Stock offering has weakest start to the year since 2016

Chance of higher U.S. interest rates for longer could push IPOs to 2025

04/26/2024

Vitor Saraiva — Foto: Silvia Costanti/Valor

Vitor Saraiva — Foto: Silvia Costanti/Valor

Contrary to the optimism at the end of last year, 2024 has begun weakly for stock offerings on the Brazilian stock exchange, marking the least active start in at least eight years in terms of financial volume. This year has seen six follow-ons from already listed companies, totaling R$4.9 billion, significantly bolstered by Energisa’s R$2.5 billion transaction. There’s a growing sentiment that the Brazilian market may experience its third consecutive off-year for initial public offerings (IPOs).

According to Valor’s calculations based on B3 data—Brazil’s stock exchange—the financial volume only includes local transactions, excluding Banco Inter’s offering on Nasdaq aimed at enhancing liquidity on the American stock exchange. Last year, market activity stalled following the public disclosure of a major corporate fraud involving retailer Americanas, halting business momentum in the first quarter. During the same period, the volume reached R$7.1 billion across four transactions, one of which involved Assaí, with Casino selling R$4 billion worth of shares to fulfill its creditor obligations. Since May, however, the market has seen increased activity, primarily from debt-laden companies.

This year, the standout offering is expected from Sabesp, which is undergoing a privatization process by the São Paulo government that could generate around R$20 billion. The plan aims to attract a reference investor to acquire 15% of the company, with ongoing evaluations of how to navigate the high market volatility. Another significant transaction is Eletrobras’s sale of Isa Cteep shares, potentially raising R$4 billion, contingent on improved market conditions.

To date, this year’s total only surpasses that of 2016, when the volume was confined to R$3.49 billion across four transactions between January and April—a period notably affected by high market volatility and President Dilma Rousseff’s impeachment. On the contrary, the most successful start was in 2021, when the Brazilian stock exchange hosted 33 offers in the first four months alone, totaling a record R$54.9 billion, buoyed by substantial global liquidity, and that period included 22 IPOs, a stark contrast to the recent trend.

The year’s weak start has disappointed investment banks and companies eager to enter the stock market. Expectations for U.S. interest rate cuts have been repeatedly deferred as new data points to a persistently robust American economy, suggesting a prolonged period of high rates. This delay is pushing back the anticipated opening of the IPO window.

Additionally, concerns over Brazil’s fiscal health are impacting market transactions, prompting listed companies to delay raising capital to avoid diluting shareholder value. Bruno Saraiva, co-head of Bank of America’s investment bank in Brazil, notes that the ongoing delay in U.S. rate cuts has dampened the market’s recovery hopes, deviating from initial forecasts of five Federal Reserve rate reductions to now just one expected in December. This adjustment follows reports of persistent inflation, complicating predictions for deal timing. “Today, it’s harder to know when there will be a deal,” he remarks. “When rates start to decline in the U.S., emerging markets will benefit.”

Vitor Saraiva, head of equity capital markets at XP, acknowledges that U.S. inflation data has altered projections, yet he remains hopeful for a few year-end IPOs, contingent on sustained expectations for Fed rate cuts. “Today, if there are [IPOs], it will be towards the end of the year,” he asserts.

Despite ongoing volatility, the secondary offering by Boa Safra, which attracted solid market interest, demonstrates that high-performing companies can successfully raise capital. “Good companies with compelling narratives earn credibility in the market,” he explains.

Marcello Lo Re, head of Latin American equity capital markets at Morgan Stanley, observes a resurgence in market activity in other Latin American nations, particularly Mexico, where the financial institution is increasingly focusing due to rising capital market activities. In Brazil, attention remains fixed on the latter half of the year, particularly as investors begin considering the prospects for 2025 from September onwards.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil’s robust job market presents challenges for Central Bank

High employment levels benefit economic activity and may boost growth but pressure inflation and could impact the intensity of interest rate cuts

04/26/2024

Leonardo Porto — Foto: Leonardo Rodrigues/Valor

Leonardo Porto — Foto: Leonardo Rodrigues/Valor

The unexpectedly robust job market performance has surprised economists and is good news for economic activity. However, it is also a major concern for the Central Bank. While a heated job market reflects a buoyant economy and means more income and consumption, a tight labor market can generate greater inflationary pressures and slow the pace of interest rate cuts, economists say.

Despite other factors, such as changes in fiscal targets and monetary policy directions in the United States, adding pressure to the decisions of the Monetary Policy Committee (COPOM), low unemployment and rising income continue to pose a problem for the Central Bank in reducing the Selic key interest rate.

In a report sent to clients recently, Citi Brazil noted that the current unemployment rate of 7.6%—the lowest since the first quarter of 2015—and real wage growth indicate the restrictive nature of labor market conditions in the country.

“The already tight labor market conditions, coupled with the view that growth is heading for acceleration, are likely to increasingly restrict the disinflation process,” wrote economists Leonardo Porto, Paulo Lopes, and Thais Ortega. “This outlook will likely motivate the COPOM to halt the interest rate reduction cycle not only sooner but also at a higher level.”

In particular, the pace of wage increases is not in line with productivity, said Mr. Porto, chief economist at Citi Brazil. “If wages rise in line with productivity, it does not generate inflationary pressures. However, if this increase is not anchored, there are potential risks of inflationary pressures emerging,” he added.

“When we look at data from the National Household Sample Survey (PNAD), we see a nominal wage increase of 9% and a real increase of 4.3%. These numbers are well above any productivity estimate in Brazil.”

A warning, the economist notes, is the sign of economic acceleration, which should further heat the job market.

After stagnation in the second half of 2023, Citi estimates GDP growth of 0.4% in the first quarter and 0.6% in the second, compared to the previous quarter, driven by domestic demand, particularly from household consumption and investment. For the year, the bank expects GDP growth of 1.5%. The unemployment rate, meanwhile, should stand at 7.5% this year, compared to 8% in 2023.

“In these conditions, the labor market is expected to strengthen even further in the future, with lower unemployment rates, pointing to an even smaller output gap [the difference between current GDP and potential GDP],” the report said.

These risks are added to a scenario of unanchored disinflation expectations in the medium and long term, which creates an additional limitation for the Central Bank.

In the Focus survey released on Tuesday, the inflation expectation for 2024 rose to 3.73% from 3.71% in one week. For 2025, the projection increased to 3.60% from 3.56%.

In addition to sustaining high service inflation, the tight job market is expected to lead to higher goods inflation, according to Citi. The bank projects a 4% rise in the benchmark inflation index (IPCA) this year.

Mr. Porto expects a Selic cut to 10% at the COPOM meeting in June. However, there are doubts about whether this projection should be recalibrated. This is because, in recent days, other risks to the interest rate cut cycle have begun to materialize.

Domestically, the change in the fiscal target has raised an alert. Internationally, there have been shifts in U.S. monetary policy, with the Federal Reserve facing greater inflationary pressures—in March, the consumer price index CPI advanced 3.5% on an annual basis, against an expectation of 3.4%.

As a result, there has been a repricing of U.S. monetary policy, said Rodolfo Margato, an economist at XP. At the beginning of the year, the market had priced in at least six interest rate cuts over the year. Now, there is uncertainty about the next cut, and the market also sees a 20% chance of an interest rate hike at the next Fed meeting at the end of April.

Discounting external pressures, domestically, Mr. Margato said, the dynamics of the job market continue to be one of the main variables monitored by the Central Bank.

“Since the third quarter of last year, the main indicators of the job market in the PNAD and the General Register of Employed and Unemployed Workers (CAGED) have been surprisingly high. The employed population grows consecutively, with emphasis on formal employment since the beginning of 2024,” he said.

“From a monetary policy perspective, the main factor to be monitored is the dynamics of real wages. The PNAD shows real average income from work on an upward trajectory since September. Data from CAGED and the Salariômetro [Salarymeter, in a free translation] from the Economic Research Institute Foundation (FIPE), are moving in the same direction.”

XP expects the average income (received from all jobs) to grow 2.5% in real terms this year, compared to 2023.

This positive moment, he said, is due to a combination of three variables. First, the traction of economic activity in recent months, which should reflect a 0.7% GDP increase in the first quarter, according to XP. The second is the increase in the minimum wage, which saw real growth of 3%.

“The third, which generates discussion among analysts, is the equilibrium unemployment rate, called NAIRU, which does not accelerate inflation. In our discussions, NAIRU would be around 8%, but we have already begun to observe it below 8% in the third quarter of 2023,” said Mr. Margato. “With it below that level, there may be pressure on wages and acceleration of inflation.”

The Central Bank has been closely monitoring some groups of the IPCA, he said. One would be services inflation, which is expected to grow 4.5% this year compared to 2023, according to XP. The underlying IPCA for services, a kind of core inflation for services, which excludes volatile items such as airline tickets, is expected to advance 4.9%. The IPCA for labor-intensive services, in turn, is expected to rise 5.2%. All projections are well above the Central Bank’s inflation target for this year, of 3%.

XP expects an IPCA of 3.5% for 2024, with an upward bias that could take the index to 3.7%. The projection for the Selic, at 9% by the end of this year, is under review.

“There are still many uncertainties, which the COPOM has highlighted when referring to the domestic scope. In the case of the labor market, we see signs of moderation in the short term, but they are insufficient for service inflation to converge to the target,” said Mr. Margato.

In its latest statement, on March 20, the COPOM highlighted an environment marked by pressures in the labor markets of emerging countries, which requires “caution.”

A report by consultancy MB Associados observes that the statement emphasizes uncertainty mixed with the resilience of activity and the labor market.

“The [Central] bank signaled another 50-basis-point cut, to 10.25% [per year] in May, but leaving some room for maneuver. The possibility of a softer 25bp cut exists, without affecting the end-of-cycle rate. By suggesting that the cut could be softer, the Central Bank demonstrates a concern with some inflation items that remain very pressured,” wrote Sérgio Vale, an economist at consultancy MB.

“It will be difficult for the Central Bank to justify further interest rate cuts given the strong expansion of employment, income, high employment rate, and low unemployment,” said Mr. Vale, who expects an unemployment rate of 7.5% this year and greater heating of the job market in response to economic activity.

In the report, MB states that elements of uncertainty will likely cause the Central Bank to end the Selic rate cut cycle at 9.25%, and “those who imagined a much lower Selic may have to revise their projections.”

This interruption, said Mr. Vale, could be the harbinger of a much more tumultuous second half in terms of monetary policy—besides the end of the interest rate cut cycle, the terms of the Central Bank president and two directors will end soon.

“In the second half, the debate will be about which Central Bank we will have and where we are heading,” he added.

*Por Marsílea Gombata — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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LG to invest up to R$1.5bn to produce white goods

Factory in Paraná starts operating in 2026 making refrigerators; there are also plans for washing machines and dryers

04/26/2024

Daniel Song — Foto: Gabriel Reis/Valor

Daniel Song — Foto: Gabriel Reis/Valor

LG Electronics is expanding white goods production in Brazil and launching a relationship program to better understand Brazilian consumers. In the first quarter of 2026, the Korean electronics and household appliances giant begins production of refrigerators in Fazenda Rio Grande, in the metropolitan region of Curitiba, in the Paraná state.

The investment in the operation will be $250 million and could reach $300 million, Daniel Song, LG’s chief executive for Latin America, told Valor.

“We have a plan to strongly expand our white goods operation [in Brazil]. And we will start with refrigerators,” said the executive, who took over Latin American operations in January this year. Mr. Song is also LG’s CEO for Brazil since last year.

In addition to refrigerators, the new factory will produce washing and drying machines. Currently, refrigerators are imported from Indonesia, China, South Korea, and Mexico. On the other hand, 90% of washing machines are imported from China.

Initially, production will meet local demand, but LG mulls exporting part of the production to Argentina, the executive said. “The new president of Argentina [Javier Milei] is adopting a policy to have more freedom and import products.”

The location of the new factory, in Curitiba, facilitates export logistics to Argentina. The company has a factory in Manaus, Amazonas, that manufactures TV sets, computers, microwave ovens, and air conditioning units, and maintains facilities in Taubaté, São Paulo. The old factory in the São Paulo state has housed customer service and maintenance services since 2021, when LG stopped producing cell phones globally and transferred the production of notebooks and computer monitors to Manaus.

With 30 years at LG, and 17 working in Latin American countries, the Korean executive states, “Brazil has high growth potential.” In addition to expanding local production, the company debuted its relationship program, LG Family Club, in Brazil, earlier this month.

“We thought of a method to establish closer contact with consumers because they usually purchase the product in-store, and afterward, we lose touch with them,” said Mr. Song, who initiated the program in Peru in 2016 before introducing the concept to Mexico in 2021.

The company plans to provide additional information about its products based on customer demand, such as video tutorials, and facilitate quick communication through the website and a WhatsApp channel dedicated to registered customers, he added.

“When we notice that several consumers are asking about the same function, we can create an online course for that topic or inform about a product update,” said Mr. Song. In addition to tutorials, the program offers raffles for experiences, such as tickets to live music shows. Since earlier this month, 5,900 consumers have connected to the program, said LG.

The United States, India, and South Korea account for most of the company’s revenues. Brazil, Germany, and Canada compete for the next positions.

LG Electronics ended the first quarter of fiscal 2024 with a global profit of 585.4 billion South Korean won ($426 million), up 24.2% year over year. Consolidated revenue in the three months ended in March was 21.09 trillion South Korean won ($15.4 billion), up 3.4% year over year. The white goods and air conditioners segment, which generates the largest share of LG’s revenue, earned 8.6 trillion South Korean won in the first quarter, up 7.2% year over year. The home entertainment division, which houses TV production, reported revenue of 3.5 trillion South Korean won, up 4% year over year.

The scenario LG reports for the global market as a whole (not necessarily for its sales) indicates a falling demand for home appliances in the first half and growth in the second half of the year.

*Por Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Google bans political ads in Brazilian elections

The company announced that its content policy will be updated in May

04/25/2024

Google is set to ban political ads in Brazil for the 2024 municipal elections following the Superior Electoral Court (TSE) update to the rules for boosting electoral advertising in February. In a statement, Google announced that it would revise its Google Ads political content policy to “no longer allow political ads to be served in the country.” This information was initially reported by “Poder360” and later confirmed by “O Globo.”

“This update will take place in May, coinciding with the enforcement of the electoral resolutions for 2024. We remain globally committed to supporting the integrity of elections and will continue to engage with authorities on this matter,” the company stated.

Resolution 23732, amending the rules on electoral ads established by the Electoral Court in 2019, includes a definition of “political-electoral content” that Google considers overly broad. According to the Court, this type of ad encompasses topics such as elections, political parties, federations and coalitions, elective positions, individuals holding elective positions, candidates, government proposals, bills, the exercise of voting rights, and other political rights, as well as issues related to the electoral process.

The Electoral Court mandates that digital platforms providing services to boost this type of electoral content must maintain a repository of the ads to monitor, in real time, the content, expenditure, payers, and demographic profiles of the audience targeted by the advertising.

Platforms are also required to offer an “accessible and easy-to-use query tool that allows advanced searches of the repository’s data” using keywords and advertisers’ names, among other criteria.

Furthermore, the Court prohibits the paid prioritization of content that promotes negative information about other candidates or “disseminates false data, fraudulent news, or news that are notoriously untrue or seriously out of context, even if they benefit the user responsible for the boost.”

The TSE’s rules must be implemented within 60 days of their enactment for platforms already offering the ad boosting service, and they are applicable even in non-election years.

Google, a subsidiary of Alphabet, which reported a net profit of $73.79 billion in 2023 (a 23% increase from the previous year), argues that moderating such a vast number of ads would be unfeasible, especially in an election involving over 5,000 municipalities. The company also expresses concern that the broad scope of the definition might lead to uncertain moderation practices.

In 2020, a year marked by a brief campaign period and pandemic-related restrictions, “O Globo” reported that candidates had spent R$36 million on boosting internet content for that election. The most significant expenditures were by three companies: Facebook, which also manages Instagram; Adyen, the fintech responsible for the platform’s payment system; and Google.

In 2022, politicians spent nearly R$127 million on advertising on Google, according to the company’s report. From the start of that year to the date of the second round of the presidential election, 53,482 ads were displayed on the big tech platforms. The campaign of former president Jair Bolsonaro spent the most that year, with R$28.7 million, followed by President Lula’s campaign, which spent R$22.8 million on Google and YouTube.

*Por Guilherme Caetano, O Globo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Outlook change raises concerns as earnings season kicks off

Deterioration in interest rate and exchange rate projections diminishes the importance of first-quarter figures, shifting focus to executives’ forecasts

04/25/2024

Jennie Li — Foto: Ana Paula Paiva/Valor

Jennie Li — Foto: Ana Paula Paiva/Valor

The first-quarter earnings season for Brazilian companies, which picked up steam this week, is set to reveal a snapshot of a scenario that for many firms is already in the rearview mirror. Analysts say that worsening projections for both the global and Brazilian economies have dimmed the allure of these numbers, elevating the importance of executives’ assessments and projections during earnings calls.

Overall, expectations are that the figures for the first three months of the year will continue the trend of sequential improvement over fourth-quarter results, especially for companies operating in the domestic market. For commodity exporters, the impact of falling input prices is expected to be felt.

“In the first quarter, we saw a revision in profit estimates, supported by the prospect of falling interest rates and the positive results companies reported in the fourth quarter, but this changed dramatically in the early weeks of April,” Jennie Li, a strategist at XP, told Valor.

She said that since August last year, market consensus on profits had been revised upwards by nearly 10%. However, with the intensification of uncertainties this April, there has been a decrease of about 1% in these analyst estimates.

“We expect that the resumption of activity, real wage gains, and employment should have positive effects mainly on the results of consumer sectors,” said Carlos Eduardo Sequeira, head of research at BTG Pactual. “It won’t be a spectacularly stronger season, but the trend should continue.”

Consumer companies are expected to stand out, with improvements in operational data and margins. However, Santander noted in a report that changes in the tax regime, with the implementation of tax changes on subsidies, are expected to impact the profit generation of a large part of the companies.

Passed last year, Law 1479/2023 increases government revenue by establishing criteria for deducting the value of benefits from the ICMS sales tax base of federal taxes. Only the value of incentives used in investments can be deducted.

The intense heatwave that hit Brazil in the early months of the year, due to the effects of El Niño, is expected to positively impact the results of power distribution companies and water utilities. Increased volumes of electricity and water are expected to improve these companies’ figures, said J.P. Morgan.

Among commodity producers, those in the paper and pulp industry are expected to be the positive highlights. “We saw a substantial rise in prices that should generate more robust results, especially for Suzano, which deals directly with the commodity,” Ms. Li stated.

Oil companies should also post strong figures, with Petrobras being a highlight, even with falling oil prices, due to high production volumes in Brazil. The outlook is also positive with the recent acceleration in oil prices, the XP strategist said.

Mining companies and steelmakers are still expected to face pressured results, with the sharp fall in iron ore prices in the first quarter impacting these companies’ figures. Mining giant Vale announced its results on Wednesday night, with a 9% drop in profit to $1.68 billion. The steel industry scenario, especially in Brazil, is still challenging and is expected to keep these companies’ performances weak, said BTG.

In this context, due to the significant shift in perspectives we have seen in recent weeks, more important than the results themselves, what the companies indicate for the coming months will be crucial for investors to have better visibility of outcomes.

The exchange rate rose to near R$5.3 per dollar in the first weeks of April. The interest rate curve steepened, largely due to uncertainties involving the evolution of inflation in the United States and the Brazilian government’s indication that the zero-deficit target has been postponed to 2025.

Steelmaker Usiminas, which released its results on Tuesday morning, showed more conservative prospects for the second quarter, noting that the stronger dollar has an impact on the price of steel plate acquisitions, directly affecting its profitability. The steelmaker ended the day down 13.91% in the stock market.

“In the United States, market consensus adjusts faster than here, so after listening to what the companies said during the earnings season, there may be a greater revision,” said Ms. Li.

*Por Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Government delivers first bill to regulate tax reform

Document spans over 300 pages; Lower House speaker expects to pass new regulations before legislative recess

04/25/2024

Fernando Haddad — Foto: Marcelo Camargo/Agência Brasil

Fernando Haddad — Foto: Marcelo Camargo/Agência Brasil

Finance Minister Fernando Haddad presented the first supplementary bill to regulate the consumption tax reform to Lower House Speaker Arthur Lira and Senate President Rodrigo Pacheco on Wednesday. The Ministry of Finance estimates the average rate for the new taxes—to be set later—at 26.5%, potentially rising to 27.3%. Mr. Lira expects to pass the new rules by the start of the parliamentary recess on July 17.

Valor reviewed the 360-page, 499-article bill, which had not been officially filed in the Congress system as of Wednesday night. Among the most anticipated elements by tax experts and business sectors were the definition of a list of 15 staple foods with a zero tax rate, the six types of goods that will be subject to the new selective tax, and the rules about categories included in specific regimes.

The text follows the guidelines of the proposal to amend the Constitution (PEC) passed by Congress last year, which merges six taxes. They will be transformed into CBS (federal) and IBS (of the states and municipalities). These new taxes will have a single federal legislation, no compounding effect, and collection at the destination. Additionally, the bill provides differentiated taxation for products made outside the Manaus Free Trade Zone that compete with those manufactured in the region.

“The country has been waiting 40 years for a solution to the most tangled of Brazilian problems, which is our chaotic tax system, still unfortunately among the 10 worst in the world but will be among the 10 best in the world following the full implementation [of the reform],” Mr. Haddad said after delivering the bill to the legislators.

The regulatory proposal does not set the rates for the new system. Bernard Appy, the extraordinary secretary for tax reform at the Ministry of Finance, said that the estimates would be similar to those previously released by the ministry before the project’s submission.

“The estimate is very close to what was previously stated, with the design ranging from 25.7% to 27.3%, averaging 26.5%. The reference is the average, but the expectation is that it could be even lower,” Mr. Appy said. Regarding the selective tax, there is no information yet, and the rate will depend on future legislation.

The proposal details the rules for products and sectors taxed at a differentiated rate, a highly anticipated aspect of the regulation. The bill lists, for example, 15 items from the basic food basket, including butter, margarine, milk, rice, and soybean oil, specified according to the Mercosur Common Nomenclature—Harmonized System (MCN/HS).

Three other items also have a zero rate, located in another chapter in the text sent to Congress: horticultural products, fruits, and eggs. Thus, the foods for human consumption subjected to a zero rate would be 18.

According to the proposal, one of the guiding principles for selecting the foods to benefit from favored rates “was the prioritization of fresh or minimally processed foods and culinary ingredients, following the recommendations of healthy and nutritionally adequate eating from the Dietary Guidelines for the Brazilian Population, by the Ministry of Health.”

Another guiding principle, the text points out, “was the prioritization of foods primarily consumed by the poorest, aiming to ensure that as much of the tax benefit as possible is appropriated by low-income families.”

The text also sets 14 foods that will have their tax rates reduced by 60%. The list includes meats, fish, mate, natural honey, and pasta.

On another front, the project details the rules for the professional categories that will be subject to specific regimes, with a reduction in rates by 30%. According to the text, there will be 18 categories under this regime, including lawyers, administrators, accountants, and economists. These professionals must be “subject to oversight by a professional council,” according to the proposal.

Additionally, 27 healthcare services will have a 60% reduction in the charges of the new taxes. The list includes psychiatric, dental, physiotherapy, and laboratory services.

The rules for the new selective tax will also likely be a point of contention in the regulatory process, with sectors diverging on which areas should have the additional taxation, aimed at discouraging the consumption of goods considered “harmful to health and the environment.” According to the government’s proposal, this list will include vehicles; vessels and aircraft; tobacco products; alcoholic beverages; sugary drinks; and extracted mineral goods (iron, petroleum, and natural gas).

According to the text, the selective tax will be levied only once on the product, with no possibility of using tax credits from previous operations or generating credits for subsequent operations. The bill also says that the Federal Revenue Service will be responsible for administering and overseeing the new tax.

Another innovation of the PEC, the so-called “cashback reward,” is also detailed in the proposal. The system provides for the return of part of the taxes paid to individuals from low-income families. According to the text obtained by Valor, the tax returns will be directed to families with a per capita income of up to half a minimum wage, provided they are included in the Single Registry for Social Programs (CadÚnico)—a tool used by the Brazilian government to identify and categorize low-income families.

In the bill, the government proposes a general rule of returning 20% of the CBS and IBS for poor families. In the case of cooking gas, there will be a 100% return of the CBS and 20% of the IBS. For electricity, water, and sewage, it is 50% of the CBS and 20% of the IBS. The only products exempted are those subject to the selective tax, such as cigarettes and alcoholic beverages, which will have no reward.

The proposal also foresees the possibility of creating “fiscal citizenship incentive” programs, aimed at encouraging the final consumer to request the issuance of a tax receipt. This initiative already exists in several states and aims to reduce tax evasion—which could lower the general rate. The IBS managing committee and the Federal Revenue Service may use up to 0.05% of the tax revenue to fund these programs. The proposal does not define how these resources will be used—whether with direct returns to the taxpayer, lotteries, or even advertising campaigns.

Following the delivery of the proposal, the government and Congress must race against time to pass the regulation by the end of the year. Before receiving the text, Mr. Lira indicated that he would try to pass the regulation in the Lower House by the beginning of the legislative recess on July 17. “We’ll establish a backward calendar. If you don’t set a date, everything gets pushed to next week, and things keep dragging on,” he said. After the recess, the Lower House is expected to be virtually inactive due to the municipal elections.

The project delivered on Wednesday is the first of a total of three texts to regulate the PEC passed last year. Another supplementary bill is expected to be sent after the International Workers’ Day holiday to address the managing committee of the new taxes. There is also a need for a statute law to address the compensation fund for the states and companies.

Mr. Lira said that, if the government delivered the reform on Wednesday, he would gather the party leaders to decide whether to appoint two rapporteurs directly in the plenary or create two “small” working groups, with five or six legislators each. According to him, choosing a single rapporteur without forming a working group might be problematic because “many competent people want to participate.” He did not indicate who the possible names might be.

*Por Jéssica Sant’Ana, Raphael Di Cunto, Marcelo Ribeiro, Beatriz Olivon, Guilherme Pimenta, Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Eneva, PetroReconcavo resume talks on merger

No formal mandate yet, but companies have re-engaged following the asset merger between 3R and Enauta

04/25/2024

Eneva’s Parnaíba thermal complex in Maranhão: company is in talks to merge with PetroReconcavo — Foto: Divulgação

Eneva’s Parnaíba thermal complex in Maranhão: company is in talks to merge with PetroReconcavo — Foto: Divulgação

Eneva and PetroReconcavo have resumed discussions on a potential merger of their businesses, Valor has learned, after their ongoing negotiations with other rivals were previously unsuccessful. According to sources, Eneva’s interest in the merger lies in gaining access to gas. There is no formal mandate yet, but the companies have come closer again after 3R and Enauta formalized their asset combination.

There is still no defined structure for how the transaction might proceed. Following the progress of discussions between Enauta and 3R, companies in the energy and oil & gas sectors began initiating dialogues among themselves. In the case of Eneva, negotiations with Vibra did not progress as the fuel distributor saw no advantage in the share exchange ratio between the two companies.

When approached to comment on the potential merger, both companies declined. However, on Wednesday night, after consultations with the Securities and Exchange Commission of Brazil (CVM), both companies denied the merger talks.

Eneva’s market capitalization on B3, the Brazilian stock exchange, stands at R$19.4 billion, while PetroReconcavo’s is R$6 billion. The most likely transaction on the table would be a share exchange, sources suggest.

Other sources confirmed that Eneva and PetroReconcavo had previously started discussions in the recent past but did not move forward. Eneva has also been in talks with other potential energy sector competitors to seek partnerships.

These talks come at a time when junior oils are preparing for a sector consolidation, initiated by a memorandum of understanding signed between Enauta and 3R. Concurrently, other discussions in the sector are ongoing. For instance, Seacrest is reportedly seeking a buyer, as previously reported by Valor.

PetroReconcavo had begun preliminary talks with 3R, but the latter ended up being approached by Enauta. Enauta may have left the door open for future consolidation in the newly combined company, which could potentially include PetroReconcavo.

Eneva has shown a keen interest in growth through mergers and acquisitions, although its significant debt is a concern, sources say. The energy company is, for instance, in the process of purchasing thermal power plants from Eletrobras, a deal estimated at R$8 billion.

A source linked to the shareholders mentioned that the company could call for a capital increase, supported by two major partners—BTG and BW, with the Moreira Salles’s family office providing the funds.

For Eneva, it makes sense to merge its assets with another company focused on natural gas, according to sources.

The energy companies are also experiencing a strong wave of consolidation, with several mergers and acquisitions underway this year. Valor reported this week that there are at least R$30 billion in ongoing purchases and sales of sector assets.

*Por Fernanda Guimarães, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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IG4 shows interest in acquiring control of Unigel

Investment in the distressed company would be linked to equity dilution of Slezynger family

04/24/2024

Asset manager IG4 has made a bid to take over Unigel, Valor has learned. The negotiations hinge on the willingness of the Slezynger family to relinquish control of the chemical company and accept equity dilution, sources indicate.

Talks began three months ago and have progressed in recent weeks, people familiar with the matter say.

With debts amounting to R$3.9 billion, the company finalized an agreement with creditors on the final details of an out-of-court reorganization plan ratified in February. It has until May 20 to secure the simple majority support of the creditors involved in the restructuring and ensure the plan’s execution.

According to a source, even if the agreement is concluded, Unigel’s restructuring merely postpones the company’s debt issues without addressing the core problem. A significant equity injection and relinquishment of control by the family would be necessary for a comprehensive restructuring of the group. IG4 is reportedly ready to participate in the business restructuring.

When approached, Unigel said that it is not negotiating the sale of the control. “The family has owned Unigel for about 60 years and has no intention of leaving the business,” the company said. IG4 declined to comment on the matter.

The family has enlisted the expertise of businessman Pedro Wongtschowski, a minority shareholder and former chairman of energy giant Ultrapar, to lead the company’s restructuring amid financial challenges.

Mr. Wongtschowski could advise the group from the board—a position he held at Unigel about a decade ago during a period of substantial debt due to expansion investments and acquisitions in Brazil and Mexico, as the company was navigating another severe financial crisis.

Mr. Wongtschowski’s role will be that of an adviser, though it is not yet clear if he will actually take a position on the company’s board. The businessman was also being considered for the CEO position, but consensus has not yet been reached. Mr. Wongtschowski’s entire career is linked to the Ultra group—he was a close aide to the late Paulo Cunha, the group’s leader for 25 years.

Henri Slezynger, the group’s founder, continues to lead the board of directors while one of his sons, Marc, serves as deputy chairman. Currently, two of the five board seats are vacant.

From January to September of last year, the company posted a net loss of R$1 billion. Net revenue totaled R$4.11 billion, a 45% decrease compared to the previous year, and the adjusted operating result (EBITDA) was negative at R$276 million, compared to a positive R$1.65 billion a year earlier. The company has yet to release its fourth-quarter financial statement, which was scheduled for early April.

*Por Taís Hirata, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Majority of Brazilian microentrepreneurs employed elsewhere

Research exposes program flaws, calls for labor cost cuts to combat informality

04/24/2024

Bruna Mirelle Alvarez — Foto: Gabriel Reis/Valor

Bruna Mirelle Alvarez — Foto: Gabriel Reis/Valor

More than half of the so-called individual microentrepreneurs (MEIs) in Brazil work as salaried employees for other companies, research shows. The study indicates that the so-called “pejotização”—hiring of workers as firms rather than individuals—could be reduced with measures such as cutting labor costs on the payroll.

The survey conducted by Bruna Mirelle Alvarez, a researcher at the São Paulo School of Economics of the Getulio Vargas Foundation (FGV EESP), reveals that 53% of MEIs—part of a government program initiated in 2008 to empower millions of small businesses—are not genuine entrepreneurs. This highlights flaws in the program’s structure, leading to unintended consequences such as informal employment and significant losses, particularly for Social Security.

The study analyzed data from 2008 to 2019, a period during which over 9 million MEIs were established, comprising nearly 70% of all registered businesses in Brazil. To arrive at these findings, the researcher initially investigated the competitive dynamics between MEIs and formal employment contracts for companies’ recruitment preferences. This analysis involved examining how the proximity to 3G antennas influenced the establishment of MEIs between 2008 and 2011, a time when online registration became available.

“Having access to the internet is essential for microentrepreneurs. They need it to register the company, issue the Document of Tax Collection paid every month, and also the tax receipts for each service,” said the economist.

The findings also establish a connection between the accessibility of opening an MEI and firms’ hiring practices. Companies situated in areas farther from the antennas tended to employ more workers under the formal regime compared to those in closer proximity to the equipment.

However, Ms. Alvarez said that the effect of the reduction in the number of formal contracts and the increase of MEIs could also suggest a rise in entrepreneurship, aligning with the original intent of the program. “It’s important to note that solely based on this analysis, we cannot determine if these individuals were shifted towards informal employment,” she said.

To ascertain which paths individuals pursued, the researcher constructed a general equilibrium model wherein individuals decide between becoming salaried employees, informal workers, microentrepreneurs, or employees of formal sector companies. This model was fed with data from the National Registry of Legal Entities and the 2010 Census. By simulating how this model adjusts to real economic data, including the distribution of workers in firms over time, it revealed that 53% of those opting for the MEI route choose informality, while 47% evolve into “genuine” microentrepreneurs.

“Based on the results, I believe that the cost of the formal work contract is an important factor. Reducing these costs would be a good measure to help reduce these illegalities related to the labor market,” she said.

Other recent studies also point to problems in the design of the MEI, created in 2008 intending to formalize people who work as freelancers or in small businesses. It allows them to contribute to Social Security and access benefits such as retirement—limited to one minimum wage—, sickness benefits, and death pension.

A recent study by researchers at the Brazilian Institute of Economics (FGV Ibre) showed that the MEI accounts for almost all the growth in the number of business taxpayers numbers in Brazil, to 3.9 million in 2023 from 750,200 in 2009. Looking only at 2021, a year in which there was a peak in the creation of MEIs—they showed that 63% of them had been laid off from a formal job. Within this group, only 22.6% of the layoffs were at the worker’s request.

Another Ibre study, from 2022, showed that 31.3% of MEIs had completed higher education, a proportion much higher than the national average of 15.7%. Meanwhile, those with no education or incomplete elementary education—the program’s target audience—were only 13.4%. At the same time, looking at income, researchers found that 56.4% of MEIs earned more than two times the minimum wage in the third quarter of 2022, a percentage higher than that of employees with a formal job (32.1%).

“This explosion in the creation of MEIs may seem like a leap in entrepreneurship, but in reality, it is just a different form of insertion into the labor market, cheaper and more attractive. And with the aggravating factor that it contains a large subsidy to Social Security, which one day will have to be paid,” said Fernando de Holanda Barbosa, an Ibre researcher.

Due to its focus on the vulnerable population, the program has high government subsidy. In the case of contributions to social security, it is limited to 5% of the minimum wage for MEIs (R$70.60 in 2024). Whereas the salaried worker earning the minimum wage for Social Security contributes up to 34% of the salary, shared between employee (7.5% to 14%) and employer (20%).

The significant gap between contributions puts pressure on the Social Security system. Rogério Nagamine Constanzi, an expert in the field, estimates that the actuarial deficit of the MEIs could reach R$1.4 trillion in the future. According to his calculations, although MEIs represent approximately 10% of contributors to the Social Security Regime, their contribution to revenue is only 1%.

“It is worth remembering that a contribution of around 30% is precisely what makes Social Security actuarially sustainable over time. If there were a total migration to the MEI, it would not be solvent,” said Mr. Barbosa, with Ibre. “Because it is a relatively new modality, it has not yet affected pension payments. But this cost will come.”

Ms. Alvarez’s study conducted simulations of four hypothetical scenarios aimed at reducing the phenomenon known as “pejotização”: terminating the MEI program, eradicating informality, enhancing oversight, and cutting labor costs. All these scenarios led to an improvement in overall welfare, defined here as the combined sum of profits, wages, and taxes paid. However, the most effective measure proved to be a 20% reduction in payroll taxes. Despite this, it resulted in only a slight decrease in the total number of MEIs in the economy, to 60.9% from 61.5%. Additionally, while the percentage of informal workers in the labor market would drop to 32.4% from 33%, their proportion within the MEI community would increase to 54% from 53%.

Unlike the other scenarios, there is also an increase in the salary of both formal workers (2.4%) and informal workers (4.9%).

“As the tax on payroll is reduced, this increases demand for these workers and, thus, their salaries. With this, part of the MEIs who were previously entrepreneurs or informal workers move to salaried employment,” said Ms. Alvarez. “With fewer informal workers in the economy, the salary offered to them increases, and this balances the proportion of MEIs choosing to be informally employed.”

For the researcher, the results also raise the question of whether “pejotização” does not represent a new structure in the labor market, albeit illegal. “It’s bad in terms of labor rights but, perhaps even more so after the pandemic, people may be more willing to accept this type of arrangement, which brings more freedom in terms of working hours, and less bureaucracy in dealing with the company.”

*Por Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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CBMM invests to expand use of niobium

Company owned by the Moreira Salles family plans to develop more applications for the metal

04/24/2024

CBMM, the world’s largest niobium producer, is expanding investments to develop new applications for the metal. After disbursing R$230 million for this purpose in 2023, the company controlled by the Moreira Salles family set aside another R$270 million in 2024.

“The company’s biggest focus is on research and development. This guarantees the market’s capacity to grow,” Rafael Mesquita, CBMM’s chief technology officer, told Valor.

The use of niobium in steelmaking still represents the most important share of sales. However, the battery and nanomaterials segments advanced faster than the steel industry in the use of metal last year. In total, sales of the company’s niobium products rose 5%, to 92,000 tonnes, of which 95% were exported.

With a production capacity of 150,000 tonnes of ferroniobium per year, CBMM chose to “stay ahead of the market”—which is currently 124,000 tonnes per year—precisely to support the innovation front.

According to Mr. Mesquita, 2023 was a year of “good growth” for the market, mainly reflecting the successful development of new battery applications. “In this case, growth came in associated with investments in technology and open innovation, with development together with customers and research institutions,” he said.

For 2024, the company plans to maintain investments in the battery materials and technology division at around R$80 million, repeating the size of last year’s investment.

Rodrigo Amado, head of CBMM’s battery division, explained that 2022 was the first year of significant sales for use in batteries, with 400 tonnes. In 2023, there were 600 tonnes. This year, sales are expected to exceed 1,000 tonnes.

According to the executive, there are currently three major applications for niobium products in batteries, the largest being material coatings—accounting for 70% of the company’s sales in this segment. Batteries are CBMM’s fifth-largest business segment but are expected to rank second in two years.

In partnership with Toshiba Corporation and Volkswagen, the company plans to present this year the first electric bus in the world with mixed niobium and titanium oxide technology in lithium batteries, enabling fast charging with greater durability and safety.

Still, there are also horizons of innovation in steel, some of which are rapidly growing and are better known, such as the use of niobium to obtain lighter structures in construction, said Mr. Mesquita. Other promising areas are superalloys for medical applications and nanotechnology.

In partnership with WEG, the company is working on applying a nanocrystalline material, which contains niobium, in electric motors, with important gains in performance in experimental validation tests. There is also the possibility of using it in non-toxic pesticides with better performance than the typical ones.

Last year, CBMM saw its net revenue grow by 3.6% to R$11.4 billion, while earnings before interest, taxes, depreciation, and amortization (EBITDA) amounted to R$7.9 billion and net profit reached R$4.9 billion, compared to R$4.5 billion in 2022.

*Por Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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