Sources say talks are in the initial stages; airline had also approached Latam years ago
06/03/2024
Azul’s proposal is expected to be launched during the formulation of Gol’s exit financing—a type of financing granted to companies facing reorganization — Foto: Leo Pinheiro/Valor
Azul Airlines is considering making a bid to acquire the operations of its competitor Gol, which is in court-supervised reorganization (Chapter 11) in the United States. Sources say the company has hired Guggenheim Partners and Citi to put together a strategy to buy its rival. The news of the deal was first reported by Bloomberg News.
This is another attack by rivals on Gol, which reported R$20 billion in debt when it filed for protection from creditors in the United States. The company is at loggerheads with airline Latam for seeking aircraft from its lessors at the same time of the Chapter 11 filing, which began on January 25.
Talks are in the early stages and there is no formal proposal on the table, three sources told Valor. In recent weeks, Azul has been seeking legal information on the acquisition of assets included in the court-supervised reorganization.
Azul has always shown interest in advancing consolidation in the Brazilian market. During Latam’s Chapter 11 process, between May 2020 and the end of 2022, Azul engaged in a public dispute for Latam by making a proposal to the creditors of the Chilean group for its Brazilian assets. However, the plan did not go through, although it disrupted the competitor’s restructuring process.
A potential bid for Gol’s assets, which may or may not include Avianca, would need to be competitive to convince Gol’s current shareholders and creditors—who must determine throughout the process whether the operation is advantageous for them.
Azul’s proposal is expected to be launched during the formulation of Gol’s exit financing—a type of financing granted to companies facing reorganization. The purpose is to pay credits restructured by the reorganization plan and finance the debtor’s operations after the process closure.
According to a source, the structuring of this loan is expected to gain momentum in the second half.
During this period, however, there is a chance of a dispute over the composition of this loan, as it will determine the shareholding structure of the company after the Chapter 11 process.
Behind the scenes, Azul’s rationale mirrors what prompted its move against Latam to take over its operations in Brazil. Here, the greatest overlap occurs between Latam and Gol’s networks. Azul, with its strong regional appeal, operates approximately 70% of its routes independently.
The low overlap could serve as a mechanism to support arguments in a potential review by the antitrust watchdog CADE. With consolidation, the prospect of one less airline in the country may not sit well with the government, especially with plans to try to reduce fare prices.
In January, the domestic market was led by Latam with 36.7%, followed by Gol (34.1%) and Azul (28.7%), according to data by the National Civil Aviation Authority (ANAC).
There are doubts in the market about Azul’s ability to finance an operation of this size, given that the company also recently went through a debt renegotiation process.
Azul said in a statement to the market that it is always attentive to the strategic dynamics of the airline industry and possible partnership opportunities, and may hire consultants to assist the company in these endeavors. Azul also said that it has not negotiated or approved any specific transactions to date. Guggenheim Partners did not immediately reply to a request for comment. Gol, Citi, and Abra, the holding company that controls Gol and Avianca, declined to comment.
*Por Cristian Favaro, Mônica Scaramuzzo — São Paulo
The National Institute of Social Security’s (INSS) pension contribution’s benefits granted by court orders in 2023 reached a new record: of the 5.964 million new benefits granted last year, 15.85% came from court decisions. Litigation is concentrated on benefits such as sickness benefits and old-age, disability, and special pensions.
In 2001, when official records began, judicial grants accounted for only 1% of the total, but this has grown year by year to 15.85% in 2023, according to a study carried out by Valor with the help of economist Rogerio Nagamine Costanzi, based on data from the INSS.
Luis Eduardo Afonso, an associate professor at the University of São Paulo’s School of Economics and Administration (FEA/USP), who also specializes in social security, said that the high level of benefits granted in courts is worrying and implies an increase in costs for both the government and the insured, as well as causing delays in the granting of benefits.
INSS President Alessandro Stefanutto admits that the current percentage of benefits granted in courts is high and said that it would be “reasonable” to keep it at around 5%. He believes that Atestmed—the granting of sickness benefits by a digital certificate, without face-to-face medical examination—will help reduce the percentage. “But that’s a personal opinion. I’m not speaking for the AGU [Federal Attorney General’s Office],” he said.
Atestmed was introduced by the government at the end of last year, and today almost 50% of temporary disability benefits (formerly sickness benefits) are granted using that tool. The goal is to further expand the use of this system among the population.
“In Italy, for example, litigation is very low. It’s less than 1%. European countries are at a different level when it comes to litigation,” he said. “There are several reasons. The first one is that the administrative decision is favored,” said the INSS president.
Mr. Stefanutto added that between November and December last year, the proportion of benefits granted by the courts fell to 13.7% from 15.2%. However, even with the reduction, he said that the percentage is “embarrassing” and needs to be reduced.
The INSS president said that in the case of benefits that are granted for a shorter period, such as sickness benefits, it is difficult to recover the amounts if they have been unduly paid because they are usually considered irrecoverable due to their alimentary nature. “But we continue to seek medical evidence to see if the person is on the mend. With Atestmed, I’ll have more [time for] the assessments [that need to be done],” he added.
Mr. Stefanutto acknowledged the difficulty of reducing the judicial grant of rural benefits, which is also one of the main causes of litigation. Currently, about 30% of rural pensions are granted through the courts, while the percentage for urban pensions is about 10%. “Proving rural status has always been a challenge because there are no reliable records. But there are government projects,” he said.
According to the INSS president, during the Rousseff administration, there was a move to create a registry similar to the National Social Information Registry (CNIS) to show how long people had worked in rural areas. “When the insured came to the INSS, there would already be much more evidence to grant a rural pension or even a disability benefit,” he said.
According to economist Rogerio Nagamine, a specialist in social security, disability benefits are highly litigated because they require medical examination. The same is true for rural retirement, due to the greater complexity of proving activity and older employment relationships needed to complete the qualifying period.
The economist also said that reducing the waiting list for benefits should be a concern for the government, as it would help reduce litigation. In 2023, the number of benefits requested monthly from the INSS from August to October was over 1 million, making the government’s task of reducing the queues even more difficult. In January, the waiting list stood at 1.57 million applications, despite the government’s efforts to reduce this number.
According to lawyer Diego Cherulli, director of the Brazilian Institute of Social Security Law (IDBP), the litigation figures could be much higher. “There are places where 50%, 60% of benefits are granted or postponed through the courts,” he said. “There are a lot of benefits granted in court that aren’t registered as such. We have this problem [of underreporting].”
According to data from the Ministry of Social Security, 39.302 million benefits were issued in 2023, and total spending on benefit payments amounted to R$909.13 billion. Of the benefits issued, 84.9% are equivalent to up to two minimum wages.
Carmaker’s announcement demonstrates “confidence” in Brazilian economy, Geraldo Alckmin said
03/04/2024
Geraldo Alckmin — Foto: Cadu Gomes/VPR
Vice President Geraldo Alckmin said Sunday (3) that he was about to attend an event on Tuesday (5) at Toyota to announce an investment of R$11 billion in Brazil for the production of new vehicle lines. According to Mr. Alckmin, the investment will create 2,000 jobs in the country.
The news that Toyota’s Sorocaba plant will be expanded was first reported by O Globo columnist Lauro Jardim.
“Another success for Brazil and the Lula administration! On Tuesday (5), in Sorocaba (São Paulo), I’ll attend an event where, thanks to the federal government’s Mover and Fuel for the Future programs, Toyota will announce investments of R$11 billion in the country over the next few years, creating 2,000 jobs and launching new models,” Brazil’s vice president wrote on social media.
Mr. Alckmin stressed that the carmaker’s announcement “is a clear demonstration of the confidence that this major Japanese company has in our economy.”
Ualace Moreira, secretary of Industrial Development, Innovation and Trade, said the investment by Toyota and other carmakers is the result of actions taken by the Lula administration, including tax incentives totaling R$19.3 billion under the Mover program, the restoration of import tariffs to stimulate domestic production, and the recovery of the domestic market. “With the R$19.3 billion stimulus from Mover and the restoration of import tariffs, Toyota will invest in its factories in Brazil, in São Paulo, creating 2,000 jobs,” he said.
Toyota did not respond to Valor’s requests for a comment.
Despite federal government compensation, states could face tough 2024 after losing revenues from taxes, federal grants
03/04/2024
Renata dos Santos — Foto: Ricardo Ledo/Valor
While the federal government compensated states for losses from lower collection of the Tax on Circulation of Goods and Services (ICMS), the combined revenues of Brazil’s 26 states and the Federal District dropped by 1.8% in adjusted terms in 2023 compared to the previous year.
The drop was primarily caused by a 3.2% decline, adjusted for inflation, in ICMS revenue and a 1.4% decrease in transfers from the State Participation Fund (FPE). Conversely, current expenses rose by 3.3%, mainly due to an increase in personnel expenditures, which went up by 5.1%.
Experts and state representatives say the figures indicate that 2024 could be “very difficult” for some subnational governments. They pointed to expectations of an economic slowdown in a year where the demand for pay raises is expected to persist. Additionally, there are spending pressures stemming from political campaigns for municipal elections. Moreover, the absence of federal compensation for ICMS losses, which were accounted for in 2023, further exacerbates the situation. Nonetheless, some states are closely watching the increase in the federal government tax revenue in 2024, which may favor mandatory transfers.
“The data shows that we have a big revenue problem. The increase in the standard ICMS rate last year by some states wasn’t enough to bring collection to the desired level. At the same time, the strong increase in current expenses is concerning. From 2024 onwards, the gap between revenue and expenses is expected to increase,” said Gabriel Leal de Barros, an economist and partner at Ryo Asset. “In 2024, we will likely see the pressure for federal salaries and public hiring tests spill over to states and municipalities.”
The unfavorable situation in the stream of revenue and expenses was widespread among the states in 2023. In nine of the 27 subnational entities, current revenues fell while current expenses increased.
As for the other 18 entities, revenues rose in 14, but at a slower pace than expenses.
Spending on personnel, states’ main expenses, also increased in 2023 compared to the previous year. Last year, spending on personnel by the Executive branch measured in relation to the Net Current Revenue (RCL) increased in 21 of the 27 entities. In six states—Rio de Janeiro, Paraíba, Acre, Roraima, Minas Gerais, and Rio Grande do Norte—it came in above the 46.55% cap set by the Fiscal Responsibility Law (LRF). The latter three states also exceeded the 49% cap set by the same law.
In 2022, only three states were above the cap, while Rio Grande do Norte was the only one to exceed the limit.
The data reviewed by Valor is part of the tax reports sent by states to the National Treasury. Authorized spending and realized revenues were considered. The 2022 data was adjusted by the Extended Consumer Price Index (IPCA), Brazil’s official inflation index.
Representatives of current state administrations point out that the indicators could have been worse without the extraordinary revenues. Supplementary law 201/2023 established a compensation of R$27.1 billion by the federal government to the states for the loss of ICMS revenues in 2022.
That year, federal laws led to a reduction in state tax rates on fuel, electricity, and telecommunications.
Supplementary law 201/2023 created a compensation schedule until 2025, with part of it to be made through debt payment relief and another part through transfers of funds from the federal government to the states.
In addition to the amounts due in 2023, the federal government also transferred around R$10 billion at the end of last year as an advance payment of the amounts that would be paid in 2024.
The compensation contributed to a 7.3% increase in current transfers to states in 2023 compared to the previous year.
Carlos Eduardo Xavier, Rio Grande do Norte’s secretary of taxation, said that this compensation contributed to an 8.7% increase in the state’s current revenue.
He highlights that there were also extraordinary revenues from the state itself, such as the sale of the payroll, which generated an additional R$ 384 million for the state last year. Additionally, he recalls that from April to December, the standard ICMS rate in Rio Grande do Norte increased to 20%, compared to the previous 18%.
The law to increase taxes in the state was passed in 2022, but it included the higher rate until December 2023 only, and the state government could not extend the increase for this year. The ICMS revenue had a boost from the installment program for tax debts Refis, which brought additional revenue of R$250 million in 2023.
The installment program and the increase in rates, together with the improvement of collection control and inspection, according to the secretary, led to higher ICMS revenue. According to data from tax reports, the state’s ICMS revenue grew 10.1% in real terms in 2023.
“For 2024, the scenario will be more challenging because we will not have higher ICMS rates, Refis, payroll sale, or the compensation by the federal government. It will be really difficult. For now, FPE revenues came in better in January and February and we will work to increase the ICMS [revenue], but still far from what we had last year,” the secretary points out.
Mr. Xavier says that the government is also studying alternatives for extraordinary revenue.
The favorable scenario for revenues in 2023 did not prevent the state from increasing the spending on personnel in relation to the net current revenue. The indicator increased from 53.37% to 56.94% of the net current revenue from the end of 2022 to last year, 7.94 percentage points above the cap defined in law.
The biggest challenge in payroll spending comes from education, as the legislation in Rio Grande do Norte determines that pay rises should be linear for all professionals, including those at higher salary levels. “It’s the only state with such legislation,” he said.
The performance of 2023 and the scenario expected for 2024, according to Mr. Leal de Barros, will make the states reopen the debate on structural issues that have been left aside since 2020, when the COVID-19 pandemic broke out, until 2022, when revenues still benefited from inflation and high commodity prices.
On the revenue side, the worsening of the ICMS base is expected to return to the debate, while the increase in spending on personnel should reopen the agenda of structural reforms, such as administrative overhaul.
At the end of last year, the Rio Grande do Norte government formally joined the Fiscal Balance Program offered by the National Treasury, said Mr. Xavier. According to him, the state is committed to reduce the spending on personnel by 10% per year.
In Rio Grande do Sul, there was also the effect of ICMS compensation brought forward by the federal government. ICMS collection in 2023 fell 1.1% in real terms, still under the effect of changes in the tax in 2022. Even so, the state’s current revenues increased by 7% in real terms, and the net current revenue, by 6.9%, an increase equivalent to R$6 billion from 2022 to 2023.
The federal compensation paid in 2022 contributed to this scenario, with R$2.3 billion unadjusted, according to the Rio Grande do Sul government. Part of the amount was compensated through a setoff, while another part came in the form of a financial transfer.
Additionally, the state received extraordinary revenues in 2023, such as the R$1.4 billion dividend payout from Corsan, the state’s water utility. These revenues are unlikely to occur again in 2024.
The increase in the net current revenue allowed the government of Rio Grande do Sul to end 2023 with the spending on personnel indicator at 45.03%, down from 47.88% in the previous year, after almost reaching the cap in the first four months of 2023, with 48.81%. In a note, Rio Grande do Sul’s finance department said that it expects to maintain strict control over expenses to comply with the Fiscal Recovery Regime requirements to which the state joined in 2022.
At the end of last year, the Rio Grande do Sul government proposed an increase in the standard ICMS rate, but faced resistance by local legislators and ended up alternatively reviewing the tax benefits, a measure that will come into force by April.
According to Mr. Leal de Barros, one potential solution for states to address the loss of ICMS revenue is to scrutinize tax incentives. Additionally, updating tax collection and inspection procedures could be part of the solution, although the effectiveness of these measures may vary from state to state.
Renata dos Santos, secretary of Finance of Alagoas, says the current administration has been mapping the state’s economic activity and its impact on ICMS collection. She says the state has received a large flow of tourists and the activity has benefited from the pay rises and the expansion of the Bolsa Família income-transfer program in 2023. The state achieved a real increase of 11.7% in tax collection by implementing changes in the tax structure and raising the standard ICMS rate from 17% to 19% in April of last year. The state’s current revenues rose 4.8% while current expenses increased 8.1%.
According to Ms. Santos, the increase in current expenses is due to the opening of two new prisons. She explains that, to cover this new expense, the state maintained the level of other expenses and backed with its own revenues the amount that was not included in the FPE funds. For 2024, she says, the state will keep a strict expense control.
Alagoas closed 2023 with R$2.68 billion in investments, an increase of 2.8% compared to 2022 and of 148.7% in real terms, when compared to R$1.1 billion in 2019, which was also the first year of the previous administration. According to the secretary, the idea is to maintain the same high level of annual investments throughout the current administration. Last year’s investments, she says, were made possible by surpluses from previous periods and by loan transactions. She said the state contracted around R$1 billion in loans last year.
Mr. Leal de Barros highlights that the stimulus the government has offered through loan transactions should be closely monitored. In some subnational entities, that could aggravate the scenario ahead, because part of the spending on investments results in an increase in spending on personnel and costing as well.
Economists discuss whether it’s time for monetary authority to revise forecasts of 50bp cuts in key interest rate
03/04/2024
Gabriel Galípolo — Foto: Pedro França/Agência Senado
As monetary easing progresses in Brazil, a debate is gaining momentum in the market as to when the Central Bank’s Monetary Policy Committee (COPOM) will adjust the communication of its flight plan. The collegial body continues to point to rate cuts of 50 basis points in the next two meetings.
Some believe that less rigid communication from the COPOM could give the monetary authority more room to maneuver at a time of external uncertainty and fears about the trajectory of services inflation. Meanwhile, there are market participants who oppose an immediate change in the so-called forward guidance, arguing that it would add noise at a time of economic slowdown.
Last week, for the first time, this debate was raised more explicitly among COPOM members. The Central Bank’s director of monetary policy, Gabriel Galípolo, said the collegial body dared to start the cycle of interest rate cuts with forward guidance, a tool he described as “a very risky sport for emerging markets.” He made the comments during a presentation at an event organized by Money Report.
“We have engaged in this high-risk sport, and so far, it has paid off. We found a pace of cuts that allowed us to adjust the level of monetary tightening, with the nominal rate following the fall in inflation, while observing the reaction of the economy,” he said.
According to Mr. Galípolo, the instrument has so far helped to reduce the volatility surrounding the Central Bank’s actions in the local market. However, about forward guidance, he said there is an attitude of dependence on the monetary authority’s data. “But at some point, you’ll have to remove the plural [in the guidance] and that could generate a cost,” he said, without anticipating whether the discussion would be taken to the COPOM meeting this month.
The discussion about changing the Central Bank’s future guidance comes at a time when the COPOM has already cut the Selic policy rate by 250 basis points to 11.25% a year. Although there is room for further rate cuts in Brazil, analysts say the Central Bank’s approach of signaling the path of rates over a three-month horizon could prove risky in an environment of external volatility.
According to economists, maintaining a fixed orientation for the Selic rate removes degrees of freedom for the monetary authority, especially at a time when the cycle of rate cuts is already at an advanced stage.
If the COPOM confirms the guidance given in the last decision and market expectations, the Selic rate will fall to 10.75% at the March meeting. The forward guidance in the statement released after the most recent meeting, on January 31, indicates that “the members of the Committee unanimously foresee a reduction of the same magnitude at the next meetings”—with the use of the plural. Therefore, if this strategy is maintained, the rate is expected to fall to 10.25% per year in May and 9.75% at the June meeting.
The problem is that since the beginning of the year, bets on the start of monetary easing in the United States have been delayed. According to data from the CME Group, about a month ago, agents assigned an implicit probability of 99.5% that the Fed Funds would start to fall or would have already fallen by June. Today, there is a 33.7% chance that rates will remain unchanged until then.
At the same time, estimates for the Selic rate at the end of the cutting cycle have also been revised by market operators and last week reached the 9.75% level—a degree that could be reached in June if the COPOM maintains the pace of cuts and future orientation until then. In addition, the latest inflation figures continue to show pressure on components that are sensitive to monetary policy.
On the other hand, real interest rates in Brazil remain at very restrictive levels and, at this point, a change in communication would be a more conservative signaling on the part of the Central Bank.
According to a source from the market’s division of a local institution, the discussion about removing the use of the plural in the statement makes no sense now. “The Central Bank may have decided to implement this guidance to prevent the market from pricing in any chance of acceleration and also to stabilize the curve, sending a relatively hawkish message. By removing the plural at this stage of easing, and with such a high level of real rates, the authority would be adding unnecessary noise to the market and the economy, just when economic growth is starting to moderate,” he said.
For this source, the Central Bank already has a very conservative stance. “Both nominal rates and, especially, the current level of real rates are at very high levels, according to any metric. If you add inflation expectations and other important indicators, such as the exchange rate and commodity prices, to the equation, there is no relevant reason to expect a change in communication,” the source said.
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