Floods put Brazil’s 2% GDP growth at risk

Economists estimate an impact of 0.2 to 0.3 percentage points driven by agribusiness

05/10/2024

The Central Market is flooded after heavy rain in Porto Alegre — Foto: Andre Penner/AP

The Central Market is flooded after heavy rain in Porto Alegre — Foto: Andre Penner/AP

The impact of the floods in Rio Grande do Sul, the state with the fourth-largest share of Brazil’s Gross Domestic Product, on the national economy may range between 0.2 and 0.3 percentage points, according to preliminary estimates. That could put in check the possibility of a GDP growth above 2% for 2024, despite the resilient general activity.

XP Asset has revised its projection for Brazil’s GDP this year to 2.1% from 2.4%. While the previous expectation was for growth of 0.7% in the second quarter compared to the first, the financial firm now expects a drop of 0.2%. “And I think the impact could be even worse than our estimates suggest,” said chief economist Fernando Genta.

That is because the estimate considers rather the direct effect of the floods on the economy of Rio Grande do Sul than an overspill into other areas, Mr. Genta explains. For example: as the annual minimum wage raise is already given, the increase in food prices due to problems with crops in Rio Grande do Sul could lead to a deterioration of households’ purchasing power and, therefore, affect consumption in the GDP.

Fernando Fenolio, chief economist at Wealth High Governance, estimates that the adverse impact could vary from 0.02 percentage points on the national GDP, if there is a full recovery of industrial capacity in Rio Grande do Sul and a 25% loss of the remaining local harvest, to 0.34 percentage points, if the loss of the remaining harvest is complete and industry recovery does not exceed 25%.

An impact of 0.22 percentage points, caused by a total loss of the remaining harvest, although with 75% recovery of industrial capacity, seems a more likely scenario at the moment, according to Mr. Fenolio. “We will review our GDP projection. It could go to 1.8%, compared to the 2% we were expecting for this year, mathematically,” he said. Inflation, in turn, would shift to 4% from 3.8%. “It’s a classic supply shock, less GDP and more inflation.”

In preliminary estimates by 4intelligence, the Rio Grande do Sul’s GDP growth could reach just 0.5% this year, from 5.5% previously projected, due to the disaster. Considering that the state accounts for around 6.5% of the national economy, the floods could reduce Brazil’s GDP growth by 0.2 percentage points in 2024, according to the estimates. As a result, 4i’s official projection of a 1.9% increase in Brazil’s GDP this year could be reduced to 1.7%.

“The main impact on activity will occur in May. In June, we believe that most activities will be back to normal, depending on the material damage and the pace of reconstruction,” Bradesco said in a report. The bank also sees a potential impact of 0.2 to 0.3 p.p. on the Brazilian GDP as a result of the disaster.

G5 Partners has a similar estimate, indicating a loss of 0.3 percentage points. “As we have never experienced a natural disaster of the magnitude seen in Rio Grande do Sul, we sought references from other locations. We used the effects of hurricanes Katrina and Rita in the U.S. in 2005 as examples,” said Luis Otávio Leal, G5’s chief economist.

Based on a study by the U.S. Department of Commerce, which measured the impact of these hurricanes on the U.S. GDP quarterly, and adapting to metrics in Brazil, Mr. Leal estimated that the floods could take 10.5 percentage points off the variation in Rio Grande do Sul’s GDP in the second quarter of 2024, compared to the first quarter. As a result, his projection for the Brazilian GDP growth in 2024 would fall to 1.8% from 2.1%.

G5 did not change the estimate, but, before the floods, the firm was expecting to raise its annual forecast for national GDP following the release of official data for the first quarter.

“I believe the comparison with the effect of hurricanes Katrina and Rita makes sense, as there was similar material damage. However, the estimate does not consider other variables, such as the difference in the countries’ ability to act,” Mr. Leal points out, as the U.S. has an organized structure to act in cases of disasters like this.

According to Banco Pine, the projection for Brazil’s GDP growth in 2024, of 2.3%, can be revised to 2.1%, in an initial estimate.

“The impact tends to be mitigated for the national GDP. Regionally, it’s much more, and thinking in trillions of reais, there’s a loss of wealth. But I’m even more concerned about agribusiness,” said the chief economist of the bank, Cristiano Oliveira. He notes that if the state accounts for 6.5% of the national GDP, its participation in the agricultural GDP is almost double, around 12.5%.

Considering the state alone, 4i estimates that the most affected sector will be agriculture, which could grow 25% less than expected in the second quarter. “Rio Grande do Sul’s agricultural GDP, alone, was expected to grow 18.9% in 2024, recovering from a giant crop failure in 2022 that was not entirely replaced in 2023. Now, the increase could be just 1.9%,” said Bruno Lavieri, 4i’s chief economist.

Assuming that half of the unharvested crop on the fields has been lost, 7.5% of rice production and 2.2% of soybeans in Brazil could be impaired, according to Bradesco. The bank argues that these estimates may still be conservative.

With that in mind and considering a possible impact on wheat planting, which has just begun, and on the slaughter of chicken and, mainly, pigs, Bradesco estimates that the drop in Brazilian agro GDP in 2024 could aggravate to 3.5% from the expected 3%.

“There is also all the infrastructure involved in agribusiness, with storage silos, roads, and energy transmission. All of that should be impaired for some time,” said Mr. Oliveira of Pine. Therefore, he says the effect of the disaster on GDP tends to “last longer and worry more” than on inflation.

In services, transportation is likely to struggle for longer due to road closures. In services provided to households, activities related to leisure, hospitality, and personal services could also be strongly impacted, Bradesco points out. 4i’s projection for services in Rio Grande do Sul was reduced to a drop of 3.1% in the year from an increase of 1.9%, with losses concentrated in the second quarter.

The industry could be less impacted: the estimate for 2024 was reduced to 1%, from 1.8%. “Extractive activities have almost no weight in the state, while manufacturing, which is important given vehicle and machine production, should experience a specific impact and recover in the future, as demand was only pent-up. Furthermore, we should see some boost in construction, as the damage should boost construction works,” said Mr. Lavieri.

For 2025, 4i raised its GDP forecast for Rio Grande do Sul to 6.1% from 2%. “We maintain our projection for services and industry, which should grow a little less in 2024, but would recover next year. Agriculture is expected to continue below what was initially expected,” said Mr. Lavieri.

“Agribusiness in the region will likely suffer the consequences of the current event for many months to come, maybe casting doubt on the success of the next harvest,” said Mr. Oliveira. He points out that the La Niña phenomenon is expected to return in July, making the weather dry in Rio Grande do Sul. Although this could seem positive given the damages caused by excessive rainfall, it harms crops. “Unfortunately, extreme weather events tend to hit the state hard given its location,” he said.

* Por Anaïs Fernandes, Marcelo Osakabe, Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Multi to make Oppo cell phones in Brazil

Chinese company is in fifth place in cell phone brands

05/09/2024

The Multi Group, formerly known as Multilaser, announced on Wednesday (8) an exclusive partnership for the manufacture and distribution of smartphones from China’s Oppo in Brazil. Sales of the devices will be made exclusively by retailer Magalu. Since 2022, Oppo has been importing its cell phones from China to serve the Brazilian market.

“In this partnership, responsibility for marketing, trade marketing, and product positioning is the responsibility of the partner,” Multi said in a statement to shareholders.

Oppo ranked fifth among the largest cell phone manufacturers in the world, with 25.2 million units sold and an 8.7% share in the first quarter of this year, according to data from consultancy IDC. A year earlier, Oppo held 10.3% of the global market.

Samsung leads global smartphone sales, with 20.8% of the market in the first quarter, followed by Apple, with 17.3%, and China’s Xiaomi (14.1%) and Transsion (9.9%), reports IDC.

*Por Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil floods kill 107 as losses top R$6bn

State government estimates that 600,000 MSEs were affected by rains and flooding

05/09/2024

A boat navigates through a flooded street after heavy rain in Canoas, Rio Grande do Sul — Foto: Carlos Macedo/AP

A boat navigates through a flooded street after heavy rain in Canoas, Rio Grande do Sul — Foto: Carlos Macedo/AP

The death toll due to the rains in Rio Grande do Sul has risen to 107, with 136 people missing and one death under investigation. According to the Civil Defense of Rio Grande do Sul, 67,542 people lost their homes and have been relocated to shelters provided by the public authorities, and 163,786 have been displaced. Of the total 497 municipalities in the state, 425 were affected by the heavy rains in the region. The number represents more than 85.5% of all state’s municipalities.

The financial impacts of the storms that started last week are also starting to be assessed. The damage to municipalities in Rio Grande do Sul affected by the floods now reaches R$6.3 billion, according to the most recent survey by the National Confederation of Municipalities (CNM). Of this total, R$1.9 billion are in the public sector and R$1 billion in the private sector. Most of the damage is in the housing sector, with losses of R$3.4 billion, arising from 61,400 homes damaged or destroyed.

The CNM points out that the data gathered until 2 pm on Wednesday (8) are partial and are being updated as municipal administrations enter information into the Integrated Disaster Information System, by the Ministry of Integration and Regional Development.

In the public sector, the estimate points to R$1.4 billion in losses in infrastructure works alone (bridges, roads, pavement work, and urban drainage systems) and R$ 351 million in losses related to material damage (public facilities such as schools, hospitals, and city halls).

In the private sector, the most affected sector is agriculture, with an estimated loss of R$595 million. Livestock farming faces losses of R$148 million. In industry, the loss is estimated at R$183 million. Losses with other services amount to R$58 million and local businesses, R$39 million.

Rio Grande do Sul’s small-business support service SEBRAE estimates that 600,000 micro and small enterprises (MSEs) were affected by the rains and flooding. The number represents 40% of the total of 1.5 million MSEs in the state.

“We attended a meeting with the state’s Department of Economic Development to prepare a methodology for diagnosing companies. The survey should be carried out from Thursday (9) with publicity so that micro, small, medium, and large entrepreneurs can participate,” said Ariel Fernando Berti, SEBRAE’s director in Rio Grande do Sul.

The new survey, according to Mr. Berti, should help financial institutions and banks evaluate loan facilities for the affected sectors, as it will disclose numbers on the real impact of damages and losses.

According to him, the priority right now is to save lives, resume essential service systems, and ensure safety for everyone in the most affected areas. “Many people have been displaced in completely devastated communities that are stranded from other areas, and are facing collapse of bridges or road issues. The priority is to save lives,” he emphasized.

The return of rain and strong winds to the Porto Alegre area on Wednesday (8) forced the city hall to pause the rescue of victims of the historic floods in Rio Grande do Sul. The Civil Defense is preparing for a new cold front expected to arrive in the state on Friday (10), causing storms almost as strong as those seen last week. They are expected to occur in the same areas affected last week.

According to the current estimate, 330 millimeters of rain is expected from Friday (10) to next Monday (13) in Porto Alegre. The forecast indicates that, during that period, the most intense rain should occur in the area between the center-north and east of Rio Grande do Sul, including the north coast of the state and the south of Santa Catarina. In these areas, the volume of rain should vary between 200 mm and 300 mm.

For Thursday (9), the forecast by the National Institute of Meteorology (INMET) is for cold, dry weather in the south of Rio Grande do Sul, with minimum temperatures varying from 4°C to 8°C.

(With Folhapress)

*Por Paula Martini, Luiz Fernando Figliagi — Rio de Janeiro, São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil slows rate cuts amid division within Monetary Policy Committee

Policy interest rate was cut by 25 bp; decision was made by 5 to 4 in the collegiate meeting

09/05/2024

Central Bank’s building in Brasília — Foto: Beto Nociti/BCB

Central Bank’s building in Brasília — Foto: Beto Nociti/BCB

In a decision that divided its members, the Central Bank’s Monetary Policy Committee (COPOM) on Wednesday reduced the policy interest rate, known as Selic, to 10.50% per year from 10.75% per year. The 25-basis-point cut was supported by five members of the committee, while the other four voted to continue the 50 bp reduction, as in the last six meetings.

This division has sparked adverse reactions among market agents, who are concerned about a potentially more inflation-tolerant board after Central Bank President Roberto Campos Neto’s term ends this year.

The board consists of the Central Bank president and eight directors. Mr. Campos Neto and directors Carolina de Assis Barros, Diogo Guillen, Otávio Damaso, and Renato Dias de Brito Gomes supported the 25-bp cut. In contrast, Ailton de Aquino Santos, Gabriel Galípolo, Paulo Picchetti, and Rodrigo Teixeira, all appointed by President Lula, voted for a 50-bp reduction.

A Valor survey had predicted this outcome, with 78 of the 118 financial institutions and consultancies expecting a 25-bp cut and another 40 anticipating a 50-bp reduction.

The last split in the committee over interest rate cuts occurred at the start of the current cut cycle in August 2023. At that time, the decision to reduce the rate to 13.25% per year from 13.75% per year garnered five votes—those of Mr. Campos Neto, Mr. Aquino, Mr. Barros, Mr. Galípolo, and Mr. Damaso. Directors Fernanda Guardado, Maurício Moura, Guillen, and Gomes had voted for a 25-bp reduction.

A significant development in Wednesday’s statement was the absence of clear guidance on the next steps for the Selic rate. Historically, the COPOM has indicated reductions of 50-bp cuts in “upcoming meetings.” This pattern shifted at the March meeting when the guidance was narrowed to a 50-bp cut at only the “next meeting” amid heightened uncertainty. Since then, the landscape has grown even murkier, and such a cut has not materialized.

Contributing to this uncertainty were doubts about the direction of interest rates in the United States and the Brazilian government’s revision of the fiscal target for 2025 from a surplus of 0.5% of GDP to a zero deficit. In this context, Mr. Campos Neto outlined four potential scenarios for monetary policy. The first scenario would see a reduction in uncertainty, taking “the usual path.” The second would occur if high uncertainty persisted without significant changes, potentially leading to “a reduction in pace.” In the third scenario, increasing uncertainty would strongly impact key variables, necessitating a discussion on adjusting the risk balance. In the worst case, escalating uncertainty would cause global stress, prompting the Central Bank to alter its baseline scenario.

In its latest statement, the COPOM noted that the external environment “appears to be more adverse.” In March, the situation was described as “volatile.” The increased adversity is attributed to significant uncertainty about when the United States will begin monetary easing and “the speed at which a sustained decline in inflation will be observed in several countries.”

Regarding the domestic situation, the statement indicated that economic activity and labor market indicators “have been more dynamic than expected.” In March, the COPOM had described these indicators as consistent “with the economic slowdown scenario anticipated by the COPOM.”

On fiscal matters, the COPOM has been closely monitoring “recent developments in fiscal policy and their impact on monetary policy,” emphasizing that a credible fiscal policy “committed to debt sustainability helps anchor inflation expectations and reduce financial asset risk premiums, consequently affecting monetary policy.” Before the fiscal targets were revised, the committee had underscored “the importance of the firm pursuit of these targets.”

The statement also emphasized that the board “unanimously” agreed that the uncertain global scenario and the domestic environment, marked by resilience in activity and unanchored expectations, “call for greater caution.”

The COPOM’s inflation projections have increased, with expectations of 3.8% this year and 3.3% in 2025. In March, inflation was projected at 3.5% for 2024 and 3.2% for 2025.

*Por Gabriel Shinohara, Alex Ribeiro — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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ADNOC gives up on buying Braskem amid Maceió soil sinking

Lack of definitive agreement on the petrochemical company’s environmental liabilities made Abu Dhabi state-owned company withdraw from negotiations

05/08/2024

Five years on, Alagoas has once again become the sticking point in Braskem’s sale process. The lack of a definitive agreement on the petrochemical company’s environmental liabilities in Maceió and a recent interest in other oil and gas assets around the world, including BP, led the Abu Dhabi National Oil Company (ADNOC) to give up on buying the Brazilian company, Valor has learned.

Braskem, however, is still on the radar of another Arab company, Petrochemical Industries Company (PIC), which received Novonor representatives in Kuwait last week, according to sources. PIC is still conducting due diligence, which is still in its initial stages.

Rumors that ADNOC was withdrawing from the dispute began circulating around 20 days ago. At the time, BP had already received an expression of interest from the Abu Dhabi state-owned company to buy a slice of its shares or control, according to Reuters. The talks, however, did not prosper.

According to sources familiar with the negotiations between Novonor (formerly Odebrecht) and ADNOC, the talks have progressed well, with signs that an agreement could finally be reached by the end of November. Novonor was still not satisfied with certain terms of the offer, but for the first time the parties involved in the potential transaction were converging on the same point: that of signing a sale and purchase agreement.

However, the collapse of Braskem’s rock salt mine 18 in Maceió in December and the exposure the case gained, culminating in an investigative parliamentary committee (CPI), threw cold water on ADNOC’s interest.

The Arab state-owned company wasn’t frightened by the soil sinking in Maceió per se but by insecurity generated by political interference in the discussions and questions surrounding the reparation agreements signed by the petrochemical company, as well as the lack of a definitive solution that could prevent, for example, questions about liability in the event of further events. So far, Braskem’s damages in Alagoas stands at R$15.5 billion.

In November, ADNOC made a new non-binding offer to buy control of Braskem, held by the former Odebrecht, for R$37.29 each share, or R$10.5 billion. The proposal was also presented to Novonor’s creditors – Bradesco, Itaú Unibanco, Santander, Banco do Brasil, and Brazilian Development Bank (BNDES) – who hold Braskem shares as collateral for debts of around R$14 billion.

For the sale of Braskem to go ahead, ADNOC would have to present a binding offer (with a commitment to buy) at the end of the due diligence it was conducting. Petrobras would then have to indicate its position in the transaction.

The petrochemical company’s second-largest shareholder, with 36.1% of the total capital (and 47% of the voting shares), Petrobras has the right to buy the share of its partner Novonor—38.3% of the total capital and 50.1% of the common shares—or to sell its stake together with the former Odebrecht.

At the beginning of Monday night, Petrobras informed that it is carrying out due diligence on Braskem for the possible exercise of a tag-along or pre-emptive right, in the event of the sale of the shares held by Novonor.

It is unclear how the creditor banks of the former Odebrecht will react to yet another failure in the years-long attempt to sell Braskem. In June 2019, LyondellBasell abandoned exclusive negotiations precisely because of the revelation of the soil-sinking problem in Maceió.

Sought for comment, Novonor said that it was still engaged “in order to move forward with the process, in line with the commitment made to its related parties,” and ADNOC confirmed that it had withdrawn from the negotiations.

*Por Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Foreign Direct Investment at highest level since 2017

Current account had a deficit of $32.6bn in first quarter

05/08/2024

Foreign Direct Investment totaled $23.3 billion in the first quarter of this year, the highest result for the period since 2017. The month of March, which saw the highest figure for the month since 2012 at $9.6 billion, contributed to this result.

FDI is considered the most stable form of financing for external accounts. Over 12 months, it decreased to $66.5 billion (2.98% of GDP) from $75.2 billion (3.76% of GDP) in March last year, but it still exceeds the current account deficit.

In the 12 months ending in March this year, the deficit was $32.6 billion (1.46% of GDP). In March 2023, the cumulative figure was $49.3 billion (2.46% of GDP). The head of the Central Bank’s statistics department, Fernando Rocha, said the deficit is low given the country’s economic conditions and is “fully financed by long-term capital, mainly FDI.”

FDI includes equity participation, intercompany operations (loans from a parent company abroad to a subsidiary in Brazil, minus amortizations paid abroad), and reinvested earnings. Mr. Rocha said that intercompany transactions were the main contributors to the increase in FDI in March, rising to $5.5 billion this year from $2.5 billion in the same month of 2023.

For Rafaela Vitória, chief economist at Banco Inter, the recovery of FDI was the positive surprise of the quarter. She said that the net inflow equivalent to 3% of GDP over 12 months is a “quite comfortable” level, considering the current account deficit. “Despite the more negative movement in the market, which signals a perception of increased risk from foreign investors due to higher interest rates and recent currency devaluation, Brazil is likely to continue to attract enough direct investment to keep the external accounts in surplus,” she said.

In the first quarter, the current account balance was negative at $14.4 billion, compared to $12.6 billion in the same period of 2023. In this comparison, the figure is mainly impacted by the service account, which had a deficit of $10.7 billion in 2024 compared to $7.6 billion in the first three months of 2023.

Mr. Rocha added that this service account shows an increase in trade flow. He also said that the explanation for the dynamics of services has changed in recent months. The major factor in the increase in the deficit is explained by intellectual property services (such as license payments for software distribution) and the account for telecommunications, computing, and information.

Luís Otávio Leal, a partner and chief economist at G5 Partners, said that the balance of current transactions in March, with a deficit of $4.6 billion against a surplus of $700 million in March 2023, includes factors such as increased expenses on travel, transport, and equipment rental, “all reactive to the recovery of the economy and income.” According to the economist, the deficit is expected to reach $45 billion by the end of this year, or 2% of GDP.

Current transactions were also impacted by the result of the goods trade balance, which had a surplus of $12.5 billion in the first quarter, and the primary income account, consisting of capital remuneration revenues and expenses—profits and interest—which had a deficit of $16.5 billion in the same period.

*Por Gabriel Shinohara, Alex Ribeiro — Brasília, São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brazil and Paraguay reach agreement on Itaipu tariffs

A 15.4% increase applies for the three-year period between 2024 and 2026; Paraguay defended higher price

05/08/2024

Alexandre Silveira — Foto: Cristiano Mariz/Agência O Globo

Alexandre Silveira — Foto: Cristiano Mariz/Agência O Globo

The governments of Brazil and Paraguay signed Tuesday in Asunción an agreement promising to resolve disputes over the Itaipu Binational Hydroelectric Power Plant, including a mechanism to maintain the Brazilian energy tariff. As reported by Valor, the energy tariff at the plant will increase by 15.4%, from the current $16.71/kW to $19.28/kW.

Despite this increase, which Paraguay requested, there will be no impact on the price of electricity in Brazil. The Brazilian half of the plant will contribute $900 million to offset the increase, amounting to about $300 million a year, which will be deducted from the investment plan. This new price will be valid for the three years from 2024 to 2026.

Brokered personally by Minister of Mines and Energy Alexandre Silveira, the agreement only partially meets Paraguay’s initial request for a tariff of just over $22/kW. Brazil has also included “structural compensations” in the deal. One such compensation is setting a deadline of December 31, 2024, for concluding negotiations on the so-called “Annex C” of the Itaipu agreement, which outlines the financial and structural terms for the construction and operation of the plant. Post-2026, the tariff is expected to drop to between $10/kW and $12/kW, excluding non-operational costs.

By finalizing the tariff agreement and progressing to the negotiation of Annex C, the Brazilian government hopes to end the recurring annual tensions with Paraguay over tariff settings. This situation mirrors a decade-long dispute between the governments of Paraguay and Argentina over the economic terms of Yacyretá, another binational power plant.

Starting in 2027, only the operational costs of the hydroelectric plant will be considered in calculating Itaipu’s energy tariffs, a change anticipated since last year when the final installment of the loan for the plant’s construction was paid off, 50 years after the signing of the international treaty. “The agreement puts an end to the complicated negotiations that occur every time a tariff change is discussed,” a participant in the negotiations told Valor.

Additionally, Brazil is advancing the sale of energy from other Paraguayan plants like Yacyretá (3,200 MW) and Acaraí (200 MW). These operations are expected to increase competition in the Brazilian energy market, potentially lowering energy prices for consumers. Brazil plans to use power purchase mechanisms similar to those already employed with Argentina and Uruguay.

Following this agreement, Brazil will no longer be obligated to buy surplus energy produced on the Paraguayan side at a fixed rate, which has historically driven up costs. Once this obligation ends, Brazil can continue to purchase the unused energy from Paraguay but at market prices, potentially leading to cost savings.

Brazil and Paraguay each have rights to half of the energy generated at Itaipu, which has an installed capacity of 14,000 MW. From this production, the plant supplies only 8.7% of Brazilian energy demand but meets a significant 86.4% of Paraguayan consumption.

The Brazilian government’s initial stance was to keep the price unchanged; however, Paraguay’s reliance on the plant’s revenue for economic stability pushed the negotiations forward. The resolution to this stalemate involved utilizing the $300 million annual surplus injected by Brazil to offset the tariff adjustment. This decision reflects the government’s strategy to invest in maintaining moderate tariff levels.

In Paraguay and Brazil, funds from Itaipu have been diverted to finance infrastructure projects unrelated to energy generation, such as highways, bridges, and airports, particularly in Paraná. This redirection of funds has drawn criticism from experts who argue that, rather than lowering energy costs for consumers, the high cost of energy has been maintained to fund these other projects.

With the new agreement, the Brazilian government expects to deliver electricity from Itaipu to consumers at a rate of R$205 per megawatt-hour (MWh), which is below the current average contract price of R$300/MWh charged by distributors.

*Por Murillo Camarotto, Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Decoupling social security faces resistance, analysts warn

Economists support Minister Tebet’s plans to separate social security from health and education spending floors

05/07/2024

Carlos Kawall — Foto: Silvia Zamboni/Valor

Carlos Kawall — Foto: Silvia Zamboni/Valor

Decoupling the increase in the minimum wage from social security and welfare benefits, as well as unlinking the spending floors for health and education from revenues, are considered priority measures to ensure the sustainability of public debt. While these measures are deemed essential to prevent the economy from being overwhelmed by revenue demands, their political feasibility remains uncertain.

In a recent interview with Valor, Brazil’s minister of Planning and Financial Budgeting Simone Tebet expressed her support for separating Social Security from the minimum wage, which is currently adjusted in real terms. Last week, Finance Minister Fernando Haddad highlighted an article on the social network X (formerly Twitter), written by economist Bráulio Borges, which advocates for detaching the social security floor from the minimum wage as a strategy to reduce federal expenditures. This article was published by FGV Ibre’s Fiscal Policy Observatory.

Carlos Kawall, founding partner of Oriz Partners, believes that Minister Tebet’s comments indicate that mere spending reviews are insufficient for fiscal consolidation, suggesting that deeper spending cuts are necessary. He noted, “We have created overly flexible rules that accommodate increased spending in a manner incompatible with economic growth and public debt sustainability. We cannot generate the necessary revenue to support this spending without stifling the economy.”

Social security expenses currently represent more than 40% of the government’s total revenue and are its most significant expenditure, according to Silvio Campos Neto, economist and partner at Tendências. He referenced a study from the Ministry of Finance indicating that for every R$1 increase in the minimum wage, there is a nearly R$400 million rise in spending on social security and benefits, such as the Continuous Cash Benefit (BPC)—a welfare program for the elderly or disabled who lack sufficient income—and the salary allowance, which annually provides additional financial relief to low-income workers. “Considering the forecasted real adjustments from 2023 to 2026, we’re looking at an accumulated increase of around R$150 billion, driven by the policy of raising the minimum wage and linking it to benefits,” he explained.

In the article endorsed by Minister Haddad, Mr. Borges contends that a key strategy to curb social security spending would be to detach the pension floor and other welfare benefits, like the BPC, from the national minimum wage, recommending that pensions be adjusted for inflation. Mr. Borges also suggests that criteria such as the minimum retirement age and minimum contribution time should not be static but should automatically adjust according to changes in life expectancy as calculated by the IBGE.

Mr. Kawall believes adjusting pensions and welfare benefits for inflation could be a viable middle ground in the debate on decoupling from the minimum wage, allowing greater flexibility in spending and making any real adjustments discretionary. He also emphasizes the need for parametric reforms in pension grants, noting, “This would be a relatively simpler reform, as the fundamental change of linking it to age was already enacted in 2019.”

Mr. Kawall acknowledges that while the recalibration of retirement ages and contribution times is necessary over time, its effects will not be felt for 10 to 15 years. “In the short term, the real increase in the minimum wage expands the base of the pyramid, which will become unsustainable over time. There won’t be time for the structural changes of recalibration to take effect. In the short term, breaking the link with the minimum wage is more critical,” he explains.

Mr. Kawall also highlights an important aspect of Ms. Tebet’s statements regarding the minimum spending thresholds for health and education. These thresholds lead to a dynamic of real growth in spending in these sectors, which conflicts with fiscal sustainability in the medium and long term. The connection between federal revenues and health and education spending stems from the so-called Transition Amendment (EC 126/2022)— a constitutional amendment in Brazil that was enacted to adjust fiscal and budgetary rules. By repealing the spending ceiling and other expense correction mechanisms, it reinstated previous rules that link health spending to the growth of net current revenue (RCL) and education spending to net tax revenue.

“In education, the minister initiated an innovative discussion about including Fundeb in the education spending,” Mr. Kawall noted. Fundeb is a funding mechanism designed to support public education in Brazil. He also notes that the constitutional minimums for health and education impose constraints not only on the federal government but also on states and municipalities.

Felipe Salto, chief economist at Warren Investimentos, expresses concern that Minister Tebet does not appear interested in making significant changes to health spending. “She doesn’t seem inclined to alter anything. And there’s an issue with the constitutional floor for health [spending], which is already compressing discretionary spending,” he pointed out. “Health spending is high and inefficient. It is not assessed, and there is constant pressure for more spending without proper assessment.”

Coupling social security benefits to the minimum wage or tying health and education spending floors to revenue metrics has placed significant strain on the budget, according to Fábio Serrano, an economist at BTG Pactual. However, he notes, “The issue is very politically sensitive, even though it makes sense from an economic perspective.” He believes there is insufficient political support for these changes.

Mr. Campos Neto, from Tendências, shares a similar viewpoint, noting the political challenges such proposals face. “Even though the proposal today comes from within the government, from Planning, and likely has the support of the Ministry of Finance, the political opposition it faces will be substantial,” he stated.

*Por Marta Watanabe, Marsílea Gombata, Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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WEG to produce wind turbines in the United States

Company’s decision aims to take advantage of the U.S. green package, which guarantees investments in the climate agenda

05/07/2024

João Gualberto — Foto: Rogerio Vieira/Valor

João Gualberto — Foto: Rogerio Vieira/Valor

WEG has announced it will produce wind turbines for onshore generation to serve the American market at its motor and high-voltage generator factory in Minneapolis.

João Paulo Gualberto da Silva, managing director at WEG Energia, says that the decision approved by the board took into account the benefits offered by the Inflation Reduction Act (IRA), Joe Biden’s green package that guarantees investments in the climate agenda aimed at attracting resources for clean energy.

“The IRA provides for around $370 billion in incentives for the energy transition over 10 years and credits for those who manufacture components locally, such as the hub [the part where the blades fit] and the nacelle [the structure that houses the wind turbine’s components], with a federal income tax rebate,” said Mr. Gualberto.

The executive says that the companies do not receive any incentives to manufacture the equipment, but customers who buy from companies that manufacture nacelles and hubs in the United States receive an additional $2.5 for every megawatt-hour produced.

“So we’re going to produce the nacelle and hub in Minneapolis, but we don’t yet have suppliers for the blades and towers,” he said. “We’re going to start developing the supply chain this month.”

The idea is to offer a 7 MW model, the largest ever produced in the Americas and developed in partnership with Petrobras. WEG’s intention is to remove the dependency of Brazil’s wind energy business, which has experienced several bumps in the road over the last 12 years, and to develop a more stable market that is growing by an average of 14 GW per year. The company also manufactures in India. The company’s plan is to obtain around 1 GW of market share, following its strategic plan to install around 3 GW worldwide.

Exploring new geographies is one of the manufacturer’s strategies, since the Brazilian market is currently stagnating and is experiencing a process of deindustrialization of the supply chain. For this reason, the company opted for a temporary shutdown of its wind turbine line in Jaraguá do Sul (state of Santa Catarina).

The situation is different around the world. The global wind industry grew by 50% in 2023 and reached 117 GW in new capacity, according to data from the Global Wind Energy Council (GWEC).

The plant in Minneapolis has the modular capacity and operational flexibility to handle the new product. According to WEG, the plant will be able to start supplying the first equipment from 2026. In the meantime, the company is starting to develop its local supply chain.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Floods cut off southern Brazil state, kill at least 90

Rio Grande do Sul state counts 132 people missing after heavy rains that hit 385 of the 497 municipalities since last week

05/07/2024

Floods impacted Porto Alegre, the capital city of Rio Grande do Sul — Foto: Gustavo Mansur/Palácio Piratini

Floods impacted Porto Alegre, the capital city of Rio Grande do Sul — Foto: Gustavo Mansur/Palácio Piratini

The government of Rio Grande do Sul confirmed that the heavy rains that hit the state over the last week killed at least 90 people. The death toll could rise even further in the coming days, as 132 people are missing and 361 injured. There are also four deaths under investigation.

This is among the worst disasters in more than 30 years in Brazil considering deaths from intense rain. According to the Digital Atlas of Disasters in Brazil, produced by the Ministry of Regional Development with data from 1991 to 2022, the disaster in Rio Grande do Sul was only surpassed by the storms of May 2022 that killed 117 people in Greater Recife (Pernambuco).

The Civil Defense of Rio Grande do Sul informed that 48,147 people lost their homes and have been relocated to shelters provided by the public authorities, and 155,741 have been displaced. Of the total of 497 municipalities in the state, 388 were affected by the heavy rains in the region. The rains that devastated cities in Rio Grande do Sul reached Santa Catarina and Paraná, causing another three deaths.

The extreme weather also damaged agriculture in the state. A survey by the National Confederation of Municipalities (CNM) shows that agriculture is the sector of the economy most affected by the disaster, with financial damages amounting to R$506.8 million, according to data collected until Monday (6) afternoon.

According to the CNM, there are so far R$967.2 million in total losses in Rio Grande do Sul also considering other economic segments and the public sector. However, the number could be much higher. The amount includes just 25 municipalities that reported to the CNM.

According to J.P. Morgan, although the “shocking floods” in Rio Grande do Sul bring a huge humanitarian toll, the impact on the Brazilian GDP “tends to be modest.” “More impacting could be the political and medium-term effect on fiscal accounts, depending on how the government and the Parliament decide to deal with the region’s needs,” said economist Vinicius Moreira and chief economist Cassiana Fernandez.

They point out that Rio Grande do Sul currently accounts for some 8.6% of the Extended Consumer Price Index (IPCA) and 6.5% of Brazil’s GDP in 2021 (the latest official data available).

Rio Grande do Sul also faces a strong impact on infrastructure due to the flooding. According to a report released on Monday (6) evening by the State Logistics and Transport Department, 26% of customers served by water utility Corsan remain without water supply, which means a total of 750,000 customers.

RGE Sul, a power distribution company that caters to 381 cities, including Novo Hamburgo, Canoas, and Santa Maria, has 270,000 points without energy, representing 8.8% of customers. CEEE Equatorial did not provide an update on the numbers but, according to the report released on Monday morning, 9.5% of customers had no power.

As for telecommunications, Telecom Italia’s TIM said 38 cities have no voice and internet services. Telefónica’s Vivo reported that 28 municipalities in its operations base are without service, and América Móvil’s Claro, 19 municipalities.

The report also informs that 789 schools in 216 municipalities have been affected—either due to damages, or because they are serving as shelters, or have experienced access problems, among other reasons. In total, 273,000 students have been impacted.

Return to classes has occurred gradually, but in the capital Porto Alegre there is still no date for resumption.

In the capital of Rio Grande do Sul, residents of two neighborhoods in the central area had to leave their homes and were advised to seek shelter in the face of imminent new floods after the water pumping system was shut down on Monday (6).

According to city hall, the local electricity provider halted the power supply to one of the pump houses for safety reasons. The system broke on Friday (3), causing all the water that had been dredged to flood the downtown area again.

(With news agencies)

Source: Valor International

https://valorinternational.globo.com/
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