In some areas, weather conditions may impact crop yields
01/15/2025
Prolonged dry spells in key soybean producing regions of southern Brazil are raising concerns among farmers about the performance of the 2024/25 harvest. While crops in Paraná are in their developmental stages, planting in Rio Grande do Sul is nearing completion amid rising temperatures that could surpass 40°C in the coming days.
In a crop monitoring bulletin released earlier this week, Brazil’s National Supply Company (CONAB) reported that soybean fields in Rio Grande do Sul are already feeling the impact of a drought lasting up to 40 days in some areas. In Paraná, dry conditions are affecting crops in their reproductive phase. Nevertheless, CONAB has so far maintained its forecast for the country’s total soybean harvest.
In Campo Mourão, northwest of Paraná state, farmer Wallace Lopes told Valor that his soybean fields have seen no rain for 20 days. “My average yield is 90 sacks per hectare, but I’m forecasting just 60 sacks this season. If it doesn’t rain soon, I think yields will drop to 30 sacks. The plants are stunted due to the heat and will likely lose productivity,” he said.
In Cascavel, western Paraná, where soybean cultivation covers nearly 100,000 hectares, the drought has already taken a toll, according to Paulo Cezar Vallini, director of the local rural union. He estimates a 10% drop in the harvest, which could reach up to 15% in some areas of the municipality. Initial projections put average productivity at 63 sacks per hectare.
Further west in Palotina, the lack of rain is also expected to impact yields, said Edmilson Zabott, president of the city’s rural union. “We’re facing a worrying situation with soybean crops. Farmers here initially expected yields of 70 to 75 sacks per hectare, but now we’ve adjusted that down to 50 to 55 sacks,” Mr. Zabott said.
He noted that rainfall stopped just before Christmas, a critical period for soybean crops requiring water for grain filling. “We didn’t get the regular rainfall we needed, and the heat has been unusually intense,” he said.
Despite farmers’ concerns, Carlos Hugo Godinho, an agronomist with Paraná’s Department of Rural Economics (DERAL), said it is still too early to assess potential losses in the state’s soybean production.
“The current conditions are considered very good overall. The drought’s effects don’t seem alarming for now, as crop maturation is generally uniform,” Mr. Godinho said. However, he acknowledged the situation could change, as widespread rainfall in the state is not expected until January 17.
The northern and western regions of Paraná, where temperatures are higher and rainfall scarce, remain the most concerning. “We’ll have a clearer picture later this week, and it’s possible the conditions recorded initially could worsen,” Mr. Godinho added.
In Rio Grande do Sul, insufficient soil moisture is delaying soybean planting. Rising temperatures are exacerbating the situation.
In areas such as the Western Border, northwest, and northern regions of the state, the lack of rain has stalled planting, which has reached 98% of the planned area. The state’s Technical Assistance and Rural Extension Company (EMATER/RS) has already noted losses in potential productivity.
“I’ve visited some parts of the state, and losses are evident in microregions, expanding with each rainless day. The combination of dry weather and high temperatures is affecting soil moisture, creating challenges even for irrigated areas,” said Alencar Rugeri, technical director of EMATER/RS.
However, Mr. Rugeri emphasized that these conditions are not uniform across the state. “In the Western border, some fields still show good potential. While some areas haven’t seen rain for 40 days, others received significant rainfall,” he said.
In Dom Pedrito, in the far south of the state, the lack of rain has not yet led to soybean losses, according to José Roberto Pires Weber, president of the local rural union. “We haven’t had rain for over 30 days. This could lead to productivity losses, but it’s premature to say for sure. There’s still time for recovery if it rains soon,” Mr. Weber noted.
Mr. Rugeri added that high temperatures are particularly detrimental to crops in the grain-filling stage, which accounts for 25% of the state’s soybean plantings. The productivity of the remaining 75% is still undetermined.
While weather forecasts predict continued heat, Mr. Rugeri urged caution before concluding whether the state’s projected harvest of 21.65 million tonnes will be achieved.
“We’re at a critical point for crop development. It’s impossible to determine the final size of the harvest now. While the outlook is challenging, there’s still room for improvement,” he said.
*By Paulo Santos e Carolina Mainardes — Campina Grande (PB), Ponta Grossa (PR)
State production contraction in November is the sharpest since june 2023, reports IBGE
01/15/2025
Industrial production in São Paulo declined by 4.7% in November compared to October, marking the most significant monthly drop since June 2023 (-5.4%). This downturn follows an accumulated gain of 3.4% over two consecutive months of growth, according to data from the Regional Monthly Industrial Survey (PIM Regional) by the Brazilian Institute of Geography and Statistics (IBGE).
São Paulo was one of nine locations out of 15 surveyed by IBGE that saw a reduction in industrial production in November. It was also the primary negative influence on the overall result, which fell by 0.6%.
According to IBGE, São Paulo’s results are linked to sectors such as oil products, food, motor vehicles, and chemical products. “These sectors were the main drivers of the state’s industrial dynamics,” says the survey analyst, Bernardo Almeida.
In comparison to November 2023, São Paulo’s industry shrank by 2.7%, while the national average increased by 1.7%. This was the first annual downturn, compared to the same month the previous year, since March 2024.
For the 12 months leading up to November, São Paulo’s industrial sector grew by 3%, matching the overall pace of Brazilian industry. From January to November 2024, São Paulo’s industry rose by 3.4%, slightly above the 3.2% growth of Brazilian industry.
With November’s performance, São Paulo’s industrial production level is 1.3% below its pre-pandemic level in February 2020, while Brazilian industry as a whole is 1.8% above that level.
A report from the Institute for Industrial Development Studies (Iedi) highlights the “industrial slowdown” in São Paulo. “The released data shows that São Paulo, which has the largest and most diverse industrial park in the country, was among the poorest performers.”
Among the nine locations with a drop in production from October to November, Espírito Santo experienced the most significant decline (-7.2%). This marks the second consecutive month of decline, with a cumulative loss of 8.4%, driven by the extractive and metallurgy sectors.
On the positive side, the highlights include increases in Pará (4.4%), Amazonas (2.7%), and Pernambuco (2.6%). In Pará’s industry, this is the second consecutive increase, with a cumulative gain of 12.8%. According to IBGE, this movement is primarily explained by the non-metallic mineral products sector.
Record debt issuance offsets a sluggish year for equity offerings and subdued M&A activity in 2024
01/15/2025
The robust growth in Brazil’s fixed-income market, particularly domestic debt issuances, provided much-needed relief to investment banks operating in the country. The segment accounted for nearly half of their total fees in 2024, marking a record year for corporate debt issuance as investors shifted toward fixed income amid high interest rates.
In contrast, revenue from equity-related activities plummeted again, hitting one of the lowest levels on record. This reflects a prolonged dry spell for equity offerings by Brazilian companies.
Data from consulting firm Dealogic, compiled for Valor, shows that revenue from core investment banking activities—including mergers and acquisitions, equity, fixed income, and syndicated loans—totaled R$4.4 billion in 2024, a 5% decline from an already weak 2023.
Fixed-income deals were the saving grace for investment banks in 2024, generating R$2.1 billion in revenue, the highest level ever for the segment. This marked a 60% increase from 2023, according to Dealogic. The surge was driven by a record R$608.1 billion in local corporate debt issuances between January and December, a 76% increase, according to newly released data from B3. International bond issuances also recovered, further boosting revenues.
Meanwhile, the equity market painted a starkly different picture. The IPO window for new companies on Brazil’s stock exchange has been closed for over three years, with no signs of reopening in 2025. Factors such as the new cycle of monetary tightening and market volatility weigh heavily. Domestically, investor risk aversion has increased following the government’s fiscal package, seen as insufficient. On the international front, uncertainty has grown due to Donald Trump’s return to the U.S. presidency, which has heightened expectations for a slower pace of interest rate cuts by the Federal Reserve.
Revenue from equity offerings, including block trades, totaled R$311.1 million in 2024, a 60% decline from R$829.6 million in 2023. This figure also represents just 7% of the R$4.5 billion generated in 2021, the last boom year for Brazil’s capital markets.
The largest equity offering of 2024—a secondary transaction tied to the privatization of water utility Sabesp—had little impact on bank revenues. Despite its size, the low fees associated with the deal meant minimal earnings for the financial institutions involved.
For 2025, investment bankers expect fixed-income issuance volumes to remain strong but less dynamic. With many companies having already accessed the market in 2024, the pipeline for new deals is not expected to be as robust.
Headwinds
In the M&A space, activity in 2024 showed signs of recovery but remained below historical averages. High interest rates and macroeconomic uncertainties could dampen enthusiasm for new transactions. However, deals involving energy and infrastructure assets stood out as exceptions, driving activity in these sectors.
Revenue from M&A deals totaled $296 million in 2024, a 25% drop compared to 2023. Many announced transactions have yet to be completed—several are still awaiting approval from Brazil’s antitrust regulator, CADE—delaying the recognition of associated revenues.
Large-scale M&A transactions involving foreign buyers and mergers between Brazilian companies seeking synergies and scale helped offset the weak equity market, said Roderick Greenlees, head of Itaú BBA’s global investment banking division.
Mr. Greenlees said Itaú closed 2024 with a strong pipeline, especially in energy, infrastructure, sanitation, retail, and consumer sectors. The bank has also expanded into sports and entertainment, industries gaining traction in global investment banking.
Bruno Amaral, head of M&A at BTG Pactual, described 2024’s transaction volume as “healthy given the circumstances,” with traditional sectors like energy and infrastructure driving activity. “Our pipeline for the year is stronger,” Mr. Amaral noted, though he cautioned that the current environment has extended the deal cycle to 18–24 months.
Fabio Nazari, head of equity at BTG Pactual, expressed optimism that a rally in the Ibovespa stock index to 140,000–145,000 points could unlock some follow-on equity offerings, boosting bank revenues.
Bruno Saraiva, co-head of Bank of America’s investment banking operations in Brazil, highlighted the resilience of the bank’s fixed-income and M&A businesses amid a challenging 2024. He noted that derivatives trading, not included in Dealogic’s data, also played a role in sustaining activity for the U.S. bank’s Brazilian unit.
“There is a lot of dialogue and activity in the M&A space this year,” Mr. Saraiva said. However, market volatility, including exchange rate fluctuations, could affect the timing of deal closures. In the equity market, Mr. Saraiva sees potential for follow-on offerings and block trades but little visibility for IPOs. Given current conditions, he anticipates another challenging year ahead.
For Erasmo Carlos Battistella, advances in public policy in the executive and legislative branches have made this a Brazilian national agenda, bringing together industry, agribusiness, environmental organizations and civil society.
01/13/2025
“The year 2024 marked one of the most important chapters in the history of Brazil’s energy transition,” says Erasmo Carlos Battistella, president of Be8, Brazil’s largest biodiesel producer. He is referring to the sanctioning of the Fuel of the Future program in October, recognized as a landmark for boosting biodiesel, ethanol, and new technological routes such as hydrotreated vegetable oil (HVO), sustainable aviation fuel (SAF), and biomethane.
Meanwhile, the approval of the Energy Transition Acceleration Program (Paten, in the Portuguese acronym); of Mover, aimed at supporting the decarbonization of Brazilian vehicles, technological development, and global competitiveness; of the National Sustainable Aviation Fuel Program (ProBioQAV); and of the Low Carbon Hydrogen Development Program (PHBC, in the Portuguese acronym) make up this backdrop for building clean, sustainable mobility. “Over the last year, we’ve seen a movement that has brought together industry, agribusiness, environmental organizations, and civil society and has been reflected in the unanimous approval of public policies for energy transition projects, which is a real Brazilian national agenda,” said Battistella.
The president of Be8 is also one of the leading characters in the pages of this story, having been involved in developing the biofuels industry for 20 years. “This is a new moment in the Brazilian economy, characterized by strong investments in the industrial park and by adding value to agribusiness, boosting the economy and green employment. The private sector is moving forward to make the energy transition a reality and turn Brazil into an international benchmark,” he says.
Investments
Even before Fuel of the Future was sanctioned, it was already possible to recognize concrete signs of a movement by the productive sector in pursuit of the Brazil’s energy transition. In 2024, the National Bank for Economic and Social Development (BNDES, in the Portuguese acronym) disbursed R$4.2 billion to the ethanol, biodiesel, and biomethane industries until November—the highest figure in the past 13 years. In a technical note, the Empresa de Pesquisa Energética (Energy Research Company or EPE) estimates that over R$1 trillion will be invested by 2034 in various technological routes.
The regulatory frameworks defined in the Fuel of the Future provide legal security and predictability for the production sector and will be the pillar for regaining confidence in the Brazilian energy market. The EPE itself has projected that the biodiesel sector will invest R$14.5 billion over the next ten years.
The decision by the National Energy Policy Council (CNPE, in the Portuguese acronym) to increase the biodiesel mandate from 12% to 14% in March 2024 and to 15% from March 2025 also indicated the resumption of public commitments to the decarbonization process and the goals defined by the Paris Agreement, with a direct impact on the reheating of this industry, which stumbled in previous years with the regression of the blend.
Important launches
Be8 was full of announcements of new developments in 2024, such as investments and product launches marked by innovation. Battistella points out that the company closed the year by announcing the acquisition of Biopar, which will allow it to expand its operations to the North, Northeast, and Midwest regions of Brazil. It also launched a biofuel that replaces 100% of fossil diesel, Be8 BeVant, a technological innovation that allows companies to significantly reduce greenhouse gas (GHG) emissions in their operations in the short term, meeting decarbonization targets.
Other news involved agribusiness. Battistella’s business group inaugurated a sustainable agricultural production model in Passo Fundo (RS), South of Brazil, which integrates high technologies with the exclusive use of biofuels, the Compostela Farm. A partnership with John Deere and SLC Máquinas which allows the field machinery to be fueled exclusively with Be8 BeVant.
At the last meeting of this forum, the Government vice-president and minister of Development, Industry, Trade and Services, Geraldo Alckmin, highlighted Mission 5 of New Industry Brazil (NIB). The plan aims to increase the use of biofuels and electric vehicles in the transportation energy matrix by 27% by 2026 and reach 59% by 2033.
To intensify the technological and sustainable use of Brazilian biodiversity, the growth targets are 10% by 2026 and 30% by 2033. Public and private investments aimed at optimizing energy efficiency will amount to R$ 468.38 billion. Of these funds, R$88.3 billion will come from public credit lines to promote innovation, exports, and productivity projects. So far, R$74.1 billion have already been contracted for 2023 and 2024, while the remaining R$14.2 billion will be available for 2025 and 2026.
Another piece of this roadmap was the Energy Transition Acceleration Program (Paten)—approved in December by the House of Representatives—which created the Green Fund. Managed by the BNDES, the fund will be supplied with tax credits held by companies with the government. The first format allows for tax transactions, i.e. the negotiation of tax debts with the Federal Government with a commitment to invest in sustainable projects, which will receive additional benefits. The other is to use the Green Fund as a guarantee to cover all or part of the financing risk, reducing interest rates and encouraging large-scale sustainability projects.
“Among the many signs pointing to the new year on the horizon in Brazil, the consolidation of the pillars of the energy transition were the most obvious,” explains Battistella. “I believe that we will see a fast response from the productive sector with investments that will boost the sustainable development of the Brazilian economy for the benefit of current and future generations,” he added.
Last year, federal government secured victories in most major cases heard in higher courts
01/13/2025
The federal government won the majority of its tax cases in Brazil’s higher courts in 2024, prevailing in 18 out of 23 significant disputes and avoiding potential losses of billions of reais. In just three cases, the combined impact was R$86.1 billion. However, the Supreme Court is still set to hear 27 additional cases, leaving the National Treasury exposed to a fiscal risk of at least R$698.7 billion.
Among the pending cases, two involve issues stemming from the 2017 STF decision on excluding the ICMS (Tax on the Circulation of Goods and Services) from the calculation base of PIS (Social Integration Program) and COFINS (Contribution for the Financing of Social Security) contributions, often referred to as the “case of the century.” These include the exclusion of ISS from the PIS/COFINS calculation base (Topic 118), where the Supreme Court plenary has already begun deliberations. Based on virtual session votes, a majority appears to favor taxpayers. Another closely watched case concerns the exclusion of PIS and COFINS from their own calculation bases (Topic 1067). Together, these cases carry a fiscal impact of R$101.1 billion.
The most financially significant case under review could cost the government R$325 billion. This dispute revolves around whether a supplementary law is required to levy PIS and COFINS on imports, which is currently done through an ordinary law, Law No. 10,865/2004, passed with a simple majority in Congress (Topic 79).
Another critical case challenges limits on tax deductions for education expenses under the income tax framework (ADI 4927), which could result in a R$115 billion loss for the federal government. Additionally, a case involving mining giant Vale addresses the use of international treaties to avoid double taxation of its foreign subsidiaries, with an estimated impact of R$22 billion.
The Vale case has seen divided opinions among justices, and the trial was paused after a request for review. The matter is scheduled to resume in the STF’s virtual plenary on February 7 (RE 870214). It remains a top priority for the Office of the Attorney General for the National Treasury (PGFN). Anelize Almeida, head of the PGFN, has personally met with all STF justices to discuss this case.
Another key issue involves the applicability of PIS and Cofins on financial revenues from technical reserves of insurance companies (Topic 1309). In June, Justice Dias Toffoli issued a preliminary injunction suspending the charges, a decision upheld in September by the Supreme Court’s First Panel. The court also recognized the general repercussion of the issue, with a potential fiscal impact of R$5.28 billion over five years. “This case currently has an unfavorable decision for the Treasury,” said Ms. Almeida, who plans to restructure her STF team this year.
Euclides Sigoli Junior has been appointed as the new general coordinator of the legal team, bringing experience from Brazil’s First Region. According to Ms. Almeida, Mr. Sigoli’s primary goals include integrating the STF team with other legal divisions and improving data transparency regarding cases and success probabilities. “I want to know how each Supreme Court justice votes based on a jurimetric analysis of prior decisions. For instance, in a specific case, what are the chances of us [PGFN] winning?” Ms. Almeida explained.
Most of the pending cases do not have fiscal impact estimates outlined in the 2025 Budget Guidelines Law (LDO). Data on the disputes were compiled by Machado Associados law firm at Valor’s request.
Key 2024 decisions
In 2024, taxpayers scored a R$6 billion victory in the STF, where justices ruled against taxing retirement and pension income sent to residents abroad (Topic 1174). Taxpayers also celebrated the reduction of penalties in administrative tax cases. The cap for qualified fines was lowered from 150% to 100%, with the higher cap now applicable only for repeat offenses.
For the government, the most significant win of 2024 involved the Special Regime of Reintegration of Tax Values for Exporting Companies (Reintegra), with a fiscal risk of R$49.9 billion. In October, the STF upheld the executive branch’s authority to freely adjust tax rebate rates under the program, which reimburses exporters for a portion of the tax burden unclaimed throughout the production chain (ADI 6040).
Another notable decision upheld the collection of PIS and COFINS on revenue from leasing movable and immovable property. Taxpayers had argued that federal taxes should not apply, as such leases do not constitute the sale of goods or the provision of services. The STF rejected this argument, preventing losses of R$36.2 billion for the federal government (Topics 630 and 684).
Most recently, the PGFN won a narrow 6-5 decision supporting the collection of social contributions on income earned from financial investments by closed supplementary pension funds (EFPCs) (Topic 1280).
Tax experts believe that some of the most significant cases in 2024 were decided by the Superior Court of Justice (STJ). These rulings were impactful due to their binding nature as repetitive appeals, establishing precedents for the judiciary, and for breaking with prior jurisprudence. One of the most critical decisions was the removal of limits on contributions paid by companies to the S System—entities like Sesc, Senai, Sesi, and Senac (Topic 1079).
The STJ’s First Section ruled that the calculation base for “third-party contributions” or “parafiscal contributions” should not be capped at 20 times the minimum wage (currently R$28,200). As a result, the tax burden, which can reach 5.8%, will now apply to companies’ entire payroll. Had the government lost the case, the estimated fiscal impact would have been R$11.7 billion. However, the case is still pending review by the Supreme Court.
For lawyer Renato Silveira of Machado Associados, the ruling has created uncertainty as the STJ excluded other contributions, such as those for INCRA (National Institute for Colonization and Agrarian Reform), from its scope. “We’ve seen varying decisions. Some courts apply the ruling consistently, while others deny similar modulation for other contributions. This inconsistency has caused significant legal uncertainty,” he said, adding that suspending the cases to resolve the issue would be a better solution.
For taxpayers, a notable victory came with the decision against taxing stock option plans (REsp 2069644 and REsp 2074564), said Ariane Guimarães, a lawyer at Mattos Filho. Another significant case involved the exclusion of ICMS-ST (substituted ICMS) from the PIS and COFINS calculation base, with an opinion and modulation issued in 2024 (REsp 1896678 and REsp 1958265). “It was determined that there is no need to demonstrate the economic impact on the substituted party, as it is already implied,” she said. “This ruling removed an obstacle that could have disadvantaged taxpayers under Article 166.”
She also highlighted the STF’s ruling on appeals regarding the automatic reversal of final tax decisions (“res judicata”) in cases where constitutional interpretations had changed (Topics 881 and 885). The STF accepted one of the companies’ arguments to remove penalties. Additionally, she pointed to a landmark decision on social security taxation of the one-third vacation bonus (Topic 985). “The vacation bonus case was one of the most emblematic, as the STF modulated its effects in favor of taxpayers due to the change in jurisprudence, considering that the STJ had ruled differently back in 2010,” she said.
Upcoming cases
Looking ahead to 2025, one of the most anticipated cases in the STJ concerns the taxation of presumed ICMS credits in the corporate income tax (IRPJ) and social contribution (CSLL) calculation bases. The case is currently being considered for classification as a repetitive appeal. A similar dispute is pending before the STF regarding PIS and COFINS (Topic 843).
Bruno Teixeira, a lawyer at TozziniFreire, said there is precedent in the Superior Court of Justice (STJ) regarding the inclusion of presumed ICMS credits in the IRPJ and CSLL calculation bases. While the precedent favors taxpayers, it is not classified as a repetitive appeal, and rulings on other tax benefits have not been as favorable. “It was thought that the issue was settled in the STJ, but significant controversy remains, especially after the amendment of Law No. 14,789 at the end of the year before last, which repealed Article 30,” Mr. Teixeira said.
Another important topic involves the authorization granted by the STJ and Supreme Federal Court (STF) for the federal government to file rescissory actions against taxpayer-friendly rulings related to the “case of the century.” These actions target decisions made between the original ruling on the merits in 2017 and the modulation of its effects in 2021. “Although the STJ and STF ruled positively for the government, the provision authorizing such actions is also under review at the STF,” Mr. Teixeira said, referencing Article 535 of the Civil Procedure Code, which is being challenged in the case (AR 2876). “If it is declared unconstitutional, the authorization granted by the courts will be nullified.”
The Office of the Attorney General for the National Treasury (PGFN) attributes the reduction in fiscal risk estimates in the Budget Guidelines Law (LDO) to the “strength of the legal arguments it defends in court.” In a statement, the agency said it aims to resolve disputes through consensual agreements, leveraging tax settlement programs such as the Comprehensive Transaction Program (PTI), which allows for agreements on 17 key issues. “We believe that negotiation and dialogue are essential tools for resolving conflicts and fostering a fairer and more transparent tax environment,” the PGFN said.
*By Marcela Villar e Flávia Maia — São Paulo, Brasília
Federal revenue in 2024 expected to be second-highest on record, aiding efforts to erase primary deficit
01/13/2025
Boosted by extraordinary payments from oil giant Petrobras and the Brazilian Development Bank (BNDES), Brazil’s federal revenue from dividends and profit-sharing rebounded in 2024, helping the government stay within its fiscal target range. Government projections indicate R$72.97 billion in dividends from state-owned enterprises (SOEs) last year, which, if confirmed, would mark the second-highest figure on record in nominal terms, trailing only 2022’s R$87 billion.
From January to October 2024, federal receipts totaled R$41.3 billion. While November and December figures have not yet been officially released, preliminary data from SOEs and public disclosures suggest the government is close to meeting its target. Treasury data through November, delayed by nearly three weeks, will be released on January 15, with full-year figures expected in February.
According to XP Investimentos, government revenue from dividends and profit-sharing reached R$72.38 billion in 2024, driven by significant year-end transfers from BNDES and Petrobras. BNDES told Valor it transferred R$5.8 billion in dividends to the federal government in November and an additional R$13.6 billion in December, while Petrobras contributed approximately R$9.7 billion during the same period.
Petrobras and BNDES accounted for the bulk of SOE dividend payments in 2024. Petrobras said it distributed R$29.7 billion to its controlling shareholder, while BNDES transferred R$29.5 billion. Together, the two state-owned companies represented 81% of the federal government’s dividend revenue. Banco do Brasil followed with R$7.5 billion (10%), and Caixa Econômica Federal contributed R$2.79 billion (3.8%). The remainder came from smaller state-owned enterprises.
After years of lower transfers, except in 2022, the upward trend in dividend payments provided critical support for primary fiscal results. These revenues, categorized as primary revenue, have become essential for the government’s effort to erase the primary deficit.
BNDES President Aloizio Mercadante said the bank increased dividend payments in 2024 to support fiscal results, while Petrobras approved extraordinary distributions from reserve accounts.
In a statement, BNDES confirmed it had “expanded dividend payments to contribute to fiscal efforts and economic stability,” while ensuring it could still invest in strategic sectors. Petrobras said “its distributions aligned with its corporate bylaws and shareholder remuneration policy”, which allows extraordinary payments as long as the company’s financial sustainability is preserved.
Economists are divided on whether the trend of high dividend payments will continue. Tiago Sbardelotto of XP Investimentos expects extraordinary transfers, particularly from Petrobras and BNDES, to remain a key strategy for boosting fiscal results amid challenges in increasing tax revenue through legislative changes. “It’s unlikely we’ll see dividend levels drop back to R$30 billion or R$40 billion in the coming years,” he said.
Felipe Salto, chief economist at Warren Investimentos, said BNDES’s payments are likely to remain elevated but cautioned against overreliance on Petrobras. “Petrobras’s payments depend on oil prices, so the government shouldn’t count on this revenue source for its fiscal recovery plans. BNDES, on the other hand, is tied to its operational policies, which suggest higher dividend payments as the bank increases disbursements,” Mr. Salto said.
Mr. Salto added that while dividend revenue is valuable, it should not form the backbone of fiscal policy. “This income is welcome but unpredictable. A sound fiscal strategy requires permanent measures to control spending and increase revenue,” he said.
Fiscal targets
Finance Minister Fernando Haddad said the government ended 2024 with a primary deficit of 0.1% of GDP, estimated at R$10 billion to R$15 billion depending on GDP calculations. This excludes extraordinary expenditures related to the state of Rio Grande do Sul.
Mr. Sbardelotto of XP warned that 2024’s results should be interpreted cautiously. “The fiscal target was only met because of significant extraordinary revenues, including dividends,” he said.
Banco do Brasil said its dividend payments complied with its “corporate bylaws, shareholder remuneration policy, and board decisions.” Caixa Econômica Federal noted that its 2024 dividend payments were related to 2023 results. “There was no dividend anticipation in 2024. We clarify that the amount paid in the 2024 fiscal year complies with Caixa’s bylaws.”
Price levels prompt only selective strategies among major asset managers, which remain cautious on domestic markets
01/10/2025
Pessimism continues to dominate sentiment among key Brazilian asset managers, following a peak in negativity during November and December sparked by frustration over the government’s spending review package. While the significant decline in domestic asset prices has made it less appealing to take new bearish positions, most firms are adopting a more cautious stance toward local markets. However, they maintain a defensive view on equities, the real, and local interest rates due to persistent concerns over Brazil’s debt trajectory.
“The government faces enormous difficulty in implementing measures to contain public spending, and the debt trajectory is unsustainable. We’ve spent considerable time debating whether the cuts will be R$40 billion or R$70 billion, but the truth is that this discussion is far from addressing the scale of adjustment needed to put debt on a sustainable path. We should be aiming for a primary surplus of 2% to 2.5% of GDP,” said Aurelio Bicalho, chief economist at Vinland Capital, during the firm’s monthly call this week.
Mr. Bicalho noted that as 2026 approaches, the presidential election will likely come into focus during the second half of the year. Investors will start assessing the current government’s competitiveness for re-election amid an environment of economic slowdown, high inflation, and a restrictive benchmark Selic rate.
In this context, Vinland Capital remains cautious on Brazil, according to portfolio manager José Monforte. “The root of the fiscal issue is not being addressed, which makes it very difficult to take any bullish position on Brazil. On the other hand, levels are important. We continue to hold a bullish bias in Brazil’s interest rate curve, particularly in the longer term, starting with the DI (Interbank Deposit) contract for January 2027. In currencies, our bias remains long on the dollar against the euro, yen, and real,” Mr. Monforte said.
Ibiúna Investimentos also pointed out that without an effective response to Brazil’s fiscal challenges, the upward movement in the interest rate curve, the depreciation of the real, stock market weakness, and worsening inflation expectations are unlikely to have run their course. “We remain alert to any potential shift in fiscal adjustment strategy, but until we gain greater clarity, we maintain defensive positions in Brazilian assets,” the firm’s team noted in a December letter.
Ibiúna continues to hold bets on rising nominal interest rates and implicit inflation rates (extracted from public bonds), in addition to long positions on the dollar against a basket of currencies that includes the real.
A similar approach is taken by Bruno Marques, co-manager of XP Asset Management’s macro funds, who highlights two parallel issues in Brazil: the monetary outlook, where the Central Bank needs to raise interest rates further, and the fiscal scenario. “These two issues are not isolated, as one of the reasons the Central Bank needs to increase rates is the fiscal influence on economic activity. On the other hand, tighter monetary policy contributes to a rising debt-to-GDP ratio over the coming years,” he said.
Mr. Marques said XP Asset has closed its long positions on interest rates but maintains some that reflect a negative outlook on Brazilian assets, including bets on the dollar strengthening against the real and rising implicit inflation rates. “We remain very concerned about Brazil. Looking ahead, it’s remarkable that even with all the deterioration seen in December, there has been no action from the government. If you’d asked us three or four months ago what would happen if the dollar reached R$6, we would have said the government would definitely change its stance. We haven’t seen anything close to that.”
Mr. Marques noted that recent statements from government officials and members of the economic team still lack a sense of urgency regarding price levels and market dynamics. “There’s talk of improving communication or explaining better what the government is doing, but that’s not the issue. There’s a significant deterioration in the debt-to-GDP ratio with no sign that this will change.”
Rising rates
Pedro Dreux, partner and macro manager at Occam, pointed out the rapid deterioration in domestic asset prices observed in December, as markets priced in a Selic rate above 17% for 2025.
“At this level of interest rates, we have no structural positions. While we believe the fundamentals will continue to deteriorate, it’s not obvious to bet on rising interest rates at these levels,” Mr. Dreux said. He added that volatility is likely to remain high and that the deteriorating environment remains challenging.
“The signals from the government indicate that no structural measures on spending are forthcoming, and the market is beginning to realize that the adjustment to our debt will likely come via inflation,” Mr. Dreux said during Occam’s monthly call. For him, this raises the possibility of inflation reaching 7% or 8% this year.
Verde Asset, led by Luis Stuhlberger, noted that the seasonal outflows of dollars in December were worsened by widespread pessimism among economic agents following the presentation of the fiscal package. The firm’s management team explained that the Central Bank’s large-scale foreign exchange interventions mitigated the immediate impact of these outflows but cautioned that such interventions cannot be sustained at the same pace going forward.
“The inflationary impacts of currency depreciation will be felt throughout 2025 and will force the Central Bank to raise interest rates to levels we thought were long forgotten. The economic model of a fiscal accelerator with a monetary brake is heading straight for a wall. While the prices of many assets already include significant risk premiums, we continue to maintain a more negative stance,” Verde Asset team said. They are holding short positions in equities and the real, along with a small bet on declining real interest rates.
Other asset managers echoed negative views on Brazilian assets in their monthly letters. Bahia Asset Management disclosed that it maintains long positions on nominal and real interest rates and short positions on the real against a basket of currencies. Similarly, Opportunity Total took a short position on the real, arguing that the Central Bank’s foreign exchange policy has temporarily distorted the price of the Brazilian currency, which “still faces weak fundamentals and relatively low carry in the short term.”
Kinea Investimentos is also holding short positions in the Brazilian stock market. “This reflects not only our view of the internal instability still present but also our negative outlook on emerging markets compared to the high real interest rates in the U.S. economy,” the firm noted.
Legacy Capital, meanwhile, maintains low exposure to the domestic market but expressed concern in its monthly letter about the Central Bank’s accelerated pace of reserve sales. The firm also projects inflation of 6.2% for this year.
IPCA accelerated to 0.52% in December; Central Bank’s inflation target was set at 3%, with a tolerance of up to 4.5%
01/10/2025
Brazil’s official inflation rate, measured by the Broad National Consumer Price Index (IPCA), accelerated to 0.52% in December 2024, up from 0.39% in November. This brought the IPCA to a year-end increase of 4.83%, according to data from the Brazilian Institute of Geography and Statistics (IBGE). The result exceeded the inflation target ceiling for 2024, which was 3% with an upper tolerance of 4.5%. The 2024 rate also surpassed the 4.62% inflation in 2023.
December’s inflation rate was slightly below the median projection of 0.53% from 34 financial institutions and consultancies surveyed by Valor Data, but it fell within the range of estimates, which varied from 0.29% to 0.60%.
For the full year, the median projection was 4.84%, with estimates ranging from 4.59% to 4.91%.
This marks the third time in recent years that the inflation target has been missed, repeating what occurred in 2021 and 2022. In 2021, the IPCA rose 10.06%, far above the 5.25% ceiling. In 2022, inflation reached 5.79%, also exceeding the target of 5%. In contrast, the 2023 rate of 4.62% was within the target range of 3.25% with a tolerance of 4.75%.
The year 2024 is the last in which the inflation target applies to the calendar year. Starting in January 2025, the target will shift to a continuous system, measuring 12-month inflation on a rolling monthly basis.
Inflation drivers
Among the nine categories of expenses used to calculate the IPCA, housing prices showed a smaller decline, moving from a 1.53% drop in November to a 0.56% decrease in December. Several categories reversed course, including household goods (from -0.31% to 0.65%), apparel (from -0.12% to 1.14%), health and personal care (from -0.06% to 0.38%), education (from -0.04% to 0.11%), and communication (from -0.10% to 0.37%).
Meanwhile, food and beverages slowed their pace of increase (from 1.55% to 1.18%), as did transportation (from 0.89% to 0.67%) and personal expenses (from 1.43% to 0.62%).
Comparing year-end figures, food and beverages—the category with the largest weight in the IPCA—jumped from a 1.03% increase in 2023 to 7.69% in 2024. Household goods rose from 0.27% to 1.31%, and communication saw a slight uptick from 2.89% to 2.94%.
Other categories experienced slower price growth in 2024, including housing (5.06% to 3.06%), apparel (2.92% to 2.78%), transportation (7.14% to 3.30%), health and personal care (6.58% to 6.09%), personal expenses (5.42% to 5.13%), and education (8.24% to 6.70%).
The IBGE calculates the IPCA based on the consumption patterns of households earning between one and 40 times the minimum wage, covering ten metropolitan areas as well as the cities of Goiânia, Campo Grande, Rio Branco, São Luís, Aracaju, and Brasília.
Core inflation
The diffusion index, which measures the proportion of goods and services with rising prices, climbed to 69% in December from 57.8% in November, according to Valor Data calculations. Excluding food, one of the most volatile categories, the index also rose, from 51.7% to 68.9%.
Core inflation, calculated as the average of five components monitored by the Central Bank, increased to 0.58% in December from 0.39% in November, according to MCM Consultores.
On a 12-month basis, the core inflation average rose from 4.21% to 4.34%.
The Central Bank’s inflation target remains at 3.0% for 2024, 2025, and 2026, with a tolerance range of 1.5 percentage points above or below the target.
Iron ore outlook for 2025 fuels pessimism for sector stocks; banks slash target prices
01/08/2025
Vale’s market capitalization dropped below $40 billion for the first time since 2016, according to Citi, and continued to decline on Monday (6), reaching $36.8 billion, based on Valor Data. Brazil’s mining giant now lags significantly behind its Australian competitors, BHP Billiton, valued at $124.2 billion, and Rio Tinto, at $96.5 billion.
On Monday, Citi and Jefferies both announced cuts to their target prices for Vale’s New York-traded American Depositary Receipts (ADRs). Both banks cited pessimism over iron ore’s outlook for 2025, driven by expectations of slower economic growth in China this year.
Citi reduced its target price for Vale from $15 to $12, while Jefferies lowered its projection from $14 to $11. Jefferies also downgraded its expectations for CSN Mineração.
Despite the downward revisions, the new targets still reflect potential upside from Vale’s current stock price. On Monday, Vale’s ADRs closed at $8.62 in New York, a 0.12% decline, while in Brazil, shares fell 1.28% to R$52.56. Meanwhile, iron ore prices dropped 2.21% on the Dalian Commodity Exchange, settling at $102.65 per tonne.
A market source noted that bank projections tend to prioritize Chinese economic data over Vale’s internal fundamentals. For years, the miner has been considered a mirror of global iron ore market trends. Vale declined to comment.
Iron ore outlook
Citi estimates that iron ore prices will average $95 per tonne in 2025, down from $106.73 per tonne at the close of 2024. The bank foresees a balanced supply and demand scenario, assuming that China’s crude steel production has peaked and will gradually decline. Stronger supply from Brazil and Australia is expected to put pressure on other producers to cut output.
According to Citi, Vale could counter this pessimism by accelerating cash generation and increasing shareholder payouts.
Jefferies also painted a bleak outlook, predicting that prices for major metal commodities are unlikely to recover in 2025 due to global macroeconomic pressures. The bank expects stronger demand only between 2026 and 2027, which could lift commodity prices and boost sector stocks.
In November 2024, UBS lowered its target price for Vale from $14 to $11.50. While acknowledging the company’s progress, such as its R$170 billion settlement for the Mariana dam disaster and its leadership transition, UBS expressed concern about the medium-term fundamentals for iron ore. “In our view, China’s steel exports are vulnerable to global restrictions and are unlikely to be fully offset by government stimulus,” UBS wrote.
UBS projects iron ore prices to hover around $100 per tonne in 2025, with a potential drop to the $80–$90 range. In a December report, UBS reiterated its concerns, particularly highlighting the anticipated tariff war targeting Chinese products following Donald Trump’s inauguration as U.S. president. UBS also recognized Vale CEO Gustavo Pimenta’s improvements in operational performance since taking office in October but cautioned that returns between 2025 and 2026 could be limited due to the company’s heavy financial commitments.
Not all analysts share the pessimistic outlook. Santander’s head of mining research, Yuri Pereira, is more optimistic about 2025. Santander maintained its $15 price target for Vale’s ADRs and projected iron ore prices at $115 per tonne.
Mr. Pereira does not expect a significant increase in supply from the world’s top players, which should help stabilize prices. “Everything depends on iron ore prices and each company’s strategy. Prices could rise, prompting companies to boost production to take advantage, but the market has been fairly balanced,” he said in an interview with Valor.
* By Kariny Leal e Felipe Laurence — Rio de Janeiro, São Paulo
Last month, monetary authority sold $21.57bn in the spot market to counter a record $26.41bn outflow
01/09/2025
The Central Bank of Brazil carried out its largest monthly intervention in the spot dollar market in December 2024, marking the most significant activity since the country adopted the floating exchange rate in 1999. The monetary authority sold $21.57 billion in the spot market last month, a record intervention driven by a historic dollar outflow of $26.41 billion, according to monthly currency flow data dating back to 1982.
“December is always a challenging month. However, the outflow in 2024 was significantly stronger, heavily concentrated in the financial account,” explained Sérgio Goldenstein, chief strategist at Warren Investimentos and former head of the Central Bank’s Open Market Department (DEMAB). “It made sense for the Central Bank to intervene in the spot market rather than through swaps because the pressure was concentrated precisely in the spot market, given the volume of physical dollar outflows.”
Until November, Brazil’s currency flow remained in positive territory, buoyed by strong commercial account results that more than compensated for financial outflows. However, this trend reversed sharply in December, a month typically marked by substantial dollar outflows for profit and dividend remittances. In October, Valor had already highlighted that financial account outflows were heading for a record high in 2024.
Over the year as a whole, Brazil posted a total net outflow of $18.01 billion. The commercial account contributed positively with an inflow of $69.2 billion, but this was outweighed by the financial account’s outflow of $87.21 billion.
Faced with December’s unusually high outflows, the Central Bank engaged in unprecedented foreign exchange market activity. In November, it conducted line auctions (dollar sales with a repurchase commitment), a tool traditionally used at year-end to address specific demands. However, the monetary authority also opted to sell reserves in the spot market to alleviate the impact of accelerating financial outflows.
The decision to auction dollar sales in the spot market was driven by the rapid deterioration of exchange rate levels. This was partially attributed to heightened fiscal risk perceptions following disappointment with the federal government’s spending review package, as well as increased global risks. The Central Bank’s focus on reserve sales was also influenced by unhedged dollar outflows—dollar movements without the purchase of future contracts.
“Throughout the month, we observed that some outflows were unhedged, which was crucial in the real’s depreciation movement. As the Brazilian currency experienced a rapid devaluation, driven by increased risk premiums, I believe this devaluation was decisive for the Central Bank to intervene more effectively in the exchange market through spot auctions,” Mr. Goldenstein noted.
Throughout 2024, the Central Bank maintained a strategy of targeted foreign exchange interventions. For instance, in April, it used currency swap contracts to manage the maturity of NTN-A bonds, while in August and early September, it conducted both swaps and spot auctions to address the rebalancing of the EWZ index fund, the top ETF for Brazilian stocks in New York. By contrast, in 2023, the monetary authority made no extraordinary interventions.
Central Bank’s approach
Pramol Dhawan, head of emerging market portfolio management at Pimco, which oversees approximately $2 trillion, believes Brazil’s current currency intervention program is largely reactive and needs a structured approach, as it may not effectively address current economic challenges. “In contrast, central banks like those of Peru and Turkey, with floating exchange rate systems, have clearer guidance for intervention, leading to better outcomes through greater transparency,” he said.
Historical data compiled by Valor shows that the Central Bank’s actions have closely tracked the currency flow since 1999. During periods of strong dollar inflows, the bank typically intervened through purchases, while outflows led to dollar sales. However, this trend was partially broken in 2023, when the Central Bank refrained from purchasing dollars despite a positive currency flow.
Although critical of the Central Bank’s current intervention approach, Mr. Dhawan recognizes the complexities of the current environment. “Political factors, including skepticism about fiscal policy and the early onset of the 2026 political cycle, cast doubt on the appropriateness of the Central Bank’s actions. With ample market liquidity and no clear signs of dysfunction, the necessity of such interventions is debatable,” he added.
In December, during a press conference on the Inflation Report, then Central Bank Chair Roberto Campos Neto said the monetary authority should intervene whenever it detects signs of dysfunction in the exchange rate. While December typically sees significant capital outflows, the record level in 2024 was particularly striking, exceeding the second-largest December outflow on record—from 2019—by 50%.
The Central Bank identified several factors contributing to the negative flow, including larger dividend payments by companies with strong earnings and increased investments by Brazilians abroad. “We began to see a greater outflow [of capital coming] from individual investors more recently, through [digital] platforms with smaller transactions,” Mr. Campos Neto said.
Roberto Lee, CEO and co-founder of Avenue, a brokerage allowing Brazilians to invest abroad, noted a marked rise in outflows during the last quarter of 2024. “The profile shifted towards more conservative investors seeking fixed income and liquidity. This was a sentiment we didn’t observe earlier in the year when expectations for Brazil were higher,” he observed.
Mr. Lee emphasized that while this shift was not comparable in scale to corporate outflows, it was a trend mirrored across emerging markets. “This is not a new sentiment. In the past, there have been instances when Brazilians adopted a more conservative stance. The difference now lies in the relatively recent infrastructure [of digital platforms], which has been around for roughly five years. Previously, these investors would turn to the CDI [Interbank Deposit Certificate]. Now, they have the option to choose safer assets. For a ‘flight to quality’, you first need an airplane ticket.”
Mr. Goldenstein added that the outflows may also have included a reversal of foreign investor inflows seen earlier in the year. “From July to November, foreign investors increased their portfolio allocation in domestic debt. We will need to wait for December’s data to confirm, but it is likely that a ‘stop-loss’ movement and reduced allocations occurred throughout much of the second half,” he suggested.
December also witnessed heightened stress in the domestic interest rate and public bond markets. Long-term rates spiked, triggering stop-loss movements among foreign investors, particularly in long-term fixed-rate bonds. This prompted the National Treasury to step in with public bond buybacks to stabilize the market.
