Public spending watchdog hampers maneuver on Eletrobras

Aroldo Cedraz — Foto: Jorge William/Agência O Globo
Aroldo Cedraz — Foto: Jorge William/Agência O Globo

The Federal Court of Accounts (TCU) confirmed Tuesday the May 18 date for the resumption of the Eletrobras privatization trial. Contaminated by political polarization, the operation gained a curious chapter last week, when TCU member Aroldo Cedraz surprised his colleagues by suggesting that an eventual attempt to retake control of the company by the government would be eased.

Rapporteur of the matter in the public spending watchdog, Mr. Cedraz delivered his opinion to his colleagues less than two hours before the beginning of the session. Among the proposals was a change in the mechanism that aims to protect minority shareholders against the takeover by means of a hostile bid, known as the “poison pill.”

A week earlier, Twitter’s board had triggered the poison pill against the onslaught of businessman Elon Musk. Not even this strategy, however, was enough to stop the billionaire, who now owns the social media.

In Brazil, the tool has also been dubbed the “anti-Lula clause.” Leader in the polls for this year’s election, the former president has already spoken out against the privatization of Eletrobras, and his allies said he would reverse the operation if elected.

To make such a maneuver more difficult, the Brazilian Development Bank (BNDES) has included a poison bill in the privatization model. Anyone interested in taking control of Eletrobras — whether the federal government or a private-sector organization — would have to pay a high amount to the other shareholders and then convince them to change the company’s bylaws.

Under the rules in force in the model delivered to the TCU, the person interested in taking control must make a public offer to buy the stakes of the other shareholders at a price three times the highest stock price recorded for the asset. Even so, even with a share of more than 50% of the voting capital, the voting power would be restricted to 10%.

To break this second barrier, a shareholders’ meeting would have to be called to approve the change in the bylaws. Mr. Cedraz considered those conditions “unfair” for an eventual strategic need for the retaking of the company by the federal government. He then proposed a kind of antidote to the poison.

“In order to protect the prerogative of the federal government to, at any time, reverse the privatization process of Eletrobras, by paying fair — but not exorbitant — amounts to the other shareholders, this TCU member proposes the revision of the poison pill clause suggested by BNDES,” he said.

His central argument is based on the strategic importance of freshwater reservoirs, which has led some governments to meddle to prevent market abuses by private-sector hydroelectric generation companies.

“This kind of intervention has proven necessary, mainly because of the ongoing global power crisis and transition. While France resumes studies to nationalize a large company in the electricity sector, Spain and Portugal present to the European Union a plan for state intervention in the sector through measures aimed at lowering power prices in the Iberian Peninsula,” the rapporteur argued.

The proposal surprised the market, and even more the other TCU members. President Jair Bolsonaro’s main ally in the court, Jorge Oliveira, was warned by technicians in his office about the antidote and called member Benjamin Zymler, considered a technical reference in the electricity sector.

The two acted quickly and, a few minutes before the beginning of the trial, convinced Mr. Cedraz to back off. The rapporteur announced the withdrawal of the idea in the middle of the reading of his vote, which caused another surprise in the room, the second in a few hours. “Shame on you,” said one member during the session.

With Mr. Cedraz’s change, the “anti-Lula clause” was preserved. According to Valor, the rapporteur was convinced that it would not be necessary to privatize in order to avoid abuses by a private partner. In such a situation, the federal government could simply cancel the Eletrobras concessions and take over the contracts through a new state-owned company.

Source: Valor International

https://valorinternational.globo.com

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Global risk perception worsens, weighs on markets

Benchmark stock index Ibovespa saw a seventh straight day of losses on Tuesday — Foto: Divulgação
Benchmark stock index Ibovespa saw a seventh straight day of losses on Tuesday — Foto: Divulgação

Investors once again showed risk aversion in the trading session on Tuesday, triggering a rush to protection. As a result, the dollar gained ground, the stock markets went south around the world and, in Brazil, interest rates faced a new day of stress. In the local market, the foreign exchange rate reached the R$5 threshold again, while benchmark stock index Ibovespa saw a seventh straight day of losses, a situation seen for the last time in May 2016, at the height of the crisis that led to the impeachment of former President Dilma Rousseff.

The Ibovespa closed down 2.23%, at 108,212.86 points, the lowest level since January 24. In the first trading session of April, Ibovespa was up 16% in the year, but those gains were reduced to less than 4% after Tuesday’s session. The exchange rate ended the day up 2.35%, at R$4.99 to the dollar, despite the extraordinary auction of 10,000 foreign exchange swap contracts by the Central Bank.

Concerns about a faster tightening of monetary policy in the United States have been compounded by the prospects of slow global growth, with signs that China will maintain strict policies to control the pandemic. This combination has made the global scenario more complex and has fueled broad risk-averse behavior.

Brazilian assets, which had seen substantial gains in the first quarter, are deteriorating fast against a backdrop of lower demand for risk.

“The last few days have been of very intense movement of the exchange rate. The appreciation had been a bit exaggerated and now there is a strong realization,” said Adauto Lima, the chief economist of Western Asset in Brazil. He notes that commodity prices have cooled in recent days and highlighted, in particular, the scenario of a stronger global economic slowdown, which has fed risk aversion in the markets.

“When you add monetary policy in the U.S., the Chinese economy growing less due to restrictions and structural issues, the perception of risk and insecurity is very big,” he said. In addition, he cites the uncertainty with the impacts of the war in Ukraine, which increased again after Russia cut off natural gas supplies to Poland and Bulgaria.

The stress seen in the foreign exchange market also drove up future interest rates, which showed a firm increase throughout the entire term structure of the curve. The rate of the interbank deposit (DI) contract for January 2025 rose to 12.14%, from 11.99% at the previous closing, while the rate for the January 2027 contract climbed to 11.97% from 11.82%.

“Despite recent strengthening, we expect a less benign global environment for the real ahead. Currently, the fundamentals point to mixed directions for the real: while on the one hand a stronger dollar and higher risk aversion is likely to weaken it, the new round of commodity price increases is likely to have a positive effect on it,” Citi’s economic team for Latin America wrote.

According to the team, the effect of commodities on the exchange rate in Brazil had been prevailing until recently, but this situation may change in the short term. “We see increasing risks for a less benign global environment for emerging markets due to the expected monetary tightening in the U.S. Moreover, a potential additional round of dollar strengthening amid lower commodity prices may exacerbate the negative impacts on the real, supporting our projection [an exchange rate at] R$5.19 to the dollar by the end of 2022,” Citi said.

The dollar gained ground against other emerging currencies as well, but more moderately. The greenback advanced 0.94% against the Mexican peso, rose 0.92% against the South African rand and gained 0.31% against the Chilean peso.

Tomas Awad, founding partner at 3R Investimentos, said that even during the first quarter, when local assets appreciated, he had little conviction that the stock market rally was sustainable. “I don’t see many ways for the rally to continue, especially because I didn’t see it back there either. The scenario of sideways movement in the stock market is not much to complain about.”

According to him, the global backdrop is quite challenging, with high inflation, monetary tightening in the United States, slowing growth in China and troubled geopolitics. As the Brazilian economy has little consistent fundamentals, in his view, Mr. Awad prefers industries linked to basic consumption in the local stock market.

Besides the fragility of the external scenario on Tuesday, local market participants received poorly the results of Santander Brasil in the first quarter. Thus, the financial industry, one of the few in Ibovespa that had been showing resilience in recent days, closed the day with widespread losses. Santander fell 4.55%, while Banco do Brasil dropped 2.25%. The preferred shares of Bradesco and Itaú declined 4.29% and 3.4%, respectively.

Global investors are increasingly wary since last week, when Federal Reserve Chair Jerome Powell endorsed remarks by members of the Federal Open Market Committee (FOMC) that a faster interest rate hike in the country is an option. At the same time, financial agents are monitoring the evolution of the pandemic in China, with fears that Beijing will be subjected to the same level of restrictions seen in cities such as Shanghai.

Source: Valor International

https://valorinternational.globo.com

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Machinery industry wants R$32bn to upgrade agricultural equipment

A Smarter Industries Through Smarter Machinery,How Taiwan Plans to Advance Major Industries

The head of the Brazilian Association of Machinery and Equipment Industry (Abimaq), João Marchesan, said Monday that the modernization of agricultural machines in Brazil depends on the conditions of the next Harvest Plan 2022/23, under formulation by the government, and requested R$32 billion for Moderfrota — a program for the upgrading of the tractors fleet and other agricultural equipment. That amount is much higher than the R$7.5 billion available for the line in this season 2021/22.

During the opening in Ribeirão Preto (São Paulo state) of the 27th edition of Agrishow (international fair of agricultural technology), Mr. Marchesan said that half of the machines currently used by Brazilian farmers is already over 15 years old and must be renewed.

He told Agriculture Minister Marcos Montes, present at the event, that farmers need a Crop Plan with interests compatible with the country’s economic situation. He also highlighted the need for predictability and security in the use of funds. The subsidized lines of this Crop Plan 2021/22 have been suspended since February due to the exhaustion of the National Treasury budget.

Mr. Montes will meet Tuesday with Economy Minister Paulo Guedes and Chief of Staff Ciro Nogueira to discuss the budget for rural credit subsidy. The intention is both to unlock the current Crop Plan — which depends on the vote of bill number 1/2022, scheduled for this week — and to outline scenarios for 2022/23, even more difficult due to the federal government’s budget squeeze.

Besides Moderfrota, Abimaq suggested the allocation of R$11 billion for the purchase of machines by family farmers through Pronaf — a government program intended to strengthen them. In the 2021/22 harvest, R$9.9 billion have already been injected in the Mais Alimentos financing line program. In all, small producers had R$17.6 billion for investments in general.

For the lines of innovation and modernization in farms, such as Inovagro and Moderagro, the proposal is for R$8.15 billion. In the current season, the combined amount for the two programs was below R$4.5 billion.

Mr. Marchesan also emphasized the need for investments in storage and irrigation. The suggestion for Proirriga (program for irrigated plantations) is R$5 billion, compared to an availability of R$1.35 billion for this harvest. For the PCA (program to finance warehouses), the request is for R$15 billion, three times more than the current R$4.12 billion.

“The positive indication of a new record harvest shows that Brazil is responding well to the demand for food. But this puts pressure on the storage deficit, close to 100 million tonnes, bordering the logistical chaos,” he added.

The country has about 740 companies that manufacture agricultural machines and implements, and more or less 30% of the production is exported. The turnover of this segment is close to R$100 billion. “To grow, we must invest. There is no other way,” Mr. Marchesan said. Between subsided and free resources, the 2021/22 Crop Plan totaled R$73.45 billion in funds for investments in farms.

Still at the opening of Agrishow, the CEO of Caixa Econômica Federal, Pedro Guimarães, once again challenged Banco do Brasil, the leader in the rural credit market in the country, by saying that his bank will take the lead in this ranking by the end of 2024. “Here we heard several criticisms in relation to Caixa. Great, I’m here to learn. Today, we are only very bad. The day that Caixa is more or less we will be the biggest agribusiness bank,” he said.

According to the event’s organization, Agrishow may total R$6 billion in deals, even with the lack of definition about the Crop Plan.

Source: Valor International

https://valorinternational.globo.com

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Enel Green Power begins operation at wind farm in Pernambuco

Enel Green Power | Climate Bonds Initiative

Enel Green Power, the renewable power arm of Italy’s Enel in Brazil, has started commercial operations of the Fontes dos Ventos II wind farm, in Pernambuco. The R$430-million project has an installed capacity of 99 megawatts, with 18 wind turbines.

The power will be sold in the free market, in which large consumers can choose their own suppliers, through the trading company Enel Trading. One client is retailer Lojas Renner.

Fontes dos Ventos II will supply the demand of 170 stores and a distribution center of Renner for 15 years, in a contract with an expected total maximum volume of 11.3 average megawatts. According to Enel Green Power, the contract will allow Renner to reduce the final cost of power by 40% and avoid around 6,200 tonnes of carbon per year in emissions.

Fontes dos Ventos II is installed in the same region where Enel has been operating since 2015 the country’s first hybrid solar and wind farm, which combines the Fontes dos Ventos I wind farm and the Fontes Solar project, with a total installed capacity of 89.9 MW.

“We are expanding our wind installed capacity in a region where we have had a presence for years. Long before the recent resolution of the regulatory agency for the development of hybrid plants in the country, we installed in that region of Pernambuco a pioneering project, with a wind and a solar farm built side by side. It was a project that generated important lessons learned for the company and for other agents in the sector,” said Roberta Bonomi, head of Enel Green Power in Brazil.

Today, in Brazil, Enel Green Power has a total installed renewable capacity of more than 4.7 gigawatts, of which more than 2.1 GW are from wind power, 1.2 GW from solar sources and 1.3 GW from hydroelectric plants.

Source: Valor International

https://valorinternational.globo.com

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Opposition to EU-Mercosur deal to continue with Macron’s victory

Because of Brazil, EU-Mercosur agreement is likely to be jeopardized — Foto: Roque de Sá/Agência Senado
Because of Brazil, EU-Mercosur agreement is likely to be jeopardized — Foto: Roque de Sá/Agência Senado

Emmanuel Macron’s reelection as president of France for the next five years means continued French resistance to the European Union-Mercosur free trade agreement on its current terms. What might change depends more on what will happen in the October presidential election in Brazil.

This is the assessment of Professor Gaspard Estrada, executive director of the Political Observatory of Latin America and the Caribbean (Opalc) at Sciences Po University, in Paris. He notes that in the debate between Mr. Macron and far-right candidate Marine Le Pen last week, this was reflected when both mentioned “chicken from Brazil”.

Ms. Le Pen complained about “a whole series of EU policies that I disagree with,” citing “the multiplication of free trade agreements in which German cars are sold, sacrificing farmers to competition from Brazilian chickens or Canadian meat.”

To which Mr. Macron retorted: “What chicken from Brazil?”, recalling that he had “opposed” the EU’s agreement with Mercosur because “when we ask things of our farmers, we ask the same thing of the other side.”

“We refused to move on this issue because there was no respect for the Paris Agreement commitments, respect for biodiversity and [also] we fought against imported deforestation,” Mr. Macron said.

In this scenario, notes Mr. Gaspard, “until there is a real change in the Brazilian environmental policy, it will be difficult for the implementation of the EU-Mercosur agreement to prosper.”

The professor notes that environmental policy is part of a general political change “and this can only happen with an alternation of power, because the Bolsonaro administration has shown that it will not change its environmental policy and that France is not on its radar.”

He mentions the public squabbles between the two presidents, when Mr. Bolsonaro spoke ill of Mr. Macron’s wife and the occasion when he refused to receive the French Chancellor, Jean-Yves Le Drian, claiming he had to go to the barber.

“What can unlock the knot on the EU-Mercosur agreement is a political agreement between leaders,” he adds. “We must not forget that the conclusion of the agreement was announced with Messrs. Bolsonaro and Macron in power, and before the political problems. Everything can also end with agreement, but for that you need to have people at the table with the will to make agreements.”

For Mr. Gaspard, if Mr. Lula da Silva is elected, “there will be an important change in the bilateral relationship, a relaunch of the strategic partnership”. He recalls that last year, Mr. Lula da Silva was received by Mr. Macron at the Élysée Palace with a head of state protocol. And that, a few days before the French election, Mr. Lula da Silva made a statement of support for Mr. Macron to defeat the far-right.

Once the impasse between Brazil and France is overcome, Europe’s very relationship with Latin America in general could improve, Mr. Gaspard believes. He notes that Ms. Macron has never visited the region in his five years in office, with the exception of his participation in the G-20 in Buenos Aires.

He notes that there is a lack of interest in Latin America on the part of European capitals. Now the Spanish prime minister Pedro Sánchez is trying to return to the region, but more forceful and ambitious initiatives are still needed. Without France or Germany, it is difficult to go ahead with larger rapprochement projects.

For Mr. Gaspard, in the context of the strategic rivalry between the United States and China, France and Latin America have everything to increase their strategic partnership – and profit from it.

Source: Valor International

https://valorinternational.globo.com

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Low education puts youngsters in bottom of labor market

Poverty, inequity and the potential of Brazil's public schools | Financial Times

Four of the ten occupations that employ young people the most in the country have low schooling requirements – less than eight years at school. The account considers the number of young people in relation to the total number of workers in a given activity. A similar situation is seen also among the activities with the highest absolute number of workers between 15 and 29 years: four of the top 10 have incomplete elementary school as their most frequent schooling.

The information is in a survey carried out exclusively for Valor by consultancy IDados, based on microdata from the Continuous National Household Sample Survey (Pnad Contínua) for the fourth quarter of 2021, the most recent for the indicator.

Among the activities that appear in the study are pedal- or arm-driven vehicle drivers, call center workers, domestic service workers in general, and elementary building construction workers.

This picture can be seen at a moment in which there is an advance in the level of education of young Brazilians. For the sake of comparison, 14.9% of Brazilian workers between 15 and 29 years already have completed higher education, and only part of them would be old enough to do so.

Adding the 12% of those who have incomplete education, the portion with higher education exceeds a quarter of the workers in this age group (26.9%). In addition, 42.9% have completed high school. The share of those who have only completed elementary school, on the other hand, is much lower, at 17.2%.

The data suggest, according to specialists, that young people enter the market in occupations that contribute little to their professional development and that there is also a mismatch between the advancement of the level of education of young people and the opportunities offered by the labor market.

“There are many young people with a college degree (complete or incomplete) in this age group of 15 to 29 years. However, the occupations that employ young people the most generally require less than this, such as complete high school or even incomplete elementary school. This suggests that there may be a mismatch between the young people’s education and the qualification required for the occupation,” said Bruno Ottoni, a professor at the State University of Rio de Janeiro (UERJ) and a lead researcher of the labor market at consulting firm IDados.

The economist, who led the study, said that, far from criticizing the occupations that appear at the top of the list that most employ young people, it is necessary to evaluate that many are activities that give few opportunities for development for young people, compromising the professional future.

“All work is worthy, but the question is what kind of work the market is managing to offer our young people. Are they jobs where they see long-term prospects? Are they jobs where they will be able to take advantage of their education? Our young people are in occupations that are great from a job standpoint, but in general don’t offer long-term career prospects,” he said. “We have more qualified young people, but there is a structural characteristic of the Brazilian labor market that today is not managing to generate better jobs for these young people.”

Along with lower educational requirements, the profile of the occupations presented in the study is also lower paid and more unstable, said Stélio Coêlho Lombardi Filho, a professor with the School of Economics at the Federal University of Bahia (UFBA). Young people typically have less experience and end up having to take jobs with lower requirements, usually in sectors such as services and commerce, as well as administrative support, he said.

“With the resumption of the economic activities, young people have managed to find available jobs. But these occupations, in general, have a lot of instability and high turnover, low qualification requirements and low wages,” said Mr. Lombardi Filho, who is also a researcher at UFBA’s Economy of Labor research group. “These young people often manage to overcome the barrier of the first job, but almost always they are in a situation of instability that prevents them from making the transition to adulthood, from having the autonomy to raise a family.”

Despite they usually face greater obstacles to enter the job market due to lack of experience, young people tend to suffer more in moments of crisis such as the current one. Companies tend to take less risk and, therefore, avoid hiring professionals who require higher investments in training, Mr. Lombardi Filho recalled. The professor mentions the so-called “scar effect” — which usually marks the professional trajectory of those who entered the market in moments of crisis.

“This outlook of the occupations that most employ young people reflects not only the bad moment of the economy as a whole, but also the fact that young people are already a very sensitive group in the labor market. They form a group with a higher turnover rate, they have higher unemployment rates, lower salaries, and are more in the informal market. And they accept it, especially because they need to gain experience,” said Solange Ledi Gonçalves, a professor at the São Paulo State University (Unesp).

In her view, there is currently a higher mismatch between the level of education of young people and the qualification of the positions available in the job market, which compromises the capacity of professional growth of young people, as scientific papers on the subject found.

“Papers show that, by accepting a job that is not compatible with their level of education, the young person may have more difficulty in growing in the job market later on, and this can impact their career progression. For example, if you have a higher education, but started working at McDonald’s, you may have more difficulty after getting a junior analyst position, which is more consistent with higher education, because you spent that time there,” she said.

Source: Valor International

https://valorinternational.globo.com

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Analysis: Exchange rate will be key for monetary authority

An appreciated real against the dollar may help the Central Bank to project inflation less distant from 2023 target — Foto: Scott Eells/Bloomberg
An appreciated real against the dollar may help the Central Bank to project inflation less distant from 2023 target — Foto: Scott Eells/Bloomberg

In the coming days, the evolution of the exchange rate will be fundamental in the inflation projections that will support the decision of the Monetary Policy Committee (Copom) of the Central Bank next week.

An appreciated real against the dollar, as seen earlier last week, may help the Central Bank to show an inflation projection less distant from the 2023 target and therefore reduce the pressure for a stronger monetary tightening.

On Friday, however, the real weakened sharply against the dollar as a result of a signal from Federal Reserve Chair Jerome Powell that a 50 basis points hike in U.S. benchmark interest rates is on the table.

The Brazilian Central Bank intervened in the exchange rate, with a sale of $571 million. The action was justified to maintain functionality in the exchange rate, in a market session squeezed in the middle of a long holiday. But in the end, it prevented a further weakened real.

Another doubt is the uncertainties about the Chinese economy, with the prospect of a more severe lockdown being enacted in Beijing to contain the latest wave of coronavirus contagion in the country. Iron ore prices dropped about 10% on Monday.

The exchange rate has no direct relation with monetary policy, but has gained prominence recently for two reasons.

One was Central Bank President Roberto Campos Neto’s remarks that market sectors were not taking into account the new, lower exchange rate in their inflation projections.

There hasn’t been a reliable indicator of market projections for inflation since March 25, when the Central Bank servants’ strike began. The Central Bank promises to release the Focus survey this Tuesday. But informal surveys, such as that of XP Investimentos, indicate that the market’s inflation projection for 2023 may have risen to 4%, against an inflation target of 3.25% for the year.

Another fact that gives greater visibility to the exchange rate, within monetary policy decisions, is that the so-called pass-through of exchange rate variations into inflation has increased.

A 10% rise in the exchange rate leads to a maximum effect of 1.1 percentage points on inflation 12 months ahead. In the longer term, between 18 and 21 months, this effect falls to somewhere between 0.6 and 0.7 percentage points.

It can make a big difference. Last week, the exchange rate even oscillated around R$4.6 to the dollar, or 8% below the market consensus, which informal surveys indicate is close to R$5 to the dollar.

This translates into an inflation projection about 0.5 percentage point lower for 2023. It may help the Copom to present an inflation projection closer to the target.

The expected inflation under relative control, in turn, would avoid taking the benchmark interest rate much further over the 12.75% per year signaled by the Copom in March for the end of the monetary tightening cycle.

Source: Valor International

https://valorinternational.globo.com

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Auction of São Paulo beltway expected to draw interest

Sao Paulo Metropolitan Beltway

The São Paulo state government is expected to auction on Wednesday the northern stretch of Rodoanel Metropolitano. With the new concession, the expectation is to finally conclude the construction of the beltway of Greater São Paulo, which began in 1998.

The contract provides for R$3 billion in investments over 31 years. Of this amount, R$1.7 billion will be used to complete the work – about 25% of the northern stretch, which is 44 km long and passes through São Paulo, Guarulhos and Arujá, has yet to be built. The beltway is expected to be fully delivered in two years.

The project will be a public-private partnership (PPP), a model in which the government contributes part of the funds. In total, the state of São Paulo is prepared to inject around R$2 billion (excluding monetary corrections): in addition to an initial contribution for the work, of up to R$876.7 million, the project includes annual payments to the concessionaire of up to R$41.65 million.

However, the amount disbursed by the government may fall, depending on the level of competition. The winner will be the one offering the biggest discount on the public contribution. According to the public notice, the interested parties must propose a discount on the value of the annual payments. If this reaches 100%, the discount on the initial contribution becomes valid.

The perception in the market is that there will be interest in the project, despite the challenging scenario. Traditional operators such as CCR, Ecorodovias and Pátria are seen as candidates.

Ecorodovias has not cited Rodoanel on its list of priorities. However, the group is considered a possible interested party because it won the first auction of the stretch, held in 2018. At the time, the bid notice only provided for the operation of the road, since the work would be completed by the state government. In the end, however, the contract was not signed and the model was changed.

CCR already operates the Rodoanel Oeste (west stretch) concession and, therefore, reportedly has synergies with the northern stretch. Another company in this situation is Bertin group’s SP Mar, which operates the south and east stretches of the beltway. Although the concessionaire is under protection from creditors, analysts do not rule out an attempt to dispute the asset through a consortium.

Ecorodovias and Pátria declined to comment. SP Mar says it has not made a decision and is awaiting a response from shareholders and investors. CCR did not reply to a request for comment.

“The expectation is for competition. Although it is not common in São Paulo, the PPP model for highways is well seen among companies, due to the state’s history of being a good payer and other successful experiences with projects in this model,” said Rafael Vanzella, a partner at law firm Machado Meyer.

For Eduardo Ramires, a partner at Manesco Advogados, a limited dispute is expected. He points out that, besides the project’s challenges, such as expropriations and environmental issues, there is an unfavorable situation aggravated by the war in Ukraine that puts pressure on the construction costs and generates uncertainty regarding the highway’s traffic. In addition, he highlights the risk for the new concessionaire of taking over a work largely built by third parties. “The operator assumes responsibility for the work already done. This succession always raises concern,” he said.

In relation to this point, the São Paulo state government has highlighted the hiring of an independent report prepared by Instituto de Pesquisas Tecnológicas (IPT) on the state of the works. In addition, in a period of six months after the signing of the contract, an independent firm will be able to point out possible divergences in relation to the structure, which will be taken to a technical commission.

The São Paulo state government has been trying to get the Rodoanel Norte highway off the drawing board for at least 10 years, during which time more than R$7 billion have already been spent. In addition, the project was targeted by the anti-corruption task force Car-Wash Operation and marked by investigations for suspected embezzlement.

In 2012, when the first tender for the Rodoanel Norte was held, the project was divided into six lots, which were won by construction companies such as Mendes Júnior, OAS, Acciona and Construcap. In view of the delays, the six contracts were terminated – three of them at the end of 2018, and the others in May 2019.

Besides the inclusion of the work in the contract, another point of attention in the project is the inclusion of the “free flow” collection system (no toll plazas and payment calculated by kilometers driven), still innovative in the country, said André Bogossian, a lawyer with Stocche Forbes.

“There are doubts about how the payment and default will be, because there is no culture of automatic payment in the country,” he said. He highlights that, to mitigate this uncertainty, the São Paulo state government included risk sharing mechanisms in the call for bids.

Source: Valor International

https://valorinternational.globo.com

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TIM foresees R$16bn in synergies with Oi stake

Alberto Griselli — Foto: Leo Pinheiro/Valor
Alberto Griselli — Foto: Leo Pinheiro/Valor

TIM Brasil snatched the largest slice of Oi Móvel in the alliance it made with Telefonica and Claro to buy the asset from the telecom in judicial recovery. In the acquisition, completed on April 20, TIM got about half of the spectrum and sites, and 40% of Oi’s customers. With the additional revenue, savings in capital investments and expenses, cost cutting, elimination of duplicate equipment and expansion, TIM estimates R$16 billion in synergy gains over the long term.

TIM CEO Alberto Griselli explains that the synergies are made of several components. The technical synergies, related to investment optimization, with cost savings, are equivalent to R$12 billion of the total estimated for the company. The value is attributed mainly to frequencies, the spectrum that the company receives with the purchase of Oi Móvel.

Frequencies are like paths in the air through which telecommunications data travel. TIM brings to its network almost 50 megahertz of spectrum from Oi. Among competitors, it had the least spectrum, a valuable asset for the companies. In addition, it receives contracts for the use of 7,500 sites – places equipped with antennas or base transceiver stations (ERBs) and electronic equipment for communication.

With this, TIM will be able to reduce network sharing costs, launch more services, expand infrastructure, improve signal coverage and service quality for its customers and those coming from Oi. Currently, it is the telecom with the largest 4G coverage, present in almost 4,800 municipalities (96.5%) and plans to reach the whole country this year. In 3G, its rate is a little over 91%, with Vivo in the lead (97%).

“We will continue to invest a lot, but less than it would be if we didn’t have Oi’s frequencies,” says Mr. Griselli. The company’s industrial plan foresees investments of R$14.5 billion over the next three years.

According to the calculations of telecoms regulator Anatel, the total synergies with the sale of Oi Móvel would be at least R$13 billion from 2021 to 2030. Tim is supposed to have the biggest gain (R$8 billion), followed by Telefônica, owner of Vivo (R$ 4.9 billion), and finally Claro (from R$270 million). These gains are based on the combined operations of each telecom company with Oi’s assets, involving issues such as duplication of base stations, operation contracts, revenue from migrated clients, among others.

Mr. Griselli explains that TIM’s calculations, compared to Anatel’s, are broader and consider several other factors. “We did the cash flow of the synergy, both revenue and cost, translated to present value, which reaches R$16 billion,” says the executive. This value includes calculations related to the technical and commercial parts, and fiscal goodwill (about R$700 million) linked to the purchase, which must be amortized by 2042.

Net present value is the formula that determines the present value of future payments discounted at an estimated interest rate, minus the initial investment cost.

The executive predicts that 50% of the synergies will be achieved by 2030, with the other half becoming a constant part of the earnings resulting from the acquisition.

Even in the long term, the gains are considerable for the Italian subsidiary, which paid R$6.98 billion for its participation in the acquisition. The total price for the asset was R$15.92 billion. In this account, Telefônica assumed R$5.37 billion, and Claro, R$3.57 billion

Another part of the gains will come from commercial synergies. The company bought the revenue that comes with the customer and receives an EBITDA margin of 60% to 70%. against TIM’s EBITDA margin of 48.4% in 2021.

TIM adds around R$1.8 billion to its revenue in the period from May to December this year. If the value is projected for 12 months, it reaches R$2.7 billion, says Mr. Griselli. In 2021, the net revenue of Telecom Italia’s subsidiary was just above R$18 billion.

This does not mean that this indicator will rise for the operator, because there are several factors involved. TIM separated its fiber network and sold its control to IHS (which created I-System) to operate with neutrality. But it will pay rent to use the network and deliver broadband. In addition, it has the investments it is making in 5G. “When we add it all up, the margin stays as it is, at 50%. It goes up a little bit and goes back to 48%,” said Mr. Griselli.

After years of being indicated by the market as a potential buyer of Oi, even before the company filed for judicial recovery in 2016, TIM Brasil finally justified part of the market’s expectations. It did not buy the company in a closed package, but in the case of Oi’s mobile assets, TIM took the largest share of customers and infrastructure in the alliance it formed with Telefônica Brasil and Claro Participações.

“When we add it all up, the margin stays as it is, at 50%. It goes up a little and goes back to 48%,” says Mr. Griselli. In addition, there are the investments in 5G that, according to Anatel’s schedule, is expected to make it debut in all capital cities and in Brasília by July.

Oi’s clients became TIM automatically on the 20th, but the number migration will be gradual, over a year. The same happens with the clients who switched to Vivo, a Telefonica’s brand, and Claro. Each telecom has signed a contract with Oi to continue serving those customers during the transition. Those who want to, can do number portability and take their cell phone to the new operator. Those who prefer another provider, are released by regulation.

“Oi’s client will realize the improvement in technical quality, Oi has less 4G coverage. With TIM, they will have 4G everywhere,” says the executive, confident in the permanence of users. By regulatory force, Oi’s plans will be maintained for all who are migrating. But TIM intends to analyze the profile of this public and offer higher value packages. With more bandwidth capacity per client, Mr. Griselli says that TIM’s clients will also perceive more quality.

With this larger mass of users, TIM will need to increase the number of agents in its own call center, with 1,500 people working remotely today. The vast majority of the service is done through outsourced companies.

To explain the effects of the transaction on its business, TIM will hold a conference call with market analysts on Monday at 10am.

With Oi’s exit from the mobile market and the distribution of its around 41.4 million clients among the trio of telecom companies, TIM continues as third in the ranking, going from 52 million clients to 68 million. At the top, Vivo, a Telefonica’s brand, increased from 84.6 million to a little over 97 million, followed by Claro, which went from 71.2 million to 84 million.

Source: Valor International

https://valorinternational.globo.com

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Bets on appreciation of bank, commodity stocks lose steam

The strategy of betting on the appreciation of bank stocks and commodity-related companies – which yielded substantial returns in the first quarter – is slowly losing steam. As foreigners decrease the volume of their purchases in Brazil in April, local investors report a more uncertain scenario and fewer alternatives for the continuity of the Ibovespa rally, since the macroeconomic fundamentals of the country do not bring much comfort to the allocation in domestic issues.

Higher uncertainties are also reflected in the larger cash position of local funds. According to a survey conducted by Bank of America (BofA) with Latin American asset managers, cash levels remained at 7.7% in April, the highest since records began, in 2018, and well above the survey’s historical average of 4.4%.

The lower confidence of financial agents stems, among other reasons, from the question mark about the growth of the global economy. With the indication of the U.S Federal Reserve that it is expected to speed up tapering, fears have also grown that further monetary tightening could lead the U.S. economy into a recessionary period. At the same time, China’s tough policies to contain the Covid-19 pandemic could also weaken demand in the world’s second-largest economy.

In this sense, the notion that global growth would remain healthy despite the normalization of monetary policy in the United States started to be, if not entirely questioned, at least considered by many global agents. Thus, after a substantial appreciation of the most liquid stocks on the Brazilian stock exchange – both in local currency and in dollars – the foreign flow has shown signs of stabilizing in April.

This month, shares of the mining and steel industries, as well as banks, went south, in contrast to the first three months of the year. Vale ON falls 15,98%, CSN ON drops 15,41% and Usiminas PNA loses 15,03 %. Bradesco PN, Itaú PN and Santander units have declined 5,12%, 6,97% and 6,21%, respectively.

The problem, analysts told Valor, is that the rotation to other sectors of the Brazilian stock market has not convinced financial agents either.

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

“My opinion is that holding commodity [stocks] is no longer a novelty as it was a few months ago, and the whole market ended up doing it. However, I don’t feel as comfortable migrating to more technology-related stocks or to assets that are more exposed to the domestic scenario. I would still stay from neutral to slightly overweight on commodities,” said Ricardo Peretti, an equity strategist at Santander Corretora.

The view is similar to that of XP’s chief strategist Fernando Ferreira. According to him, the firm still tends, at the moment, to be upbeat with stocks linked to commodities in relation to assets more dependent on the local economy, since the macroeconomic fundamentals are still bad, with weak activity and high inflation. But the conviction about commodities of early 2022 no longer seems to be the same.

“We think it is too early to rotate into growth assets, as the macro environment is still not good and commodity companies continue to generate a lot of cash, with strong dividend yields. The asset prices also remain historically low, which, in theory, is a good entry point indicator, but it can also suggest that the shares may face a correction soon,” he said.

In addition, the strategist said he is concerned about a potential change in the behavior of foreign investors, who “propped up” the local stock market in the first quarter by buying, precisely, stocks linked to commodities and the financial sector, but put negative pressure on the index in April.

“The slowdown in the flow draws attention, and a possible reversal of this movement would be a major concern for the [stock index] Ibovespa, precisely because the local institutional investors are still dealing with redemptions. If international investors start selling their positions in Brazil, who will be the marginal buyer? I don’t think the factors that brought these investors here have changed, but we can see additional pressure,” he said.

Jorge Oliveira, an equities manager at BlueLine Asset Management, also ponders that the local market may be experiencing a turning point, assuming that foreign investments, focused mainly on commodities and the financial industry, have no longer shown the same strength as before.

“With Petrobras stocks slowly gaining ground and China’s slowdown affecting metal commodities, the narrative that had Brazil as a destination for international investors has been put to the test. Valuations are cheap, but the Chinese government is still propping up the economy there. In case the stimulus expected by the market does not come, there may still be a downward revision of companies’ profits, making them not seem so cheap anymore,” he said.

Along these lines, between February and March this year, the asset manager considerably reduced its positions in stocks in its Blue Alpha B hedge fund, privileging exchange and interest rate products.

There are, on the other hand, those who still feel more comfortable with commodity-linked assets. Victor Nehmi, manager of Sparta’s commodities fund, points out that when commodity prices move uniformly, it is a sign that macroeconomic imbalances are occurring.

“We see no signs that prices have peaked and that they will start to fall from here on out. There is no prospect of an increase in the supply of the main commodities and this gives us conviction that prices are likely to remain high at least until next year,” he said.

According to him, the high prices of commodities are likely to still be reflected in the corporate results of companies over the next 12 months. Mr. Nehmi’s only caveat that the recent appreciation of the real reduces exporters’ margins.

Lucas Brunetti, a commodities analyst at Garde Asset, also sees the worsening of the industry as unlikely. He is upbeat about the fact that China has seen such a flagrant slowdown in the economy, since this is expected to stimulate more forceful government action.

“The Chinese government was restricting credit, now it is expanding it. Also, with the lockdown, services naturally fall. And if the third sector is not advancing, the state apparatus, which seeks to deliver a GDP growth close to the 5.5% estimated for 2022, will need to invest in infrastructure,” he said.

Source: Valor International

https://valorinternational.globo.com

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