Bahia-based company produces more than 50,000 tonnes of tissue paper per year
01/12/2023
OL’s toilet paper mill in Bahia — Foto: Divulgação/OL
The Asian group Royal Golden Eagle (RGE) did not give up after losing the competition for Kimberly-Clark’s assets in Brazil to Suzano. Interested in expanding in the tissue segment in Brazil, it finally found an M&A deal in the country. RGE has just agreed to buy Bahia-based OL Papéis, sources told Valor’s business website Pipeline.
In Brazil, RGE operates through Bracell, one of the world’s largest pulp makers, which has production units in Bahia and São Paulo. The acquisition of OL brings forward by one year the Asian company’s entry into Brazil’s tissue market in relation to the organic investment schedule. The reason is that the company announced last year the construction of a tissue paper mill in Lençóis Paulista, with operations expected to start in the second quarter of 2024.
OL has three factories in Bahia and Pernambuco, which produce 50,000 tonnes of toilet paper per year, under Velud, Familiar and Absoluto brands, in addition to paper towels and tissues, and more than 30 million diapers per month under its own Fofura Baby brand.
The OL operation, based in Feira de Santana, began in 2007 and has expanded its scope in recent years, taking advantage of the demographics in the region and less local competition. The market estimates that the company now holds 20% of the Northeast region’s toilet paper market.
The transaction gave OL an enterprise value (equity and debt) of R$500 million.
Sources close to the companies say that RGE was advised by Bradesco BBI and OL Papéis by Fortezza.
The original story in Portuguese was first published on Valor’s business website Pipeline.
Findings affect indicators like leverage ratio, net equity
01/12/2023
CEO Sergio Rial and CFO André Covre resigned after inconsistencies were found in one of Brazil’s largest retail chains — Foto: Brenno Carvalho/Agência O Globo
Retail giant Americanas revealed on Wednesday that it found “inconsistencies” in the funding of its suppliers in previous years, including 2022, the company said in a material fact released Wednesday night. In a preliminary analysis, the company estimates that these values reached R$20 billion on September 30 – the amount does not impact cash reserves, but affects key indicators like leverage and net equity.
In light of the discovery, CEO Sergio Rial and CFO André Covre, both in office for 10 days, resigned with immediate effect. Mr. Rial will be an external advisor to the shareholder 3G throughout the process of investigating and putting the house in order.
The arrival of the duo had boosted Americanas shares by 32% in the beginning of January alone as investors bet they would turn around the company. A number of large investors, such as U.S.-based Blackrock, have recently built positions in the stocks betting on this thesis.
It helps explain why the loss reported in the material fact fell like a bomb among asset managers and investors, surprised with the huge amount and the even more negative signaling of the resignation of the new administration.
Americanas says that “the accounting team identified the existence of financing operations for purchases, in which the company is a debtor with financial institutions and that are not adequately reflected” in the financial statement.
In other words, they are accounts for purchases from product suppliers that have already become debt with banks — but were left in a limbo on the financial statement.
Sources believe, based on the statement, that those are operations of factoring of receivables with banks, classified as “forfait,” very common in retail, and that may not have been registered as debt, as defined by the accounting rules.
The operation works in the following way: the company has a trade bill to pay, for example, and makes an agreement with a bank so that it pays the producer, then the retailer pays the bank back later with interests.
This way, the bank finances the company, and the chain pays the supplier in cash (receiving some discount for this).
“The point is that everything indicates that this amount was underestimated for years, or that it was not properly accounted for. And there is still the question of the exact size of this issue, because the notice of material fact says that, among the inconsistencies, there is this operation with financial institutions,” says one asset manager.
There is no impact on cash reserves because this debt would migrate from the line of suppliers to the line of loans and financing — but with an effect on the debt indicators — and consequently in the debt parameters agreed in the debt contracts — the so-called covenants.
If the covenants are broken, the creditor can ask for the acceleration of debts. Therefore, there are other related impacts.
“The text is not entirely clear, but it indicates that the amounts were classified as suppliers and not as Interest-bearing liabilities,” says a former chief financial officer of a retailer.
Another fund manager that follows the stock and competitors adds that there are some “accounting options” in retail balance sheets, which can justify the inconsistencies without necessarily being fraud.
But he also reinforces that the financial volume and the scare of the new administration, “which clearly does not want to take statutory responsibility for what may come next,” put strong pressure on the company.
On January 3, Mr. Rial appeared in a live-streamed video with 40,000 employees, stressing the encouraging expectations of a new job at the group. “He had no idea about this shakeup,” a source familiar with the matter said. “It reportedly emerged from a complaint with the audit committee,” the source said. The company declined to comment on this information.
In the notice of material fact, the company said it is not yet possible to determine all the impacts of such inconsistencies on the company’s income statement and financial statement. It also emphasizes that the number is preliminary — that is, it may possibly increase.
The estimate is still subject to confirmations and adjustments resulting from the conclusion of verification work and work by independent auditors.
The board of directors appointed João Guerra on an interim basis as CEO and chief investor relations officer. He is an executive from the technology and human resources areas “not previously involved in accounting or financial management.”
The board also decided to create an independent committee to investigate the circumstances that caused the inconsistencies, with the necessary powers to investigate divergences in the amounts.
Americanas’s primary shareholders, formed by 3G Capital partners (who, until last year, were the controlling shareholders), told board that they intend to “continue supporting the company.”
This means that the primary shareholders can use their own funds once again in case the company needs a capital injection, given the situation of equity, which is going into negative territory, and leverage.
The need for a capital injection is being considered by two major equity fund managers.
But it also points to the monitoring in the auditing process by the trio of executives, who have high credibility in the market.
The company called a group of institutional investors and analysts for a conference call on Thursday morning, at 9am, held by BTG Pactual. Sources say the meeting will have Mr. Rial’s participation and will be restricted to the guests, without participation of reporters.
Asset managers question the external audit and the internal audit committee. “In the United States, this would be a case for class action. In Brazil, they will face questioning from CVM,” a source said.
*By Adriana Mattos, Maria Luíza Filgueiras, Manuela Tecchio — São Paulo
Company, which started process on Tuesday, has not informed how many people will be dismissed
01/11/2023
Layoffs involve only Brazil; company started process on Tuesday — Foto: Divulgação
The wave of layoffs in technology companies has reached Didi’s Brazilian mobility service 99. The company, which started the process on Tuesday, has not said how many people will be dismissed. The layoffs involve all areas of the company, sources say.
“To continue democratizing our services, including digital payment solutions with 99Pay, we have conducted extensive evaluations of our resource allocation across all lines of business,” a company spokesperson told Valor. “As a result of this and other operational factors, we made the difficult decision to conduct an internal reorganization. Unfortunately, we had to dismiss a group of employees this week, to whom we are extremely grateful for their contributions,” he added.
The company did not inform how many people will be dismissed, but the layoffs involve only Brazil. Currently, there are 3,920 Brazilian employees registered on the company’s LinkedIn profile.
“Knowing that the macroeconomic environment also directly impacts our users and partners, we affirm our commitment to continue offering more affordable services to our more than 20 million active users, generating value for the entire ecosystem we support,” the spokesperson said. “According to a study by Fipe, 99 indirectly injected R$54 billion into the Brazilian economy over the last 10 years,” he added.
Layoffs at tech companies in the country became frequent since March last year, including cuts in major companies like Creditas, Loft, QuintoAndar, and iFood, all of them valued at more than R$1 billion.
In February, the meal delivery app 99Food will start operating without its own fleet, keeping only the platform, as Valor reported last week. The fleet reduction process started in January 2022.
99 reported that it will expand two-wheeled services beyond passenger and parcel transportation for individuals. At the end of the month, the company will launch 99Entrega Moto Corporativo, a logistics service aimed at companies, in 3,000 cities where it already offers other services with motorcycles.
“Overall demand for our services on two wheels – 99Moto and 99Entrega Moto – has grown by more than 50% over the past three months compared to the third quarter of 2022,” said the company’s spokesperson.
99’s parent company is going through a delicate time in China. Didi was one of 14 technology companies investigated by the Chinese government for more than two years, alongside giants such as Alibaba and Tencent Holdings around suspicions of abusing its dominance in the Chinese market.
On Monday, Guo Shuqing, the chairman of the China Banking and Insurance Regulatory Commission (CBIRC) and Chinese Communist Party secretary of the People’s Bank of China (PBOC), told Nikkei Asia that supervision of the sector will be normalized and government support will be provided to help platform companies play a bigger role in job creation and global competition.
The investigations led to the suspension of Ant Group’s IPO and the delisting of ride-hailing giant Didi Global from the New York Stock Exchange (NYSE) just five months after its debut, Nikkei Asia added.
Founded in 2012 as an app-based car transportation company, 99 received a $100 million injection from Chinese company Didi in January 2017 and was acquired by the group in 2018. Currently, the group has stakes in companies such as Chinese electric car company SmartAI, hotel company Oyo, and leads investments in truck freight, bike sharing, motorcycle rental, and self-driving car companies in China.
Infrastructure hurdles are second greatest risk; low-carbon agriculture comes in third place
01/11/2023
An EY survey with agribusiness executives in Brazil, Argentina, and Chile showed that climate change and its short and long-term impacts are the main risks they see for their businesses. The study listed the top ten risks and opportunities that agribusiness executives face in their businesses.
According to the survey, 47% of the executives and investors consulted might reconsider their investments based on climate risks. And for 82% of those consulted, climate change represents a “high” risk to their businesses.
EY divided the risks to agribusiness associated with climate change into six types, with different weights. Contrary to what many industry leaders say, reputational risk is one of the lowest, accounting for 12% of the risks related to the problem. The biggest risk in the list is “acute,” such as abrupt changes in precipitation and temperatures, and extreme weather such as droughts and storms.
EY survey sees political and legal risks at 19% of the total risk. They relate to enhanced disclosure obligations for greenhouse gas emissions, exposure to litigation, rising emissions prices, and existing product mandates or regulations. At the same level (19%) are technology risks, which involve the costs of transitioning to a lower emissions model of production and services, and unsuccessful investments in new technologies.
Difficulties in accessing markets were seen as 15% of the risks related to climate change. They involve changing consumer behavior, increasingly unwilling to consume products with high emissions footprint, as well as rising costs of raw materials with higher carbon footprint and uncertainties in market signals.
Reputational risks are seen as 15% of climate change-related risks, as are chronic risks (15%) involving long-term changes in average precipitation levels and temperatures, biodiversity loss, and sea level rise.
After climate change, respondents from agribusiness companies understand that the second greatest risk is infrastructure hurdles, with inadequate roads, concentration on road transport, and static capacity limitations.
The third most cited aspect by respondents is an opportunity: low-carbon agriculture.
Next, were cited issues related to increasing productivity, cost management, and asset management; restrictions on the use of agrochemicals and pesticides; issues of ethics, compliance, and control; government interventions, regulatory changes, and reforms; shortage of skilled labor and implementation of an agile and innovative culture; financial profitability, currency volatility management, and margins; and finally, professionalization and evolution of the governance and succession model.
Experts predict wave of restructuring due to high interest rates
01/11/2023
The number of court-supervised restructuring requests nationwide in 2022 is the lowest in the last eight years — a total of 833 companies, according to credit bureau Serasa Experian. But this calm scenario is not likely to remain in place in 2023.
Lawyers say that many companies leveraged themselves with the supply of credit during the pandemic when interest rates were low and now — with the Selic, Brazil’s key interest rate, at 13.75% per year — are unable to honor the payments.
This situation can be seen in Serasa Experian’s delinquency indicator. It shows that in November the country had more than 6.3 million companies in the red, the highest level since records began, in 2016.
There are 45 million delinquent debts — or R$108 billion. Also, according to Serasa’s survey, most defaulted companies operate in the service sector (53.5%). In second place are those in commerce (37.5%) and in third are industrial companies (7.7%).
Some of these companies have already reached firms specializing in insolvency. Lawyers say demand grew after November and December.
“There was a boom, a scary one,” said André Moraes, of Moraes & Savaget Advogados. “One hundred percent of the clients who came to us at the end of the year complained about the same thing. They took out loans with interest rates at 3% that more than tripled, they can no longer pay.”
Three of Mr. Moraes’ clients filed for court-supervised restructuring in December. And two others have their documentation prepared to file for court-supervised restructuring requests in the first months of 2023.
“During the pandemic, we worked more for sectors affected by social distancing measures. Hotels, tourism agencies, and transportation companies. Now all sectors need help,” added the lawyer.
Juliana Bumachar — Foto: Leo Pinheiro/Valor
Juliana Bumachar, from Bumachar Advogados Associados, confirms the high demand at the end of the year and projects an increase in requests for 2023. “Companies had been renegotiating, but it got to a point where they can no longer afford,” she said, adding that had filed for court-supervised restructuring for one of her clients, in São Paulo, on the last day of the judicial recess.
Also in December, according to her, there were two other new cases at the office, one of them with liabilities of R$1.2 billion.
In the first half of the year, the scenario is not expected to change as there is no estimate of an interest rate reduction. The banks project that the Selic will remain stable at 13.75% per year until May. In June, when the monetary easing cycle would start, it would drop 0.5%.
“In the current economic scenario, with interest rates at this level, a wave of restructuring is likely. But what will dictate whether or not these processes will be done by judicial means will be the posture adopted by creditors, especially banks,” said Renato Franco, founding partner of Integra Associados, a consulting firm specializing in company restructuring.
To Mr. Franco, there was a change in the behavior of creditors, especially banks, during the pandemic. They began to show much more willingness to negotiate, even granting terms and discounts that were previously only possible through court-supervised restructuring.
With this attitude, and the offer of credit, companies were able to solve their financial problems with out-of-court agreements and the number of requests fell. In 2020, 1,179 were registered, and 891 in 2021, according to Serasa data.
In the pre-pandemic period, the rates were higher. The worst years in the historical series are 2016 and 2017. In 2016, when President Dilma Rousseff was impeached, 1,863 court-supervised restructuring requests were filed. This is more than double today’s numbers.
In the lawyers’ view, 2022 was an “aftermath” of what was seen in 2020 and 2021. The problem now, they say, is that companies may not have the means to renegotiate. “There are no more guarantees to offer to the banks,” said Mr. Moraes.
According to Vicente de Chiara, legal director of the Brazilian Federation of Banks (Febraban), the current situation is far from the scenario that existed in 2016 and 2017, and he stresses that financial institutions will continue to prioritize out-of-court negotiations. To him, all the major banks have restructured their credit and collection departments and now have teams focused on collaborating with the companies to solve the problem.
“In this pandemic and post-pandemic period, we realized that everyone should anticipate the move. Instead of letting the company file for protection from creditors and then sit down to negotiate, it brings forward the negotiation. That is better for everyone,” said Mr. de Chiara.
Some lawyers say that besides the pandemic factor, out-of-court solutions were also boosted by the new recovery and bankruptcy law, which came into effect in January 2021.
Now, companies can, for example, use the so-called stay period outside the court-supervised restructuring, that is, while they are trying to negotiate with creditors. This mechanism suspends collection actions against the debtor.
The deadlines, however, are different. In judicial recoveries, collection actions are suspended for 180 days. For negotiations, the new law provides for up to 60 days.
The new law also strengthened out-of-court restructuring. In both judicial and out-of-court restructuring, the debtor gathers its creditors to negotiate. A payment plan is drawn up, usually with a grace period, discounts, and installment plans. If the majority of the creditors approve these conditions, all the others are bound and will receive what is due to them in the same way.
The number of creditors involved, however, changes from one method to the other. In the court-supervised restructuring, all debts incurred up to the date of the beginning of the process are submitted (there is an exception for tax debts and amounts with fiduciary guarantees).
In the out-of-court restructuring, the debtor chooses the creditors with whom it wishes to negotiate — which allows it, for example, to spare suppliers, avoiding getting into trouble with those who are essential to the business. This negotiation occurs without interference from the Judiciary. Only after approval by the group of creditors is the payment plan submitted to a judge for ratification.
Before the new law, the agreement of 50% of the creditors with whom the debtor chose to negotiate was required. Now, if the debtor has one-third approval of the payment plan, the debtor notifies the judge and gets 90 days to try to convince the others — and reach the 50%.
During this period, collection actions are suspended. If even after this period the debtor cannot obtain approval, he can still file for court-supervised restructuring.
Last months were marked by consistent deceleration of price hikes
10/01/2023
Inflation has surprised once again to the upside at the end of 2022, raising the full result for the year. The benchmark inflation index IPCA rose by 0.62% in December, above the 0.61% ceiling of the projections gathered by Valor Data — the median was 0.45%. Thus, last year closed with an inflation of 5.8%, against a market expectation of 5.6%.
According to economists’ evaluation, inflation is still high, although it represents a significant slowdown considering the 10.1% reported in 2021 and the peak of 12.13% reached in the 12 months until April. Despite that, for the second year in a row, the Central Bank will need to write a letter to the finance minister justifying why the IPCA missed the target, which was 3.5% in 2022, with a tolerance of up to 5%.
The last months of last year saw a deceleration in 12 months, but the IPCA remained at double-digit levels between September 2021 (10.25%) and July 2022 (10.07%). The projection for last year’s inflation was much higher than what was actually observed, had it not been for the government’s intervention at the time. Amid the electoral race, then-President Jair Bolsonaro cut taxes on important items.
Considering deflations in fuel (-23.9%, after a 49.02% high in 2021), electricity (-19.01%), and internet services (-12.09%), this “hand of the government” reduced inflation by 2.16 percentage points, said Luis Otávio de Souza Leal, chief economist at Banco Alfa.
Gasoline alone fell 25.78% in 2022, after a high of 47.49% in 2021, exerting the greatest individual impact (-1.7 percentage points) on holding down the IPCA for 2022. Besides the effect of the lower ICMS, there was also the influence of falling fuel prices at refineries, set by Petrobras throughout the year.
“Excluding the gasoline and electricity sub-items from the inflation calculation, the IPCA would have been 9.56%,” said André Filipe Guedes, an analyst at the statistics agency IBGE.
Administered prices (those regulated by contract or public agency) saw a deflation of 3.83% in 2022 after rising almost 17% in 2021, according to MCM Consultores. Free prices, on the other hand, had accelerated to 9.39% from 7.7%.
Among the main influences for the IPCA’s rise are items related to automobiles — be it taxes, services, or the vehicle itself. The automotive industry was one of those that most felt the effects of the disorganization of the production chain brought about by the pandemic, with more expensive inputs and a lack of raw materials. As the prices of taxes and services follow the variation in car prices, they are also affected.
The behavior of industrial goods, however, ended up affecting the average of the measures that try to soften the effect of more volatile items and are closely monitored by the Central Bank, which went to 0.66% in December from 0.33% in November.
*By Anaïs Fernandes, Lucianne Carneiro — São Paulo, Rio de Janeiro
Peculiarities of the sanitation sector, however, will require a negotiation with the municipalities
01/09/2023
Natália Resende — Foto: Silvia Costanti / Valor.
The São Paulo state government will study the privatization of water and waste management state-run company Sabesp in the same way as was done for Eletrobras — considering the peculiarities of the sanitation sector, though — which will require a negotiation with the municipalities served by the company. According to Natália Resende, who took over the recently created “super-secretariat” of Environment, Infrastructure and Logistics of the State, the initial step will be taken in the first 100 days of the administration, carrying out the contracts for the studies. In the process, other privatization models may also be evaluated, she says.
“We are going to detail each of the scenarios. Of course we already have a feeling, a smell, so when we talk about the Eletrobras privatization model it’s because we really see there [an interesting format]. But we will certainly study the proposals that emerge”, he says.
In an interview with Valor, Ms. Resende also talked about other plans ahead of the secretariat, which brought together the Transport and Logistics and Infrastructure and Environment Secretariats.
Among the projects under analysis is the privatization of the Metropolitan Company of Water and Energy (Emae), which is expected to have a call for a bid this year; the plan for reducing the effects of pollution of rivers, which may be connected to the privatization of Sabesp and Emae; the concession for coastal ferries, in a PPP format; and the possible resumption of a state project to get the Santos-Guarujá dry link off the drawing board, in case the federal government does not move ahead with the tunnel, included in the privatization of the Port of Santos.
Federal Attorney General’s Office (AGU), Ms. Resende served as a legal advisor to the Ministry of Infrastructure under the current governor of São Paulo, Tarcísio de Freitas (Republicans) — and, according to her, helped in the structuring of “a hundred infrastructure auctions”.
Read below the main excerpts of the interview:
“We are going to study the privatization of Sabesp, which includes privatization. If this is the best option, we will move towards it,” says the secretary. According to her, the goal is to anticipate the universalization of the water and sewage services in the State and improve the services provided to the final user.
In the 375 cities served by Sabesp, water supply is universal (98%), but water losses still represent 16% of the total produced. The sewage collection coverage is 92%, and the treatment, is 78%, according to data from 2021.
Ms. Resende says the idea is to study a combination of the Eletrobras privatization model (done by selling the state-owned company’s shares on the Stock Exchange) with the peculiarities of the basic sanitation sector. In the process of selling the power company’s control, there was a dilution of the federal government’s shareholding, through a capital increase.
In the case of the water and sewage sector, the main difference is that the competence of the service lies with the municipality. This means that it will be necessary to renegotiate contracts with the municipalities if Sabesp wants to make changes — for example, to extend terms or add investments. “We need to talk to the municipalities. This we will do. There are several contracts with different deadlines, and we want to bring forward universalization. To do this, we need more investment,” he says.
When asked about the possibility of the State keeping a “golden share” (a special share with veto power), she says that the topic will also be studied.
Also asked about other forms of privatization, such as direct sale, block concession, or capitalization, she said that different models would be analyzed, but highlighted that it is necessary to have focus. “Several proposals will arise in the process. What you cannot do is lose focus.”
There is still no timeline for the privatization process. This will be defined in the studies, which will be contracted in the first 100 days of the administration.
Regarding the discussion in the federal government about changes in the sanitation law, Ms. Resende says that the idea was poorly received. “When I looked [at the Provisional Measure that proposed changes to the National Water Agency], it caused me a lot of concern. Then they said that it was a mistake. It’s okay, mistakes happen, but the sanitation agenda is a high priority, it has to be given a lot of attention.”
The secretary says that it will still be necessary to wait for the federal proposals to ponder the possible impacts on the State’s plans. “On our side, we will do our best to protect and do what we think is right.”
Foreign banks show signs of concern with directions pointed by new government
01/09/2023
After the noises emitted by the new government provoked days of high tension among local market players, foreign banks have now started to send messages of greater caution with the directions indicated by the Lula administration, worsening their projections for the trajectory of Brazilian assets.
Besides increasing the uncertainties about the performance of the local market, the move seems to give strength to the thesis that foreign players take a little more time to react to domestic political news.
For Morgan Stanley, the context of fiscal worsening and uncertainties about the framework that will discipline public spending in the coming years was translated into a worsening of the prospects for Brazilian assets. The American bank even cited in a recent report “echoes of the fiscal deterioration experienced in 2015 and 2016” in local markets.
“We reaffirm that, from the exchange rate point of view, the attractive spread [i.e., high-interest rates] will not be sufficient to avoid more significant depreciations if external accounts and the fiscal outlook continue to deteriorate,” stated the report. The bank’s strategy team reaffirms a pessimistic view of the real. “We believe that the BRL [real] should underperform emerging market peers due to the risks of political uncertainty and we have opened a short position against the South African rand.”
As for interest rates, the institution considers a process of falling rates unlikely, preferring to adopt a trend which gains from rising local rates. “We remain very focused on inflation expectations for 2024 and 2025, as further de-anchoring may lead markets to price a resumption of the high cycle in 2023 — which is not the base scenario, for now,” they assess.
The higher interest rates for longer are expected to undermine the story of apparently attractive valuation for local stocks. “If we are correct in our assessment, the next few years should not be good for domestic stocks,” said the Morgan Stanley analysts, who maintained a “neutral” recommendation for local stocks.
In the first week of the new administration, Commerzbank sent its clients a note asking, “what does Lula represent for the real?” In response, the German bank said “probably nothing positive.” According to Antje Praefcke, Commerzbank’s senior foreign exchange analyst, Brazil’s fiscal scenario and the sustainability of public debt has been a stumbling block for investors for some time. Now the situation is likely to get worse, as the government plans adjustments to the spending cap to facilitate the increase in social spending it promised during its election campaign.
“Lula will have to manage to improve it [the debt], either with the help of spending cuts or revenue increases. No easy task in times of high inflation and deep political division. The prospect of higher spending will probably make investors even more skeptical and may drive them away completely.”
For the analyst, two questions will be decisive for the Brazilian currency over 2023. The first is whether Mr. Lula will manage to control the fiscal situation or whether it will deteriorate with adjustment to the spending cap. The second is how the Central Bank will react to the evolution of the budget and whether the monetary authority will continue to be an anchor for the stability of the real. “It is likely that times will get tough for the real. If investors question Mr. Lula’s budget policy and the Central Bank’s monetary policy, the currency is likely to depreciate rapidly, with the biggest risk probably being fiscal policy.”
Wells Fargo: fiscal fears materializing — Foto: Scott Eells/Bloomberg
Another foreign institution to raise concerns about the new government’s early directions was Wells Fargo. “With Lula now officially sworn in, the fiscal fears that have pre-emptively shaken investors are beginning to materialize and further affecting market participants’ confidence,” the institution said in a report.
Wells Fargo calls attention to the fiscal expansion already approved in the Transition PEC, while there is the prospect of using state-owned banks to leverage economic activity. “We believe that this new direction of fiscal policy will end up being inflationary, and we now believe that the CB will delay monetary policy easing until the third quarter of 2023,” said the bank report.
Thus, Wells Fargo recognizes that its projection made at the beginning of the year, that the dollar would end the first quarter trading in the R$5.30 range, runs the risk of not materializing. “Should future policy decisions indicate further erosion of fiscal responsibility, we will adjust our USD/BRL outlook to reflect likely pending capital outflows that would put depreciation pressure on the currency,” he said.
For Eirini Tsekeridou, Julius Baer’s fixed income analyst, the announced extension of the tax exemption on fuel prices not only affects tax collection but was also a “rug-pulling of Minister [Fernando] Haddad,” who was against the measure, weakening his credibility and also the country’s commitment to fiscal responsibility.
“There is still no clarity regarding Brazil’s fiscal structure, including the replacement of the spending cap, so until we have more visibility on Lula’s strategy, the real will likely remain volatile and affected by news flow,” Ms. Tsekeridou told Valor.
The Oxford Economics consultancy was another institution that revised its scenario for the country. As pointed out by Regis Chatellier, director and emerging markets strategist, Brazil’s fiscal outlook has deteriorated following the recent increase in the spending cap and Mr. Lula’s post-election speech. “In this context, inflation should remain relatively high and the CB’s interest rate cuts will be much slower than anticipated. We believe risk premiums will remain high, with strong investor positioning also limiting the appreciation of Brazilian bonds,” he said.
Mr. Chatellier says that premiums on Brazilian bonds are relatively high, which ends up being a buffer for risks. “However, we believe that risk premiums embedded in LTNs and NTN-Fs will remain elevated given the deteriorating fiscal outlook and slower normalization of monetary policy,” he added. “We cut our recommendation for exposure to local Brazilian bonds to ‘neutral’ from the above market average.”
*By Arthur Cagliari, Gabriel Roca, Matheus Prado — São Paulo
If unsuccessful with bloc, negotiation can be individual
01/09/2023
China says it is ready to negotiate a free trade agreement with Mercosur or separately with any partner of the bloc. It is an issue of impact that is unlikely to be left out of the visit that President Luiz Inácio Lula da Silva (Workers’ Party, PT) plans to make to China in the near future.
During the 20th Congress of the Chinese Communist Party in October, a report presented by President Xi Jinping highlighted China’s strategy to seek “greater integration in the global industrial chain and supply chain and (continue) to promote the liberalization and facilitation of trade and investment.”
To this end, the country will continue to negotiate “high-standard free trade agreements” with its trading partners. “In short, China’s opening door to the world will be opening wider and wider. This will certainly create more opportunities for its own development and for the rest of the world.”
Li Chenggang — Foto: Denis Balibouse/Reuters
In late November, during the examination of Brazil’s trade policy at the World Trade Organization (WTO), Chinese Ambassador Li Chenggang noted that Brazil has concluded several free trade agreements and renewed or started new negotiations, and gave Beijing’s message: “China believes it is crucial to improve Brazil’s regional integration and export diversification. In this regard, China encourages Brazil to play an active role in expanding Mercosur’s network of regional trade agreements with key trading partners.” He also recalled that China is Brazil’s largest trading partner since 2009, the largest market for Brazilian exports, a major source of imports for Brazil and contributes heavily in Brazil’s trade surplus.
Asked by Valor to elaborate on the ambassador’s speech, the Chinese Ministry of Commerce (Mofcom) replied clearly: “This means that China is willing to negotiate a free trade agreement (FTA) with Mercosur as a whole or an FTA with any Mercosur member.”
Beijing has already concluded 22 free trade agreements, for example with Chile and Peru in South America, besides ten under negotiation and eight “under consideration”, such as with Colombia. It has also made a feasibility study of an agreement with Uruguay, which in practice would cause the dismantling of Mercosur as a customs union. Diplomatically, for Beijing it would be better to negotiate with Mercosur as a whole. But it confirms plan B to negotiate separately.
The Bolsonaro administration has never hidden its skepticism and little sympathy for Mercosur. The Lula administration, on the other hand, has signaled the importance of the bloc not only economically, but politically and strategically. The reaction to Beijing’s plan will certainly be different.
The discussion becomes less defensive regarding China. The diplomat and economist Tatiana Rosito prepared a document along these lines on “Bases for a long-term strategy for Brazil towards China,” at the request of the Brazil China Business Council (CEBC), in 2020. Ms. Rosito is now the new secretary for International Economic Affairs at the Ministry of Finance.
In the document she notes that, due to the expected impacts, there is a way to go for Brazil (and the Mercosur partners) in the negotiations of international agreements before dealing with free trade with China, “but this theme should not be taboo and should be increasingly considered through an approach that can lead Brazil and the different sectors of the Brazilian economy to dwell on the gains and losses of increased trade with China.”
Ms. Rosito cites a 2019 study by the Applied Economics Research Institute (IPEA), “Impact assessment of a Brazil-China Free Trade Agreement on the Brazilian Economy,” which points to “unequivocally positive results for the Brazilian economy, with gains in GDP, investment, exports, and imports. The trade balance would be slightly worse, but there would be a significant reduction in the aggregate price level and an increase in the degree of openness of the economy.”
“The fact that opening up to China would promote large export gains even in ‘unexpected’ sectors is a highly relevant result,” the study says, noting that production and employment losses in some sectors require debate on the issue.
The study uses a general equilibrium model that causes skepticism. It is not because of tariffs that Brazil does not export other products, outside the list of commodities, to China, but because it does not have the competitiveness, scale or efficiency to serve the gigantic Chinese market.
“I don’t know of any segment [in Brazil] that, first, has enough production, and second, that has the appetite to take the risk of increasing business in a market that size. China is not a market for selling surpluses, distributors have no interest in small volumes,” says Marcos Caramuru, former Brazilian ambassador to China (2016-2018), partner at consultancy Kemu and a leading China expert.
When Mr. Lula raises in Beijing the recurrent complaint of lack of diversification of Brazilian sales to the Chinese market, the answer will certainly be to discuss agreements.
For Renato da Fonseca, Industrial Development superintendent at the National Confederation of Industry (CNI), it is not necessary to start with a free trade agreement. He suggests a trade facilitation agreement as a kick-off.
Brazil’s next harvest is expected to be “normal” compared to the last two, which were seriously affected by the weather, experts say
01/05/2023
Brazil is in the off-season of a smaller production cycle, and the next one is not expected to be a “super-crop” — Foto: Silvia Zamboni/Valor
With divergent estimates, the real size of Brazil’s 2022 coffee harvest is still unknown. And, even as this is taken into account, coffee prices may face surprises in the first half of the year.
This is because Brazil is in the off-season (January to June) of a smaller production cycle, and the next one is not expected to be a “super-crop,” as international market agents believed.
In the importers’ view, the trees would be rested from bad weather, and the cycle could surprise to the upside. However, nature is responding differently. The 2023 harvest will be good, sources say, but smaller than 2020 — a record year that yielded 63 million bags, and that had been propping up buyers’ expectations.
Analysts are cautious about projections for prices, but some see them going up. “We are in the off-season of a crop that was much smaller,” said Eduardo Carvalhaes, from Escritório Carvalhaes. There is no exact dimension of the shortfall or the stocks in the country.
The Brazilian production of coffee (Arabica and Robusta) harvested in 2022 is projected with a large gap. While the National Supply Company (Conab) indicates 51 million bags, the U.S. Department of Agriculture (USDA) foresees 62 million bags.
For Fernando Maximiliano, an analyst at StoneX, it will be necessary to observe the pace of Brazilian exports in the coming months, a factor that will show the availability of grains and the appetite of the foreign market. This can still affect prices, he said.
The international and domestic prices are on a downward path in the last few months, after an intense price rise that gained strength after the frosts in July 2021. But despite the recent drops, the 2022 annual average in New York, of $2.1283 per pound, exceeds by 25% the average level of 2021, according to Valor Data.
Gil Barabach, an analyst at Safras & Mercados, said that there is usually a mismatch between the foreign and domestic markets during Brazil’s off-season. He sees room for recovery of domestic prices, but the weak demand abroad has curbed increases.
Attention now turns to the first figures for the 2023 harvest, which are expected to be released soon. StoneX, for example, is in the middle of an analysis in the field and will unveil a projection in mid-February.
Sources consulted by Valor from the main producing regions in Minas Gerais say that the next harvest will be, at least, “normal,” if compared to the last two seriously affected by the weather. The harvest is still under development. January to May is the time of grain expansion, a phase that still depends on the weather.
The agronomist Adriano de Rezende, technical coordinator of the Minasul cooperative, the second largest exporting center after Cooxupé cooperative, explains that 95% of the coffee fruit is formed by carbohydrates acquired through photosynthesis.
For the process to run smoothly, rain, adequate temperature, and sunshine will be necessary until May, the harvest time. Only 5% of the carbohydrate arises with the help of fertilizer. According to him, until now, fruit setting (transformation of the flower into fruit) has been a little impaired in the south of Minas Gerais by low temperatures and poorly distributed rainfall.
But both in the Minasul region and in Patrocínio, in the Cerrado region of Minas Gerais, considered stars in the global production of Arabica coffee, the 2023 harvest is expected to exceed the production of 2021 and 2022, and will be below that of 2020.
According to Simão Lima, head of the Cooperative of Coffee Growers of the Cerrado (Expocaccer), productivity is estimated at 32 bags per hectare this harvest, compared to 27 bags per hectare in 2022. Mr. Lima estimated that the region may supply nearly 6.5 million bags, but made it clear that it is still early to determine figures.
The rainfall is favorable in the Cerrado, and an atypical second blooming has occurred in December in some places. With this, there will be coffee beans at different stages of maturity at harvest time, but this is not an alarming factor, he said.
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