, there is potential to provide services for companies interested in electrifying their fleets, such as logistics firms and those that embraced a work-from-home policy.
In January, GreenYellow closed a local partnership with NewCharge, a Brazilian engineering and development company for electric power storage. “The intention is to expand the number of charging stations in Brazil. We are monitoring the expansion of electric vehicles,” Mr. Zerkowsky said.
GreenYellow is also expanding its solar power generation capacity in Brazil. The goal is to add more than 50 megawatts in generation plants to the portfolio this year and reach an installed capacity of 150 MW in the country by December.
The growth strategy may involve acquisitions of projects and development of own plants, the executive said. In November, GreenYellow unveiled the purchase of a 90% stake in five distributed generation solar plants from FazSol around Brasília, with a capacity of 4.4 megawatts-peak.
In 2021, GreenYellow grossed R$304 million in Brazil, up 83% year over year. The company operates in eight countries in the solar power, trading, energy management and energy efficiency businesses. The company entered Poland last year as part of its strategy to expand operations in emerging countries, which includes South America and Asia.
GreenYellow ended last year with an installed power generation capacity of 740 MWp around the world, up 31% year over year. The company has 3,000 efficiency projects in place worldwide, which meant global power savings of 985 gigawatt hours by 2021.
About a third of the global volume of energy saved by GreenYellow’s clients last year came from contracts in Brazil. “We are talking about R$140 million in savings [with energy efficiency], given the tariffs of the Brazilian market,” he said.
Mr. Zerkowsky predicts that the segment will grow worldwide with the crisis generated by the war in Europe, which raised energy prices. Considering the higher demand for efficiency seen before the war, the company started to offer service contracts in Brazil in the last few months.
This way, GreenYellow makes available the rental of equipment that helps save energy and takes responsibility for the operation and maintenance during the entire contract. This type of solution brings greater predictability to the customers’ cash flow, Mr. Zerkowsky said. The model was used in an agreement for the lighting of Leroy Merlin stores, for example.
Grupo Profarma, Lojas Quero Quero and Panvel signed contracts with GreenYellow in Brazil in 2021. Mr. Zerkowsky points out that, today, the group’s clients are mainly companies from the pharmaceutical, telecommunications and retail sectors, but the intention is to also cut deals with mining, metallurgy and food processing companies this year. “We are in a growth pace in Brazil,” the executive said.
According to him, the company maintains its intention to go public, as announced last year. However, there is still no definition about deadlines.
After receiving R$73 billion in foreign funds this year to March 16, more than any full year since official records began in 1994, the secondary market of B3 may see the flow slowdown in the coming months as the global landscape for stocks undergoes adjustments, asset managers told Valor.
To be sure, global investors continue to see support for commodity-linked stocks, which account for 40% of benchmark stock index Ibovespa, but a shift in focus to assets more reliant on the local economy seems increasingly less likely, as inflationary pressures intensify and the Federal Reserve has already started its monetary tightening cycle.
The Ibovespa is up 9.8% this year, while S&P 500 is down 6.3%, Nasdaq lost 11.6% and Stoxx 600 fell 6.8%. The positive performance, however, is strongly concentrated in the blue-chip companies, those with the greatest weight in the local index, and in the mining, steel, financial and oil and gas industries, the favorites of global investors because of their liquidity.
Before the beginning of the Russia-Ukraine war, in February, analysts saw a potential migration of international capital to assets more linked to the local economy, expecting a slowdown in inflation and a reversal of the Central Bank’s monetary policy after the presidential election, scheduled for October. This scenario seems distant now.
“Central banks in Latin America had been preparing for months for this monetary tightening cycle, trying to stay ahead of the curve, but the impact of the war is essentially inflationary, with high food and energy prices. It’s not catastrophic, but it makes the landscape more challenging and delays expectations of a turnaround,” said Alejo Czerwonko, chief investment officer for emerging markets and Americas at UBS, which has a neutral recommendation for Brazilian assets.
UBS BB, the arm of the Swiss bank in Brazil, believed that the Selic could reach 13.75%. But after the local policymakers’ decision on Wednesday to raise Brazil’s benchmark interest rate to 11.75% and signal another 100-basis points hike, UBS revised its projection for the final rate to 12.75%. The difference, however, is that the bank’s analysts now predict that the rate will remain at this level by March 2023.
As a result, the environment is less favorable for the recovery of assets linked to the domestic scenario, Mr. Czerwonko said. He cites the Federal Reserve’s monetary policy decision, unveiled on the same day, as a potential watershed for the stock markets.
“Fed’s statement was tough, indicating several hikes and showing concern with inflation, which is likely to mean less liquidity and funds for emerging markets. In addition, investors have left some sectors of the U.S. stock market, such as technology, to protect themselves from interest rate hikes, but now this seems to be more priced in, so we may start to see the move lose steam.”
Along these lines, Marko Kolanovic and Bram Kaplan, with J.P. Morgan, wrote in a report that they no longer believe that U.S. growth assets have much correction ahead. “Markets can anticipate turning points, so we believe it is time to start adding risk in many fields that have experienced too strong a correction,” they argued.
Mr. Czerwonko, with UBS, also points out that Brazil’s historical problems, such as the lack of a growth rate more compatible with emerging economies, help explain why the local market took a back seat in recent years and its use only as a “tactical refuge” during commodity boom cycles.
“Besides markets such as China, India and Southeast Asia presenting consistently better activity figures, the elections, which were pushed to the back burner in recent months, are likely to gain prominence throughout 2022,” he said.
Mauro Oliveira, head of Latin America equities at Credit Suisse, said that the Brazilian central bank and the Fed released tough statements, which shows discomfort with inflation that may impact assets more dependent on local activity. However, the flow will continue, even at a slower pace, with the help of commodities, he said.
“Foreign investors are likely to tap the local market at a slower pace, with profit-taking moves in some days or even leaving some stocks. In some sectors, like construction, is very hard to invest now because of poor results and labor cost inflation. But the Brazilian stock exchange is a commodities exchange, there is no way to escape this, and this segment is likely to draw money throughout the year.”
Alexandre Reitz, head of equities at Julius Baer Family Office, follows the same path. He points out that, in communication with clients, local equities have started to carry more risk than they did at the beginning of the year due to the factors added in recent weeks.
“We could already see a recovery in domestic assets at the beginning of 2022, and this has been extended a bit further ahead. But the constructive view about commodities remains. The profitability level last year had been high and was telegraphing a correction, but the war has changed this landscape,” he said, pointing out that he has started to look for positions in more resilient domestic assets, such as the clothing sector.
Credit Suisse estimates that Brent oil, the benchmark for Petrobras, is likely to remain at the level of $100 by the end of 2022 due to persistent supply problems. Iron ore is likely to stay above $120 throughout the second half, even as discussions of control in steel production remain in China.
As for the Asian powerhouse, Messrs. Oliveira and Czerwonko saw favorably recent remarks of vice premier Liu He. He said the government will stimulate the country’s economy again and work to organize its stock market. Besides commodities, the analysts say the changes can impact Chinese assets, which trade at a discount level in some sectors compared with the Brazilian market.
As for the Brazilian real, which has appreciated firmly this year, the three financial firms see resilience at current levels, given local interest rates and high commodity prices. Mr. Oliveira, with Credit Suisse, points out that there may even be a correction in case of occasional risks, to between R$5.25 and R $5.30, but that foreigners would soon return to set up positions in the local currency.
After years of preparation, the phone carriers that won the auction last November are beginning to put in place the fifth-generation mobile network in Brazil. Algar, América Móvil’s Claro and Telefónica’s Vivo have already started using one of the auctioned frequencies, 2.3 Ghz, to offer 5G connection in specific places. Telecom Italia’s TIM, on the other hand, is waiting for the release of the 3.5 GHz band by telecoms regulator Anatel to start operating the new technology.
For now, 5G is being offered in a band that can be used both for 5G and for 4G in the 2.3 Ghz band. Claro launched 5G in this frequency in some areas of São Paulo and Brasília; Algar did the same in Uberlândia and Uberaba, in Minas Gerais, and Franca, in São Paulo. Algar said it offers customers a better data browsing experience through the 5G 2.3 GHz network. It would be possible to download a 20-gigabyte video in about 40 seconds.
When available, a more powerful version of 5G, known as standalone, will allow downloading a movie, video, or song faster and easier. Tests done in Claro’s 5G lab in Rio show that downloading a 10-hour YouTube video in high definition would take only one minute and 30 seconds. On Netflix, a 500-megabyte video could be downloaded in 30 seconds, while on Spotify 24 hours of music will be downloaded in two minutes. Downloading the game Free Fire will take only 25 seconds.
The bands work as “avenues” through which the signal reaches the consumer. The major carriers will focus on “Avenue 3.5,” the fastest and most efficient of them all. According to the schedule of the call for bids, the standalone 5G will be working in the 3.5 GHz band in all the country’s capital cities by July 31. However, Communications Minister Fábio Faria said there may be delays in some locations until September – the maximum deadline defined by Anatel.
Despite the minister’s prediction, telecom companies, trade unions and the regulatory agency are still in talks about potentially moving up the 3.5 GHz band launch in some cities, where the satellite dish broadcast is used less. Phone carriers and suppliers have been saying that, from an operational standpoint, 5G is ready to be activated. Vivo, for instance, says it expects to launch the technology in capital cities by July 31.
Transmitted by radio waves, the new technology will need exclusive frequencies. The 3.5 GHz band, however, needs to be cleared because part of it, mainly in the interior of the country, is used for parabolic TV transmission, whose signal will be changed to another “avenue.”
The band clearing involves bureaucratic issues as well. One step was made on February 23, when Entidade Administradora da Faixa (EAF), a private-sector company coordinated by Anatel, was created to manage the bands. It will be overseen by telecoms regulator Anatel through a body known as Gaispi. The schedule may only be moved up with regulatory authorization.
Vivo says it is still adapting its network and, since the beginning of 2021, customers can already try 5G in the 2.3 GHz frequency in some locations in São Paulo, Rio de Janeiro and Brasília. The company is in the final phase of quality assurance of the service and plans to make a commercial launch soon. In the auction, the lots acquired in the 3.5 GHz frequency were those of 100 Mhz, while the 2.3 GHz frequency was divided into 40 Mhz and 50 Mhz lots – meaning a capacity about twice as small, able to offer a less robust 5G called NSA (non-standalone).
Despite its lower potential – although much faster than 4G – some carriers have chosen to go ahead and use the 2.3 GHz band. Algar will focus on expanding connectivity in the country by region. “We were the first carrier in the country to launch the 5G service, in January, for customers in the frequencies auctioned by Anatel, in the NSA standard. Since December 15, 21 neighborhoods in Uberlândia, 12 in Uberaba and seven in Franca started to count on the new fifth-generation technology,” said Márcio de Jesus, Claro’s head of retail business.
Claro’s CEO, Paulo Cesar Teixeira, says that the launch of 5G at 2.3 GHz in specific points met the great demand for data traffic. The executive also says that the phone carrier was the first to offer, in July 2020, the so-called 5G DSS, which uses 4G with some 5G features, a kind of 4.5G. Its capacity, however, is smaller than that of 5G NSA and standalone 5G. TIM and Vivo also offer the technology to their customers.
“From there, we started to foster the handset industry. It is key that clients have the possibility of immediate use. There is no point in launching a network and not being able to use it because the cell phone is not suitable,” Mr. Teixeira said. Claro is already talking to manufacturers to launch mid-range level, cheaper handsets, and bets that cell phone prices will fall as 5G gains ground in the country. “The technology will quickly reach other social classes,” he said.
At the moment, carriers are not charging more from customers to have use 5G in the 2.3 Ghz band. On the other hand, to be able to connect to the internet, one must have a device compatible with the new frequencies. For the 2.3 GHz frequency, there are already some compatible smartphones. For the 3.5 Ghz band, the supply is still low.
In a recent event held by BTG Pactual, Huawei argued for a plan to sell 5G phones at affordable prices. According to specialists, one possibility is to sell subsidized handsets to customers, at lower prices, under loyalty programs.
With the release of the 3.5 GHz band, data usage packages with 5G technology are expected to become more expensive in the first moment. Marcos Ferrari, head of Conexis, which brings together Brazil’s large phone carriers, says that companies do not have a “crystal ball” to know how long the new technology will take to be dominant and surpass 4G. For this to happen, the country must foster competitiveness and face challenges including municipal laws that block base transceiver stations, the tax burden of the sector and cable theft.
TIM’s chief technology officer Leonardo Capdeville says that the standalone 5G network will coexist with DSS and NSA in the future. The carrier’s strategy is to wait for the release of the 3.5 GHz band, which, despite higher capacity, has smaller coverage, requiring more antennas. “We are not going to race simply to claim that we have released something that is not definitive. Our choice is not to worry about being the first one, but about being the best one. And to be the best one we are going to have to use the 3.5 Ghz frequency,” he said. The executive also said that the cost of investment in the 2.3 Ghz and 3.5 Ghz bands is virtually the same, so it is better to focus investments on what offers the best technology.
According to data from Anatel, the existing coverage in the 2.3 Ghz band is still incipient. At the beginning of February, there were only 90 authorized base transceiver stations in the country. Brazil currently has about 100,000 antennas. 5G, on the other hand, will need at least five times as many.
Paraná-based Copel, another phone carrier, has already defined investments. The company joined Sercomtel and Consórcio 5G to win regional lots in the 3.5 Ghz frequency in the South and North regions and in São Paulo. Now, it has a minimum initial investment plan of R$1 billion, besides a $200 million fund to bring 5G to the Amazon rainforest region.
CEO Wendell Oliveira said that the goal is to bring the technology to the cities in 2022, before the deadline set in the call for bids for cities with more than 500,000 inhabitants, which is 2025. In Paraná, the goal is to have the new technology online in the first half of this year. “The idea is to take 5G to those who need it most, especially regions and activities where not even the internet is a reality yet. For São Paulo, the group will look closely at the commercial sector, taking the new internet to companies, ports, airports, logistics companies and the agribusiness sector,” he said.
Cloud2U, which bought a regional lot in the 3.5 Ghz band, covering locations in Rio de Janeiro, Minas Gerais and Espírito Santo, says that the company will follow Anatel’s schedule.
Winity, which has bid for the 700 Mhz lot, which will be used to connect roads and expand 4G, says that the commitments made with the concession begin as of 2023 and that the company will be the country’s first wholesale carrier. “During 2022, we will develop commercial agreements with our customers, companies that operate nationwide and in specific regions, and deploy our wholesale operating business model, where we build the network to make coverage and capacity available to our customers,” the company said.
There are, however, risks with the worsening of the economic scenario due to the war in Ukraine. Telecoms and international relations experts do not foresee sanctions against China due to its implicit support for Moscow – which could affect Huawei, a key supplier of telecoms infrastructure, including in Brazil. But the war increases inflationary pressure and the possibility of supply chain disruptions.
Mr. Ferrari, with Conexis, sees no risk for the local telecoms industry, though. “For now, the sanctions we have seen do not affect the deployment of 5G in the country. We do not anticipate any kind of problem to connecting 5G in the capital cities this year as provided for in the call for bids,” he said.
In the wake of the Russia-Ukraine war and the economic slowdown at the end of last year, the Bolsonaro administration has cut its estimate for GDP growth in 2022 to 1.5%, from the 2.1% previously projected. Despite the cut, the government’s expectation remains well above the 0.49% expected by the market, according to the latest Focus survey with analysts.
At the same time, expectations for inflation in 2022 have risen. In the projections of the Ministry of Economy, Brazil’s benchmark inflation index IPCA stood at 6.55%, compared to 4.7% expected in November. The National Consumer Price Index (INPC) reached 6.70%, against a projection of 4.25% in November, and the General Price Index – Internal Availability (IGP-DI) is expected to close the year at 10.01%, against 5.42% estimated previously.
Valor had previously reported that the government admitted a reduction of 0.5 percentage points in the growth this year, because of the war in Ukraine.
The conflict has already impacted the economy and will continue as a risk factor, said Pedro Calhmann, the secretary of Economic Policy. Besides driving inflation around the world because of the rise in commodity prices and bringing volatility to the fuel market, there are other risks: disruption of global value chains, deterioration of financial conditions and impacts on international trade and the balance of payments in Brazil.
The pandemic also continues as a risk factor to be followed, he said. It could impact growth and inflation.
Besides the effects of the war, the revision of the GDP is explained by the revision of the national accounts data by the Brazilian Institute of Geography and Statistics (IBGE) and also by the weaker activity seen at the end of 2021.
Fausto Vieira, the undersecretary of Macroeconomic Policy of the Ministry of Economy, said the government projects growth of 0.5% in the first quarter of 2022. This scenario includes growth of agribusiness (2%) and services (0.4%) and contraction of the industry (-0.8%). Economic growth in 2022 will be led by the recovery of the labor market and private-sector investments, the Ministry of Economy said.
Investments are growing because of the concessions program, said Mr. Calhmann. The contracts already signed contain commitments for expansion, and improvement of the structures granted that. In 2022 alone, those commitments reach R$78 billion. This is equivalent to a 2.3% growth in investment, with an impact of 0.45% in the GDP, he highlighted.
It is important that the government continues on the path of fiscal sustainability in order to have a medium and long-term scenario that is friendlier to investment, the special secretary of the Treasury and Budget, Esteves Colnago, says. “In January 2022 we are almost at zero deficit and heading towards surplus,” he said. But, he added, the scenario is challenging and “we need to see how it will progress.”
Since August 2020, 11 million jobs have been created, Mr. Vieira pointed out. “The participation rate is close to the historical average, but we believe it will continue to grow reaching similar levels to 2018 and 2019.” The country, however, still has a high unemployment rate. In 2021, the average annual rate was 13.2%, compared with 13.8% in 2020 and 12% in 2019.
Food sector faces new escalation of cost inflation after bad end of year for supermarkets — Foto: Divulgação
After a 2021 full of volatility and uncertainties, retail will not have an easy life in 2022. Major retailers in the country have been signaling, in conferences call on results in recent days, that the sector was already managing greater pressures on expenses, such as rents and labor, in addition to the escalation of costs of products in recent months. And the advance of the war in Eastern Europe once again concerns executives about results in the short term.
A survey carried out by Valor Data based on data from most traditional public retailers (18 reports were analyzed) shows that sales advanced less than costs and expenses at the end of 2021, while net income and profitability fell. Net revenue rose 5.3% in the fourth quarter of 2021, in nominal terms, to R$97.3 billion, compared with the previous year, with the cost of selling goods rising a little more, 6%.
When that happens, gross profit loses steam and gross margin drops — the rate fell to 25.8% in retail in the fourth quarter of 2021, compared with 26.6% in the same quarter of 2020.
Operating expenses grew 8.4%, in part, due to a weaker comparison base — the pandemic closed offices and reduced rents in 2020, but administrative and rental expenses are returning to market levels.
Summing up, this means that, when they entered 2022, companies were already dealing with more expensive inventories from purchases from industries – a reflection of the escalation of input prices, especially in food and electronics in 2021 – and also a return of expenses to higher levels. And that with sales even shrinking, in real terms.
“We had forecast the beginning of ‘normality’ after 2022. And I speak of normality in quotes, considering that it is an election year and sales are still recovering. But now we are very clear that inflation will not give in, and it should even go up, and the input and fuel costs, which affects retail distribution, tends to get worse,” said Gustavo Oliveira, partner at Tower Three (T3), with shares of retail chains in the portfolio.
For Breno de Paula, a retail analyst at Inter Research, this scenario puts more aggressive plans for store openings this year on the back burner in segments like durables retail and part of the fashion chains. “It is no wonder that, in the earnings conference calls in February and March, there was almost no mention of much more openings [in relation to 2021], because this weighs on the operating expenses, and soon affects EBITDA in a really bad time.”
“The focus now is to monetize the structures they already have, especially the marketplace, which a good part of the chains already operates. The name of the game is raising fees for sellers and charging more services to try new revenue and dilute costs,” said Iago Souza, an analyst with Genial Investimentos.
The food sector is already going through the first half of 2022 in a new escalation in cost inflation after a bad end of year for supermarkets. The year-end was better for the cash and carry segment. The combined sales of GPA, Carrefour, Grupo Mateus and Assaí rose 5.7% at the end of 2021, for a rise in costs of goods of almost 8%, and a high of up 10% in expenses. As a result, net income declined by 14%.
For an executive with 30 years of experience in cash and carry chains, with more expensive agricultural commodities and fuel, due to the war in Ukraine, inputs are already more expensive in some markets, which will weigh on the stores’ costs. “We were already dealing with a 10% food inflation in the 12 months until December, but still in this low double-digit range. But it’s up more than a point since January,” he said.
“The good news is that wholesale purchases from suppliers have grown. The corporate client is increasing inventory to protect itself from the inflation that comes from the war. February and March were better than January. The risk is that we’re basically just anticipating sales, but that’s part of the game,” he said.
According to XP, inputs such as oil, synthetic rubber, metals, grains and cotton have already risen by nearly 60%, 20%, 10%, 40% and 5% since the beginning of the year, respectively, which is expected to put further pressure on retailers’ costs. “However, the appreciation of the real against the dollar (by 10% in the same period) is expected to partially offset this effect,” said XP analyst Danniela Eiger.
At this beginning of the year, electronics chains have to focus on revising expenses as their supply chains are less pressured than the food retail. “I think that for us, unlike food, the biggest concern of the sector is with operational expenditures and reduction of stock purchased at higher exchange rate,” says the vice president of a traditional chain.
The fourth-quarter figures show that Americanas, Magazine and Via closed from October to December with total sales just 1.4% above 2020 and the biggest drop in profit among all the segments, of 36%. Sales dropped, but the cost of goods (which includes the inventory account) was stable. For Mr. Oliveira, with T3, the results of durables retail had already been declining since the third quarter, due to the effect of high interest rates and with the high exchange rate, but companies took a long time to adjust.
“In addition to the 2021 inventories that Via and Magalu must be reducing now, they carry a lower employee turnover after the crisis. The point is that this change of employees always helped to reduce labor costs naturally.”
Magazine, Via and Americanas highlighted the improvement in sales since February in a conference call. “Seeing the half full glass, the stock that will enter the chains after this reduction of the old stock will be cheaper, because we don’t see movement of transfer of the industry today, the exchange rate even fell and the war is not yet making components more expensive. So, this can help in the gross margin or we can pass it on to the customer,” the chain’s vice president said.
Some factors can help to balance this equation a little, such as the new injection of funds into the economy, with government measures, which could reach R$86 billion in the coming months, and the electricity bill, which stopped rising as in the past, one of the main lines in the sector’s cost bill.
For fashion retail, the scenario was of sales growing faster at the end of 2021 – partly due to the weak base of comparison the year before, when it was more affected by store closures –, with revenues rising 17%, gross margin gains and profit advancing 5%. Despite this scenario, as they sell non-essential goods, they have less room to pass on higher costs in times of crisis.
XP calculated in a report in March that for each 1% increase in the cost of raw materials, C&A’s EBITDA falls 3%. At Renner, the decline is 1% to 2%. “The premium chains ended 2021 under protection and will remain so this year, but the rest will face a more difficult landscape,” Mr. Souza said.
A new 10% cut in Mercosur’s Common External Tariff (CET) this year depends mainly on two measures being prepared by the federal government and linked to maritime transport. The Economy Ministry believes that the approval of these measures would help to reduce the cost of production in Brazil and pave the way for a further cut in the tariff later this year.
“Considering overhauls put in place and others that will come this year, we see room for another 10% cut in the CET,” said Lucas Ferraz, Foreign Trade Secretary of the Economy Ministry.
The CET is a kind of unified rate among Mercosur countries and is charged on imports of products from outside the bloc, although several goods are exempt.
According to the secretary, after cutting the Tax on Industrialized Products (IPI) at the end of February, the federal government will announce a reduction in the rate of the Additional Freight for the Renovation of the Merchant Marine (AFRMM) – a tax levied on maritime freight. For long-distance transportation, the rate is 25%. In addition, the Economy Ministry plans to exclude taxes from the terminal handling charge. According to calculations by the Secretariat of Foreign Trade (Secex), importing companies can save between R$600 million and R$1 billion a year with the change.
In addition to these measures, there have been reforms in recent years that have helped to lower, even as indirectly, production costs in Brazil and improve the business environment, Mr. Ferraz said. He cites as examples the new regulatory frameworks, the independence of the Central Bank and the pension reform. The Economy Ministry has even hired think tank Fundação Getulio Vargas (FGV) to develop an indicator to measure the variations of the cost of production in Brazil. The first measurement is currently being carried out.
In November 2021, the federal government had already cut the tariff by 10%. The reduction was temporary, lasting until the end of this year. This is because Mercosur rules state that any permanent cut must be consensual. To approve this cut, Uruguay wants to be allowed to negotiate free trade agreements with countries outside the bloc, regardless of whether the other members agree. Thereafter, Brazil used a clause that allows the cut on a temporary basis.
“As soon as Uruguay makes the CET move official – and it is not against it, but insists on flexibility – the cut made by Brazil will be followed by the other partners and will become permanent,” Mr. Ferraz said. “For the second cut, we will negotiate again, and we intend it to be permanent.”
Even though Argentina is “the biggest challenge,” the secretary believes that it is possible to reach an agreement on the new round with the other bloc countries, considering that since 2019 Paraguay and Uruguay “have signaled that they are in favor of even more ambitious CET cuts.” But even without Argentine support, “there is always the possibility” that countries “make the tariff reductions at times that are not necessarily coincidental.”
According to him, Brazil can use “some exception clause that gives legal grounds” for a second temporary cut, even if the first has not become permanent. “But we will always seek the negotiation route.”
Economy Minister Paulo Guedes has said more than once that the federal government may reduce the CET again by the end of the year, without elaborating. “We are starting to open the economy,” he said in February at an event sponsored by BTG Pactual. “We have lowered the CET and we can lower it again before the end of our term in office.”
Many economists are questioning technical basis and rhetoric behind Central Bank’s decision — Foto: Raphael Ribeiro/BC
Economic analysts, in general, understood that the Central Bank’s Monetary Policy Committee (Copom) signaled a rate of 12.75% per year at the end of the current interest rate tightening cycle. Yet many still see this level as the floor for the Selic, Brazil’s benchmark interest rate.
Economists and traders told Valor that the end-of-cycle signal, this time, was weaker and subject to revisions since the committee linked the future path of interest rates to the evolution of oil prices.
Others say that, even considering that the Central Bank’s intention is to stop at 12.75% per year, the inflationary scenario will remain challenging and, as a result, force the Copom to do more.
Others say that the cycle is unlikely to end up at 12.75% because, in that case, the committee will make one last sharp move in interest rates, 100 basis points. The Central Bank typically ends tightening cycles more smoothly.
There are still concerns, in part of the market, of an exaggeration in monetary policy. But even those who believe that the Central Bank has gone too far on interest rates consider it unlikely that it will deliver a rate lower than 12.75% per year. Wednesday, interest rates rose to 11.75% per year, and the Copom explicitly signaled a new 100 bp increase, which would take the Selic to 12.75%.
BGC Liquidez presents a look at the market mood shortly after the Copom’s decision in a survey of 162 economists and traders, distributed to its clients on Thursday.
Only 16% of respondents think that the Central Bank will stop at 12.75%. The most common bet, of 42% of those who took part in the survey, is that the interest rate will rise to 13.25%. On the eve of the Copom meeting, in another survey by the BGC, with 207 participants, only 26% mentioned this percentage. End-of-cycle bets of 13%, meanwhile, shrank to 6% from 27%.
This is, however, a snapshot of the moment, and many economic analysts want to wait longer for an eventual change in their bets for the Selic rate at the end of the cycle. They say the language of the Central Bank usually changes a lot between the release of the Copom statement and the minutes. Next week, the monetary authority will also release the Inflation Report, with a press conference.
Many economists are questioning, after the Copom meeting, the technical basis and rhetoric behind the decision, so they are waiting for the Central Bank to better explain what was discussed in it.
A question mark is the fact that the committee presented projections for the price index in an alternative scenario, incorporating a good part of the oil price drop that occurred until Wednesday, to show that inflation reaches the target in 2023 without a dose of interest rate higher than 12.75% per year.
Some in the market are skeptical about that, so much so that the projections for the Selic rate have risen. There was already a questioning of the monetary authority’s calculations due to the fact that the Copom’s inflation projections are below market estimates, of 3.7%.
Another point that bothers many economists is the change in the way the Copom analyzes the balance of risks. The committee basically said that the chances of inflation exceeding expectations were lower because much of the fiscal fears had already materialized in market expectations and in the foreign exchange rate.
For some, the Copom swept some fiscal uncertainty under the carpet to avoid having an inflation forecast adjusted by the balance of risks that requires an interest rate higher than 12.75% per year.
But this may just be a concern of economists, who have a more technical view of the Copom’s decision-making process. But market operators consulted by Valor on Thursday were more comfortable with the communication, despite the large number of people who think that the interest rate will have to go over 12.75% per year.
The survey by BGC Liquidez shows a divergence in the reading of the Copom statement between economists and traders. Among economists, 69% thought the message was “dovish,” or less inclined to tightening. Among traders, this percentage is 35%.
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/C/A/ienzOSSCqBdSlzpMOeOA/140322xp22.jpg)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/P/M/Qk05T9RlArifPR0jp7AA/claudio-considera-leo-pinheiro-valor.png)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2021/s/5/KNQcxDREWiWKoAfkYRDg/ydray-vila-clementino-282-29.jpg)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/z/j/Y5VeMbQfCWrYh3hR2HwA/18bra-200-tec-a2-img01.jpg)
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/7/v/LtiOiWQveJZEIvviscow/48002100183-9f9f187eee-k.jpg)