Climate crisis to recur in Latin America with high toll, IDB says

Ilan Goldfajn defends shaping multilateral banks for emergencies

05/21/2024

Ilan Goldfajn — Foto: Ana Paula Paiva/Valor

Ilan Goldfajn — Foto: Ana Paula Paiva/Valor

At the height of the disaster in Rio Grande do Sul, Ilan Goldfajn, the Inter-American Development Bank (IDB) president, visited Brazil and announced an aid package that could reach R$5.5 billion.

In his view, the disaster reinforced the assurance that extreme weather events have become increasingly frequent. Therefore, in addition to the emergency action, it is necessary to shape multilateral banks to act in climate emergencies. Floods in Rio Grande do Sul or the major drought that hit Argentina and Uruguay last year are examples of how the entire region has been affected by climate events.

The contingency structure includes three fronts: granting loan facilities, pausing loan payments in the face of moderate climate emergencies, and creating “catastrophe bonds,” which involve debt waiver in extreme events.

On another front, he says reconstruction work must increase resilience to climate events.

Another topic that brought Mr. Goldfajn to the country is the IDB support for the Brazilian presidency of the G20, the subject of a meeting with Finance Minister Fernando Haddad.

Coincidentally, the IDB currently leads a group of ten multilateral credit banks. An overhaul of these institutions’ performance is among the themes promoted by Brazil. In April, this group of banks announced measures to act as a system. Among its goals is increasing funding by $300 billion to $400 billion over the next decade.

The IDB wants to increase credit supply by $150 billion. One initiative in this area includes a request to the International Monetary Fund (IMF) so that countries’ reserves in the institution may be used by multilateral banks.

Initiatives by the Brazilian presidency at the G20 will also include the launch of a global pact against hunger and poverty. On this topic, according to Mr. Goldfajn, the IDB has a database gathering successful experiences in the area, such as the Brazilian cash-transfer program Bolsa Família. The database also describes programs that were not as successful, knowledge that can be made available to the world, he said.

Read below the main excerpts from the interview with Valor:

Valor: You were in Brazil at the height of the disaster in Rio Grande do Sul. What did this disaster reveal?

Ilan Goldfajn: It shows us that addressing the climate issue is a key priority. A development bank cannot ignore these impacts, which have many social consequences, including people being displaced, returning to poverty, losing income, and losing their properties. Many people lost their lives. Dramatic moments arise from extreme [climate] events, which, unfortunately, are becoming increasingly frequent.

Valor: Do you see that happening in the region?

Mr. Goldfajn: Let me tell you a story. As I joined the bank, my feeling was that the climate impact could be seen in the Caribbean and Central America, with hurricanes and the islands being devastated. However, I wasn’t so sure that would spread across the entire region. Since I joined, we have seen the worst drought ever in Uruguay and Argentina. There was a lack of water in Montevideo, which had never occurred before. Argentina lost $15 billion, although it didn’t have huge dollar reserves. There have been major fires in Chile and a hurricane that devastated Acapulco, Mexico. These events will be recurring and will pose high tolls. Development banks have to prepare to help the region deal with that.

Valor: How?

Mr. Goldfajn: There are two ways of doing so. One is in the medium term. Reducing emissions, using renewable energy, and working on our program Amazonia Forever. However, we also have to emphasize adaptation and physical and financial resilience.

Valor: The Brazilian government is in talks with multilateral organizations to seek a structural solution to climate emergencies. How does that coincide with the IDB’s agenda?

Mr. Goldfajn: We need to think about creating a contingency system that should be developed in advance to be prepared once the event occurs. Dividing the risk into three fronts. In major catastrophes, we offer debt waiver. In the intermediate events, we extend loan maturity. We have loan facilities that can be extended for two years. In minor events, we can offer loan facilities. We can act according to the extent of the catastrophe.

Valor: Waiving the debt?

Mr. Goldfajn: We can work together with the state or federal government to issue catastrophe bonds. In other words, in the event of a catastrophe, we settle the debt.

Valor: How about material losses?

Mr. Goldfajn: We will work on reconstruction in a resilient way. Putting in place an infrastructure that can better resist flooding or hurricanes.

Valor: Could such instruments be used in Rio Grande do Sul or are they still being developed?

Mr. Goldfajn: We have to think structurally. What happened in Rio Grande do Sul could have an impact elsewhere. We need to organize for the future. Regarding Rio Grande do Sul, we will work according to two models.

Valor: What would they be?

Mr. Goldfajn: We will allocate R$1.5 billion to things that are already in place, including loans to small and medium-sized companies, project relocation, humanitarian aid, and hiring staff to organize reconstruction. In addition, there will be another R$4 billion as a boost to the future of reconstruction in Rio Grande do Sul in a resilient way.

Valor: You have declared your intention to increase available funds to countries by $150 billion over the next decade. How do you plan to get these funds?

Mr. Goldfajn: The IDB recently approved three major changes. One is the capitalization of IDB Invest through a new model, totaling $3.5 billion. It doubles the funds by IDB Invest, our private-sector arm, designed to help companies.

Valor: Does it include Rio Grande do Sul?

Mr. Goldfajn: We have just had a meeting with the BRDE [Far South Regional Development Bank ] about how we can help them. IDB Invest was among the topics we discussed. Part of the R$1.5 billion I mentioned includes loan facilities via BRDE. In addition, IDB Invest can help the BRDE. With greater liquidity and guarantees, it can increase leverage. Brazil is the IDB and IDB Invest’s largest client. This capitalization is great news for the world and even better news for the region and Brazil.

Valor: What is the second change?

Mr. Goldfajn: An approval of $400 million for IDB Lab, which donates to startups. It is very important for Brazil.

Valor: What about the third change?

Mr. Goldfajn: The approval of our new strategy for the future. These are relevant reforms, which increase our work’s scale. That includes financial innovation, increasing leverage, and using our own funds in the best way. These are instruments to improve our balance sheet, such as the SDR [Special Drawing Rights, the IMF’s “currency”]. There are also ways to increase the impact of our work, including selectivity, effectiveness, and development.

Valor: In Brazil, you met with Finance Minister Fernando Haddad. What did you talk about?

Mr. Goldfajn: Rio Grande do Sul, environmental aid, and solidarity, were the main topics of my visit. Another subject was our role in the [Brazilian] G20 presidency. We are making a huge effort to support Brazil in the presidency. That includes a few implications. On the financial side, the Brazilian presidency intends to create a framework of reforms in multilateral banks. It wants to create a guidance. We are helping as we are a multilateral bank with experience in what is useful, and what is needed. We tap into our leadership of multilateral banks, which includes ten institutions, to agree on a joint reform plan. This is one side.

Valor: What’s the other?

Mr. Goldfajn: Brazil introduced a relevant topic on the agenda, which is the fight against hunger and poverty. And the country will launch the global alliance against hunger and poverty, a banner at the G20. At the IDB, we have been carrying out social programs to combat hunger and poverty for years. There are successful experiences, like Bolsa Família and a program in Mexico, but there are also those that don’t work. We have a database setting apart programs that have or haven’t worked in Latin America. And we are making it available for the G20 presidency. We also addressed a very important program increasing climate funding by offering currency hedging.

Valor: Does this hedging prepare Brazil to receive more investments?

Mr. Goldfajn: I think some areas are more prepared to receive investment, while others need improvement. Brazil and Latin America need to get ready to receive more investments. That is related to planning, but also to regulation, which includes defining the rules of the game and the appropriate business environment. A lot has been discussed in Latin America about public security and organized crime. And I’m not just talking about Brazil. I’m talking about the entire region. We have a major public security program in place in Ecuador.

Valor: Are Brazil’s macroeconomic weaknesses a hindrance to investments?

Mr. Goldfajn: Whenever I talk to investors, they say stability is a key factor for them. Economic stability, stability of rules, and stability in security. They seek our help dealing with the risk of excessive exchange rate depreciation, expropriation of concessions, or a rule change midway that completely changes the tax structure, for example.

Valor: How do you see Brazil’s macroeconomic situation?

Mr. Goldfajn: Brazil has stability. It has challenges, but it has macroeconomic stability. Thanks to the size of its reserves and because there is a Central Bank, a Ministry of Finance, and a Ministry of Planning and Financial Budgeting doing their jobs. Looking from the outside, we can see the forest: we see challenges, but we also see all that has been achieved in recent years.

Valor: Valor promoted an event about the Interest for Education program, and Secretary of Treasury Rogério Ceron said the IDB will work on it. What other innovations is the IDB promoting in Brazil?

Mr. Goldfajn: Everything is changing. We can’t go on with the same solutions we had before. We have to innovate. For decades, I faced the issue of exchange rate fluctuations and I know that can be a problem. However, for the first time, we are innovating and, if everything works well, we will increase investment in climate.

Valor: How?

Mr. Goldfajn: By offering a currency hedging that makes investors feel more comfortable. We have been leaders in swap operations, with the debt-for-nature deal, Ecuador’s big project. In Barbados, there was a debt-for-water swap, following a lack of water [in the country]. And we have debt-for-health projects in some countries. Under the Interest for Education program, we are offering our expertise. But everything is preliminary and yet to be defined.

*Por Lu Aiko Otta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Corporate debt market flourishes with more issuers, high liquidity

Borrowings now feature larger volumes and extended terms, becoming increasingly central to corporate management strategies, while tax-exempt bonds are increasingly drawing individual investors

05/21/2024

Pierre Jadoul — Foto: Gabriel Reis/Valor

Pierre Jadoul — Foto: Gabriel Reis/Valor

In Brazil’s relatively subdued stock market, corporate debt instruments like debentures and receivables certificates are carving out more substantial roles within investor portfolios and have become crucial elements of corporate financing strategies. This sector’s expansion and increased sophistication are clearly reflected in the secondary market activity, where these securities are traded before their maturity.

For instance, in terms of transaction volume, the secondary market concluded last year with 2.255 million operations involving all forms of corporate debt securities, marking an increase of more than sixfold over the past five years, according to data provided by B3, the Brazilian stock exchange, for Valor. This surge included a 70% growth in just one year, notably during a period characterized by globally high interest rates that generally deter investors from this asset class.

Financially, the trading volume of private bonds in 2023 reached R$839.7 billion, quadrupling over five years. In the first four months of 2024 alone, transactions have already amounted to R$277.95 billion.

The number of issuers has nearly doubled in the past five years, with a total of 626 in 2023. Regarding the value of assets traded, there was a significant jump from R$4.4 billion in 2019 to R$14.5 billion last year. In just the initial four months of this year, the figure has already hit R$5 billion, signaling solid potential for growth throughout the year.

Fabio Zenaro, B3’s director of over-the-counter products, commodities, and new business, notes that the fixed-income market has seen rapid evolution in recent years across all industry metrics. “Until recently, we were processing around 3,000 trades a day, and now, we’ve reached 20,000,” he said.

Mr. Zenaro recalls that more companies are now turning to the local market for financing, drawn by longer terms and a market capable of handling large operations, thereby enhancing the sector’s significance even further.

Despite technological advancements, corporate debt trading is predominantly conducted over the counter with broker mediation. Mr. Zenaro points out that only 1% of fixed-income trading currently occurs on electronic platforms, a stark contrast to international norms, where this could exceed 30% in the future.

On a typical day, investors contact brokers by telephone to locate assets and finalize transactions. Whereas the market previously saw fewer trades, compelling investors, including fund managers, to hold onto their assets until maturity, it now allows for much more active and flexible management.

At Legacy, for instance, securities are typically held in the portfolio for about six months, according to Leonardo Ono, the firm’s corporate debt manager. “It’s like the chicken and the egg scenario. I’m not sure if the liquidity came from the longer maturities of the assets or if the longer maturities brought about the liquidity,” he muses. With increased liquidity, the number of investors grew, but so did market volatility. “Many investors complain about the volatility, but that’s just a byproduct of increased liquidity.”

Mr. Ono also highlights that individual investors have played a significant role in bolstering the secondary market in Brazil. “The current high interest rate environment is likely to sustain the trend of individuals entering the corporate debt market,” he observes, noting that income tax-exempt bonds have made this market particularly attractive to investors, leading them to prefer corporate debt over public bonds. “Today, every investor maintains a portion of their portfolio in corporate debt,” he adds. The market could see further expansion with the entry of foreign investors and pension funds.

On the other hand, Pierre Jadoul, corporate debt manager at ARX Investimentos, points out that despite its growth, the Brazilian market remains highly concentrated in the banks, contrasting with more developed countries where capital market participation is more pronounced. “The migration of credit from banks to capital markets is a natural progression,” he asserts.

Mr. Jadoul reflects on a recent revelation within the Brazilian market: the realization that fixed income can be volatile, a fact underscored by mark-to-market practices, and that securities are susceptible to defaults, as seen in the recent cases involving Americanas and Light. He points out that mark-to-market practices have introduced more efficiency, allowing assets to be bought and sold at fair prices.

At ANBIMA, Brazil’s association of securities firms, the scope of private securities monitored has seen substantial growth year over year. Over the past five years, for instance, the assets tracked have tripled, now totaling around 900.

Vivian Lee, chief credit strategist at Ibiúna Investimentos, observes that improved transparency in pricing has played a crucial role in drawing investors, thereby boosting market liquidity. “Five years ago, the secondary market had fewer significant players,” Ms. Lee remarks. She notes that, following the pandemic, bank treasuries and multimarket funds have become more active participants.

With individual investors increasingly entering the market, regulatory oversight has intensified to prevent any misuse of the spread level, according to Mr. Zenaro from B3. He adds that BSM, the self-regulatory body of the stock exchange, plays a critical role in this oversight, ensuring that assets are not sold at prices that significantly deviate from market norms, thereby enhancing the transparency of corporate debt trading.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Economic outlook becomes murkier for 2024 and 2025

Expectations for GDP, inflation worsen due to floods in Rio Grande do Sul, Brazil’s fiscal situation, U.S. interest rates

05/21/2024

Sérgio Vale — Foto: Claudio Belli/Valor

Sérgio Vale — Foto: Claudio Belli/Valor

A series of negative news and emerging risks have formed a mix that has worsened economic agents’ expectations for the economy in 2024 and 2025. The latest sign of this process is the market’s median projection for 2024 GDP growth, which fell for the first time in almost a year this week.

Analysts say the scenario pressures the Central Bank to adopt a more cautious stance on interest rate cuts. However, some also see these movements as somewhat exaggerated.

According to the Central Bank’s Focus survey, the market’s median projection for 2024 economic growth dropped to 2.05% from 2.09%. This is the first decline in the projection for this year since June 16 of last year, when it fell to 1.20% from 1.27%.

Meanwhile, the median for Brazil’s official inflation index IPCA rose to 3.80% from 3.76%. For 2025, inflation expectations increased to 3.74% from 3.66%. The median projection for the Selic policy rate rose to 10% by the end of 2024 from 9.75%.

“This worsening of expectations is not new. It started with the changing outlook for U.S. interest rate cuts and growing concerns about Brazil’s fiscal scenario. But it was accelerated by the rift within the Central Bank’s board at the last Monetary Policy Committee (COPOM) meeting and now by the tragedy in Rio Grande do Sul,” said Sérgio Vale, chief economist at consultancy MB Associados. “This last factor directly impacts growth prospects for 2024 and also inflation, as analysts are already incorporating short-term shocks in food prices. These events have halted the previously improving projections for economic activity.”

The scenario is almost a “perfect storm”—but, according to him, “one created by the government, which bears significant responsibility for the poorly calibrated fiscal outcome since the fiscal framework, exemplified by the change in the primary target for 2025,” he said. “This spills over into problems like the one in Rio Grande do Sul, where the situation demands a level of aid that public finances are not prepared to provide.”

“There is indeed an environment of deteriorating expectations, which became more evident with the Focus survey. It was the third consecutive week of an increase in the IPCA median for next year, which is the Central Bank’s main focus,” said Silvio Campos Neto, a senior economist and partner at Tendências Consultoria.

He also highlighted the split within the Central Bank’s board regarding the pace of interest rate cuts, which has crystallized doubts that have existed since the end of last year about how the monetary authority will act with the change in leadership. “It is more than natural for the market to be uncertain due to high political signals and pressures towards a more interventionist approach, as seen in the Petrobras leadership change episode or attempts to boost economic activity using state-run companies in a context of low economic slack.”

Fabio Romão, a senior economist at LCA Consultores, calculates that the recent worsening of projections for 2024 and 2025 inflation in the Focus survey is concentrated on free prices within the IPCA. While the 2024 projection rose to 3.72% from 3.67%, the 2025 projection increased to 3.68% from 3.57%.

“We believe this increase in expectations for 2024 and 2025 is related to currency depreciation and uncertainties in the pricing of certain food items—following climatic events in the South,” he said. The consultancy raised its estimate for food-at-home inflation in 2024 to 4.5% from 3.9% but kept the 2025 estimate at 4.9%.

For 2025, Mr. Romão expects a moderate acceleration in regulated prices after the municipal elections. Another source of pressure could be the resumed rise in industrial goods prices, which have been contained since 2023, he added.

Silvia Matos, coordinator of the Macro survey at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), said that the current expectation scenario calls into question the quality of future economic growth.

“When the fiscal policy is more expansionary, the economy ends up with much higher real interest rates to keep inflation lower. This signals a higher risk premium, and the cost of rolling over public debt also rises. It’s the worst of both worlds—high disinflation costs in terms of activity,” she said.

Given this scenario, economists believe the monetary authority will need to be more stringent in its message about combating inflation, which may include rethinking the final stretch of the interest rate cut cycle. However, they also note that uncertainties surrounding the Central Bank’s leadership change hamper this process.

“Today, there is a fear that the Central Bank will lower its guard on reducing interest rates. If this concern grows, medium- and long-term interest curves will rise significantly. This increases debt costs and affects economic activity because the cost for companies to invest will be higher,” said Mr. Campos Neto, with Tendências.

Despite predominantly negative news, some urge caution in analyzing the worsening expectations scenario. One reason is that, although uncertainties have increased, current economic indicators still allow for some optimism.

“I believe some concerns are natural at this stage of the cycle, in which growth comes more from demand, particularly from a labor market that continues to surprise and raises questions about future inflation behavior,” said Cristiano Oliveira, chief economist at Banco Pine. “But at the same time, I see some exaggeration. There seems to be a contradiction in increasing expectations for both the Selic rate and the IPCA in the medium term. Even working with a higher real interest rate than the Central Bank, as we do, it is only logical to assume that only one side [inflation or interest rates] will be correct, not both.”

For Mr. Oliveira, the floods in Rio Grande do Sul will have a greater impact on activity than on inflation. The unanchoring attributed to food prices may disappear, as it is temporary and other prices remain controlled. However, the damage to activity will be more significant, he said. “Much is expected from the fiscal stimulus, but I have my doubts. We must consider that even the government’s aid of R$5,100 [per affected family] is small to recover entire lives and businesses that have been closed.” The market reacts to uncertainties and is right to demand a higher premium for it, but it is not necessarily correct about what will happen, he added.

*Por Marcelo Osakabe, Marsílea Gombata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Foreigners once again increase their share of public debt

A share of 10.2% is a far cry from the 20.8% held in 2015 when country boasted an investment-grade rating

05/20/2024

Rogério Ceron — Foto: Gesival Nogueira Kebec/Valor

Rogério Ceron — Foto: Gesival Nogueira Kebec/Valor

Figures from the National Treasury show that foreign investors have gradually increased their participation in Brazil’s public debt, although they are still a long way from regaining the share they had in the past when the country had the so-called investment grade rating from risk assessment agencies. Despite the government’s optimism, experts believe that it is too early to say that this movement is here to stay and that Brazil will quickly return to previous levels of non-resident participation in the debt.

Data from the latest Monthly Debt Report (RMD), released by the Ministry of Finance, indicate that the share of foreigners in public debt rose again and reached double digits for the second time since the beginning of 2023, closing at 10.2% in March, compared to 9.8% in February and 9.5% in December. In addition, the Treasury announced that the flow of non-residents into domestic federal government securities (DPMFi) reached R$51.8 billion in the first three months of this year, compared to R$60.7 billion in the 12 months of 2023.

Foreigners’ share of Brazilian debt peaked in March 2015, when it reached 20.8%. With the loss of the investment-grade label by the rating agencies a few months later, the share fell dramatically and closed 2022, for example, at 9.4%.

“This increase is happening, and I have the impression that it is structural, as it comes in the wake of all the rating agencies improving Brazil’s prospects,” Treasury Secretary Rogério Ceron told Valor. “The change in the rating allows funds, albeit on the margin, to start allocating to countries that are close to investment grade,” he added.

At the same time as being cautious, experts estimate that, with the recent rating upgrades by the three main risk agencies (Fitch, S&P, and Moody’s), even if the presence of foreigners in the debt does not immediately return to close to 20%, there is a tendency for the participation to gradually increase. In March, according to the Treasury, non-residents increased their participation mainly in bonds with maturities of between one and three years. Bonds over five years, in turn, also showed an increase in participation of R$5.9 billion.

“The brutal change in the composition of investors should happen when Brazil achieves investment grade. Until then, if we continue with this evolution [on the part of the rating agencies], participation will increase marginally,” said the Treasury secretary.

In terms of debt profile, experts say that participation is still far from ideal since there are few purchases of National Treasury Notes series F (NTN-F), a fixed-income security with semi-annual interest and a fixed rate, considered the best profile for public debt management.

This is because, as the traditional buying profile of foreigners tends to be fixed-rate and long bonds, the participation of non-residents helps the Treasury to manage the public debt since a higher percentage of these investors buying these bonds causes the yield curve to be pulled down. Today, non-residents hold 45.88% of NTN-F, a percentage that reached 60% during the period in which the country boasted an investment-grade rating.

“Their profile is one of interest in longer fixed-rate bonds, while banks and treasury departments tend to prefer shorter bonds and National Treasury Bills [LTN],” said Daniel Leal, fixed-income strategist at BGC Investimentos.

Another point that makes experts cautious about a possible permanent increase in non-resident debt is that foreigners’ purchases have been concentrated in National Treasury Bills (LFT), a floating-rate security that has been the flagship of public debt financing in the first quarter of this year. Non-residents increased their stocks of these securities by R$22.8 billion from January to March. Of the entire portfolio, 3.41% of LFTs are held by non-residents, compared to 1.22% at the end of 2015.

Mr. Leal points out that large international funds, for reasons of governance, can only buy bonds from countries with an investment-grade rating—often, more than one rating agency has to give this seal to the country. “But some funds have flexibility; they can make this allocation and anticipate it. Some of the nominal increase we’ve seen is already a reflection of this,” said the expert.

“We’ve lost the flow of investors who have a mandate to buy countries’ debt with the loss of investment grade,” said Fernando Ferez, fixed-income strategist at Necton. For him, having 10.2% of the debt in the hands of non-residents is too little.

Even if Brazil regains its investment grade rating in the future, experts believe that it is not possible to predict that foreigners will have the same percentage of the public debt as before since Brazil’s debt today is much larger than in the past.

Since 2023, the National Treasury has been trying to trade public debt securities on the global Euroclear platform, based in Belgium, with the intention of increasing foreign participation in the debt. Today, for an international fund to buy bonds in Brazil, for example, it has to access the Central Bank’s Special Settlement and Custody System (Selic), which increases costs.

Valor has learned that since then, the government has encountered some difficulties in the negotiations. It was noted, for example, that the Central Bank has more control over the information flow of operations, unlike the European platform. The same applies to tax issues with the Federal Revenue Service. Even so, negotiations are continuing.

According to Mr. Ceron, Brazil is still pursuing access to trading on Euroclear, which could generate annual interest savings of up to R$70 billion based on countries that have started trading their bonds on the global platform. “Isn’t it worth looking into and overcoming the operational problems given the savings we would have in interest?” asked the secretary. “Euroclear is willing to make adjustments to provide the necessary information,” said Mr. Ceron. He expects this process to go ahead later this year.

Regarding the recent growth, albeit small, of non-residents in the federal public debt, Mauro Rochlin, economist and professor at the Getúlio Vargas Foundation (FGV), says that the movement coincides with Brazil’s lower country risk indicator.

“We see that the country risk is now below 200 points, and this has been happening more frequently despite a certain volatility in the indicator. This coincides with greater stability in macroeconomic policy,” Mr. Rochlin said.

According to the professor, the stabilization of the country’s debt-to-GDP ratio will be necessary in attracting more foreign investors. “A more stable macroeconomic policy and a macroeconomic scenario with lower inflation, a stable debt-to-GDP ratio, and growth that, in my opinion, will be close to 3%, provides more security for foreign investors.”

*Por Guilherme Pimenta, Jéssica Sant’Ana — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Oil production surge expected to boost royalties by 20% in 2024

National Petroleum Agency projects R$90.3bn revenue amid rising production, market conditions

05/20/2024

Vilma Pinto — Foto: Wenderson Araujo/Valor

Vilma Pinto — Foto: Wenderson Araujo/Valor

This year’s oil production increase in Brazil is projected to generate R$90.3 billion in royalties, marking a 20.4% rise compared to the R$75 billion collected last year, according to the National Petroleum Agency (ANP). The early months of 2024 confirm the agency’s forecast of higher production for the year. The ANP anticipates higher government revenue from these participations in the coming years.

From January to March, the latest available data, Brazil’s average oil production was 3.441 million barrels per day, a 6.96% increase year-on-year. The average natural gas production between January and March was 148.8 million cubic meters per day, 4.26% higher than the same period last year, according to the ANP.

Revenues generated from increased production bolster public coffers at a favorable time, with rising barrel prices, and provide relief to the federal government, oil-producing states, and municipalities amid discussions on fiscal balance.

Experts consulted by Valor say the federal government can freely use the money from royalties and special participations (an additional royalty paid to the government on large-volume fields), except for the portion allocated to the social fund. Fields under the production-sharing regime allocate 22% of royalties to the Social Fund. For states and municipalities, there are restrictions. Federal law prohibits using royalties and special participations to pay active public employees and settle debts, with exceptions for public school teachers’ salaries and debts to the federal government.

Vilma Pinto, director of the Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog, notes that it is inappropriate to use royalties to increase current expenditures, as this type of revenue is “sensitive to the cycle.” “Using it to expand recurring expenses can create future fiscal imbalances. This applies to both the federal government and states and municipalities,” she said.

Between January and April, Brent crude was priced at an average of $82.95 per barrel, 0.95% higher than the average for the same period last year, which was $82.16, according to Valor Data. In May, Brent continued to rise, closing on Friday with a weekly gain of 1.41%, at $83.98. The price of the barrel and exchange rates are key in calculating government participation in the oil sector.

On Thursday, the ANP reported that it allocated R$8.3 billion to the federal government, states, and municipalities related to the payment of special participation corresponding to January through March this year.

ANP data also indicate that federation entities will see increased revenue from royalties and special participations in the coming years. The ANP’s projections suggest that revenue from these government participations is expected to reach R$404.1 billion between 2024 and 2027, 12% above the R$360.9 billion that filled the coffers of the federal government, states, and municipalities between 2019 and 2023.

The projection assumes an oil price slightly below $80 per barrel. There is no forecast yet on when the data that underpins the survey, conducted in 2023, will be updated.

Symone Araújo, a director at ANP, said that historically, government participation hit a record high in 2022 due to rising oil prices and increasing production. There was a decline in revenue in 2023 compared to 2022 due to falling oil prices after the peak: “Government participation in the coming years is likely to increase due to the expected rise in oil and gas production, with new production units coming online, positively impacting public revenue,” she told Valor.

Economist Gabriel Barros Leal, former director of the IFI, said that royalties and special participations give the federal government more flexibility in their use compared to taxes and contributions, as they do not have a specific destination, except for the part allocated to the Social Fund. “This additional revenue could help pay down debt and improve the primary balance. It could also help if the government wants to finance expenditures,” said Mr. Barros Leal, who warns that the risk is that government-financed expenditures are generally mandatory and have low returns. “The government spends more than it collects and spends poorly, taking money from society and transferring it incompetently,” he said. The best use of the money, he added, would be to reduce the public debt, which he deems as “high and expensive.”

Economist and public finance expert Raul Velloso added that higher royalties and special participation revenue this year, if confirmed, offer an opportunity to reduce consolidated public sector debt. Ms. Araújo, with ANP, said the agency is not responsible for evaluating the use of revenue by entities benefiting from government participation: “This responsibility lies with the state and municipal audit courts. The agency only calculates and transfers the funds, leaving it to the entity managers to decide on resource use, without ANP interference.”

Royalties are financial compensation paid by oil and natural gas producers to the federal government, states, the Federal District, and municipalities benefiting from the exploitation of these activities. Royalties are calculated based on a rate applied to the producing field (ranging from 5% to 15%), the field’s monthly production, and the reference price of oil or natural gas. The ANP supervises the funds.

The legislation stipulates that 40% of royalties are allocated to the federal government, 22.5% to producing states, and 30% to producing municipalities. The remaining 7.5% is distributed among all states and municipalities in the federation. Within the federal government, the funds are divided between the Navy and the Ministry of Science and Technology. “Royalties are a simple and direct form of taxation,” said Décio Hamilton Barbosa in the book “Tributação do Petróleo no Brasil e Outras Jurisdições” (“Petroleum Taxation in Brazil and Other Jurisdictions”).

Special participations, on the other hand, are extraordinary financial compensations paid by oil companies for oil and natural gas fields with large production volumes. Compensation is made quarterly, and the destination of funds depends on the type of field.

The federal government also benefits from oil reserves even before production begins. In area auctions, the Brazilian State receives funds from companies winning the bids. Under the concession regime, companies winning blocks pay a signature bonus, based on the prior perception of resource generation. Under the production-sharing regime, adopted for part of the pre-salt fields, area winners allocate a portion of production, called profit oil, to the federal government through the state-run Pré-Sal Petróleo (PPSA), which later sells it on the market in its auctions.

Eduardo Pontes, a partner at consultancy Infis Consultoria, said that 69% of the revenue obtained from oil sales in the country is allocated to the federal government in the form of taxes, royalties, and special participations. “And in the pre-salt, the federal government gets 70%, 80% of the profit oil, which is a form of special participation, both from Petrobras and other companies,” said Mr. Pontes.

Petrobras is the main contributor to public revenue, being the largest oil company in the country, with oil and gas production around 3 million barrels of oil equivalent per day. The company injected R$420.5 billion into public coffers in royalties, special participations, and other categories (such as signature bonuses) between 2016 and 2023.

In a statement, Petrobras said, “In 2023, we collected R$61.4 billion in government participations (royalties and special participations), whose amounts are distributed by the ANP to the National Treasury, states, and municipalities, based on criteria defined by law. Additionally, our contribution in the form of taxes collected to the federal government in 2023 was R$87.4 billion.”

In adverse geopolitical scenarios, the state-run company tends to benefit from increased revenue from oil sales and potential increases in the prices of oil products in the domestic market, as well as possible hikes in the dollar exchange rate. However, there are negative effects of rising oil and product prices on inflation, which tends to make both Petrobras, a state-run company, and the government delay price increases when necessary. On the other hand, the higher the Brent price, the more viable exploration and production activities become. Petrobras has been seeking to explore new areas to replenish its portfolio in regions such as the Equatorial Margin and the Sergipe-Alagoas and Pelotas basins, concerned about the decline of its fields.

With the current reserves maintained, without exploring new frontiers, studies indicate that production is expected to continue to increase until it declines around 2030. “The trend is for government participation to follow production, with increases in the coming years and declines from 2030, 2031, if new reserves are not incorporated,” said Ms. Araújo, with the ANP.

The current pace is of reserve growth, which is likely to translate into increased production. According to ANP, total proven oil reserves (which have a reasonable certainty of commercial extraction) increased by 6.98% in 2023 compared to 2022. Natural gas reserves increased by 27.12% last year compared to the previous year.

Por Fábio Couto, Rafael Rosas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Aid to Rio Grande do Sul could have an impact of 1% of GDP

Consultancy estimates that measures announced by the federal government for the state total R$12bn, but amount could grow

20/05/2024

Arroio do Meio, in the Taquari Valley, will need to rebuild as the river waters recede; floods claimed 157 lives and 88 people are still missing — Foto: Gustavo Mansur/Palácio Piratini

Arroio do Meio, in the Taquari Valley, will need to rebuild as the river waters recede; floods claimed 157 lives and 88 people are still missing — Foto: Gustavo Mansur/Palácio Piratini

The impact of measures to aid Rio Grande do Sul on the central government’s primary accounts should be between 0.6% and 1% of the Gross Domestic Product, which would mean a spending of up to R$117.8 billion considering a proactive administration. These are the projections of a study carried out by BRCG consultancy and reviewed by Valor.

According to the consultancy, being a proactive administration means acting more to aid than in previous emergency events, such as the landslides due to heavy rains in the mountainous region of Rio de Janeiro in 2011. The study says that, if the federal government follows the pattern seen in other disasters, primary spending will be around R$70 billion, equivalent to 0.6% of GDP.

In the context of more conservative government action, spending would be R$48.4 billion or 0.4% of GDP. On the other hand, with a more active government, it could reach R$117.8 billion, equivalent to 1% of GDP.

“Even a scenario of moderate government action would have a relevant impact. Therefore, the estimated spending, in any scenario, is significantly higher than the amount announced by the government, of R$12 billion,” economists Matheus Ribeiro and Lívio Ribeiro wrote in the report.

“For now, the government is being cautious or timid, and that’s not that bad,” they say.

However, the economists point out that primary spending will comply with the rules set in the fiscal framework, “which will accelerate the increase in public debt.”

“Whatever [spending] has a primary impact will have an impact on the debt, whether or not it falls outside the framework. There is the primary [spending] considering the [fiscal] framework, and the difference between revenue and primary spending which, ultimately, is what increases debt,” Mr. Ribeiro told Valor.

In the study, the economists disregard the impacts from the revenue perspective, whether related to delays in tax collection or changes in the tax base.

Measures with no effect on primary spending, such as the use of the Workers’ Severance Fund (FGTS), multilateral loan facilities, or suspension of the Rio Grande do Sul state debt payment to the federal government, were also excluded from the study.

BRCG points out that the extent of the tragedy remains to be known and will only be determined when the water recedes. “However, it is clear that this is the biggest natural catastrophe in Brazilian history; its humanitarian, economic, and social cost will be very high,” the report says.

On Sunday (19), the Rio Grande do Sul government reported that the floods that started at the end of April killed 157 people, and 88 are still missing. More than 20% of the Rio Grande do Sul population (2.34 million people) was affected by the storms and 582,000 people were displaced from their homes—77,000 are in shelters.

The forecast is for more heavy rain in Rio Grande do Sul from Tuesday (21).

The measures announced by the government in recent weeks total around R$62 billion, according to the consultancy—R$12 billion are of primary impact. The numbers, however, are expected to increase, according to the economists’ projections.

Their estimates were based on similar events, such as the one in the mountainous region of Rio de Janeiro, the dam burst in Brumadinho, Minas Gerais, in 2019, and Hurricane Katrina, in the U.S., in 2005.

“Hurricane Katrina is the extreme climate event most close in proportion to what we will likely see in Rio Grande do Sul. The area receiving aid from the U.S. government was approximately 11% larger than the area affected in southern Brazil, although the population impacted is about 60% larger,” the economists wrote in the report.

“The comparison may get closer, depending on the number of municipalities in Rio Grande do Sul declaring a state of emergency.”

Estimated spending in infrastructure and environmental recovery in the consultancy’s report is based on information on the area affected by previous disasters, as well as the impact on material capital and the environment.

The damage caused by Katrina was estimated at 1% of the U.S. GDP in 2005, according to the National Oceanic and Atmospheric Administration, equivalent to 6.1% of Brazilian GDP that year, BRCG compares.

“In 2005, the U.S. government approved spending about 0.8% of GDP, or 4.9% of Brazilian GDP currency-converted, aimed at recovery following the hurricane. In the first 16 months after the catastrophe, spending was around 0.3% of U.S. GDP or 1.8% of Brazilian GDP,” the economists point out.

Landslides due to rains in the mountains of Rio de Janeiro, in turn, caused damages of R$7.9 billion, at current prices, in addition to related losses amounting to R$1.9 billion.

In the Brumadinho disaster, caused by a Samarco dam burst, Vale—one of the owners of the company—reached an agreement in 2021 with the Minas Gerais government at 0.4% of that year’s GDP (or R$37.7 billion) for repair and compensation.

As these are events of a different nature and magnitude, economists rely on hypotheses to estimate the numbers related to the disaster in Rio Grande do Sul.

In the case of infrastructure and housing spending, 40% of the works are expected to occur in the first year after the floods, with 50% backed by the federal government.

To measure environmental recovery spending, they consider non-compensatory payments incurred by Vale in Brumadinho. It is assumed that spending per square kilometer would be the same in Rio Grande do Sul, with a variation of around 25%.

The BRCG estimates for health and sanitation spending are based on amounts allocated by different levels of the federation during the COVID-19 pandemic.

Although the two situations are different, the economists argue that the pandemic was “an extreme and recent event in which public authorities were called upon to act and faced a prolonged state of emergency.” For now, the consultancy’s study considers the federal government’s health spending and projects that per capita spending in the affected municipalities could grow 40% to 60%.

Amounts involved in policies aimed at credit, job protection, and income transfer are based on the draft of similar policies adopted in the previous events analyzed.

For estimating credit, for example, the study considers per capita spending with credit fund quotas and payroll financing in the first year of the pandemic.

Regarding measures to maintain employment rates, BRCG consultancy works with a scenario of replication, until the end of 2024, of the Employment and Income Maintenance Benefit (BEm) program by the federal government. The program was created to maintain employment during the pandemic by reducing working hours and salaries.

Estimates for social spending consider the reconstruction aid (a R$5,100 voucher via the Brazilian instant payment pix), with the possibility of adopting a type of emergency aid of R$600 or minimum wage for people affected by the disaster.

“The package announced by the government should be reviewed and extended over the coming weeks and months. Furthermore, most of the measures will likely last well beyond the end of 2024,” the report points out. Even the Fiscal Recovery Regime of Rio Grande do Sul, which has already been made more flexible, with postponement of payments to the federal government, could undergo further renegotiations in the coming months.

*Por Marsílea Gombata, Rafael Vazquez — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Rio Grande do Sul government considers relocating entire cities

Increasing frequency of extreme weather events demands new engineering solutions, experts say

05/17/2024

Marcia Musskopf and Sandra Barzotto, who own two stores in Roca Sales, Rio Grande do Sul — Foto: Arquivo pessoal

Marcia Musskopf and Sandra Barzotto, who own two stores in Roca Sales, Rio Grande do Sul — Foto: Arquivo pessoal

It remains unclear when reconstruction efforts will begin in Rio Grande do Sul. However, engineers, urban planners, and the state government agree on one thing: simply rebuilding houses, schools, streets, bridges, and water treatment plants as they existed before this year’s historic floods will not suffice.

Given the new reality of more frequent extreme weather events, the unanimous view is that many cities in Rio Grande do Sul will need to take on new forms.

Among the ideas being suggested are transforming neighborhoods into parks, building houses on stilts, and constructing new barriers and dikes in urban areas. In extreme cases, where cities have been almost entirely submerged, a drastic measure is being considered as a possible solution.

“We face a series of challenges, and we cannot rule out the possibility of having to relocate entire cities from where they currently are, or even rebuild them in other locations,” Vice-Governor Gabriel Souza told Valor.

“This has happened in some places around the world and even in Brazil. Of course, it requires dignified living conditions, public resources, and compensation. But where it is unfeasible to keep people living, it is better to provide them with another place.”

The number of cities affected by the historic floods has reached 452, and 77,000 people are living in shelters. The heavy rains began to hit the state on April 29.

The state government has yet to detail how and where to rebuild the affected structures. However, experts have outlined some priorities.

One of them is critical infrastructure. Roads and water supply systems should be designed to be quickly repairable, said Professor Vanderley John from the University of São Paulo’s engineering school. In the case of water, it would be better to place some facilities in more distant and higher locations, out of the reach of floods, even if this is less cost-efficient. But it would be more efficient in terms of risk, he said.

The same could apply to electrical substations and sewage treatment plants.

There is currently no precise assessment of the damage. However, the government reports that more than 700 schools, hospitals, military barracks, fire stations, police stations, roads, bridges, viaducts, sewage treatment plants, water treatment plants, and power substations have been affected. Half of Rio Grande do Sul’s infrastructure has been destroyed or impacted, said the vice-governor.

William Mog, an architect and urban planner and a member of the Prosecution Service of Rio Grande do Sul, does not believe in a single, large solution but rather in several strategies to address likely future floods.

One of the most important, according to Mr. Mog, is relocating populations from neighborhoods in flood-prone plains and those living on hillsides. “In these cases, it would not be enough to relocate and leave these areas vacant. One option to be considered would be the construction of linear parks in these areas,” he said.

A second change would come in the form of land use in a strip of land behind these parks. “In this second strip, some developments could be allowed but with restrictions, such as requiring buildings to be elevated on stilts so that the ground floor is left open and with permeable soil to act as a sponge.”

Projects involving mass relocations—whether entire cities or neighborhoods—tend to be complex, controversial, and costly.

However, the risk of new losses and more deaths seems to be pushing some residents of cities in Rio Grande do Sul to seek exactly that: to leave their homes permanently.

“In September last year, during the first flood, we said, ‘This happens once in a lifetime; it won’t happen again,’” recalls Sandra Panis Barzotto, 51, a businesswoman in the city of Roca Sales, a town of 10,400 inhabitants in the Taquari Valley, one of the regions heavily affected by the floods. In September, the waters invaded everything, reaching a height of 2 meters. In November, there was another flood, though less destructive. “We told people it wouldn’t happen again. But then came this May flood, and now people in the city are saying they will leave, they will look for another town. There are people who no longer have a house. And we no longer dare to encourage them to stay; we can’t say it won’t happen again.”

Ms. Barzotto and her sister, Márcia Regina Musskopf, 56, are business owners in Roca Sales, with stores selling clothes and shoes. The losses they suffered from last year’s two floods may have reached R$800,000, and this year’s losses are about R$300,000. With streets impassable due to mud, part of Roca Sales’ commerce remains closed.

The sisters repeat the questions many residents have been asking: What can be done? Deepen the riverbed, build barriers? “It will be expensive and laborious, but if nothing is done and another flood like this comes, no one will want to stay in the city,” said Ms. Barzotto.

After the September 2023 floods in the Taquari Valley, the government decreed that rebuilding homes in areas that had been engulfed by the flood would not be allowed.

River dredging, drainage systems such as retention basins, raising bridges, and building and rebuilding dikes to protect urban areas from future floods are other measures being mentioned by the state government and experts as options that should be on the state’s agenda when reconstruction begins.

However, opinions on barriers are divided. Some believe these structures could increase the speed of water in downstream cities.

“The fact is that we cannot do things the same way. All calculations were based on the rainfall of the last hundred years, but all of this is outdated,” said Nilson Sarti, vice president of Environment and Sustainability at the Brazilian Chamber of Construction Industry (CBIC).

A few days ago, Governor Eduardo Leite presented a preliminary estimate of reconstruction costs: R$19 billion. But shortly thereafter, a bridge collapsed, raising the total.

“The estimated cost is only for rebuilding. We are not including the construction of anything new in that amount. Just reconstruction,” said Mr. Souza.

“It seems that the United States needed $50 billion to rebuild the area affected by Katrina [the hurricane that devastated parts of the southern country in 2005]. I cannot give an exact number, but it will certainly be much more than R$20 billion, which means that the state will not be able to make all this reconstruction effort on its own.”

*Por Marcos de Moura e Souza — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Floods decimate bees, threaten Rio Grande do Sul’s honey dominance

State accounts for 15% of honey production in Brazil

05/17/2024

Recent weeks’ heavy rains have covered or fully destroyed many beehives in the state — Foto: Sérgio Ranalli

Recent weeks’ heavy rains have covered or fully destroyed many beehives in the state — Foto: Sérgio Ranalli

The recent floods in Rio Grande do Sul are expected to confirm a situation that has been threatening small farmers, who dominate the activity in the region: the state will likely lose its position as Brazil’s largest honey producer. The recent weeks’ heavy rains have covered or fully destroyed many beehives in the state, which had already been dealing with the consequences of the floods of September last year.

The 2023 floods compromised the spring flowering, which is now hindering the recovery of the remaining swarms. “Around 10% of bee colonies were lost in this flood, which destroyed 35,000 to 50,000 beehives,” estimates Patric Luderitz, vice-president of the Beekeeping and Meliponiculture Federation of Rio Grande do Sul (FARGS) and coordinator of the State Beekeeping and Meliponiculture Sector Chamber. “The sector is in a catastrophic situation.”

The numbers are preliminary but tend to rise as the damage assessment advances, Mr. Luderitz says. The Brazilian honey production amounts to R$1 billion.

According to the most recent data by the Brazilian Institute of Geography and Statistics (IBGE), Rio Grande do Sul produced 9,000 tonnes of honey in 2022, or 15% of national production. Of the approximately 100,000 beekeeping farms in Brazil, 37,000 are located in Rio Grande do Sul.

With the high rates of bee mortality and hive destruction, beekeeping in the state will take at least two years to recover, Mr. Luderitz estimates. “It all will depend on the weather and the funds we will have available. One thing is to get R$300,000. R$3 million is a whole different thing,” he points out.

In Cachoeira do Sul, beekeeper Ede Nelson Beck estimates he has lost at least 500 of his 1,700 beehives on the banks of the Jacuí River. Each of his beehives had some 30 kilograms of honey.

Most farmers build apiaries in floodplains as biodiversity tends to be richer in these areas, which improves production. “We have been keeping bees in these areas for years and have never seen losses like we are experiencing now,” Mr. Beck said.

With the floods, he expects the segment to struggle to resume operations in the municipality. Much of Cachoeira do Sul’s agriculture is located in the highlands, meaning the food supply for insects in the floodplains is limited.

“The solution will be to install apiaries in hilly grasslands, which will likely reduce production. We will lose these [floodplain] blooms. This is the city’s new reality,” he lamented. “There will hardly be a corner left for beekeepers to produce honey.”

President of the Rio Grande do Sul Beekeepers Association (AGA) Abenor Furtado points out that the heavy rains in recent weeks worsened the problems the segment had been facing since last year’s floods. “We were counting on the fall season flowering but then came this rain,” he said.

Without enough food, bees in Rio Grande do Sul will become extremely weak to face the winter, which could further increase losses in the state. Mr. Furtado hopes the next flowerings, beginning in August, may help recover swarms.

Until then, the bees will have to be fed artificially—and the state’s honey production will be negligible. “We are already considering that we will have no production this year,” he said.

*Por Cleyton Vilarino, Globo Rural — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Private equity funds have worst start to year since 2020

New investments fell by 8%, while company exits plummeted by 80% year-on-year from January to the first week of May

05/17/2024

Priscila Rodrigues — Foto: Gabriel Reis/Valor

Priscila Rodrigues — Foto: Gabriel Reis/Valor

Private equity funds, which buy equity stakes in companies, are experiencing one of the most challenging periods in recent years. The scenario is caused by volatility and the fact that the IPO market has been stuck for almost three years, narrowing the door to exit investments. Economic uncertainties have also made new investments more complex. Even so, the report is of more movement in the sector, something that should be reflected in the figures ahead.

In the year to the first week of May, asset sales by managers operating in Brazil totaled $105 million, and investments—disbursements to acquire stakes in companies—totaled $997 million. According to Dealogic data collected at Valor’s request, this is the worst start to the year, on both counts, since 2020, when the outbreak of the pandemic closed the markets.

The drop was significant compared to 2023 when the beginning of the year was marked by the revelation of the accounting fraud at the retailer Americanas, which abruptly closed both the variable and fixed income markets in an unprecedented way. In terms of new investments, there was an 8% drop year-on-year. In exits, the decline was even more intense, at around 80%, on the same basis of comparison.

The difficult start to 2024 comes after two equally weak years for the activity of these funds around the world. Higher interest rates damaged the financing of acquisitions and narrowed the exit door for investments via the capital markets. However, with many funds still capitalized and cash on hand, the pressure for disbursements to return to shareholders is growing.

Among the investments made in 2024, the American company Advent remained active and bought the cosmetics company Skala for undisclosed sums. It also invested R$1 billion, alongside Canada’s CPPIB, in the Inspira basic education network. Atmos, Warburg Pincus, and Mission invested in the Salta group. Among the assets currently looking for a buyer are, for example, Odontocompany, by LCatterton, and Gran Coffee, by Pátria, both of which already have financial advisors in place. Among the divestments made, Pátria sold shares in Hidrovias do Brasil to Ultrapar in the meantime.

According to data from the Brazilian Private Equity and Venture Capital Association (ABVCAP), the association that brings together private equity funds operating in Brazil and uses a broader base than Dealogic, investments in the first quarter reached R$5 billion, compared to R$9 billion in the fourth quarter and R$5.8 billion in the same period in 2023.

Priscila Rodrigues, president of ABVCAP, points out that the sector’s aim is to “put money to work” and that she has seen funds with cash in hand looking for opportunities. Those who start investing earlier, she points out, will be able to get more attractive prices. “What hinders divestments is what benefits allocation,” said Ms. Rodrigues, who is also one of the main partners of private equity manager Crescera.

Piero Minardi, from Warburg Pincus, predicts a slightly better 2024 for funds, given the degree of uncertainty in the economy. However, he believes that the funds already have mature investments in their portfolios and that divestments will, therefore, occur even though the IPO window remains closed. “If the funds carry these investments for another year, the internal rate of return begins to dilute,” he said.

Although the figures for the beginning of the year show less activity in the period, Ricardo Madrona, a partner at Madrona Fialho, says private equity funds are more active on the trading desks and will start investing. “Since March, April, these funds have been more active to start allocating,” he said. However, the closing of these transactions, which began to be worked on in recent months, will only appear in the figures later on.

Mr. Madrona says, for example, that of the 15 M&A (mergers and acquisitions) mandates on his desk, six are from funds. He says another four private equity mandates are currently being negotiated.

UBS BB director Anderson Brito says that the bank’s pipeline of private equity transactions is quite significant at the moment, including “buy side” operations—where they are on the buying end. “We’re seeing a sustainable movement, and the funds have significant ‘dry powder’ [cash to invest],” says the executive. He points out that, despite the more challenging scenario, the funds are managing to raise funds. “We see this in a positive light, and in an uncertain environment, it’s one of the best times to bet on this asset class,” he points out. “In addition, with the capital market closed, there is less competition,” he recalled.

Mr. Brito also states, on the other hand, that negotiations are taking longer to complete, and for this reason, the movement is not yet reflected in this year’s transaction figures.

Pedro Muzzi, director of Goldman Sachs in Brazil, says that M&A talks are more active at the moment and that private equity funds will have a prominent position in this recovery. “Private equity is part of this ecosystem and will be present at both entry and exit,” he said.

At igc Partners, which advised cosmetics company Skala on its sale to Advent, private equity funds are still among the contenders for the assets, but with a more significant presence of foreigners, while the locals are more distant, according to Daniel Milanez, a partner at igc. “The foreign funds have no problem with dry powder,” he comments. According to Mr. Milanez, as of next year, with the improvement in economic conditions, local funds will once again occupy a larger space on the buying side.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Chinese e-commerce giant Temu set to enter Brazilian market

Amid pressure from local industry and retailers, Temu applies for tax-exemption certification

05/16/2024

As the industry and retailers increase pressure to bring the issue of ending import tax exemptions for foreign websites to the forefront in the Lower House, a new global player is poised to enter the Brazilian market. Sources say that Temu, part of the Chinese mega-group Pinduoduo and a direct competitor to Alibaba, has submitted a certification request to the Federal Revenue Service for the Remessa Conforme program— which establishes a set of rules for the advanced customs clearance of products in exchange for an exemption from import taxes for shipments up to $50.

The certification was submitted through Elementary Innovation Pte, a subsidiary of Pinduoduo (PDD) based in Singapore. The carrier expected to operate with Temu, according to Brazil’s Revenue Service records, will be J&T Express Brazil, although negotiations with other logistics operators are ongoing.

If approved, the company will be allowed to send deliveries under $50 to the country without paying the 60% import tax. Only the 17% sales tax ICMS tax will be mandatory for local buyers. To comply, it will have to follow rules such as the prior submission of purchase and consumer data.

Temu declined to comment. The company’s application was submitted in March and could take several months to process—on average, recent requests have taken between 60 to 120 days for approval, but there is no official deadline for the review.

To expedite the project’s implementation, Temu representatives have been contacting Brazilian technology companies to establish agreements that will accelerate the integration of systems in China and with its local platform to be created.

Before making a final decision, the company sought a clearer definition of the Remessa Conforme program to verify its progress and the actual requirements for compliance. Currently operating in about 50 countries, Temu has emphasized the need to expand operations in emerging markets.

Market speculation suggests that Temu is well-positioned to disrupt established foreign platforms that already have a loyal customer base in Brazil and to innovate with advanced language capabilities.

Santander published a report suggesting that traditional sector companies, such as Mercado Libre, Shopee, and Magazine Luiza, could feel a greater impact from Temu’s entry.

Temu extensively utilizes game-like approaches and layouts, offering games that allow users to earn more discounts and support frequent customer check-ins to gather data on profiles and habits.

Given the perception that Temu will invest heavily to gain market share, competition for sales is expected to intensify in Brazil. This comes at a time when national and Asian companies have been adopting more rational and conservative strategies to protect returns.

Globally, Temu is known for selling a wide range of products at low prices (“shop like a billionaire” is the campaign slogan) and has faced criticism from governments in Europe and the U.S. over alleged imports of counterfeit products and the use of labor under poor conditions, allegations it denies.

A hybrid of Shopee and Shein, Temu was created in 2022 by Pinduoduo, a company with a market capitalization of $192 billion on Nasdaq. Among Chinese digital groups, Pinduoduo is almost on par with leader Alibaba ($193.5 billion in market cap).

While the Temu app can already be downloaded in Brazil, purchases are not yet possible—there have been over 3 million app reviews so far.

Temu’s likely entry comes at a time when local stores and industries are pushing for the return of import tariffs. On Tuesday, industry associations, commerce groups, and union leaders published a manifesto in the media criticizing the lack of tax equality between foreign online marketplaces and national companies.

Also on Tuesday, they held a press conference to increase pressure on the issue. They advocated for the approval of a report by Congressman Átila Lira that ends the import tax exemption for shipments up to $50. The issue is part of the Green Mobility and Innovation (Mover) program bill, but the Workers’ Party opposes it.

“What is the logic of granting a tax waiver to those who do not generate any jobs in Brazil?” questioned Sérgio Zimerman, CEO of Petz. “Just one individual sender shipped 16 million parcels to Brazil. This is mockery. We have been ridiculed by the platforms,” he said.

Businessman Flávio Rocha, from Riachuelo, stated that a piece sold in the chain’s stores “contains an absurd 45% tax, but enters through the borders, when applicable, with a 17% state tax,” he said.

The meeting was organized by the Parliamentary Front for Entrepreneurship (FPE), which has been pressuring the government to end the exemption since last year.

Initially, the Lula administration adopted the measure but backed down amid negative social media backlash and a drop in popularity. The Federal Revenue Service created Remessa Conforme in 2023 to organize the flow and study taxation, with support from the Ministry of Finance, but the exemption has been maintained so far.

In response, business leaders mobilized in Congress alongside Lower House Speaker Arthur Lira to approve the end of the exemption within a bill by the legislator and rapporteur Átila Lira. However, the Workers’ Party and the presidential office opposed the approval, creating an impasse last week, and the bill did not advance.

“Congress works under pressure, popular pressure, and sector pressure,” said the congressman. “We know that part of the government supports this matter, but part does not and does not want to address it. We need a fair text.” The rapporteur said he is open to negotiation but awaits a proposal from the government leader in the Lower House, Congressman José Guimarães.

*Por Rafael Rosas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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