After arriving in Brazil with the purchase of a paper mill in 2020, the European group Klingele Paper & Packaging is investing in cutting-edge technology to grow in the Brazilian market of corrugated boxes, particularly in the segment of premium packaging for fruit.
With investments of €3 million, Klingele Embalajes Canarias, a company of the group with headquarters and factory in Tenerife, Spain, is receiving a new, high-end German rotary printing press to meet the requirements and quality demands of large exporters of fruit in Brazil.
In this market, packaging can cost more than the fruit itself and the new equipment offers five-color printing, the most sophisticated in the field. “We are investing in the machine because of Brazilian fruit exports,” said Kelly Ribeiro, the regional commercial manager at Klingele Canarias.
In the next harvest, the expectation is for sales of 12,000 tonnes of boxes in the country. Besides farmers, clients in the fish farming and animal protein sectors are on the radar of the company, which has a conversion capacity of 30,000 tonnes a year in Spain.
The boxes supplied to the Brazilian market leave from Tenerife using the kraftliner produced at the Nova Campina (São Paulo) plant and shipped to the box-converting unit in Spain, among others of the group. The São Paulo-based unit has an annual production capacity of 162,000 tonnes of kraftliner.
The group, one of the major European manufacturers of paper and packaging, arrived in Brazil in the middle of the pandemic by buying a plant Klabin had acquired from International Paper (IP) Embalagens, for R$196 million.
For now, the executive said, there are no plans to install a conversion unit in the country. In the future, when the business has scale, this possibility can be evaluated.
According to Ms. Ribeiro, who joined Klingele nine months ago with the goal of expanding sales in Brazil and other countries in Latin America, the fact that customers in the country take advantage of the “drawback” regime when importing packaging and exporting fruit also favors the current model of exporting kraftliner and importing boxes.
In the next few days, the executive will visit the Bahia Farm Show, an agribusiness event that brings together fresh fruit producers, and will visit large producers in Mossoró (Rio Grande do Norte) and Petrolina (Pernambuco). The ambition is to return to Tenerife with new clients and contracted commercial representatives.
With consolidated revenues of more than €1 billion last year, the Klingele group bets on the integration of operations to remain competitive and protect itself from the risks of paper shortages, as seen today in the world, and the pressure of costs. Because of the integrated production model and a competitive contract with MSC to serve the Brazilian ports, says the executive, Klingele managed to freeze the prices of packaging for fresh mango and lemon until July, despite the historical prices of kraftliner and the escalating freight.
High education companies are going to court to open medical schools, without going through the scrutiny of the More Doctors program law, which defines several requirements. Since last year, 400 places were authorized after injunctions forced the Education Ministry to analyze requests to open these courses without taking part in the federal program. With the favorable decisions, companies now seek similar injunctions and have already filed 180 suits, according to Anup, a trade group that represents private universities.
Lawyers are telling judges that the private education sector is free, so schools should not be forced to launch medical courses through public calls, as required by the More Doctors program and unlike what happens with other courses. Another justification is that there is a shortage of doctors in the country, with the need to call Cubans to regions far from large cities. The opening of medical courses was halted in 2019, in a moratorium valid by April 2023, according to a federal law.
Three education companies launched medical courses since last year. Bahia-based network UniFTC got 199 places in the Feira de Santana unit. Faculdade de Educação de Jaru, in Rondônia, was authorized to offer 120 places; and college Dom Bosco, with a unit in São Luiz (Maranhão), got 84 spots. These three educational companies obtained 403 places in the past year and a half. For comparison purposes, in this same period, 800 More Doctors spots were released through a public call. These 800 places were authorized in 2018, but only now the Education Ministry released them.
Educational groups that take an injunction to open medical courses manage to circumvent the More Doctors program and the five-year moratorium. The ordinance that prohibits the opening of new medical courses for public and private institutions until April 2023 was instituted after strong pressure from the Federal Council of Medicine, which complained about the quantity of low-quality courses and excess of students. In 2020, there were 142,500 students enrolled in medical courses, in the private sector.
About 75% of the private courses are located in São Paulo, Minas Gerais, Rio de Janeiro, Santa Catarina, Bahia and Rio Grande do Sul, since the institutions opted for the most populated regions. This is one reason for the current shortage of doctors in the North and Northeast regions, and in smaller cities. Given this scenario, in 2013 the government created the More Doctors law, which defined that private colleges can only operate medical courses in cities lacking professionals. Sixty-seven municipalities were chosen, and the colleges selected to operate in these cities must make commitments, such as transferring 10% of revenues from tuition fees for the municipalities to invest in public health. To serve the students, the city’s public infrastructure must have, for example, at least five public beds for each student, a hospital with 100 inpatient units, among other requirements. If the transfers are not sufficient, the college can invest more funds. By obtaining a court injunction, colleges are not obliged to follow these rules and can open their units in larger cities, which end up attracting more students.
“More Doctors program is a socially-oriented public-private partnership. The program serves private schools, but requires investments in public health in return. When another company manages to open medical courses through an injunction, this public policy is broken,” said Elizabeth Guedes, head of the Anup, which has already complained to the ministries of Education and Health, the Federal Attorney General’s Office (AGU) and the Federal Council of Medicine (CFM). “These courses are not illegal because they took court injunctions, but they are immoral,” she added.
“With litigation, the only restriction of More Doctors is no longer being met, which is the public call, which defines the region to install a medical school by social criteria,” said the physician Julio Braga, coordinator of CFM’s Medical Education Commission.
Bahia-based UniFTC Network, which obtained 199 places in Feira de Santana, says that the reason for filing a suit was the lack of medical schools in the region. “Health indicators already clearly demonstrated the lack and the social demand for the formation of doctors in the region, which has more than 3 million inhabitants. Until then, there was only one medical course at the State University of Feira de Santana, with only 35 places,” said Ihanmarck Damasceno, academic vice-president of UniFTC.
Esmeraldo Malheiros, a lawyer specialized in education who worked 35 years at the Education Ministry, says the injunctions are fair. “Private education is free, and educational institutions are free to operate. You can’t create barriers and have a protected market,” said Mr. Malheiros, whose office was the first to obtain a favorable decision, which encouraged others to file similar requests. Another point raised by Mr. Malheiros is that the requirement of the More Doctors calls for bids benefits large groups, which can prove better cash flow. “The large groups, which have more regulatory experience, got 70% of places authorized,” he said.
According to data from Hoper, a consulting firm specializing in education, in 2020 there were 142,500 students enrolled in private medical courses, 27.6% of them concentrated in eight major groups: Afya, Ânima, Cruzeiro do Sul, Kroton, Ser Educacional, Tiradentes, Uninove, and Yduqs.
The lawyer says that injunctions are for the Education Ministry to analyze the requests, not to approve the courses. “The ministry is free to approve them or not. If the course is bad, it rejects it. The issue is that with More Doctors, the Education Ministry doesn’t even analyze the request,” Mr. Malheiros said. The head of Anup argued that the ministry has the autonomy to analyze the requests, but the injunctions exert additional pressure. After receiving and analyzing the documents from the request to open a course, Education Ministry representatives make several visits to the college that made the request. By the normal rites, this process takes months, even years.
The wave of lawsuits may affect the market, which has already been suffering the impact of increased competition. The average tuition fee remained around R$8,300 and R$8,400 between 2019 and 2021. In the previous seven years, there was an upward curve, according to Hoper.
In 2020, the ratio of candidates for each place was 8.6 in the private sector. In 2013, there were 31 students vying for each medical school place. The estimate is that the year will end with 239 private courses, practically twice as many as in 2014.
The Education Ministry and Faculdade de Educação de Jaru did not immediately reply to a request for comment. Dom Bosco declined to comment.
The risk-averse behavior in financial markets around the globe this year — together with the upward movement of short and long-term interest rates both in Brazil and abroad —generated a strong deterioration in financial conditions. The effects on the economic activity have not been strong so far, given that measures adopted by the government and the process of reopening the economy have boosted growth in the short term. But the impact is likely to be felt in the second half of the year.
ASA Investments’ Financial Conditions Index (FCI) is close to the maximum since records began, in 2009. Several times this month, it beat the record of 2.28 of April 8, 2011 — on the 9th of this month, it reached 2.44. This Monday, it showed a slight accommodation, to 2.13, but still at a very high level.
The indicator combines price components (commodity indexes, oil prices and exchange rates) and market variables, such as national and international stock indexes, as well as the behavior of interest rates in Brazil and overseas. When they are negative, financial conditions are expansionary – favorable to the economic activity. When they are above zero, they indicate tight conditions, that is, contractionary.
“The trend seen since last year is a reversal [of financial conditions]. At the end of 2020, the indicator reached the negative minimum and began to reverse with quite impressive speed in the direction of the contractionary territory. At the beginning of this year, it was still negative and was advancing quite a bit [until reaching the positive field],” said Leonardo França Costa, an economist at ASA Investments.
The main movement towards the contractionary territory was oil prices, which skyrocketed since the beginning of the war in Ukraine, says Mr. Costa. In addition, the Brazilian and international interest rates have risen sharply since the beginning of the year. While the 10-year interest rate is around 3% in the United States, the return of the 10-year German Bund already exceeds 1% — much higher levels than those seen at the end of last year. In Brazil, almost the entire yield curve is around 12%.
Given the movement to higher interest rates around the world, equity markets have suffered this year, which also helps to tighten financial conditions.
Analysts, however, evaluate that the financial conditions may reach even higher levels, given the ongoing monetary tightening in the United States, which could affect Brazilian economic activity, especially in the second half of the year.
From a quality point of view, there has been a worsening in almost all the most common components of financial conditions this year, said Leonardo Porto, Brazil head economist at Citi. Besides interest rates and the global stock markets, he highlights the behavior of country risk, measured by the five-year Brazil Credit Default Swaps (CDS), which is around 230 points against 205 at the end of 2021 at the same time that the Volatility Index VIX, considered Wall Street’s “fear barometer,” also rose strongly.
“These are variables that point to tighter financial conditions that hurt economic activity. So far, all of them are heading in the same direction, of turning the financial conditions indicator into a more restrictive one throughout this year”, he says. According to Mr. Porto, the only factor that has helped contain an even more restrictive environment is the strong performance of commodities, important for an exporter country like Brazil.
Still, the economic activity seen in the GDP to be released on Thursday, however, is likely to show acceleration. The median of the projections collected by Valor indicates a 1% growth in the first quarter and 1.4% for the whole year 2022, while two weeks ago, the market expectation was that the GDP for this year would be around 0.8%. The expectation for the 2023 GDP fell to 0.7% from 0.9% on May 12.
Eduardo Yuki — Foto: Ana Paula Paiva/Valor
“We had some temporary effects, which helped the activity in the short term,” said Eduardo Yuki, executive superintendent of macroeconomics at Safra. He cites the positive performance of the soybean harvest at the beginning of the year and government programs, such as the payment of the salary bonus moved ahead, as well as the year-end bonus called thirteenth salary, for retirees and pensioners, and the authorization to withdraw money from Workers’ Severance Fund (FGTS).
“All of this helps the activity in the short term. The point is that, if you bring forward factors such as the bonus and the thirteenth salary, you won’t have them up front and, when the end of the year comes, we will have two effects together, since those payments were moved ahead and we will see the impact of the financial conditions more strongly,” warns Mr. Yuki. Safra believes that the economy is expected to have a much more moderate performance in the second half “and, for this reason, we have a view that an important part of what happened to the activity was supported by temporary effects,” the economist said.
He does not see room either for a big relief in financial conditions ahead. To the extent that the policy interest rate Selic rate may rise to 13.25% and remain around 13% for quite some time, in Safra’s view, the economic activity throughout 2023 will also be affected.
“Our perspective, looking at how the indicator is constructed, is that it will tighten a little more. One of the premises is precisely in global conditions, because we know that the U.S. Federal Reserve has a cycle of interest rate increases to make. This could tighten financial conditions in the U.S. and, consequently, ours as well. So, the contractionary territory is expected to remain,” Mr. Yuki says.
For the Safra economist, next year could start with a modest performance around the globe, “precisely because of the need for the world as a whole to make a monetary tightening cycle to control price pressures.” Consequently, in Mr. Yuki’s view, this environment is likely to make Brazilian GDP grow below potential in 2023. “It is the pace that will help the disinflation of the economy over time.”
In the view of Santander Asset Management’s chief economist Eduardo Jarra, the tightening of financial and monetary conditions into the economy will be seen more intensely in the second half. He emphasizes that the current environment takes place at a level of risk aversion different from the one experienced in recent years and that the uncertainties that are already present in the scenario will remain, especially those related to inflation in the United States and the path of U.S. interest rates.
“It seems that we will carry those questions with us as the economy moves towards a more advanced stage of the economic cycle. The international environment will probably continue to be heavy and in Brazil the electoral environment in the second half will likely generate an increase in volatility,” points out Mr. Jarra.
Evaluating the scenario as a whole, the economist says he believes there is an indication of even tighter financial conditions in the second half. “We may see negative GDP readings in the second half [of 2022], and for next year we are expected to continue to carry over the effects of tight monetary policy,” he notes. For him, there may be a scenario in which the Selic only begins to be reduced in the second half of 2023. In addition, Mr. Jarra points out that, although the international scenario may become less uncertain, “it is still not a positive environment.”
Economists were taken by surprise with the data for the Brazilian economy, especially in March, and raised their projections for the GDP in the first quarter of this year, opening space for a more positive view of the activity both in the following three months and in 2022. The year, however, is likely to have two opposite configurations: a stronger economic performance in the first half of the year and a likely technical recession (two consecutive quarters of falling GDP at the margin) in the second half.
The GDP is expected to have grown 1% in the first quarter of 2022, compared to the fourth quarter of 2021, seasonally adjusted, according to the median of the projections of 82 financial institutions and consulting firms consulted by Valor. Almost half of the respondents bet on even higher increases, with the maximum reaching 2.6%, for a minimum of 0.1%. Only two banks expect a drop. In comparison with the same period in 2021, the median of the projections of 76 institutions indicates a high of 1.7% from January to March this year.
The forecasts for the GDP in 2022 have moved a lot and in a short time. Since the last Valor survey, with 72 institutions and published on May 12, the median went to 1.4% now from 0.8%, with 96 estimates. The projections vary from zero to 2%. The Central Bank’s Focus survey, which serves as a compass for the market and the monetary authority, usually has between 80 and 100 respondents, but has not been published since April 29 because of the civil servants strike.
The GDP increase in the first quarter is expected to be boosted on the supply side by services, which, according to the median, rose 1% compared to the fourth quarter of 2021 (3.3% compared to the first quarter of last year). “Transportation is likely to lead, which has to do with the return of circulation and a boost from e-commerce to the postal services. And there is a big highlight for “other services’, which include those provided to families and which went through a certain euphoria after the omicron wave,” says Tiago Negreira, partner and economist at Macro Capital.
Even trade — which is part of services in the National Accounts — will probably offer a positive contribution for the quarter compared to the end of 2021, he says. “The drop in unemployment seems to be contributing, with recovery in the total wage bill, in addition to the government’s own aid programs, authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts, but that is something for the second quarter.”
The recovery in services (although somewhat delayed by the omicron) was already on the radar, so that, for Pedro Ramos, chief economist at Sicredi, there were surprises in other segments as well. “Industry had shown weakness in previous quarters and there was a moment when it was thought that agribusiness might weaken, because of crop failures, but we should still see growths on the margin and we may have record harvests in the year,” he says.
Valor’s survey indicates a rise of 0.4% in industry and 1% in agriculture in the first quarter, compared to the three immediately preceding months. In relation to the first quarter of 2021, however, they are expected to fall by 1% and 3%, in that order.
On the demand side, in line with the expansion in services and a more resilient trade, the positive contribution to the GDP from January to March should come from household consumption. The median expectation is for 1% growth in the margin and 2.5% in relation to the same period in 2021.
The Gross Fixed Capital Formation (GFCF), on the other hand, is expected to remain stagnant in the first quarter, which, according to economists, is not necessarily a bad thing: “It rose 17% in 2021, it was at a very high level. If you think that this investment was raised based on interest at 2% and a lot of transfer to the economy, we could imagine that, when the Selic reached the level that we project, this will go down,” says Mr. Ramos.
The GDP of the first quarter will be very important for the growth of the year, according to Luana Miranda, economist at GAP Asset. Based on data from the fourth quarter of 2021, the carryover for 2022 was 0.3 percentage points. With the consolidation of the first quarter, for which GAP expects a high of 1.3%, the carryover would rise to 1.9 points, according to Ms. Miranda.
“We do not have a high projection of 1.9% of GDP this year because we expect a fall in the second half due to the lagged impacts of monetary policy,” she says, predicting a 1.5% growth in Brazilian activity in 2022.
Ms. Miranda recalls that, after the better-than-expected result in the first quarter of last year, there was a wave of optimism that pushed up the GDP estimates for 2021. One has to be careful with that, she says. “I believe the first half of the year is given and will be good. The question is what the impact will be in the second half.”
Preceding data shows household services still in the spotlight in April, Ms. Miranda says. For the second quarter GDP, the median expectation of economists is a deceleration, but there would be a rise of 0.4%, compared to the first quarter.
“The carryover from the first quarter to the second quarter is positive, but the growth factors are already starting to become more limited,” says Mr. Negreira, with Macro Capital. The manager, who projects 1.9% for the GDP in 2022, expects, as do most economists, contractions in the third and fourth quarter of the year.
Besides monetary tightening, the exhaustion of the process of reopening services and the uncertainties surrounding the electoral process will probably weigh. One question is also whether the labor market will remain resilient given the worsening financial conditions, Ms. Miranda notes. At some point, she says, this will hit the companies.
Tendências Consultoria, which has a more modest GDP estimate for 2022, of 0.6%, highlights the role of inflation, systematically revised upwards, in the perspective of weaker quarters ahead. The international scenario is not very helpful either, points out economist Thiago Xavier. Despite bringing commodities up, it has been, he says, the stage for downward revisions of growth, inflation upwards, with monetary tightening. “The world, from the point of view of growth, has been a frustrating and limiting factor for the Brazilian GDP.”
The inflationary scenario already called for caution and indicated a great challenge ahead for the Central Bank. The concerns of market players, however, have increased as inflation has raised a red flag, with an even more persistent character, while the monetary authority has given signs that the end of the tightening cycle is near. The deterioration of the scenario continued to materialize in market projections: the escalation of inflation expectations continued and an increase in the Selic policy interest rate beyond June entered the debate strongly.
Between May 24 and 27, Valor consulted 101 financial institutions and consultant firms about projections for inflation and policy interest rates this year and in 2023. Since the last survey, published on May 12, the median of expectations for Brazil’s benchmark inflation index IPCA increased to 8.9% from 8.35% this year and to 4.5% from 4.2% in 2023.
Regarding the Selic rate, the median of the estimates remained at 13.25% at the end of this year but increased to 9.63% from 9.5% at the end of 2023. The simple arithmetic average of the projections for the Selic at the end of this year also rose, to 13.48% from 13.39%.
With the basic interest rate at 12.75%, the Central Bank has contracted a new increase in the Selic rate in the June meeting, at the same time that it has given increasingly clear signals that it wants to end the monetary tightening cycle that started in March 2021. Nevertheless, the monetary authority has started to adopt a more data-dependent strategy.
Part of the market has migrated to a scenario foreseeing a hike in August. Two weeks ago, 25% of the estimates indicated a rise in interest rates in August. In the current survey, this scenario is already defended by about 36% of the institutions.
Fernando Rocha — Foto: Leo Pinheiro/Valor
“There is a desire to stop, but we still have very bad inflation. In every month, the [mid-month inflation index] IPCA-15 and the full IPCA have been surprising us negatively,” says Fernando Rocha, chief economist at JGP. He expects the Central Bank will try to end the cycle but will not succeed. That’s why JGP projects the Selic rate at 14.25% at the end of the cycle.
“I see the risk of the Central Bank stopping and inflation expectations getting even worse. If current inflation were a little better, showing signs of slowing down, I believe it [the monetary authority] would be more comfortable, but it is getting worse and spreading,” observes Mr. Rocha. The scenario projected by JGP is one of the most complex for disinflation in 2023, as it foresees the IPCA at 5.6% next year.
Brazil’s mid-month inflation index IPCA-15 for May scared the market about the dynamics of inflation. The acceleration of the cores raised the alarm among economists regarding scenarios of even more persistent inflation ahead.
“The IPCA-15 had a very bad quality indeed, really bad. The Central Bank, in fact, has already raised interest rates a lot, but we are afraid that it will end up stopping the cycle with an inflationary situation of this nature. This could further de-anchor expectations”, points out the chief economist at Truxt Investimentos, Arthur Carvalho, whose projection indicates the Selic at 13.75%.
He argues that it is better for the Central Bank to keep raising interest rates now in order not to run the risk of having to raise the Selic even more in the future due to the chance of further de-anchoring of expectations.
Mr. Carvalho notes that there has been a change in the monetary authority’s strategy, which has become more dependent on data. “Before, the Central Bank was very explicit and now it is no longer being so, in order to try to see if, as time goes by, it can get some evidence that the monetary policy is working. So the best thing right now is to slow down to buy time,” he argues.
Claudio Ferraz, chief economist for Brazil at BTG Pactual, is also attentive to the unfavorable surprise of the IPCA-15. “A highly disseminated inflation, with very high cores, is the kind of composition that leads one to reassess the short and medium-term scenario, impacting longer-term projections,” he says.
The prospect that the cycle of Selic hikes will end with the rate at 13.25% gained less clear features, in the economist’s view. “Although we expect a 50 basis points increase now in June, the risks are up. They have been growing in the sense that we might have another high in August,” he says.
Mr. Ferraz, however, says that clearer signs of an economic slowdown could prevent the Central Bank from extending monetary tightening into the second half of the year. “The debate could grow if the activity data in June and July start to show a sharper weakening. There is still a long period for the Central Bank to monitor economic indicators, but in that sense, it depends on the data.”
At least in the short term, economic activity has shown resilience, despite the tightening of monetary and financial conditions observed since the end of last year. “If demand proves more resilient than expected, the Central Bank’s job will become more difficult. However, we believe that due to the lag in the monetary policy action, of about nine months, most of the effect of the real interest rate tightening will be observed in the second half,” says Andressa Castro, chief economist at BNP Paribas Asset Management.
For her, it is not possible to draw hasty conclusions about the monetary policy action based on the positive surprises of recent months in activity. “In this sense, the main indicators to monitor will be the pace of consumption of excess savings, which has contributed to the resilience of demand, and the performance of the most credit-sensitive sectors, such as construction and discretionary consumption,” she emphasizes.
Ms. Castro, however, notes that if the gap between 2023 inflation expectations and the target continues to increase, it could generate additional pressures on the Central Bank. “According to our models, if expectations rise above 5%, a movement that is already starting to happen, it would be necessary to tighten the Selic more, entering the second half of the year, to avoid an even greater de-anchoring,” she says. For Ms. Castro, this scenario would increase the chances of the Selic approaching 14% — which is not in BNP Paribas Asset’s baseline scenario at the moment.
In fact, de-anchoring of expectations has proven to be even more pronounced. Of 99 estimates collected in Valor’s survey for the IPCA in 2023, 24 already indicate that inflation will end the next year above the target cap.
“There is no longer any discussion about the dangers of inflation spreading. This is already a fact,” says Dalton Gardiman, chief economist at Bradesco BBI. He points out that in his estimate of 8.5% for the IPCA in 2022, some effect of the reduction in sales tax ICMS on fuels and electricity is already considered.
However, there is a prospect of major disinflation next year, given the prospect that global economies — Brazil included — will lose traction in 2023. “The big theme and the biggest challenge in the year 2022 is inflation. I believe that this theme will become growth in 2023,” says Mr. Gardimam. Because of that, he projects stagnation of the economy next year and inflation at 4.5%.
(Anaïs Fernandes and Marta Watanabe contributed to this story)
Jose Claudio Securato — Foto: Sergio Zacchi / Valor
Finance executives are less optimistic about the future of the Brazilian economy. In the first quarter, the CFO confidence index (iCFO) stood at 131.6 points, the lowest level since the end of 2020, when it was at 121.3 points. Input costs, domestic market demand, competitiveness and competition, labor costs, and inflation were the main points of concern indicated by the executives.
The data were collected in a quarterly survey by the Brazilian Institute of Finance Executives (IBEF) in partnership with Saint Paul Escola de Negócios. The most recent edition shows that the confidence of executives dropped in the three dimensions analyzed: macroeconomics, sector and company of operation.
José Cláudio Securato, head of the administrative council of IBEF-SP and CEO of Saint Paul & LIT, explains that the data show a short-term concern of executives, heightened by factors such as the war in Ukraine, growth slowdown in China, and the elections in October. He points out, however, that the index remains at a relatively high historical level and that the executives’ view on investments, for example, indicates a more optimistic perspective regarding the medium and long terms.
The iCFO aims to capture CFOs’ confidence in the future performance of the country and businesses in the following 12 months. The scale ranges from 20 to 180 points, with 100 representing neutral expectations. Thus, the result indicates that executives remain positive about the economy, although this level is falling.
Right at the start of the pandemic, the index fell to 121.3 points in the first quarter of 2020 and 89.5 in the second quarter from 132.8 points at the end of 2019. It then started to recover and reached 144.1 points in the second quarter of last year, the highest since records began, in 2016. In recent quarters, however, it has fallen again. “We are back to the pre-pandemic level,” Mr. Securato said.
The index is divided into three components. The iCFOm, which measures confidence in relation to the macroeconomy, was the field of the greatest volatility throughout the historical series. In the first three months of this year, reflecting the instability of the macroeconomic scenario, it reached 122.5, down 3.9 points compared with the previous quarter. The results of iCFOs, which refers to the sector, and iCFOe, referring to companies, also fell to 138.7 and 133.4 points, respectively.
Mr. Securato points out that, while the confidence index itself shows the concern of businesspeople in the short term, data about investments and funding reveal a more optimistic view in relation to the future.
“The investment outlook is focused on fields such as the expansion of installed capacity, new lines or business units, mergers and acquisitions. These are not items that will generate short-term results, so there is a vision that in the medium and long term these companies continue to believe in Brazil,” Mr. Securato said. In relation to the destination of the investments foreseen for the following 12 months, the field most cited by the executives was the expansion of the installed capacity, mentioned by 26% of the respondents.
Considering the origin of funds to finance investments, the first positions are occupied by cash reserves, an option mentioned by 30.5% of the participants, and reinvestment of profits, mentioned by 23.2%. “The way these companies raise funds does not depend on the scenario we are experiencing,” the executive said.
The lower optimism is reflected in the outlook for profitability and earnings in the following 12 months. In the last quarter of 2021, 64.7% of the participants expected a higher return on equity, compared with 56.4% now. The expectations of EBITDA margin increase dropped to 67.5% from 74%. In addition, 61.8% of the respondents expect a higher cost of debt in the next 12 months.
The survey also shows projections for macroeconomic parameters. On average, executives expect the Extended Consumer Price Index (IPCA), Brazil’s official inflation index, to be 8.3% this year. As for GDP, they expect growth of 1.5%. The average expectation for the foreign exchange rate was R$5.32 to the dollar, and for the benchmark interest rate was 12.3%.
The formation of regional sanitation blocks, one of the great changes brought by the new legal framework for the industry, has faced challenges. One major obstacle is that municipalities are unwilling to join the model, which in some cases can turn projects unfeasible.
One example is the regional unit of Rondônia. The block may become economically and financially unfeasible if Porto Velho does not participate. The capital city, on the other hand, is about to launch a call for bids for its municipal concession.
The state has signed a partnership with the Brazilian Development Bank (BNDES) for studies of a regional project. However, Porto Velho says that it will go ahead with the project. Public hearings held in recent months were marked by protests of the state company, which suggests litigation is likely. The state government and the city hall did not immediately reply to a request for comment.
Another case is Rio Branco, which in 2021 decided to take over the services. As a result, the regional block of Acre, which was about to be auctioned, was made unfeasible as well.
The participation of capital cities is key due to the high degree of dependence on the states, said Felipe da Cruz, a research economist at the State University of Rio de Janeiro (UERJ), who took part in a study on the regionalization of the industry.
The study, conducted with data from 2018, reveals a large weight of capital cities in the states’ collection of water and sewage services. In nine of them, the participation exceeds 50%. The greatest dependence is seen in the North region – Acre, the capital city accounted for 70.06% of the revenue.
“It is challenging. Cities that are regional leaders have fewer incentives for voluntary participation because they know they will pay for other municipalities,” he said.
Cities do not always have the option of staying out of the block. Mr. Cruz recalled the case of Rio de Janeiro. The capital city of the namesake state has a large weight (65%) and was unwilling to join the regional block. But the city ended up joining the effort because it is part of a metropolitan region – in cases like this, the city is forced to participate because structures are shared.
The new sanitation law provides for different forms of regionalization, which can be either compulsory (such as micro-regions, in which cities are forced to participate) or hybrid (regional units, where participation is voluntary), said Rodrigo Bertoccelli, a partner at law firm Felsberg Advogados.
Analysts who follow the matter say that the mandatory model makes participation easier but does not eliminate resistance. First, a complementary law is required for that, which is more difficult to approve than ordinary law. Besides this, the definition of the governance and internal rules of the block is complex.
Convincing municipalities is even harder in the states that have chosen regional units, like São Paulo. In July 2021, the state approved the division into four regions: the municipalities operated by water utility Sabesp remained in a block and the others were divided into three others. However, many cities are raising questions, and participation has been low. The same challenge is faced by Rio Grande do Sul.
“It is necessary negotiation and a convergence of interests that is not simple. This model has not worked so well so far because municipalities are blocking it – in many cases because they are not aligned politically,” Mr. Bertoccelli said.
Other states have not even managed to approve laws to create regional blocks, such as Minas Gerais, Mato Grosso, and Goiás.
Goiás proposed two micro-regions, but the municipalities presented a counterproposal. “It is now up to the regional lawmakers to hold negotiations with all the interested parties so that the best alternative can be reached,” the Secretariat of Environment and Sustainable Development said in a note.
The governments of São Paulo, Rio Grande do Sul, Minas Gerais, and Mato Grosso did not immediately reply to requests for comment.
Aware of the obstacles, the federal government has already extended until March 2022 the deadline for the states to create regional blocks.
So far, 84 blocks have been approved in 17 states based on the rules of the new framework. Besides the three states that are still trying to approve the laws, three others (Acre, Pará, and Tocantins) have not prepared a regionalization proposal, according to data by Abcon, a trade group of private-sector water utilities, updated in May.
However, besides the approval of the laws, it is necessary to put in place the operation of the regional blocks, which is another challenge, said Fernando Vernalha, with law firm Vernalha Pereira Advogados.
One obstacle to regional services is the several contracts in force in the municipalities, which end at different deadlines. “The ideal would be to replace all municipal services by a regional operation, but contracts must be respected. It will be hard to regionalize in the short term.”
Renato Sucupira, a partner at BF Capital, says that there is a natural difficulty for municipalities to join. However, he highlights that the new law has already achieved important advances.
Goal is to eliminate wharfage services or terminal handling charges — Foto: Leo Pinheiro/Valor
The government has a decree ready to change the way import tariffs are collected. With this, the economic team believes it will achieve an additional reduction of 1.5 percentage point of the rates on imported goods.
The idea, according to aides to Minister Paulo Guedes (Economy), is to eliminate wharfage services, or terminal handling charges, from the tax calculation basis. Wharfage is the loading and unloading work of cargo in general at port terminals.
Today the tax rates on imported goods are applied taking into account the terminal handling charges. Government sources argue that Brazil is one of the few countries in the world to adopt this practice. Not even other Mercosur members, including Argentina, do so.
The provisional measure that changes the collection system already has the approval of the ministries involved and the Presidency’s Sub-Office for Legal Affairs. A final analysis is being made by the Federal Attorney General’s Office (AGU) to completely rule out the risk of illegality because of the proximity to the election period. If it passes, the provisional measure will be signed into law by President Jair Bolsonaro.
The Economy Ministry expects a 10% linear reduction in import tariffs. The Common External Tariff (TEC) is currently at 11.6%. This would mean, approximately, a cut of 1.5 percentage points.
It would be, in practice, the third cut in TEC made by Brazil. Last year, there was already a 10% reduction in the rate. This month, the Brazilian government announced another 10% cut. Both, however, are temporary and valid until the end of 2022.
In the case of removing terminal handling charges from the calculation basis, this is a definitive change, in principle. It is an old plea of the private sector, led by the National Confederation of Industry (CNI), and the government prefers not to talk about “loss of revenue”, considering that the import tariff is essentially a tax of a regulatory nature.
According to the ministry, the estimated loss of revenue with this change is R$ 461.3 million in 2022 but falling in the coming years. The economic team emphasizes, however, that the most important is the reduction of the so-called “Brazil cost” and the gain in competitiveness with the measure.
“The cap rate in the customs value has always been incompatible with the rules of the World Trade Organization (WTO), because it distorts the competitiveness of productive sectors in domestic and foreign markets,” says Leandro Barcelos, international trade coordinator at BMJ Associated Consultants.
“Brazil is still one of the only countries that charge this tax, generating an additional cost in the acquisition of inputs used in the production chain. The removal of the wharfage tax would be a good thing in the government’s strategy to relieve the import tax base. The removal of the tax would significantly reduce industrial costs and increase, in the medium term, the competitiveness of Brazilian industry, and would directly impact the reduction of product costs for the final consumer.
More than two years after the beginning of the pandemic, retailers have resumed investments in store openings and land purchases, at the same time they have been increasing disbursements in the digital arena — the business that has supported part of the retail results. This increases the need for the chains to expand their spending in the year, in a scenario where there are already new pressures on the cost of building the stores. There was an increase of up to 50% in the value of each new store this year compared to 2020 — in an environment of more expensive money in the market.
An analysis by Valor shows that the investments of 15 public retailers — considering those with data available between 2019 and 2022 — reached R$1.9 billion from January to March this year, 35% higher than in early 2019, the year before the health crisis, when the combined figure reached R$1.4 billion. The analysis considered the amounts reported by the companies in the quarterly financial statements. When taking into account the annual expansion rate of the decade, the projection was that this figure would be reached a year ago, but the pandemic held back investments. This delay increases the need for accelerating projects, despite the uncertain consumption environment and high interest rates making capital more expensive.
“What is happening again is a greater allocation of funds for organic expansion, because it is not possible to keep this part of the business in the ICU for a long time, as it was. And stores are key in the strategy of online sales today. It happens that the disbursements in logistics, distribution and systems have already grown in 2020 and 2021, and it is also an investment that needs to be accelerated,” said Alberto Serrentino, partner and founder of Varese Retail.
“Right now, this investment management is much more complex within the management teams. One thing is to invest under good conditions. Another one is with the CDI [interbank deposit rate] at the level it is. The return on capital analysis in the current environment has become more critical, but nobody doubts that companies must occupy new spaces again.”
Data from January to March compiled by Valor show, for example, that Via (owner of Casas Bahia and Ponto chains) opened 22 stores in this period — the highest number since 2019 — while Centauro opened four, a record in the period. In the building material chain Quero-Quero, there were 14 openings, an unprecedented number in this period. For the year, Renner projects 40 openings, versus 32 in 2021, and in food retail, Grupo Mateus estimates 45 to 50 openings, compared with 44 in 2021. Pague Menos talks about 120 new stores, 50% above last year. Raia Drogasil projects 260 stores, 20 above 2021.
Despite the strategic function of the new stores, an aspect raised by the companies themselves recently, in first-quarter conference calls, was the increase in the cost of construction of the units, and the storage centers. Even when leased, they saw an increase in rent. “The bill today is for a 40% to 50% increase in construction costs compared to before the pandemic. Steel, aluminum, copper, everything went up and was passed on,” said José Barral, a consultant and a board member in some retailers.
According to Luiz Novais, chief financial and investor relations officer at drugstore chain Pague Menos, there is strong inflationary pressure on investments. “We are suffering with this. Before, we imagined that the average investment cost for opening a store would be R$1.1 million, and this average value is closer to R$1.35 million now. So, there is a great pressure. But even with these two components we have a very good rate of return, above 18%, a level above the cost of capital, that is, we remain very optimistic with new stores,” he told analysts a few weeks ago.
For Mr. Barral, companies with the right geographic expansion strategy, in areas that prove to be more resilient or with already tested models, will come out ahead in this resumption of expansion. “But I am still a little skeptical about this, because we have to remember that investments in new stores affect the [operating profit] margin initially, and we have already entered the pandemic with certain chains opening too many stores.”
The management team of Assaí, which projects 50 openings in the year, 40 of them being conversions of Extra’s stores, states that the increases in materials occur mainly in steel and concrete because of the war in Europe. The plan is to renegotiate with suppliers. “There is an impact on the conversion costs, especially steel. But it’s not easy to negotiate because there’s not much to do,” CEO Bemiro Gomes said. Each new cash-and-carry store costs between R$70 million and R$85 million on average now. Two years ago, the cost ranged from R$50 million to R$60 million.
In the listed companies analyzed by Valor, the disbursements in structure for digital operations also advanced rapidly this year. The analysis shows that from January to March there was a growth in the value of intangible assets – such as software, licenses and brands – three to five times the value recorded in 2019.
In this line of fixed assets are real estate, renovations, land, machinery and equipment. But this is partly due to the effect of the base of comparison. The combined physical assets of companies is higher than that recorded as intangibles because this line had a greater expansion in recent years, after the 2020 pandemic.
In the first quarter of this year, companies such as Renner, Riachuelo, Centauro and Soma more than doubled the added value in their intangibles, which include, for example, license renewal and systems. In the specialists’ view, these are disbursements that cannot be interrupted, especially in projects that are still gaining traction.
“Technology products can run on their own for a while, but they can’t survive without updates. You can’t unplug them quickly. That’s why these investments are still at a high level, and this is likely to continue for a few years. But I don’t see this as an issue. The leading companies in the industry have access to resources in various channels and have been able to sell to the market the idea of their growth plans in digital and physical stores,” says a consultant specialized in online marketplaces.
Trade groups, analysts and developers included in Green Yellow House have been calling for a new update of the housing program subsidies — Foto: Tomaz Silva/Agência Brasil
The Brazilian Chamber of the Construction Industry (CBIC) unveiled this week the sector’s data for the quarter, which shows stability compared to the beginning of 2021. Sales are up 1.4%, while new launches fell 2.6%. But the results hide the most complicated situation of properties in Green Yellow House. New launches included in the federal housing program dropped 25.6% year over year, to 22,300 new units.
Trade groups, analysts and developers included in Green Yellow House have been calling for a new update of the housing program subsidies. The idea is to increase prices of units without seeing customers lose purchasing power, as their income is already pressured by high inflation in Brazil. Building projects aimed at this public are unattractive or even unviable without such update, they say.
This change will come, the new minister of Regional Development, Daniel Ferreira, told Valor. The value of the subsidies will be increased by 12.5% to 21.4%, depending on the location of the project, household income and other criteria. The cap of the amount borrowed remains at R$47,500. The measure will be put in place in June and last by the end of the year. The ministry wants to include 400,000 contracts in the program this year, compared with 91,000 so far.
Now, it remains to be seen if the update will be enough to speed up the segment, which accounts for 42% of the launchings now, compared with a 57% slice in the beginning of 2020.
So far, the rise in launches and sales of units not included in the program offset the drop of projects in the Green Yellow House, but high interest rates hinder new sales.
Besides developers, companies that provide services to the home construction industry also expect the housing program to recover. Versátil, a company that rents scaffolds and props for buildings in Paraná and Santa Catarina, reports an 85% occupation rate, a level above the historical average of 60%. The company plans to keep up the pace at least until mid-2023, when the projects launched in recent years will be ready. After that, Versátil expects changes in the Green Yellow House to keep demand for construction work heated.
Since 2020, the company has already increased by 50% the amount charged to lease its products, due to higher steel prices. This increase is another obstacle for real estate developers, who have reported thinner profit margins due to higher costs.
Considering the combined first-quarter results of public developers, gross margin fell 3.2% year over year, while net profit dropped 14.3%. In a report released on Wednesday, XP cited real estate as one of the sectors in which companies that delivered lower-than-expected results for the first three months of the year.
The Brazilian Association of the Construction Materials Industry (Abramat) blames the prices of raw materials and freight, in addition to taxes – which also hit producers – for the increases. In the year through April, revenues fell 9.3% year over year in the industry, according to the Abramat index. In 12 months, they declined 2.3%.
The members of the Brazilian Association of Manufacturers of Ceramic Tile (Anfacer) also reported bad results in the quarter. The output dropped 2.6%, while ceramic tiles sales fell 11.4%.
Amid the bad news of falling sales, at least the pace of new price increases is also likely to slow down. Celso Petrucci, vice president of CBIC, said that the phenomenon of rising costs is expected to lose steam throughout the year. The National Index of Construction Cost (INCC) is up 11.54% in 12 months, compared with the country’s official inflation of 12.13%.
In the business buildings segment, two deals closed last week suggest a recovery in occupancy and rental value, at least among high-end units, analysts say. BR Properties sold more than half of its portfolio to Brookfield for R$5.9 billion, which included 12 business towers and two plots of land for industrial warehouses. The following day, GTIS Partners sold its 62% stake in Infinity Tower, a high-end building near Faria Lima Avenue, for R$850 million. The buyer was a group formed by companies Lucio, AMY and Omar Maksoud Engenharia, which already owned the rest of the building.