Brazil’s economic outperformance does not ease fiscal uncertainty, Fitch says

Credit rating agency says that if fiscal performance is weak during strong economic growth, it may deteriorate further during an unexpected slowdown

09/27/2024

Shelly Shetty — Foto: Claudio Belli/Valor
Shelly Shetty — Photo: Claudio Belli/Valor

Despite Brazil’s surprising economic growth this year, the country’s fiscal performance has been “weaker than anticipated,” maintaining high uncertainty regarding public finances, according to Fitch Ratings. “Economic outperformance may partly result from the loose fiscal position. If fiscal performance is weak when growth is strong, it could deteriorate further in an unexpected slowdown. Uncertain consolidation prospects are therefore a key macroeconomic vulnerability constraining Brazil’s ‘BB’/Stable sovereign rating.”

In a commentary released Thursday, signed by analysts Todd Martinez, Shelly Shetty, and Mark Brown, Fitch noted that the Lula administration is aiming for gradual fiscal consolidation after allowing the deficit to increase last year to accommodate a rise in social spending. However, the analysts pointed out that the government faces challenges both in significantly boosting revenues and in controlling expenditures.

The agency highlighted that the government projects a primary deficit of 0.6% of GDP this year, which would be the maximum allowed under the fiscal framework and zero-deficit target, with a tolerance range of plus or minus 0.25% of GDP. However, this projection does not account for certain expenses, such as those related to flooding in Rio Grande do Sul. Fitch stated that it expects the government to achieve this target, “but it would not be an auspicious start to the consolidation process.”

Fitch analysts emphasized that the main revenue-enhancing measures are either temporary or have uncertain outcomes, specifically mentioning revenues from dispute settlements under the Administrative Council for Economic Defense (CARF). Moreover, they regarded the government’s contemplated measures to offset revenue shortfalls, such as using idle bank deposits and increasing dividends from the Brazilian Development Bank (BNDES), as “improvisational measures.” “Such improvisational measures show a commitment to fiscal targets but do not offer structural fiscal improvements,” the agency said.

Meanwhile, Fitch noted that controlling expenditures has proven to be a “challenging” process, particularly with higher-than-expected pension costs. Additionally, the agency warned that indexing and tying expenditures to specific revenues would “keep pressure on social expenditures in the next few years, requiring a further squeeze of discretionary spending to compensate that could eventually become unviable.” Thus, the agency acknowledged the government’s initiative to combat fraud in social programs but stressed that “political appetite for changes that deliver major relief remains unclear.”

In its updated projections, Fitch now expects a 2.8% growth rate for this year. Regarding public finances, the agency predicts a primary deficit of 1% of GDP in 2025, higher than the previous forecast of 0.7%. “This would exceed the maximum 0.6% allowed by the fiscal rule,” it warned. Furthermore, interest costs are expected to rise due to the Central Bank initiating a mini-cycle of monetary tightening. “This will lift interest payments immediately, given a high share (45%) of floating-rate debt.”

Fitch forecasts that economic growth will slow to 2% starting in 2025. In this context, the agency projects that debt will reach 77.8% of GDP this year and 83.9% of GDP by 2026. “This is faster than previously forecast, widening the gap to the ‘BB’ category median of 55%,” the Fitch analysts remarked.

*By Victor Rezende, Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Companies ramp up share buybacks using cash and credit

With stock prices below “fair” value, firms launched 53 buyback programs from January to August, compared to 35 last year

09/27/2024

Marcelo Bacci — Foto: Gabriel Reis/Valor
Marcelo Bacci — Photo: Gabriel Reis/Valor

Publicly traded companies are capitalizing on a lackluster year in the capital markets by launching share buyback programs, seizing the opportunity to repurchase shares they believe are undervalued. From January to August, 53 buyback programs were announced, surpassing last year’s total of 35.

Some prominent examples include pulp producer Suzano, construction company Moura Dubeux, and logistics warehouse provider Log Commercial Properties, which have all initiated buyback operations since January. These buybacks range from 500,000 to 200 million shares, collectively amounting to 1.2 billion shares—50% more than in 2023.

The reasons behind these buybacks vary. Companies often cancel repurchased shares, which benefits shareholders by dividing capital among fewer outstanding shares. This move signals to the market that the company believes its stock is undervalued, potentially boosting its price. Additionally, repurchased shares can be allocated for executive and employee compensation programs.

Most companies fund these buybacks using their own cash reserves. In this model, they set a share repurchase limit for a specific period, hire brokers to place purchase orders based on market conditions, and settle the payment within days of the transaction.

However, some companies opt for a financial tool called a “total return swap.” This derivative contract allows a company to trade shares for credit at a future interest rate. In this arrangement, the company partners with a bank that agrees to purchase the shares in the market and charges interest for the service. These contracts typically last 12 to 18 months.

Companies and banks sometimes agree to periodically assess the stock’s performance on the exchange. If the stock price drops, the company compensates the bank for the difference. If the stock rises, the bank transfers the gains to the company minus the interest on the transaction. Additionally, any dividends paid during this period are passed from the bank to the company.

Eric Altafim, director of corporate products at Itaú, estimates that the number of these derivative deals could reach around 100 this year. “It’s become quite common for companies to enter into these contracts,” he notes. “Most prefer traditional buyback operations, but some use derivatives.”

According to his calculations, large-scale operations in this category are relatively few. “The volume tends to be smaller, likely in the dozens rather than hundreds,” he explains. “There are probably around ten larger-scale operations.”

For financial institutions, the benefit comes from the interest they receive on these transactions. One of the main advantages for companies is that they can execute buybacks without tapping into their cash reserves. They also gain the flexibility to trade shares without needing to adhere to a blackout period, such as when preparing to release earnings results.

Earlier this month, shopping center operator Iguatemi announced it was “nearing the end of the settlement period for the total return equity swap contracts” under its fourth buyback program, approved in March 2023, and had initiated its fifth program as approved by its board of directors.

According to the company’s statement, contracts for Iguatemi’s fifth buyback program could total up to R$120 million. When contacted, Iguatemi declined to provide further details beyond the information disclosed to the market.

Having just completed one share buyback program, Log Commercial Properties is now launching another. In its first program, announced on July 5, the company repurchased 10% of its 5.5 million shares on the market, investing R$240 million from its own cash reserves.

“We considered the ‘total return swap’ option but ultimately decided against it,” says André Vitória, Log’s chief investor relations officer. He explained that with a “comfortable cash position” of around R$900 million to R$1 billion, there was no need to employ a derivative instrument. “Every operation like this comes with a cost, and we preferred to use our cash rather than leave money on the table for the banks,” he added.

Marcelo Bacci, chairman of the board at the Brazilian Institute of Finance Executives (IBEF), explains, “The logic behind these operations is often driven by companies that don’t have cash on hand but see an opportunity to capitalize on the depreciated value of their shares, creating value for shareholders.” According to Mr. Bacci, using derivatives allows companies to preserve cash for other strategic purposes, such as investments or acquisitions.

At Suzano, where Marcelo Bacci serves as vice president of finance, investor relations, and legal, the company views share buybacks as “a good investment for the company’s resources.” “Our shares have been trading at the same level for two years,” Mr. Bacci explains.

Suzano launched a new buyback program on August 9, and on the same day, its shares rose 1.68% to R$54.50. Earlier this year, Suzano’s stock was priced at R$55.14, but it hit a low of R$46.64 on June 5, marking a 15% decline. Despite having a buyback program in place during this period, the stock has not fully recovered to its early 2024 levels. However, investment analysts still view the stock as undervalued, estimating its fair price within 12 months to be between R$70 and R$80.

Construction company Moura Dubeux, which focuses on middle- and high-income real estate in the Northeast and raised R$1 billion in its 2020 IPO, is also engaging in share buybacks. According to Diogo Barral, chief investor relations officer, the company is now in its third buyback program. It repurchased 10% of the available shares in its first round, followed by 5% in the second program. “Now, with the third program, we’re set to buy back 1% of the shares,” Mr. Barral says.

Of that 1%, 80% to 85% will be allocated to the company’s executive compensation program. The company has yet to decide the fate of shares from previous buybacks, which could either be canceled or used in future rewards programs. “Our shares are trading below their equity value,” Mr. Barral notes. Moura Dubeux is funding the buyback using its own cash reserves. “It’s worth it. Over the past two years, our stock has risen by 120% to 130%,” the executive adds.

*By Nelson Rocco, Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Market expects sharper Selic hikes following Central Bank’s inflation forecast

The report reveals strong economic activity and inflation above target until 2027

09/27/2024

Marcelo Fonseca — Foto: Divulgação
Marcelo Fonseca — Photo: Divulgação

The Central Bank’s inflation projections, which remain above the target throughout the forecast horizon, as highlighted in the Inflation Report released on Thursday, have strengthened expectations of further tightening the Selic rate in the coming months. Financial institutions are now adjusting their forecasts to reflect a higher policy rate.

However, Central Bank President Roberto Campos Neto avoided signaling future moves, emphasizing a “data-dependent” approach. “We need more data and more time to understand how [the cycle] will proceed,” he said.

Since the Central Bank’s Monetary Policy Committee (COPOM) began its rate-hike cycle last week and the minutes released on Tuesday (24) echoed the same hawkish tone, the Inflation Report has been perceived as another firm signal from the monetary authority.

The report shows that inflation projections fail to return to the target in any timeframe. The Central Bank estimates the 2024 IPCA at 4.3%, with inflation at 3.7% in 2025. In the first two quarters of 2026—key periods in the relevant monetary policy horizon—inflation is forecast at 3.5%. Even in the first quarter of 2027, the most distant projection, inflation stands at 3.2%, still above the 3% target pursued by the COPOM.

“The Central Bank anticipates the need for restrictive monetary conditions until at least the end of 2026, and the market’s reference trajectory for the Selic policy rate and the real do not align with inflation projections meeting the 3% target over the next two and a half years,” said Alberto Ramos, head of macroeconomic research for Latin America at Goldman Sachs.

The COPOM revised its output gap projections, a measure of economic slack. The indicator is now estimated at 0.5% for the second and third quarters of 2024, up from 0% to 0.2% in the previous report. For the fourth quarter of 2024, the output gap is projected at 0.3%, down from 0.4%. Looking ahead to the first quarter of 2026, the estimate remains at 0.3%.

The data presented in the report has led many financial institutions to conclude that the Selic rate may need to be higher than the 11.5% projected in the Focus Report to bring inflation back to target. Throughout the day, some institutions, including BTG Pactual, began expecting a Selic rate of 12.5% by the end of the tightening cycle.

BTG now foresees three consecutive hikes of 50 basis points in November, December, and January, followed by a final 25-basis-point increase in March.

In a note from BTG’s chief economist for Brazil, Claudio Ferraz, the bank pointed out that the Inflation Report data sends a “hawkish” message, reinforcing COPOM’s communication since last week’s meeting.

BTG highlighted the “substantial revision” in 2024 economic growth projections and noted that the output gap has moved into positive territory. Despite this, the inflation projection for the second quarter of 2026, just after the COPOM’s relevant monetary policy horizon, still shows a high Extended Consumer Price Index (IPCA) of 3.5%.

“The September communication shows that the COPOM acknowledged stronger-than-expected economic activity and sees a more challenging process in converging inflation to the target, citing upward asymmetry in its balance of risks,” the economists added.

The Buysidebrazil consultancy, founded and led by economist Andrea Damico, mapped a similar trajectory for the Selic rate after the release of the Inflation Report. The firm highlighted that the revision of the output gap adds 35 basis points to inflation by the end of the first quarter of 2026, which falls within the relevant horizon for monetary policy. According to their calculations, this increase is partially offset by the higher interest rate outlook, which reduces the inflation projection by 25 basis points.

Marcelo Fonseca, chief economist at Reag Investimentos, noted that the Inflation Report did not introduce any new information beyond what was outlined in the statement and minutes of the last COPOM meeting. Still, it implicitly suggests that the Central Bank will accelerate the Selic rate hike to 50 basis points starting in November, Mr. Fonseca said.

“The Central Bank is clearly committed to ensuring inflation convergence, and to achieve that, it will need to deliver a longer tightening cycle than most analysts and the market initially anticipated,” explained Mr. Fonseca, whose projection is also for the Selic rate to reach 12.5%, with the cycle concluding in March. Reag revised its forecast shortly after the previous COPOM meeting.

While the COPOM started the current tightening cycle with a more modest 25-basis-point increase, Mr. Fonseca believes this decision was specific to the context of the September meeting.

During a recent interview, Mr. Campos Neto clarified that no discussion took place regarding a more aggressive 50-basis-point hike in week three of September. “Had a group considered a 50-basis-point increase, we would have noted it in the minutes. Since it’s not there, that debate didn’t happen,” Mr. Campos Neto explained.

When asked about the recent IPCA figures, Mr. Campos Neto acknowledged some qualitatively better signs, reiterating his previous comment that short-term inflation could be “a little better.” However, he also expressed concerns over future price dynamics, particularly food prices related to ongoing drought conditions. Brazil’s mid-September inflation index IPCA-15—known as a reliable predictor for official inflation—showed a 0.13% increase in September, significantly below market expectations.

The release of the Inflation Report notably impacted the interest rate market, especially for intermediate-term contracts. By the end of the session, the January 2026 DI rate rose from 12.085% to 12.20%, while the January 2027 DI increased from 12.11% to 12.245%.

Based on the yield curve, projections now indicate that the Selic rate could reach 12.75% by 2025.

Regarding market reactions, Mr. Campos Neto stated it is not the Central Bank’s role to “keep commenting on whether we agree or disagree with the market,” after being questioned about his earlier remarks concerning a potential overreaction in risk premiums.

By Gabriel Roca, Gabriel Caldeira, Anaïs Fernandes, Gabriel Shinohara, Alex Ribeiro, Victor Rezende, Estevão Taiar — São Paulo and Brasília*

Source: Valor International

https://valorinternational.globo.com/
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Central Bank minutes signal faster tightening pace

The market increasingly expects a 50-basis-point hike in the Selic policy rate by November, with forecasts of 12% per year rate or higher gaining traction

09/25/2024

Solange Srour — Foto: Gabriel Reis/Valor
Solange Srour — Foto: Gabriel Reis/Valor

After the Central Bank’s Monetary Policy Committee (COPOM) maintained a notably harsh tone in the minutes of its last meeting, the market has increasingly consolidated the view that accelerating monetary tightening will be necessary starting in November. The likelihood of a 50-basis-point increase in the Selic policy rate at the next decision gained further support, with market participants viewing this scenario as increasingly probable. Meanwhile, the monetary authority emphasized its vigilance regarding the inflationary challenges posed by an economy operating above capacity and current inflation remaining above target.

In the digital options market, the probability of a 25-basis-point hike at the next meeting slipped slightly from 18% to 17%, while the likelihood of a more aggressive 50-basis-point increase rose from 64% to 66%.

J.P. Morgan was among the banks revising its projections, now anticipating a faster tightening ahead. The bank shifted its forecast from three more 25-basis-point increases in the Selic rate to a more accelerated pace in November and December, expecting the tightening cycle to culminate with the basic interest rate at 12% in January. In a report to clients, economists Cassiana Fernandez, Vinicius Moreira, and Mirella Sampaio highlighted concerns over fiscal risks and the relatively muted easing of the exchange rate.

According to the J.P. Morgan economists, recent developments in the fiscal sphere, particularly after the release of the bimonthly revenue and expenditure report, “cast doubt on the credibility of the fiscal framework and its key parameters, namely the spending cap and the primary result target.”

In the minutes, the COPOM dedicated more attention than usual to evaluating the fiscal situation. When outlining factors driving demand, the board pointed to expansionary fiscal policy. Another section emphasized the importance of a credible fiscal policy “based on predictable rules and transparency in its results,” as well as strategies that reinforce the commitment to the fiscal framework, which are crucial for anchoring inflation expectations and reducing risk premiums on assets.

The COPOM also indicated that its baseline scenario includes a gradual slowdown in public spending growth over time. The minutes further emphasized that “synchronous and countercyclical monetary and fiscal policies contribute to ensuring price stability.”

“It’s a tone of concern, and we know this has grown over time, especially with the output gap [a measure of economic slack] being positive. The minutes clarified the COPOM’s positions better,” said Solange Srour, director of macroeconomics for Brazil at UBS Global Wealth Management, highlighting the signals related to the fiscal framework. “It’s clear this will lead to a more restrictive monetary policy,” she adds, noting that the market is already pricing in an accelerated pace of tightening, even entertaining the possibility of a 75-basis-point hike in the Selic rate.

“What remains for the market, then, is the question: if the Central Bank is so ‘hawkish’ on activity, inflation, and the fiscal situation, why only deliver a 25-basis-point hike?” Ms. Srour asks. She suggests that the COPOM’s caution regarding a more gradual start to the tightening cycle “doesn’t seem to stem from domestic conditions” but is likely influenced by external factors, “which is somewhat inconsistent with the statement that there is no mechanical relationship between Fed policy and Brazil’s or between the exchange rate and interest rates.”

An acceleration of the pace is, therefore, necessary. “A 25-basis-point hike is minimal. I think it’s natural for the market to expect three 50-basis-point increases. Whether that will be sufficient depends heavily on external factors. Domestically, I don’t see anything significant that would make the cycle less aggressive,” argues Ms. Srour.

In the view of Porto Asset Management’s chief economist, Felipe Sichel, the minutes indicate that the COPOM’s gradualism was limited to the beginning of the cycle. He believes the restrained start of the Selic rate hike aligns with the Central Bank’s scenario, which includes robust economic activity, upward inflationary pressure, and the possibility that the neutral interest rate—the rate that neither stimulates nor contracts economic activity—may have risen.

“We started the cycle with gradualism. Our base case currently projects 25-basis-point increases, but it’s clear the COPOM is data-dependent,” Mr. Sichel notes. He adds that the firm’s projection for the Selic rate is under review and that they are waiting for the release of the Inflation Report on Thursday (25) for further clarity.

At Quantitas, chief economist Ivo Chermont now expects three 50-basis-point increases in the basic interest rate, followed by a final 25-basis-point hike in March, bringing the Selic to 12.5%. Previously, the firm had projected the rate to reach 12%.

“Inflation expectations remain a concern because, even after a more ‘hawkish’ COPOM and its strong message of commitment to the target, the Focus report hasn’t improved,“ says Mr. Chermont, referring to the further deterioration in inflation projections released on Monday (23). “Part of the explanation likely stems from the fiscal situation, which has worsened in recent weeks,” he argues.

The Quantitas economist also highlights that their scenario revision wasn’t based on new data but on the Central Bank’s acknowledgment of a positive output gap and the inflation projection increase for the relevant horizon, from 3.2% to 3.5%.

Canvas Capital’s chief economist, Camila de Faria Lima, expects the Selic rate to reach 12% per year by the end of the cycle in January 2025. According to her, the COPOM will need to accelerate the pace of tightening at its November meeting unless economic activity and inflation cool down quickly.

“Unless we see a significant shift in activity or more positive surprises in the inflation breakdown, I believe the most likely outcome is a move to 50 basis points,” says Ms. Faria Lima. She adds that the minutes reiterated the Central Bank’s “deep concern” in reinforcing its commitment to hitting the inflation target within the relevant monetary policy horizon.

The demand for increased spending and attempts to exclude certain expenses from the fiscal target—such as expanding the gas allowance and combating fires—creates a “sense of lost transparency that is very damaging,” argues the Canvas economist. “The market doesn’t believe the government will pursue a better primary result to stabilize the public debt trajectory,” she said. “It would be beneficial to have clarity and a correction to this narrative.”

Still, she doesn’t foresee the Central Bank accelerating the pace of tightening beyond the 50-basis-point hikes she has projected, which the market has already priced in.

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

Souce: Valor International

https://valorinternational.globo.com/
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Arbitrators exit Eldorado case, citing threats from J&F

The Batista brothers’ holding company and partner Paper Excellence have been in conflict in various courts since 2018

09/24/2024

Control of the pulp producer Eldorado, which has a plant in Três Lagoas, is at the center of a R$15 billion dispute that has lasted more than six years — Foto: Anna Carolina Negri/Valor
Control of the pulp producer Eldorado, which has a plant in Três Lagoas, is at the center of a R$15 billion dispute that has lasted more than six years — Foto: Anna Carolina Negri/Valor

The president of the arbitration tribunal overseeing the dispute between J&F Investimentos and Paper Excellence over control of the pulp producer Eldorado, along with another arbitrator, resigned on Monday (23). According to letters reviewed by Valor, Juan Fernández-Armesto, who chaired the arbitration, and Paulo Mota Pinto stated that their decision was prompted by “direct threats” from the Batista family’s holding company, which owns meat producer JBS. The news was initially reported by columnist Malu Gaspar in the newspaper “O Globo.”

J&F did not respond to requests for comment.

“Given the direct threat against me, I no longer feel capable of making the decisions I believe to be just and in accordance with the law. Therefore, I am resigning,” Mr. Armesto stated in a document dated September 23.

These resignations are not the first in the Eldorado case and come amid new developments in a battle that has been ongoing for over six years. The latest issue revolves around a case in the Federal Regional Court of the 4th Region (TRF-4), which suspended the transfer of Eldorado shares to Paper more than a year ago.

While J&F claims that one of TRF-4’s decisions had already suspended the arbitration itself, Paper and the arbitration tribunal argue that only the transfer of controlling shares was suspended, along with the activities of the coordinating body established to balance decisions made at Eldorado. This is because Paper, which owns 49.41% of the pulp producer, has a minority stake on the board.

As a result, people familiar with the dispute said J&F had been asserting that the arbitration was violating a court ruling, risking legal penalties.

This clash of narratives was reflected in Itaú’s decision to withdraw from the dispute. The bank was the custodian of Paper’s funds for purchasing the shares of Eldorado still held by J&F, as well as the share book deposited in court by arbitration order. Itaú had sought clarification on the need to return the share book but ultimately ended the contract.

The partners were then given 60 days to find a new custodian, but no financial institution accepted the role. This deadline expired on September 16, and Itaú returned the share book to the company. According to people interviewed by Valor, J&F had sent notifications to these banks, indicating that acting as a depositary would constitute a breach of court ruling and a violation of the rights of both the holding and Eldorado.

Last week, the vice president of TRF-4, Judge João Batista Pinto Oliveira, ordered the suspension of the arbitration itself after a challenge from J&F. The president of the arbitration tribunal acknowledged this recent decision.

Judge Armesto said that the arbitration had always complied with judicial decisions, including those from TRF-4. For this reason, on September 20, he declared the arbitration suspended, following the second-instance judge’s position.

“While it is true that since the issuance of the partial ruling, J&F has adopted a confrontational approach with the Tribunal, this is the first time it has made such a brutal and ‘ad hominem’ threat, implying that I, as president, would be guilty of possible crimes of ‘malfeasance,’ ‘disobedience,’ or ‘abuse of authority,’” M. Armesto wrote.

Judge Mota Pinto, who joined the arbitration after Anderson Schreiber’s resignation—following accusations from J&F of omitting information that could indicate a conflict of interest—stated in his letter that the holding’s threats were directed not only at the presidency but at the entire tribunal.

“There are limits to the viability of establishing arbitration, which in this case have been largely exceeded concerning the president of the Arbitration Tribunal, regardless of the respect always due, asserted and practiced regarding the (better or worse) decisions of state courts,” he wrote.

“In any case, the threats directed at the Tribunal, along with the profound respect and full solidarity owed to the president…prevent me from continuing to serve as an arbitrator in this proceeding,” he added.

In a statement, Paper Excellence described the latest chapter in the dispute as “regrettable” and accused its partner of once again resorting to “criminal threats against some of the most renowned arbitrators worldwide, forcing their resignation.”

“This only confirms that J&F disregards contracts and the decisions against it, acting without the necessary seriousness and ethics in its business relationships,” it added, reiterating accusations that its partner uses “deceptive and dilatory procedural tactics to delay its inevitable defeat.”

J&F and Paper have been engaged in legal disputes across various courts since mid-2018, just before the Batista holding company annulled the purchase and sale contract for Eldorado, which was signed in September 2017. While Paper has won arbitration against its partner, it has yet to gain control of the pulp producer.

J&F is attempting to annul the arbitration ruling in a case currently proceeding in São Paulo’s judiciary. Furthermore, a TRF-4 decision has blocked the transfer of controlling shares based on legislation limiting land purchases by foreigners in the country for over a year.

*Por Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Market distrust of fiscal policy grows as interest rate futures hit yearly high

Rates surpass 12% after disappointing report, impacting exchange rate and stock market

09/24/2024

Maurício Bernardo — Foto: Rogerio Vieira/Valor
Maurício Bernardo — Foto: Rogerio Vieira/Valor

The market once again voiced concern over the state of government accounts, leading to the third consecutive session of pressure on futures rates, which reached their highest levels of the year and settled above 12%. Investors were disappointed by Friday’s release of the bimonthly revenue and expenditure report, which revealed a reduction in the previously announced R$15 billion spending freeze from July. With the perception of a less stringent fiscal policy, risk premiums surged, impacting future interest rates and the foreign exchange and stock markets.

During Friday’s session, rising risk aversion caused significant market stress, which only deepened on Monday. Brazil’s interbank benchmark rate, known as CDI, for January 2029 surged from 12.31% to 12.475%, hitting a session high of 12.575%. On the foreign exchange front, the FX rate neared R$5.60 per dollar but closed at R$5.5344, up 0.25%, while the benchmark stock index, Ibovespa, dropped 0.38% to 130,568 points.

“The reduction in fiscal efforts, announced earlier, sends a negative signal, especially in light of the growing primary deficit,” says Roberto Secemski, chief economist for Brazil at Barclays. “It suggests the government’s tendency to spend up to the maximum limit allowed by the fiscal framework, despite the pressing need for structural, long-term spending adjustments.”

According to Mr. Secemski, the current skepticism in the domestic market stems less from concerns about compliance with the fiscal framework this year and more from a broader lack of confidence in addressing “underlying vulnerabilities” and the “perception of weak commitment to the effective stabilization of public debt.”

This view aligns with that of Luiz Alberto Basqueira, partner and head of fixed income at Ace Capital, who believes that the primary factor behind the market’s recent downturn is a growing “distrust of fiscal policy.” “The market has been skeptical of fiscal policy for some time, but recent small measures and government announcements have accumulated, reminding investors of the persistent challenges with government accounts,” Mr. Basqueira notes.

He points to the Supreme Court’s authorization of additional extraordinary credits, last week’s income and expenditure report, and the announcement of the gas voucher program, which, while likely to be altered by the government, “has already left a scar.”

“This is all unfolding against a very unfavorable backdrop, with increased market concern over the debt-to-GDP ratio. The market is troubled by two things: the perception that the government is not committed to delivering the surplus needed to stabilize the debt and the fact that while the current target can be met, it would be achieved mainly through revenue-side measures, many of which are ‘one-offs.’ The market views this as a low-quality adjustment,” says Mr. Basqueira.

Compounding the negative fiscal outlook is the onset of a monetary tightening cycle, with the Central Bank’s recent communication taking a notably hawkish tone. “The high inflation projection in the reference scenario signals to the market that the interest rate path in the COPOM’s model—already factoring in a 100-basis-point rise in the Selic rate—will need to be more aggressive,” Mr. Basqueira adds. It’s no surprise, then, that Ace Capital has maintained its “long” positions on rising interest rates across the curve.

Both short- and long-term interest rates have been climbing steadily, reflecting the market’s expectation of a more aggressive tightening cycle. The Focus Bulletin, released on Monday, now projects a Selic policy rate of 11.75% per year at the end of January, while the market is already pricing in a rate of 12.75% by mid-next year.

Despite this surge in interest rates, the Brazilian real has not found support. Although the currency gained on Thursday, it has been heavily penalized in recent sessions due to rising risk perceptions.

“The fiscal issue remains the ‘Gordian knot’—the country’s unsolvable problem,” said Andrei Basilio, head of foreign exchange at XP Treasury. “The government missed a key opportunity to show it is addressing fiscal concerns seriously, not just in the short or medium term, but structurally.”

Mr. Basilio emphasizes that it’s not just the numbers in the report that matter, but the lost opportunity. “The Central Bank is clearly grappling with stronger economic growth, which pressures inflation and leads to rate hikes. We’re also seeing improved tax revenues driven by expansionary fiscal policy. This should have been the time to build a fiscal cushion, not the opposite.”

If there are no further negative surprises on the fiscal front and the government delivers on its medium-term promises, the real remains a solid bet, according to Mr. Basilio. “But right now, there’s a bitter aftertaste due to the bimonthly report, as reflected in the yield curve.”

In this context, Maurício Bernardo, fixed-income manager at Vinland Capital, finds the rise in market premiums “reasonable,” given the disappointment with the income and expenditure report.

He notes that the yield curve was already under pressure due to expectations of a higher Selic rate. Now, concerns about fiscal policy have reignited uncertainty, prompting investors to question whether an even larger rate hike, beyond the anticipated 50 basis points in November, might be necessary.

“The risk premium weighs on the exchange rate and fuels market speculation about whether faster monetary tightening might be required. If more tightening is necessary, why not act sooner? The market is factoring that in,” says Mr. Bernardo. Last week, the digital options market for the next Monetary Policy Committee (COPOM) meeting in November briefly priced in a minority chance of a 75 basis-point hike.

In Mr. Bernardo’s view, the market still has room to price in additional risk premiums on the yield curve, driven by expectations that interest rates may need to rise further or concerns over fiscal risks. “If we don’t see positive developments on the fiscal front or more favorable inflation and activity data, it’s reasonable for the market to continue pricing a premium above 250 bp,” he says, referring to the Selic rate the market currently projects for the end of the tightening cycle.

ASA’s head of multimarket, Filippe Santa Fé, shares a similar perspective, calling the recent behavior in the interest rate market “natural.” “He adds, “I don’t think it’s a matter of positioning or that the movement is exaggerated at this point. Perhaps the speed of the adjustment has attracted attention, but we’re clearly not at any extreme in pricing.”

*Por Gabriel Caldeira, Arthur Cagliari, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Environmental ambiguity likely to draw criticism for Lula in New York

President Lula is expected to address the climate crisis, conflicts, and global financial reforms in his speech at the UN General Assembly

09/24/2024

President Lula in New York with European Commission President Ursula von der Leyen — Foto: Ricardo Stuckert/PR
President Lula in New York with European Commission President Ursula von der Leyen — Foto: Ricardo Stuckert/PR

The climate crisis, conflicts in Europe and the Middle East, and the urgent need for reforms in multilateral mechanisms will be at the center of President Lula’s speech this Tuesday at the United Nations headquarters in New York. However, the ambiguity in his environmental discourse—balancing Brazil’s desire to lead on green issues while simultaneously pursuing the exploitation of the last drop of oil—will not escape the scrutiny of more critical analysts.

As is customary, Mr. Lula will be the first leader to speak right after the secretary-general of the United Nations, António Guterres, and the president of the 79th United Nations General Assembly, Philémon Yang.

Climate, wars, and UN and multilateral reforms are “inescapable topics,” a government official told Valor. Brazil is experiencing unprecedented droughts and wildfires across the country. In May, the state of Rio Grande do Sul endured the devastation of severe flooding.

Considering the extreme climate impacts on Brazil, Mr. Lula is expected to call out industrialized nations for their role in the global crisis, emphasizing the delay in fulfilling the promise to allocate $100 billion annually to developing nations starting in 2020. This target was only met in 2022, two years later, with nearly 70% of the total coming in the form of loans.

On Monday, President Lula held three bilateral meetings—with German Chancellor Olaf Scholz, European Commission President Ursula von der Leyen, and Haitian Prime Minister Garry Conille.

With Germany, he continued discussions from last November in Berlin regarding cooperation on renewable energy and hydrogen. With Ursula von der Leyen, Mr. Lula discussed advancing the conclusion of the agreement between the European Union and Mercosur. With Garry Conille, the Brazilian president committed to helping Haiti and mobilizing other powers to do the same.

The most uncomfortable situation for Mr. Lula so far in New York was a meeting kept off the official agenda—a one-hour session with the global CEO of the British oil company Shell, Wael Sawan, and the president of Shell Brasil, Cristiano Pinto da Costa.

As reported by BBC Brasil, the meeting took place Monday morning at the residence of Brazil’s permanent representative to the UN, Ambassador Sérgio França Danese, where Mr. Lula and First Lady Rosângela da Silva are staying. Presidential aides told the BBC they had been instructed not to disclose the meeting.

Mr. Da Costa told Valor earlier this month that Shell is considering exploring oil areas on the Equatorial Margin, particularly in the basin at the mouth of the Amazon River, should the government decide to move forward in the region stretching from Amapá to Rio Grande do Norte.

Another important event on President Lula’s agenda this Tuesday at the United Nations will be a conference co-organized by the Brazilian president and Spanish Prime Minister Pedro Sánchez. “It will not be a gathering of left-wing leaders but a defense of democracy and a stand against extremism,” a government official said.

Leaders such as Justin Trudeau (Canada), Gabriel Boric (Barbados), Gustavo Petro (Colombia), Emmanuel Macron (France), and Charles Michel (President of the European Council) are expected to attend. However, the U.S. will likely send a lower-ranking official, Deputy Secretary of State Kurt Campbell, as reported by Folha de S.Paulo.

The meeting, titled “In Defense of Democracy: Combating Extremism,” is a key item on the Brazilian president’s agenda in New York. Mr. Lula reportedly invited Joe Biden in a phone call back in July.

On Monday night, there was some tension between President Lula and Mr. Biden’s security team at an event hosted by former U.S. President Bill Clinton’s foundation. Mr. Biden had confirmed his attendance at the last minute, leading to heightened security measures, including the arrival of U.S. Secret Service agents. When the Brazilian delegation arrived, some members were denied entry. Protocols were broken, with demands to search ministers and ambassadors. President Lula, reportedly irritated, canceled his participation.

President Lula then attended a Bill and Melinda Gates Foundation event, where he participated in a talk show-style discussion with Bill Gates and received an award for his fight against poverty and hunger.

Mr. Lula was sharply critical of global wealth concentration during his remarks, highlighting the poor’s lack of access to decision-making platforms. “It’s not acceptable that a single individual has more money than Brazil, with its 200 million inhabitants.”

In a highly critical tone, Mr. Lula pointed to the ineffectiveness of the UN’s decisions, continuing the theme of his Sunday speech in New York.

“The world is ungoverned, no one respects anyone. The UN had 51 member countries at its founding in 1945, now there are 193. More than 140 didn’t participate in the creation of the UN. It had the strength to create the State of Israel, but the UN doesn’t have the courage to create the State of Palestine,” he said, earning immediate applause from the hundreds of people in the auditorium.

He continued by stating that current geopolitical conflicts, such as Russia’s war against Ukraine and Israel’s occupation of Gaza, could have been avoided “if the UN fulfilled its role as a global power.”

One of Mr. Lula’s final events in New York before returning to Brazil will take place on Wednesday, when he will open the second meeting of G20 foreign ministers at the UN headquarters. For the first time in history, the world’s largest economies will jointly call for reforms to the multilateral system.

*Por Daniela Chiaretti, Naiara Bertão — New York

Source: Valor International

https://valorinternational.globo.com/
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Brazil reinforces commitment to sustainability

First Lady Rosângela da Silva says Brazil experienced setbacks in public policies

09/20/2024

Speaking at the SDGs in Brazil, an event held by the UN Global Compact Brazil on Thursday (19), in New York, Ambassador Sérgio Danese emphasized the importance of sustainable development as one of the fundamental pillars of international politics. He highlighted the importance of the 2030 Agenda and the Sustainable Development Goals (SDGs) as a crucial achievement in Brazil’s advocacy for multilateralism and global cooperation.

According to the ambassador, Brazil has been a historic advocate of development as one of the three fundamental pillars of the United Nations, alongside peace and security. “Brazil is seeking to convey the message of the importance of sustainable development as one of the pillars of global politics,” he affirmed.

During the event, Mr. Danese emphasized that Brazil is launching the Global Alliance against Hunger and Poverty, within the G20. The proposal aims to create international synergies to combat poverty, including the creation of a database of social policies and promote an exchange of knowledge and strengthening of instruments to combat poverty on the global stage.

The ambassador also highlighted Brazil’s advances in social policies, citing the latest UN State of Food Security (SOFI 2024), released in July. “The UN report shows that severe food insecurity fell by 85% in 2023 when 14.7 million people were spared from going hungry in the country,” he said.

Despite the advances, the ambassador warned of the challenges still faced by Brazil in the environmental sphere. He mentioned the recent flood disasters in Rio Grande do Sul and the fires currently destroying parts of the national territory as some signs of the urgency of stronger actions to mitigate climate change.

At the event, First Lady Rosângela da Silva said the country experienced “setbacks” in recent public policies and cited COP30, which will take place in Belém in 2025, as a crucial opportunity to advance global climate negotiations. She emphasized the importance of the conference in addressing environmental challenges, especially in the Amazon rainforest, and restoring Brazil’s leading role in the fight against climate change.

Ms. Silva cited the crucial role of the next Climate Conference (COP30) in Belém in advancing global climate negotiations. According to her, when the 2030 Agenda was launched, in 2015, UN countries were committed to maintaining progress on the Millennium Development Goals. However, Brazil went through a period of dismantling and setbacks, which negatively impacted its ability to achieve the established goals.

*Por Robson Rodrigues — New York

Source: Valor International

https://valorinternational.globo.com/
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Central Bank pushes futures interest rates higher, boosts real’s value

The hawkish stance taken by COPOM on Wednesday strengthens the Brazilian currency, which stood out during the session; Ibovespa closes lower

09/20/2024

Luís Garcia — Foto: Rogerio Vieira/Valor
Luís Garcia — Foto: Rogerio Vieira/Valor

The more hawkish tone adopted by the Central Bank’s Monetary Policy Committee (COPOM) triggered a significant adjustment in domestic assets during Thursday’s session. Markets have now fully embraced the likelihood of an accelerated Selic policy interest rate hike from November, leading to a surge in future interest rates and a drop in Brazil’s benchmark stock index (Ibovespa). However, the Brazilian real gained from the widening interest rate differential, driving the foreign exchange rate to its seventh consecutive decline and marking its lowest level in a month.

In the digital options market for the November COPOM meeting, the probability of a 50-basis-point rate hike reached 65% by the end of the day, compared to a 22% chance of a 25-basis-point increase and a 9% likelihood of a more aggressive 75-basis-point hike.

“The odds of a 50-bp increase at the next meeting have risen,” noted Evandro Buccini, manager at Rio Bravo Investimentos, though he expressed surprise that the real’s appreciation wasn’t as pronounced as the upward shifts in the futures yield curve throughout the day.

The exchange rate finished the session down 0.70%, at R$5.4241. Meanwhile, Brazil’s interbank benchmark rate, known as CDI, for January 2026 surged from 11.77% to 12.05%, with the curve now pricing in a Selic rate of approximately 12.5% by the end of the tightening cycle.

Market participants highlighted several key points from the COPOM statement, including a positive outlook on the output gap (the measure of economic slack), an upward revision of inflation projections over the relevant horizon, and concerns about unanchored inflation expectations—all of which could justify a more forceful start to the tightening cycle.

Contrary to the prevailing market view, Camilo Cavalcanti, partner and manager at Oby Capital, sees the COPOM’s announcement as balanced and does not signal a more aggressive pace of interest rate hikes. “We interpreted the statement as more neutral. The language seemed more like a defense of the initial interest rate adjustment rather than guidance suggesting an accelerated pace,” Mr. Cavalcanti explains. He expects more clarity when the minutes are released. Mr. Cavalcanti also noted that the Central Bank’s acknowledgment of the output gap as positive was more of a formality, aligning with market expectations.

In his assessment, the market’s reaction during the session was “exaggerated,” and he predicts the COPOM will likely maintain a more gradual pace of 25-bp Selic rate increases per meeting until January 2025, with the rate ending at 11.5%. He pointed to the fact that the projection horizon will soon include the second quarter of 2026, which may show more moderate inflation and reduce the need for aggressive hikes.

As traders await the COPOM’s minutes to refine their Selic rate forecasts, which should be released in the next week, the real strengthened, ranking among the day’s top-performing currencies due to the rising interest rate differential, which favors bets on its appreciation.

Jorge Dib, manager at Galapagos Capital, sees a positive outlook for the real if U.S. data holds no surprises. “Among Brazilian assets, what we like today is the real,” he said, revealing a long position on the Brazilian currency against the dollar. He emphasized the real’s liquidity among emerging market currencies, making it an attractive option for quick inflows and outflows.

Mr. Dib believes the U.S. yield curve has already priced in a substantial rate cut. “At some point, the market may even push up long-term interest rates in the U.S., which could slow the demand for the Brazilian currency,” he notes, though he still expects the real to appreciate in the short term. For Mr. Dib, the current environment suggests a stronger real, not just against the dollar, but also compared to other currencies like the Mexican peso.

According to Luís Garcia, CIO of SulAmérica Investimentos, the growth differential between Brazil and the U.S. is more significant for the real’s performance than the widening interest rate gap between the two countries. “Both the U.S. Federal Reserve and the Central Bank are making monetary policy decisions based primarily on the overall health of the economy, with less focus on short-term inflation changes,” he explains. “This sends a strong signal that the relative performance of the two economies is diverging.”

Mr. Garcia notes that while Brazil’s economy is delivering positive growth surprises, the U.S. economy is starting to show signs of slowing. “This growth differential is more impactful than the interest rate spread alone.”

“Previously, the interest rate differential was a factor, but now, with the added growth differential, the outlook for the real is even more favorable,” says Mr. Garcia. He sees potential for further appreciation of the Brazilian currency. Because of this combination’s promising potential, the executive believes there is room for further appreciation of the real. “Of course, we’ve gained some support from the international market, but the fiscal debate remains critical,” he adds.

The surge in future interest rates directly impacted the Ibovespa, which closed down 0.47% at 133,123 points, marking an intraday low in a session marked by volatility. “With the COPOM’s tougher stance, investors are likely repricing the entire curve, which isn’t beneficial for the stock market in the short term,” says Alexandre Póvoa, strategist at Meta Asset Management. However, he believes that rising Brazilian interest rates, backed by credibility coupled with a decline in U.S. rates, could ultimately favor the Ibovespa in the long term.

Among the blue chips, Vale’s common shares were a highlight, gaining 1.20% to R$58.23, driven by an increase in iron ore prices.

Mr. Buccini, from Rio Bravo, notes that he sees value in holding a long position in Vale, citing iron ore’s solid but volatile performance. He acknowledges that Vale’s stock has suffered due to weaker growth prospects in China but argues that the slowdown has likely reached its peak, leaving room for potential recovery in the raw material’s performance.

*Por Arthur Cagliari, Bruna Furlani, Gabriel Caldeira, Maria Fernanda Salinet — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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