Ultragaz goes beyond LPG with Neogás purchase

Ultra’s company has already entered distributed generation

11/22/2022

Tabajara Bertelli — Foto: Claudio Belli/Valor

Tabajara Bertelli — Foto: Claudio Belli/Valor

A few weeks after the acquisition of startup Stella and getting into distributed solar power generation, Ultragaz — the liquefied petroleum gas (LPG) distributor of Ultra group — made a new strategic move to consolidate itself as an energy company with a diversified portfolio. For R$165 million, the company purchased Neogás, a leader in compressed natural gas (CNG) distribution in the country, with an eye on the energy transition and the potential of the biomethane market.

Founded 22 years ago, Neogás was the pioneer in CNG distribution in Brazil and operates six compression bases installed in São Paulo, Rio de Janeiro, Paraná, and Rio Grande do Sul with an estimated production capacity of 100 million cubic meters per year, the same volume produced in 2021.

The distributor also has a fleet of 149 trucks, a customer portfolio complementary to that of Ultragaz, with large industrial consumers mainly far from the coast, and supplies 50 gas stations, in addition to providing logistics services to natural gas distributors.

“The main point [with the acquisition] is to unlock the biomethane market, which has a huge potential in the country,” Tabajara Bertelli Costa, CEO of Ultragaz, told Valor. Today, according to the executive, the domestic production of gas corresponds to only 3% of the potential.

As with the acquisition of the distributed generation startup, the strategy with Neogás is to take advantage of the strength of the Ultragaz brand and its broad commercial bases — over 58,000 companies and 11 million families served throughout Brazil — to offer new products and services to customers.

The expansion of access to natural gas and biomethane is expected to especially benefit industries that are more distant from pipelines and distribution networks. At the same time, by connecting biomethane producers — who are in landfills or near sugar and ethanol mills — and end customers, Ultragaz’s expectation is to accelerate the development of this sector.

“Distributed generation already exists and may be very relevant in the coming years. Now, the vision is to develop the biomethane production chain”, said Mr. Bertelli. Ultragaz’s plan, according to the executive, is not to become a producer of gas, although there may be some incursion of this nature to learn more about the technologies or to promote the value chain.

The intention, stressed the executive, is not to be a large producer of biomethane. It is necessary to know the technologies and better understand the market, eventually encouraging the production to ensure that the product reaches the market with a proper price. The focus, however, remains on the last mile. “The idea is to do the same thing that was done with LPG,” he said.

Although today the Neogás operation is concentrated in the South and Southeast, the ambition is to expand the supply to other Brazilian regions. Ultragaz has advanced conversations with customers that may result in the installation of compression stations, which by business logic should be close to the market, in new locations and, consequently, in new biomethane production centers. “Ultragaz brings logistical expertise,” said the executive.

While Stella is likely to remain as a subsidiary of Ultragaz, the plan for Neogás is to incorporate it in the future. From the beginning, the commercial area will be already integrated, according to the executive. The closing of the operation still depends on certain conditions, including approval by the antitrust watchdog Cade.

According to Mr. Bertelli, there is growing demand from customers for different types of energy, particularly those that meet the sustainability commitments made by companies. Another factor that will probably drive the market and the energy transition itself is the concern with supply security.

Ultragaz is still unable to measure the additional revenues from its latest acquisition. However, the company’s CEO says, there are several opportunities to be seized. “There is a lot happening in renewable energy, but we are looking at where we have a differentiated operation. The vision is to accelerate the energy transition process, and this way we are potentially building a new Ultragaz,” he added.

The Ultra group’s company had already been studying a renewable LPG, obtained from raw materials such as ethanol, biodiesel and chemical residues. The main challenge, according to Mr. Bertelli, is to reach a commercially competitive product. LPG of fossil origin can be transported in a canister. Through a partnership, the first BioGLP flame in the country was produced in 2021. The next step will be to check the commercial viability.

*By Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Fiscal uncertainty increases Brazilian assets’ risk premium

Difference between Brazilian and U.S. real interest rates increases again after elections

11/22/2022

Thiago Mendez — Foto: Leo Pinheiro/Valor

Thiago Mendez — Foto: Leo Pinheiro/Valor

One barometer of the size of the premium demanded by the market is the spread between Brazil’s long-term real interest rate and the U.S. benchmark real rate. Real interest is the indicator that usually represents the true gain from an investment, since it discounts inflation.

The relative resilience of Brazilian assets to the risk aversion in global markets had been reducing the risk premium of local assets throughout the year until very recently. This trend has begun to reverse. Since early November, investors have started to demand a higher risk premium for domestic assets amid heightened uncertainty regarding the sustainability of the public debt in the long term.

In March, at the peak of the discussions about this year’s budget and with the start of the monetary tightening cycle in the United States, the difference between the rate of NTN-Bs (Brazil’s National Treasury notes) maturing in May 2055 and the 10-year U.S. real interest rate was close to 7 percentage points. Since then, the spread has fallen to 4.07 points on November 3, but is now approaching 5 points again.

“We had a very tight election in Brazil, with discussion about what the country’s fiscal framework will be. There is a vague speech of the future administration about combining fiscal and social responsibility, but there is great uncertainty about what will be done and how. In this context, the Brazilian assets had little risk premium,” said Thiago Mendez, head of fixed-income strategies at Bahia Asset Management. Taking the interest rate market as an example, he recalled that the curve priced Brazil against the world in 2023, and the country was expected to be among the first ones to cut interest rates.

“A little while ago, the market priced a cycle of almost 4 percentage points of Selic drop, which would indicate a rate below 10% [per year], even as the United States and Europe will still raise interest rates next year,” said Mr. Mendez. He points out that the agents got excited with the possibility of an orthodox person to take over the Ministry of Finance, but said that, in face of the signaling of a large volume of spending wanted by the elected administration for next year, the real increase in spending is “very big.”

“The risk premium situation of Brazilian assets, which was low, has completely reversed. Abroad, we saw the pricing of interest rate hikes in the United States decrease. The market started to bet on interest rate cuts there, while in Brazil we saw the opposite. Any priced drop is out of the yield curve,” he said. “At this moment, the market considers more likely that the Central Bank will raise interest rates again in the short term.” In this sense, the firm chose to have few positions in Brazilian assets at the moment.

According to the manager, the strong upward movement of interest rates in the last few days has led Brazilian fixed-income alternatives to once again present a “relevant” premium, which reflects the uncertainty with debt sustainability. “We are navigating an environment of great uncertainty in the short term. Volatility will continue to be high, especially in interest rates. The more expenses, the harder it will be for the Central Bank to start reducing interest rates. Given the premiums, if the world helps and Brazil has a credible fiscal framework, assets may once again have room to behave well, but it is still too early for this. In addition, the new administration has not given any concrete signs that it will move along these lines,” he said.

Since the market jitters seen on November 10, the performance of local assets has been very much tied to Brasília and to information about the Transition PEC – a proposal to amend the Constitution aimed at excluding Brazil’s main social program from the spending cap – and about who will lead the Ministry of Finance in the next administration. The disclosure of an alternative PEC, which provides for R$70 billion in expenses above the cap rather than R$198 billion, gave support to the markets on Monday and helped to reduce the risk premium of Brazilian assets. Yet, the high uncertainty prevails and still generates a demand from investors for a premium.

If the Transition PEC is passed with nearly R$200 billion excluded from the cap, as indicated by the first draft forwarded by the transition team to Congress last week, the primary deficit of 2023 could reach a “dangerous” level for the behavior of country risk measured by five-year CDS contracts, said Marco Antonio Caruso, the chief economist of Banco Original.

The bank compared Brazil’s primary result as a proportion of the GDP with the difference between Brazil’s five-year CDS and the average of other emerging countries from 2007 to 2019. Original excluded two exceptional periods: Luiz Inácio Lula da Silva’s first term in office (2003 to 2006), when the CDS remained high due to market fears about his fiscal policy, but in fact surpluses were produced; and the pandemic, when government spending rose to around 10% of GDP, but the market was “tolerant” because it understood that it was an emergency situation.

“Apart from these two periods, we saw that the higher the surplus, the higher the premium of our CDS against the other emerging economies, and the opposite is also true,” said Mr. Caruso. For him, this was already expected, given that the CDS acts as “insurance” against a debtor – in this case, the federal government. “It reflects, in some way, the possibility of a worsening or improvement in the public accounts,” he said.

According to Original’s calculations, the “magic number” that would trigger an excessive worsening of Brazil’s risk measured by the five-year CDS is close to 1% of GDP. “That is, deficits higher than 1% of GDP, looking at Brazilian history, end up triggering a much worse CDS,” said Mr. Caruso.

Original’s estimate for the primary result in 2023 was close to zero. However, if the Transition PEC is approved with an amount close to R$200 billion, this deficit could be around 1.5% of GDP, he said.

The primary surplus that does not make the Brazilian debt explosive is estimated at 2% of GDP, according to the economist. “If the government starts with a deficit much larger than 1%, it is so far away from the 2% [surplus] that it starts to be politically very difficult. If the government started with a smaller deficit and had a signal that this 2% would be reached, maybe the market would settle down,” said Mr. Caruso. The duration of the waiver (permission to spend above the cap), whether it will be permanent or not, and its size “matter a lot” to the market, the economist said.

Not by chance, as noted by Ian Lima, fixed-income manager at Porto Investimentos, the discussion around the Transition PEC without the participation of the economic group that makes up the transition team generated bad mood among market participants. “The market interprets the PEC as a political proposal, not an economic one. The Ministry of Finance and the Ministry of Planning, which will have to comply with what was determined, did not participate in the discussion about what the budget will be. The pilot is not present and the market tends not to like this kind of behavior,” said Mr. Lima.

When referring to the interest rate market specifically, Mr. Lima notes that the market has interpreted the Central Bank’s next move as an interest rate cut, but points out that since it is not possible to see a sustainable growth scenario or debt stabilization, to the extent that it is still difficult to say what the fiscal policy will be, caution with bets on interest rate cuts predominates.

“From the market jitters of the 10th to now, we understand that this is not the time to simply reduce the positions to zero. We left a mix a little shorter, because the whole curve widened and we are, therefore, with shorter positions,” said the manager from Porto Investimentos.

When looking at the long end of the real yield curve, however, Mr. Lima opts for a more careful tone. “It has a premium. A real interest rate above 6.3% doesn’t seem to make sense in historical terms, but we have a discussion about fiscal imbalance and nothing concrete yet about debt sustainability,” he said.

The head of finance at a large local bank says that among Brazilian assets, implied inflation and long-term interest rates are the assets that are currently trading at a positive premium, while the stock market and the real are still trading at a negative premium. “This means that local stocks and the currency are relatively expensive compared to rates and implied inflation, especially,” this source said on condition of anonymity.

“While the tax discussion has been very bad, nothing concrete has been decided yet, but most of the bad news has been fully incorporated into the inflation market,” the executive said. According to Warren Renaissance data, on Monday the “implied” inflation priced by NTN-B maturing May 2025 was at 7.06%.

“Without the proper fiscal support, not even a politically independent Central Bank can control inflation,” analysts at A.C. Pastore & Associados wrote in a report to clients. For them, only with primary surpluses that allow compliance with the government’s budget constraint will it be possible to preserve macroeconomic stability.

*By Victor Rezende, Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Alternative proposals in Senate will force Lula’s team to negotiate

Senator Tasso Jereissati will file a proposal to amend the Constitution suggesting a way to ensure monthly payments for cash-transfer program

22/11/2022

Tasso Jereissati — Foto: André Coelho/Valor

Tasso Jereissati — Foto: André Coelho/Valor

Senator Tasso Jereissati will file a proposal to amend the Constitution (PEC) suggesting an alternative way to ensure monthly payments of R$600 for the cash-transfer program Bolsa Família (current Auxílio Brasil) in 2023. Mr. Jereissati’s idea is to increase the budget limit foreseen for next year by R$80 billion, an amount that would definitively expand the basis for calculating the spending cap the following years.

This is the second proposal that has emerged in recent days as an alternative to the blueprint prepared by the Worker’s Party’s (PT) transition team, providing R$198 billion in expenses outside the spending cap next year. The first was unveiled last Saturday by another PSDB senator, Alessandro Vieira, of Sergipe, and proposes to exclude R$70 billion from the spending cap for extra spending in 2023.

The emergence of yet another proposal reinforces the expectation that the transition team will have to negotiate. In the view of public accounts experts and some members of Congress, R$198 billion is an exaggerated amount to leave outside the cap, just as they criticize the idea of removing Bolsa Família from the spending limit for good.

Mr. Jereissati argues that with more R$80 billion the new administration can both adjust the value of Bolsa Família and expand spending in important areas such as health, education, science, technology and culture, including a real increase in the minimum wage. This bill is criticized, however, by Workers’ Party senators. They say that R$80 billion would be enough just to guarantee the value of the Bolsa Família at R$600 and an additional payment of R$150 per child up to six years old.

According to former Finance Minister Nelson Barbosa, a member of the presidential transition team, the new administration is able to expand the 2023 budget by up to R$136 billion, even outside the spending cap, without generating fiscal expansion.

The debate about fiscal expansion is not directly related to the spending cap, which is being discussed in the Transition proposal to amend the constitution, the so-called Transition PEC.

According to Mr. Barbosa, the federal administration’s primary expenses are expected to end this year at nearly 19% of GDP, while the 2023 budget bill foresees primary expenses at 17.6% of GDP. The R$136 billion, in this case, would correspond to a difference of nearly 1.4 percentage points of GDP.

Given these numbers, he considered insufficient the R$70 billion of additional spending to be provided by the alternative PEC filed by Senator Alessandro Vieira.

Mr. Barbosa made these statements at the Centro Cultural Banco do Brasil (CCBB), where Mr. Lula’s transition team is working.

At the same place, the vice-president of the Worker’s Party and reelected federal deputy José Guimarães said that the expenses included in the Transition PEC represent an attempt to define spending “as low as possible.” In other words, he suggested that a lower amount than the one proposed by the elected government would not be enough to meet social demands.

Another member of the transition team, Senator Randolfe Rodrigues said that the blueprint of the PEC may be presented this Tuesday. According to the senator, the blueprint is expected to provide the exclusion of the cash-transfer program from the spending cap for four years. The deadline was defended by Mr. Guimarães and by the Workers’ Party’s head, Gleisi Hoffmann.

Mr. Rodrigues also said that the counterparts to ensure fiscal balance may come in the same text of the PEC or the medium term.

A member of the regional development technical group, the senator said he received the data with an “alarming scenario” from the current administration. Last year, R$700 million was spent on Civil Defense actions, he said. For 2023, only R$120 million were set aside.

There was also a distortion, in the senator’s opinion, in the allocation of funds. “In 2018, 19% of regional development funds were allocated from parliamentary amendments, in 2022 this represents 64%,” he said, criticizing the system of rapporteur amendments, also called the secret budget.

Mr. Guimarães also said that the inclusion of the rapporteur’s amendments in the PEC “was never” discussed with the Chamber of Deputies Speaker Arthur Lira.

“This issue was never part of our talks,” he told reporters after being asked if this possibility, raised by Deputy Ricardo Barros, could help the PEC to move forward in Congress.

According to Federal Deputy Guimarães, “there is a great spirit of goodwill to approve the PEC.” “Everything has to be negotiated, nobody can impose it,” he said. He also said that from now until next Wednesday, the PEC negotiation will be “unlocked.”

While the political group discusses the PEC that will enable the payment of R$600 for Bolsa Família, the economic team analyzes several proposals for the new fiscal rule. Mr. Barbosa said that the transition team will present a recommendation on the topic in mid-December.

In the former minister’s opinion, the suggestions presented so far converge on the importance of establishing a sustainable debt trajectory as a relevant concept.

He also stated that there is a “reasonable consensus” in the transition team regarding the importance of a tax proposal that implements a value-added tax. According to him, Congress seems to have converged towards the adoption of the dual VAT, that is, a federal tax and another state tax. That is how it is described in PEC 110 report.

“This is a theme to be matured and approved in 2023 to be in effect as of 2024,” he added.

The same calendar applies to Income Tax reform, which, in his opinion, is not mature. Thus, he believes that there will be plenty of time to seek an agreement on the collection of income tax on dividend distributions.

*By Renan Truffi, Vandson Lima, Anaïs Fernandes, Estevão Taiar, Lu Aiko Otta, Caetano Tonet, Matheus Schuch — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Investors look abroad amid doubts about fiscal policy

Wealth and asset management firms see more interest in foreign assets after election

11/21/2022

Roberto Lee — Foto: Silvia Costanti / Valor

Roberto Lee — Foto: Silvia Costanti / Valor

The market jitters caused by doubts about what Brazil’s fiscal policy will look like as of 2023 left everything cheaper, from stocks to long-term fixed-income bonds to the local currency. But instead of taking advantage of low prices, some investors are moving part of their funds abroad, especially after the runoff vote held on October 30. A novelty is that investors have sought U.S. Treasuries, which are widely seen as safe havens, despite the fat premium offered by similar assets in Brazil.

Avenue, a U.S.-based asset management company, saw the number of account openings grew three times above pre-election averages, while remittance volumes more than doubled, reaching on some days more than five times the average of previous quarters, said Roberto Lee, the platform’s founding partner. He declined to reveal the numbers because of the sale of the business to Itaú, which was agreed earlier this year and still depends on the approval of regulators.

Mr. Lee expected this move to end five or six days after the election, but it is still in place. “It is a phenomenon that doesn’t happen only in Brazil. Investors usually wait for the results [of an election or other event] to decide whether to send 20% or 40% [of their portfolios].”

In his view, this is not a capital flight, but Brazilians figuring out that it is worthwhile having part of the portfolio in hard currency.

What draws attention, however, is the destination of this money – short-term Treasury bonds, the more traditional U.S. fixed-income alternative and an asset almost as liquid as cash, which is now remunerating at a level not seen in the past. “That shows that it’s an alternative for capital protection, safety reserve,” said Mr. Lee. “It makes perfect sense, because it’s a broader market that has the safest securities.”

In this type of remittance, the amounts are larger than those destined for the stock market, he added.

In the last two weeks, after the runoff vote confirmed that Luiz Inácio Lula da Silva will be Brazil’s president again from 2023 on, the interest in sending part of the portfolio abroad gained steam, said Thiago de Castro, a partner and CEO of the wealth management company Tag Investimentos. “Investors think that in this new term he [the president-elect] won’t follow the basics of what was the first Lula administration. They see an angrier Lula focused on social policies, as he has always been, but without the fiscal responsibility seen in the past. They expect him to rule like the first term of [former President] Dilma [Rousseff],” who was picked by Mr. Lula to succeed him 12 years ago.

The view of the firm was already that regardless of who wins, the solution to go over the constitutionally established spending cap would be to tax structures that affect the top of the pyramid, from private family funds to inheritances and dividends. “Regardless of the taxation, because there will be taxes abroad as well, people are more interested in having funds in hard currency abroad,” said Mr. Castro. Investors now keep 20% of their portfolios abroad. Mr. Castro believes that this share will increase.

With about R$11 billion under management, Mr. Castro says that at least 20 clients who had no exposure to international assets started a conversation about that. “It was very reactive,” he said, despite expecting two difficult years for developed economies amid interest rate hikes and the economic slowdown expected in the United States, Europe, and China.

But unlike in Brazil, where investors compare their investments with the interbank deposit rate (CDI) on a monthly basis, Mr. Castro perceives an increase in the remittance of funds with the objective of preserving capital. “They look at how the S&P500 has behaved over the last 20 years. They are prepared to seek returns in more developed markets leaving behind eventual premiums that fixed income gives us in Brazil every cycle like the one we are experiencing.”

B.Side, two movements could be seen, said Antonio Costa, CEO of the wealth team: the expansion of the share abroad by families that had already invested in international markets and a greater interest by those who have not yet taken this step. “After the election, many clients approached us to ask what to do in this regard,” he said. “I think it’s natural when you change the status quo and there are no definitions about the government plan, what the Transition PEC [proposal to amend the Constitution] will look like, and who will be in the economic team.” The executive does not consider, however, such movement as capital flight. The Transition PEC is being proposed by Mr. Lula’s team to finance Brazil’s main social programs.

Mr. Costa’s clients are families with at least R$10 million in assets. According to him, this type of client already has interests abroad, use currency hedging, and holds stocks and other assets. As there are also significant risks out there, with geopolitical tensions, tightened financial conditions in developed countries, and the fear of recession, his clients prefer U.S. Treasuries as well. “Despite the overperformance of the S&P500 in recent days, volatility can still hurt a bit,” said Mr. Costa.

Wealth management firms Alloc and Portofino have also identified increased investor interest in international alternatives.

Two weeks ago, Guide was telling its investors to set up some hedges because the market opened up this opportunity in the first trading sessions after the election. One way to do that was to allocate in IVVB11, the S&P500 ETF traded on B3, said Fernando Siqueira, head of research at Guide. It is a way to capture the appreciation of the U.S. stock market and the depreciation of the real without having to send money abroad.

With the recent devaluation of Brazilian assets, the suggestion has already been revised, because prices in the local market have become attractive again, but some investors prefer to hold the bond that replicates the U.S. stock market index. “As much as our vision is that with Lula’s election the chance is that he will repeat what he did between 2003 and 2010 [in his two previous terms], many people doubt and prefer to stay out [of the stock market],” he said.

This move has not accelerated particularly after the election, according to Mr. Siqueira, but those who were disappointed by the defeat of President Jair Bolsonaro have been inclined to do that.

As for the local stock market, the specialist says he already sees good companies trading at a discount, including WEG, Vale, and Gerdau, and some others more linked to the domestic economy, such as Arezzo, Multiplan, and Totvs.

“There are good-quality companies with high margins, which are good cash generators, are not in debt, and fell 10% to 15%. They are buying opportunities,” said Mr. Siqueira. “Others will suffer a lot to pay [their obligations] because of higher interest rates.”

For those who prefer to bet on the Ibovespa ETF, the specialist said the current level – Brazil’s benchmark stock index is just below 110,000 points – is a good entry point, but that in this case investors must lengthen their investment horizon. “There will be volatility because you don’t know what the new administration is going to do. It could test the limits of the market again.”

By Adriana Cotias — São Paulo

https://valorinternational.globo.com/
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Infrastructure concessions to draw R$173bn by 2027

Abdib indicates an increase in investment in 2022, but the volume falls far short of what is needed

11/21/2022

The infrastructure sector could generate R$173.1 billion in new private-sector investments by 2027. Projects auctioned since 2019 account for R$96.2 billion of that. The remaining R$76.9 billion would come from auctions to be held in the coming years, according to data compiled by the Brazilian Association of Infrastructure and Base Industries (Abdib) in an annual publication that includes all federal, state, and major city projects in the country.

Despite the substantial volume, the amount is still far short of what is needed to reduce Brazil’s logistical hurdles. The association calculates that it would be necessary to invest R$374 billion per year in infrastructure over the next decade, including public and private-sector funds.

The auctions held in the last four years have already had a positive impact. By 2022, there should be a 10% annual increase in investments in the sector, to R$163 billion, considering public and private-sector disbursements, compared with R$148 billion in 2021. However, the gap between the construction works required and those effectively carried out will continue to be wide, at R$211 billion this year.

Even with the perspective of new private-sector investments in the next years, Abdib’s projections indicate that the total amount will not even reach the peak seen in 2014, of R$207.5 billion (figure adjusted to 2021 prices).

Brazil must increase public investment substantially for numbers to recover, said Abdib’s head Venilton Tadini.

“The concessions program will remain in place, both the federal ones and those put in place by states. This is irreversible. However, the significant increase in private-sector investment is not enough to compensate for the big drop we have seen in public investment. There is a limit to make cuts in a budget,” said Mr. Tadini.

For him, the transportation and logistics sector – roads, railroads, ports, airports, and urban mobility – is likely to be the main focus of the next administrations.

First, because it is still largely under the responsibility of governments. “Segments such as power and telecommunications are already in the hands of private-sector groups. But in transportation and logistics, there are limitations for that to happen, due to scale and returns, which are not always attractive,” said Mr. Tadini.

In addition, this is the segment with the biggest investment gap in the country. In 2021, R$30.1 billion were allocated to the sector. Abdib calculates that the industry needs R$196.2 billion of construction works per year.

The volume of investments is expected to see a great leap in the coming years given the new projects signed recently and those expected to be auctioned in the short term. Abdib estimates that this amount will reach R$47.6 billion in 2023 and R$60.3 billion in 2024. Still, however, the gap will persist.

“We have improved a lot with the advance of private-sector participation, but we will not solve the logistical hurdles without public funds,” the association said.

Abdib advocates the revision of the spending cap, the rule that limits growth in public spending to the previous year’s inflation, and its replacement by a fiscal rule that allows the resumption of public investments, plus reforms to reduce the government’s current expenses. “Brazil has made, over the last few years, the worst fiscal adjustment possible, because it is compromising its physical capital,” he said.

Furthermore, Roberto Guimarães, Abdib’s director of planning and economy, said it is possible to use public funds to draw private capital through public-private partnerships as well. “When the federal government puts R$10 billion into a project in which the private sector will invest another R$10 billion, there is a multiplier effect.”

As for infrastructure auctions, which have advanced substantially in recent years, Mr. Tadini sees no risk of discontinuity.

Altogether, considering initiatives of the federal government, the states and the main cities of the country, Abdib mapped 432 projects, which would total R$543.5 billion in investments.

In a shorter-term scenario, until 2027, the association identified a prospect of investments of R$173.1 billion, considering contracts auctioned since 2019 (whose initial works are underway) and those scheduled for the coming years. The account includes the transport and logistics, sanitation, and administrative and social infrastructure sectors.

In this calculation, the highway sector is the one likely to generate more construction works between 2023 and 2027, followed by railroads and basic sanitation.

The results of the runoff vote were well received by the infrastructure sector. According to a survey conducted by Abdib and EY right after the conclusion of the election (between October 31 and November 9), there was an improvement in the market’s perception regarding future concessions, said Mr. Guimarães.

*By Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Alternative PEC reduces spending cap to R$70bn from R$198bn

Proposal sets date for future government to create a new sustainable fiscal regime

11/21/2022

Alessandro Vieira — Foto: Roque de Sá/Agência Senado

Alessandro Vieira — Foto: Roque de Sá/Agência Senado

The alternative proposal to the so-called Transition PEC, a proposal to amend the Constitution, filed on Saturday by Senator Alessandro Vieira (Brazilian Social Democracy Party, PSDB of Sergipe) and anticipated to Valor, reduces to R$70 billion from R$198 billion the necessary increase to the spending cap to ensure the maintenance of R$600 paid monthly by the cash-transfer program Auxílio Brasil/Bolsa Família and ensure the additional Early Childhood Benefit of R$150 per kid to families.

In addition, the new PEC sets a deadline of July 17, 2023, for the government to approve a complementary law creating a new sustainable fiscal regime, with the repeal of the spending cap, the rule that limits growth in public spending to the previous year’s inflation.

The senator points out that the elected government’s proposal is “very generic and broad”, which could put at risk the stability and fiscal credibility of the future government, besides leading to an increase in the cost of the country’s debt. This could compromise the fiscal capacity to honor its commitments and to implement public reconstruction policies that the country so desperately needs. “We understand that maintaining the credibility of the Brazilian government’s fiscal framework is essential to begin the process of reorganizing the Brazilian state,” says Mr. Vieira, to justify the presentation of an alternative text.

Growing discontent in the market and internal pressures from political allies of President-elect Luiz Inácio Lula da Silva (Worker’s Party, PT) lead to the expectation that the first names to occupy the Ministries, which was expected to be made official only in December, may begin to be defined as of this week.

In the evaluation of some allies, the delay in defining the first names has given a sign of a lack of sense of opportunity to generate positive media before the beginning of the new term. PT sources cite the importance of Mr. Lula not losing the timing for the choice of the Economy Minister, but some evaluate that this name may not be announced in the first wave precisely to mark a position that the President-elect will not be influenced by direct market demands.

The former Minister of Education Fernando Haddad, the defeated candidate of the PT for the government of São Paulo, is one of the candidates to head the economic team of the new government.

One of the few areas of the transition team that have not yet had its members confirmed, the Defense technical group, is expected to be announced as of this Monday. One of the names that emerge as a clear front-runner is that of Senator-elect Flávio Dino (Brazilian Socialist Party, PSB), who coordinates the Justice and Public Safety technical group.

Gilberto Kassab’s PSD (Social Democratic Party), which will have 42 deputies and the second-largest Senate caucus in 2023, with 11 members, will have a privileged space among the nominations. The party can occupy up to three Ministries or special secretaries of equal status in the new government.

Regional coordinator of Mr. Lula’s campaign in the Central-West region, Senator Carlos Favaro (Social Democratic Party, PSD, of Mato Grosso) is the favorite to head the Ministry of Agriculture. He was one of those responsible for overcoming resistance in the sector and opening doors in the agribusiness sector for Mr. Lula during the polarized electoral dispute.

*By Edna Simão, João Valadares, Matheus Schuch, Andrea Jubé, Vandson Lima, Renan Truffi — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Brazil resorts to Russian wheat as drought affects prices in Argentina

Record harvest of wheat and reduction in consumption reduce Brazilian imports

18/11/2022

A severe drought, followed by several frost episodes, is expected to cause Argentina’s wheat crop to finish 40% below initial estimates, with around 12 million tonnes. As Brazil is the largest consumer of Argentine grain, with purchases close to 6 million tonnes each season, experts indicate that domestic mills, especially in the Northeast region, will need to seek wheat from other sources, such as Russia and the United States.

Although prospects indicate an increase in purchases from other countries as of May 2023, some mills in the Northeast region have already moved and several sources confirm the arrival of seven ships with Russian grain to Brazil in the coming months. “The harvest loss has already made the Argentine wheat price rise at an unusual time, close to harvest. So, mills in the Northeast have been buying Russian grain, which is cheaper,” said Christian Saigh, head of São Paulo’s wheat industry union (Sindustrigo).

On Wednesday, the available Argentine wheat FOB price (without import costs) was priced at $370 a tonne on average, while the Russian cereal was $330. The French/European product was priced around $350 a tonne and the American or Canadian at $430.

The Argentine harvest begins this month and lasts until January. Usually, trade with Brazil intensifies at the beginning of the year, so Mr. Saigh believes that the product available for export from the neighboring country will run out near May. “The war in Ukraine has made other countries see Argentina as a supplier of wheat, so Brazil has more competition,” he said.

Luiz Carlos Pacheco, analyst and partner at T&F Consultoria, recalled that it is difficult to know how much Argentina has available at the moment because the export quota released by the government refers to what the trading companies can buy and not to what has effectively left the country. “Of the 10 million tonnes quota, 8.5 million tonnes were traded and the taxes were already paid. This does not mean that they reached any external destination.”

Last week, the Rosario Board of Trade reduced its forecast for Argentina’s wheat crop by 1.9 million tonnes, to 11.8 million tonnes in 2022/23. The week before, the Buenos Aires Grain Exchange also reduced its estimate by 1.6 million tonnes, to 12.4 million tonnes. The initial calculation for the season was 20.5 million tonnes. In the 2021/22 cycle, the country produced 22.5 million tonnes of wheat.

Despite this scenario, two issues can make the need for Brazilian imports lower than it would be in other historical moments. The first is that Brazil will have a record harvest of wheat, with 9.5 million tonnes, according to the National Supply Company (Conab). This will allow an internal rearrangement of the grain, which is likely to migrate from Rio Grande do Sul to Paraná, where there was also a harvest loss, and São Paulo.

Another point is that the mills are expected to process a lower amount this year in comparison to 2021, due to a reduction in consumption. “Maybe inflation has scared consumers, but the expected increase in demand due to the cash-transfer program Auxílio Brasil did not occur. The market is flat,” said Alexandre Sales, CEO of Ceará-based mill Santa Lúcia.

Santa Lúcia has already imported the 50,000 tonnes it needs this year, but it does not know what 2023 will look like. “We are trying year by year to reduce this dependence on imported grain and have been successful with the incentive to plant in the Northeast region,” said Mr. Sales.

Mr. Saigh, with Sindustrigo, said that the entire industry feels this contraction in consumption after the peaks during the pandemic, in 2020 and 2021. Brazil imported 4.6 million tonnes between January and September, compared to 4.9 million tonnes in the same period in 2021.

Daniel Kummel, CEO of Moinho Arapongas and head of Paraná’s wheat industry union (Sinditrigo), recalls that Brazil has a quota of 750,000 tonnes exempt from the Common External Tariff (TEC) for purchases outside the Mercosur and is likely to use it in 2023.

But while Canadian and U.S. wheat can be imported by any region of the country, Russian grain can only be purchased by mills located on the coast. The Ministry of Agriculture restricted the entry of Russian grain a few years ago to mitigate risks with the possible entry of pests, fungi, and weeds.

Mr. Pacheco, from T&F, also recalled that some trading companies will prefer not to buy Russian grain while the war continues for fear of restrictions from Western governments. “We know that multinationals can receive payments even in reais to avoid sanctions on bank payments, but it is always risky.”

By Fernanda Pressinott — São Paulo

https://valorinternational.globo.com/
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WhatsApp starts shop search, purchase on a single chat in Brazil

Service will be expanded this Friday to all over the country, the first one to receive the feature in the world

11/18/2022

Mark Zuckerberg — Foto: Nick Wass/AP

Mark Zuckerberg — Foto: Nick Wass/AP

WhatsApp, Meta’s messaging app, has started to offer a search tool for nearby businesses on the platform in Brazil. Soon, the company will also launch in-app purchases.

The two new features were unveiled Thursday by Mark Zuckerberg, CEO of the parent company of Facebook, in a remote video participation at the company’s event in São Paulo.

“This is one of the only countries where I’ve heard of people opening bank accounts, buying cars and ordering dinner — all on WhatsApp,” Mr. Zuckerberg said in a recorded video shown during the WhatsApp Business Summit event. “And while millions of businesses in Brazil use it to chat, we haven’t made it easy to discover businesses or buy from them, so people end up having to use work-arounds.”

The new Business Guide feature started being tested last year in the city of São Paulo and, starting this Friday, will be expanded to all over the country, the first one to receive the feature in the world. “Starting today [Thursday], people will be able to search for a brand or small business directly on WhatsApp, either by browsing a list of categories or by typing in a name,” Meta’s founder said.

WhatsApp will also soon launch payments for in-app purchases in the country. Testing is in the final stages with payment partners Cielo, Fiserv, Getnet, Mercado Pago, Rede, Mastercard and Visa.

“If you run a business in Brazil, this means that people will be able to find you, contact you, and buy from you, all in one WhatsApp chat. We are working to bring this experience to more countries in the coming months as well,” Mr. Zuckerberg said. “This is the next step for business messaging, and I look forward to hearing what opportunities this unlocks for all of you,” he added.

On stage at the event, the head of WhatsApp Latin America, Guilherme Horn, tested the first payment for the purchase of a keychain through WhatsApp. According to the executive, these and other partners have already performed the technical integration necessary for the service to work.

The business version of WhatsApp was released in 2018. Currently, the platform makes 5 million business contacts per day through WhatsApp in Brazil, Mr. Horn told reporters after the event.

Asked about possible changes in the launch schedule due to the global layoffs announced a week ago by the company, the WhatsApp executive said there were no changes or delays.

Mr. Horn said that the most critical part of the payments offering, which involves the technology integration with WhatsApp partners, is solved. He did not give a specific date for the start of payments within the app.

On the opening of a new revenue generation channel to balance losses reported by Meta in the third quarter, Mr. Horn said that business messaging is one of Meta’s strategic pillars today.

He reported that the launch of in-app purchases comes from a process of maturing the platform. “The company understands that we are at a level of maturity and use of the app that allows this to become a source of revenue.”

In addition to contracts with payment platforms, the stores will pay a fee to WhatsApp for the service in the application, but the executive did not inform the percentage to be charged. “The search service is free,” he said.

“Globally, 71% of people say they want to communicate with companies via messaging in the same way they communicate with friends and family,” Mr. Horn pointed out, citing an April study by consultancy Kantar Ibope. “In Brazil, 60% of the 50 most valuable brands in the country, present in the Kantar BrandZ 2021 ranking, are already on WhatsApp,” he added.

According to the company, ads generated by clicks on websites that lead to companies’ business profiles on WhatsApp, the so-called “Click-to-WhatsApp,” grew more than 80% in the third quarter, compared to the same period in 2021, generating revenue of $1.5 billion.

WhatsApp has 2.4 billion active users worldwide and is used by 96.4% of Brazilians connected to the internet, aged 16 to 64, according to data from digital media consultancy Hootsuite.

The business version of WhatsApp was launched in 2018. This year, 85% of Brazilians said they are willing to communicate with businesses via WhatsApp and 75% to make purchases via the app, according to a Kantar study commissioned by Meta. Also according to the company, 60% of major Brazilian brands interact through the app.

Revenue generation through WhatsApp is a way to balance losses with advertising sales on Meta’s platforms, including Facebook and Instagram.

A week ago, Mr. Zuckerberg announced a global restructuring involving the cut of 11,000 employees, equivalent to 13% of the company’s workforce. According to the results released at the end of October, the company had 87,314 employees worldwide.

The cuts will affect all areas and geographic regions where the company operates. Valor found out that the cuts have already affected employees in Brazil.

The Brazilian subsidiary will also return the floors it has occupied since 2012 in Infinity Tower, a building located in the district of Itaim Bibi, in the southern zone of São Paulo, sources close to Valor said last week. According to Meta, the decision is not linked to the cuts, but to a reorganization announced in October.

Along with the announcement of the layoffs, Meta revised estimates for 2023, reducing projections for expenses – to a range between $94 billion and $100 billion from a range between $96 billion and $101 billion – and for investments, to a range between $34 billion and $37 billion from a range between $34 billion and $39 billion.

Meta does not disclose revenue for WhatsApp alone, but in conjunction with Facebook, Instagram, Messenger, and other services, which the company calls its family of apps (FoA). In the third quarter, the division’s revenue reached $27.4 billion, down 3.5 percent from a year earlier.

The company’s total revenue in the third quarter amounted to $27.7 billion, 4.5% lower than the result presented a year earlier. The net income of $4.4 billion meant a 52% drop in the same period.

*By Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Market has another tense day with fiscal uncertainties

President-elect Luiz Inácio Lula da Silva once again criticized spending cap, the rule that limits growth in public spending

11/18/2022

Luiz Inácio Lula da Silva — Foto: Peter Dejong/AP

Luiz Inácio Lula da Silva — Foto: Peter Dejong/AP

On his second day of public appearances at COP27, the UN climate conference, President-elect Luiz Inácio Lula da Silva once again criticized the spending cap, the rule that limits growth in public spending, in an event organized by civil society.

One day after sending to Congress the blueprint of a proposal to amend the Constitution (PEC) to allow higher spending in social programs, he said that all the spending cap does, in its current form, is “take money away from health, from education, from culture.” “You try to dismantle everything that is part of social and you don’t take a centavo from the financial system,” he said. “If I say that, will the stock market fall, will the dollar rise [against the real]? So be it. The dollar doesn’t rise and the stock market doesn’t fall because of the serious people, but because of the speculators who speculate every single day.” Mr. Lula was commenting on the market reaction after his first visit to the Centro Cultural Banco do Brasil (CCBB), in Brasília, where the presidential transition team works, on the 10th.

On the occasion, he said that the social policy should be put ahead of issues of interest to the market – which caused the benchmark stock index Ibovespa to fall 2.58% that day. “What is the spending cap? If it was to discuss that we are not going to pay the amount of interest to the financial system that we pay every year, but keep the benefits, that would be fine,” said Mr. Lula, who arrived accompanied by the former mayor of São Paulo, Fernando Haddad, the future first lady, Rosângela da Silva, and the former foreign minister Antônio Patriota, who currently leads Brazil’s diplomatic mission in Egypt.

The markets Thursday again went south, not only because of the president-elect’s remarks, but also because of the blueprint of the so-called Transition PEC intended by Mr. Lula’s team, which definitely excludes from the spending cap the social program Brazil Aid. The blueprint excludes almost R$200 billion from the constitutional limit for public spending in 2023. In the interest market, the interbank rate (DI) for January 2024 reached 14.155%. The foreign exchange rate rose 0.37% and the Ibovespa fell 0.89%.

The president-elect’s new remarks also triggered reactions from economists linked to the Brazilian Social Democracy Party (PSDB). Former Central Bank President Armínio Fraga, former Brazilian Development Bank President Edmar Bacha, and former Finance Minister Pedro Malan signed a letter published in the newspaper Folha de S.Paulo supporting the spending cap. All three had declared their support for Mr. Lula in the runoff vote.

Hours later, Mr. Lula canceled a highly-anticipated press conference to end his two-day stay at the conference. According to the president-elect’s aides, the change of plan occurred after his other agendas were delayed. Besides a meeting with indigenous leaders in the early afternoon, Mr. Lula had meetings with UN Secretary-General António Guterres, Norwegian Climate Minister Espen Barth Eide, and German Foreign Minister Annalena Baerbock.

The meeting with Norway unlocked the immediate restructuring of the Amazon Fund. The idea is to set up teams that will do what is necessary so that the Amazon Fund can be launched in the first days of the Lula administration. The Amazon Fund is the most structured global compensation mechanism for efforts to contain deforestation and support projects in the Amazon region.

Brazilian and foreign journalists lined up outside the conference room. When the cancellation was confirmed, several of them were sitting on the floor.

Mr. Lula now heads to Portugal, where he is to meet with President Marcelo Rebelo de Sousa and Prime Minister António Costa. Mr. Lula will stay overnight in Lisbon and is scheduled to meet with supporters on Saturday.

The negative reactions to Mr. Lula’s remarks caused Vice President-elect Geraldo Alckmin to call journalists to talk in Brasília. He called the market’s reaction to the Transition PEC and Mr. Lula’s remarks “momentary.” He also said that a new fiscal framework will be discussed throughout his term in office, but that the priority is to ensure the payment of R$600 a month through social program Bolsa Família, plus R$150 per child up to six years old, as cited in the PEC – which implies R$175 billion in extra costs excluded from the spending cap.

Mr. Alckmin said he sees no reason for so much “stress.” “This will be clarified and overcome. President Lula has already been president of the Republic for eight years, two terms. He had absolute fiscal responsibility,” he said. “It is good to make it clear that the Lula administration is committed to fiscal responsibility. This cannot be an argument not to attend to social issues.” When talking about the new fiscal framework to be implemented in place of the spending cap, Mr. Alckmin said that the priority now is to approve the proposal to amend the Constitution.

“We have 30 days to approve a PEC, one thing at a time. Right now, [we will work on] urgent things, which is PEC and LOA [annual budget law]. The election ended 15 days ago,” he said. “A new fiscal framework will be discussed. But one thing at a time. We have an emergency thing to solve.”

Mr. Alckmin also said that fiscal responsibility and social spending are not “incompatible.” “Things are not incompatible. The current administration spent R$800 billion excluded from the cap.” According to the vice-president-elect, the 2023 budget is “unworkable.” “You don’t have the money to pay Bolsa Família. How do you do with [housing program] Green Yellow House,My Home My LIfe? You have R$30 million in the budget [for that program].”

Mr. Alckmin said that growth, spending cuts and tax reform will be priorities in the Lula administration’s economic management in order to improve the country’s fiscal situation. “The government will act on the expenditure side, cutting expenses that can be cut. For example, contracts. There has to be a review of all contracts. We will go through it with a fine-tooth comb. There may be a huge margin,” said Mr. Alckmin.

Within this agenda, he said, is tax reform. Mr. Alckmin signaled that the government can take advantage of one of the two proposals that moving forward in Congress. “It is a very good situation, because there are two very similar PECs. Both seek to simplify by replacing taxes with VAT [value-added tax], which the whole world has in place,” he said.

Another way to stimulate economic growth is a greater presence of Brazil in foreign trade. He said it will be necessary to “insert Brazil in the world economy” through international agreements.

Mr. Alckmin also said Brazil can take advantage of the high liquidity of international funds to carry out infrastructure and logistics projects.

The leader of the Workers’ Party (PT) in the Chamber of Deputies, Reginaldo Lopes, was picked by the presidential transition team to explain the details of the PEC to financial market representatives on Thursday in São Paulo. He met in São Paulo with representatives of at least 10 investment funds to justify the proposal.

By Ana Rosa Alves, Daniela Chiaretti, Fabio Murakawa, Andrea Jubé — Sharm El Sheikh, Brasília

https://valorinternational.globo.com/
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Analysis: Costs, interest still weigh on balance sheets

Retailers suffered both from inflation and interest on debts

11/17/2022

Companies in this sample reported a combined sales revenue of R$1.6 trillion in the January-September period and boast a market capitalization of nearly R$2 trillion — Foto: Divulgação/B3

Companies in this sample reported a combined sales revenue of R$1.6 trillion in the January-September period and boast a market capitalization of nearly R$2 trillion — Foto: Divulgação/B3

On the last day of the third-quarter earnings season, it is already possible to glimpse the state of public non-financial companies.

Taking the benchmark stock index Ibovespa as a base and excluding banks, insurance companies, and holding companies – and also heavyweights Petrobras and Vale, so as not to distort the numbers –, there are about 70 companies that can tell the story of the quarter. It would not be necessary to do so, but it should be noted that this is a tiny sample of the Brazilian business world and about 20% of the total number of publicly traded companies.

They are the most traded stocks and, for this reason, are part of Ibovespa. They reported a combined sales revenue of R$1.6 trillion in the January-September period and boast a market capitalization of nearly R$2 trillion, considering Monday’s prices.

Costs, again

Once again, costs weighed considerably on the result. The situation has improved in relation to cost inflation, and the rise in raw material prices, especially after the start of the war in Ukraine. There has been a cooldown, but the levels are still high compared to last year.

The numbers tell this story. This group of companies increased their sales revenues by 10% in the quarter and 15% in the nine months (for reference, official inflation is 6.47% in the 12 months through October). Costs, however, are up 17% in the quarter and 20% in the nine months. Excluding administrative expenses, sales, marketing, fees, and so on, the calculator is unforgiving. The operating profit was down 30% in the quarter – and 15% lower through September. It is a still profitable sample, but with a downward trend. Of the companies selected, 15 reported a loss (about 20%), compared to 11 in the third quarter last year (15%).

Interest rates

Going down the earnings reports, one comes to the dreaded financial line items, usually scary in times of exchange rate instability. This is not the case now. One difference with previous quarters was that this time companies complained a lot more about interest rates, whose effects hit their cash flows.

Retail suffered both from inflation on the sales line and interest on debts, the remedy against inflation that increased financial expenses. In the report that accompanies the financial statements, Americanas summarized the operating situation: “Between July and September, a combination of factors in the macroeconomic scenario challenged retailing as a whole in the country. The industry raised prices sharply, reflecting inflationary pressure and high interest rates, and Brazilian households, in debt and with reduced purchasing power, stopped buying more expensive items.”

Besides scaring consumers, the high interest rates have taken a toll on the companies’ finances. Cash-and-carry chain Assaí reported a net financial expense of R$440 million, up 168%, which accounted for 3.2% of sales. According to the company, this result continues “being impacted by the high interest rate, with an increase of about three times the [interbank deposit rate] CDI in the period, and the higher volume of gross debt given the backdrop of high investments in expansion, in particular, the project of hypermarket conversions.”

It was not only retail, of course. Positivo Tecnologia faced problems with cost and interest rates as well. The manufacturer of computers and electronic voting machines increased sales by almost 30%, but costs advanced further and ate into the gross margin. Financial expenses took another chunk of the profit because of interest on higher debt, according to the company. In the Simpar group, which owns logistics and car-rental companies, the financial result was negative by R$1.25 billion, four times higher. The figure surprised the market and the effect was immediate: the shares closed down 8%.

By Nelson Niero — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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