Haddad advocates for comprehensive review of public spending

Statement comes amid growing pressure for spending-cut measures

14/06//2024

Fernando Haddad and Simone Tebet — Foto: Diogo Zacarias/MF

Fernando Haddad and Simone Tebet — Foto: Diogo Zacarias/MF

Finance Minister Fernando Haddad said on Thursday that it is essential to intensify studies on the review of public spending. According to Mr. Haddad, “primary spending needs to be reviewed, tax spending needs to be reviewed, and the Central Bank’s financial spending as well.” He also mentioned that the economic team set in motion a “comprehensive, general, and unrestricted” review of expenses.

Mr. Haddad unexpectedly commented on the matter alongside Planning Minister Simone Tebet after a last-minute meeting at the Ministry of Finance amidst financial market tensions due to concerns that he could be losing ground within the Lula administration and uncertainty about the progress of the government’s economic agenda following the Senate’s rejection of a provisional presidential decree on social taxes PIS/Cofins this week.

The statement was in response to demands for spending-cut measures, as there is a perception among market agents and experts that the fiscal agenda on the revenue side is exhausted.

Shortly after the meeting, in the early afternoon, the finance minister said that he had started discussions with Ms. Tebet on the 2025 Budget and that the public spending review agenda “is gaining more traction over time.” “Simone [Tebet] and I are talking more and more about this,” he said.

The minister’s statement to the press caused the foreign exchange and interest rates to fall and the Ibovespa, Brazil’s benchmark stock index, to recover losses partly. Despite the statements, economists remain skeptical about the possibilities of concrete progress on these proposals.

“We asked for an intensification of efforts so that by the end of June we can have clarity on the 2025 Budget, structurally well-constructed to provide reassurance on addressing the country’s fiscal issues,” Mr. Haddad said.

According to the minister, there will be a “more intense pace” of work this month, as the budget proposal needs to be sent to Congress by August 31. Although he did not specify which types of spending are being structurally analyzed by the economic team, he mentioned that the review aims to accommodate the “legitimate aspirations” of Congress and the Executive branch, “especially so that we can have peace of mind next year.”

The minister noted that any proposals for public spending review that require legislation need to be approved this year to impact 2025.

“Congress is willing to move forward, willing to review primary spending and cut privileges. Topics discussed like super salaries, correction of benefits practiced against the law, and improvement of records are back on the table. We think this is great; it facilitates the work of balancing the accounts.”

On Wednesday, domestic assets were hit by another round of deterioration after President Lula cited increased revenue and lower interest rates as a recipe for fiscal balance—without mentioning spending cuts or the rejection of the provisional presidential decree.

When asked about Ms. Tebet’s remarks on detaching the minimum wage from benefits such as unemployment insurance and the Continuous Cash Benefit (BPC, for very poor elders and disabled people), Mr. Haddad said that the position is the “economic team’s,” claiming that they are “in sync.”

“Although the Ministry of Finance deals more with revenue and the Ministry of Planning with spending, we are not exchanging views on the feasibility of the proposals all the time. Everything that can be done on both sides helps.”

The population, the minister said, needs to continue to have their fundamental rights met, as well as investment happening “to improve the productivity of the Brazilian economy.”

Following this, Ms. Tebet reiterated that the economic team has “plans A, B, C, D, E” for the spending review but noted that the review of constitutional floors for education and health are “towards the end of the alphabet in the menu.” This “menu,” she said, has not yet been presented to President Lula.

Ms. Tebet also said it is necessary to forget the word “pension” in discussions about detaching the minimum wage, referring to retirement. “Even I don’t agree with that,” she responded when questioned.

The minister has opposed detaching pensions from the minimum wage but supports studying the delinking of other benefits. According to her, this is an agenda that is “mid-alphabet,” referring to the plans and possibilities studied by the economic team.

According to Ms. Tebet, social security spending is increasing sharply, but the solution is not a new pension reform. “The problem lies in social security exemptions that affect tax spending. Solving tax spending problems means not creating new tax exemptions in the country, as pointed out by the public spending watchdog in the government’s 2023 accounts report, approved on Wednesday,” she said.

The planning minister also noted that there are several filters before a proposal can prosper. “Haddad has to agree with the Ministry of Planning’s proposals, and vice versa, otherwise we won’t move forward.”

*Por Guilherme Pimenta, Gabriela Pereira — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Mubadala: Private sector key to net zero carbon emissions

Financially viable solutions, investments in biorefineries, and large-scale renewable energy production are all viable for addressing climate change and goals

06/13/2024

Mubadala’s Yamamoto stressed the need for large-scale initiatives to counteract climate change effects — Foto: Christopher Pike/Bloomberg

Mubadala’s Yamamoto stressed the need for large-scale initiatives to counteract climate change effects — Foto: Christopher Pike/Bloomberg

Leonardo Yamamoto, executive director of Mubadala Capital, emphasized that the private sector plays a crucial role in achieving global “net zero” carbon emissions. Speaking at the FII Priority Summit in Rio, a gathering of international leaders and executives, the director of the UAE fund stressed the need for large-scale initiatives to counteract climate change effects.

“The only viable strategy to combat climate change involves financially sustainable solutions,” he explained, adding, “In Brazil, Mubadala is investing in a biorefinery in the Northeast. We believe this facility will not only produce renewable fuels but also a molecule that captures carbon.”

Mr. Yamamoto further pointed out the necessity of producing renewable energy on a large scale to facilitate the energy transition, stating, “We must challenge the existing polluting industries.”

Marcos Bulgheroni, president of the Pan American Energy Group, speaking alongside Mr. Yamamoto, noted that the world will need to utilize a variety of energy sources before achieving “net zero.” He stated, “We need to determine the mix of energy sources that will help us lower the overall emissions of our energy matrix. These varied sources will coexist and compete for many years to come.”

Mr. Bulgheroni, leading the Argentine-based group, emphasized the importance of a regional approach to fostering energy transitions: “The Vaca Muerta gas pipeline, for instance, will be crucial for the Southern Hemisphere. A regional vision is essential for identifying optimal solutions.”

Adding to the discussion, Musaab M. Almulla, vice president of energy and economic insights at Saudi Aramco, reiterated that scaling and implementing finance for the energy transition poses a significant challenge. He highlighted Aramco’s commitment to investing not just in green hydrogen but in all technologies aimed at reducing emissions and introducing innovative solutions.

Mr. Almulla also outlined the company’s strategies for decarbonization, which include enhancing energy efficiency, expanding the use of renewables, and minimizing flaring. Flaring, he explained, is the process where natural gas released during oil extraction is burned off, emitting carbon dioxide into the atmosphere.

*Por Kariny Leal, Victoria Netto — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Haddad’s perceived isolation raises fears over Brazil’s fiscal health

Exchange rate hits R$5.4 per dollar, long-term interest rates exceed 12%, and Ibovespa reaches yearly low amid growing investor pessimism

06/13/2024

Eduardo Cotrim — Foto: Luciana Whitaker/Valor

Eduardo Cotrim — Foto: Luciana Whitaker/Valor

Domestic assets in Brazil suffered from a fresh wave of risk aversion, reaching their lowest levels of the year. Comments from President Lula, who suggested that increased tax collection and lower interest rates could narrow the primary deficit, failed to reassure market participants. Additionally, the reinstatement of a Provisional Presidential Decree that restricts PIS and Cofins (social taxes) credits fueled concerns that Finance Minister Fernando Haddad is losing influence within the government, contributing to a broadly pessimistic sentiment across financial markets.

The foreign exchange rate ended the day up 0.86% at R$5.4066—its highest since January 4, 2023—peaking at R$5.42. Future interest rates jumped, with the market now anticipating a sharp increase in the Selic policy interest rate by year-end. Meanwhile, Brazil’s benchmark stock index Ibovespa fell below 120,000 points, dropping 1.4% to close at 119,936 points.

This heightened domestic anxiety contrasts starkly with the positive trends in global markets. In the U.S., lower-than-expected inflation data shifted focus away from immediate Federal Reserve actions, leading to a significant rally in U.S. stocks and a decline in both the dollar and Treasury yields.

“Before, we could even talk about U.S. interest rates, but now we have other reasons for our underperformance. What is at the heart of this is our fiscal issue,” said Luis Garcia, CIO of SulAmérica Investimentos, highlighting the need to confront domestic problems directly. “It’s effortless to find out where the problem lies.”

In Mr. Garcia’s view, following market tensions that escalated since Friday, there was an expectation for President Lula to publicly support Minister Haddad by acknowledging the fiscal challenges yet reiterating a commitment to fiscal targets. “What we saw today [Wednesday] was exactly the opposite. We saw the president saying that the country is going to grow and that, as a result, there will be more revenue and, therefore, no need to cut spending. It’s the opposite of what was expected,” he noted.

President Lula, speaking at the FII Priority Summit, an international gathering of leaders and executives to discuss investment opportunities capable of providing sustainable growth to countries, said his administration is “putting its house in order,” including government accounts. “Through increased revenue and reduced interest rates, we can decrease the deficit without hindering public investment capabilities,” the president stated.

“Things are still hideous in the local market, and we’re in a crisis. Several articles throughout the day said that Haddad was weakened, with friendly fire from within his own party trying to undermine him. Lula had the opportunity to defend the minister and his role in controlling public spending, but he didn’t do it,” said Luiz Eduardo Portella, partner and manager at Novus Capital. “We need Lula to come to Haddad’s defense and prime his intention to control spending. Otherwise, we won’t get out of this downward spiral,” he added.

Mr. Portella also commented on the broader international context affecting Brazil’s market positioning; a few months ago, Brazil was in an environment where it was enough “just not to do anything stupid” to be dragged along by a global improvement. “We seem to have hit a wall now. We need to do some homework and row in the right direction to get back in line with global markets,” he said.

This issue is compounded as global investors grow wary of emerging markets due to political changes in countries like Mexico, India, and South Africa. “Global investors look at these countries and simply choose to reduce their exposure to emerging markets. Why would they look at emerging markets if the American market is still at all-time highs?” Mr. Portella questioned.

A similar stance is upheld by Eduardo Cotrim, partner and manager at JGP, who shares insights into how his company successfully navigated recent market turbulence. He reveals their strategic positions, which included long bets on the dollar against the real and on rising long-term interest rates.

On Wednesday, the Interbank Deposit (DI) rate for January 2029 closed the session at 12.155%, marking the first time this year it crossed the 12% threshold.

“The emerging darlings were Mexico and India, where the elections disappointed. With the emerging class full of problems and doubts and the return on American fixed income at an all-time high, the notion that money could flow into Brazil is diminishing, particularly as there are significant concerns here regarding fiscal policy and uncertainties about the continuation of the fiscal framework,” points out Mr. Cotrim. He sees the return of the PIS/Cofins Provisional Presidential Decree as “emblematic.”

“Haddad’s agenda proposes no spending cuts and leaves the entire bill to the private sector. Eventually, the business community feels the strain, and that time has come. The costs are simply too high,” he explains, indicating general exhaustion with the government’s approach to maintaining public expenditure without cutbacks. “This dissatisfaction stems from the excessive spending. The expenses are substantially high, and as budget discussions approach, we’re yet to see a clear plan on fiscal management,” he adds.

Mr. Cotrim reveals strategic shifts in his own investment approach, saying he has zeroed out positions in Brazilian assets and currently sees no appeal in the real or domestic interest rates. “I have no appetite for it. We believe it’s still too premature to place favorable bets. Numerous uncertainties are lingering, and these issues aren’t unique to Brazil,” emphasizes the JGP manager.

He also points to necessary changes in the global financial sentiment that could potentially improve the local economic outlook. “The high interest rates in the U.S. have set a high benchmark for foreign investors to allocate risk in emerging markets, diminishing the appeal of riskier emerging markets investments. This reluctance is evident in the bond auctions and other investment activities. Moreover, the rising skepticism in the market due to Lula’s waning popularity and other local issues like the continuous disputes within COPOM and changes in Petrobras’s leadership add to the prevailing uncertainty,” states Mr. Cotrim.

It’s important to note that in Wednesday’s session, Petrobras’s common shares fell by 2.1%, and preferred shares were down by 2.41%, following comments by the company’s CEO, Magda Chambriard, indicating that the company will use “all resources to invest in Brazil.”

“Since the Bolsonaro administration, we’ve seen numerous changes in the presidency of the company but minimal actual change within the company itself. We’re observing these shifts in discourse cautiously, as this isn’t the first time we’ve encountered this scenario, yet we still believe it’s mostly noise,” stated Fernando Siqueira, head of research at Guide Investimentos.

Assessing the overall situation, he suggests adopting a more defensive stance until there’s clearer visibility, particularly considering the perceived weakening of Minister Haddad. “His potential exit might create room for increased government spending,” Mr. Siqueira commented. “Moreover, President Lula’s recent statements were poorly received as they suggest a continued misdiagnosis of the fiscal situation.”

Leonardo Monoli, managing director of Azimut Brasil Wealth Management, also highlighted concerns in the financial landscape. He criticized President Lula’s recent remarks for not addressing necessary spending cuts, which he believes significantly impacts market sentiment. “There is never any discussion on the spending side, but only on the side of increasing revenue,” Mr. Monoli noted.

“We’re going to have a complicated second half of the year, and my concern now is that we’re going into this second part of the year very badly positioned,” he remarked, referencing the Federal Reserve’s indications of only one interest rate cut this year. “We’ve wasted a first half of the year that is seasonally favorable for flows. The government has to act, or we could have a problem. We’re heading for it.”

*Por Victor Rezende, Matheus Prado, Gabriel Roca, Arthur Cagliari, Augusto Decker — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Saudi Arabia’s investment fund targets technology, renewables, and soccer in Brazil

Strategic expansion focuses on key sectors, highlighting Brazil’s role in renewable energy and AI’s growing energy demands

12/06/2024

The Governor of Saudi Arabia’s Public Investment Fund (PIF), Yasir Al-Rumayyan, expressed keen interest in broadening Saudi investments in Brazil. “We started investing in 2016 through one of our subsidiaries. Now we are focusing on technology, renewable energies, if all goes well, football,” he said at the FII Priority Summit in Rio, an international meeting of leaders and executives that takes place on Wednesday (12) in Rio.

Mr. Al-Rumayyan, who also serves as chairman of the board of the state oil company Aramco and president of the FII Institute, shared that about 80% of PIF’s investments are domestic, primarily in greenfield projects aimed at job creation. “Our remaining 20%, amounting to around $200 billion, is targeted internationally,” he said.

The executive emphasized Saudi Arabia’s commitment to sustainability, stating that the nation is a leader in renewable energy. He noted that fossil fuels can no longer be the basis of business, explaining Aramco’s strategy to decrease oil production and ramp up investment in renewable energy sources.

Mr. Al-Rumayyan raised a crucial issue that often goes unaddressed—the significant increase in energy consumption driven by advances in artificial intelligence.

“Energy consumption is going to rise substantially with artificial intelligence. The energy needed for one day of ChatGPT is equivalent to the annual consumption of 273,000 homes in California. This presents a major challenge globally, and we must seek renewable energy solutions to power such technologies,” he explained.

He further underscored Brazil’s potential as a “key player” in the renewable energy sector. “Brazil is very well positioned to be one of the key players [in renewable energy]. What it needs is good regulation and the right people, like those who are here,” he noted.

*Por Victoria Netto, Lucianne Carneiro — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Senate returns government decree limiting tax credits

Business sectors praise decision to reject controversial measure

12/06/2024

Rodrigo Pacheco — Foto: Brenno Carvalho/Agência O Globo

Rodrigo Pacheco — Foto: Brenno Carvalho/Agência O Globo

After significant pressure from industry and agribusiness leaders, Senate President Rodrigo Pacheco returned on Tuesday part of the provisional presidential decree (MP) that limited social taxes PIS and Cofins credits. Mr. Pacheco said that it was a “constitutional decision, affirming the Legislative and reassuring the affected sectors.”

Mr. Pacheco’s decision was seen as an embarrassment for the government, especially the economic team. The last time such a return occurred was in 2021, during the Bolsonaro administration, involving a measure that hindered the removal of false internet content.

Following the announcement, Finance Minister Fernando Haddad said that the Parliament’s reaction “is part of democracy” and added that he did not find the criticism from the productive sector “undue.”

He further mentioned that the Federal Revenue Service team would work with Congress to find a solution to compensate for the tax revenue loss from the payroll tax relief for 17 labor-intensive sectors and municipalities—the goal of the returned decree. When asked if the government had a plan B, Mr. Haddad denied it but said, “There’s always a way to find a solution.”

“The Senate has taken part of the responsibility to try and build a solution, from what I understood from President Rodrigo Pacheco’s speech,” the minister said as he left the Finance Ministry headquarters.

The day before, the Senate President had a meeting with President Lula and agreed on a 24-hour deadline for the government to propose an alternative to the MP, which did not happen. One possibility was for the government to withdraw the provisional measure itself to minimize the perception of a failure in coordination.

“There is a substantial innovation in the MP with changes to tax rules that significantly impact the national productive sector, without observing the constitutional ninety-day rule, especially for PIS and Cofins compensations,” said Mr. Pacheco in the plenary when announcing his decision.

“Therefore, based on this very basic and obvious observance, and with absolute respect for the Executive branch’s prerogative, the President of the Republic in issuing provisional executive orders, what we see is a violation of the Constitution, which requires the impugnation of this matter with the return of these provisions to the Presidency,” he added.

After the announcement, Mr. Pacheco was applauded by opposition members. The leader of the Parliamentary Agricultural Front (FPA), Congressman Pedro Lupion, was also present.

Despite the discomfort, the government’s leader in the Senate, Jaques Wagner, not only praised but also thanked Mr. Pacheco’s decision. “The Honorable Mr. Pacheco, with your calmness and negotiating manner, instead of showing any outburst, ended up finding a solution that I can assure you: it has the applause of the President of the Republic, it has my applause,” said Mr. Wagner to Mr. Pacheco in the plenary.

In the same speech, Mr. Wagner said that Mr. Lula was uncomfortable with the decree and that maintaining the text would result in an “endless tragedy.”

“I want to say for the record here the role of the President of the Republic, who called you for a dialogue, along with the Finance minister, and expressed that he was clearly not comfortable, and you could find a legal and constitutional way to stop what would be an endless tragedy,” he said.

It was not only Mr. Lula who was uncomfortable. Members of the ministries of Agriculture (Mapa) and Development, Industry, Trade, and Services (MDIC) told Valor that they were unaware of the measure’s content until it was made public on Tuesday. These two ministries include the sectors that would be most affected by the restrictions.

Vice President Geraldo Alckmin was leading an official government delegation on a business trip to China and Saudi Arabia when he learned of the decree’s content through businesspersons accompanying the trip.

One source close to him said that Mr. Alckmin was “caught off guard,” as he did not have studies and data to counter the industrialists’ criticisms. The president of the National Confederation of Industry (CNI), Ricardo Alban, interrupted his participation in the official delegation and returned to Brazil early to act against the decree, holding meetings with the country’s main authorities, including President Lula.

After meeting with Mr. Lula, Mr. Alban told members of the ruralist caucus that the decree was “dead” and that he heard from the president himself that the matter would be withdrawn by the government or returned by Congress. Mr. Alban’s report of a private conversation with Mr. Lula caused even more discomfort in the government.

The decree’s return also created uncertainty about the legal effects of Mr. Pacheco’s decision. Senator Tereza Cristina questioned the Senate President about this during the session, amid doubts among business leaders on this point.

“All effects cease since the decree’s issuance, in the part impugned, which is the main part of the articles already referred to,” said Mr. Pacheco.

Historically, returning a provisional executive order, although possible, is not usual and has ramifications that vary from case to case, according to a note from the law firm Cascione Advogados sent to clients when the rejection was still a possible scenario. The text recalls MP 1068, issued during the Bolsonaro administration, which was returned by Congress through a summary rejection of the norm—in that case, the text was rejected and immediately revoked. In the case of MP 33, Congress also returned the text, but the norm remained in effect until it lapsed.

Lawyer Gabriel Baccarrini, from Cascione, said that the text returning the decree expressly states that the items would be “considered unwritten,” with the decree’s expiration. Therefore, it should not have effects. However, Mr. Baccarini added that the Senate’s own Rules of Procedure provide for the possibility of an appeal to the Constitution and Justice Committee.

Lawyer Fernanda Secco, a partner in the tax area of Velloza Advogados law firm, also highlighted the section of the act that states that the provisions limiting compensations were summarily rejected and considered unwritten, with the declaration of the end of the MP’s validity and efficacy, since its issuance.

*Por Julia Lindner, Caetano Tonet, Jéssica Sant’Ana, Rafael Walendorff, Beatriz Olivon — Brasília

Source: Vlor International

https://valorinternational.globo.com/
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Inflation rises above expectations in May driven by services, floods

With greater pressure from food in the South, benchmark index rises 0.46% in comparison to April

12/06/2024

Marcela Rocha — Foto: Ana Paula Paiva/Valor

Marcela Rocha — Foto: Ana Paula Paiva/Valor

The Extended Consumer Price Index (IPCA), Brazil’s official inflation index, interrupted a sequence of more favorable readings and rose again above expectations in May. The indicator brings the first impacts of the floods in Rio Grande do Sul on prices, as well as reinforcing economists’ discomfort with metrics linked to the heated economy.

The IPCA rose from 0.38% in April to 0.46% in May, statistics agency IBGE reported on Tuesday. The result was above the median of 0.41% collected by Valor Data and at the ceiling of forecasts.

In 12 months, the IPCA gained momentum again, from 3.69% to 3.93%, after seven decelerating readings. The rise was already expected, but it was also stronger than the median forecast of 3.87%.

“I didn’t like what I saw and ended up changing the [IPCA] figure for the year,” said Fábio Romão, an economist at LCA Consultores, who adjusted his projection to 3.9% from 3.7% in 2024.

J.P. Morgan also revised its IPCA projections after the last reading, to 4% from 3.7% this year and to 3.7% from 3.5% in 2025. The new figures seem more consistent with “the combination of a tight labor market, rising inflation expectations, a more depreciated exchange rate, and higher food prices,” wrote economist Vinicius Moreira and the bank’s chief economist for Brazil, Cassiana Fernandez, in a report.

Five of the nine classes of expenditure registered a slowdown in inflation between April and May: food and beverages (to 0.62% from 0.70%); household goods (to -0.53% from -0.26%); clothing (to 0.50% from 0.55%); health and personal care (to 0.69% from 1.16%); and communication (to 0.14% from 0.48%). On the other hand, there was an acceleration in housing (to 0.67% from -0.01%); transportation (to 0.44% from 0.14%); personal expenses (to 0.22% from 0.10%); and education (to 0.09% from 0.05%).

With the floods in Rio Grande do Sul, inflation in the Porto Alegre metropolitan region rose to 0.87% in May from 0.64% in April. This was the highest rate among the 10 metropolitan regions and six cities monitored by the IBGE. Remote price collection (by telephone or internet) in the region rose to around 65% from the historical standard of 20% in May, according to André Almeida, the IBGE manager responsible for the IPCA.

The IPCA would have risen less, by 0.42%, if the index had been reweighted without taking the state into account, said XP economist Alexandre Maluf. Mr. Almeida explains that the institute does not estimate the IPCA without the influence of one region or another, unlike the sub-items, for which it calculates the individual influence.

The main contribution (0.57 percentage point) to inflation in Rio Grande do Sul came from food prices at home, especially fresh food, dairy products, poultry, and wheat-related products, according to Mr. Maluf. In the general IPCA, rice rose 1.47% in May, “even faster than indicated by the collections,” said Terra Investimentos in a report. In April, there was a deflation of 1.93%.

The effect of the floods in Rio Grande do Sul has started to show up in inflation measured by the IPCA, especially in foodstuffs, but as the heavy rains affected production chains in general, consequences for industrial goods or services could still arise, said Mr. Almeida.

Although it slowed down compared to April, the food and beverages group exerted the greatest upward influence on the IPCA in May, by 0.13 percentage point, or 28.2% of the increase in the index. “Despite the slowdown, the rate recorded is seasonally high,” said Mr. Romão.

XP’s Mr. Maluf says that, in general terms, the acceleration of the IPCA in May, compared to April, was due to more volatile items, such as airfare (5.91% from -12.09%), some industrial goods (0.29% from 0.21%) and monitored items (defined by contract or public agency), such as energy (0.94% from -0.46%). Also contributing were some services linked to the economic cycle, such as personal services (0.31% from 0.19%) and food away from home (0.50% from 0.39%).

On the other hand, the 0.45% rise in gasoline was lower than expected by economists. Fuels (0.45% from 1.74%) and food at home (0.66% from 0.81%), especially fresh foods (0.99% from 3.66%), moderated the rise in May, compared to April. The problem is that economists were expecting a much smaller increase for food at home—0.37% for Terra and 0.44% for XP, for example. The result was “much higher” and “with generalized upward surprises,” said Mr. Maluf.

Marcela Rocha, chief economist at Principal Claritas, highlights the 0.29% rise in industrial goods, above her expectation of 0.27%. “It’s not such a significant surprise, but in the annualized and seasonally adjusted quarterly moving average, it went from a fall of 0.1% to a rise of 0.4%, which is still super low, but it’s another indicator that the process is no longer so much about favorable news,” she said. The seasonally adjusted annualized three-month moving average is a way of smoothing out monthly movements, but still capturing the trend “at the end.” “Unlike the last two months, these underlying measures performed worse,” said Ms. Rocha.

The greater-than-expected advance in industrial goods, driven by personal hygiene products and new cars, according to Mr. Maluf, contributed to the average of the cores (measures to smooth out volatile items) monitored by the Central Bank rising 0.39% in May, from 0.26% in April, matching MCM Consultores’s expectation and above XP’s forecast (0.34%), for example. All five core inflation rates accelerated compared to April, say Victor Beyruti and Yuri Alves, economists with Guide.

Over 12 months, the average core inflation rate accelerated to 3.55% from 3.53%, according to MCM. “It showed higher inflation again for the first time since June 2022,” Mr. Beyruti and Mr. Alves wrote.

In the three-month moving average, the cores went to 3.2% in May from 3.1% in April, “deviating from the downward trend seen in previous months,” said Mr. Maluf.

Services inflation accelerated to 0.40% in May from 0.05% in April, largely due to the rise in airfares, the first in the year. More relevant to economic analysis, underlying services rose from 0.33% in April to 0.41% in May, matching MCM’s forecast and above the expectations of Principal Claritas (0.32%) and XP (0.36%). The quarterly moving average rose to 5.1% from 4.9%.

“It’s still a level below that of the beginning of the year, when the services figures came in well above expectations and reached 5.6% in March, by this metric. But it shows a qualitative part of inflation that is not as favorable as had been observed and reinforces the Central Bank’s scenario of caution and concern,” said Ms. Rocha.

Labor-intensive services, another measure closely monitored by the Central Bank, slowed to 0.38% in May from 0.53% in April, “undoubtedly the only (albeit important) relief in the opening,” said the Terra team. The news, they say, would be more impressive if it happened in a context of a slowdown in the job market, which is not the case.

“In the midst of a below-equilibrium unemployment rate, accelerating wages, and a stagnating participation rate, we will need more to convince us that there is a new trend underway,” write João Maurício Rosal, Terra’s chief economist, and economists Homero Guizzo and Luís Gustavo Bettoni. On the quarterly moving average, labor-intensive services are at 6%.

The diffusion index, which measures the proportion of items rising in the basket, rose from 57% in April, to 57.3% in May, according to Valor Data. The dispersion “came in flat,” says Mr. Romão of LCA, noting that it not only exceeded that of April but was also higher than that of May last year. The same goes for underlying services. “It’s a nuisance, a red flag,” he said.

For June, inflation forecasts are around 0.3%. But economists expect food prices to rise even more, mainly because of the floods in the South region.

*Por Anaïs Fernandes, Lucianne Carneiro — São Paulo, Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Brazil’s sales to Argentina plummet

Shipments drop over 33% from January to May; Argentina’s share of Brazilian exports hits record low

06/10/2024

Exports to Argentina totaled $5 billion from January to May this year, marking a 33.1% decrease compared to the same period last year. These shipments accounted for just 3.61% of Brazil’s total exports, the smallest share for this period in the historical series of Brazilian exports since 1997. The previous low was in 2020 when Argentina received 3.71% of Brazil’s export value.

In May alone, Brazilian exports to Argentina fell by 42.7%. Shipments amounted to just $1.1 billion, causing Argentina to be surpassed by Spain in the monthly ranking of countries buying the most from Brazil. Brazilian products worth $1.51 billion were sold to Spain in May.

Despite the decline, Argentina remains the third-largest destination for Brazilian exports over the five-month period. Automobiles and vehicle parts are the most exported Brazilian products to Argentina, accounting for 24% of the total shipment value.

Brazilian imports of Argentine products remained relatively stable, totaling $5 billion from January to May, with a slight increase of 1.2% compared to the same period in 2023. Brazil’s trade deficit with Argentina was $60.7 million.

Argentina reported sales of $1.05 billion in May, a 15% increase compared to the same period last year.

*Por Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Proposal for new app regulations threatens Social Security stability

Government experts warn that the plan is actuarially “unsustainable”

06/10/2024

Adroaldo Portal (center) and Luiz Marinho (right) — Foto: Bruno Spada/Câmara dos Deputados

Adroaldo Portal (center) and Luiz Marinho (right) — Foto: Bruno Spada/Câmara dos Deputados

Despite ongoing discussions about the necessity of reforming Social Security to address its escalating deficit, the Lula administration has proposed legislation to regulate “four-wheeled vehicle app drivers” such as Uber, 99, and InDrive, aiming to integrate them into the social security system. However, the cost implications for the public finances remain unclear.

In Congress, government officials conceded that the bill is “actuarially unsustainable” yet proceeded to fast-track its vote. The proposal was advanced without short-term financial projections and, according to responses obtained through the Access to Information Act (LAI), it lacks any long-term impact studies on Social Security.

The reply from the Ministry of Social Security to an LAI inquiry stated, “supplemental legislation PLP No. 12, of 2024, […] aims to foster social security inclusion and enhance working conditions, although the SRGPS [General Social Security System Secretariat] did not conduct the requested studies and technical notes for this analysis.” Similarly, the Ministry of Labor provided technical insights on the draft’s preparation but did not include these essential financial evaluations.

The proposed legislation establishes a formal category for app drivers, setting a minimum hourly wage of R$32.09, along with mandated social security contributions—1.8% from the worker’s income and 5% from the company, and rules for exclusion and suspension of platforms. This inclusion in the National Social Security Institute (INSS) entitles drivers to benefits such as retirement, death or disability pensions, maternity leave, and accident coverage.

Originally, the government introduced the bill without providing financial impact assessments. Subsequent inquiries prompted a response detailing expected annual revenues of R$279 million from these contributions. This projection is based on data from the Brazilian Institute of Geography and Statistics (IBGE), which identified 778,000 individuals in 2022 whose primary occupation involved passenger transportation apps.

However, the government has yet to disclose the potential cost impact of these contributions on Social Security expenditures, which surged by 17.2% last year, totaling R$306 billion. To illustrate, if each of the 778,000 workers were to receive the minimum INSS pension today, the annual cost would amount to R$14.2 billion.

During a public hearing in the Chamber of Deputies in April, Adroaldo Portal, the secretary of the General Social Security System, expressed significant concerns about the proposal’s impact on social security’s sustainability. Despite these concerns, he defended the proposal as a commitment by the current government to ensure minimum rights for app drivers. “By proposing this text, the Brazilian state is addressing a financial need in social security. Essentially, the state is assuming responsibility for a fiscal gap. From an actuarial standpoint, this contribution model is unsustainable,” he remarked.

Rogério Nagamine, an economist at the University of São Paulo’s Economic Research Institute, concurs on the necessity of providing worker protection but emphasizes the importance of sustainability. He points out the lack of supporting studies as “a significant concern.” “Creating a model that jeopardizes the system’s funding is futile. Schemes like rural pensions and the Individual Microentrepreneur (MEI) are already financially strained. Looking ahead, the country faces high expenditures with minimal revenue,” he cautions, suggesting that platform fees should be increased to offset the reduced worker rates.

Despite the subsidy, the government is struggling to pass the proposal. The driver community is split between those advocating for Social Security affiliation to secure enhanced accident protection and those resisting the deduction of contributions from their earnings. The government has withdrawn its request for urgent processing, and the bill has been referred to committees, where drivers are lobbying for contributions to be optional or channeled through the MEI system, which allows for voluntary participation.

The bill’s rapporteur in the Economic Development Committee, Congressman Augusto Coutinho, explained that while making the contribution optional is not feasible, the legislation will accommodate drivers who supplement their income through platform work but already contribute to the INSS through other professional activities. These drivers will not be required to pay additional social security charges for their platform earnings. “From the perspective of Social Security, these workers are already covered,” he stated.

Senator Rogério Marinho, leader of the opposition in the Senate and former special secretary for Social Security under the Bolsonaro administration, criticized the Lula administration for its handling of the bill, accusing it of flouting fiscal responsibility by not providing impact estimates. “Given a government whose social security minister [Carlos Lupi] denies the existence of a social security deficit, this does not come as a surprise,” he remarked.

When approached for comment, the Ministry of Finance deferred inquiries, suggesting that “questions should be directed to the advisors” of the ministries of Social Security and Labor and Employment, who have not yet responded to requests for clarification on the bill’s potential impact on Social Security.

*Por Raphael Di Cunto, Marcelo Ribeiro — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Proposal for new app regulations threatens Social Security stability

Government experts warn that the plan is actuarially “unsustainable”

06/10/2024

Adroaldo Portal (center) and Luiz Marinho (right) — Foto: Bruno Spada/Câmara dos Deputados

Adroaldo Portal (center) and Luiz Marinho (right) — Foto: Bruno Spada/Câmara dos Deputados

Despite ongoing discussions about the necessity of reforming Social Security to address its escalating deficit, the Lula administration has proposed legislation to regulate “four-wheeled vehicle app drivers” such as Uber, 99, and InDrive, aiming to integrate them into the social security system. However, the cost implications for the public finances remain unclear.

In Congress, government officials conceded that the bill is “actuarially unsustainable” yet proceeded to fast-track its vote. The proposal was advanced without short-term financial projections and, according to responses obtained through the Access to Information Act (LAI), it lacks any long-term impact studies on Social Security.

The reply from the Ministry of Social Security to an LAI inquiry stated, “supplemental legislation PLP No. 12, of 2024, […] aims to foster social security inclusion and enhance working conditions, although the SRGPS [General Social Security System Secretariat] did not conduct the requested studies and technical notes for this analysis.” Similarly, the Ministry of Labor provided technical insights on the draft’s preparation but did not include these essential financial evaluations.

The proposed legislation establishes a formal category for app drivers, setting a minimum hourly wage of R$32.09, along with mandated social security contributions—1.8% from the worker’s income and 5% from the company, and rules for exclusion and suspension of platforms. This inclusion in the National Social Security Institute (INSS) entitles drivers to benefits such as retirement, death or disability pensions, maternity leave, and accident coverage.

Originally, the government introduced the bill without providing financial impact assessments. Subsequent inquiries prompted a response detailing expected annual revenues of R$279 million from these contributions. This projection is based on data from the Brazilian Institute of Geography and Statistics (IBGE), which identified 778,000 individuals in 2022 whose primary occupation involved passenger transportation apps.

However, the government has yet to disclose the potential cost impact of these contributions on Social Security expenditures, which surged by 17.2% last year, totaling R$306 billion. To illustrate, if each of the 778,000 workers were to receive the minimum INSS pension today, the annual cost would amount to R$14.2 billion.

During a public hearing in the Chamber of Deputies in April, Adroaldo Portal, the secretary of the General Social Security System, expressed significant concerns about the proposal’s impact on social security’s sustainability. Despite these concerns, he defended the proposal as a commitment by the current government to ensure minimum rights for app drivers. “By proposing this text, the Brazilian state is addressing a financial need in social security. Essentially, the state is assuming responsibility for a fiscal gap. From an actuarial standpoint, this contribution model is unsustainable,” he remarked.

Rogério Nagamine, an economist at the University of São Paulo’s Economic Research Institute, concurs on the necessity of providing worker protection but emphasizes the importance of sustainability. He points out the lack of supporting studies as “a significant concern.” “Creating a model that jeopardizes the system’s funding is futile. Schemes like rural pensions and the Individual Microentrepreneur (MEI) are already financially strained. Looking ahead, the country faces high expenditures with minimal revenue,” he cautions, suggesting that platform fees should be increased to offset the reduced worker rates.

Despite the subsidy, the government is struggling to pass the proposal. The driver community is split between those advocating for Social Security affiliation to secure enhanced accident protection and those resisting the deduction of contributions from their earnings. The government has withdrawn its request for urgent processing, and the bill has been referred to committees, where drivers are lobbying for contributions to be optional or channeled through the MEI system, which allows for voluntary participation.

The bill’s rapporteur in the Economic Development Committee, Congressman Augusto Coutinho, explained that while making the contribution optional is not feasible, the legislation will accommodate drivers who supplement their income through platform work but already contribute to the INSS through other professional activities. These drivers will not be required to pay additional social security charges for their platform earnings. “From the perspective of Social Security, these workers are already covered,” he stated.

Senator Rogério Marinho, leader of the opposition in the Senate and former special secretary for Social Security under the Bolsonaro administration, criticized the Lula administration for its handling of the bill, accusing it of flouting fiscal responsibility by not providing impact estimates. “Given a government whose social security minister [Carlos Lupi] denies the existence of a social security deficit, this does not come as a surprise,” he remarked.

When approached for comment, the Ministry of Finance deferred inquiries, suggesting that “questions should be directed to the advisors” of the ministries of Social Security and Labor and Employment, who have not yet responded to requests for clarification on the bill’s potential impact on Social Security.

Por Raphael Di Cunto, Marcelo Ribeiro — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Real long-term interest remains at 6%, with no signs of declining

NTN-B rate climbs to a 14-month peak amid fiscal deterioration and external pressures

06/10/2024

Fabricio Taschetto — Foto: Rogerio Vieira/Valor

Fabricio Taschetto — Foto: Rogerio Vieira/Valor

Real long-term interest rates have settled at around 6% for the past two months, reaching a 14-month high with no indication of decline. This uptick aligns with a global context of rising interest rates, notably in the United States, and is compounded by a deteriorating perception of risk and growing uncertainties surrounding government accounts.

The fiscal measures adopted by the government have not helped alleviate these rates. Recent taxation changes affecting exclusive or restricted closed-end funds have prompted investors to shift their capital towards tax-exempt securities, thus increasing demand for long-term NTN-Bs (B-Series National Treasury Notes, Brazilian government bonds indexed to the national inflation rate), which are generally less influenced by monetary policy cycles.

Notably, the real interest rates indicated by long-term NTN-Bs starkly contrast with those during the last cycle of the Selic rate (Brazil’s benchmark interest rate) cuts. In 2020, rates for bonds maturing in 2045 fluctuated between 3.5% and 4.5%. Now, those same securities are yielding rates above 6%. This significant shift reflects both the deteriorating state of government accounts over the past four years and the tightening of monetary policy in the United States.

In recent weeks, Brazil’s financial markets have shown increasing independence from U.S. trends. The gap between Brazilian and American real interest rates has widened significantly, suggesting that the market is demanding a higher premium to hold Brazilian bonds.

“Rates are undoubtedly high. From a fiscal standpoint, it appears unsustainable,” observes Michael Kusunoki, the head of fixed income and multimarkets at BNP Paribas Asset Management. He emphasizes that Brazil is at a pivotal moment. “We are facing challenges with the credibility of its fiscal and monetary policies. There is a perception of leniency in both areas, which undermines confidence and necessitates higher risk premiums from the market,” he adds.

Despite a recent easing of U.S. interest rates, this relief has not extended to the Brazilian market. Mr. Kusunoki points out, “The external environment offered some support, but the domestic factors failed to contribute positively. If the international situation were worse, the local scenario could be even more dire.” As of Friday, the rate for the NTN-B bond maturing in May 2045 was recorded at 6.3%.

Real long-term rates are expected to remain elevated for the foreseeable future, influenced by fundamental economic factors, fiscal deterioration, and persistent uncertainties. Renan Rego, chief investment officer at G5 Partners, notes that complexities such as changes in the Central Bank’s leadership and increased government spending contribute to the heightened levels of NTN-B rates. “The market is naturally adjusting, and this adjustment is compounded by technical issues related to investment flows,” he explains.

Mr. Rego observes that NTN-Bs have recently encountered increased competition, leading to reduced demand for these Treasury bonds. Consequently, interest rates on these securities have risen as the market adjusts to make them more appealing to investors.

“The taxation of come-cotas [mandatory withholding of income tax on investments] has significantly impacted closed-end funds, which traditionally held allocations in non-exempt assets like NTN-Bs,” Mr. Rego continues. “As taxation takes effect, investors face a tax burden on accumulated earnings, prompting them to shift their investment strategies towards managed portfolios with exempt securities. This shift has resulted in decreased allocations to NTN-Bs.”

The shift in investment strategies has thinned the pool of buyers for NTN-Bs, particularly at a time when the multimarket sector is experiencing volatility. “Multimarkets have traditionally purchased NTN-Bs when they perceived the pricing to be favorable. However, significant redemptions within the multimarket sector have notably decreased the demand for this asset, contributing to persistently higher rates.”

This perspective is echoed by Fabricio Taschetto, chief investment officer at Ace Capital, who attributes the sustained high levels of real long-term interest rates primarily to technical flow factors. “The government’s decision last year to alter the tax regime for exclusive funds disrupted the decades-long-standing equilibrium in the market for funds and bank bills. The imposition of taxes on the accumulated earnings of closed funds has freed up capital, prompting a shift towards tax-exempt alternatives. This has resulted in a significant migration of investments,” he observes.

Mr. Taschetto also notes that, as NTN-Bs underperform, funds linked to the IMA-B—an index of inflation-linked government bonds—are similarly struggling, leading to a cascade of redemptions affecting these funds as well. “Effectively, there are fewer financiers for public debt. The competition facing NTN-Bs has intensified alongside the surge in demand for exempt commodities, complicating the government’s efforts to finance its debt through these securities as capital flows into exempt investments. This results in a significant fiscal shortfall,” he explains.

Furthermore, Mr. Taschetto points out a unique challenge for NTN-Bs. “When managers of funds holding incentivized bonds receive contributions, they typically purchase IPCA-linked incentivized bonds and must hedge these positions. Generally, this hedge involves selling NTN-Bs short. Thus, capital exits funds that were allocated to NTN-Bs, necessitating their sale and is redirected to other funds where managers are again compelled to sell NTN-Bs. It results in a compounded negative impact on these securities.”

Ace Capital maintains a position in long NTN-Bs, albeit reduced. “Once we grasped the dynamics at play, our appetite for NTN-Bs diminished sharply, leading us to halve our holdings. Given the enduring nature of these technical factors, we plan to maintain our current positions until the market stabilizes. While NTN-Bs priced near 6.2% represent significant value, we do not foresee any immediate catalysts that would dramatically alter their status,” Mr. Taschetto adds.

Miguel Sano, a fixed-income manager at SulAmérica Investimentos, shares a similar pessimistic outlook on long-term real interest rates. “The premiums are steep on the long end, yet we see no catalyst for improvement. For instance, this week saw a significant drop in the yields of 10-year U.S. Treasuries, but neither the local market nor other emerging markets mirrored this movement.”

Mr. Sano explains that real rates have struggled to maintain a downward trend due to liquidity constraints, similar to those affecting other assets. “Purchasing requires available capital. Multimarket funds have experienced significant redemptions over the past eighteen months. Likewise, IMA-B funds and foundations have shown little interest. The market is missing a catalyst… We have long considered equities undervalued, yet there’s been no movement,” he states.

Additionally, Mr. Sano highlights that the attractiveness of NTN-Bs may be dampened by shifts in the neutral interest rate. “If the neutral interest rate is indeed higher, the potential for gains on these bonds diminishes,” he notes.

Mr. Sano also contemplates the likelihood of even higher interest rates. “Back in 2007, when Treasuries were around 4.7%, long-term NTN-Bs were trading at about 7%. We can’t discount the possibility of reaching those levels again if the economic outlook deteriorates,” he explains.

Lucas Queiroz, a fixed income strategist at Itaú BBA, notes a recent trend towards risk reduction in Brazil. “There’s been a notable correlation between interest rates and the exchange rate lately, indicative of classic risk aversion. This trend became particularly evident in April and May, as investors started unwinding their positions,” he observes.

Mr. Queiroz believes that the current interest rates incorporate considerable risk. “The Focus [bulletin] suggests that the market anticipates a real neutral rate of around 5%. If you hold an indexed bond over five years, you’d expect a return of five percent over the Consumer Price Index (IPCA+5%). Currently, NTN-Bs are offering about 6.2%. There’s a premium in play here, which is central to our optimistic outlook for a potential reduction in rates,” he concludes.

Por Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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