COPOM rate cut clouds view of ‘reaction function’

Analysts say Central Bank is buying time after oil shock, but strategy may prove costly if inflation expectations keep drifting higher

 

 

The Central Bank’s Monetary Policy Committee (COPOM) delivered an unusual decision in late April, cutting the Selic base rate by 25 basis points even as its inflation forecasts deteriorated for the relevant policy horizon.

Since the committee formally began targeting the 18-month-ahead window for monetary policy in mid-2024, this was the first time the benchmark rate and inflation projections moved in opposite directions. The decision has raised caution among market participants, who now see less clarity in the Central Bank’s reaction function.

With the inflation picture worsening significantly after the oil shock caused by the war in the Middle East, investors believe the COPOM is betting that oil supply will normalize and is trying to preserve the easing cycle to gain time, a strategy that could become costly later.

That view is shared by Juliano Cecílio, chief economist at asset manager Adam Capital, who disagrees with the decision to keep cutting the Selic amid current inflation above target and unanchored inflation expectations, both in the market and at the Central Bank itself. He also notes that Brazil’s economy was already feeling the effect of a significant fiscal impulse, which supported activity and service prices throughout 2025 and early this year.

“We had the largest forecast error in the IPCA’s historical series in February, before the war began, and that was basically caused by service inflation,” Cecílio said, referring to Brazil’s benchmark consumer price index. “Right after that, when the war came, a narrative emerged that expectations rose only because of that [in the Central Bank’s Focus survey], but before the conflict there was already a series of fiscal stimuli and an acceleration in service inflation.”

The three-month moving average of annualized and seasonally adjusted underlying services inflation, a less volatile measure than the monthly reading and widely used by the market, shows signs of acceleration. The measure stood at 4.74% in December, 5.41% in February, and 5.32% in March. Some firms estimate that April’s IPCA may show a new acceleration in underlying services inflation, to around 5.7%.

For Cecílio, the oil shock acted as a “smokescreen” that kept the Central Bank from identifying the core problem: “An economy strong enough to prevent service inflation from cooling or to keep it accelerating.”

More tolerance

Cecílio also sees greater leniency by the monetary authority toward the worsening inflation forecasts, although he says the phenomenon is neither new nor limited to Brazil. A study by Adam Capital shows COPOM’s sensitivity to deteriorating projections has declined since the pandemic, a trend also seen at major central banks such as the Federal Reserve.

“In 2026, we mark the sixth consecutive year in which the PCE deflator [the Fed’s preferred inflation gauge] is above the 2% target. That is an unusual situation,” Cecílio said. “The Central Bank [of Brazil] looks at these post-pandemic examples of greater tolerance for inflation deviations, and that helps explain this looser reaction function.”

Cecílio said reduced sensitivity to expectations has already led to monetary-policy mistakes in recent years, including the Selic-cutting cycle in 2023 and 2024, which was followed soon after by a 450-basis-point increase in the benchmark rate between September 2024 and June 2025.

“Central banks did not make bets in the past. They always worked with the most conservative premise possible, and that no longer seems to be happening,” Cecílio said. He sees the COPOM losing credibility in the current rate-cutting cycle, as longer-term IPCA expectations become further unanchored.

Since the start of the war, the median Focus survey forecast for 2028 inflation has risen to 3.64% from 3.5%, a development the COPOM itself has flagged with concern in its recent communication.

Clearer threshold

The additional drift in inflation expectations was highlighted by BTG Pactual as a warning sign for monetary policy. “The deterioration reduces the comfort to extend the cycle without making the reaction threshold clearer, that is, which conditions would lead to a pause, an end to the cycle, or greater restriction. Without that, the risk increases of further deterioration in the anchoring of expectations and in the credibility of communication,” economists Tiago Berriel and Iana Ferrão said.

In a note to clients, they said the Central Bank’s reaction function has changed and has become “harder to infer.” BTG believes qualitative judgment now carries more weight in the monetary authority’s decision-making process, while projections provide less guidance on the next steps for interest rates.

“It has become less clear what [level of] deterioration in projections, expectations, or core measures would lead the COPOM to stop the cycle,” Berriel and Ferrão said. That is because the current Selic-cutting cycle rests on two points: the extended period of monetary restriction and a greater qualitative assessment of how persistent the shock caused by the war in Iran will be.

For Ian Lima, active fixed-income manager at Inter Asset, the Central Bank is trying to buy time to better understand the effects of the oil shock on Brazil’s economy while preserving the easing cycle and signaling a bias toward further Selic cuts in upcoming decisions. “By continuing to ease, the Central Bank keeps the interest-rate market pinned down in some way. If it pauses the cycle, the market could flirt with a Selic hike, and that would tighten financial conditions, which it does not want to deliver. It is a bet, but it is easier than for other central banks in Europe and Asia,” Lima said.

Lima sees the impact of the war on Brazil as milder and says the Central Bank has “fat to burn” after raising the Selic to 15% last year, its highest level in almost two decades, and holding it there for nine months.

“Some say the increase to 15% was made precisely to put [interest rates] at a restrictive level beyond any doubt,” Lima said. Brazil’s real interest rate is now around 10%, well above most market estimates of the neutral rate, which stand near 6% to 7%.

“I think this slow cycle of cuts fits the current context. The COPOM has some fat and is burning it. If it had left the Selic unchanged at 15%, expectations would be rising because of oil, and it might have had to raise rates,” he said.

Room for cuts narrows

Still, the space for further Selic cuts has narrowed “substantially,” said Aurélio Bicalho, chief economist at Vinland Capital. He said the Central Bank is “acting in a way that manages some of this uncertainty and tries to continue the cycle for some time.” In the asset manager’s monthly call, Bicalho said the Central Bank is likely to keep lowering the Selic at the current pace of 25 basis points until September.

Although he agrees that monetary policy has been working to cool activity, a point emphasized by the Central Bank, Bicalho said that has never been used as a justification for easing interest rates. He noted that Brazil is part of a group of countries with high inflation, unanchored expectations, and credibility problems at the monetary authority, which should force the COPOM to pause the cuts before the last quarter.

“It will have to stop [the cycle] because the inflation outlook is very unfavorable. The IPCA will move toward 5% this year and, if the Central Bank continues the cycle for much longer, inflation in 2027 will also be much higher,” he said.

* By Gabriel Caldeira and Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brazil’s public spending watchdog to review debt forecasts

Government’s budget proposal projects delayed stabilization of debt burden

 

 

Debt projections presented by Brazil’s federal government in its annual budget guidelines proposal will be scrutinized by the country’s public spending watchdog, according to people familiar with the matter.

The assessment inside Brazil’s Federal Court of Accounts, known as the TCU, is that the proposal does not clearly explain the assumptions underlying the projected trajectory and eventual stabilization of public debt.

One issue raised is that while the government frequently predicts an eventual turning point for public debt, the outlook often worsens again within a few months, as seen in previous years, delaying stabilization.

Even if the watchdog ultimately determines that the government’s information is accurate, it still plans to keep a close watch on the issue.

In a statement, Brazil’s National Treasury said it “recognizes the importance of oversight institutions” and noted that “audits and information exchanges are conducted continuously.”

Brazil’s fiscal framework law, approved in 2023, requires the government to present in the budget guidelines proposal the fiscal results needed to stabilize public debt as a share of gross domestic product over a 10-year horizon.

The 2027 proposal, however, showed a deterioration compared with the previous version.

Under the 2026 budget guidelines proposal, gross public debt was expected to peak at 84.2% of GDP in 2028, then begin to decline the following year.

In the new 2027 proposal, the peak has been postponed to 2029 and revised upward to 87.8% of GDP, with debt declining only from 2030 onward.

From that point, the government projects a gradual decline to 83.4% of GDP by 2036.

In the document, the government says the scenario assumes the continuation of fiscal reforms over the coming years to make the projected primary-balance trajectory feasible.

“In this context, the importance of deepening public spending review measures and initiatives to increase public revenues should be emphasized,” the document says.

“The implementation of a fiscal adjustment capable of supporting the projected primary-balance path is a requirement for stabilizing the macroeconomic scenario over the medium term.”

Besides the primary fiscal balance, debt projections are also directly influenced by variables such as GDP growth and Brazil’s benchmark interest rate, the Selic.

According to the government’s projections, the central government’s primary balance would improve from a deficit of 0.44% of GDP in 2026 to a surplus of 0.05% in 2027.

The government expects gradual improvement in subsequent years, with the surplus reaching 0.62% of GDP in 2028 and 0.93% in 2029.

From 2030 onward, the projections assume primary surpluses above 1% of GDP, reaching 1.5% by 2036.

The proposal also assumes a gradual decline in interest rates and continued economic growth throughout the next decade.

The government projects the average Selic key rate at 13.6% in 2026, falling to 10.6% in 2027 and 9.3% in 2028 before stabilizing at 6.4% from 2031 onward.

For GDP, the projection is for real growth of 2.3% in 2026, accelerating to 2.6% between 2027 and 2029 and reaching 3% from 2034 onward.

Another important variable is the cost of debt, measured by the implicit interest rate on Brazil’s gross general government debt.

According to the proposal, the nominal implicit rate would fall to 9.8% in 2027 and 9.1% in 2028, down from 11.8% in 2026, and then reach 7.2% from 2034 onward.

The real implicit rate, adjusted for inflation, would decline from 7.8% in 2026 to 6.6% in 2027, then continue to fall until stabilizing around 4.1% from 2033 onward.

For economist João Pedro Leme of Tendências Consultoria, the government is working with overly optimistic parameters, producing a more favorable debt trajectory.

He argues, however, that the repeated revisions to the debt outlook impose a “reputational cost” on the government and make fiscal policy management more difficult.

Leme also said that the lack of detail regarding certain fiscal assumptions in the 2027 proposal creates uncertainty.

The document projects net primary revenue remaining elevated as a share of GDP, rising to 19.2% in 2030 from 18.9% in 2026.

At the same time, expenditures would decline by almost 1.5 percentage points of GDP over the same period, falling to 18% in 2030 from 19.4% in 2026.

The economist acknowledged that the budget guidelines proposal is not intended to detail specific adjustment measures.

Even so, he argued that the absence of clearer signals from the economic team regarding that agenda increases skepticism toward the projected scenario.

“That puts market participants in a wait-and-see position,” he said. “We have not seen a fiscal consolidation of this magnitude in a very long time.”

“There are doubts about how the government intends to organize spending cuts equivalent to 1.5% of GDP without creating a contractionary effect while still delivering economic growth close to 3% per year, which is above what used to be considered Brazil’s potential growth rate,” Leme added.

Alexandre Andrade, director at Brazil’s Independent Fiscal Institution, a Senate-affiliated fiscal policy watchdog, said the perception that the debt turning point is constantly postponed is confirmed when comparing successive budget cycles.

According to him, this partly reflects what the government describes as the real cost of financing, but that is not the only factor complicating debt stabilization.

Andrade contended that, despite the government’s plan assuming adherence to the fiscal framework, including primary surpluses and ongoing spending reviews and reforms, the actual primary balances in 2024 and 2025 were inadequate to limit the increase in gross public debt.

“Legal deductions from expenditures in calculating the primary result may help the government formally meet the target set in the budget guidelines law, but the effective fiscal result ends up weaker—and that is the variable that affects public debt dynamics,” he said.

Another issue raised by Andrade concerns the gap between the government’s projections and market estimates.

“As a rule, the executive branch’s projections tend to be relatively more optimistic,” he said.

The Treasury also said it “publishes the Fiscal Projections Report every six months,” which also includes debt estimates.

Brazil’s Planning and Budget Ministry declined to comment.

By Giordanna Neves and Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Bracell secures R$1.5bn from BTG for forest planting

Funds will support eucalyptus cultivation on degraded land in Mato Grosso do Sul, where company plans new mill

 

 

 

 

Bracell, the pulp producer owned by Asian conglomerate Royal Golden Eagle (RGE), has secured a R$1.5 billion credit line from BTG Pactual to finance eucalyptus planting on degraded land in Mato Grosso do Sul state, where it plans to build a new pulp mill with estimated investment of $4 billion.

BTG, the biggest winner among private banks in the second auction of Eco Invest Brasil, a program that combines public and private funding to leverage investment in sustainable projects, has a total of R$4.9 billion to allocate toward the productive restoration of degraded land in Brazil, which was the focus of this round.

With the amount offered in the second auction—made up of 40% Treasury resources and the remainder raised by BTG from investors—the bank committed to enabling the restoration of 164,000 hectares of degraded land, converting them into agricultural and forestry production systems.

The Bracell contract, representing roughly one-third of the total area BTG aims to restore, was the first agreement signed and will allow for the recovery of 54,000 hectares in Brazil’s Cerrado biome. The financing line has a 10-year term, and Bracell could begin construction of the new facility in Bataguassu later this year. Under that timeline, the mill, with annual production capacity of 2.8 million tonnes, could begin operating in 2029.

“This transaction is a win-win: financing terms compatible with eucalyptus’s seven-year cycle, at competitive cost, while also restoring degraded land,” said Rogerio Stallone, the BTG partner responsible for corporate credit.

According to the executive, the favorable cost and maturity terms offered through Eco Invest ultimately made possible an investment in land restoration that Bracell might not have pursued under standard market conditions.

In an emailed statement, Bracell’s vice president of finance banking, Claudio Pitchon, said the operation will enable “the expansion of our forest base, while also contributing to carbon capture and storage.”

According to Pitchon, Bracell is currently one of Brazil’s largest green loan borrowers. “The structure of this transaction reinforces the advancement of financial solutions aligned with Brazil’s climate agenda, connecting private capital to projects with verifiable environmental impact,” he said.

Bracell, which operates mills in Bahia and São Paulo and is one of the world’s largest producers of dissolving pulp, does not disclose the size of its eucalyptus land holdings in Brazil. The company has pledged, however, to preserve one hectare of native vegetation for every hectare of eucalyptus planted.

According to Rafaella Dortas, BTG’s partner and ESG director, the bank assessed the socio-environmental requirements for participating in the second Eco Invest auction and concluded it had the internal capacity to manage the program’s required monitoring, including hectares restored and carbon stored. “It is a financially competitive transaction and operationally feasible from a risk perspective,” she said.

In a separate initiative, BTG has also recently raised $1.24 billion for its reforestation fund, which is currently considered the largest in the world.

*By Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brasil promulga acordo para facilitar comércio no Mercosul

Acordo foi firmado entre Brasil, Argentina, Paraguai e Uruguai
08/05/2026

O governo brasileiro promulgou nesta sexta-feira (8) medidas para agilizar e simplificar negociações no âmbito do Mercosul.

O decreto que prevê o Acordo sobre Facilitação do Comércio do Mercosul, firmado em dezembro de 2019 por Brasil, Argentina, Paraguai e Uruguai, está publicado no Diário Oficial da União.

A medida foi assinada pelo vice-presidente Geraldo Alckmin, no exercício da Presidência da República, e decorre da aprovação do texto pelo Congresso Nacional em setembro de 2023.

O acordo estabelece regras comuns para facilitar o comércio intrazona, alinhadas às diretrizes da Organização Mundial do Comércio (OMC) e da Organização Mundial de Aduanas (OMA).

Os principais pontos são:

  • ampliar o uso de documentação eletrônica,
  • adotar procedimentos aduaneiros mais rápidos e baseados em gestão de riscos,
  • promover a transparência regulatória
  • estimular a cooperação entre autoridades de fronteira dos países.

O texto também prevê medidas específicas para o despacho mais célere de bens, inclusive perecíveis, a implementação do Guichê Único de Comércio Exterior e a ampliação do intercâmbio de documentos em formato digital, como certificados de origem e sanitários.

Além disso, o acordo busca reduzir custos e prazos, ampliar a previsibilidade das regras e oferecer maior segurança jurídica aos operadores de comércio exterior, com atenção especial às micro, pequenas e médias empresas.

Atos que venham a revisar o acordo ou gerar novos compromissos financeiros ao País continuarão sujeitos à aprovação do Congresso Nacional.

Fonte: Agência Brasil

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Chinese investment in Brazil jumps 45% to $6.1bn in 2025

Mining becomes new frontier for Chinese capital, while electricity remains top sector, Brazil-China Business Council survey shows

 

 

 

With a strong bet on mining and gains in manufacturing, Chinese investments in Brazil are becoming more diversified and grew 45% last year from 2024, to $6.1 billion, the highest amount since 2017. The figure was enough to make Brazil the top destination for Chinese investment abroad in 2025, a survey by the Brazil-China Business Council (CEBC) shows.

By number of projects, there were 52 Chinese ventures in Brazil in 2025, 33% more than in 2024 and a record in the series, which began in 2010.

The electricity sector remained the largest recipient of investment, but the “new frontier” is mining, which ranked second. Investment in the sector more than tripled from 2024, reaching its largest share of total Chinese investment in Brazil since 2007.

The automotive sector also stood out, ranking third in invested value, followed by oil and information technology.

The CEBC survey also shows that Brazil attracted more Chinese investment than any other country in the world in 2025, with a 10.9% share of the total invested. It was followed by the United States, with 6.8%; Guyana, 5.7%; Indonesia, 5.4%; and Kazakhstan, 4.4%. Over the past five years, Brazil has always ranked among the top five global destinations for Chinese investment. The last time the country topped the ranking was in 2021.

The study considers confirmed investments in projects by companies from mainland China or by companies based in other countries with Chinese shareholding.

The study is based on news reports, company websites, municipal and state government portals, as well as information provided directly by representatives of Chinese companies and confidential sources.

Tulio Cariello, the author of the survey and CEBC’s content and research director, notes that, depending on the database, some surveys may not show Brazil as the top destination for Chinese investment, but the country is still very close to that position. “Brazil is a very consolidated destination for Chinese investment and will continue to be.”

China’s performance in Brazil outpaced total foreign investment in the country, which rose 4.8% in 2025, to $77.7 billion. The increase was also higher than China’s total investment abroad, which grew 1.3%, to $145.7 billion.

Under the Central Bank’s criteria, which use a different methodology, the United States was the largest direct investor in Brazil last year, with $8.47 billion in equity capital, down 29% from the previous year.

Investment profile

For Cariello, the main highlight in 2025 was the greater diversity of Chinese investments in Brazil. Although electricity remained the largest sector by value, with a 29.5% share of the total, he says the strong expansion of mining projects changed the profile of Chinese investment in the country. Mining accounted for 29%.

The survey shows that mining investments totaled $1.76 billion in 2025, more than triple the $557 million reported in 2024. “The electricity and oil sectors had already been very strong. Electricity, in particular, has received large investments since 2010, with virtually no year in which the sector did not stand out. But new sectors are competing for spots on the podium,” Cariello said.

“Mining is the major highlight of this survey. Investments in the sector were made through mergers and acquisitions. In other words, a Chinese company buying a foreign or even Brazilian company operating here, which involves billions of reais. This is a new frontier for us to watch. Since the early 2010s, Chinese companies had already been investing in the area, but there has been a very strong rebound because there is now a race for strategic minerals.”

Cariello recalls a recent investment by a U.S. company in rare earths in Brazil. “The mining sector opens up the need for Brazil to think about a strategy in the race for critical minerals that benefits the country over the long term. That would allow Brazil to attract investments with some kind of technology transfer or that place the country in other parts of the production chain, not only in metal extraction, but also in processing and even component manufacturing. Having an electric battery plant here, for example, would be interesting.”

The study notes that the profile of Chinese investment in Brazil is particularly relevant in light of Beijing’s ambitious decarbonization policy. China, the survey says, leads the development and manufacturing of several products linked to the energy transition, which is driven by rising demand for critical minerals.

Cariello says Brazil stands out in this context because of the diversity of strategic minerals it holds. He cites a survey by the Economic Commission for Latin America and the Caribbean (ECLAC) showing that Brazil has 26.5% of global graphite reserves and is the second-largest holder of rare earths, with a 23% share, behind only China itself.

Mining, he says, also helped push Chinese investment farther into Brazil’s interior, although the electricity sector remains the main driver of geographic diversification, especially through transmission projects. Oil also contributes to that trend, he notes.

“We saw a larger share for states in the North region now, the highest in history, because of China’s investments in the Equatorial Margin region, at the mouth of the Amazon River. These are offshore investments and therefore in federal waters, but since we are talking about the sea, these states may receive royalties, and the investments will also create jobs and opportunities for people in the region.”

Chinese investment in the oil sector totaled $804 million in 2025, 24% less than in 2024. Even so, the industry accounted for 13.3% of China’s total investment in Brazil, ranking fourth.

One highlight was oil company CNPC, which acquired, in partnership with U.S.-based Chevron, nine blocks in an auction held by Brazil’s National Agency of Petroleum, Natural Gas and Biofuels (ANP), all in the region at the mouth of the Amazon River.

The survey shows that 2025 also set a record for the number of states with Chinese investment projects. There were projects in 20 states last year, compared with 14 in 2024. The previous record was 17, in 2019.

Automotive and green projects

Ranking third among the sectors that received the most Chinese investment in Brazil in 2025, automotive took a 15.8% share. The study estimates that at least $965 million was invested in the sector, up 66% from the previous year. The final amount may be higher, the survey says, because some investments did not have their value disclosed.

In 2025, the number of Chinese investments in Brazil in sustainability and green energy, including hydropower, solar, wind and the electrified-vehicle industry, reached a record 31 projects, posting growth for the fifth consecutive year.

Although the number rose in absolute terms, these segments’ relative share of total projects fell to 60% from 69% in 2024. The loss of share, however, does not indicate lower interest in new green ventures, the survey says.

Instead, it reflected growth in investments in other sectors in 2025, mainly oil and mining.

Looking ahead, Cariello says Chinese investment in Brazil is expected to remain at relatively high levels by recent historical standards.

“We should continue to see more investment in renewable electricity, as well as investments in manufacturing in general, especially those directly linked to the energy transition. We see interest from other Chinese electric-car makers in having plants in Brazil, in addition to those that are already producing or have already signed partnerships in that direction. And mining should be a new chapter in Brazil-China investment relations.”

* By Marta Watanabe — São Paulo

Source:Valor International

https://valorinternational.globo.com/

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Brazil plans new debt renegotiation program for informal workers

Measure aimed at borrowers current on payments but facing high interest rates could be announced by early June

 

 

Finance Minister Dario Durigan said on Wednesday (6) that the Lula administration is studying a new debt renegotiation program aimed at borrowers who are current on their payments but face high borrowing costs, such as informal workers. The measure is expected to be announced between late May and early June.

Earlier this week, the government launched version 2.0 of the Desenrola debt renegotiation program, targeting delinquent borrowers ranging from middle-class consumers to students financed through the Student Financing Fund (Fies) and small family farmers.

“Informal workers, a group we monitor very closely, do not have fixed monthly income, recurring salaries, or stores with a history of recurring revenue. They need to earn their income day by day, often in a very irregular way. And they are the ones paying the highest interest rates. We are studying a credit line for informal workers to be announced in late May or early June,” Durigan said in an interview with the “Bom Dia, Ministro” program.

Regarding the Fies component of the new Desenrola program, the minister said the government is expected to introduce incentives to encourage students to remain current on their payments.

“Borrowers who are up to date on their payments will also receive some kind of future incentive to continue paying on time. This is being discussed with Banco do Brasil and Caixa Econômica Federal, which are the two main banks operating Fies with us. Together with the initiative for informal workers that I mentioned earlier, we will soon present these measures to the country,” he said.

The new Desenrola program will allow Brazilians earning up to five minimum wages per month to renegotiate debts contracted through January 31, 2026, that are between 90 days and two years overdue. Renegotiations will take place directly on each bank’s platform for credit card debt, overdraft facilities, and personal loans.

The average discount will be 65%, but may range from 30% to 90% depending on the type of debt and how long it has been overdue. The maximum interest rate will be 1.99% per month, close to the lowest levels available in the market.

Borrowers will have up to 48 months to repay, with 35 days to settle the first installment. The limit for the renegotiated debt, after discounts, will be up to R$15,000 per person per financial institution. The minister said the renegotiation could benefit as many as 20 million people.

For Fies borrowers, debts overdue by more than 360 days may be renegotiated with discounts of up to 99% for individuals enrolled in the federal government’s Cadastro Único social registry. For borrowers outside the registry, discounts may reach 77%.

For more recent debts overdue by more than 90 days, borrowers will receive discounts on interest and penalties, as well as a 12% reduction in principal for lump-sum payments, or may repay in up to 150 installments with all interest and penalties waived. Around 1.5 million students could benefit from the measure.

*By Giordanna Neves — Brasília

Source: Valor international

https://valorinternational.globo.com/

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Spending watchdog closes case on compensation for electricity firms

Decision keeps burden on consumers, who will continue paying through utility bills until 2028

 

 

Brazil’s Federal Court of Accounts (TCU), a public spending watchdog, has shelved an audit proceeding that examined the methodology used to define the multibillion compensation payments made in recent years to power transmission companies, totaling about R$60 billion. The TCU’s discussion of the matter came nearly a decade after the audit process began in 2017.

The compensation is paid to power transmission companies whose contracts were renewed in 2012 under provisional presidential decree 579/2012 for assets that had not yet been fully amortized. The legislation established compensation payments for those non-amortized assets, with the total amount estimated at R$62 billion.

Initially, those payments were expected to be made over eight years, as established by a Mines and Energy Ministry ordinance published in 2016. The compensation process, however, sparked controversy and legal disputes over the calculation methodology. In 2017, an injunction suspended part of the payments, which were only resumed in 2020.

Last year, when reviewing reconsideration requests filed by power sector associations, the board of Brazil’s electricity regulator ANEEL reduced the amount owed by about R$5.6 billion, at June 2025 prices. The closure of the TCU case therefore preserves the burden on electricity consumers, who will continue making payments through their bills until 2028.

Within the TCU, the debate centered on whether the government’s regulatory framework was lawful, particularly regarding the appropriateness of the adjustment factor used to update compensation values in order to offset the transmission companies’ temporary lack of access to those funds.

Initially, the TCU’s technical staff argued that the adopted calculation rule was illegal and proposed ordering the Mines and Energy Ministry to suspend the provision establishing the remuneration factor as early as 2019. In 2020, then-reporting member Aroldo Cedraz requested additional analysis. In 2022, the technical staff reaffirmed its earlier position. Cedraz left the TCU in February of this year.

In 2023, however, the prosecutor’s service attached to the TCU disagreed with the technical staff and supported the legality of the ordinance and the government’s rule, arguing that the selected calculation factor was intended to compensate transmission companies for lack of access to funds owed between 2013 and 2017, a period in which the assets were effectively “sterilized,” without securitization potential and requiring companies to rely on their own capital.

In December 2025, the issue returned to the agenda, and Cedraz proposed following the technical staff’s recommendation by ordering the Mines and Energy Ministry to partially revoke the rule and requiring ANEEL to take steps to ensure proper compensation for transmission companies.

The judgment was suspended, however, after Benjamin Zymler requested time to examinate the case records. In February 2026, Zymler presented a vote defending the existing criterion on the grounds of legal certainty and regulatory stability.

At the time, Zymler emphasized that revising the payments after such a long period would create systemic disruption, given that about 81.14% of the amount were expected to be settled by the 2025/2026 cycle. Cedraz ultimately aligned with the reviewer’s recommendation despite some differences.

Also in February, Bruno Dantas proposed converting the audit into a diligence and requesting further clarification from the Mines and Energy Ministry and ANEEL.

“The new elements presented by the Mines and Energy Ministry and ANEEL confirm the hypothesis I expressed in my voting statement: the exact amount of compensation was unknown at the time the contract amendments were signed, which made prior technical studies quantitatively and objectively assessing the economic advantages of the renewal impossible,” said Dantas in his opinion.

Dantas added, however, that the governance and planning failures identified, combined with the significant passage of time, made it impossible to issue a reliable judgment on the adequacy of the compensation calculation and adjustment procedures.

*By Marlla Sabino — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Embraer, Airbus compete for KLM Cityhopper fleet

Competition involves order for 25 aircraft from KLM’s regional aviation subsidiary; Embraer currently holds exclusivity in the fleet

 

 

Embraer’s E2 jet is once again in the final stages of a competition with Airbus and its A220 model. This time, the contest is to secure an order for 25 aircraft from KLM Cityhopper, the regional aviation subsidiary of KLM. Maarten Koopmans, managing director of KLM Cityhopper, told Valor that negotiations are ongoing, and a decision is expected by the end of this year. The company’s goal is to replace part of its fleet of E1 (previous generation) aircraft from the Brazilian plane maker.

Currently, all of the airline’s aircraft are from Embraer—a total of 61 jets comprised of 25 E195-E2s, 19 Embraer 190s, and 17 Embraer 175s. Depending on the outcome of the competition, Embraer could lose its exclusivity with an important regional partner.

Koopmans explained that in 2019, KLM Cityhopper placed an order for 25 E2-195 aircraft, with an option to order an additional 25 units. By the end of 2025, the last aircraft from the firm order was delivered. Now, the airline is exploring other opportunities while negotiating the terms to decide on the additional jets with Embraer.

“We are in the process of reviewing our options. The work needs to be completed this year,” he said, emphasizing that the new aircraft will be used to replace part of the E1 fleet, particularly the E190.

Embraer and Airbus are currently engaged in a fierce global competition in the segment of aircraft with up to 130 seats. In December, the French company took the lead by securing a contract with Argentine low-cost airline Flybondi for a firm purchase of 15 A220-300s and 5 purchase options.

On the other hand, Embraer secured a significant order for up to 74 E2 aircraft from Latam. Of the total, 24 are firm, with a list price value of $2.1 billion. This acquisition was a victory for the Brazilian company, which has been seeking to expand its operational fleet in the country for years—currently, only Azul operates its commercial aircraft in Brazil.

KLM Cityhopper was founded in 1991, but its relationship with Embraer began only in 2008. That year, the airline received its first jet from the Brazilian plane maker. Until then, the entire fleet consisted of aircraft from Fokker, an important Dutch manufacturer back then. Fokker went bankrupt in 1996, and Cityhopper had to seek a new partner. The last Fokker aircraft left its fleet in October 2017.

Koopmans highlighted that regional aviation plays a central role in Europe and for KLM’s business. “If you look at KLM, we connect Europe. It’s the concept of connecting smaller planes with larger ones,” he said. Cityhopper operates 400 daily flights and is the largest in the segment in the region.

According to data from the European Regions Airline Association (ERA), the segment is responsible for transporting about 52 million passengers per year, which represents almost half the passenger volume that Brazil handles annually. Koopmans is vice president of the ERA.

Despite the optimism, the executive stated that the oil crisis poses various challenges. The main risk, he pointed out, is the reduction of routes and frequencies in less profitable markets. “The situation is complicated for the industry. We have been able to hedge fuel for the coming months,” he said.

The company made some minor changes to its flight schedule in Europe for May. These changes resulted in 80 fewer round-trip flights starting April 27. However, the cut represents less than 1% of the flights scheduled for the period.

Embraer and Airbus did not immediately reply to Valor’s requests for comment.

*By Cristian Favaro — São Paulo

Source: Valor International

https://valorinternational.globo.com/

 

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Brazil’s manufacturing sector deepens trade deficit in Q1

Industrial exports lag broader trade growth as rising imports of vehicles, pharmaceuticals offset stronger aircraft sales

 

 

While Brazil’s overall trade surplus increased 47.6% in the first quarter compared with the same period of 2025, the manufacturing industry posted a trade deficit of $19.7 billion, deepening its negative balance by 1.2% over the same time frame. Exports of manufactured goods rose just 2.8%, less than half the pace of total exports, which grew 7.1%. Imports of industrial goods increased 2.3%, one percentage point above the country’s total import growth.

The figures come from the Institute for Industrial Development Studies (IEDI), based on data from the Secretariat of Foreign Trade (Secex/MDIC). The study analyzed manufacturing trade performance across four levels of technological intensity, following Organisation for Economic Co-operation and Development criteria: high technology, medium-high, medium, and medium-low technology.

The report shows that despite strong export performance in sectors such as aircraft manufacturing—which also saw a decline in imports—imports increased in key industries such as automobiles and pharmaceuticals. The medium-low technology group, which usually offsets deficits in higher-tech industries, remained in surplus, though with a smaller positive balance than in the first quarter of 2025.

The manufacturing deficit from January to March was mitigated by strong export performance in high-technology industries, particularly aircraft manufacturing, said Rafael Cagnin, chief economist at IEDI.

Brazil’s total exports of manufactured goods reached $43.9 billion in the first quarter of 2026, a record level in current dollar terms for the period and $1.2 billion above exports in the same months of 2025. Growth in aircraft export revenue accounted for 59.6% of this increase.

Cagnin said aircraft exports are volatile because they involve high-value products tied to the delivery schedule of Brazil’s leading manufacturer, Embraer. He also noted a relatively weak comparison base. Early in 2025, he said, major trade tensions were already emerging as markets awaited the direction of U.S. President Donald Trump’s tariff policy. During the last year, however, aircraft were exempted from Trump’s sweeping tariffs and effectively “shielded” from harsher trade measures. “That allowed the sector to continue operating relatively normally,” he said.

In addition, Embraer increased aircraft deliveries in the first quarter of 2026, especially in commercial aviation. “There is a backlog among major global aircraft manufacturers, and Embraer has managed to expand market share in this environment. The company has been innovating, moving further into larger aircraft segments with competitive energy performance,” Cagnin said. He added that Embraer has also expanded into defense and security, an area seeing growing demand amid rising global military spending. “Although it is only one quarter, the period reflects the company’s portfolio diversification strategies over recent decades.”

Even with stronger aircraft exports, the IEDI report shows that the high-technology group still posted a trade deficit of $11.4 billion in the first quarter, maintaining its traditionally negative balance, though improving from the $12.5 billion deficit recorded in the same period of 2025. In addition to aircraft manufacturing, the high-tech group includes pharmaceuticals and electronics. Those two industries stood out for rising imports, up 21.6% and 5.3%, respectively, from January to March compared with the same period last year. Overall imports for the group, however, fell 2.5%, also influenced by aircraft imports, which declined 45.7% over the same comparison.

A negative highlight, according to Cagnin, came from the medium-high technology segment. The group—which includes weapons, automobiles, machinery and equipment, and medical instruments, among others—posted a 4% decline in exports in the first quarter compared with the same period of 2025. But the economist said imports were more concerning. Imports in the group rose 3.6%, driven largely by automobiles, which jumped 23.6%.

“It is the China effect, with electric vehicles, which highlights a major challenge for Brazil’s automotive industry both domestically and abroad,” Cagnin said. Chinese competitiveness, he noted, extends beyond the automotive sector. “China’s gain in the manufactured-goods market share across Latin America is increasing, often displacing Brazilian industry not only because it produces similar products, but because it has technological dynamism that allows it to capture market share with new products. We have been viewing the vehicle issue more from a short-term perspective, but it reflects a structural transformation of the market and very strong competitive pressure from innovative products.”

Overall, the medium-high technology group closed the first quarter with a trade deficit of $20.2 billion. While deficits are typical for the segment, this year’s negative balance widened 7.8% compared with the same period of 2025.

The IEDI report highlighted positive performance in medium-technology goods, whose exports rose 10.6%, driven by the metallurgy industry, which increased 15.3%. Imports in the group also rose, but at a much slower pace of 2.9%. The segment closed the first quarter with a deficit of $680 million, significantly lower than the $1.2 billion deficit recorded in the same period of 2025. The report noted, however, that the negative balance at the start of this year was affected by the accounting treatment of oil platforms, which, since last year, have distorted certain quarterly figures. Excluding shipbuilding, where these assets are recorded, the medium-technology segment would have posted a surplus of $1.8 billion from January to March. In addition to metallurgy and shipbuilding, the medium-technology group includes industries such as rubber and plastics manufacturing and non-metallic mineral products.

The medium-low technology group, meanwhile, was a negative surprise, Cagnin said. Traditionally in surplus, the segment typically offsets deficits in industries with greater technological intensity. According to the economist, some sectors face structural innovation gaps that translate into chronic trade deficits. “Especially in higher-tech industries, with a few notable exceptions such as aerospace.”

The medium-low technology segment—which includes apparel, footwear, wood products, furniture, metal products, petroleum products, food, and beverages—has historically helped cushion these deficits. “But this group has been posting very weak, stable performance,” he said.

According to the report, exports in the medium-low technology group were virtually flat, rising just 0.2% from January to March 2026, while imports increased 4.2%. The stagnation in exports is notable, the study said, as the group traditionally posts large trade surpluses due to industries linked to commodity processing. Among the four technological-intensity groups, it was the only one to record a trade surplus, at $12.6 billion. Even so, the surplus was 3.1% lower than in the first quarter of 2025.

* By Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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