Central Bank announces first forex intervention in 15 months

In an environment of external pressure and maturing NTN-As, the agency will offer the equivalent of $1 billion in currency swaps

04/02/2024

Sérgio Goldenstein — Foto: Leo Pinheiro/Valor

Sérgio Goldenstein — Foto: Leo Pinheiro/Valor

The sentiment that the scenario allowed for a significant appreciation of the domestic exchange rate lost strength. On a day when the dollar rose globally, the Brazilian real was among the currencies that suffered the most, with the exchange rate remaining firmly above R$5, its highest level since October 2023. The pressure on the Brazilian currency was primarily external due to the renewed strength of the U.S. economy. However, domestic factors also played a role, such as the approaching maturity of dollar-linked bonds (NTN-As), which led the Central Bank to announce the first intervention in the foreign exchange market since December 2022.

Shortly after the markets closed, the monetary authority announced that it would hold an extraordinary auction of up to 20,000 currency swap contracts, equivalent to $1 billion. It will be the first foreign exchange swap offering since May 2022. The action also marked the end of a tense day in the markets. The exchange rate ended Monday’s (01) session up 0.87%, trading at R$5.0591 per dollar, the highest level since October, after reaching R$5.0704 at the day’s peak.

The global movement was a determining factor in the pressure on the exchange rate. The process of repricing U.S. interest rates took on new contours after strong statements from two leaders of the Federal Reserve (Fed) last week—director Christopher Waller and chairman Jerome Powell. As the market advances with the start of an interest rate cut cycle in the U.S., the dollar strengthens.

However, the real stood out negatively in Monday’s session. Among Latin American currencies, the Brazilian currency was at the bottom. The dollar rose 0.42% against the Mexican peso, 0.58% against the Chilean peso, and 0.04% against the Colombian peso. Among the world’s most liquid currencies, only the Turkish lira managed to continue rising.

On Monday, the activity index for the U.S. industrial sector startled investors by rising from 47.8 points in February to 50.3 in March, thus reaching a level that indicates expansion for the first time since September 2022. Additionally, the price sub-index rose from 52.5 to 55.8 points, which could indicate a scenario of more intense inflationary pressures in the sector, turning on the yellow light among market participants.

“Until then, these prices had been more controlled. Moreover, the Fed has been placing significant emphasis on inflation data as a condition for its future actions, in this case, a possible interest rate cut,” noted Marcel Yagui, currency manager at BlueLine Asset.

The market, he says, has begun to cast doubt on the start of the interest rate cut in June, which had been considered quite likely. According to the CME Group at Monday’s close, Fed funds futures indicated a 58.4% chance of an interest rate cut in June and a 41.6% probability that the easing cycle wouldn’t begin until later.

“The relevance of this data is undeniable given the recent context of more conservative statements from the Fed. The movement could only be one of rising interest rates and a stronger dollar,” said Mr. Yagui. In this context, BlueLine reduced its long positions (which bet on appreciation) in the real.

Although external factors were decisive for the dynamics of the session, they were not the only ones that influenced the behavior of the exchange rate. Market participants have been pointing out in recent weeks that the maturity of NTN-As could generate some stress in the exchange rate, although they were not betting on extraordinary action by the Central Bank.

“I have the impression that the initial idea of the Central Bank was to let the market absorb this maturity, which is relevant but not huge. However, with the more adverse external environment exerting pressure on the real, they opted to mitigate the potential additional impact on the exchange rate resulting from the maturity of the NTN-As,” said Warren Investimentos’ chief strategist, Sérgio Goldenstein.

The maturity of the papers on April 15 is expected to create a demand for the American currency of around $3.7 billion, which had already heightened the perception among agents that the exchange rate could be more unstable at the beginning of April. From the low to the high of the day in Monday’s session, the dollar fluctuated by more than R$0.06, a level not seen in recent trading sessions.

“These bonds originate from the process of exchanging foreign debt for domestic debt,” explained Mr. Goldenstein, who once headed the Central Bank’s Open Market Department (DEMAB). “It’s undoubtedly an exchange rate pressure because it’s unlikely that the Treasury will renew these bonds,” he explained. “Entities holding these bonds are effectively buying in dollars. Upon the bonds’ maturity, these entities will no longer hold their positions. If they wish to maintain their investment position in dollars, they would need to re-enter the market [to purchase more dollars].”

Some traders even mentioned that the pressure might not be so significant as the bonds could be protected with some kind of hedge. Mr. Goldenstein, however, emphasizes the need to distinguish between the Central Bank, the Treasury, and the private sector, noting that the process could still exert pressure on the exchange rate. “If there is a hedge, someone in the market has to provide it, so it remains within the market,” he said.

In the view of Banco Pine’s chief economist, Cristiano Oliveira, the Central Bank acted appropriately since the maturity of NTN-A introduces distortion to the foreign exchange market, which has already been affected by uncertainties surrounding U.S. monetary policy. “Domestic factors do not suggest a devaluation of the real. The Central Bank should monitor the market closely until maturity and, if necessary, offer more swaps. The real depreciated more than its peers on Monday because of that,” he explained.

The assessment of some financial agents aligns with Mr. Oliveira’s perspective on the domestic fundamentals, suggesting room for an appreciation of the Brazilian currency. This perception was quite relevant at the turn of the year, but successive disappointments with the dynamics of the exchange rate have led to a “cleansing” on the technical side, with a reduction in optimistic positions on the real.

Among foreign investors, the long position (betting on a rise) in the dollar through derivatives such as dollar futures and currency swaps reached an all-time high last Friday, climbing to $68.44 billion. Local investors, meanwhile, continue to hold a short position (betting on a decline) in the dollar against the real, amounting to $13.3 billion.

In a monthly call on Monday (01), Fernando Chibante, currency manager at Occam, stated that the firm continues to bet on the Brazilian real’s appreciation, citing the positive carry trade and stable external accounts as key factors. “Additionally, last month, we saw a significant improvement in technical factors. Even though the real experienced some deterioration throughout March, we attribute much of that to the broader external scenario, particularly the stronger dollar,” he explained.

*Por Arthur Cagliari, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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OneSubsea wants to have 25% of global revenue in Brazil

Supplier emerged in October after joint venture between SLB, Aker and Subsea

04/01/2024

Mads Hjelmeland — Foto: Leo Pinheiro/Valor

Mads Hjelmeland — Foto: Leo Pinheiro/Valor

Subsea technology and equipment supplier OneSubsea expects Brazil to rise to 25% of its global turnover from the current 20% in three years. The company, which does not reveal its annual revenue, was created in October as the result of a joint venture between SLB (70%), Aker Solutions (20%) and Subsea7 (10%), and has headquarters in Oslo, Norway, and Houston, Texas. The estimated synergy potential of the new business is more than $100 million per year in the medium term.

On his first visit to Brazil as the company’s CEO, Mads Hjelmeland told Valor that the country is of strategic importance to OneSubsea.

Before taking over the new company, Mr. Hjelmeland was the head of subsea production systems at SLB. OneSubsea has 11,000 employees in 16 countries, 3,200 of them in Brazil, where the company has production units in São José dos Pinhais (Paraná state) and Taubaté (São Paulo) and service units in Rio das Ostras and Macaé (Rio de Janeiro).

Mr. Hjelmeland said that production in Brazil is important because of the importance of the oil and gas market, which leads OneSubsea to acquire the knowledge to develop solutions here for other countries: “We develop new capabilities here that don’t just stay in the Brazilian market. We acquire knowledge here and export it to the rest of the world.”

He cited as an example the production of a piece of equipment used to monitor and control the production of a subsea well, known as a wet Christmas tree, produced at the company’s Brazilian facilities and which will be used in a Chevron project in the Gulf of Mexico.

The installation is scheduled for April this year and represents a significant milestone for the industry, said Mr. Hjelmeland. The company produces Christmas trees in Brazil and exports them to countries in the Gulf of Mexico and the North Sea. Around 800 Christmas trees produced by OneSubsea and Aker have already been delivered to Petrobras for use in the pre-salt fields.

Among the motivations on the company’s horizon is the development of new oil frontiers, such as the Equatorial Margin, in Brazil, and West Africa. In the case of the Brazilian region, Mr. Hjelmeland has good prospects: “The Equatorial Margin is an exciting prospect. It’s one of the areas in which we’re interested in collaborating in partnership with Petrobras. We’ve been looking at how to increase the level of investment in people to meet these needs for new fronts and new energies.” By “new energies”, Mr. Hjelmeland is referring to wind power generation, both onshore and offshore. “It’s still early days, but it’s a market we’re very interested in. We’re hopeful, but the energy transition is complex.”

Mr. Hjelmeland says that the company is committed to positioning itself in Brazil to support oil companies in the current boom cycle in the oil and gas sector, while also looking at other markets: “We are excited about the Brazilian market in 2024 and, after that, it is a place where we will continue to increase our activities. We are positioning ourselves to be able to support the expectations of projects in Brazil, collaborating in prospecting with Petrobras and other players. It’s one of the most attractive markets in our portfolio.”

As for the market in Africa, Mr. Hjelmeland said there are clear indications that activity there is recovering: “The west of the African continent has historically been active, but there was a recent slowdown, which affected each of the countries in different ways, and now we see activity returning.”

OneSubsea’s expectations are confirmed by market projections. According to Citi, countries that are not part of the production agreements of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are expected to stand out in terms of increased oil production in 2024 and 2025. According to the bank, in a March 17th report, Brazil’s oil production is expected to increase by around 400,000 barrels per day in 2024 and around 200,000 in 2025 with the boost from the pre-salt fields.

Mr. Hjelmeland cites the difficulties in the oil and gas supply chain as a warning sign. Petrobras itself, for example, has mentioned on several occasions the difficulty of contracting Floating Production, Storage, and Offloading (FPSO) units due to the boom cycle, which has increased demand from oil companies.

“There are typical challenges that arise in times of a boom cycle in the world’s oil and gas sector, such as the supply chain,” said Mr. Hjelmeland. “Right now, especially, the FPSO manufacturing market is struggling to meet demand. But we need to keep in mind that we are still living through the consequences of the pandemic, which has impacted the industry and people in general, as well as other global geopolitical issues that also affect the sector and the transportation of goods, imposing challenges in the execution of projects.”

*Por Kariny Leal — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Consumer credit growth could boost GDP

Corporate sector yet to experience turnaround cycle, key for investment growth

04/01/2024

Credit concessions to families, more closely linked to consumption, have been growing at a more vigorous pace than those related to debt consolidation, a trend that has strengthened since the beginning of the year. Some economists believe this will be an important factor in boosting the Gross Domestic Product (GDP) throughout 2024.

In January, free credit for individuals associated with consumption increased twice as much as that linked to debt: 14.4% compared to 7.1% in the same period in 2023. A survey conducted by PicPay economists categorizes lines of credit for the acquisition of goods (such as vehicles), cash cards, installment cards, and installment loans as consumer credit, and overdrafts, non-consolidated personal loans, and revolving loans as debt credit.

“They are not separate things; the division has intersections. However, it’s a way to differentiate credit lines that are more aligned with consumption logic from those linked to expensive debt,” said Marco Caruso, PicPay’s chief economist.

Brazil’s Central Bank has raised its credit growth projection for 2024 from 8.8% to 9.4%, according to the quarterly Inflation Report for March, released last week. The growth in free credit for individuals increased from 9% to 10%, while for companies, it rose less significantly, from 7% to 7.5%.

In the minutes of its March meeting, also released last week, the Central Bank’s Monetary Policy Committee (COPOM) noted that credit, alongside income, has acted to mitigate the slowdown in activity recently and mentioned “the credit cycle in the recovery phase” as one of the factors that should lead to “resilient consumption.”

Mr. Caruso recalls that, after an initial decline in both categories following the outbreak of the pandemic, credit linked to consumption recovered in the second half of 2020 and surged until mid-2021, as families increased their savings and shifted consumption from services to goods.

“Consumption took the lead, but at a certain point, perhaps due to an overemphasis on consumption and also with the ongoing pandemic, the debt portion grew excessively,” said Mr. Caruso.

The share of credit linked to consumption decreased from the second half of 2021, but the growth in credit linked to debt increased, peaking at the beginning of 2022. “That year was a revelation. We saw people taking out costly loans to cover daily expenses,” said Mr. Caruso.

Throughout 2022, both categories were declining, “either because, from the demand side, people were overly indebted, or because, from the supply side, banks were applying the brakes,” the economist recalled. Since mid-2023, however, while the portion of credit more closely associated with debt continued to shrink, the consumption portion stabilized and then began to increase, creating what economists call an “alligator mouth” in comparison to the other indicator.

“It’s as if the house has been put in order by both families and banks and now we’re witnessing the beginnings of a resurgence in confidence in both taking out and offering credit. It appears to be a more favorable environment for household consumption and credit,” said Mr. Caruso.

Now, total credit concessions are about 30% higher than pre-pandemic levels, according to PicPay, but for consumption, they are 89% higher, and for debt, 55% higher.

That aligns with the broader macroeconomic scenario, Mr. Caruso notes. “We have cuts in the Selic rate that are beginning to reflect in the interest rates for individuals, providing a first relief. And we are seeing improvements in default rates,” he added.

Mr. Caruso also highlights the lower burden of household income devoted to debt, though, for now, this is more due to the reduction in the principal (the initial amount of the debt) than to a drop in interest rates themselves. “We’re observing an improvement in income and in people’s capacity to repay their debts, which aligns well with what we’re seeing in the job market and workers’ earnings. The main story is still not so much about interest rates, which are now starting to improve as well,” said Mr. Caruso.

Furthermore, PicPay’s economists note that this cycle of relief in defaults has been quicker than in other difficult periods, such as at the end of 2015. “That was a much more challenging time, with GDP falling by more than 3%,” Mr. Caruso recalled.

In 2023, GDP grew by 2.9%, and for 2024, the expectation is that it will increase by 1.85%, according to the median of the estimates in Focus, the Central Bank’s survey of market participants. However, financial institutions have raised their projections, in part, precisely because of the signals emanating from credit.

Itaú Unibanco has updated its GDP forecast for 2024 to include a more optimistic outlook for credit concessions, particularly to individuals and for housing, raising its projection from 1.8% to 2%. According to BTG Pactual, credit data from January suggests that the anticipated acceleration will occur sooner than expected. BTG now forecasts a 2.3% increase in Brazil’s GDP for 2024.

“Credit will never be the savior of Brazil’s GDP because it is pro-cyclical; it only starts to pick up after GDP has already begun to move. However, it acts as a bolster, a catalyst for activity. If a person was going to consume ‘x’ without credit, with credit, they could consume ‘2x’,” Mr. Caruso explained.

Igor Cadilhac — Foto: Gabriel Reis/Valor

Igor Cadilhac — Foto: Gabriel Reis/Valor

The prospects are much more favorable this year, especially for credit related to the purchase of durable goods, such as vehicles, notes Igor Cadilhac, an economist at PicPay. “It’s challenging to predict whether this improved macro scenario will ultimately enhance debt repayment, i.e., to what extent people will actually pay off their debts,” Mr. Cadilhac mused. “But today, the outlook is promising.”

For February, a survey by the Brazilian Federation of Banks (FEBRABAN), using consolidated data from the country’s major banks, shows a 0.5% growth in the total balance of the credit portfolio compared to January, driven by loans to families.

LCA Consultores forecasts an 11% growth in the balance of free credit to individuals in 2024, according to analyst Michael Burt. “What underpins this projection, besides the fall in the Selic rate [Brazil’s primary monetary policy instrument used to control inflation], is a unique moment in the credit market, characterized by a large number of people being banked, having access to checking accounts and other products,” said Mr. Burt.

He notes that despite the recent cycle of interest rate increases, the level of lending to families has remained historically high. Mr. Burt attributes that to the growth of digital banks and the resulting access to new products and banking relationships, such as the cash credit card. “People start with this one card and then graduate to other products. That boosts consumption,” he stated.

Mr. Burt cautions that, although it is decreasing, the rate of individual defaults remains high, and should there be any setbacks in the macroeconomic scenario, such as reduced economic activity growth, more persistent inflation, or less monetary easing, these defaults could increase again.

Igor Barenboim, chief economist at Reach Capital, anticipates a GDP growth of around 2% in 2024, with credit contributing approximately 1% to this growth.

The problem, according to him, is that this “turning point in the credit cycle” for individuals is not being extended to companies. That, for example, diminishes the chances of potential GDP growth in Brazil, Mr. Barenboim notes. It also does not aid in investment.

Credit, when offered under adequate conditions and used responsibly, is a “powerful lever for economic growth,” as it enables economic agents to realize their projects presently, states the Institute of Industrial Development Studies (IEDI) in its most recent letter.

“Brazil’s credit conditions remained unfavorable for boosting economic activity throughout most of 2023,” he noted. “However, by the end of the year, there were initial signs of improvement, which may become more robust,” he added.

For short-term GDP, the quality of credit that families are taking out matters less, Mr. Barenboim explains. “Ultimately, it’s spending; it’s going to finance consumption. However, in the medium term, it might not be incredibly beneficial. And the challenge will be to approach the election year with these levers already somewhat expended,” he said.

*Por Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Highway auctions in April to test market potential

Tenders for BR-040 and the Litoral Paulista Lot PPP are expected to generate R$9 billion in investments

04/01/2024

The market ended 2023 on alert after the cancellation of the auction of BR-381 in November, due to a lack of proposals — Foto: Alberto Ruy/MInfra

The market ended 2023 on alert after the cancellation of the auction of BR-381 in November, due to a lack of proposals — Foto: Alberto Ruy/MInfra

The highway concessions market will be tested in April, when two important auctions are scheduled, involving construction work estimated at R$9 billion. The federal auction for BR-040, connecting the cities of Belo Horizonte and Juiz de Fora, in Minas Gerais, is scheduled for the 11th. On the 16th, the São Paulo state government plans to carry out the bid for the Public-Private Partnership (PPP) for the Litoral Paulista Lot.

The highway sector is uncertain about the level of investor interest in the new projects being structured. The market ended 2023 on alert after the cancellation of the auction of BR-381 in Minas Gerais, in November, due to a lack of proposals. However, analysts point out that it was a particularly challenging and troubled project, and the scenario is not likely to recur in the April auctions. Both bids are expected to attract offers, but the level of competition remains uncertain.

“The market is tough but BR-381 is an outlier. The BR-040 southern stretch is attractive; more than nine companies have visited it. It is an asset with an interesting return and good traffic volume,” said Marcos Ganut, managing partner at Alvarez & Marsal.

He added that the project has challenges due to the highway’s characteristics, including a high flow of trucks, which demands high maintenance costs. “However, the balance between construction work, operational costs, and traffic risk is positive.”

The BR-040 concession runs from the capital of Minas Gerais to Juiz de Fora and provides for R$5 billion in construction work. Operating costs are estimated at R$3.53 billion, over the 30 years of the contract. The winner will be the competitor offering the biggest discount on the toll fee.

Among potential interested parties are companies such as CCR, Pátria, EPR (Equipav and Perfin), and Ecorodovias, as well as construction companies.

The auction is also emblematic because it brings a partial solution to the imbroglio surrounding the re-tendering of Via040, an Invepar concession that went wrong and is being returned to the government to be handed over to a new operator.

Invepar has been trying to return the concession since 2017, but only in 2020, it managed to sign the re-tender contract. A new auction was expected to be held by 2022, but the process faced a series of delays. In 2023, the court had to guarantee that Invepar would continue operating the route until the re-tender. However, the auction will not completely solve the problem as it does not include another stretch of Via040, from Belo Horizonte to Goiás, that is yet to be re-bid.

Although the project is linked to the re-bidding, the reading is that it should not pose a legal risk to the auction because the invitation to tender has detached the two processes, says Lucas Sant’anna, a partner at Machado Meyer.

The second auction scheduled for April, involving the Litoral Paulista Lot PPP, on the coast of São Paulo, has also faced ups and downs in recent years, but the expectation is that it will now be successful. “The private sector is familiar with and has studied these stretches for a long time. There should be interested parties,” Mr. Sant’anna said.

In the PPP, which involves R$4.3 billion in construction work, part of the funds will come from the government, which will pay the concessionaire an annual consideration of up to R$199 million per year. The winner will be the group offering the biggest discount on the amount. Should any interested parties offer a 100% discount, bringing the consideration to zero, the dispute will be defined by the largest grant.

The Litoral Paulista project was initiated by the São Paulo government in the past administration, which was unable to get the auction off the drawing board due to resistance from the municipality of Mogi das Cruzes, which is crossed by the tendered stretch. The solution found by the current administration was to transform the contract into a PPP, which allowed to reduce the toll rate and the criticism around it.

Ecorodovias is one of the groups analyzing the bid. The company has a special interest in the project as it currently operates the Anchieta-Imigrantes system, connecting the capital city of São Paulo to the coast, and whose demand competes in part with highways in the new lot. The market reading is that the company will likely try to ensure its hegemony on the route. CCR, EPR, and Starboard (which debuted in the sector in 2023 by winning the Rodoanel Norte auction) are also seen as possible competitors.

When contacted, Ecorodovias said it watches “with interest the concession programs announced by federal and state governments to evaluate opportunities.” CCR said it “analyzes all opportunities on the three platforms on which it operates, selectively.” EPR said “it has a habit of evaluating opportunities in the sector.” Starboard and Pátria did not comment.

While the market expects the April auctions to be successful, analysts pointed out that the scenario for highway tenders in 2024 will be tough, due to the high volume of new concessions currently being structured by governments.

“There may be an excess of lots in the calendar. On the one hand, there are multiple project profiles, which can attract newcomers. However, there is concern that the sector will not be able to handle so many bids. The April auctions will be a good barometer”, Rodrigo Campos, partner at Vernalha Pereira Advogados, said.

According to Mr. Ganut, the current scenario for attracting new investors to highway concessions is not optimistic. “It is not easy. Although Brazil’s economic fundamentals are good, the attractiveness for investors is limited. One issue is the return on projects measured in dollars. Furthermore, in recent years we have experienced changes in rules, which brings uncertainty,” he added.

*Por Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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