Murray Advogados
Planning and Budget Minister Simone Tebet denies focus on revenues and R$80bn increase in spending
05/31/2023
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Simone Tebet — Foto: Leo Pinheiro/Valor
Planning Minister Simone Tebet and Finance Ministry’s Executive Secretary Gabriel Galípolo strongly defended the progress made so far with the fiscal plan when they participated in the seminar “E agora, Brasil?” held by Valor and O Globo newspapers.
In response to criticism, they said the new fiscal rule is more restrictive than the previous one, focuses on reducing expenditures rather than revenues, and does not increase expenditures by R$80 billion, as some economists estimate. According to Ms. Tebet and Mr. Galípolo, the proposal is more flexible than the spending cap – Brazil’s previous fiscal anchor, which limited growth in public spending to the previous year’s inflation – and adapts better to economic cycles, while allowing public debt to be kept under control and social demands to be taken into account.
“I think [the fiscal plan] has been successful not only from a political point of view but also from a market point of view. Of course, there will be disagreements and criticisms. But if I look at the price of assets since the fiscal plan was unveiled, long-term interest rates have declined, the exchange rate has reached a new, much more comfortable level, and the risk that existed in terms of the debt-to-GDP ratio has been eliminated,” Mr. Galípolo said.
When talking about the result of what was passed by the Chamber of Deputies, the secretary stressed that the fiscal framework is not “a paper of economy,” but rather the result of a democratic construction, “which reflects the composition of forces that were elected,” leaving implicit the different interests involved in the debate.
Ms. Tebet said that a cut of up to R$40 billion will be necessary next year after changes made by the bill’s rapporteur in the Chamber of Deputies, Cláudio Cajado, signaling this more restrictive format of the fiscal rule. She was confident about the bill’s passage through the Senate but said there was no room for further cuts.
“The Senate, which is sovereign, will have a say [about the framework]. But it’s up to us to make a counterpoint to a narrative that has come from the market in recent days. We are going to show — and I am a fiscalist — that the framework has become more restrictive in terms of spending. In today’s parameters, with the change made by the rapporteur, we would have to cut between R$32 billion and R$40 billion in discretionary spending,” she said.
Ms. Tebet’s speech is in line with what Treasury Secretary Rogério Ceron said in an interview with Valor on Tuesday. According to him, the change in the bill — which established that the 2.5% increase in public spending above inflation will depend on the increase in revenues — means cuts of between R$40 billion and R$60 billion in discretionary spending for next year’s budget.
The minister hinted at possible cuts in congressional earmarks. “If it is not possible to restore one point or another, let the framework remain as it is. If it is more restrictive, we will have to cut congressional earmarks, for example,” she said, sending a message to senators.
In the direct comparison between the fiscal framework and the spending cap currently in force, both emphasized the advantages of flexibility and space to make the necessary investments for the country, including in the social sector.
The previous format of the fiscal rule – with spending increasing in line with inflation – implicitly entailed the loss of relative participation in these expenditures, Mr. Galípolo said. With the new framework, he said, ranges are created with upper and lower limits for spending that allow the anti-cyclical nature to be preserved and allow flexibility for certain expenditures, especially social ones, while offering “signs of good behavior in the relationship between debt and GDP.”
Ms. Tebet said the spending cap was too rigid and depended on the survival of sustained economic growth, which depended on a tax overhaul that did not come. She denied that the framework was revenue-focused and stressed the possibility of adjustments in the event of lower economic growth while keeping the country’s public debt under control.
“It’s a misconception [that the framework] is revenue-oriented. It depends on revenues, but the focus is on expenditure control, precisely so as not to spend more than is collected. And in the future it has an impact on controlling Brazil’s public debt. Of course, always keeping in mind the social side,” he said.
Commenting on the device that allows a 2.5% real increase in spending in 2024, Mr. Galípolo said that there was some “noise” from the market, although calculations presented by economists are “legitimate” because “everyone is trying to do their math” on the new framework.
According to Mr. Galípolo, it is not possible to increase spending by R$80 billion, as some economists have calculated after the publication of Mr. Cajado’s report. For him, an increase in spending of this magnitude is not feasible, even if we consider that it represents 20% of the GDP. The level of spending, he said, is between 18.5% and 18.7% of GDP, and the difference between 0.6% of GDP and 2.5% of GDP is R$38 billion.
The secretary argues that the rule is much tighter than it seems and there is a difficult scenario in the transition from 2023 to 2024. “We will have to face another issue, which is whether we are willing to squeeze health and education.”
Commenting on the outcome of the bill, Ms. Tebet also said that the rapporteur made the rule “credible, flexible and sustainable,” but also acknowledged the challenges of complying with it. She revealed that she had joked with Finance Minister Fernando Haddad that he had “thrown a grenade without the pin into his lap.”
“I told Haddad, ‘We’re here to support you, but you know you threw a grenade without a pin in your lap, right? The framework has ambitious goals, trying to bring the deficit to zero by next year. It is a challenge, but it is credible and it is possible,” she said.
*Por Lucianne Carneiro, Marta Watanabe, Estevão Taiar — Rio de Janeiro, São Paulo, Brasília
Source: Valor International
Despite growth surprise, economy likely to remain weak with high interest rates, inflation
05/31/2023
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Ana Paula Vescovi — Foto: Carol Carquejeiro/Valor
The Brazilian economy is growing a little faster than expected, driven by a good performance in agriculture and the labor market. This is good news that could ease the conflict between the interests of the Finance Ministry, which wants to increase tax collection to reduce the budget deficit, and the Central Bank, which wants to keep interest rates high to reduce inflation.
But economists predict that these frictions will persist throughout President Luiz Inácio Lula da Silva’s third term. Expansionary fiscal policies are likely to maintain an environment of inflation and high interest rates. Public debt tends to rise in the coming years, and GDP growth is expected to be weak and insufficient to offset the country’s distributive conflicts sustainably. On the other hand, the external environment promises to be favorable, with a stronger real.
Finance Minister Fernando Haddad has put all his chips on the passage of the new fiscal plan. The consensus among experts is that the new law will not solve the imbalance in the public accounts, but some think that at least the extreme risk of sovereign default has been taken off the table. Analysts are now waiting for the implementation of the fiscal program promised by the minister, especially the increase in revenues since the new rule provides for a real expansion in spending.
On the monetary front, the most important decision will be the definition of the inflation target for 2026 by the National Monetary Council (CMN) at the end of June. If it is maintained at 3% per year, without any tricks to force the Central Bank to abandon its austere stance, there could be some decompression in inflation expectations – creating an environment to start a gradual and sustainable cycle of reductions in the policy rate in the second half of the year.
“In our baseline scenario, the Central Bank would be able to cut rates at the November meeting. But some things can help bring this process forward,” said Ana Paula Vescovi, Santander’s chief economist, who was executive secretary of the Finance Ministry in the Temer administration. “One is the confirmation of the 3% inflation target.”
When President Lula was elected in October, financial market analysts had a very negative forecast for economic growth. The median forecast was an expansion of only 0.5% of GDP in 2023, due to the cycle of high interest rates in Brazil and abroad.
At the beginning of the year, the estimates suffered a first round of revision, to nearly 1%, because the economy grew more than forecast last year, reaching 2.9%. The more positive result was mainly due to the fiscal stimulus implemented by then-President Jair Bolsonaro during his election campaign. Since April, there has been a new revision of growth forecasts in the Focus bulletin, a weekly survey with private-sector economists, which reached 1.26%. Central Bank President Roberto Campos Neto recently said that GDP could grow by 1.5%.
The increase is largely due to the good performance of the agricultural sector, which is estimated to have expanded by 7.3%. The labor market remains strong, with the unemployment rate at 8.9% in March. In seasonally adjusted data, the rate is 8.5%, essentially stable since the end of last year.
Economists point to other factors supporting the economy, including continued fiscal expansion. The Lula administration was allowed by Congress to spend R$200 billion above the ceiling, including an increase in social program Bolsa Família transfers.
“These upward revisions in GDP growth also occurred during the pandemic and in the post-pandemic period,” said Solange Srour, Credit Suisse’s chief economist. “It’s the effect of fiscal policy, which is very difficult to model,” she said, referring to the mathematical and statistical models used to project economic performance.
In addition, food prices have fallen, boosting real incomes. Some families accumulated savings during the pandemic and are now spending them, with a greater appetite for services. Whatever the reason for the economy’s greater strength, it is helping to ease some of the tensions between the Lula administration and the Central Bank, which was made independent two years ago.
“I was very pessimistic about the growth of the economy at the beginning of the year, and it’s much better than I imagined,” said Carlos Kawall, founding partner of Oriz Partners and a former Treasury chief. “It takes away some of the tension that the government wants to accelerate the pace of public spending or further harass the Central Bank in conducting monetary policy.”
In many ways, the picture left by the Bolsonaro administration was a very negative one, with the urgency of putting the brakes on the economy to curb inflation, in addition to dealing with a fragile fiscal adjustment with spending restraint. President Lula had to pay the price of the adjustment, with a risk to his popularity, and Mr. Haddad’s task of finding revenues to balance the budget deficit became more difficult.
The relative strength of the economy is bad for the Central Bank, which will have more work to do to lower inflation, but there is potential for relief from friction with the rest of the administration. “Growth is ultimately a way to reduce social tensions and fiscal pressures,” Mr. Kawall said.
It will depend on how the Lula administration manages the willingness to stimulate the economy. In recent days, there have been new initiatives, such as the intention to grant a tax cut to encourage the production and sale of economy cars, and the return of extra-budgetary subsidies in the form of loans from the Brazilian Development Bank (BNDES) for innovation.
Parafiscal policies are another source of pressure on the Central Bank, which has warned of the risk of monetary policy losing its effectiveness. In their meetings, the members of the Monetary Policy Committee (Copom) discuss why the economy remains resilient, and why inflation remains high.
The Central Bank estimates that by the end of the year the economy will have a slack of 1.7%, contributing to lower inflation. However, the Central Bank has overestimated economic slack since last year and may have to revise it again. Price indexes are falling more slowly than expected, especially services and core inflation. The May IPCA (Brazil’s official inflation index) preview brought more encouraging data, with a downward surprise in the overall index, which stood at 4.07% in 12 months, and a slight decompression in services prices and cores. But more data will be needed to see if a trend of declining inflation is really taking hold.
Caio Megale, the chief economist of XP Investimentos and a former Secretary of Industry and Trade at the Ministry of Economy, points out that inflation is more resilient worldwide due to policies to combat the economic effects of the pandemic, to which the central banks of developed economies were slow to react. But there is also the effect of strong fiscal expansion.
“It is difficult to promote disinflation of the economy amid this super-strong fiscal expansion,” Mr. Megale said. “It’s not surprising that inflation is proving to be so resilient and, for now, so unresponsive to interest rate hikes.”
The government’s fiscal plan embeds a 2.5% real spending expansion next year, albeit one that is dependent on revenues. Private-sector economists predict that there will be a primary deficit throughout the Lula administration, albeit a declining one. Gross debt would continue to grow until at least 2032, rising to 91.75% of GDP from 73%.
In addition to forcing the Monetary Policy Committee (Copom) to put the brakes on in the short term and keep the Selic policy rate high to reduce inflation, the expansion of fiscal and directed credit will tend to lead the economy to operate with higher interest rates in the long term. The estimates of the economists in the Focus survey are for a real rate of 5% for the next few years, until 2027. Market forecasts for GDP in 2024 have been lowered to 1.3% from 1.8%.
*Por Alex Ribeiro — São Paulo
Source: Valor International
Transition to a green economy is part of the solution; but according to experts, Congress lacks commitment to climate, biodiversity
05/31/2023
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Natalie Unterstell — Foto: Leonardo Rodrigues/Valor
The refusal of the federal environmental agency Ibama to grant Petrobras a permit to explore for oil at the mouth of the Amazon River represents a milestone in the socio-environmental framework of the Lula administration. Is the commitment to climate change just for show? How will the transition to a low-carbon economy take place? How can a population like that of Amapá, the best-preserved state in the Amazon, generate a sustainable income if it is deprived of oil royalties?
The triggering of the crisis, five months after President Luiz Inácio Lula da Silva took office, reveals the magnitude of the socio-environmental challenge. For now, there are only stalemates and unresolved issues on the table.
The Congress, much stronger than in previous Workers’ Party administrations, has passed proposals that, according to experts, are unfavorable for the Amazon, the Pantanal, the Atlantic Forest, the Cerrado, the Caatinga, and the Pampa. Also for the indigenous peoples, quilombola communities of escaped slave descendants, and other communities, and for climate protection, biodiversity, and the future. Also for the present, given the number and violence of extreme events affecting the country, from droughts with crop failures to sudden rains, floods, and deaths from landslides. In March, more than 1,500 communities were a state of emergency across the country.
“There can be no negotiated solution to the issue of oil in Amapá — and I’m not going to delve into the merit of whether exploration should take place — without proposing something that responds to the prospect of income that would be generated by exploration in the country’s most protected state,” said Sérgio Leitão, executive director of the Escolhas Institute. “We need to reframe the debate: one that brings income generation for those who have a lot of forests. Because today there is only one thing on the menu for the Amazon’s survival, and that is deforestation. It’s either that, or we’re going to get stuck in the conflict between the economy and the environment, without finding new solutions,” he said.
Brazil’s Number 1 environmental problem is deforestation, but it is not the only one. “Our great challenge is the issue of deforestation, not only in the Amazon but also in other biomes. We are at a critical moment,” said Tasso Azevedo, coordinator of MapBiomas. The forest engineer has repeatedly said that the climatic future of Brazil and the planet depends on preserving the forests. “It is a key issue for Brazil. Deforestation also has an important impact on the perception of Brazil abroad,” Mr. Azevedo continues. “Brazil can solve all its environmental problems, but if it doesn’t show results on deforestation, it’s as if it hasn’t done anything.”
Deforestation alerts in the Amazon, according to data from the Deter system of the National Space Research Institute (Inpe), decreased by about 40% in the first four months of 2023 compared to the same period in 2022. However, these data, which have been analyzed with caution, are subject to cloud interference. The worrying factor is what specialists from the Environment Ministry call “assumed deforestation” — the high rate of deforestation from August to December last year, the last months of the Bolsonaro administration, which will be accounted for in the Lula administration.
Between August 2022 and April, the Amazon lost almost 6,000 square kilometers, the largest area ever for this period. The dry season, when deforestation increases the most, is just beginning. Moreover, the deforestation warnings for the Cerrado in 2023 are the largest in the last five years.
For climatologist Carlos Nobre, it is not enough to immediately stop deforestation and forest degradation in the Amazon. It is necessary to start a major restoration process in the southern part of the forest and the Andes. This green corridor would cover 500,000 square kilometers and run in two arcs from Colombia, Peru, and Bolivia, crossing the south of the Brazilian Amazon and reaching the state of Maranhão. It would cost at least $20 billion.
Mr. Nobre, co-chair of the Scientific Panel for the Amazon — where the so-called Arcs of Reforestation project was created — said that deforestation in the Amazon is close to the point of no return. “Unfortunately, many studies show that we are on the edge of the abyss,” he said.
Mr. Azevedo said it is necessary to “create a mechanism to pay for the standing forest, without limiting it to carbon, which is unfair and has mean incentives.” He explains: “You pay someone who generates a risk and who benefits if he doesn’t consolidate it.”
The resumption of the global agenda is a positive point of the Lula administration. The talks with partner governments were built by Environment Minister Marina Silva, still during the climate conference in Egypt in November, and consolidated by the announcement of new participation in the Amazon Fund in the first months of 2023.
“Brazil is one of the only countries that can have a dialogue with all the others, with philanthropy, international organizations, and financiers. We can bring this leading role to the climate agenda,” said Renata Piazzon, director-general of the Instituto Arapyaú and co-facilitator of the Coalizão Brasil Clima Florestas e Agricultura, a movement composed of more than 300 representatives from the private sector, finance, academia, and society.
In August, Brazil will host the Amazon Summit, bringing together the member countries of the Amazon Cooperation Treaty Organization. The United Nations Climate Change Conference, COP 30, is also expected to be held in Belém, Pará, in 2025. “In the international arena, the future is more optimistic,” Ms. Piazzon said.
Natalie Unterstell, president of the Talanoa Institute, notes that there has been a shift in expectations on the global climate issue since 2015. The new prism has been shaped in part by reports from the Intergovernmental Panel on Climate Change (IPCC), Pope Francis’ encyclical on the environment and climate, and youth movements. “We started to hear more about the climate agenda, we felt more pressure from public opinion. And there were advances in technology and finance,” he said.
The price of wind turbines, solar panels, and batteries has plummeted, easing the path to electrification. “We don’t have to invent anything new. Things are moving fast. We are seeing a convergence of facts that are beginning to establish a different logic,” he said. For example, capital flows are shifting away from oil and gas.
“We are in full acceleration in the race to reduce emissions to zero in the world. We need to pick up the pace,” she added. In his view, the net-zero world will require regulation, which has already begun in the United Kingdom, Canada, and Australia. “It is necessary to give a strong signal, to show how you are going to decarbonize. In Brazil, make the house ready for green hydrogen,” Ms. Unterstell said. She continues: “We don’t have to give up oil overnight, but I think it’s wrong for Petrobras to say we’re going to exploit the last drop of oil. What will be the new face of the company?”
Climate geopolitics should cause unease, she said. “With 90% of countries committed to net zero, shouldn’t we be looking at our trading partners and thinking about what we export? Shouldn’t we be looking at the moves of our partners, as they may be moving towards a net-zero economy?” Ms. Unterstell said.
The private sector, said Roberto Waack, a board member of Marfrig, Wise Plásticos, and the Tupy engine factory, has incorporated climate practices into the business model. “In the food sector, traceability is something that has to be done, and this is being assimilated,” he said. Another discussion, more contemporary, takes into account how heterogeneous the sector’s production systems are and is being analyzed in more detail. “For example, there is a major challenge with ultra-processed foods, which pose a threat to health and employment.”
Worldwide, between 1.5 billion and 2 billion people are employed in food production. If the trend of over-industrialization continues, due to the search for greater productivity, it is predicted that in 10 years it will be possible to produce three times as much food with half the land use. “This is significant from the point of view of carbon emissions. But there should be a significant reduction in the number of jobs,” Mr. Waack said.
“This will affect a large number of unskilled workers who will be unemployed. That’s an important social component of this discussion,” he added. “Deforestation has to stop, but there is still a lot to be done.”
In the case of plastics, Mr. Waack said there is a big push for the circular economy, including traceability, to make the logistics of recycling more efficient and less polluting. In the transportation sector, there’s a recognition that burning fossil fuels needs to be much more efficient during the transition, a concern with battery recycling, and preparation for hydrogen. “In general, the search for efficiency cuts across sectors and is coming strongly into the ESG game,” Mr. Waack said.
Mr. Azevedo, with MapBiomas, agrees that in the Brazilian case, once deforestation is tackled, the energy transition will be a major challenge. Other bottlenecks include sanitation, solid waste, and an industry that is more in line with the global movement. “We need to get rid of deforestation, implement traceability of all production, regenerate the soil, allocate public lands in the Amazon and, in this process, ensure the full demarcation and rights of indigenous peoples, quilombolas, and traditional populations.”
Congress clearly showed that the land conflict is far from being resolved. In the clash of votes on the provisional measure that reorganizes the Lula administration by removing the demarcation of indigenous lands from the Ministry of Indigenous Peoples, the lawmakers left the new ministry without its primary function.
For Mr. Leitão, with Escolhas, the crisis that has opened up in the government, opposing environment and energy, translates into “our lack of initiative to deal with some challenges. What about a concrete proposal for the transition to a decarbonized economy? We have the narrative, the desire, but we don’t have an effective and concrete project,” he said.
Escolhas has carried out a study that shows that it is possible to reduce poverty by 56% in Pará and by 30% in Maranhão by investing in the restoration of deforested areas and the planting of vegetables and materializing this effort through work fronts. “This is for the government to start activities that generate employment and show the population of the region that there is an alternative,” he said. “And give time for bio-economy projects to take root.”
“Amapá society wants to preserve the environment, but it also wants jobs. We can no longer allow this stark choice to be made. If the choice is between jobs and the forest, what does the history of this country teach us? That we will lose,” Mr. Leitão said.
*Por Daniela Chiaretti — São Paulo
Source: Valor International
Businesses, states, municipalities resist tax unification
05/31/2023
With the promise of keeping the tax burden neutral, the tax overhaul is expected to add up to 20 percentage points of potential GDP growth over 15 years. The debate over a new consumption tax has gained momentum in recent years and the change has even been touted as the Lula administration’s “only silver bullet,” but the reform still faces challenges for consensus among businesses and from a federative perspective. Some believe that steps need to be taken before the unification of taxes advocated by the federal government.
Considered ambitious, the government tax agenda includes a constitutional amendment for the reform of the consumption tax, to be passed in the first half of 2023, and an income tax overhaul in the second half of the year.
The federal government has not presented a proposal to change the tax on consumption but expects a new text to be voted on in Congress based on the discussion of the proposals to amend the Constitution (PECs) 45/2019 and 110/2019. The two proposals establish a Tax on Goods and Services (IBS) that, similarly to a Value Added Tax (VAT), would be collected at the destination, non-cumulative, with financial credit, and leave exports and investments free. In both proposals, the social taxes PIS and Cofins, and the industrialized products tax (IPI), all levied by the federal government, in addition to the state sales tax ICMS and the municipal services tax ISS, would be replaced by the VAT.
Under PEC 45/2019, there would be a single IBS bringing together all five taxes. For PEC 110/2019, there would be two taxes: a Social Contribution on Goods and Services (CBS) or federal IBS, and a subnational IBS, bringing together ICMS and ISS. The two proposals also provide for the creation of a selective tax on so-called goods and services with negative externalities, such as cigarettes and alcoholic beverages.
In recent months, however, concerns have arisen about how this more structural change can compete with other agendas, said Ítalo Franca, an economist at Santander. He highlights the federal government’s effort to find new revenues to meet the goals of the proposed new fiscal rule, in addition to the race by the states to recover the revenue lost with sales tax ICMS cuts imposed in 2022 on fuel, electricity, and telecommunications services. “These are discussions that can lead to the exhaustion of political capital in these short-term agendas, leaving aside the medium and long-term agenda of reforms, although the government’s discourse maintains their importance.”
The work of Bernard Appy, extraordinary secretary for tax reform at the Ministry of Finance, has been highlighted. Still, Mr. Franca says, the issue raises many uncertainties that can affect investment decisions. The expectation, he said, is that a replacement based on the two PECs will be presented that maintains the essential characteristics of a good VAT, but there is intense pressure from sectors that are asking for preferential treatment, with lower rates or special regimes. It is recalled that a neutral effect on the collection of the consumption tax is promised. But the greater the number of preferential treatments, he recalls, the higher the rate of the new VAT. The pressures that are already emerging are likely to intensify, he said. “From the moment the text is presented, the forces will start to play.”
In addition to an amendment to be approved in the first half of the year, Mr. Appy said he expects a supplementary law defining key VAT issues, such as the taxable event, the tax base, and the destination principle, to be voted on only in 2024. In the dual model, federal VAT – whether contribution or tax – would come into effect in mid-2025 and the subnational VAT in 2027, in a schedule considered more realistic.
With this schedule, says Mr. Franca, the approval of a constitutional amendment this year is unlikely to cause so much impact on business expectations. “There will be a gain in advancing the agenda, of course, but there are still many doubts that will have to wait until the debates on the complementary law.”
The impact on the economy is the big argument that has been put forward for the reform. A simpler, more efficient, and transparent system could bring a 5% to 20% increase in potential GDP growth over 15 years, according to the papers presented, mainly from 2019, and based on PEC 45/2019.
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Bráulio Borges — Foto: Ana Paula Paiva/Valor
The diversity of results may cause some skepticism, but it must be noted that each study measured the impacts considering different expected outcomes, said Bráulio Borges, an economist at LCA Investimentos and a researcher at the Brazilian Institute of Economics of Fundação Getulio Vargas (FGV Ibre).
Mr. Borges is the author of a study that shows the reform could add up to 20 percentage points to potential GDP in 15 years. The study was carried out at the request of the Center for Fiscal Citizenship (CCiF), the author of the text that gave rise to PEC 45/2019.
Some studies, explains Mr. Borges, have focused on the reallocation effects with the end of the tax war and special regimes. His study considered these aspects, but also the embedded effects of the estimated reduction in the cost of investment and the reduction in the cost of compliance.
“In any case, a 5% gain would be important and shows that reform is not a zero-sum game, as it is often portrayed,” Mr. Borges said. “Reform brings higher growth, and everybody wins.”
International studies show this effect, he said. One study he cites is from 2019, in which International Monetary Fund (IMF) researchers analyzed the experience of 30 countries over 50 years. One finding, he said, is that the larger the tax base of the consumption tax and the lower the number of rates and exemptions, the greater the positive impact on GDP in the medium and long term.
The growth perspective, however, does not convince everyone of the reform advocated by the government. The “Simplifica Já” movement, which brings together more than a hundred entities, including representatives of municipalities, commerce, and services, defends that it is necessary to go through a stage of unification of legislation, but without the unification of taxes.
The movement proposes a single legislation for ISS, with part of the collection that can go to the destination and shared revenue among the municipalities based on data from invoices. For the ICMS, the proposal is also to unify the tax, with rates and transition to be established by the Senate.
Felipe Salto, a partner at Warren Rena, is a pessimist and says that there is no political viability for the reform. A former finance secretary for the state of São Paulo, Mr. Salto believes that there is a great fear of states and municipalities losing their autonomy and that there is no consensus on a national or dual VAT. “In an ideal world, it would be important to go to a national VAT, but this is extremely difficult to happen and politically costly,” he said.
For the economist, a more feasible first step would be to keep the ICMS separate from the ISS, migrate the state tax to the destination, and create a robust regional development fund, but with restricted rules for access to funds.
*Por Marta Watanabe — São Paulo
Source: Valor International
Aegea and Iguá are interested in acquiring company, but discussions with controlling shareholder Canadian Brookfield are still not active
05/30/2023
After the failure of its IPO, BRK Ambiental is undergoing an internal restructuring to increase its value in the sale process. Two groups, Aegea and Iguá, have already expressed interest in acquiring the company. However, the Canadian Brookfield, which controls the company, still faces a dilemma: to sell or to keep the asset after the restructuring. According to sources, this is a question that will be answered in the next two months.
Among the main parties interested, Aegea is seen as the strongest candidate, even though the company has recently won several new projects, with multimillion investments and complex works that may reduce its appetite. Iguá, on the other hand, is trying to attract a new partner, which could give a boost to the transaction.
For now, the sale discussions are not active. The restructuring is expected to last until the end of this year, but sources say that talks with interested parties could resume before then, partly because the efficiency gains must be felt in the next months.
BRK even tried twice an IPO in 2022, but the plan was suspended in December. The operation was aimed at raising capital for the business, but Brookfield already admitted that it could pave the way for its exit from the asset, which is an investment that is already considered mature.
The Canadian company entered the company in 2017 when it acquired a 70% stake in what was then called Odebrecht Ambiental – the other 30% remains with the fund FI-FGTS.
The central obstacle to the IPO was the pricing, given the unfavorable market scenario. For the offer to go through, the value of the shares could not fall below the price reported by FI-FGTS in its financial statement. The fund estimates that BRK as a whole is worth around R$10 billion, a price that would hardly be reached by the offer.
The scenario changes when it comes to the sale that would include a control premium. In this context, the FGTS pricing is already feasible, according to sources close to those interested in the company.
The internal restructuring process launched in January was also a way of “cleaning the house” to maximize this value. The idea is to increase efficiency, improve contract management and optimize expenses and investments. The goal is to reach cost savings of around R$120 million per year.
In March, the company’s CEO Teresa Vernaglia resigned and was replaced on an interim basis by Alexandre Thiollier, a partner at Brookfield Private Equity in Brazil. Three hundred employees were laid off, a 15% reduction in the workforce, as reported at the time by columnist Lauro Jardim, with newspaper O Globo.
Today BRK faces the challenge of reducing its leverage (the ratio of net debt to Ebitda), which ended the first quarter of this year at 7.3 times, stable in the annual comparison. The high ratio is the result of the multibillion commitments to its projects, which are still in the maturity phase.
Since the group won the concession of the metropolitan region of Maceió, in September 2020, with a R$2 billion (R$500 million more than the second place) offer, the company took a conservative stance and did not try to win any more contracts.
The presence of FGTS in the business contributes to this policy, sources say. The analysis is that the fund makes management difficult and makes decision-making much slower and more difficult.
Asked, Brookfield said it “does not comment on market speculation, but clarifies that in all its portfolio companies, it implements projects to increase productivity and continuous improvement of services provided.” Caixa said it “does not comment on strategic issues related to the fund’s participation.” Aegea said it would not comment on the subject. Iguá affirmed that “it continues with the organic and inorganic growth agenda as part of its strategy” and that “assets such as BRK are part of this universe.”
Por Taís Hirata — São Paulo
Source: Valor International
Economists forecast 1.3% rise in GDP from January to March, but warn that higher-than-expected expansion could be “illusion”
05/30/2023
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José Pena — Foto: Claudio Belli/Valor
The combination of bumper crops, resilient employment, and additional government transfers to support consumption is expected to lead to robust growth in Brazil’s GDP in the first quarter. However, economists warn that the result could create a false illusion about the pace of activity throughout 2023.
First-quarter GDP is expected to increase by 1.3% year over year compared to the last quarter of 2022, according to the median of the projections of 72 financial institutions and consulting firms heard by Valor. In the last three months of last year, GDP fell by 0.2% on the same basis of comparison.
Only one analyst still expects the GDP to fall in the first quarter, by 0.1%, while the maximum projection reaches 2.2%. Compared with the first quarter of 2022, the median expectation for the GDP from January to March this year is 3% growth. In this case, the forecasts range from zero to 4.3%. The median forecast for 2023 is growth of 1.4%. The official GDP data will be released by IBGE on Thursday.
On the supply side, agriculture is expected to be the main driver of growth in the first quarter, with median expectations of 10.3% increase compared to the fourth quarter of 2022 and 12.3% compared to the first quarter of last year. As a result, the segment may end the year up 8.1%.
Luis Otávio de Souza Leal, chief economist at G5 Partners, expects GDP to grow by 1.4% in the first quarter of this year, with 0.9 percentage points coming directly from agriculture. There are also indirect effects. In IBGE’s services survey, for example, warehousing and road transport, which are linked to agriculture, have grown the most, he said.
“We will have a ‘high PIB’” in the first quarter, Mr. Leal said. “It’s a good number, of annualized 5.7%, which guarantees, by a statistical effect, a GDP of 1.6% for the year,” he said. However, he expects a peak of 1.5% in 2023 as he sees a drop in activity in the following two quarters.
Also on the supply side, the median of estimates collected by Valor points to a 0.3% advance in services in GDP, which includes commerce. “I expect a 0.3% rise. But virtually all of that comes from agriculture. So when we look at the aggregate projection for the first quarter, it looks like a ‘high GDP’, but the general feeling of businesspeople is ‘low GDP’, because it is very concentrated in agriculture and activities linked to it,” Mr. Leal said.
Since the expectation is that the activity will move “sideways” during the year, even with the possibility of some surprise also concentrated in agriculture in the third quarter, GDP projections for 2023 repeat the dynamism expected for the results from January to March, Mr. Leal said. “We could say that GDP growth feels much closer to 0.5% than to 1.5% [in 2023].”
On the demand side, the highlight in the first quarter is expected to be household consumption, which, according to the median, would grow 0.7% from January to March compared to the three months immediately prior.
“Until recently, there was a well-consolidated expectation that the first quarter would show relatively strong GDP growth, driven mainly by agriculture due to the good harvest. What we will probably find out when the data is released is that agriculture only tells part of the story,” said José Pena, chief economist at Porto Asset Management.
According to Mr. Pena, “there is a picture of well-sustained consumption activity,” which already appeared in Porto’s proprietary data, especially for cards and financing, and was confirmed when the IBGE sectoral surveys were released. “The first quarter is likely to show a vigor that goes beyond agriculture,” he said.
According to the median of estimates collected by Valor, analysts still expect some decline in industrial production in the first quarter, of 0.3% compared to the end of 2022.
“The dynamism of activity is in services, and this is true for the world and for Brazil. But industry ended 2022 and started 2023 decelerating, and it was imagined that this would be accentuated at the beginning of this year. However, what we are seeing is far from confirming the most pessimistic expectations,” Mr. Pena said.
According to him, in the first quarter there was a combination of growth in the employed population and real average income. “The labor market is slightly worse, but only slightly. The unemployment rate is still around 8%, which is low by the standards of the last years,” Mr. Pena said.
In addition, he said, current inflation of consumption has slowed, while salaries have been indexed to higher inflation in the past. Mr. Pena also cites credit, which is slowing for individuals, but no more than one would imagine for the current phase of the monetary cycle.
“Disposable income is growing,” Mr. Pena summarized. This has supported consumption and, in particular, demand for services, he said.
However, another component of demand in GDP, the gross fixed capital formation (GFCF), a measure for investments, is expected to decline by 1.5% in the first quarter of this year compared to the last quarter of 2022, according to the median.
“Here, the picture is a bit more complex, because investment decisions, in a simplified way, are influenced by the cost of capital, which is high globally, and by the level of confidence [of businesspeople]. You could have a low interest rate and a low cost of capital, but if there is a lot of uncertainty about the future, the attitude will probably be more cautious,” Mr. Pena said.
The high interest rate in the country is one reason why Modal is a bit more cautious about the GDP for the first quarter and the year, for which it projects increases of 0.9% and 1%, respectively.
“The economy is responding to two major factors: the monetary contraction, which tends to hamper activity, and, on the other hand, the fiscal expansion implemented by the government, with measures such as the increase in income transfers or, recently, the reduction in taxes for the automotive sector,” said economist Rafael Rondinelli.
The cautious first-quarter forecast is because “the economy should have already reacted more to the level of monetary contraction,” said the economist. However, Mr. Rondinelli acknowledged that the surprises have been in the opposite direction, which puts an upward bias on Modal’s annual forecast.
From the point of view of the contribution of the external sector to GDP, agriculture is helping exports, but the weaker performance of industry is not helping imports, Mr. Leal said. He expects a 1.5% increase in exports in the first quarter compared to the fourth quarter, and a 7% decrease in imports. “The weaker imports are another sign that the economy as a whole is not that strong,” he said.
The median forecast, however, is for a slight 0.2% decline in exports and a 6.2% drop in imports. “With the bumper crop, there may be a problem in getting it out at the speed that would be desirable. Probably, these shipments will last a little longer,” Mr. Pena, with Porto, said about exports.
For him, the signs of stronger activity and less dependence on agriculture in the first quarter is important because if growth were based solely on agriculture, “we would see a big drop in the following quarters,” he said. Due to the already known seasonality, the weight of agriculture in the GDP is concentrated in the first quarter. “This is not what we see, and perhaps this is an explanation for us to have a slightly more optimistic view of activity in the rest of the year,” he said.
Porto expects GDP growth of 0.5% in the second quarter, compared with the first, and 1.7% in 2023. The median estimate of economists is 0.2% and 1.4%, respectively.
*Por Anaïs Fernandes, Marta Watanabe — São Paulo
Source: Valor International
Share of people with overdue debts of five to 10 minimum wages rose to 22.6% in four months
05/30/2023
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Marcelo Neri — Foto: Leo Pinheiro/Valor
Default is growing at a faster pace this year among middle-class families, those earning between five and 10 minimum wages per month. The warning came from the National Confederation of Commerce of Goods, Services, and Tourism (CNC), which carried out an analysis on the matter based on the Consumer Indebtedness and Delinquency Survey (Peic), which covers 18,000 families in the country.
The survey shows that from January to April, the share of defaulters in this income group set a record, in addition to advancing faster than the other three groups surveyed. For specialists consulted by Valor, the scenario indicates a tighter budget for the middle class this year, with little room to pay off their loans on time.
“We have more and more people delaying payments, month after month, in this income bracket,” said Izis Ferreira, the CNC economist in charge of Peic and the analysis. The work shows that from January to April, the percentage of defaulters with an income between five and 10 minimum wages jumped to 22.6% from 20.4%. It was the highest proportion of default in this income range since records began, in May 2021.
Ms. Ferreira says that it is unusual for the Peic to see an increase of more than two percentage points for this default data in such a brief period. On average for all income brackets, for example, this data improved from January to April, with the percentage of delinquent borrowers falling to 29.1% from 29.9%.
This is because, in the first four months of the year, the share of families with overdue bills either decreased or increased less in the other income brackets of the survey. In the low-income group, that goes from zero to three minimum wages, the proportion of defaulters decreased to 36.3% from 38.7%; from three to five minimum wages, it increased to 27.3% from 27.2%; and above 10 minimum wages, the data increased to 13.9% from 13.5%.
According to Ms. Ferreira, several reasons have led to the current scenario. The middle class is an income bracket that, unlike the richer strata, does not have a “protective cushion” of income, nor is it the target of income transfer programs, such as Bolsa Família, she notes.
Marcelo Neri, director of the Social Policy Center of the Getulio Vargas Foundation (FGV Social), agrees. “And in recent years, we’ve had major negative shocks, starting with the pandemic. [The income of the] poor was ‘preserved’ in the pandemic,” he added, citing cash-transfer programs for low-income groups starting in 2020. “Since the pandemic, and continuing now, this middle class does not receive cash handouts, nor has the assets of the higher income.”
Mr. Neri estimates that the middle class represents about half of the country’s population – the most recent data available puts the total population of Brazil at about 200 million. The crises of the last three years have dealt a heavy blow to middle-class income, the expert points out. He cited data from his latest study, The Map of Wealth in Brazil. In this survey, the class that Mr. Neri considered as middle class was the one with a household income between R$2,284 and R$9,847 per month. In the study, he predicted that in 2020 the income of the middle class will decrease by 4.2%. On the other hand, the income of the richest will decrease by 1.5%; and the income of the poorest 40% will increase by 0.2% that year.
Since then, the researcher notes, the middle class has increasingly turned to credit, especially credit cards, for day-to-day expenses and has not always been able to pay off its obligations. “And interest rates are getting higher and higher,” Mr. Neri said. This situation makes debt service payments more expensive.
Renato Meirelles, president of Locomotiva, an institute that tracks trends in society and economy, also points out that the middle class has more access to diverse types of credit. “Low-income people don’t have overdraft credit and have low credit card limits,” he said. “The middle class has the potential to take on more debt, with higher interest rates, than other economic strata, and has taken on more and more expensive debts, like credit card debt,” he said. “And then [when you don’t pay] it starts a snowball effect, with rising interest rates.”
Thiago Basílio, sub-coordinator of the consumer defense center (Nudecon) of the Public Defenders’ Office of Rio de Janeiro State, sees this “spiral” up close. Mr. Basílio works on default renegotiations with banks, and this work has only increased. “Our service is not precise statistical data,” he said, noting that his assessment is more empirical. “But we feel that it has almost doubled since the pandemic.” And continues: “And we’re seeing more and more of the middle class ‘rolling over debt’ to the point that the person doesn’t even remember what the original debt was, with higher interest rates.”
Rodolfo Margato, an economist at XP Investimentos, points out that since the pandemic default has increased across all income ranges. But the big issue, he said, is that the middle class has fewer resources than other classes to deal with the situation. There has been an improvement in the labor market, starting last year and continuing this year, which has boosted income, he acknowledges. “But it was an increase on top of a base [of income] that was depressed by the pandemic,” he adds. “Today, we have a more unprotected middle class for defaults.”
Mr. Margato notes that there are expectations for a reduction in the key interest rate (Selic) in the second half of the year, a level which currently stands at 13.75% per year and is the highest level since January 2017. A drop in the Selic, foreseen by him to happen as of August, would lower interest rates across the market, which could help the middle class pay off overdue debts. “But [if there is], it will be a gradual reduction,” he estimates, citing XP projections of Selic at 12% by the end of 2023; and 11% by the end of 2024. “I think that [middle-class default] can improve gradually in next year,” he said. “But there is no short-term solution to this problem. There is no silver bullet,” he said.
*Por Alessandra Saraiva — Rio de Janeiro
Source: Valor International
The Lula administration may be on the verge of new political defeats as lawmakers demand more jobs and funds
05/30/2023
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Arthur Lira — Foto: Brenno Carvalho/Agência O Globo
In a new delicate moment for the Lula administration, eight provisional measures (MPs) risk lapsing this week because they have not been voted on by Congress. This outcome would be a new defeat in the wave of setbacks suffered by President Luiz Inácio Lula da Silva in the Parliament. The reluctance to analyze the issues reflects the growing irritation of lawmakers with ministers of the so-called political wing — especially those in charge of political coordination and the distribution of funds and positions in the administration.
Two of those provisional measures — the one dealing with the restructuring of the government and the one dealing with the environmental regularization programs — are more advanced and can be voted on this week. Both must be passed by Thursday. Otherwise, they will expire.
Considered the latest drama of the administration, the MP that restructures the government became a headache for Mr. Lula due to the changes made by the rapporteur Isnaldo Bulhões. The text approved last week by the joint committee (formed by senators and deputies) trims down the ministries led by Marina Silva (Environment) and Sônia Guajajara (Indigenous Peoples).
Members of the governing coalition and ministers close to Mr. Lula tried to convince the rapporteur to modify his opinion before acknowledging, in private conversations, that it is better to accept the changes made by Mr. Bulhões and avoid making the passage impossible.
Giving in this case means avoiding an even greater defeat. The assessment is that if the matter lapses, the whole structure of the government would have to be rebuilt when Mr. Lula reaches his sixth month in office.
“The guidance of the political coordination and the president is to seek the maximum restoration [of the original text], both in the plenary of the Chamber of Deputies and in the plenary of the Senate, but before that, we seek approval. The provisional measure lapses on Thursday. The great victory is to approve this provisional measure and send it for the president to sign,” said Randolfe Rodrigues, the government’s leader in Congress.
As the Chamber of Deputies is expected to have a floor vote this Tuesday, Mr. Bulhões is likely to meet Speaker Arthur Lira and leaders before the session. Unlike issues such as the new fiscal framework and tax reform, Mr. Lira has already signaled that on issues that government leaders will have to negotiate to ensure progress of those matters seen as priorities by the president.
Behind the scenes, members of the congressional leadership are not sparing their criticism of Chief of Staff Rui Costa and Institutional Relations Minister Alexandre Padilha. They blame them for the difficulties in dealing with some of the proposals, since both of them “leave something to be desired” in the fulfillment of the promises made to the legislators since the approval of the transition PEC (proposal to amend the Constitution) last year.
“What is happening is a bad outcome of a confused government. The government must work. Bad managers produce bad results. In the private sector, they get fired. In the public sector, not always,” a person close to Mr. Lira told Valor.
Also with a deadline for voting on Thursday, six other provisional measures have, in the assessment of Congress members, “very low” chances of being passed in the next few days and are expected to lapse before leaving the joint committees. Some will be included in other bills, while others will be sent as urgent bills.
There is also an alternative for the government to implement some of these measures through decrees or ordinances. Despite this possible solution, there is a risk that the Presidential Palace will suffer a new setback later, as happened when the Chamber of Deputies began to overturn Mr. Lula’s decree that sought to change some parts of the basic sanitation framework. The legislative decree still has to be analyzed by the senators.
*Por Marcelo Ribeiro, Caetano Tonet — Brasília
Source: Valor International
