Brazil-China trade relations may grow with less red tape, diplomat says

After investing heavily in energy sector, China’s next target may be electrified railroads, says Luiz Augusto de Castro Neves, a former ambassador in China

01/05/2023

Divulgação — Foto: Luiz Augusto de Castro Neves

Divulgação — Foto: Luiz Augusto de Castro Neves

Brazil’s relations with China, its largest trading partner, could gain new steam if the Lula administration puts in place measures to cut red tape and ease exports. Chinese investments in Brazil could also increase once the regulatory environment here becomes clearer.

This is the view of Luiz Augusto de Castro Neves, a former Brazilian ambassador in Beijing, who for years has maintained a constant dialogue with businesspeople and executives from both countries and knows the mutual demands well.

After having lived four years in China, Mr. Neves presides the Brazil-China Business Council (CEBC), an entity that brings together large Brazilian groups like Bradesco, Itaú Unibanco, Banco do Brasil, BRF, JBS, Klabin, Suzano, Petrobras, and Vale. Among the members with Chinese capital are 99, CPFL Energia, and Bank of Communications.

In an interview to Valor, Mr. Neves says that after the Chinese have invested heavily in the power industry in Brazil, their next target may be electrified railroads to improve the transportation of Brazilian commodities to the ports.

He also sees a growing interest from China for more products from Brazil, beyond the few products that today dominate exports to China – soybeans, iron ore, meat, oil, and sugar. But this expansion and diversification require internal changes. “As long as we are in a position to supply these products competitively in the international market,” he said.

The former ambassador also says that the return of a leftist government, headed by Mr. Lula — who is, in theory, more aligned with Beijing than the right-wing Mr. Bolsonaro — is unlikely to bring, by itself, more fluidity to trade and investment. “Historically, the Chinese have always separated their foreign policy from ideological aspects.”

Read the main excerpts from the interview below:

Valor: What should the Brazilian government do to stimulate an increase in Brazilian exports to China and a greater diversification of these exports?

Luiz Augusto de Castro Neves: There are many obstacles, and one is the tax issue. Companies pay taxes to export. Another issue: there is often a bureaucratic entanglement for companies to export that makes Brazilian exports less competitive. In other words, it contributes to making Brazilian exports more expensive. The Brazilian government could facilitate exports, which is not easy. Export licenses and several required bureaucratic steps make our exports more expensive. This affects Brazilian exports in general, including to China, which is our main customer.

Valor: Regarding Chinese investments in Brazil, what obstacles could be removed by the government?

Mr. Neves: The regulatory environment in Brazil often hinders foreign investments here. A few years ago, a Chinese ambassador told me that all he needed was to better understand the regulatory environment in Brazil, what they could do, and what they couldn’t do in terms of investments. My answer was: “Listen, whoever finds out first tells the other.” And there is an interesting aspect of Chinese investments in Brazil. That is, the Chinese have a strong interest in Brazil becoming a great exporting and competitive nation because they are our clients. Chinese investments in Brazil exceed $70 billion, which is equivalent to less than two years of Brazilian exports to China.

Remember that the Chinese interest in Brazil has to do with the fact that a country with more than 1 billion inhabitants is very concerned about ensuring supplements to feed its population. And Brazil is one of the few countries in the world that can meet a large part of this Chinese demand for food. In this sense, investment in infrastructure helps Brazil to become more competitive in the world market. This is positive for Brazil as an exporter, but it is also positive for China, as an importer that wants more competitive prices.

Valor: Still about Chinese investments in Brazil, what new areas could be on their radar?

Mr. Neves: They have already invested in the power generation industry. The Belo Monte hydroelectric plant, for instance. They have invested in power transmission and more recently in distribution, with the acquisition of CPFL, Brazil’s largest power distribution company. In my view, they are going to invest in electrified railroads to transport, for example, soybeans by rail and not by truck, as happens today, when a substantial part of the harvest is lost in transportation.

Valor: Has this possible Chinese investment in electrified railroads in Brazil already been discussed with you directly?

Mr. Neves: I lived in China for four years and have been president of the Brazil-China Business Council for several years. Nobody told me what the Chinese goal is, but the Chinese goal is to invest in infrastructure to ensure a better transportation of goods for export.

Valor: Unlike other partners of China, Brazil has not joined the Belt and Road Initiative, launched a few years ago by President Xi Jinping, to enable investments in infrastructure to facilitate the flow of products to the Chinese market. Would Brazil’s joining this project help commercial relations?

Mr. Neves: It could help, but the economic trade and investment relationship between Brazil and China are so dynamic that we can ask if it is worthwhile for Brazil to join this Chinese project. There is great dynamism in the relations between the two countries: the Chinese are our biggest exporters and importers. And there is also a dynamism of Chinese investments, which would grow and be much more dynamic if the regulatory environment in Brazil was clearer and more predictable.

Valor: Does the fact that Brazil will be governed again by President Lula, a leftist leader, tend to have any impact on trade and investment relations with China?

Mr. Neves: No, I do not believe so. Throughout the four years of the Bolsonaro administration, trade between Brazil and China has remained dynamic. Historically, the Chinese have always separated their foreign policy from ideological aspects.

Valor: Is there any big issue to be solved today between the two countries from a trade standpoint?

Mr. Neves: All countries which have intense commercial and financial relations also have aspects subject to controversy. Brazil complains about certain phytosanitary barriers for exporting food to China, and the Chinese complain, for example, about the Brazilian regulatory environment and the doubts generated regarding whether they can invest in this or that sector.

Valor: Are there conditions in the Chinese economy for more Brazilian products to have more significant sales?

Mr. Neves: Yes, there are. When President Xi Jinping announced changes in China’s economic policy, the goals are still the same. The means vary a little. He said the model that allowed China to grow for 40 years at double-digit levels has in a way run out. Among other reasons, it depends a lot on the level of economic activity of the rest of the world economy. And today it is turning more to China’s internal consumption, among other reasons because China’s economic growth was spectacular, but it generated a great inequality. President Xi Jinping was already talking about this in 2007 when I was living there. He already said that China’s model was not sustainable in the long term and that at some point a more inward-looking model would be needed. This means that the Chinese people will consume more and save less. Although not at spectacular rates, the country will continue to grow, and this creates a demand in China for Brazilian products, as long as we are in a position to supply these products competitively in the international market.

*By Marcos de Moura e Souza — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Petrobras’s future CEO rules out intervention on fuel prices

Senator Prates, picked by President Lula to run state-owned oil company, said prices will be aligned with international market

01/05/2023

Jean Paul Prates — Foto: Edilson Rodrigues/Agência Senado

Jean Paul Prates — Foto: Edilson Rodrigues/Agência Senado

Senator Jean Paul Prates, picked by President Luiz Inácio Lula da Silva to head Petrobras, said Wednesday that the promised change in the fuel price policy will not include a direct intervention in the market.

Mr. Prates also made it clear that the calculation for price rises will continue in line with what is practiced internationally – but will no longer follow the so-called import parity price, a policy put in place in 2016, during the Temer administration, in which the variation of Brazilian fuel prices occurs according to the prices of oil and oil products in the main markets. “It will not unlink from the international price, it will unlink from the import parity, without imposing a tariff, with no direct intervention in the market, just using the competitive advantage,” he said.

Mr. Prates’s statements brought some relief to local assets in the trading session and allowed Brazil’s benchmark stock index Ibovespa to rise for the first time in 2023 driven by the appreciation of Petrobras shares. The stocks ended the day up 1.67% (common shares) and 3.18% (preferred shares).

He also guaranteed that the measures will be taken in a predictable way. “Saying that the IPP will end doesn’t mean the price will be disassociated from international swings. Only that we will use the fact that it is produced domestically in favor of the Brazilian economy. We will discuss it with all interested parties,” he said.

Mr. Prates spoke to reporters after the inauguration ceremony of Vice President Geraldo Alckmin as Minister of Development, Industry, Commerce, and Services (MDIC). Among other measures under study, Petrobras’s future CEO advocated that a stabilization account for fuel prices must be followed by other measures such as an “ad rem” rate – in currency, instead of percentage – and the return of the federal tax Cide “to recover the collection of the states.”

He also said that the measure is implemented quickly, comparing its absence to being in a car without wearing a seatbelt. “I think it is important to have [the stabilization account soon]. You’re always at risk. You’re riding without a seatbelt,” he said. “I think having a cushion like that, and then suddenly using Cide again, getting some of the revenue back for the states somehow, using a flat, ad rem tariff. Putting currency instead of percentage, because when the price goes up, the tax does not go up in the same proportion. But at least the price is not inflated from the inside,” he said. “If you use ad rem, single-phase tariff, single rate, and the states are comfortable, it’s good, it works. The problem is that cutting taxes from the states abruptly was an emergency solution,” he added.

President Jair Bolsonaro eliminated the collection of federal taxes (Cide and social taxes PIS and Cofins) on fuels last year, amid the rise caused by the war in Ukraine. He also sponsored a bill that transformed fuels into essential products, limiting the collection of the sale tax ICMS to the minimum rate of each state, between 17% and 18%.

The measure reduced prices, but also affected revenue collection by state governments. “No structural solution was put in place. The solution was to take money from states,” he said. “It’s not a smart solution. It is even a somewhat punitive palliative. You are not fighting volatility. If another country goes to war with an oil-producing country, you won’t have anywhere else to cut. There was not a solution.”

Mr. Prates reiterated that the price policy will not “revoke the market,” but will take into account “the actions of the National Petroleum Agency, the ministry, and the market practice.”

The senator also said that the pricing policy is the country’s, not the oil company’s. “Petrobras follows the context. The instance of Petrobras’s decision concerns Petrobras’s customers. And the national context instance concerns the Ministry of Finance and the Ministry of Mines and Energy,” he said.

*By Vandson Lima, Cristiane Agostine, Fabio Murakawa — Brasília

Source: Valor International

https://valorinternational.globo.com/
/by

Agrarian Development Ministry faces mission of eradicating hunger

Conab will play key role in purchase of food and formation of regulatory stocks, says Minister Paulo Teixeira

01/04/2023

Paulo Teixeira — Foto: Marcelo Camargo/Agência Brasil

Paulo Teixeira — Foto: Marcelo Camargo/Agência Brasil

The Minister of Agrarian Development and Family Agriculture, Paulo Teixeira, reinforced on Tuesday, during his inauguration ceremony, that he is facing the challenge of eradicating hunger in Brazil and providing more dignified living conditions for the people who live in rural areas.

The ceremony was attended by Vice President Geraldo Alckmin and several other high-ranking officials, in a clear sign of the importance that the ministry will have in the new administration.

“No country can consider itself civilized with such a substantial portion of its population threatened by hunger. Without food, there is no democracy,” said Mr. Teixeira in his speech.

The minister said that the National Supply Company (Conab) will remain within the ministry’s structure, despite the suggestion of Agriculture Minister Carlos Fávaro to implement shared management in the state-owned company.

“Conab will play an important role in the purchase of food and the formation of regulatory stocks,” he said, adding that “all the Conab programs aimed at corporate agriculture will be maintained, but the company must remain in this ministry.”

About the stocks, however, Mr. Teixeira acknowledged that it will be necessary to seek funds in the budget to finance the storage. “We will talk to Finance and Agriculture [ministries] about the formation of regulatory stocks, so there will be no increase in the price of food or lack of food in the off-season,” he said.

With the high prices of meat in the last few years — and after President Luiz Inácio Lula da Silva’s campaign promise that people will eat picanha, a cut barely similar to sirloin cap, again — Mr. Teixeira does not know if he will be able to create stocks of these products. “We will see the economic conditions for this. But there will certainly be grain stocks,” he said.

The ceremony also attracted rural social movements, which delivered food baskets from agrarian reform producers to the new minister and performed music and poetry.

The Conab auditorium, in Brasília, was packed with deputies, senators, and former ministers. The president of the Workers’ Party, Gleisi Hoffmann, and the justice of the Superior Court of Justice (STJ), Benedito Gonçalves, also attended.

Mr. Teixeira believes that there has been a setback in policies aimed at family farming and rural, water, and forest peoples since 2016, after the impeachment of former President Dilma Rousseff.

“The reversal process started in 2016 led to Brazil’s return to the hunger map. We have a huge territory that has not been used rationally in recent years due to the lack of public policies,” said the minister.

Even without a direct connection to agriculture, the new minister cited historical agendas of family farming social movements — such as agrarian reform, which had new settlement processes paralyzed during the Bolsonaro administration.

“Today, we restart this challenge to eradicate hunger and give more dignified living conditions to Brazilians who live in rural areas. We want to rescue the role of the Brazilian State, which through this and other ministries must promote access to land,” he said.

“We have thousands of families living in camps, on the sides of roads, in very poor conditions, in a country fully capable of offering land and housing to their sons and daughters,” he added.

According to the minister, access to land is the initial step to other rights, such as mobility, electricity, internet, and quality water. He also deems it necessary to show the impact of family agriculture on the preservation of the environment.

In this sense, Mr. Teixeira said he intends to implement an agrarian reform program with the resumption of expropriations and land distribution in Brazil. He also said that he will maintain the process of giving official deeds for existing settlements.

The minister guaranteed that, in this process, there will be legal security and that the property right will be respected. The minister criticized the interruption of land distribution actions in the last administration and wants to resume expropriations that have already been judged in court. Mr. Teixeira still does not have a survey of the size of the area suitable for expropriation.

The minister also said he intends to expand technical assistance and rural extension actions in agrarian reform settlements and for family producers.

*By Rafael Walendorff — Brasília

Source: Valor International

https://valorinternational.globo.com/
/by

Solar tops wind power, becomes second source in Brazil’s generation mix

Source is only behind hydro power one decade after first projects

01/04/2023

Strong state policy of incentives for renewable sources also drives growth — Foto: Uwee Westphal/Pixabay

Strong state policy of incentives for renewable sources also drives growth — Foto: Uwee Westphal/Pixabay

Solar power became the second-largest source in Brazil’s generation mix, only behind hydroelectric plants, from a virtually non-existent installed capacity a decade ago. The source has just topped wind power and hit 23.9 gigawatts, considering large plants and small photovoltaic systems of self-generation on roofs, facades, and small plots of land.

The amount accounts for 11.2% of the country’s power generation mix. Since 2012, investments have totaled R$120.8 billion, according to the Brazilian Solar Energy Association (Absolar). Technological improvement, market evolution in Brazil, cost reduction, and good insolation quality have created ideal conditions for the source to grow.

A strong state policy of incentives for renewable sources also drives growth, according to the Economics of Energy Innovation and System Transition (EEIST) project.

Absolar’s head Rodrigo Sauaia told Valor that Brazil is among the 10 largest markets in the world in this segment and is still gaining ground. “The first solar power contract with the federal government was signed in 2014. Only in 2017 Brazil hit one gigawatt. The first auction of the wind power industry, on the other hand, was held a decade earlier,” said the executive.

Last year was unique in this trajectory: the sector overcame the challenges of exchange rate oscillation, high freight rates, the collapse of China’s supply chains, congestion in ports, inflation caused by high global demand, and the pandemic. Even so, Brazil added 9 GW of power. In the last 150 days alone, the rate of growth has been more than 1 GW per month.

With this, the power generated from photovoltaic panels has been the fastest-growing segment in the electrical sector by associating the growing search for clean and renewable power with the appeal of low cost.

Yet, the solar source is expected to keep growing strongly. Bloomberg projects that the solar source will be the most important in the power generation mix by 2050, surpassing hydroelectric plants, which total 110 GW in operation, according to the Brazilian Electricity Regulatory Agency (Aneel).

“This path can be traced in a more or less agile manner, according to public policies developed and the use of these technologies in government programs,” said Mr. Sauaia.

It is worth pointing out that the solar source is significant in Brazil’s power generation mix because of distributed generation, a type of energy production generated mainly with solar panels near consumers with a limit of up to 5 MW.

Guilherme Chrispim, head of the Brazilian Association of Distributed Generation (ABGD), recalled that in this historical context, wind power took longer to reach the same level. Furthermore, the growth of solar was key for the social, economic, and environmental development of Brazil, at a time when the consumer became more empowered, including with the option to generate their own energy.

“Distributed generation for small consumers made solar power the second-largest source in Brazil’s generation mix,” he said. “This shows democratization in this source. Plus, there is no lack of sunny areas in Brazil.”

Not surprisingly, distributed generation is the model that added the most power in the system – 7.7 GW, compared to 4.6 GW in 2021 – and is expected to be the source that will inject the most capacity in the system.

Absolar forecasts that the source will add more 10 gigawatts of capacity in the electrical system this year, raising the total to 34 GW. Of this amount, 21.6 GW will come from small and medium-sized systems installed by consumers in homes, small businesses, rural properties, and public buildings.

The sector’s path is still long. Technological development is a challenge since a good part of the solar panels installed in residences has low efficiency. The crystalline silicon cells had 13% efficiency 10 years ago, compared with up to 26% now. As technology advances, costs are falling.

“As of 2020, solar power is the generation source with the best cost-benefit ratio in places where more than 60% of the world’s population lives. Cheaper than coal-fired, wind-fired, and hydro sources,” said Mr. Sauaia when referring to large power plants. According to the International Energy Agency’s forecast, the source is expected to surpass power production from coal by 2027.

Smaller solar systems have also seen their costs reduced. A study by consultancy Greener with companies in the sector found that, in Brazil, a residential photovoltaic system that cost an average of R$35,000 in 2016 can currently be purchased for R$19,500.

Even with the substantial drop in equipment prices, it is still expensive for low-income households. Camila Ramos, director and founder of the consultancy Clean Energy Latin America (Cela), stressed that even with the high interest rates in Brazil, the demand for financing solar panels has increased because of the growing rise in electricity bills in recent years.

According to the executive, the segment’s financing lines have increased in the last year. The sector calls for more access to credit in social programs to bring this technology to the whole society in a more democratic way.

The source’s growth is not restricted to Brazil. The whole world has been advancing at a record pace, not only because countries are driving the expansion of renewable power, but also to achieve their climate and energy security goals. China, for example, has more than 306 GW. The United States is at more than 123 GW, according to 2021 data. Compared to some countries, Brazil is still taking its first steps.

*By Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Expansionist view backs nominations for state-owned banks

Share of private-sector banks in lending is expected to lose ground again after growth in recent years, experts say

01/03/2023

Tarciana Medeiros — Foto: Divulgação/Fernando Santos

Tarciana Medeiros — Foto: Divulgação/Fernando Santos

The appointment of top executives from Caixa Econômica Federal and Banco do Brasil (BB) working forces to lead these state-owned banks are the latest signs that President Luiz Inácio Lula da Silva intends to use both banks to support the increase of credit, according to market specialists. The market share of private-sector lenders, which has grown in recent years to equal that of the state-owned peers, is expected to give way again to this group that dominated the ranking of the National Financial System (SFN) until 2015.

For investors who own shares in the sector, this is bad news, as it potentially reduces the distribution of dividends from BB, the only state-owned bank with listed shares, and represents competition for other banks in some segments.

“Overall, both BB and Caixa have a relevant part of the portfolio of individuals. I would expect an expansion of credit lines, either through new concessions or debt renegotiation,” said Larissa Quaresma, a financial sector analyst at Empiricus Research. “It is one way to extend the use of state-owned banks as a mechanism for economic policy.”

Both Tarciana Medeiros, appointed as CEO of BB, and Rita Serrano, Caixa’s new CEO, came from the lenders’ ranks. Ms. Medeiros worked at the middle management level and was catapulted to the highest post in the federal bank, and “will need a quick learning curve to handle the position in the statutory board,” said Ms. Quaresma.

As for Ms. Serrano, the employees’ representative on Caixa’s board of directors, Ms. Quaresma says that “she maybe will give in to the pressure for increasing social spending and real salary adjustments.”

Ms. Quaresma evaluates that, in an environment of high interest rates, there will be pressure for the banks to reduce rates. “It is unclear how state-owned banks will manage their finances given the increase in the cost of funding tied to the [Brazil’s key interest rate] Selic.”

The eventual use of BB and Caixa to stimulate credit, contrary to monetary policy, may provoke the migration of riskier borrower profiles from private-sector to state-owned banks, said Ricardo Almeida, the founding partner of the asset management company Tower Three. The executive, who is former CEO of Bradesco Asset, says he does not believe that credit expansion via state-owned banks will occur at the same levels seen in the Rousseff administration when BB, Caixa, and the Brazilian Development Bank (BNDES) adopted anti-cyclical growth policies. “If the amount is the same, it will help a lot with the default rates in private-sector banks. The [population’s] indebtedness is high, I have more concern about Caixa than BB in that sense.”

Turbocharging credit has already proven to be “a bad incentive” because state-owned banks are not good capital allocators, said Otávio Vieira, a managing partner of Nest Investimentos. For him, there is a risk of setbacks, of the expansionist policy depleting the institutions’ financial situation. “The government attempt to stimulate with cheap credit, with subsidies, can be bad and destroy value.”

Fernando Siqueira, head of research at Guide Investimentos, saw the nominations as more political, as the executives were not at the summit or held similar positions elsewhere. “It is worth monitoring now what the policy adopted will look like.” According to him, the market does not see great risks in the “Desenrola” program, of credit for indebted households, one of the priorities of Finance Minister Fernando Haddad. But it is necessary to observe how it will be done and if the government will adopt an expansionist credit policy, as it was during the Roussef administration.

What is emerging, however, is a more competitive scenario for the financial sector, especially in the free credit, in lines such as overdraft, credit cards, and car financing, says Ms. Quaresma, from Empiricus. In real estate credit, there are already subsidies, and this is a field dominated by Caixa. BB, in turn, stands out in agribusiness. For the analyst, private-sector banks tend to seek profitability by making lines that are out of the focus of the state-owned ones more expensive.

Empiricus had a buy recommendation for BB shares during most of the year, but after Mr. Lula’s election, suggested the sale of the stocks. “Whoever bought, definitely has to worry because now the BB’s focus is different, it no longer has that profitability, efficiency, and cash generation agenda. Profit becomes a secondary objective,” said Ms. Quaresma.

She does not expect impacts on the distribution of dividends in the next two or three quarters, which will reflect the results of 2022, but in one year this tends to appear in the accounts.

One stock manager says he held BB in his portfolio for much of the year because the results had been very good, the best in the industry. “I wouldn’t have much of a problem buying again, but I’m waiting to see the first days of government.”

Leonardo Morales, partner and director of SVN Gestão, reduced to zero the positions he held in BB and Petrobras some time ago because of the political risk. For him, the big challenge for the bank is to keep the return on equity (ROE) around 20%.

*By Adriana Cotias, Mariana Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Tough fiscal scenario suggests more restrained activity in 2023

Projections for GDP growth in the year remain at the median of 0.7%, but a wave of revisions has already begun

01/03/2022

Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

While it is making its way in Congress, the so-called Proposal to Amend the Constitution (PEC) for the Transition and the expectations surrounding President-elect Luiz Inácio Lula da Silva’s government team has triggered a sharp worsening of the fiscal outlook this year-end.

Economists started to forecast higher inflation and abandoned the prospect of a reduction in the key interest rate in mid-2023 — the baseline scenario now is that interest rates will only be lowered at the end of the year or even later. Although the projections for the GDP next year have undergone few revisions so far, analysts are still debating the effects on the economy of the promised spending expansion of the new administration.

The median of the estimates of 114 financial institutions and consulting firms consulted by Valor for the GDP in 2023 is still at 0.7%, the same level as the last survey, at the end of November. In this period, at least 20 institutions lowered their projections, reflecting greater concern with the fiscal issue and the prospect that the Selic rate will take longer to fall again.

Another 22 revised their estimates upward. In this case, there was a contribution from the update of the GDP calculation for 2020 and 2021 by the Brazilian Institute of Geography and Statistics (IBGE). The updated values implied a carry over — that is, assuming a zero annual variation rate — for the 2022 and 2023 projections. The median of the projections for growth this year went to 3.0% from 2.8%.

At Claritas, the projection for 2023 was recently lowered to 0.6% from 1.0%. “We could see that Brazil would already experience a cyclical slowdown in growth because of two vectors: the lagged effect of monetary policy, which is possible to see in the figures for credit concession and default, and also because of the global scenario, with [the prospect of] recession in the United States, Europe, and the United Kingdom next year,” says Claritas’ chief economist, Marcela Rocha. “Brazil is a closed economy, but that generates lower export growth in an environment of tighter financial conditions.”

Against this picture, argues Ms. Rocha, there was only the prospect of a record agricultural harvest — with a growth of 14.6% according to projections by the National Supply Company (Conab), or 9.6%, according to the statistics agency IBGE — as well as some recovery in China, which is abandoning the zero Covid policy. But the scenario has ended up getting worse since the elections.

“The size of the Transition PEC spooked, and the market took away the Selic cuts that were planned for next year. Besides hitting the financial conditions, this has also generated an economic cost, which is the worsening of expectations and the increase in uncertainty,” he says. Claritas, however, still sees room for cuts in the key interest rate as of the third quarter.

The new government’s promise to boost public investments in the first year is seen with some skepticism. “It is necessary to see if there is enough time to spend next year. To make investment viable takes time, you need a plan,” says Ms. Rocha. “In any case, I believe that the balance would still be negative. Given the deceleration already contracted so far, this impulse given by the government may be more than offset by the increase in uncertainty.”

According to Cosmo Donato, an economist at LCA Consultores, 2023 will not have any major sector-boosting activity, but farming and cattle raising can make a positive contribution. “Growth drivers, such as industry and services, will lose strength next year. Our vision remains positive for the agriculture and cattle-raising sector, which fell by 0.6% this year and may grow by 3.1% next year,” he says, based on the prospection of harvest indicators and economic activity in China, one of the main destinations of Brazilian agricultural exports.

“But there is the distrust around the fiscal issue, which may imply a cycle of high Selic for a longer time, which weighs on the activity as well. It will be a very challenging year, without much positive news and having to be careful not to get more negative,” he continues.

“There is a lot of uncertainty in 2023. What will happen with this fiscal package is not trivial,” he says. “Next year we will still have high-interest rates holding back credit, construction that helped this year losing steam, and more indebted families,” says Armando Castelar, coordinator of the applied economics area at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV).

The expectation is for less momentum from domestic demand and a less likely interest rate reduction scenario: “2023 will be more difficult than 2022. In part, because we are working close to the capacity limit. And the Central Bank is raising interest rates to slow the economy and control inflation. The complicating factor is expansionary fiscal policy,” says Castelar. “On one hand, you step on the accelerator. On the other, on the brakes. And one thing will get in the way of the other.”

“As the Monetary Policy Committee (Copom) has reinforced, when you have a very dynamic economy, fiscal pressures spill over into inflation, and monetary policy needs to respond to that,” says chief economist Cecília Machado. “In the short term, there may be some mismatch between the effects of these policies, so that the fiscal policy can give some more support to the economy. However, I believe that the monetary one will balance this game.”

Despite this, Ms. Machado sees upside risk to the projection, should the prospects for the agricultural harvest come true. “Agriculture is the big driver, but it also has spillover effects for other sectors, such as equipment and services. Incorporating this, it is possible to reach 1.6% [of growth next year],” she says.

(Contributed to this story Anaïs Fernandes and Marta Watanabe)

*By Marcelo Osakabe, Marsílea Gombata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Uncertainty to slow down advance of corporate debt

Role of Brazilian Development Bank under new administration is warning sign

01/03/2023

Vivian Lee, socia da Ibiuna Investimentos. — Foto: Carol Carquejeiro/Valor

Vivian Lee, socia da Ibiuna Investimentos. — Foto: Carol Carquejeiro/Valor

The corporate debt market is likely to start 2023 in a cautious tone after one more year of growth. Doubts about the role of the Brazilian Development Bank (BNDES) and the uncertainties common at the beginning of a new federal administration make it more difficult to predict how the coming months will be.

The arrival of new capital market rules, such as mark to market in securities trading, also clouds the horizon, as does redemptions from some funds that invest in debt.

“We must observe how the market will evolve over the weeks,” said Felipe Wilberg, head of fixed income and structured products at Itaú BBA. “Today, it is more uncertain than usual.”

Funding from funds that invest in debt began to slow down in October. In November, the situation worsened, according to Vivian Lee, a managing partner at the asset management company Ibiuna. “It was the first month with net redemptions of the funds we follow,” she said. Ibiuna monitors monthly the flow of funds with net assets over R$100 million that buy more than 20% of debt. The data is important because the inflow and outflow of funds influence the pricing of securities in the market.

It is unclear whether this is a one-off movement driven by the increase in year-end spending or whether it will persist. “We will monitor to see if it will become a trend starting in 2023,” said Ms. Lee. The market, in general, is likely to adopt a wait-and-see approach. “It doesn’t necessarily mean that asset managers will stop buying debt, but maybe they will stop buying while they watch what’s coming down the road.”

Until November, companies raised R$235 billion through bonds, data from Anbima, the association of securities firms, show. The market expects that the volume for the year will exceed the R$250 billion seen in 2021. The growth was driven by the migration of funds to fixed-income alternatives from equity – a move triggered in 2021, when the Central Bank started to raise Brazil’s key interest rate Selic.

The closing of the foreign market for raising debt also helped improve the local market. Brazilian companies halted the issuance of bonds in the foreign market in early 2022 because of the strong instability caused by the increase in interest rates in the United States, which made it difficult to set prices. Thus, large exporters like Petrobras opted for raising funds in the Brazilian market.

“The local market has partly supplied what cannot be raised abroad due to the lack of access to the bond market,” said Gilberto Nakayasu, head of corporate debt at Bradesco BBI. “Next year, if there is an increase in rates or a lower appetite from investors, companies will likely return to bonds.”

Mr. Nakayasu foresees for the coming months an increase in the premium charged by investors to take part in new offerings in the local market, considering the record volume of issues in 2022. “Whether we like it or not, unlike the foreign market, the number of investors available to buy securities is smaller and very concentrated. As a result, we expect some pressure on the rates charged on loans.”

Throughout the year, spreads did not vary much considering JGP’s main index, created to track the evolution of this market. “The spreads started the year at CDI [interbank short-term rate] + 1.8% and will end the year at CDI + 1.85%,” said Alexandre Muller, with JGP. “Even with a large volume of issuance, fundraising was great. Now, with funding slowing down in some assets, the offers are also decreasing. The market managed to balance itself out.”

Looking ahead to 2023, Mr. Muller says he is not yet convinced that issuance volumes will be higher. “Before that, we need to evaluate how the companies’ investment plans will be and if they will eventually fall because of high interest rates and political and economic uncertainties,” he said. The estimates also depend, according to him, on how individual investors will react to the new rules of the market. “Possibly there will be a contraction in this investor base.”

As of January, banks and asset managers must present to investors the prices of securities at the value at which they are traded in the secondary market or at the probable negotiation value. Until now, the most common thing is for investors to visualize their positions with yields on the issue rate curve or on the acquisition rate curve, ignoring variations in the market’s mood.

The growth of the local debt market next year still depends on the reduction of political and fiscal uncertainties, according to Pierre Jadoul, corporate debt manager at ARX Investimentos. “I don’t believe that this year will be bad, but it depends on how the new administration behaves. If it calms the market and gives positive signals from the fiscal standpoint, it will manage to take a lot of the pressure off future flows and bring a better environment for companies to invest.”

If the BNDES acts like when under President Dilma Rousseff, the number of issues is likely to fall, said Mr. Jadoul. “From the signals of [Aloizio] Mercadante [nominated to lead the development bank under President Luiz Inácio Lula da Silva], this doesn’t seem to be the path, but we’ll have to wait and see.”

*By Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Brazil ends 2022 with record trade surplus

In December alone, country’s trade balance totaled $4.8bn

01/03/2023

Brazil’s trade balance was positive at $62.3 billion in 2022, up 1.5% year-over-year — Foto: Pixabay

Brazil’s trade balance was positive at $62.3 billion in 2022, up 1.5% year-over-year — Foto: Pixabay

Brazil’s trade balance in December meant a surplus of $4.779 billion. The number was released Tuesday by the Foreign Trade Secretariat (Secex) of the Ministry of Development, Industry and Trade (MDIC). The value is 24.5% higher than in the same period of the previous year, calculated by the daily average criteria.

With this, the balance was positive at $62.3 billion in 2022, up 1.5% year-over-year, and also the highest since records began.

Exports totaled $26.6 billion in December, up 14%. Imports reached $21.8 billion, up 12%.

In 2022, imports totaled $272.7 billion, up 24.3% and the highest since records began. Exports, meanwhile, totaled $335 billion, up 19.3% and also a record. In turn, the total trade (sum of exports and imports) reached $607.7 billion, up 21.5% and also a record.

The better-than-expected positive balance of trade in 2022 “is explained by higher growth in exports and lower growth in imports compared to the estimated,” Secex said in a note.

In its most recent projection, Secex had calculated a $55.4 billion surplus, the result of $330.3 billion in exports and $274.9 billion in imports. In this case, the total trade would be $605.2 billion.

“The higher-than-expected total trade figure is explained by the higher growth of exports compared to the estimated one,” said Secex.

As for exports, the sector with the highest growth last year was agriculture, “mainly due to higher prices.”

In addition, “growth in value was seen to Brazil’s main trading partners in 2022,” such as China, the European Union, the United States, and Argentina.

Last year, agricultural exports grew 36.11% year-over-year, while the extractive industry saw an increase of 4.64%, and the manufacturing industry posted an increase of 26.18%.

Sales to China rose by 1.46%, while those to Asia increased by 7.54%. Exports to North America grew 19.86%, those to South America climbed 29.03%, and exports to Europe rose 31.39% year-over-year.

As for imports, there was an increase of 6.31% in agricultural purchases, an increase of 69.8% in the extractive industry, and a 22.89% advance in the manufacturing industry.

Regarding imports, the price was also “a determining factor for the increase in value” in 2022. In addition, “an increase in the value imported is noted in all categories” last year, formed by capital goods, intermediate goods, consumer goods, and fuels.

Finally, the “main suppliers of goods to Brazil” in 2022 were China, the European Union, the United States, and Argentina.

*By Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
/by

Factors favorable to investment lose ground as economic scenario changes

Weaker activity, high interest rates, and distrust in fiscal situation are main threats in 2023, says Cemec-Fipe

01/03/2023

Carlos Antonio Rocca — Foto: Silvia Zamboni/Valor

Carlos Antonio Rocca — Foto: Silvia Zamboni/Valor

The good performance of investments in the last two years was driven by factors that are losing steam or under threat. After reaching 19.6% of GDP in the third quarter of this year, the highest level since 2014, the investment rate faces a more difficult perspective amid a scenario of anemic growth, high interest rates, and distrust about the fiscal policy.

This is the situation currently described by most analysts. After two years of strong growth — the expansion of the GDP reached 5% in 2021 and is expected to close at 3% this year —, a firm deceleration is now expected. The median of the Central Bank’s Focus survey points to an advance of 0.75% next year. In the survey published Friday by Valor, the median among 114 institutions was 0.7%.

At the same time, the economy will enter 2023 with a key interest rate of 13.75% per year and also high long-term interest rates — the ones that matter for investment decisions. At the close of the last trading session of 2022, the NTN-B (National Treasury note) maturing in 2035 was at 6.03%, compared with 5.27% at the end of 2021 and 3.21% in 2020.

Investment decisions look at the future outlook but are also based in part on current conditions. One way to look at this is to observe the behavior of the return on invested capital (ROIC) and the weighted average cost of capital (WACC) of a selection of 450 publicly traded companies. The calculations made by the Center for Capital Market Studies (Cemec-Fipe) show that investment attractiveness — the difference between ROIC and WACC — peaked in the first quarter of last year, but the cost of capital prevailed again in the third quarter.

“Besides this, this period had some interesting advances that helped drive investments, such as the new law on regulatory agencies, the approval of the basic sanitation framework, the gas law, and a better institutional environment,” said Carlos Antonio Rocca, coordinator of Cemec-Fipe.

It is worth noting, says the economist, that the numbers are compiled using data from listed companies which, in theory, are more efficient than the average of the Brazilian market. In other words, the cost-benefit ratio of investing for the average Brazilian company is worse.

Taking a closer look, it is also possible to observe that the two main sectors that have led the recent improvement in investment — civil construction and the agribusiness truck and machinery industry — do not necessarily have prospects as favorable as those that have been present until now.

The perspective of the Civil Construction Union of the State of São Paulo (Sinduscom-SP) is that the segment’s growth will fall from 7% in 2022 to only 2.4% in 2023. The second sector, on the other hand, has a more encouraging outlook. The most current estimate from the National Supply Company (Conab) is for a record harvest in 2023, reaching 312.2 million tonnes, or 15% more than the one obtained this year. On the other hand, it is widely expected that the boom in commodity prices has ended and that this picture will be stable or show a slight decrease next year.

Gilberto Borça, a researcher at the Brazilian Economy Institute (Ibre FGV), points out the cyclical character of both “drivers” of investment. “The commodities sector is linked to this cycle of rising prices, which is a less noble type of investment. Civil construction, on the other hand, is also recovering from a sharp drop between 2015 and 2016, when the sector was virtually decimated by the Car Wash scandal,” he said.

Mr. Borça lists other reasons to reduce enthusiasm for the recent investment boom. The first is the well-known accounting effect of the internalization of the oil platforms in the national accounts, which inflated gross fixed capital formation (GFCF) by about 1 percentage point in 2020 and 2021 — the effects of which are expected to diminish as of 2022.

The second reason is the fact that the prices of investment products and inputs have grown faster than the prices of the economy as a whole in the recent period. In situations like these, GFCF as a proportion of GDP can grow even if there is no real growth, he says.

Considering the variation of the investment rate to the GDP at current prices, the economist notes that this investment deflator accounted for 42.8% of the investment growth in 2021 or 2.1 percentage points of the 4.9% GFCF growth in 2021 compared to the previous year. Still, real growth would have been 2.5 percentage points — the highest since 2010.

Looking ahead, the Lula administration is promising a resumption of public investments, whose levels today are not even sufficient to cover the depreciation of capital, recalled the FGV-Ibre researcher.

“Public investment ends up generating systemic gains in the economy and channeling private-sector investment,” said Mr. Borça. “I believe that the appointment of Gabriel Galípolo [to the Executive Secretariat of the Ministry of Finance], a specialist in public-private partnerships, can help this model get off the ground and attract the private sector, given the fiscal limitations.”

According to Cláudio Frischtak, managing partner of consulting firm Inter.B, public investment in infrastructure, including that of state-owned companies, currently accounts for nearly 0.6% of GDP. “Therefore, it is not very relevant from the standpoint of aggregate investment, but it can generate a ‘crowd-in’ effect [when it induces other agents to invest]. I see the two as complementary,” he said.

The question, he ponders, is that the direction the new administration intends to give to the fiscal issue may scare investors away. “What is currently being proposed in Congress already creates a negative effect that can last for months and maybe years. We are going to have a huge disincentive because of the increase in the cost of capital,” said Mr. Frischtak.

In the short term, Mr. Frischtak is skeptical about the new administration’s promise to increase public investment next year. “There is no project, execution capacity, or governance for a construction boom. If everything goes right, it could grow nearly 0.1 percentage point of the GDP next year 2023, around R$10 billion, maybe 0.2 points. It doesn’t make sense to talk about a shock of R$40 billion,” he said.

By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by