Restrictions on Brazilian steel were imposed in 2018 during the Trump administration
06/14/2022
Restrictions on Brazilian steel were imposed in 2018 during the Trump administration — Foto: Reprodução/Severstal
The Biden administration has signaled to Brazil that it will not meet so soon the demand to review the quotas that limit the ingress of domestic steel in the U.S. market — although it has already made agreements with the European Union and Japan.
Valor has learned that the U.S. deputy secretary of commerce, Don Gaves, advised Brazilian representatives when he was in Brasília about a month ago that there was no political climate yet in the U.S. to deal with the review of the situation of Brazilian steelmakers.
However, the number 2 at the Commerce Department “promised to make the best efforts,” according to a source.
When asked recently in an interview about lifting tariffs on steel from China, the U.S. Trade Representative Katherine Tai said that “with respect to the tariffs, our approach, as with everything in this relationship, is to be strategic.”
The restrictions on Brazilian steel were imposed in 2018 during the Trump administration, despite President Donald Trump ideological affinity with the Bolsonaro administration. That was when Mr. Trump, amid trade tensions with China, decided that foreign steel threatened to “weaken national security” and imposed an additional 25% tariff on imports of steel products and 10% on aluminum imports, causing tremendous irritation in Washington allies who saw the measure as retaliation.
Of the $2.3 billion of steel that Brazil exports on average to the U.S. per year, 85% is semifinished products, that is, raw material for the American steel mills to make the final product.
Under President Joe Biden, the U.S. and the European Union reached in October an agreement whereby Washington kept the additional tariffs, but exempted a specific portion, allowing European companies to sell a certain “historical volume.”
Later, Washington struck a deal with Japan, another major ally, eliminating tariffs since April within an import quota of 1.25 million tonnes of Japanese steel — a volume still lower than the 1.8 million tonnes exported by Japan in 2018.
In the case of Brazil, the assessment in Brasília is that the Biden administration has no appetite to deal with trade. Last week, during the Summit of the Americas, the U.S. insisted on redesigning supply chains amid the new geopolitical situation, but showed nothing concrete, according to a source.
Brazil takes to WTO proposal to expand access of companies in public bids
06/13/2022
Lucas Ferraz — Foto: Edu Andrade/Ascom/ME
In negotiations to join the Agreement on Government Procurement (GPA) of the World Trade Organization (WTO), Brazil will make this week a new offer that expands accession for foreign companies in the country’s public procurement. This includes giving more room for foreigners to participate in bids in financial services subsectors and also in more states.
On Monday, Brazil will also submit to the WTO the request for accession to the organization’s Agreement on Trade in Civil Aircraft, as revealed by the Economy Ministry’s secretary of foreign trade, Lucas Ferraz, who is in Geneva for the conference of trade ministers.
The secretary said the negotiations to enter the GPA are advanced, “with preservation of our public policy space, especially the one focused on stimulating small and medium enterprises, health, and science and technology.”
For him, “Brazil’s joining the GPA will represent a turning point in the fight against corruption in public procurement in the country, increasing the efficiency of public spending and aligning Brazil’s regulatory framework with international best practices.”
According to the secretary, after the internal consultation process, “the country will be able to make some movements in financial subsectors,” confirming that this includes the insurance area.
So far, Brazil has increased to 10 from 6 the number of states, plus the Federal District (Brasília), that will allow foreign participation in public procurement of goods, services, and works. But industrialized countries are asking for the inclusion of states with “substantial procurement volumes,” such as São Paulo, Rio de Janeiro and Bahia.
Mr. Ferraz informed that the number of states to be presented in the new offer will be substantially higher. “In recent weeks, we have had strong demand from federal entities to join the agreement, after clear evidence of its benefits for public administration,” he said.
The expectation was that it could be accepted at the current WTO ministerial conference in what is known as the “anti-corruption deal” in global trade rules. But the appetite of industrialized countries is great and demands for further concessions continue.
Australia presented new demands last week. One of them is for Brazil to offer access also to bids in construction services of the Ministry of Defense. It also asked the inclusion in the procurement list of the National Nuclear Energy Commission and the Brazilian Space Agency.
Brazil had already signaled that it could improve its offer but warned its partners to keep their feet on the ground, because it would not give the full opening demanded by some. The Brazilian evaluation is that what is on the table is already an ambitious offer, especially being the first Latin American country to join this agreement.
As for seeking accession to the WTO Agreement on Trade in Civil Aircraft, the goal, according to the Economy Ministry, is to try to facilitate the country’s access to a world market estimated at around $3 trillion. Brazil is the only relevant aircraft producer and founding member of the WTO still outside the agreement, which came into force in 1980 and brings together 33 members of the organization.
This agreement eliminates the import tax on civil aircraft, their parts, pieces and other goods used in air services. It also prohibits quantitative restrictions, licenses, and certifications that restrict trade and are contrary to the General Agreement on Tariffs and Trade (GATT).
A participation in the agreement, according to Brazil, has the potential to reduce the negative impact of the Covid-19 pandemic on the airline industry, aggravated by the war in Ukraine, according to the government.
Selic rate is expected to be raised to 13.25% on Wednesday because of worsening inflation and fiscal risk
06/13/2022
With the Selic policy interest rate already in double digits since the beginning of the year and in significantly contractionary territory, the Central Bank’s Monetary Policy Committee (Copom) meets this week to deliver a new interest rate increase. The market consensus points to a 50 basis points hike, which would take the basic rate to 13.25%.
The decision, however, became even more uncertain. The de-anchoring of inflation expectations for 2023 has intensified since the last decision and, in addition, the deterioration in the balance of fiscal risks has given additional support to the possibility of a further increase in the Selic in August – a scenario that has already been captured in the survey carried out by Valor.
The survey was carried out between Thursday and Friday, after the release of Brazil’s benchmark inflation index IPCA for May and included 91 financial institutions and consulting firms. The midpoint of the projections collected by Valor indicates that the Selic rate should be raised by 50 basis points this week and by another 25 bp in August, when it would reach 13.5%, at the end of the current monetary tightening cycle. In the survey released on May 30, the consensus pointed to a Selic rate of 13.25% at the end of the cycle.
The increase in expectations for the Selic rate comes in the wake of a further deterioration in expected inflation ahead. If, in the survey carried out before Copom’s May meeting, expectations for the IPCA in 2023 were at 4%, they are now at 4.6%. It is worth remembering the relevant horizon for monetary policy currently includes only calendar year 2023 and that next year’s inflation target is 3.25%.
Cassiana Fernandez — Foto: Divulgação
“We expected that inflation would have already slowed down and the truth is that there is still inflationary pressure that is still very widespread and quite worrying in the composition,” notes J.P. Morgan’s chief economist for Brazil, Cassiana Fernandez. She also notes that this process has been reflected in the increase of inflationary expectations, especially in the relevant horizon for the Central Bank’s actions.
On Friday, J.P. Morgan began to see, in its baseline scenario, an even more extensive cycle of monetary tightening, with a final increase in the Selic in August. Ms. Fernandez notes that the Central Bank has promoted a very aggressive tightening cycle, raising the Selic by more than 1,000 bps since March 2021, which justifies the feeling that the cycle is nearing its end.
“The point is that it is still difficult to calibrate that end. And that is why I expect the Central Bank not only to deliver a 50 points hike, signaled in the last communication, but also to leave the door open for future movements, recognizing that, since the last meeting, there has been a worsening in the inflation scenario,” she says.
Fernando Gonçalves, superintendent of economic research at Itaú Unibanco, says it is unlikely that the Central Bank will interrupt the tightening cycle on Wednesday. “Even with the slightly better IPCA number for May, the cores are still extremely high and inflation has all the peculiarities of being persistent, quite widespread,” he says.
Itaú understands that Copom may indicate it foresees a new Selic increase in the August meeting. For Mr. Gonçalves, the statement may be similar to the last month’s decision, in which the committee gave strong signals, but opted to leave the next steps of monetary policy open, depending on the data.
Besides the two 50-point interest rate increases expected by Itaú, Mr. Gonçalves believes that in order to materialize the process of convergence of inflation expectations to the target, interest rates will need to remain at a high level for a very long period. “We can only see a cut in interest rates in the middle of next year. We know that long periods of relative stability in the Selic are not common in Brazil, but it will need to remain stationary to start exerting a greater influence of interest rates on the economy,” he argues.
Valor’s surveys have already captured an upward trend in expectations for the Selic rate at the end of 2023. Before the Copom meeting in May, the midpoint of the projections pointed to a basic interest rate of 9% next year. Now, the expectation is for a Selic at 9.75%, when bets that it will remain above 10% have increased.
The effort to try to cheapen fuel prices via tax exoneration is a fact expected to increase the uncertainties in the decision. “It has a considerably large deflationary potential, but the impacts would be temporary. Besides, the measures imply a worsening of the fiscal framework. As the discussion is ongoing, it may enter laterally in monetary policy via the balance of risks,” says economist Leonardo Costa, with ASA Investments.
For him, the measures worsen the balance of risks for meeting the targets in 2023. “Observing the attempts to control administered prices, I consider it an additional risk for the balance next year. Obviously you gain in inflation in the short term, at the cost of higher inflation in the medium term,” he points out.
Elisa Machado, chief economist at ARX Investimentos, who expects a Selic at 13.75% in the cycle, also believes that Copom may leave the next steps open, given the increased uncertainty and risks.
“Not only because of this view that there is no relief on the inflation side, but also because of these changes in [sales tax] ICMS, [social taxes] PIS/Cofins… On the one hand, this represents an increase in fiscal risk and. On the other hand, there would be a reduction of inflation in 2022, which would rise again in, disrupting the relevant horizon and throwing up inflation expectations for 2023,” emphasizes Ms. Machado.
Camila de Faria Lima, chief economist at Canvas Capital, defends a more open communication by the Central Bank given the high level of uncertainty. “However, I understand that if the Copom is effectively foreseeing the end of the high cycle, it would be better to make this vision explicit and, thus, guide market expectations,” she says. For her, this could happen with the indication of yet another residual hike or with the indication that the hike to be implemented this week marks the end of the cycle.
In its basic scenario, Canvas projects the Selic at 13.25% at the end of the cycle and 10% in 2023. Ms. Faria Lima recalls that the basic interest rate is already at a very contractionary level and that the most forceful effects on the economy are expected to appear in the second half. “Taking these aspects into account, in my opinion it is completely justifiable, in the scenario we have, to establish a credible inflation target for next year, extending the convergence to the center of the target to 2024,” she says.
Victor Candido, chief economist of RPS Capital, also adopts in his basic scenario the end of the cycle this week, with the Selic at 13.25%, although he points out the risks of a new high in August. For him, the Central Bank has already fulfilled the main part of its cycle and now only a “fine adjustment” remains. “I believe it will make the 50 bp hike that is priced into the curve and say it needs to evaluate the international scenario, the new internal risks and see how inflation itself will behave,” he predicts.
UNCTAD shows optimism about Brazil’s rise, unlike the rest of the world
06/10/2022
FDI flow to Brazil in 2021 reached $50.3 billion, up 77.9% from 2020 — Foto: Scott Eells/Bloomberg
Brazil was the sixth country that attracted the most Foreign Direct Investment (FDI) in 2021, climbing three positions in relation to the previous year, the World Investment Report released Thursday by the United Nations Agency for Trade and Development (UNCTAD) points out.
The expectation is that the country can continue to attract a good volume of productive foreign investment, although the global trend now is slowing down because of the war in Ukraine.
The FDI flow to Brazil in 2021 reached $50.3 billion, up 77.9% from 2020, when the country received $28.3 billion, according to Unctad’s consolidated figures.
In January, the UN agency had estimated that the flow to Brazil could have increased by more than 100% and the country would be the seventh-largest destination for real foreign investment.
“Brazil is an interesting case,” James Zhan, head of Unctad’s investment division, told Valor. “It is typically one of the largest recipients of FDI in the region and even among the most advanced developing countries.”
He notes that there was a strong recovery of investment in Brazil in 2021, but it has not yet resumed the level of 2019, before the pandemic, when the flow reached $65 billion. Last year, the flow was driven by the reinvestment of profits that multinationals had accumulated in recent years.
For Mr. Zhan, commodity prices may encourage multinationals to increase their investments in Brazil, expand existing operations and perhaps some new investments in the extractive industries and in the production of other commodities, such as in agriculture this year.
“That could be a kind of continued increase in investments for a full recovery of FDI in the country,” he said.
In 2021, Brazil was behind only the U.S., China, Hong Kong, Singapore and Canada as a recipient of FDI. And it attracted more productive resources than India, an economy that grows about 8% annually and is pointed out as one of the drivers of global expansion.
The FDI flow of $50.3 billion last year represented 18% of the gross fixed capital formation (GFCF), a measure of the productive capacity of an economy, compared to 11.8% in 2020.
The stock of FDI in Brazil totaled $592.7 billion at the end of 2021 (or -0.4% compared to the previous year) and represented 36.9% of the GDP compared to 41.1% in 2020.
The announcement of greenfield projects in Brazil reached $23.2 billion, or 35.1% more than in 2020. Mergers and acquisitions by foreigners in the country fell 45.7% between 2020 and 2021. The volume declined to $2.7 billion last year from $14.3 billion in 2018.
Overall, global foreign direct investment flows reached $1.6 trillion last year. Reinvested profits by subsidiaries of multinationals accounted for the bulk of this amount, reflecting a record high in profits for these companies in the wake of rising demand, low financing costs, and significant government support. Multinationals’ profitability doubled to 8.2% last year on average.
As for this year, UNCTAD sees “a significant risk” of the momentum for international investment recovery stopping untimely.
The global environment for international investment has changed dramatically with the war in Ukraine. New project activity already reflects increased risk aversion among investors.
Preliminary data for the first quarter show a 21% drop in greenfield projects. And international project financing fell by 4%.
Most of the top 5,000 multinationals have revised downward their earnings estimates for 2022 — but with differences that point to risks of setbacks in the energy transition.
The oil and gas industry forecasts an additional 22% gain and the coal industry another 32%, while the renewable power industries project a 22% drop in profits.
Other factors will negatively affect FDI in 2022. The spread of Covid-19 in China (with new lockdown measures) impacts global value chains.
Rising interest rates in several countries are also expected to slow down M&A activity and dampen growth in international project financing.
Negative financial market sentiment and signs of a looming recession could accelerate a fall in FDI. But UNCTAD also points to stabilizing factors. For example, large public support packages for infrastructure investment, with implementation over several years.
Challenging scenario, with strong inflation of construction costs, is unlikely to hinder competition
06/10/2022
Brazil’s new auction of airport concessions, scheduled for August 18, is expected to draw strong interest from the private sector. The challenging scenario in the infrastructure market, with strong inflation of construction costs, high interest rates and economic uncertainties, is unlikely to hinder competition, analysts told Valor.
The highlight of this 7th round is the block of Congonhas airport, in São Paulo. Any operator interested in the asset, considered one of the federal government’s “crown jewels,” will have to take some regional airports as well – 10 of them, located in Minas Gerais, Mato Grosso do Sul and Pará. This block of airports will receive R$5.9 billion in investments. The winner will be the one who offers the highest fixed concession payment – the minimum amount is R$740.1 million.
“It is hard to imagine that there will be no competition for a block that includes Congonhas. All the large groups that participated in the last rounds are analyzing it,” said Ricardo Fenelon, with law firm Fenelon Advogados.
This is an eagerly anticipated auction, said Fabio Falkenburger, a partner at law firm Machado Meyer. “Since this cycle of concessions began, all operators have been studying Congonhas. This asset has guaranteed air passenger traffic and great potential for commercial exploration,” he said.
The resilience of domestic flights after the peak of the pandemic also makes players more confident, said Daniel O’Czerny, head of global infrastructure finance for Latin America at Citi.
The participation of some groups is seen as certain, including CCR, France’s Vinci Airports and Spain’s Aena. Other large international operators already present in the country are strong candidates, including Switzerland’s Zurich Airport and Germany’s Fraport. The investment fund manager Pátria, which has been trying for some time to enter the airport industry, is not showing much interest, but is also considered a strong candidate.
The arrival of new players is not seen as likely, but considering the importance of the airpot in São Paulo, it is not ruled out either. Groups such as France’s ADP, Australia’s Macquarie and U.S.’s Houston Airport may take part.
The other two airport blocks included in the seventh round play second fiddle, but are also seen as good opportunities. The North block, which includes the airports of Belém and Macapá, will receive investment of R$875 million. The executive aviation block, formed by Campo de Marte (São Paulo) and Jacarepaguá (Rio de Janeiro), will draw R$560 million in construction works.
The North block is expected to draw medium-sized operators, such as Socicam. Vinci and Aena are also seen as natural candidates due to possible synergies with the airports they already operate. The French group has already won a first regional block in the North region last year, which includes airports in Manaus, Porto Velho, Boa Vista and Rio Branco. The Spanish company, on the other hand, has been operating six airports in the Northeast region since 2020.
Some analysts see the business aviation block as a question mark. But the government expects a successful auction, said Ronei Glanzmann, federal secretary of Civil Aviation.
“We have seen companies totally different from those that typically participate in auctions. It is a segment that involves three businesses: general aviation, real estate exploration and, especially in Jacarepaguá, fuel supply. The perception is that there may be multidisciplinary consortiums,” he said.
The scenario of economic instability, high interest rates and fast inflation of construction inputs have hindered infrastructure auctions this year, especially those of highways. In the case of the airport auction, market players say that these factors are unlikely to make it unfeasible.
For Elias de Souza, partner at Deloitte, the crisis scenario is likely to impact mainly the attraction of new operators. “I don’t think new groups will come for this auction. The current macroeconomic scenario requires more security. But those that already operate in the country know the local risks and are likely to bid,” he said.
According to a source that follows the auction closely, the advantage of airport projects is that the impact of cost inflation is somewhat lower and, in addition, operators have a greater variety of ancillary revenues. Mr. O’Czerny also notes that the range of airport operators already present in the country is much larger than in the road sector, which favors competition in the auctions.
Vinci and Zurich declined to comment. CCR said it is “attentive to opportunities.” Aena, Fraport and Pátria did not immediately reply to Valor’s requests for comment. Socicam said it is analyzing the projects.
Meanwhile, changes in management team of oil behemoth are also in standstill
06/10/2022
Fuel prices prompted change in the command of Petrobras — Foto: Leo Pinheiro/Valor
The double-digit gap between diesel prices in Brazil and abroad means that Petrobras could immediately raise costs to refineries, sources told Valor. The company, however, continues to analyze the market situation before deciding.
Consultants’ calculations indicate that the price of diesel that Petrobras charges from distributors is between 15% and 17.5% below international parity. In the case of gasoline, there are estimates that the price the state-owned charges from distributors in Brazil is 45% below the price negotiated in the Gulf of Mexico, one of the world’s main refining centers.
Meanwhile, the management changes intended by the government in the state-owned company, as part of President Jair Bolsonaro’s strategy to try and control fuel prices, continue to face difficulties.
On Wednesday, there was a meeting of the board of Petrobras. The company’s strategic planning was on the agenda, but the discussion turned to the state-owned company’s Eligibility Committee (Celeg), linked to the Personnel Committee (COPE). Celeg/COPE verifies if candidates for the board meet the necessary requirements and have no restrictions to run for the position, according to the internal rules of the company and the State-Owned Companies Law.
In a statement released on Thursday, Petrobras confirmed that the collegiate debated the day before a request made by the federal government, the company’s controlling shareholder, to replace the current CEO, José Mauro Coelho, by Caio Paes de Andrade, who is associated with Economy Minister Paulo Guedes. But there was no decision concerning this issue. A person familiar with the company said that “the analysis [of Mr. Paes de Andrade by Celeg] has not been made yet because the information is not ready.”
Mr. Paes de Andrade was nominated on May 23, through a letter from the Ministry of Mines and Energy (MME), which requested a shareholders’ meeting to elect him as a board member — the first step for him to become the company’s CEO to replace José Mauro Coelho. On May 25, the Petrobras collegiate met and concluded that it needed to wait until the federal government sent the list of eight candidates (including Mr. Paes de Andrade) to the Petrobras board, which has not yet happened.
Mr. Coelho, the current CEO of Petrobras, was elected in the shareholders’ meeting in April by an unbundled vote, and once he is removed all other members of the collegiate elected by the same system must go through a new election. Eight of the 11 members of the Petrobras board were elected by this method, which allows votes to be concentrated on certain candidates. These are the eight positions expected to be disputed once again in the meeting, which has not set a date so far.
This list seems to have become a point of conflict between independent advisors and the government. Celeg/COPE, after having received Mr. Paes de Andrade’s documents, is still waiting for the list of the other government candidates. The government, in turn, is trying to bring forward the result of the Eligibility Committee’s analysis to know if Mr. Paes de Andrade will be approved by the company’s governance bodies. The situation has become a kind of chess game, in which each party waits for the opponent’s move to define its own move. Meanwhile, almost nothing is happening.
After privatization by capital increase, government will hold about 40% of votes
06/10/2022
Investors say changes will help company gain efficiency — Foto: Domingos Peixoto/Agência O Globo
Eletrobras managed to price at R$42 each share in the mega stock offering that will privatize the company. Eletrobras sold 802.1 million shares, raising R$33.7 billion.
According to a Valor Data survey, in dollar terms, the amount represents a little more than twice the volume of Vale’s privatization, and 78% more than Banespa’s privatization. It was the second-largest privatization ever in the country, second only to that of telecoms company Telebras.
With the sale of part of shares held by the Brazilian Development Bank (BNDES) and especially the dilution of the federal government’s stake with the issuance of new shares, the government is no longer the controlling shareholder of Eletrobras — although it holds a golden share. The federal government and the BNDES go to 40.3% from 68.6% of the common shares (there is still a small participation of other government funds, not detailed in the prospectus), going to 36.9% of the total capital.
By early evening, the tug-of-war between banks and investors was concentrated on a R$0.5 difference, with the official range between R$42 and R$42.5. Relevant international investors, such as GIC and CPPIB, had tried to reduce the price (in the morning, the groups were pushing for shares between R$38.5 and R$39.5). With the high interest in the operation, around R$60 billion, the banks managed to raise the price. The Brazilian institutional group includes funds such as SPX and Truxt, already existing shareholders 3G Radar and Banco Clássico, and firms such as RWC and GQG.
Workers who invested using funds from the Workers’ Severance Fund (FGTS) will keep R$6 billion in shares, which was the maximum value for this type of reserve. According to Valor Investe, around 370,000 workers used the FGTS to make reserves for the shares — a demand higher than the 248,000 workers who joined, with the same fund, Petrobras’s offering in 2000, but lower than Vale’s offering, in 2002.
In the privatization process, the company wants to migrate to Novo Mercado — the strictest governance segment of B3. To keep the status of a corporation, the golden share gives the federal government veto power on changes in the bylaws, such as trying to change to 10% the limit of voting power for each shareholder or group. The company also defends the new composition, which prevents the controlling shareholder from creating a poison pill.
Privatization via capital increase also implies the payment of fixed concessions, concerning the renewal of concessions and the adoption of the operation regime — changing from the quota model to the independent production model, in which the plants can sell power at market price.
Although it is different from the classic privatization by auction, with the sale of government participation, the process has the same outcome. “Internally, the structure changes a lot. There is no longer need for a public hiring test, it is no longer under the control of the public spending watchdog TCU, it no longer fits into the law of state-owned companies, it is no longer a semi-public company,” said Vitor Rhein Schirato, founding partner of Daemon Investimentos.
These changes alone can already help the company gain efficiency, in the view of investors. “Historically, privatizations have been accompanied by higher productivity and competitiveness. The companies became more efficient and this in itself should boost competition in the sector, benefiting the consumer,” said Sergio Zanini, a partner at Galapagos.
With different projects and supporters in recent years, the privatization of Eletrobras was fraught with disbelief even after the public offering was filed (you never know when an injunction might come along). At the beginning of last year, Wilson Ferreira Jr. left the command of the company – to which he had agreed to return precisely to conduct the privatization – annoyed with actions in different wings of government to block the process.
Mr. Ferreira Jr., who currently heads Vibra, estimates that Eletrobras will be able to more than triple its investments, becoming a more efficient and competitive company. The management of a state-owned company “is a living hell,” the executive told newspaper O Estado de S. Paulo last week, describing complex and rigid decision-making. The company, on the other hand, will now assume risks that used to be shouldered by the controlling shareholder, such as hydrological risks.
Some people link Eletrobras’s privatization to the beginning of the electoral race – but the fact is that it materialized. “It was one of the government’s promises since the election and, for good or for bad, being able to deliver this offering, at this size, with this demand, is relevant for the government,” Mr. Zanini said.
In the base offer, Eletrobras issued 627.7 million new shares, and BNDES sold 69.8 million shares. An additional allotment added more 104.6 million to the offering.
*Maria Luíza Filgueiras, Manuela Tecchio — São Paulo
Mato Grosso-based institute proposes technical, financial cooperation to foster sustainable production
06/09/2022
The Mato Grosso Meat Institute (Imac) has started a movement to try and avoid the approval of new rules by the European Union that would impose trade barriers to livestock products from the state and the country because of deforestation.
In meetings with authorities in Belgium and Germany this week, members of Imac will present a proposal for technical and financial cooperation with Europe to foster sustainable production in Brazil, to remunerate the environmental services rendered, and improve the monitoring of the herds.
“We will suggest that the European Union participate with more influence and economic capacity in the Brazilian meat market, defining obligations for monitoring and inspection of the production chain, with the integrated cooperation of its links, to give support and structure an action plan that will allow the recovery of deforested areas without marginalizing cattle farmers, mostly small and medium-sized ones,” said Caio Penido, head of Imac.
The intention is to open a “channel of dialogue” with the Europeans. Imac wants to put together a more “proactive, constructive and inclusive” joint trade policy, capable of sharing costs and problems. The current assessment is that new European rules under discussion may exclude several producers that act legally, without reaching the objectives of environmental protection.
Among the points presented by Imac to the Europeans is the fact that the proposed regulation for the bloc does not consider the implementation costs and the economic impact borne by farmers for its regularization, nor does it treat companies that already apply compliance systems differently.
The institute suggests the “creation of incentives through remuneration for environmental services rendered, including in an integrated manner to the global carbon market” and the increase of import quotas with premium prices for properties that conserve biodiversity.
The institute also warns that the legal deforestation supported by the Brazilian Forest Code, of up to 20% of forest areas in the Amazon rainforest, for example, must be respected. According to Imac, the cattle farmers will not give up a certain gain with the production in a regular and productive area because of “generalist economic arguments.”
In the document presented to the Europeans, Imac highlights the control programs already implemented in the country. “The main problem of deforestation in Brazil, in the meat chain, is technological unavailability and lack of professional assistance,” it said.
The European proposal for “regulation of deforestation-free products” determines that imports will not be able to enter the European market if the production area is identified as being in a deforestation zone, which Brazilian cattle farmers consider a “boycott.”
The project may be analyzed by the Council of Ministers at the end of the month, and the final draft is expected to reach the European Parliament in July. Besides meat, the rules may affect other production chains, such as soy and coffee.
Analysts say fiscal risk, approaching end of the tightening cycle will stir interest rate curve
06/09/2022
Luiz Armando Sedrani — Foto: Divulgação
Even though they are at the highest level this year, long-term interest rates may not find so much support ahead for a stronger withdrawal of risk premiums. The market is already starting to see the end of the monetary tightening cycle over the coming months and, even though some agents see this event as important to unburden the market, the scenario for long-term rates is not very favorable, because fiscal and political risks continue to rise, at the same time as the Treasuries continue to go up.
The bets of the agents, therefore, have been concentrated on the steepening of the yield curve, that is, on a wider spread between long-term and short-term interest rates. At the moment, the spread between long and short rates is negative — in market jargon, the yield curve is inverted. On Wednesday, the difference between five- and ten-year interest rates was -0.635 points. In the view of market analysts, this difference tends to widen after the end of the monetary tightening cycle. This bet indicates the possibility of short interest rates falling significantly, or even the chance of long rates rising further.
“All the paths lead to a greater slope of the yield curve,” said Mauricio Oreng, head of macroeconomic research at Santander. He listed the factors that point to this scenario: the monetary tightening process in advanced economies, which has generated doubts about the natural level of interest rates; the inflation peak; the nearby end of Brazil’s benchmark interest rates Selic hike cycle; and the fiscal risks, which remain on the radar.
As for the international scenario, Mr. Oreng notes that international interest rates usually have an influence, especially on long-term rates. “We have this tightening scenario that may be faster than in other cycles for several central banks in developed countries and there is doubt whether in the future, when the cycle is over, interest rates will be at higher levels,” he said.
“The doubt is what the natural level of global interest rates will be in the future. Did we have an increase after all those inflationary impacts in the post-Covid, worsening of production chains, geopolitical tensions? It is a question mark that can bring the view that the natural interest rate in Brazil may have risen additionally,” Mr. Oreng said. He notes that, with the increase in fiscal risk during the pandemic, Brazil’s neutral interest rate rose to around 4% in real terms, in Santander’s calculations, and adds that it may be that the neutral interest rate will rise even more, depending on the global neutral interest rate.
As for domestic factors, fiscal risk is one of the issues that have often put pressure on long-term interest rates. In the last few days, the discussions about the sales ICMS tax and other tax cuts proposed by the federal government to contain fuel prices generated a strong rise in long-term rates, which reached their highest levels since October 2021. On Wednesday, the DI rate for January 2027 rose to 12.605% from 12.57%.
Besides the fiscal issues, one main factor cited by market analysts for betting on the steepening of the yield curve is the proximity of the end of the monetary tightening cycle. As soon as the Central Bank indicates that it has ended the process of raising interest rates, the market will start to include in the price of assets when the inverse movement will happen, which can generate a predisposition of the market to bet on the fall of shorter-term interest rates.
The CIO of BV Asset, Luiz Armando Sedrani, highlights the fact that Brazil is one of the few countries, among the world’s main economies, whose interest rate is already above current inflation levels, which can be translated into an advanced stage of the monetary tightening cycle.
According to him, global inflation caused by commodities may start to lose traction from now on. Moreover, when inflationary pressures more linked to economic activity in Brazil begin to give way, the disinflation movement may be faster than expected by financial agents. “This way, we have a preference for bets that benefit from the steepness of the yield curve. On the one hand, we believe that the Central Bank may cut rates sooner than expected. And, on the other hand, the increase in political risk also benefits the strategy,” states Mr. Sedrani.
In the context of better-than-expected fiscal results, the executive believes that it seems to be difficult to contain the government’s impetus to expand spending, especially in an election year. “We believe there will be pressure for more spending and the government will try to stimulate the economy. This concerns us, it has an impact on the yield curve, and so our bets are on steepening,” he argues.
Legacy Capital is another asset management company likely to increase positions that benefit from a greater spread between long and short interest rates, in view of the proximity of the end of Selic peak. “Whenever the cycle of interest rate hikes has been interrupted, the curve has steepened. For different reasons, but the slope always increases,” said Gustavo Pessoa, partner and manager of Legacy.
Legacy follows this process in Brazil and other countries, and it “has never failed,” Mr. Pessoa said. Thus, the firm maintains this position in the portfolio. “The difficulty is to understand when the cycle will be over. When the movement [of increasing the slope of the yield curve] happens, it tends to be abrupt and powerful,” he said.
Fernando Fenolio, the chief economist at WHG, evaluates that the bets on a wider spread between long and short interest rates are based on the view that the actions of the Central Bank are likely to influence short rates, while the fiscal risk can keep the long-term interest rate under pressure.
“If the Central Bank stops raising interest rates at the next meeting, in a scenario of high inflation and deteriorating expectations, the yield curve could steepen considerably with an inflation premium. It would mean a market reading that it [the monetary authority] would be interrupting the cycle at a moment when the work is not yet finished,” Mr. Fenolio said.
On the other hand, if the monetary authority ends the tightening cycle at a moment of cooling of current inflation and expectations, the inclination of the curve could occur at a lower magnitude. “In this case, the market would begin to project the interest rate cut cycle,” the economist said.
“But the premium for the fiscal situation could well dominate the steepening. In a more extreme scenario, if the fiscal risk rises too much, we could even see a need for the Central Bank to raise interest rates again and the curve to flatten again,” Mr. Fenolio said. He, however, stressed that this is not WHG’s baseline scenario.
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