Cities invest 65% more in first half

With cash reserves strengthened and personnel expenses contained, spending grows driven by health, education

09/12/2022

The municipalities invested a combined R$20.92 billion in the first half of 2022, a real advance of 64.8% compared to the same period in 2021. In comparison with the first half of 2018, the same period in the previous election cycle, investments grew 80.2%, showing an atypical behavior for the second year of the mayors’ mandate.

With this performance, considering also the investments made by the states, the sub-national governments were responsible for R$52.4 billion in investments from January to June this year, more than double the R$24.42 billion invested in the same period last year.

According to specialists, in the case of the municipalities, the numbers show a picture of the first half with investments driven by still restrained personnel expenses and the need to comply with constitutional minimum investments with higher absolute values for education and health.

The municipal revenues also had a favorable evolution in the first half, under the effect of the services sector, with the reopening of the economy, and by the transfers from the federal government and the states, in a reflection of cyclical factors still fattening the federal collection and sales tax ICMS collection. Specialists expect, however, that the second half of 2022 will bring a change in the scenario.

The advance in investments by municipalities was not restricted to a few. In the universe of 4,925 municipalities that submitted data to the National Treasury Secretariat (STN) for all the periods compared, 77% increased investments by more than 10% in the first half of this year compared with the same period in 2021, and 75% did so compared with the same period in 2018. Brazil has 5,570 municipalities. The sample, therefore, represents 88% of the total.

The advance in the combined investments of the municipalities was much higher than the real rise of 10.3% in current expenses compared to last year and 17.8% compared to 2018. Personnel expenses were also relatively flat, with a real increase of 3.6% compared to 2021 and 9.04% compared to 2018.

Kleber Castro — Foto: Leo Pinheiro/Valor

Kleber Castro — Foto: Leo Pinheiro/Valor

According to Kleber Castro, a consultant for the National Front of Mayors (FNP), there is a clear tendency to expand investments this year, although not at the same magnitude indicated from January to June. He explains that investments are not linear expenses and tend to gain steam as the fiscal year progresses, which can make the base of comparison of the first half too low.

Gabriel Leal de Barros, an economist at Ryo Asset, points out that the municipalities’ revenues, which in the first half of the year were favored both by their own collections, with the reopening of the economy and the recovery of services, and by transfers from the federal government and the states, are likely to slow down in the second half of this year. This tends to happen not only because of the expected slowdown in the economy, with effects on tax collection, with commodity price adjustments, but also as a result of ICMS reductions on regulated prices, Mr. Barros said.

Another factor that should also undergo adjustment and helped the revenues of about 900 municipalities in the first half of the year, Mr. Castro said, were the royalties and special participation from oil, which rose in line with the high prices of the commodity.

Complementary law 173/2020, which limited hiring and pay rises to civil servants, left more funds available for investments this year, Mr. Castro said. The restriction imposed by the law lasted until the end of 2021 and pay rises as of the beginning of this year can still have clearer effects on expenses in the second half or as of 2023, he said.

Cash reserves created a favorable scenario for large municipalities like São Paulo and Rio de Janeiro to put investment plans in place, Mr. Castro said.

At the top of the list in absolute values, São Paulo invested R$794.4 million between January and June, up 41.4% year-over-year in real terms. Yet, the amount is 12.9% lower than that of 2018.

Rio de Janeiro comes in second, with investments of R$485.7 million in the first half of the year, up from R$23.1 million last year and R$126.5 million in 2018.

Juliana Damasceno, an economist with Tendências Consultoria, said that the rise in investments may also have been driven by constitutional minimum spending on health and education. With the increase in revenues in 2021, part of the municipalities, says Ms. Damasceno, have not met the minimum for education and have until next year to adjust.

Besides a favorable fiscal situation in 2020 and 2021 that tends to be partly reversed at the end of this year, she said, the heating up of the economy, also influenced by fiscal stimuli, such as the early payment of the 13th salary – a mandatory year-end bonus – for retirees and pensioners and the authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts, may have increased the demand for investments.

With the expected slowdown in activity in the second half of the year and next year, she said, there is uncertainty about the sustainability of this scenario, both in terms of demand and funding sources.

*By Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Soybean crop poised to reach 150m tonnes for first time

2022/23 cycle will start to be planted next Sunday; production will grow 25m tonnes if weather cooperates

09/09/2022

Sowing of another Brazilian soybean crop will begin next Sunday, with all the signs of a new record. If the weather cooperates, as the current forecasts indicate, the harvest should be at least 25 million tonnes larger in the 2022/23 season and exceed the 150 million tonnes mark for the first time, with positive effects on the gross value of agricultural production, GDP and the country’s trade balance.

According to estimates released Thursday by the National Supply Company (Conab), the 2021/22 season totaled 125.6 million tonnes of soybeans, 9.1% less than in 2020/21, because of a strong harvest loss in the South region and part of Mato Grosso do Sul caused by drought. And, according to Conab’s first projections for the new cycle, production will now reach 150.4 million tonnes, in a crop area of 42.4 million hectares, 3.5% higher.

Thus, if in the 2021/22 cycle the flagship of agribusiness in the country represented 46.3% of the total grain harvest even with weather damages, in 2022/23 it will account for 48.8%, according to Conab. Private-sector consultants believe, however, that the volume may be even higher, provided that the influence of the La Niña phenomenon is mild. StoneX, for example, reckons that the planted area will grow 3.9% and, with better yields overall, production will reach 153.6 million tonnes.

“La Niña tends to result in drier weather in the South, which penalized the region’s 2021/22 season. However, the atmospheric phenomenon does not necessarily mean harvest losses, as the record result achieved in Rio Grande do Sul in 2020 shows,” the consulting firm said in a recent report. According to StoneX, planting will advance in all regions of Brazil. Mato Grosso will continue to lead production, and Rio Grande do Sul and Paraná will compete for second place.

After the waiting period, which is mandatory to prevent the spread of pests and diseases, the sowing will be released on October 11 in Paraná and Rondônia. In states like Mato Grosso, Mato Grosso do Sul and São Paulo, the green light comes on October 16, and farmers in Goiás will go to the fields on October 25. In Rio Grande do Sul, the waiting period will end only on October 10.

Although production costs have increased significantly, mainly due to higher fertilizer prices, the persistently high soybean prices in the international and domestic markets prop up the projections of higher production. In the Chicago exchange, the main reference for prices in this market, the benchmark second-position future contract is up more than 8% in 12 months, almost 43% in 24 months and around 60% in the last three years.

Sustained by firm global demand, mainly for the production of poultry and pork feed – and especially from China – these high prices are reflected in the gross value of agricultural production of the crop. According to the Ministry of Agriculture, production will reach R$350.6 billion in 2022, down 10.8% from 2021, because of the harvest loss, but the second-best result ever, up 123% from 10 years ago. And, as prices are steady, one can expect an advance proportional to the harvest in 2023.

Brazil is the largest producer and exporter of soybeans. And exports are expected to resume growth next year after a drop caused by lower availability in 2022. According to the Brazilian Association of Vegetable Oil Industries (Abiove), this year shipments of the grain will total 76.8 million tonnes, down 10.8% from 2021. Yet, revenues will grow 16.3% to $44.9 billion. Conab expects shipments of 92 million tonnes in 2023, while revenues are expected to exceed $50 billion.

*By Fernando Lopes — São Paulo

Source: Valor International

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Union seeks to reverse Mercedes layoffs

Automaker announced elimination of 3,600 jobs, including temporary contracts

09/09/2022

When announcing, this week, the plan to outsource part of the activities of the plant in São Bernardo do Campo, São Paulo, Mercedes-Benz hinted at the intention to give preference to nearby suppliers. An attempt for these companies to absorb the automaker’s workers who will lose their jobs. Moisés Selerges, head of the local metalworkers’ union, however, said that the solution is not that simple.

“There are no front axle manufacturers in the ABC region, for example,” Mr. Selerges said shortly after a workers’ meeting, at Mercedes’s doors on Thursday, which decided to paralyze work until Monday in protest against the company’s decision, which intends to eliminate 2,200 jobs linked to the areas that will be outsourced and will not renew the contracts of 1,400 temporary workers.

Mercedes’s outsourcing plan involves logistics, maintenance, tooling, laboratories, and manufacturing of axles and transmissions for medium-sized trucks.

In the negotiations with the company, which will start next Tuesday, the direction of the union intends, according to Mr. Selerges, to fight for the maintenance of jobs inside Mercedes. The leader recalled that, as the company says, the Brazilian market is strategic for the German group.

Mercedes CEO in Brazil, Achim Puchert, said that outsourcing aims to reduce costs and stop successive losses in the country. According to the executive, the Brazilian operation has failed to send dividends to the parent company in Germany since 2011.

“I believe that in these years the company has not delivered the expected results, but in the past, when other plants, like the one in the United States, were making losses, Brazil was sending money to Germany,” he said.

Mr. Selerges foresees a long negotiation and says this kind of subject must be discussed “very calmly.” It is not the time, he says, to talk about dismissal, buyout plan, or outsourcing. “It is time for dialogue to find paths. After all, the leader said, the German automaker’s employees “are proud to work there.”

*By Marli Olmos — São Paulo

Source: Valor International

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Diamante to invest R$5bn in gas-fired thermal power plants

Company announced joint venture with Qatar’s Nebras Power to invest in two projects in Santa Catarina

09/09/2022

Pedro Litsek — Foto: Divulgação

Pedro Litsek — Foto: Divulgação

Diamante Geração de Energia unveiled a joint venture with Nebras Power, an international energy investment company and a subsidiary of Qatar Electricity & Water Company (QWEC), to invest R$5 billion in two natural gas thermoelectric projects in Santa Catarina. Last year, the company had already acquired the 857 MW complex Jorge Lacerda, in Santa Catarina, from Engie Brasil Energia for R$325 million.

The first project foresees the construction of the Norte Catarinense thermoelectric plant, a 600 MW project bought from Engie, with investments of up to R$3 billion. It is expected to be located in Garuva. The second is a 440 MW generation unit, which will be set up inside the Jorge Lacerda thermoelectric plant, with an investment of up to R$2 billion.

Engie CEO Pedro Litsek said that in the joint venture, each party owns 50% of the projects and will jointly explore investments in the gas thermoelectric plants. According to him, the equity in these projects will be divided equally between the companies, with 30% of the total investment being made with their own capital.

“The first [project] is more prepared to participate in auctions, which is the Norte Catarinense thermoelectric. We already have the permit, land, and everything that is needed. The second project is in the final stages of the environmental permit within the Jorge Lacerda complex, and we hope to have this permit by the end of the year,” Mr. Litsek said.

The investment is conditioned on a guarantee of new revenues, should the company win the capacity auctions scheduled for 2023. The construction of the thermoelectric plants is expected to start the following year, and the projects should start operating in 2028.

The second venture, within the Jorge Lacerda complex, which has seven coal-fired generating units, plans to take advantage of the land and infrastructure already installed on the site to install a gas turbine. As an example, Mr. Litsek highlights the transmission and water lines already available.

The executive considers that the project has an important social side. Bill 712/19, which extended for 15 years, starting in 2025, the contracting of coal-fired thermoelectric plants, benefited the Jorge Lacerda thermoelectric complex, by means of an energy contract.

The former owner, Engie Brasil Energia, was considering shutting down the complex if it did not find a buyer, but the coal industry found a way out to make operations viable. The law also provided for the reallocation of the labor force of about 20,000 workers involved in the coal chain to other activities.

“The two projects will allow us to mobilize the manpower we already have to be used in these new ventures,” Mr. Litsek said.

The challenge for Diamante to be competitive in the auction and, in the future, in maintaining the thermal plants, are the gas supply guarantees. The Garuva project is more strategic and can even initiate the operation of the LNG (liquefied natural gas) terminal that is being built in the Port of São Francisco do Sul.

“We are close to the connection point of the New Fortress Energy terminal on the Bolivia-Brazil pipeline, and we see the gas for the Norte Catarinense Thermoelectric coming from this terminal,” Mr. Litsek said.

*By Robson Rodrigues — São Paulo

Source: Valor International

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Ibema mulls new pulp mill in Paraná

Studies are in an advanced stage and are expected to be submitted for approval later this year

09/08/2022

Nilton Saraiva — Foto: Divulgação

Nilton Saraiva — Foto: Divulgação

Ibema, a cardboard maker that has Suzano as a shareholder, is studying the feasibility of building a new mill to make bleached chemi-thermomechanical pulp, or BCTMP, in Turvo, Paraná. The estimated investment in the unit, which will have a production capacity of up to 160,000 tonnes of raw material per year and is expected to be Brazil’s largest one, was not disclosed, since negotiations with suppliers are still underway.

The studies are in an advanced stage and are expected to be submitted for approval later this year, CEO Nilton Saraiva said. This way, the construction work could start, at the latest, by the second quarter of 2023. “This plant will have Brazil’s most modern BCTMP production process,” he said.

About 40% of the additional BCTMP production will be used by Ibema and 60% will be supplied to Suzano through a long-term contract and at market prices. The new plant will meet the companies’ current demand and support future expansions in cardboard production.

“The BCTMP project will considerably improve the return of the capacity expansion projects that are currently being studied by both companies,” said Fabio Almeida, Suzano’s executive director of paper and packaging, in a note.

The investment will also allow for an increase in both margins and quality of the cardboard paper, which is used in packaging production, produced by Ibema. There will be gains in rigidity and printing, for example.

Ibema’s cardboard output, which is operating at the limit of its capacity, is expected to exceed 150,000 tonnes this year. In 2023, through initiatives to streamline production, the output should reach 160,000 tonnes. The company has plants in Turvo and Embu das Artes, São Paulo.

“The project brings us more control over the supply chain, which is important because of customer service and brings greater competitiveness in terms of costs,” the executive said. Today, the company exports about 25% of its cardboard output despite mounting quality requirements in the international market.

According to Mr. Saraiva, Ibema has already secured the necessary volumes of wood to supply the new plant, considering its own crop and third-party inputs. The mechanical pulp contains 80% eucalyptus and 20% pine.

Looking at the industrial assets, the Turvo plant will specialize in cardboard produced from virgin fiber, while the Embu das Artes plant output will be focused on recycled paper, another strategic market for the company.

In 2019, the company launched Ibema Ritagli, the first post-consumer triplex cardboard in the Brazilian market, with 50% recycled fiber, of which 30% comes from post-consumption. Today, about 7% of total revenue comes from products with post-consumer trimmings. Ibema Impona, in turn, is composed of post-industrial trimmings.

According to Mr. Saraiva, the domestic demand for cardboard is still strong and exports had to be reduced to ensure domestic supply. The domestic market is expected to grow by 2% to 3% in volume.

The demand for cardboard remains steady, especially in the pharmaceutical and delivery segments and in those where plastic is being replaced by more sustainable materials like disposable cups. The demand from end consumers for products with a greater sustainability footprint, such as cards with post-consumption trimming, has also ensured sales growth. “This brings opportunities in circular economy projects,” he said.

*By Stella Fontes — São Paulo

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Raízen starts integrating Biosev’s sugarcane suppliers

350 farmers will have access to access to rural credit, technologies and input purchasing pool

09/08/2022

A year and a half after agreeing to buy Biosev from Louis Dreyfus Company (LDC), Raízen is starting to integrate the company’s sugarcane suppliers into its relationship dynamics with farmers. In total, 350 farmers will have access to the company’s initiatives such as access to rural credit, technologies and an input purchasing pool.

With the addition of these producers to its base, Raízen will have around 2,000 sugarcane suppliers, which represent half of the volume of raw material processed. In the 2022/23 season, they are expected to harvest around 40 million tonnes, half of the almost 80 million tonnes the company is expected to crush in this cycle, as Raízen itself indicated in its last earnings report.

The integration of suppliers is the last step in the union of Biosev’s business with Raízen. The transaction, closed for R$3.6 billion and exchange of shares with Biosev’s former shareholders, increased Raízen’s crushing capacity by 30 million tonnes per cycle, making it account for one-fifth of the sugarcane processed in the South-Central region.

Offering relationship programs to these and its other sugarcane suppliers is a crucial part of Raízen’s strategy to ensure the supply of raw material at a time when the sugar-and-ethanol industry faces a shortage of sugarcane.

Amid low productivity, the mills face increasing competition. There is also fierce competition with the advance in soybean cultivation, which has reduced sugarcane fields.

One strategy has been to include the new suppliers in a pool of input purchases led by Raízen in its Cultivar program, which results in cost reductions by increasing the scale of purchases.

Ricardo Berni — Foto: Divulgação

Ricardo Berni — Foto: Divulgação

The company expects Biosev’s former producers to start joining the pool in the next crop, said Ricardo Berni, Raízen’s agribusiness director. In the last season, the organization of the pool allowed the company and 282 producers to circumvent cost inflation aggravated by the war in Ukraine at the end of the season, resulting in a savings of R$71 million, compared to R$295 million committed with inputs.

In general, the savings are around 7% to 10% in relation to market prices. In three harvests, Raízen and 200 suppliers – mostly large ones – saved R$120 million.

“More than the savings, farmers now have access to information, better logistics, and predictability,” Mr. Berni said. As many suppliers also produce other crops, the partnership can help them with other activities.

The former suppliers of Biosev’s plants will also be able to access rural credit Raízen intermediates with Santander. Last season, the company facilitated the granting of R$120 million in credit from the bank to its suppliers.

Between 20% and 25% of the producers that integrate the Cultivar program tap the line of credit. Through the program, Raízen speeds up the concession of credit to farmers, reducing the red tape normally faced by individual farmers.

The company does not reveal estimates of the pace of integration of Biosev producers to its input purchase and agricultural credit programs, but expects “good adhesion,” assures Mr. Berni. The challenge is to access regions where Raízen was not present before, such as Ribeirão Preto (São Paulo), Minas Gerais and the Biosev cluster in Mato Grosso do Sul.

Some suppliers coming from Biosev are already accessing technologies that Raízen fosters in its startup hub, Pulse, in Piracicaba (São Paulo). The company has been promoting 24 tools developed there with producers from the Cultivar program. “With the scale we have acquired, we can transfer much more technology,” said Mr. Berni.

According to him, the “triad” of solutions offered – formed by the Cultivar program tools, the Elos program, more focused on sustainability, and Pulse – intends to “raise the level of profitability and productivity” of producers, who continue to be harassed by competition in the segment and by the expansion of soybean plantations.

Raízen also indicated that it expects to consolidate until the end of this harvest a program that will reward suppliers that improve their environmental and social practices. The plan is to offer better conditions to producers with “excellence in sustainability,” such as priority access to the purchasing pool, discounts on products and more attractive rates.

*By Camila Souza Ramos — São Paulo

Source: Valor International

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CSN concludes purchase of cement company

Benjamin Steinbruch signed check for R$5.2bn to take over LafargeHolcim’s operations in Brazil

09/08/2022

Benjamin Steinbruch — Foto: Claudio Belli/Valor

Benjamin Steinbruch — Foto: Claudio Belli/Valor

By signing a check for R$5.2 billion, businessman Benjamin Steinbruch, the main shareholder of steelmaker Companhia Siderúrgica Nacional (CSN), concluded on Tuesday the purchase of the cement company LafargeHolcim Brasil, unveiled one year ago. The deal was approved by CADE, the country’s antitrust watchdog, in August and was not contested within the usual period of 15 days. In dollar terms, the acquisition was closed for $1.025 billion – at the exchange rate of R$5.7 to the dollar at the time, the value was equivalent to R$5.8 billion.

In a notice of material fact, CSN said its subsidiary CSN Cimentos S.A., which concentrates the group’s cement manufacturing and sales operations, takes over 100% of the shares of LafargeHolcim (Brasil) S.A. As a result, the company acquired from the French-Swiss group Holcim is now called CSN Cimentos Brasil S.A. and becomes a wholly owned subsidiary.

Last year, Mr. Steinbruch’s cement company also acquired Paraíba-based Cimento Elizabeth for R$1.1 billion.

The acquisitions of Elizabeth and LafargeHolcim elevated CSN to the rank of Brazil’s second-largest cement producer, behind only Votorantim Cimentos and just ahead of InterCement Brasil. Total annualized production and sales of the new CSN Cimentos are estimated at 12 million tonnes – a volume to be confirmed by the end of 2023.

Holcim representatives arrived in Brazil on Monday to define the last details of the deal – and receive the check from Mr. Steinbruch’s hands. They met with him and had dinner with CSN executives, the businessman said during an event held by Valor. CSN was awarded in the Metallurgy and Steelmaking category.

“I am paying this semester, until the end of the year, R$9 billion in acquisitions,” Mr. Steinbruch said, listing the purchases of the cement company, Rio Grande do Sul-based power generation company CEEE-G, and two other companies in the sector (Energética Chapecó and Santa Ana Energética).

According to the businessman, the group has a project to invest more in power generation, with emphasis on renewable energy, such as solar. The goal is to supply the group’s own demand. The manufacture of cement is electricity intensive.

CSN already owns a thermal plant (235 MW) in the steel plant of Volta Redonda (Rio de Janeiro) and stakes in the hydroelectric plants of Itá (in the South region) and Igarapava (between Minas Gerais and São Paulo).

LafargeHolcim brings a net revenue of R$2.15 billion obtained in 2021, with an EBITDA of 64.2%, to CSN Cimentos. Ten operational units (integrated plants, mills and blending) in the states of Paraíba, Bahia, Espírito Santo, Minas Gerais, Rio de Janeiro, Goiás and São Paulo will be integrated by the group, with a capacity of 10.3 million tonnes a year.

After the two deals, CSN Cimentos has 13 plants in Brazil.

*By Ivo Ribeiro — São Paulo

Source: Valor International

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Central Bank cools expectations of rate cut in early 2023

Lack of consistency in inflation projections still worries asset managers

09/08/2022

The Central Bank has tried to cool expectations that it will start reducing Brazil’s key interest rate as early as the first quarter of 2023. The fact that short-term inflation slowed down and commodity prices went south in the international market was a determinant to bringing down future interest rates in the last few days. This backdrop paved the way for the market to price in the yield curve the key rate, known as Selic, below 13.75% per year as early as March 2023.

The rise in future rates on Tuesday partly eliminated this variation. Yet, some market participants still expect interest rate cuts early next year.

Central Bank President Roberto Campos Neto told the audience at an event held by Valor on Monday that the monetary authority is not thinking about lowering interest rates at this moment. He has also reinforced the message of the last meeting of the Monetary Policy Committee (Copom), in August, when the Central Bank indicated that it will analyze the need for raising the Selic once more. Mr. Campos Neto’s message was reinforced by Bruno Serra Fernandes, the bank’s monetary policy director, who showed concern on Tuesday about the de-anchoring of inflation expectations for 2024 – the median is 3.43%.

“The work of the Central Bank has already been done. It recognizes this and has signaled that, from now on, it must remain cautious in order to bring inflation expectations to the target. We agree. The Central Bank must remain cautious, but we also think that this stance will make inflation converge to the target,” said Gustavo Pessoa, a partner and fixed-income manager at Legacy Capital. The firm’s baseline scenario includes rate cuts starting in March 2023.

“Since inflation is just starting to slow down, the Central Bank doesn’t want to commit to cuts, but reality will weigh in. Inflation has started to give way strongly, and not only because of the government’s measures. And this lower inflation has left the real interest rate [ex-ante] close to 9%, a level that will be enough to make inflation converge to the target. This will allow the Central Bank to start cutting interest rates at some point,” Mr. Pessoa said.

In Legacy’s view, in March 2023 the monetary authority will look, in particular, at inflation for 2024 on the relevant horizon, whose expectation is today at 3.43%. “We expect expectations to anchor again and the median of 2024 projections to return to 3% by March. The Focus expectations will probably drop, given the Selic rate level. So it would be a natural path for the Central Bank to start cutting interest rates. We think this will happen as of March, and how fast interest rates will drop depends a lot on inflation dynamics here and abroad,” he said.

On Monday, the yield curve was pricing a cut of about 0.20 percentage points in March 2023 as the starting point for an easing cycle. After the market closed on Tuesday, there was a relevant repricing, and the market stopped betting on cuts in the first quarter of next year.

Alexandre de Ázara, the chief economist of UBS BB, believes that Mr. Campos Neto wants to combat expectations of a premature start to the easing cycle. “I believe he said that it is important to maintain interest rates flat for a while. In my view, the Central Bank doesn’t like to see the market price cuts in the first quarter and I think he wanted to fix that,” he said.

Mr. Ázara believes it is early to price a cut in the first quarter, but sees room for stronger cuts throughout next year, as of June. UBS BB projects that in 2023 the Central Bank will make four 100-basis-point cut in the Selic rate, starting in the second meeting of the second quarter, and a final 50-basis-point reduction in 2023. In addition, the bank expects the cycle to continue in 2024, with the Selic reaching 7.75%.

“This will help inflation to converge to the target in 2024. If it falls too slowly, inflation will not converge in 2024. If it falls too early, it will not converge in 2023,” said Mr. Ázara, whose projection for Brazil’s official inflation index IPCA next year is 4%, well below the market consensus of 5.27%.

Cooler commodity prices in the international market have been key for the downward variation in short-term interest rates in recent weeks. Brent oil prices, now close to $90, drew attention.

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

“For two and a half years, commodities put upward pressure on inflation. It was a headwind that is now changing a little into a tailwind. I think this factor hindered the Central Bank a lot, but now it can be helpful,” said José Carlos Carvalho, a partner and head of macroeconomics at Vinci Partners. Yet, he recalled that services inflation is still under pressure. “Activity is still strong and should remain that way, but commodity-related prices more than make up for the rise in services.”

Mr. Carvalho believes that the Central Bank closed the monetary tightening cycle with the Selic at 13.75% and has a downward trajectory of interest rates ahead, considering that the real interest rate in Brazil is between 7% and 8%. According to him, these are quite high levels, well above the natural rate of interest, which is around 4%. “With help from commodities and the time for monetary policy to make its effect, the cycle of Selic hikes is over. There is no reason for the Central Bank to deliver even higher interest rates,” he said.

The cycle of interest rate reduction is related to the new federal administration and its fiscal policy, the executive with Vinci said. “In the first quarter of 2023, the Central Bank will still want to understand the fiscal policy of the next administration. In the second quarter, if it is the right thing to do, it can start thinking about cutting interest rates,” Mr. Carvalho said.

The fiscal policy is precisely one point highlighted by Tomás Goulart, the chief economist of Novus Capital, to advocate the view that the key interest rate is unlikely to start being reduced at the beginning of next year. He also cited the level of interest rates in developed countries, especially in the United States.

“The fiscal anchor is the first condition for the Central Bank to start reducing the Selic. It must know what the fiscal anchor will look like in the next administration, given the fact that the spending cap has lost credibility,” he said, citing the rule created to limit growth in public spending to the previous year’s inflation, which was circumvented by the Bolsonaro administration. The monetary authority will only feel ready to start easing the Selic when it finds out which fiscal regime will prevail in Brazil, he said.

“And then, considering the legislative process, we still don’t know what the next administration will be and what will be proposed in terms of an anchor. There is no clarity at the moment. And the legislative process to replace the fiscal anchor and pass something in Congress that has credibility should take around six months, that is, it will be time-consuming,” he said. When assessing the necessary conditions for the Central Bank to start reducing the key interest rate, Mr. Goulart said that such a cycle may start in June or August 2023.

*By Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

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Business leaders press for overhauls, fiscal austerity

Leaders of companies that stand out in 27 sectors intend to increase investments in 2023

09/05/2022

Fiscal responsibility and an environment that provides security to private-sector investments are the basis of the model that Brazil must pursue in the next four years, according to the executives that run the most efficient companies in the country.

For this recipe to work, tax and administrative reforms were defended as priorities by the businesspeople that gathered on Monday during the “Valor 1000” award event, which highlights the companies with the best performance in 27 sectors.

Frederic Kachar, managing director of print media and radio at Grupo Globo, highlighted the renewal of winners in the categories: of the 27 winners, 12 are different from the previous year. “This shows the dynamism and how relevant companies emerge in Brazil every year,” he said. Mr. Kachar emphasized that the winning companies show “concern in developing the entire country with operations in all regions.”

“We are celebrating much more than good financial results. We celebrate the values that companies have embraced and must continue to pursue as well. Efficiency, capacity to invest and innovate, environmental protection, employee and community development, for example,” said Maria Fernanda Delmas, Valor’s editorial director.

Although they see 2023 as a still challenging year, due to the need to keep fighting inflation and the still adverse external scenario, most leading companies in each sector intend to increase or maintain the volume of investments compared to 2022. The executives also emphasize the importance of ensuring social advances in the country.

Alexandre Birman, CEO of Arezzo&Co, defends the respect for the spending cap and says that “just as businesspeople need to efficiently manage the generation, allocation, and distribution of their resources, the government must do the same. It is necessary to fight ‘huge money leaks’ so that the funds are directed to the priorities.” Among these, he lists food, education, and health.

Copel CEO Daniel Slaviero agrees that the first priority is the goal of balancing public accounts, which, in his view, will create the necessary conditions for the resumption of sustainable growth, based on the confidence of the private sector. But he points out that the “government will need to establish, together with society, the size of the indispensable social safety net for the neediest population.”

This is also one concern of B3 CEO Gilson Finkelsztain. He stressed the importance of a favorable environment for the strengthening of Brazilian companies so that they contribute to the generation of employment and income. However, he cited urgent issues like “bridging the educational gap, which widened during the pandemic, and having a growth structure that contributes to reducing inequalities in the country.”

Jeane Tsuitsui — Foto: Silvia Costanti/Valor

Jeane Tsuitsui — Foto: Silvia Costanti/Valor

The balance between fiscal austerity and inclusive public policies can come from increased public-private partnerships and investment in technologies that raise the efficiency of services provided to the population. For this reason, Jeane Tsutsui, CEO of Grupo Fleury, advocated an advance in health access policies, with incentives and partnerships that “bring quality care and primary care solutions to low-income populations,” such as telemedicine and digital devices.

In addition to fiscal austerity, Thiago Muramatsu, CEO of Syn Prop & Tech, lists as necessary fronts for action “the adjustment of interest rates, inflation control, and unemployment reduction.” Randon CEO Sérgio Carvalho said it is necessary to move forward with structural overhauls, an infrastructure plan and the efficiency of public management. “These are fundamental pillars to boost the country’s economy, with the potential to improve the business environment and stimulate Brazilian companies to grow, generate wealth and sustainably develop their communities.”

Reflecting on his area of expertise, Eduardo Parente, CEO of the Yduqs group, points out that in basic education it is key to improve “training and continuous development of teachers” in addition to “ways to raise the quality and mitigate regional inequalities of the public education system, which is very comprehensive but needs to deliver more quality.” As for higher education, expanding access of lower-income people to universities should be a priority, he said.

Whirlpool Chairman João Carlos Brega said that “there is no silver bullet,” but considers that the “resumption of the country’s growth and the construction of a safe, stable and attractive institutional environment for investments, capable of providing dignity, well-being and prosperity to Brazilians” depend on an agenda that includes tax and administrative overhauls, and expansion of investments in infrastructure. But he recalled that “society has a very important role to play” in pressing presidential candidates and in presenting new agendas during the electoral campaign.

A tax overhaul designed by executives was considered by WEG CEO Harry Schmelzer Jr. as the “number 1 priority.” He said that it “should include tax breaks for payrolls, investments, and exports, avoiding the accumulation of tax credits and also paying attention to the simplification and reduction of the bureaucracy of the processes.” The rationalization of the tax system also appears as one of the priorities of TIM CEO Alberto Griselli, along with the greater integration of Brazilian companies into international production chains and a “great effort to modernize the Brazilian educational system.” A similar vision is shared by Localiza CEO Bruno Lasansky, for whom investment in education and entrepreneurship is fundamental: “These are fronts with high potential to drive social transformation.”

For Milton Maluhy Filho, CEO of Itaú Unibanco, “controlling inflation and ending the cycle of high interest rates are two major short-term priorities,” since a more robust resumption of growth depends on them, with job and income generation. The continuity of the structural overhauls, especially the administrative and tax ones, is his third priority. Marcelo Arantes, the chief people, marketing and press relations officer at Braskem, listed as priorities maintaining the industry’s competitiveness and legal security, and encouraging job generation.

Suzano CEO Walter Schalka sees a weak world economy in 2023, possibly heading towards recession, which will demand attention in business management. “Although we work with products that present greater inelasticity in consumption, it is necessary to pay attention to the economy to be prepared,” he said, considering that a “fiscal contraction seems inevitable” in the country. World inflation and the cycle of high interest rates in rich countries and its effects on Brazil are also on CSN’s radar. However, CEO Benjamin Steinbruch points out that Brazil “brought forward the rise in interest rates,” which forces down inflation, and, with fiscal control, it will be possible to “put the economy back on track, getting Brazil out of the crisis.”

Among others, Viveo CEO Leonardo Byrro has an optimistic point of view. He evaluates that inflation may converge to something more feasible and point to a reduction in interest rates at the end of the year or in the first quarter of 2023, which unlocks growth and consumption and helps to resume spending.

This scenario gives confidence for an increase in investments. Therefore, even considering the impact of the recent rise in interest rates on fundraising, Airton Gallinari, CEO of Coamo, says that “investments should be at least 50% higher than the R$588 million in the two years 2021/2022.” São Martinho has a similar concern. “For future growth and investments, we will have to be more diligent in capital allocation. This is a discipline we implemented in 2010 and never deviated from it,” CEO Fabio Venturelli said.

*By Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Inflation expectations for 2024 rise as market expects smaller rate cut

Economists are anticipating a more challenging scenario for the Central Bank to meet inflation targets

09/05/2022

Central Bank's building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Fuel tax cuts will remain in place next year, which lowered financial market inflation expectations for 2023 but did not prevent them to rise in 2024 – a year that is already entering the monetary policy radar.

And the market has begun to factor in fewer interest rate cuts next year, anticipating a more challenging scenario for the Central Bank to meet inflation targets.

The Central Bank’s Focus survey with analysts, released Monday morning, shows that the market’s median projection for inflation in 2023 has dropped to 5.27% from 5.3%. It is the third consecutive week of decline in market projections for inflation.

This drop may be linked to the fact that fuel tax cuts will remain in place next year, per the budget bill. The measure, which some market analysts had already priced in, has the potential to lower inflation by 0.6 percentage points next year.

But the measure could also have a negative effect in the longer term because it increases the fiscal risk. In fact, the market’s median inflation forecast for 2024 increased again this week, to 3.43% from 3.41%.

The deterioration in inflation expectations for 2024 is of particular concern because the Central Bank has lengthened the time frame in which it intends to bring inflation to the target. Today, the Central Bank manipulates interest rates with a view to bringing inflation to the target in the first quarter of 2024.

The Central Bank has signaled that it is reaching the end of the monetary tightening cycle. But some analysts believe, according to the Focus survey, that the Central Bank will have to tighten the key interest rate Selic more, or at least postpone interest rate cuts.

The distribution of expectations about interest rates, released Monday by the Central Bank, shows that 80% of analysts think that the monetary authority will leave interest rates stable at 13.75% in the next meeting, in two weeks, keeping them at this level thereafter. But 20% predict a further increase, to 14% per year.

The market is calculating that there will be less room for interest rate cuts in 2023. Before, the median of the analysts’ projections indicated an interest rate of 11% per year at the end of 2023; now, they see the rate at 11.25% per year.

Besides the worsening of fiscal risk after the budget bill was sent to Congress, inflation expectations for 2024 may have been influenced by the second-quarter GDP data, which show that the economy is growing above expectations – a development that may hinder the Central Bank’s efforts to slow down inflation.

The map of the distribution of inflation expectations shows that only a little more than a quarter of economic analysts believe that inflation will stay within the target in 2024, set at 3%.

More than 30% of analysts think it will stay well above the target, in the range between 3.68% and 4.28%. The mapping also shows an upward bias in expectations for 2025, with about 40% of analysts projecting inflation above the target of 3%.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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