States, municipalities to face losses with cap on sales tax

The cap for sales tax ICMS rates on certain items, as proposed by the Chambers of Deputies and approved on Wednesday, may reduce inflation projections in the short term by 1 to 1.5 percentage points, while generating revenue losses for states and municipalities of R$65 billion to R$70 billion per year, especially as of 2023, economists estimate.

The current measure goes against what is done in most parts of the world, say some specialists, especially when it comes to fossil fuels, which usually suffer higher taxation.

Deputies approved a bill defining fuel, electricity, natural gas, communications and public transportation as essential goods and services, implying that they would have a 17%-18% cap for ICMS collection. Today, states usually apply rates as high as 30% on these items, especially fuel and energy.

The eventual impact of the measure on prices will depend on the rate charged by each state, but the governing coalition expects a reduction in gasoline, gas cylinders and electricity bills before the October election. “It is the latest attempt by Brasília to ease inflation after another bill to reduce the ICMS tax on diesel prices did not yield the expected results,” said Roberto Secemski, Brazil economist at Barclays.

On Tuesday, even before the decision at the Chamber of Deputies, J.P. Morgan added the possibility of the bill’s approval to its scenario and reduced its projection for benchmark inflation index IPCA in 2022 to 8.7% from 9.1%. “Considering an 80% pass-through to final consumers, we estimate that the gasoline tax cut reduces this year’s IPCA by about 40 basis points [0.4 percentage point]. For energy, we assume a 100% pass-through, as this price is controlled at the consumer level, which would reduce this year’s IPCA by about 30 basis points,” wrote economists Vinicius Moreira and Cassiana Fernandez.

The justification for the project among politicians is that states and municipalities have fiscal space and “surplus” cash. Ítalo Franca, an economist at Santander, notes, however, that the revenue of the states has risen by cyclical factors, such as high oil prices and high inflation. “When the disinflation process comes, revenue tends to fall,” he said.

In addition, expenses are normalizing, increases for civil servants have already been granted, but if inflation remains high, the pressure for increases ahead is likely to continue. “This can cause problems for the states’ accounts. In the broader picture, this revenue tends to fall. If the government wants to reduce taxes, I think it is positive, the tax overhaul is one of the focal points, but they cannot let mandatory expenses grow,” the economist said. “We contract a problem for one, two years from now. We are postponing it.”

Felipe Salto — Foto: Wenderson Araujo/Valor

Felipe Salto — Foto: Wenderson Araujo/Valor

If the states get into a tight spot further down the road, however, the problem returns to the federal government, notes the economist, as they need to enter government support schemes. Felipe Salto, secretary of Finance of São Paulo, said that the bill may reduce by R$0.10 to R$0.12 fuel prices in the pump, but the reduction will be rapidly offset by the effect of high oil prices driven by the war in Ukraine. According to him, the state will lose R$8.6 billion a year with the measure.

Fuels, electric energy, and telecommunications represent 31.7% of the states’ total ICMS collection, according to data from the National Council of Finance Policy (Confaz) organized by economist Sergio Gobetti, a specialist in public accounts.

“There is a high chance of litigation of this issue,” Citi comments in a report. “As this is an election year, it is not yet clear whether states would raise taxes on other goods to offset the negative impact of this bill on tax revenues.”

Although, in theory, there is fiscal space for the measure, Gabriel Leal de Barros, chief economist at Ryo Asset, says the ICMS is a tax with many problems and the focus of Congress should be on more structural solutions, such as the approval of the dual value-added tax – a single value-added tax encompassing the federal collections and another for state and municipal collections. Mr. Gobetti says that with the creation of the Tax on Goods and Services (IBS) in the model of a VAT, the tax overhaul is the best solution to standardize the tax burden on goods and services and end some distortions that exist in the ICMS.

Source: Valor International

https://valorinternational.globo.com

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Nubank focus on long run, maintains strategy despite stocks dive

David Vélez — Foto: Julio Bittencourt/Valor

David Vélez — Foto: Julio Bittencourt/Valor

“We are still focused on building up, and on the same strategy. In five years, we’ll talk.” This is how Nubank founder David Vélez reacted when asked in Davos, Switzerland, where the World Economic Forum is being held, about the fintech’s new dive in the stock market, which gave it a lower market capitalization than rival BTG.

“Until then, you’re going to have crises and cycles. It’s Latin America. But in the long run…” Mr. Vélez told Brazilian reporters after speaking at a dinner dedicated to Latin America, in which he told the story of Nubank.

Mr. Vélez noted that the market capitalization of Latin America’s banking industry is $1 trillion, while the region has 250 million unbanked people. According to his view, the digital model is much more profitable than traditional lenders, as these banks have no branches, for example.

Asked about derisive comments in the market that the value of the fintech seemed unreal, the Nubank founder smiled. “That’s great because being ignored is the best thing that can happen,” he said. “We were ignored in Brazil for three to four years. Nobody was looking at us. We went through the four Gandhi phases: first they ignore you, then they laugh at you, then they fight you, then you win,” he said, misattributing the quotation to Mahatma Gandhi. “Now we go back to being ignored,” he added.

Nubank, once the most valuable bank in Latin America, now has a market capitalization of $15.53 billion (R$74.7 billion), the sixth-highest among Brazilian banks, behind the likes of Itaú (R$236.5 billion), Bradesco (R$194.6 billion), Santander (R$126.1 billion) and BTG (R$99.33 billion).

Asked about when he estimates that Nubank will recover the IPO price, he replied that it is impossible to know. But reiterated that “we are still an ant, and our strategy is long term.” He said Nubank is focused on Brazil, Mexico and Colombia and getting close to 60 million customers – mostly in Brazil. “We still have to grow with that base,” he said.

In Davos, he took advantage of contacts with other fintechs, but said he has no plans for partnerships at the moment. “Since we are the biggest in the world, we get a lot of emails from neo banks abroad,” he said. Sometimes Nubank invests in other companies, as happened with a bank in India. And all this with an eye on the potential for the next 20 years.

Source: Valor International

https://valorinternational.globo.com

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Antitrust regulator OKs sale of Big to Carrefour

CADE did not disclose how many stores will be sold or the deadline for the deal — Foto: Divulgação

CADE did not disclose how many stores will be sold or the deadline for the deal — Foto: Divulgação

Antitrust regulator CADE approved, with restrictions, the acquisition of Big by Atacadão — Carrefour’s Brazilian subsidiary. It will require the sale of some self-service units (supermarkets, hypermarkets, cash-and-carry stores, or buyers’ clubs) of the Big group. The decision was unanimous. The CADE did not disclose how many stores will be sold or the deadline for the deal. A source told Valor that 14 stores are on the list.

This number increases by six stores the initial proposal made by Cade’s General Superintendence. In January, it had suggested the approval of the operation provided some conditions (remedies) were met, such as the sale of units. Behavioral remedies were also set, which concern the monitoring of the operation’s compliance or other market conditions that are usually simpler than the sale of units (considering a structural remedy).

The deal analyzed by the CADE consists of the acquisition by Atacadão of all shares of Big Brasil group. The purchase was announced in March, for R$7.5 billion — in value, it’s the largest ever in Brazil’s retail market. The deal turns Carrefour into the second-largest retailer in Latin America, behind Walmex, Walmart’s operation in Mexico and five other Latin countries.

In practice, Atacadão is buying 386 stores. Big, which is controlled by the management company Advent and Walmart and comprised of seven brands (Big, Big Bompreço, Nacional, Super Bompreço, Sam’s Club, Todo Dia and Maxxi Atacado), concentrated the supermarket and hypermarket chains that belonged to Sonae, in the South region, and Bompreço, in the Northeast.

Of these seven, Big and Maxxi will probably disappear, according to information obtained in March. Hypermarkets BIG and Bompreço will be converted into Carrefour, Atacadão or Sam’s Club stores. Maxxi will probably become Atacadão. With Big, Carrefour will have 876 stores and R$100 billion in annual sales.

This will be the third time since 2016 that Big and Bompreço brands will undergo changes. From 2016 to 2017, years after Walmart bought the assets in the country, the company removed the name Big and started using Walmart in stores in the South region. In 2019, after selling the operation to Advent, the brand returned. Now, again, it will stop being used. In the Northeast, the group is expected to keep elements of the Carrefour brand, along with the name Bompreço.

With this Wednesday’s approval, Carrefour reaches a goal before facing its biggest challenge in recent years, in the view of experts: setting up a mega infrastructure of systems, logistics and integrated distribution, which is the basis for retail and wholesale to operate in a profitable and harmonious manner.

The issue came on the recommendation of the General Superintendence (GS), which recommended the approval but imposed some conditions (remedies). According to the GS’s opinion, the companies involved in the business are currently competitors in three markets: self-service retail, wholesale distribution of products (mainly food and other goods), and retail fuel resale. For the GS, the problem would lie in the self-service.

The vote of the rapporteur, member Luiz Augusto Azevedo de Almeida Hoffmann prevailed. For Mr. Hoffmann, some problematic situations were identified in some places, such as stores very close to Big and Carrefour, while those of competitors were very far away. Thus, the operation in some cities would require adjustments in the divestment package proposed by the GS, according to the rapporteur, increasing the number of stores that the company would have to get rid of.

The number of stores to be sold and the deadline were considered confidential and were not disclosed in the session. The number of stores to be divested was increased by the CADE, according to the rapporteur, and the CADE was aware that the company has already received proposals to sell some units and there would be interested parties in others. Therefore, for the rapporteur, the operation could be implemented before the conclusion of the investment.

If necessary, for the sale of the stores, a divestiture trustee may be required, in addition to the general monitoring expected to be implemented. If the obligations are not fulfilled in the foreseen period, there will be penalties.

(Adriana Mattos and Raquel Brandão contributed to this story)

Source: Valor International

https://valorinternational.globo.com

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Brazil may need to sacrifice GDP growth to tame inflation

Solange Srour — Foto: Silvia Costanti/Valor

Solange Srour — Foto: Silvia Costanti/Valor

Faced with a complicated scenario for inflation, which threatens to stay above the target cap for the third year in a row, as well as an exchange rate that may remain depreciated, despite a super-attractive interest differential compared to foreign countries, Brazil may face the possibility of having to “sacrifice” economic growth to control the pace of price hikes. This analysis comes from Solange Srour, chief economist of Credit Suisse Brazil. According to her, the country may have to face expansion rates around 1% or below in the coming years to enforce the target system.

The higher- than-expected reading of mid-month inflation index IPCA-15 for May strengthened the understanding that the Central Bank, contrary to its recent communication, will need to extend the monetary tightening cycle until August.

This change is close to the scenario already outlined by the Credit Suisse team, for whom the monetary authority will end the tightening cycle with the Selic interest rate at 14%. Despite the fact that the price dynamics continue to be qualitatively bad – a deflation was expected in May, but it does not look like it will happen – the economist sees a low chance that the cycle will extend much beyond its current projection.

On the other hand, Ms. Srour believes that the idea of trying to “exchange” an additional increase in the Selic in August for a more distant start to the cycle of cuts is risky. A recent study by Credit Suisse shows that since 1999, when the inflation targeting regime was implemented, the Central Bank has never ended a tightening cycle before seeing expectations stabilize or converge back to the target – which is not the case today. The same happens with the break-even inflation measures, which continue to deteriorate. “If the Central Bank stops in June, it will need to change communication,” she says, citing the decision to bring forward the change of monetary policy horizon and also new inflation projections.

Read the main excerpts from the interview below:

Valor: Credit Suisse recently raised its 2022 GDP projection to 1.4% from 0.2%, but cut 2023 projection from 2.1%. That is, the fall next year will more than offset the rise this year. Why is that?

Solange Srour: Starting in the second half of the year, we will see not only the lagged effect of monetary policy on activity, but also the high inflation starting to strongly affect disposable income. At the beginning of the year, it is harder to notice this because most salaries are raised by June and July, so people feel they have a higher income, then consumer spending gains steam. But as the year comes to an end, this is lost. Another factor that holds back GDP expansion next year is global growth. We are seeing substantial revisions of projections, this year driven by China and Europe, next year more by the United States, because we believe that the monetary policy there will be tighter than anticipated. Besides this, we cannot rule out the uncertainty about the prevailing agenda in Brazil from 2023 on. Today, this seems to be a topic that the market does not want to discuss much, but it certainly affects investment and consumer spending decisions. If there is too much uncertainty, this affects current activity. Current investment is not so weak because the commodities sector has holding up the ends, but the other industries already see a relevant drop, which is likely to be accentuated in the second half of the year. Considering a real interest rate of 6% in the next few years, it is very difficult to think of a higher growth rate than something close to 1%, which is what we project for 2023. On the contrary, we risk seeing a lower rate than that.

Valor: Why will we need to keep real interest rates so high?

Ms. Srour: Every time Brazil had a real interest rate as high as the current one, we also had a very expressive currency appreciation that helped to bring down inflation. This time, we see real interest rates high for a long time without a strong real. It reached R$4.6 to the dollar just to return to R$5, and is still oscillating. A stronger real is not enough. It must be seen as something more permanent in order for us to see a pass-through effect. The price takers need to see a consistent appreciation in order to pass this on to prices. There is a lag in all of this. So, if this happens, it will help a lot. If it doesn’t, the weight will fall on activity. A 1% growth is not enough to bring inflation down fast. Without a strong real, disinflation is going to be much more costly, slower and gradual, especially because inertial inflation increases after two and a half years of very high inflation.

Valor: Why do you believe the real will remain weak?

Ms. Srour: If you look at the fundamentals of a given model, commodities and real interest differential, the real should have been stronger in the past two years. There are several reasons for that. The main one is the uncertainty about what Brazil will be like over the next few years. It is very difficult to draw medium-term investments if it is unclear what is going to happen. Much of this uncertainty is related to the fiscal situation. As much as the spending cap [a rule that limits growth in public spending to the previous year’s inflation] is up, several expenses are held back, including pay increases for civil servants. There are also developments out there. The tightening of the U.S. monetary policy may strengthen the dollar, should the Federal Reserve need to tighten further than expected. And the slowdown in China may also be longer and start in 2023, which also makes it more difficult for the real to appreciate.

Valor: We have seen a very intense cycle of Selic (Brazil’s benchmark interest rate) hikes in the last months. Wasn’t it time for it to start having an effect on the activity?

Ms. Srour: I don’t think that it is not having an effect. Credit is more expensive, spreads are on the rise. The activity is not showing that because the effect of the opening has been much more intense and much slower than expected. Economists thought that the effect of the reopening on the economy would peak between January and February, but people seem to have accumulated some savings, so we see a very strong effect in services and consumer spending. This is not happening in Brazil alone. The same happened in Europe, where recent indicators from some countries did not come as bad as expected, precisely because of the longer effect of the opening.

Valor: In its statements, the Brazilian central bank has been trying to support a longer cycle of high Selic instead of additional hikes later this year.

Ms. Srour: Our study shows that in all monetary tightening cycles, the monetary authority paused when the difference between inflation expectations and the target was falling. In the current cycle, the Central Bank is trying to end the tightening while the gap is still rising. If this happens, it will be the first time. We believe this is complex, dangerous, considering that we have been missing the [inflation] target for two years. It is complicated to stop the cycle with expectations still rising and risking being above the target for the third year in a row. We have projected that the Selic would rise by August for some time now, which has now become a more consensual scenario. The [last reading of] IPCA-15 [Brazil’s mid-month inflation index, known as a reliable predictor for official inflation] was qualitatively bad and is likely to worsen projections for 2023.

Valor: Will the Central Bank still follow the path it has communicated?

Ms. Srour: If the Central Bank stops in June, it will need to lengthen the convergence period, admitting that the monetary policy horizon is now 2023 and also, to some extent, 2024. This is something we expected to happen in August, which is when the Central Bank typically starts to give more weight to the following year. So it will need to say that, or even that it will pursue this adjusted target, and no longer that of 2023. I think it is more likely to lengthen the horizon, but this will only be more credible if it puts projections closer to those of the market – today the Central Bank’s projections are very far from them. If the Central Bank wants to signal that it will stay put for a long time, but its projections are low, nobody will buy this for a long time, since the Central Bank’s own projections allow it to start cutting earlier as well. That is why I think it is very complicated to reconcile all this: to stop rising in a bad environment, with expectations moving away from the target, and to extend the horizon as it argues that it will stay still for a longer time to try and prevent expectations from unanchoring further.

Valor: Do you see any chance of the Selic going beyond the projected 14% a year?

Ms. Srour: I do not think the Central Bank will go much beyond 14%. We cannot rule it out at all, given what we have seen about inflation in Brazil and in the world. But I think it is very difficult to go beyond this because the Central Bank has communicated that the cycle is nearing its end, financial conditions are tight and this is going to have an impact on activity – it should already be influencing it, but some extraordinary factors, mainly fiscal, are preventing this. The real ex-ante interest rate is at a very high level, close to the peak. But we cannot rule out that the next move will be a hike, or that the cycle will stop for very long, especially because it may stop for the first time with a very large gap between expectations and the target.

Valor: How do you see the new change of Petrobras CEO?

Ms. Srour: We are facing a global problem of energy and food prices. Several countries, supported by international mechanisms, are creating policies to mitigate this shock. I believe Brazil should be adopting some more transparent measure for the budget, as was done by [President Michel] Temer at the time of the truck drivers’ strike. It could be even an extraordinary credit, instead of trying to make Petrobras hold prices or reduce taxes, because tax collection is surprisingly well, but this is something temporary, and tax breaks tend to be more permanent. A transparent mechanism avoids a greater impact on inflation and also a greater political impact.

Source: Valor International

https://valorinternational.globo.com

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Government shows no interest for $1bn to protect forests

Eron Bloomgarden — Foto: Sandy Young/PA Wire
Eron Bloomgarden — Foto: Sandy Young/PA Wire

The lack of engagement of the federal government is leaving Brazil out of an innovative initiative by three countries — the U.S., Norway, and the United Kingdom — and a group of large companies with an initial $1 billion to protect forests.

It is the Leaf Coalition (Lowering Emissions by Accelerating Forest Finance). It pays countries or local governments for their performance in stopping deforestation faster, while helping them achieve their Nationally Determined Contributions (NDCs) under the Paris climate agreement.

In an interview with Valor, Eron Bloomgarden, founder and CEO of the Emergent organization, which launched the Leaf Coalition, said 20 major companies are already participating. They include Salesforce, Amazon, Nestlé, Unilever, BlackRock, Burbery, EY and Walmart, for example. Another five are about to be announced.

According to the executive, many companies are interested in paying for the reduction of deforestation in the Amazon, but that it takes political will to make this happen.

The way the coalition operates is with an open call for proposals. In the first call, last year, the coalition received 35 project proposals, half of them from countries such as Costa Rica, Ecuador, Ghana, Nepal, Vietnam, and half from states or municipalities, which together cover more than half a billion hectares of forest.

In the case of Brazil — a country considered key to combating deforestation globally — the federal government has not presented any proposal, but eight states (Acre, Amapá, Amazonas, Maranhão, Mato Grosso, Pará, Roraima and Tocantins) have made proposals in order to have access to resources — and the Legal Amazon Consortium wants to sign a memorandum of understanding.

However, without Brasilia, the situation is complicated. “The states need approval from the federal government to participate. We will not sign a contract [with the states] unless there is approval from the federal government,” Mr. Bloomgarden said. And so far, there is no sign of engagement from Brasilia.

According to the executive, Brazil is a green superpower that should be thinking “about how to preserve this asset to help solve the issue of climate change and for its economic growth.” He says that what the Leaf Coalition is trying to do is “provide a very clear path for companies to help support Brazil by paying to reduce deforestation.”

“Unfortunately, the trends are going in the other direction, at least in Brazil, where there was almost a 65% jump in deforestation in the first three months of 2022 compared to last year. So, the problem is an urgent challenge. We are ready to be a partner,” he added.

Under the Leaf Coalition, emissions reductions are made across entire countries or large states and municipalities through programs that involve key stakeholders, including indigenous peoples and local communities, in five-year contracts. The initiative will use satellite imagery to verify results over wide areas. The monitoring would, at least in theory, prevent governments from protecting forest in one place only to let it be cut down in another area, for example.

A global effort that already exists called REDD+ is seen as affected by bureaucratic problems, for example. The Leaf Coalition says that while the international community has historically paid $5 per tonne of CO2 avoided, it pays a minimum of $10. And if the companies buying the credits sell them above that amount later, the extra resource goes to the country or state.

This new model of public-private finance for forests is attracting growing interest, and an illustration of this is Mr. Bloomgarden’s participation this time at the World Economic Forum in the Swiss Alps.

“At COP 26 in Glasgow it was the first time that nature and forests played such a large and relevant role,” he says. “And now this idea of protecting, preserving, restoring nature as a climate solution is high on the international agenda. There are many other things happening in the world with Ukraine and Russia, and the pandemic. [But] there’s urgency to do that now, both for companies and for biodiversity communities.”

“Companies are saying: you build climate strategies for the next 5-10 years. We would like to use high quality credits, say from Brazil, to protect forests,” he says. According to the executive, if it is shown that there is high-quality supply and political will on the ground, the initial $1 billion fund could reach $10 billion.

Source: Valor International

https://valorinternational.globo.com

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Medium-sized banks face more defaults than large ones

Mid-sized banks are suffering more than their larger rivals in the current cycle of rising default rates. With a less diversified portfolio, a more aggressive approach to draw clients and a less attractive funding structure, these lenders tend to see the quality of their assets deteriorate more when faced by adverse macroeconomic scenarios like the current one, with fast inflation, high interest rates and household debt close to record levels.

Valor analyzed 10 medium-sized banks – BV, Daycoval, Banrisul, ABC Brasil, Pan, Inter, Bmg, BNB, Mercantil and Pine – and found a strong credit portfolio, low growth in margins and some signals that the quality of assets is worsening. These lenders are classified by the Central Bank in categories S2 and S3 that defines them by type and complexity.

The combined credit portfolio of these banks grew 14.75% year over year, to R$301.2 billion, more than Brazil’s five largest lenders (Itaú Unibanco, Bradesco, Santander, Banco do Brasil and Caixa Econômica Federal), which climbed 13.46%, to R$4.1 trillion. But the financial margin of medium-sized banks grew 3.1%, a much slower pace, and totaled R$8.4 billion.

Several of them grew in lines with higher risk-return ratio, such as credit cards and personal loans, including BV, Pan and Inter. Others have portfolios highly concentrated in safer products, such as payroll loans or credit for medium and large companies, which is the case of Mercantil and Pine, respectively.

The default rate in this sample of banks grew in seven of the 10 banks, was flat in one and dropped in two. They ranged from a year-over year drop of 0.47 percentage points (Banrisul) to a rise of 1.8 pp (Pan). Among the large banks, Santander showed the largest variation, with a growth of 0.8 pp. Medium-sized banks increased provisions for bad debts by 49.5%, compared with 37.6% in large lenders.

Analysts say that the group of medium-sized banks is diverse, and that those with portfolios focused on individuals, offering especially credit cards and consumer credit, are expected to face higher default rates. Large banks have a diverse mix, which eases variations.

Renan Manda — Foto: Divulgação

Renan Manda — Foto: Divulgação

“Each bank will have its niche, its strong product. Those working more with retail, those more exposed to these lines, are more impacted,” said Renan Manda, chief analyst for the financial sector at XP. Eduardo Rosman, an analyst at BTG Pactual, said that, faced with the different profiles of lenders, investors are monitoring unsecured personal loans, especially for lower-middle to lower class consumers, more affected by the macroeconomic scenario.

Carlos Macedo, an analyst at OHM Research, said that medium-sized banks tend to take more risk than large ones within the same client profile, because they lack broad bases and need to entice users. “Generally speaking, they take more risk, which means that when they get it right, they earn more, but when they get it wrong, they lose more,” he said.

Conrado Rocha, founding manager at Polo Capital, has a similar view. “The smaller banks are usually focused on two, three products. When everything was going well, with low interest rates, many went to unsecured credit, and it was a boon. Now that the scenario has changed, the situation gets more difficult.”

In a report released this week, Bank of America analysts point out that they have met with Brazilian investors and that they are concerned about the global macro scenario and are choosing to weather the storm by investing in the country’s large banks, which have historically performed well in periods of fast inflation and high interest rates.

“Most investors seem to believe in a high interest rate environment for longer in Brazil, which is detrimental to the operations of most technology-driven players whose funding depends on wholesale banking. This reduces interest in payment companies and digital banks, as well as in deals with lower returns, such as foreign exchange and investments.”

Mr. Macedo said that measures adopted to fight the pandemic, such as payment breaks, the emergency aid paid to informal workers and government credit programs, created a “compliance bubble” in the financial system, which is now shrinking. “The big question is whether defaults will just go back to the pre-pandemic level and stop there or rise beyond that level and reach the peaks seen in past crises. I believe in something in the middle way,” he said.

Mr. Manda, with XP, also was not surprised by the increase in the indicator and said that the question is much more the pace of growth going forward. For him, the most likely scenario is one of normalization, but “a little above the historical average.” The analyst points out that this is not a trivial year, with a difficult economic scenario and elections. Looking ahead, Mr. Rosman, with BTG, believes that the default rate will rise, especially in the riskier lines, and that lenders will adopt a cautious approach for new originations.

At the same time, the mismatch between the growth of the portfolio and the financial margin is, according to analysts, expected due to the cycle of high interest rates. The expectation is that over the next few quarters this difference will start to fall. “The cost of funding for banks has risen and, as a large part of the portfolio is fixed-rate loans, they lose margin. As the portfolio rotates, the new lines come with interest rates more compatible with the current ones,” Mr. Manda said.

Banks have a few options when they see asset quality starting to fall. The first is to restrict supply, especially of riskier lines, by reducing the issuance of cards, for example, and raising interest rates. In addition, they can take a more proactive approach and seek out clients with difficulties to renegotiate loans. The third option is to sell portfolios of loans in arrears.

Pan said, when commenting on the results of the first quarter, that it has been adopting restrictive measures since the fourth quarter of last year as it anticipated that the macroeconomic scenario would worsen. The issuing of cards fell 55.4% to 316,000 in the first quarter of this year from 708,000 in the third quarter of last year. Car loans, on the other hand, dropped 13.2% in the same base of comparison, going to R$2 billion from R$2.3 billion.

“We used to issue almost 200,000 cards a month, now we issue 100,000. We have reduced the pace by about 50%. Car loans were reduced by 15% to 20%. We are adapting our policies, our risk management, to the macro conditions,” Pan CEO Carlos Eduardo Guimarães told reporters.

According to him, the bank expects defaults to end the year near the current level of 6.8%. “We have a more restricted credit and tighter collection since the end of last year,” he said.

Inter CEO João Vitor Menin said that amid high interest rates in the country, the credit portfolio is expected to grow 50% this year and “maybe more than that” in 2023, depending on the macroeconomic scenario. According to him, there will be a slowdown this year compared with 2021, when the portfolio almost doubled, but there is still room for expansion, considering factors such as funding at competitive costs and high collateralization of the portfolio. After a strong growth of the credit card portfolio, a deceleration is expected this year, with a “better balance” with other products.

BV’s credit portfolio rose 5.6% year over year, to R$76.2 billion. Car loans were virtually stable, at R$41.3 billion, but origination dropped 18.5% in the quarter after a combination of a more conservative credit policy and a 24.7% drop in the used car sales market, according to data by Fenabrave, a trade group that represents vehicle distributors.

BV CEO Gabriel Ferreira says that at the turn of the third to the fourth quarter of last year the bank started to see pressure in the default rate. Since then, it has tightened credit and adjusted policies, which has already had an effect. This does not mean, however, that the performance of the automotive segment will no longer be a source of concern. “Defaults are already back in a sustainable level. What needed to be done has been done. But a key question is how long will this inflation shock last and, consequently, how long will be the period of high interest rates,” the CEO said.

Source: Valor International

https://valorinternational.globo.com

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Brazil will “dance” with U.S., China, Guedes says in Davos

Guedes met UBS CEO Colm Kelleher — Foto: Reprodução/Twitter/ME

Guedes met UBS CEO Colm Kelleher — Foto: Reprodução/Twitter/ME

Economy Minister Paulo Guedes said that “everyone is going after Brazil” at the World Economic Forum and that, with the turnaround in world geopolitics, the country will “dance” with the U.S. and China at the same time.

In a conversation with journalists, Mr. Guedes said that Brazil suffered pressure from both the United States and Europe in the wake of the war in Ukraine to stand on one side. But that now “nobody is cursing us” and Brazil is seen as a solution to energy and food crises.

As an example, he said that the new interest in Brazil with a series of bilateral meetings on Tuesday in Davos — with the CEOs of UBS, Mittal, Alibaba, Sem Merck, Claure Capital, YouTube, Canada Pension Plan Investment (CPP), as well as lunch with investors promoted by Itaú Unibanco.

“There is demand from 30 of the largest companies in the world, but we can’t supply everyone,” said the minister.

In the World Economic Forum, Brazil is almost absent from the agenda, without any specific debate. The public manifestations of most of the authorities present are about the size of a possible recession in the European Union, in the United Kingdom, and perhaps in the U.S. after next year. In other words, little is said about Brazil, except in restricted circles that know more about the country.

According to the minister, “people do not understand: the world has changed and Brazil’s position has improved.” He says that “Brazil has lost 30 years, it has not connected (with global value chains). China got out of poverty, Thailand, everyone went up, and Brazil was left hopping.”

The minister adds that with the crises caused by the pandemic and the war in Ukraine, other countries got into difficulties, but not Brazil. And so, in his vision, the country can redesign its production chains with new axes, such as renewable energy and semiconductors.

In this scenario, said Mr. Guedes, the pressures came on Brazil. He said that the Europeans asked Brazil if the country was on their side or on Russia’s, if it was with the Brics or with the OECD.

On the one hand, the U.S. Treasury Secretary Janet Yellen made it clear that Washington would redesign investment criteria and that the world will never be the same. In other words, the U.S. needs closer supply chains and reliable partners.

The way Brazil is going to stand, according to the minister, is to be “the guy that is going to give food and energy security to Europe. And the U.S., which Brazil is close to and a friend of, will not need to go to China.”

As for China, “the Chinese and the Americans had a synergy that lasted 30 years, then China grew and they started fighting. We are going to dance with both of them.

Furthermore, Brazil wants to accelerate its integration into the OECD. He said he has established a good relationship with Mathias Cormann, Secretary-General of the OECD, who will visit Brazil in the near future.

Source: Valor International

https://valorinternational.globo.com

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Analysis: Inflation nightmare is not over

The snapshot of inflation offered by mid-month inflation index IPCA-15 in May makes it clear that Brazil is still in inflation hell, unlike what Economy Minister Paulo Guedes said last week. Inflationary pressures remain widespread, with strong increases in the prices of services, industrial products, fuels and food at home. Even with the significant deflation of electricity rates, of 14.09%, the indicator rose 0.59%, well above the 0.45% of the consensus indicated by analysts consulted by Valor Data.

The 12-month inflation rose to 12.2% in May, the highest since November 2003, compared with 12.03% in April. It is much higher than the target for this year, of 3.5%.

Almost three-fourths of the items in the IPCA-15 for May went up, as shown by the diffusion index of 74.93%. This is lower than the 78.75% reading of the previous month, but well above the 67.57% of May 2021, according to figures from MCM Consultores Associados.

Inflation is still spread throughout the economy, despite the strong cycle of hikes in the Selic. The Central Bank raised Brazil’s benchmark interest rate to 12.75% a year from 2% in March 2021. In June, the rate will probably rise another 50 basis points, and a new hike in August cannot be ruled out.

Food-at-home prices helped to slow down the IPCA-15 to 0.59% in May from 1.73% in April, but the rise is still very significant. It rose to 1.71% from 3%, still a very strong increase. The 12-month inflation in this segment rose to 16.79% from 15.4%, MCM points out.

This high, persistent inflation of food-at-home prices helps to erode the popularity of President Jair Bolsonaro, especially among the lower-income population. The IPCA-15 for May, it is worth mentioning, measures inflation between the second half of April and the first half of this month.

The picture is also concerning in services inflation, which accelerated to 1% from 0.59% between April and May. The reopening of the economy, with the end of social distancing measures due to Covid-19, contributes to the significant rise in these prices, which in 12 months jumped to 8.16% from 6.68%.

Service underlying inflation — which concentrates the items that respond most to demand — also had a significant increase. It advanced to 0.98% in May from 0.67% in April, making the 12-month inflation jump to 8.36% from 7.4%, MCM figures show. The underlying services inflation excludes the domestic services, such as courses, tourism and communications, which are less affected by the economic cycle.

The collection of bad news doesn’t end here. Industrial goods saw inflation accelerate to 1.62% from 0.87%, as the Russia-Ukraine war contributes to problems in global supply chains, a process that had begun with the pandemic.

Prices of industrial goods rose 14.41% in the 12 months to May. It is the biggest increase since MCM records began, in July 2000. Until April, the increase was 13.7%.

The average of the five cores monitored more closely by the Central Bank once again showed a difficult picture for the fight against inflation. Measures that seek to reduce or eliminate the influence of the most volatile items, these five cores rose by an average of 1.1% in May, after rising 0.87% in April, according to MCM.

As a result, the 12-month inflation went to 10.14% from 9.34%, surpassing the double-digit level. It is another sign that inflation is not concentrated in a few items.

Electricity deflation was the main factor contributing to lower inflation in May. Since mid-April the green flag was turned on, which means that there are no additional charges on the electricity bill. As a result, the item dropped 14.09% in May’s IPCA-15.

Without this effect, the indicator would have risen 1.28%, instead of 0.59%. Fuel prices, which are President Bolsonaro’s obsession, rose 2.05% in May. This is a strong increase, although lower than the 7.54% seen in April.

Fuel prices, Bolsonaro's obsession, prompted another change in the command of Petrobras — Foto: Leo Pinheiro/Valor

Fuel prices, Bolsonaro’s obsession, prompted another change in the command of Petrobras — Foto: Leo Pinheiro/Valor

The dissatisfaction with the hike of these products explains another change in the management of Petrobras —the government announced Monday night the resignation of José Mauro Coelho as CEO of the state-owned company and the appointment of Caio Mário Paes de Andrade.

The panorama for inflation, as can be seen, is still complicated. Inflation hell is not behind us. This will probably require high interest rates for a long time, which will affect economic activity in the second half of the year and next year. The return of inflation to the target path, of 3.5% in 2022 and 3.25% in 2023, will not be easy.

Read more about inflation in Brazil.

Source: Valor International

https://valorinternational.globo.com

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Change at Petrobras increases uncertainty

One day after the government’s decision to change Petrobras CEO – the third in little more than a year – the market’s perception of risk regarding the company’s pricing policy has increased even more. The oil company’s board of directors meets on Wednesday, and the meeting may be decisive to define how long its pricing policy will remain shielded from the pressures by President Jair Bolsonaro. Through the federal government, Petrobras’s controlling shareholder, Mr. Bolsonaro is trying to make changes in the company to hold back diesel and gasoline prices in a scenario of rising inflation and proximity to the presidential elections, in October.

Although Petrobras’s governance guarantees a certain protection, the successive attempts of government interference create uncertainty and instability around the company, in the view of sector specialists and financial market operators. On Tuesday, Petrobras’s common shares closed at R$34.40, down 2.85%, while the preferred stock stood at R$31.60, down 2.92%. The government’s measures to control prices at the state-owned company are expected to be the target of discussion in Petrobras’s board.

Caio Mario Paes de Andrade — Foto: Denio Simões/Valor

Caio Mario Paes de Andrade — Foto: Denio Simões/Valor

Valor has learned that, at Wednesday’s meeting, the oil company’s independent board members will try to postpone the extraordinary general meeting that will be called, at the request of the federal government, to replace the current CEO José Mauro Coelho, with the nominee by the controlling shareholder, Caio Paes de Andrade.

If successful, the effort will allow the company to gain up to 45 days of protection for its pricing policy. This is because, by not putting the extraordinary general meeting on the agenda at the board meeting, the burden of calling it would be shifted to the federal government, which would have to do it in the next few days.

The call for the extraordinary general meeting is one topic of the board meeting, which was scheduled even before Mr. Coelho’s dismissal. Sources linked to Petrobras acknowledge that postponing the call is not simple, especially because there is a perception that most directors are aligned with the federal government. Of the 11 seats on the board, six are nominated by the federal government, four are representatives of minority shareholders and one represents the employees.

In the ongoing changes within Petrobras, it is not yet clear whether the federal government may also change other names on the board at the extraordinary general meeting, in addition to Mr. Coelho. The government would also be interested in replacing Petrobras’s executives.

On Monday, it became clear that Mr. Coelho, the current CEO, will remain in office until the meeting is held, the date of which will only be known after it is called. There is a minimum period for holding the meeting, which is 30 days from the call. But this time can be even longer, which means that the extraordinary general meeting can take place between the end of June and mid-July, two and a half months before the first round of vote in the presidential elections. It is a shorter period than the 100 days-freeze in price hikes intended by the government.

Until the extraordinary general meeting, Mr. Coelho will remain at the head of the company, since he did not resign, but was the target of a dismissal request by the federal government. The 8.87% increase in the price of diesel on May 10 led to his dismissal. A day later, Mr. Bolsonaro fired the former minister of Mines and Energy Bento Albuquerque, to whom Mr. Coelho was linked. Without a close interlocutor in the ministry, Mr. Coelho was isolated in the government and distant from the new Mines and Energy minister, Adolfo Sachsida, who is linked to Economy Minister Paulo Guedes, as well as Mr. Paes.

Mr. Coelho couldn’t hold on to his job even in a scenario of less pressure for hikes in oil product prices. The difference between fuel prices in the domestic market and abroad has been near zero, reducing the gap, that has exceeded 20% about three weeks ago. Diesel prices at the state-run company’s refineries were negotiated Tuesday, on average, 0.4% below import parity price, according to Stonex calculations.

The Brazilian Association of Fuel Importers (Abicom) indicated an average gap of 1% in diesel oil prices. According to XP Investimentos, diesel prices are 6.7% above those seen abroad. As for gasoline, prices are, on average, 2.1% below parity, according to StoneX calculations. XP Investimentos sees, however, a discount of 11.4% in domestic prices compared to the import parity price. The last hike of gasoline prices occurred on March 11, when the state-owned company raised prices in refineries by 18.8%.

Despite Mr. Paes de Andrade’s nomination, there are doubts about whether he can fulfill the legal requirements for the position. It will be up to the People Committee, linked to the Petrobras board, to analyze his résumé. Mr. Paes de Andrade is secretary for Debureaucratization at the Economy Ministry. With a degree in Social Communication by Universidade Paulista, Mr. Paes de Andrade reports two post-graduate degrees from U.S. universities, Duke and Harvard. Before joining the government, he ran internet providers (PSTNET, Web Force Ventures and HPG) and a digital platform for the real estate market (Maber), as well as agribusiness investments. In the government, he was the CEO of Serpro, a state-owned IT company that manages government data, and secretary of privatization. Like Mr. Sachsida, who was secretary of strategic affairs at the Economy Ministry, Mr. Paes de Andrade also reported to Paulo Guedes, but was a Bolsonarist before joining the minister’s team.

The head of the Brazilian Petroleum and Gas Institute (IBP), Eberaldo de Almeida Neto, said that maintaining the fuel price policy is key to keep the market supplied and draw investments in the sector.

The executive-president of Abicom, Sérgio Araújo, said he expects Mr. Andrade, once approved, to keep the commitment with the company’s shareholders and with the market, following international prices. For consultancy Control Risks, the new change in the head of the company represents an escalation in the government’s strategy of interfering in Petrobras. Ettore Marchetti, head of investments at EQI Asset, says, however, that it is necessary to consider that many countries in the world have also made or are considering policies to cushion fuel price shocks, which is a global phenomenon. The chief economist at BV Bank, Roberto Padovani, says that the behavior of the markets suggests that they are not moving in tandem with the news. “Of course it has an impact on the stock market, but the reading is that this is another noise created in an environment of many uncertainties.”

Source: Valor International

https://valorinternational.globo.com

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Projects recreate ecosystems in Amazon, Atlantic Forest

The restoration of forests in Brazil has been gaining supporters in the private sector and also in the public sector. Despite the long and uncertain way to go to reach the government’s goal of recovering 12 million hectares until 2030, recent initiatives like the one from newcomer re.green, the multinational packaging company Tetra Pak, the Floresta Viva program, the Brazilian Development Bank (BNDES), and the award-winning NGO Sociedade Chauá are in line with the objectives of the United Nations, which declared the current decade as one of ecosystem restoration. The success of actions in the Atlantic Forest and the Amazon represents the capture of more than 18 million tonnes of carbon and the reduction of the risk of extinction of more than 1.000 species, according to a study by the International Institute for Sustainability (IIS).

“We already are in a climate emergency and in one of mass extinction of biodiversity. We have less than a decade to avoid irreversible devastating consequences. Restoration at scale helps solve both crises”, says Bernardo Strassburg, one of the founders of re.green, created with the purpose of restoring at least 1 million hectares of forests, almost 10% of the national goal, which has made little progress. The initiative is ambitious and still unprecedented in the world. Its success will allow the capture of 15 million tonnes of CO2/year. The company is led by a group of specialists (Mr. Strassburg has provided consulting services to the UN, the World Bank, and Conservation International) and has names such as Armínio Fraga, Fábio Barbosa, and João Moreira Salles on its board.

re.green, which was born with R$359 million to finance the start of its operations, will recreate ecosystems in an identical compositions of those in the Atlantic Forest and Amazon, ensuring the integrity of the forest and its biodiversity. To do so, the team will collect samples in chosen areas to sequence all living organisms in that ecosystem, ensuring greater accuracy in defining the species present and, thus, the perpetuity of the vegetation. “This technique will generate a lot of science. We are talking to funding agencies. We want the areas to be a big international science playground. We know that there is still a lot to learn,” says Mr. Strassburg. The funds will come from the sale of carbon credits and environmental services.

Tetra Pak has chosen Brazil to invest in its forest restoration project, specifically the araucaria forests in the states of Paraná and Santa Catarina, as a way to reach the world target of neutralizing its emissions until 2030. The option for the South region of Brazil is due to the threat of extinction of the araucaria forest, which originally occupied 200,000 square kilometers in the region. Today, only 3% of its original formation is in good condition, equivalent to about 6,000 km2.

Valeria Michel — Foto: Silvia Costanti / Valor

Valeria Michel — Foto: Silvia Costanti / Valor

Tetra Pak’s goal is to create a biodiversity corridor between Paraná and Santa Catarina, reforesting 7,000 hectares. In the pilot project in Urubici (Santa Catarina), which started this year, methodologies will be tested to be replicated in the future for the restoration of the whole planned area. “Besides the restoration, there will also be payment for environmental services, both for the carbon to be generated and for the biodiversity, which is something new,” says Valéria Michel, Tetra Pak Brazil’s head of Sustainability.

Another initiative for the restoration of araucaria forest comes from the Chauá Society, headed by forest engineer Pablo Hoffmann, winner of the Whitley Award – seen as the “green Nobel” – for his work in the preservation of Brazilian biodiversity, research, and reforestation. Operating since 1997, Mr. Hoffmann and his team have built nurseries with more than 250 species (in general, projects use about 30 types).

The nursery has 210 types of plants native to the Araucaria forest alone. The work consists of mapping the plants in the fields, collecting the seeds, transporting them to the nursery, germinating them, and replanting them in the original system. “We always try to collect the maximum number of species with the greatest genetic diversity. This facilitates the perpetuation of the restoration over time. We focus on endangered species. This is the motivation for the project,” says Mr. Hoffmann.

The BNDES joined the forest restoration initiative through its Floresta Viva program, launched in 2021. The goal is to reach up to 33,000 hectares of restored area, capturing about 9 million tonnes of CO2. The match-funding program already has R$600 million (the goal was R$500 million but was exceeded in March) and 13 partner companies.

Source: Valor International

https://valorinternational.globo.com

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