Pátria expands technology portfolio targeting 5G

Fund plans to invest $500m to $1bn in next three years in data infrastructure opportunities

12/14/2022

After the sale of the data center company Odata to the American Aligned, Pátria Investimentos fund, which held about 90% of the company’s capital, now seeks to expand its technology portfolio, with a focus on infrastructure for 5G networks.

“In three years, we will invest $500 million to $1 billion in data infrastructure opportunities,” said Felipe Pinto, partner at Pátria, in an interview with Valor.

Among the 42 companies in Pátria’s current portfolio, 19 of which are infrastructure companies and 23 are private equity, Winity — created in 2020 to provide infrastructure to wireless networks — is currently the fund’s only technology company.

The idea, according to Mr. Pinto, is to expand Winity’s operations beyond the Brazilian market and seek new investments in Latin America, with an eye on the expansion of 5G networks in countries like Colombia, Peru, and the Central American region.

Winner of the national lot of the 700 MHz band in the frequency auction for 5G offering in the country last year, Winity is awaiting approval from the antitrust regulator Cade on a network sharing agreement signed with Telefonica (Vivo) in August. “We are confident that we will go through the approval processes normally,” said Mr. Pinto.

The fund says it is interested in investing in data infrastructure companies to meet corporate demand for 5G networks. “We look at the potential infrastructure that can serve companies in the agricultural, mining – including mining complexes in Chile –, healthcare, and industrial plants among others,” Mr. Pinto said.

In addition to investing directly in technology companies, for two years Pátria has been digitalizing companies from other segments in its private equity investment portfolio.

According to Ricardo Barbosa, Pátria Investimentos’ Digital Transformation and Value Creation Private Equity Portfolio Leader, the goal is to increase EBITDA and raise the forward enterprise value-to-EBITDA multiple of these companies, in addition to generating business through digital transformation.

One of the examples cited by the fund is the agricultural resale platform Lavoro, which is preparing to carry out an IPO on Nasdaq. As Valor’s business website Pipeline reported in September, Lavoro will go public through a merger with TPB Acquisition Corporation, a special purpose acquisition company (SPAC) sponsored by investment firm The Production Board. In the deal, the Brazilian company was valued at $1.2 billion.

Today, 23 companies in Pátria’s private equity portfolio are in digitalization projects led by Mr. Barbosa’s sector, including database migrations to the cloud and production chain robotization.

In October last year, the fund also identified a space to invest in information security by announcing the purchase of cybersecurity companies Neosecure and Proteus for the markets of Argentina, Brazil, Chile, and Colombia. At the time, the fund committed to injecting $250 million into the sector.

The manager informed on Tuesday that the sale of Odata to Aligned and of the concessionaire Entrevias, announced at the beginning of the month to the French company Vinci, is expected to generate a gain of approximately $1.4 billion for the shareholders of Pátria Infraestrutura III fund. In the case of Entrevias, Pátria is selling a 55% stake and the fund will continue with the remaining 45%.

*By Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Aligned buys Odata, plans to invest $1bn over 10 years

Data center company intends to accelerate expansion in Latin America, expects to quintuple revenues in five years

12/14/2022

Andrew Schaap — Foto: Divulgação

Andrew Schaap — Foto: Divulgação

The U.S.-based data-center infrastructure company Aligned announced on Tuesday the acquisition of 100% of the capital of the Brazilian company Odata, which has data center operations in Brazil and other Latin American countries.

The deal was signed over the weekend by Pátria Investimentos fund, which holds about 90% of Aligned’s capital, and by the U.S.-based data-center company CyrusOne, which held about 10% of Odata.

The value of the deal and its terms were not revealed. Sources say the deal is valued at more than R$10 billion and represents 26 times Odata’s EBITDA.

The deal depends on approval by the Administrative Council for Economic Defense (CADE) in Brazil, as well as the regulatory bodies in the United States, Chile, Colombia, and Mexico, where the companies have operations.

According to Ricardo Alário Arantes, Odata’s CEO, the acquisition does not change the company’s data center expansion schedule — today there are eight in four countries — or the team of 350 employees in Latin America. “We will accelerate the conquest of new clients and business opportunities,” said the executive.

The purchase of Odata makes it possible for Aligned, which has 16 data centers in the United States, to bring clients to Latin America. “Exporting clients is exactly what we want to do,” Andrew Schaap, CEO of Aligned Data Centers, told Valor.

Mr. Schaap says his schedule of trips with Mr. Arantes to visit current and potential clients will be intense in the coming weeks, focusing on the 2,000 largest companies in Fortune magazine’s global index.

With the support of Macquarie Asset Management fund, Aligned intends to accelerate investments in Odata’s expansion. According to Mr. Schaap, the plan is to invest more than R$5.3 billion ($1 billion) in the Latin American operation in the next 10 years. The company also expects to quintuple revenues in five years.

Felipe Pinto, a partner at Pátria Investimentos, said that the exit is part of a natural cycle. “We launched Odata as a startup and, for us, it is a typical cycle that has been completed,” he said.

In April, Valor reported that Pátria was already in advanced conversations with international M&A boutiques and foreign investment banks to define who could buy Odata. At the time, the company was valued at $1 billion.

In addition to Odata, Pátria has already divested companies such as Highline do Brasil, a telecommunications tower company, sold in December 2019 to the U.S.-based investment group Digital Bridge (former Digital Colony), and Vogel Telecom, of fiber optic connectivity for companies, sold to the Algar Telecom group for R$600 million in May 2021.

According to Mr. Pinto, Pátria continues to invest in technology, as well as in energy, logistics, and sustainable companies. One company in the current portfolio is Winity, which was created in 2020 to provide infrastructure for wireless networks.

Odata, which was created in 2015, does not disclose its revenues, but they come mostly from long-term contracts with large cloud computing service providers, as well as clients in the financial, telecommunications, and education industries.

Odata currently has six data centers in operation — three in Brazil, one in Chile, one in Colombia, and one in Mexico. The company has three other centers under construction in Brazil and Chile with delivery scheduled for the first half of 2023, as well as in Mexico, for the first half of 2024.

At the end of last year, the company raised $30 million from the International Finance Corporation (IFC), the World Bank’s branch aimed at the private sector, to finance the expansion of its data center structure in Latin America, including Brazil.

In August, Odata received a new loan from IFC, of $35 million, to invest in the expansion of data centers in Latin America.

Mr. Arantes says Odata continues to work with the IFC and expects Aligned to bring in new funding partners for expansion.

In addition to supporting the expansion of leading U.S. data center providers Aligned and Netrality Data Centers, Macquarie Asset Management manages investments in AirTrunk, a data center operator with facilities in Australia, Singapore, Japan, and Hong Kong. In September, it announced the acquisition of a minority stake in British data center company Virtus, which operates in the Greater London area and is owned by Singapore’s ST Telemedia.

Macquarie Asset Management, a division of the Australian group of investments Macquarie, managed more than $2.8 trillion in assets by the end of September, up 8% year-over-year, according to the company’s most recent financial statement.

*By Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil may become self-sufficient in uranium driven by private sector

Provisional measure paves the way for partnerships between INB and private-sector companies for ore production

12/14/2022

With the approval by the Senate of the provisional measure 1,133/2022, which allows private-sector investment in nuclear ore extraction in Brazil, the sector sees the possibility of new companies joining an activity previously exclusive to Indústrias Nucleares do Brasil (INB).

Companies in the industry believe that the measure will make the activity more dynamic and provide greater legal security not only for the electric sector but also for other fields, such as health and environment.

Brazil has the sixth-largest uranium reserve on the planet and is one of the few countries in the world to master enrichment technology for peaceful purposes, but it manages to mine only 40% of what is needed for Angra 1 (640 MW). The remainder comes mainly from Kazakhstan and Uzbekistan through the Russian state-owned company Rosatom, which operates in these countries.

The Brazilian Association for the Development of Nuclear Activities (Abdan) understands that this is an opportunity for more intense uranium exploration and to make the country self-sufficient and the chance for new companies to land in Brazil since, without a guaranteed regulation, it would be difficult for the private sector to invest in the industry.

Celso Cunha — Foto: Luciana Whitaker/Valor

Celso Cunha — Foto: Luciana Whitaker/Valor

Abdan’s head Celso Cunha told Valor that the arrival of private-sector companies in the extraction of nuclear ores does not mean a breach of the federal government’s monopoly, but changes in the law that give more clarity to possible companies and investors.

He recalls that a public-private partnership (PPP) already exists. The Santa Quitéria consortium is a partnership between INB and Galvani – a company that produces phosphate fertilizers – for the implementation of a joint mining project. The objective is to exploit uranium and phosphate found in an associated form in the Itataia ore deposits in Santa Quitéria, Ceará. The current law determines that less than 50% must be uranium, but now the provisional measure does not establish quotas and uranium exploration can increase.

“But only INB can sell and use uranium. It is not the state’s job to dig a hole. Extracting uranium from great depth requires technical knowledge we don’t have in Brazil. The solution is to make public-private partnerships, bring Brazilian and foreign companies together and take it to INB,” he said.

Today the pillar of expansion of the Brazilian electricity sector is wind and solar sources. These sources are intermittent because they depend on the wind and the sunlight. This instability creates a challenge for Brazil’s national grid operator ONS, which organizes the mix of sources to meet the demand in real-time, which also varies. According to Mr. Cunha, nuclear generation is important because it is commanded by people, not the sun, wind, or rain.

“To produce for Angra 1, 2, and 3 we need the Santa Quitéria mine, in Ceará. Then we will be able to supply the market. We won’t need to import uranium,” he said.

A target of worldwide controversy for almost 70 years, when U.S. President Eisenhower proposed, in a speech to the United Nations, the atomic program for peace, nuclear energy is now back on the international agenda, going from villain to climate hero. Amid the urgency of combating global warming and the ever-shortening window for action, atomic energy already fits the definition of green energy. On the other hand, Russia’s war against Ukraine may make uranium imports more expensive, as European nations seek to reduce their dependence on Russian gas.

Brazil is not out of this context. The National Energy Plan-2050 signaled eight to 10 new nuclear plants, and the Ten-Year Energy Expansion Plan (PDE) 2031 foresees another 1 GW in the Southeast region. The works of Angra 3 have resumed and besides guaranteeing the fuel, the executive says that Brazil needs to define the energy tariff to approve the financing if it wants to maintain the plant’s completion schedule until 2027.

The financing is divided into a R$4 billion tranche that is already underway and R$17 billion BNDES is expected to raise in the international market. Eletronuclear will hold the auctions.

There is talk of a fourth nuclear plant in the Southeast region in the next 10 years. If the plant gets off the drawing board, the forecast is that it will have 1 gigawatt of installed capacity. There is no decision on where the site will be, but chances are it will be in the region of Angra dos Reis, Rio de Janeiro.

Abdan is advising the new administration’s energy transition committee, besides being ahead of important agendas for the next year, involving new plants in Angra and small modular reactors. According to him, the priorities for the government’s 100 first days in office range from unlocking funds to make research feasible, to providing legal security for the mining and commercialization of nuclear ores and their by-products, in addition to the challenge of speeding up the operation of the National Nuclear Safety Authority, which currently does not have a president.

*By Robson Rodrigues — São Paulo

https://valorinternational.globo.com/
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Petrobras has lost R$187bn since its October peak

Uncertainty about the future of the state-run oil company and recovery in China explain the distance

12/13/2022

In mid-October, when Petrobras shares peaked, the state-owned company was the most valuable company on the Brazilian stock exchange, R$116 billion ahead of second-place Vale. By early November, after the second round of presidential elections, the gap had narrowed to R$85 billion. Within two weeks, on the 11th, Vale had moved ahead. Today, one month later, the mining company has already put R$77 billion ahead.

The swap of positions, which seems to have come to last, was the result of the combination of uncertainty about the future of the state-run oil giant with the return to power of the Workers’ Party (PT) and the expectation of a recovery in China, the main market for Vale, with the easing of restrictions because of Covid-19. Iron ore has been up 9% in the month.

Investors’ distrust of the election winners, which was great before, has only increased with the news over the last few weeks, following the movements of the huge transition team. Monday, the day of the graduation of the elected, two pieces of information did the damage: Aloizio Mercadante would be considered to be the CEO, and the state-owned companies law would have its days numbered.

At 4:00 pm, Petrobras preferred shares fell 4.17% to R$23.68, accumulating an 11% drop in the month and 30% since October’s record high of R$33.72 — equivalent to R$187 billion less in market capitalization. Meanwhile, oil was up 2.48%.

It has been such a good period for the oil companies that the stocks remain in the black for the year, up 42%, while Ibovespa went into the red today. Among peers, however, Petrobras has also fallen behind. Prio, considered by analysts as an option for the state-owned company to invest in the sector, rose 63% in the year. The American Exxon advanced 71%.

*By Nelson Niero — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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China shows interest in importing beans from Brazil

Ministry of Agriculture received a technical questionnaire to check the feasibility of starting a partnership

12/13/2022

Bean harvest is just under 3 million tonnes per season — Foto: Claudio Belli/Valor

Bean harvest is just under 3 million tonnes per season — Foto: Claudio Belli/Valor

The Brazilian private sector has insisted for years, and now China is showing the first signs of interest in importing beans and pulses (lentils, chickpeas, and peas) from the country. Last month, the Ministry of Agriculture received a request for answers to a technical questionnaire sent by the Chinese to check the feasibility of starting shipments.

Although the document is not an official manifesto, producers and industries in Brazil are celebrating, since the opening may represent good opportunities. In China, the per capita consumption of beans is only 1.7 kilos per year, but the average has grown 400% annually.

“This is a work that has been going on for years, involving the Ministry of Agriculture, Foreign Affairs Ministry, and the interested segments. In the specific case of mung beans [also known as moyashi and used to produce edible sprouts], it was very celebrated in Brazil,” Ariana Guedes, international advisor to the State Secretariat of Economic Development (Sedec) in Asia, told Valor.

The beginning of this process is also related to the loss of area destined for the planting of beans, especially for crops such as soybeans, as has also happened in Brazil, added the advisor. Given this trend, exporting to China may represent even more than compensation.

According to the most recent data from the U.S. Department of Agriculture, in the 2019/20 harvest, China produced 4 million tonnes of beans, lentils, chickpeas, and peas, down 10% from 2018/19. In Brazil, the bean harvest is just under 3 million tonnes per season, with gross production value estimated by the government at R$15 billion this year.

It is worth remembering that Brazil makes occasional imports of black beans from China, especially when there are difficulties in Argentina, which supplies 90% of the 100,000 tonnes imported by the country annually.

Although the Chinese do not consume beans as much as Brazilians, the demand for processing has been growing in the country, for use in human food and animal feed. According to Ibrafe, between 2018 and 2021 there was a 172.3% increase in Chinese imports of mung beans, 819.7% in purchases of pinto beans, 503.7% in red beans, 2.8% in peas, and 79.7% in chickpeas.

According to Mr. Araújo, Canada currently supplies 93% of pulses imported by China, while the United States keeps the rest. The world market for beans and pulses is worth $26 billion annually, according to the Brazilian Institute of the Bean (Ibrafe), and it is natural that China’s greater appetite, considering its population of 1.4 billion, will transform the landscape.

In addition, Larissa Wachholz, former special advisor to former Minister Tereza Cristina (Agriculture) for issues related to China and partner at Vallya Agro, stressed that the growth of China’s middle to lower-middle class, today with about 800 million people, has broadened the debate on food security and health.

“There is a trend that those people who have moved to urban areas and achieved a better income be more concerned about food diversification and nutritional issues. Pulses fall into that category, which is a great opportunity for Brazil,” he said.

Despite the euphoria of the Brazilian private sector, Fábio Coelho Correa de Araújo, Brazilian agricultural attaché in China, reinforced, in an interview with Valor, that the Chinese questionnaire does not mean official interest in buying Brazilian products. At least for now. “The opening of the market for plant products is done through risk analysis of the product, and this can take months or years.”

This does not discourage optimists, though. And Marcelo Lüders, president of Ibrafe, is one of them. “With the problems of the war in Ukraine, the Chinese needed to expand their peanut suppliers and authorized Brazilian purchases in a few months. The same can happen with pulses,” he said.

It was Mr. Lüders who forwarded the questionnaire received from the Chinese to Embrapa (Brazilian Agricultural Research Corporation Rice and Beans) and IAC (Agronomic Institute of Campinas). But both are waiting for an official request from the Ministry of Agriculture to contribute with the technical aspects.

*By Fernanda Pressinott — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Mavenir expands presence in Brazil boosted by 5G technology

System integrator competes with Ericsson and Nokia; in Brazil, Telefónica’s Vivo is a client

12/13/2022

U.S.-based company Mavenir is taking advantage of the deployment of the 5G wireless technology in Brazil by phone carriers to expand its presence in the country. A provider of network software in the cloud, with end-to-end operations, Mavenir is a systems integrator that competes with large suppliers such as Ericsson and Nokia. In Brazil, it has already won Telefónica’s Vivo as a client. Now, it is negotiating with other large carriers and regional providers, according to Antonio Correa, senior regional vice president for Southern Europe, the Caribbean, and Latin America.

Mavenir has been a Vivo supplier for seven years for messaging systems and three years for cybersecurity. To serve the phone carrier in this last project, it has established a commercial partnership with NEC, said Mr. Correa.

Vivo declined to comment. NEC said that the alliance was designed for the integration of a “proof of concept” of open RAN (open network, with different suppliers) for Vivo in Pernambuco. Mavenir wanted the Japanese multinational to lead the equipment implementation process. The result was considered very positive, according to NEC, and served at the time as a successful case of network architecture for the two companies worldwide.

Mavenir serves more than 250 communication service providers in 120 countries and employs 5,000 people around the world. The company expects to post a global revenue of $750 million this year. In Brazil, the operation is still small.

The company, which is focused on applications for 5G technology, made a capital increase of $155 million in October. The company has raised $250 million in strategic capital since July. The funds will be used to finance products that drive the company’s growth.

With the capital increase, Siris, a private-equity firm focused on technology, which was the first investor, remained the largest shareholder. In the last four years, Koch Strategic Platforms, a subsidiary of Koch Industries, and microprocessor manufacturers Intel and Nvidia have joined as minority shareholders.

On Mavenir’s website, CEO Pardeep Kohli said that it took seven years for the company to reach its current level and that he has spent the last three years building a team to design and build radios for network communication. In the case of Brazil, Mr. Correa said that there is interest in assembling these open RAN radios, but this will first depend on the business “getting off the ground.”

Anderson André — Foto: Divulgação

Anderson André — Foto: Divulgação

“We have global assembly partners, including in Brazil, to start [producing] as soon as we have contracts,” said Mavenir’s vice president for Brazil, Anderson André. The primary production process will be the model used.

Mr. Correa said that he started to focus on Latin America in the last three years, mainly interested in increasing the company’s presence in Brazil, due to the potential 5G market and integrating its geographical service area, which became its territory almost three years ago. The executive said that besides negotiating with providers and phone carriers, he has also talked to integrators already established in Brazil with the aim of expanding the service arm and accelerating opportunities in the local market.

For now, the investments in Brazil are with personnel. The company has an office in São Paulo and a team in Rio de Janeiro.

Anderson André said that an ecosystem of integrators is being built that will “sew” the pieces to supply customers. The executive is confident in the wide range of possibilities that are opening up with 5G to serve the corporate market that operates in wholesale and retail.

*By Ivone Santana — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Fiscal uncertainty puts pressure on neutral rate of interest

Market participants are already working with real rate of 5%

12/13/2022

As discussions about public spending move forward with the Transition PEC (proposal to amend the Constitution), the worsening perception of fiscal risk and the possibility of increased subsidized loans via state-owned banks have put pressure on the neutral rate of interest, the one that neither speeds nor slows economic growth. The international landscape is not helpful either, with tighter monetary conditions in the major economies, which props up the feeling that the local interest rate will remain at higher levels in the future.

The lower levels of neutral rates of interest have been left behind. Before the pandemic, the Central Bank and the market worked in their scenarios with a neutral rate of interest of around 3% in real terms. In June, the monetary authority started to adopt in its scenarios a neutral real rate of 4%, but in the last few weeks the market has been working with even higher numbers –some institutions have already put in their scenarios a neutral rate of interest of 5%.

In the Banco Original’s calculations, which consider the difference between the key interest rate Selic and the IPCA (Brazil’s official inflation index) estimated by the Focus (Central Bank’s weekly survey with economists) for a three-year period ahead, the neutral rate of interest implicit in the expectations of market economists is 4.9% in real terms. The environment with a higher neutral rate makes it clear that, in the market’s view, even if the Selic does not rise above the current level of 13.75% per year, it will not fall as much as was expected months ago. This is linked to recent scenarios of market participants who have raised projections for the Selic in 2023 and 2024.

Fernando Genta — Foto: Silvia Zamboni/Valor

Fernando Genta — Foto: Silvia Zamboni/Valor

This is the case of XP Asset Management, whose central scenario includes a neutral real interest rate of 5%, with an upward bias, said chief economist Fernando Genta. For him, the signs of neutral rate of interest hike are “unequivocal” and Brazil is likely to transition to a new macroeconomic balance of higher public spending, higher interest rates, faster inflation, and some increase in the tax burden.

“With the prospect of higher public spending, the Focus survey is likely to show upward revisions in the Selic projections, with no downward revisions in inflation expectations. This combination of more interest and inflation expected, for an extended period, is interpreted by the model as an increase in neutral rates of interest,” said Mr. Genta, who was assistant secretary of the Ministry of Economy between 2017 and 2018.

The most recent discussions about possible changes to the Long-Term Rate (TLP) also interfere with the sense of a higher neutral rate of interest. Rumors that former Minister Aloizio Mercadante may take over the Brazilian Development Bank (BNDES) in the next administration gained steam Monday and impacted long-term interest rates substantially. The interbank deposit (DI) rate for January 2027 rose to 13.05% from 12.865%; while the DI for January 2029 climbed to 13.1% from 12.9%.

Last week, Mr. Mercadante criticized what he considers an excessive transfer of profit from the BNDES to the National Treasury, advocated the bank’s role as a booster of industry and guarantor of long-term loans and, internally, also discussed ways to rebuild the bank’s funding system and change the TLP. The presidential transition team’s view is that, besides being excessively high, the TLP is inflexible and, thus, inefficient.

In Mr. Genta’s view, the recent discussion about changes in the TLP moves in the direction of a higher neutral rate of interest, since, in case of reversal and return to the previous scenario, the power of monetary policy would be weakened. “As you increase the percentage of credit not impacted by monetary policy, you need a higher interest rate to achieve the same impact on inflation. It may sound semantic, but I think this is more a reduction in the power of monetary policy per se rather than a rise in the neutral rate of interest. But both things go together,” he said.

Banks such as Credit Suisse and Citi are also working in their scenarios with a neutral real interest rate of 5%. Santander embeds in its scenarios a neutral rate of interest of 4%, but stressed that this variable shows some tendency to the upside.

“Our calculations, which are based on the real yield curve and smooth market moves, the neutral rate of interest is actually moving towards 5%. We are not incorporating this into our scenario yet; we are waiting for fiscal decisions and signals about economic policy,” said Mauricio Oreng, Santander’s head of economic research. While uncertainty is high, he said, “in fact, there is a preliminary indication that the neutral rate of interest may be going to 5%.”

“All else constant, a higher neutral rate of interest also means that the neutral primary result gets higher,” said Mr. Oreng, as he points to the fiscal challenges ahead. “And we are also seeing a scenario where international interest is higher. For a few years ahead we will be working with a higher interest rate abroad. The environment with Fed funds at 5% is quite different from what we expected before.”

When evaluating the recent history of the neutral rate of interest, Mr. Oreng recalled that, after Congress passed the pension reform and TLP was put in place, the risk premiums of Brazilian assets fell to “very low” levels, which led the market to project a neutral rate of interest of 3%. “However, the evolution of the post-pension reform scenario, with new discussions of the fiscal framework and spending above the cap, led to a higher neutral rate of interest scenario. If we excluded the pension reform, our interest rate would be at an even higher level.”

The baseline scenario of Apex Capital’s chief economist Alexandre Bassoli includes the neutral rate of interest at 5% in real terms. “The trend has been upward since the pandemic. The estimates of the Central Bank itself, which used to be 3%, went to 4%. There is a global component because clearly there is a trend of a significant increase in interest rates in the world, but there is also a local component, which is the issue of the risk premium, which is related mainly to fiscal uncertainty.”

Mr. Bassoli points out that the spending cap brought predictability to public spending and increased the confidence of economic agents. “It is unclear what kind of regime may come to be adopted, but if the adoption of the cap contributed to reduce the neutral rate of interest, the extinction of the cap increases the rate.”

Original’s chief economist Marco Antonio Caruso observed the same. “If you have a federal administration willing to reduce public savings, there is, in theory, less availability of funds, and this helps you to have a higher neutral rate. Brazil has a high debt – almost 20% above its emerging peers – and the signaling of an increase in this debt causes risk premiums to rise. This also brings a higher neutral rate of interest,” said Mr. Caruso.

Since the neutral interest rate is an unobservable variable, according to Mr. Caruso, the evidence of a higher neutral rate of interest may show up in the economy through slower disinflationary processes and higher nominal rates for longer periods.

Mr. Caruso also draws attention to the recent discussion on the resumption of the Long-Term Interest Rate (TJLP). “BNDES used to offer subsidized loans to large companies, in relevant volumes. You end up making a large part of the economy’s credit unresponsive to monetary policy. If this scenario comes back, it would also require a structurally higher interest rate over time,” the economist said.

Cautious messages about the resumption of subsidized interest rates have even been sent by Central Bank authorities, especially by the monetary authority’s president, Roberto Campos Neto, in recent events. But despite the discussion being on the rise among market players in recent months, Mr. Caruso does not believe there will be any sharp change in the neutral rate of interest in the Central Bank’s next communications.

“The Central Bank is a ‘taker’ of fiscal information and cannot assume things that are not yet materialized. And it would be strange. Nature does not make jumps. It is difficult for the Central Bank to indicate that it has a high conviction that an unobservable variable went to 5% from 4% overnight. I think it would be a longer and more discussed process,” he said.

*By Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Chemical industry posts record revenues, negative trade balance

Price hikes made sales jump 24%, but deficit exceeds $64bn in the year

12/12/2022

The strong rise in international prices of chemicals has boosted revenues of the industry this year. According to preliminary data from Abiquim, the trade group that represents the sector, net sales probably reached R$969.4 billion, up 24% year-over-year and an all-time high, despite the stable output volume. In dollars, there was a 27.3% jump, to $187 billion.

At the same time, the most pessimistic projections for the balance of trade in chemicals materialized. In the year, the deficit probably reached the unprecedented level of $64.8 billion, up 40.3% year-over-year, driven by the country’s low share in the global market – despite having the sixth-largest industry in the world – and the relevant weight of imports in the domestic demand.

According to Abiquim, while imports grew 36.1%, to $82.6 billion, the highest ever, Brazilian exports advanced less only 22.1%, to $17.7 billion, also a record.

“There were good results in 2022, which shows that there are very competent companies in the country at what they do and they knew how to take advantage of the favorable moment. But the absence of structural solutions once again affected the results and the last four months showed a downward trend,” Abiquim’s head André Passos Cordeiro told Valor.

The figures estimated for 2022 will be presented Monday during the 27th Annual Meeting of the Chemical Industry. In the event, key players will debate the sector’s strategic agenda, which will be taken to the President-elect Luiz Inácio Lula da Silva’s transition team and governors of states that are home to important industrial hubs including Bahia, São Paulo, and Rio Grande do Sul.

The main objective of the agenda is to interrupt the decline of manufacturing that has been impacting the sector for years, said the executive, for whom natural gas is a central topic. Today, the chemical industry accounts for 30% of the country’s gas consumption, either as raw material or energy, and competes in the global market especially with the United States and China, countries that, for different reasons, have lower production costs.

“The discussion includes a solution for sufficient gas supply and competitive price,” said Mr. Cordeiro. There were advances in the current administration, such as the Gas Law, and the industry’s perception is that the next administration is sensitive to this matter, as well as to the need to resume an industrial policy to benefit the chemical industry and other sectors as well, he added.

According to Fatima Giovanna Coviello Ferreira, Abiquim’s economics and statistics director, there is an opportunity for expansion of the Brazilian chemical industry if conditions are more favorable. The record trade deficit confirms this potential for the industry.

“Europe is now facing a gas crisis. It is the main input for the petrochemical industry in the world. This will open space in the market, but China and the United States, which have idle capacity, are ahead of us. Brazil could compete with these players if there were gas at a lower price and in sufficient volume to increase production capacity, and adjustments in the tax burden and infrastructure,” he said.

As for the industry’s results, although sales have been a record, margins in 2022 were below those seen in previous years. Just as chemical prices skyrocketed on the international market with the war in Ukraine, raw materials and energy also became more expensive and reduced profitability particularly in Brazil, where gas still costs three times as much as in other regions. “The cost went up and logistics saw a brutal increase, so the margin was lower,” she said.

In 2023, according to the executive, prices of chemical products are expected to fall, with a reduction in the trade deficit as well. “Momentarily, there was some improvement in terms of logistics, but it is still unclear how the crisis foreseen for 2023 in the international market will reflect on costs,” she said.

Of the net sales of $187 billion estimated for the Brazilian chemical industry in 2022, a little less than half, or $88.3 billion, is generated by chemical products for industrial use, such as resins, elastomers, and various preparations. Compared to last year, the expansion in this segment was 24.6%.

In 2021, the chemical industry will account for 3.1% of Brazil’s GDP. This share reached 3.6% in 2004, the peak since Abiquim’s records began, in 1995. In the transformation industry, the sector’s share is the third largest, with 12.4% of the industrial GDP in 2020, behind food and beverages and oil products and biofuels.

*By Stella Fontes — São Paulo

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Supreme Court analyzes package of tax cases before recess

Justices rule multi-billion impact disputes over PIS, Cofins, Funrural, Difal-ICMS

12/12/2022

Ricardo Lewandowski — Foto: Carlos Moura/SCO/STF

Ricardo Lewandowski — Foto: Carlos Moura/SCO/STF

A package of tax disputes that represent a significant impact on federal government and state accounts is being decided by the justices of the Federal Supreme Court (STF) this week. There are almost R$150 billion under discussion. Financial institutions, agribusiness, and retail companies are the most impacted by the trials, which are expected to end on Friday.

It is at stake R$115 billion in one of the cases analyzed, related to the collection of social taxes PIS and Cofins from financial institutions, which will have a general impact — meaning that their ruling applies to all similar cases.

At the beginning of the trial, on Friday, the rapporteur, Justice Ricardo Lewandowski, accepted the thesis of banks and brokerage houses that they were entitled to collect, between 1999 and 2014, the contributions on a lower basis than that claimed by the federal government.

The discussion, which has been awaiting definition for more than a decade is whether the National Treasury can demand contributions on financial revenues — on interests, for example. Banks argue that they should only collect taxes on revenues from the provision of services, the sale of goods, or a combination of the two. This would be the case of those generated with the payment by customers for checkbook issuance, current account maintenance, and transfers, for example.

Since Bill number 12973 of 2014, which provided for social taxes PIS and Cofins taxation on all revenues from business activity, the dispute has been stalled. A year before the bill, the government opened an installment program for tax debts (Refis) to try to eliminate this liability and end judicialization.

According to lawyers, banks joined the program en masse because of the possibility of paying the taxes due with a waiver of fines and interest. In exchange, they would give up their lawsuits.

In his 11-page vote, Justice Lewandowski proposed the following thesis to be applied to all similar cases: “The concept of revenues as a tax base for the collection of social taxes PIS and Cofins, against financial institutions, is the revenue from banking, financial and credit activities arising from the sale of products, services or products and services, until the onset of Constitutional Amendment 20/1998.

The conclusion is based especially on two decisions of the STF. The first, in 2005, the Court declared unconstitutional paragraph 1 of article 3 of Law 9718 of 1998. This provision established as gross revenue “the totality of the revenues earned by the legal entity, being irrelevant to the type of activity performed by it and the accounting classification adopted for the revenues.”

At the time, the Supreme Court interpreted “gross revenue” and “billing” as synonyms, the latter referring to the sale of goods, services, or goods and services (Extraordinary Appeal [RE] 346.084).

In the second decision considered by Justice Lewandowski, the STF understood as a consumer any individual or legal entity that uses, as the final recipient, banking, financial, and credit activities (action of declaration of unconstitutionality [ADI] 2591).

“As a result of these understandings the financial institutions offer products or services, whose revenues are part of the concept of billing, again, even if they do not require the issuance of an invoice,” said the rapporteur. The other Justices are yet to give their opinions (REs 609096, 880143, and 1250200).

Another dispute in progress this week and with a multi-billion impact is about Funrural, which is the Rural Workers’ Assistance Fund, the social security contribution for the agribusiness sector.

There are three lawsuits under analysis. One of them discusses whether there is an obligation to pay Funrural (ADI 4395). Interrupted in May by a request for examination, the virtual trial resumed on Friday. The score is six votes to five to uphold the constitutionality of the contribution but rejects the obligation of the individual rural producer to pay the tax in sales operations to legal entities.

In the other lawsuits, the dispute is over Funrural’s tax base — whether it is the gross revenue from production, or the remuneration paid or credited to insured employees. The impact of both is R$24 billion and affects agribusinesses (RE 611.601) and rural business entities (RE 700.922).

In the first case, the rapporteur justice Dias Toffoli validated the social security contribution levied on gross revenue from the sale of production.

In the appeal involving business entities, in turn, there are four votes with distinct opinions. The retired Justice Marco Aurélio Mello, which used to be the case’s rapporteur, ruled for the unconstitutionality of the social security contribution levied on the gross revenue from the commercialization of production, payable by rural employers who are legal entities. Justice Edson Fachin followed him.

Justice Alexandre de Moraes, however, opened the divergence. He understood as constitutional the contributions due to social security by the employer, a business entity that is engaged in rural production levied on the gross revenue from the sale of its production. Justice Dias Toffoli partially followed that understanding.

The justices are also analyzing a crucial issue for the state’s cash flow. It is the dispute over the collection of the ICMS rate differential, the so-called Difal. By reopening the trial on Friday, Justice Gilmar Mendes reduced the advantage of the companies over the states. The score, with his vote, is five votes to three.

The justices are deciding on the starting date of the collections. If the states could have demanded the payment of the Difal in 2022, or if the collections will only start in 2023. This time difference, although short, has a high cost. States estimate that they will lose R$9.8 billion without the Difal in 2022.

Representatives of the companies, especially in retail — the most affected sector — say that an unfavorable decision can generate debt because until now companies have sold goods without considering the payment of the tax, which resulted in lower prices to the consumer.

If the collection is authorized, they say, in addition to carrying the loss of sales in a lower value, they risk receiving a tax-deficiency notice and having to pay the Difal since January, adjusted by the Selic, Brazil’s benchmark interest rate, plus a 20% interest for late payment.

Difal is used to divide the ICMS tax collection from e-commerce between the company’s state of origin and the consumer’s state. The company pays the interstate rate — 7% or 12% (depending on the location) — to the state where it is located, and the Difal, to the destination state.

*By Bárbara Pombo, Adriana Aguiar, Joice Bacelo — São Paulo, Rio de Janeiro

Source: Valor International

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Changes in transition package hindered by Chamber’s short deadline

Yet, lower house mulls requiring a fiscal rule; lawmakers also disagree with suggestion for new anchor to be introduced through complementary law

12/09/2022

Alex Manente — Foto: Luis Macedo/Câmara dos Deputados

Alex Manente — Foto: Luis Macedo/Câmara dos Deputados

Approved by the Senate on Wednesday night, the Transition PEC (proposal to amend the Constitution) will begin to be negotiated only now by parties in the Chamber of Deputies. Members of the lower house complain that they were not consulted about changes made and that the proposal provides for a greater expense than expected, but that the deadline is short for changes.

Chamber Speaker Arthur Lira called on party leaders and deputies to begin discussions in Brasília on Monday, and the caucuses will meet Tuesday and Wednesday to debate and count the votes. One of the more criticized points, which could be potentially rejected, is the permission for the country’s new fiscal rule to be put in place by a complementary bill, which would repeal the spending cap.

The leader of Citizenship, Deputy Alex Manente, said he will advocate the need for passing a PEC instead. “If you do it by complementary bill, you can change it by majority vote. This causes instability,” he said. To approve a PEC, it is necessary the votes of 308 of the 513 deputies, while a complementary law requires the support of only 257. Sources say that Brazil Union and the Progressive Party (PP) are also concerned about this matter.

The PEC is expected to be voted on Wednesday night, after the resumption of a trial by the Federal Supreme Court (STF) that may consider unconstitutional the so-called rapporteur’s amendments, also known as the “secret budget.” This is a mechanism by which deputies and senators distribute money to their electoral bases without much transparency about whom the authors are.

The result of this process can cause problems in the vote because some lawmakers believe that President-elect Luiz Inácio Lula da Silva asked STF justices to block the secret budget. This forced Mr. Lula to call the Chamber speaker on Wednesday to deny the move. Messrs. Lula and Lira made an agreement at their first meeting that possible changes in these amendments would occur through political negotiation.

Valor heard four party leaders. They spoke on condition of anonymity because they want to hear other party members before taking a position. They said the vote is likely to take place on Wednesday, even if the Supreme Court trial is not over, and that there is little room to change the draft. At most, deputies will exclude provisions.

It is only possible to enact the parts of the PEC passed in both houses of Congress. If there are substantial changes, for example in the amounts, the proposal will have to be voted on again by the Senate. But the deadline is short, and the lawmakers intend to vote on the annual budget law for 2023 on December 19-21.

The lawmakers intend to reduce the amount of spending authorized by the PEC, which would total R$191.9 billion in 2023, the lower house’s budget consultants say. The figure includes R$145 billion of expansion of the spending cap, R$23 billion excluded from the cap for investments if there is surplus revenue, and R$23 billion of investments using funds from inactive accounts of the Workers’ Severance Fund (FGTS), which would be possible to do only once.

In addition, the proposal releases the spending of educational and scientific research institutions made with their own funds or agreements, investments made with funds from multilateral organizations or transfers from states and municipalities to the federal government, and socio-environmental projects carried out with money from donations. All of these items would be excluded from the spending cap.

Deputy Danilo Forte said the volume authorized by the Senate caught the deputies by surprise. “The PEC came much more hypertrophied than the debate was suggesting,” he said. “Everyone thought the Senate was going to restrain it and go along the lines of the proposals of Senators Tasso [Jereissati] and Alessandro Vieira, with an expenditure of a hundred and a few billion [reais].”

Deputies are also advocating the reduction of time authorized for this extra spending to one year from two. But, again, the short timeframe hinders this change. Leaders of parties allied with Mr. Lula, on the other hand, said that the significant score in the Senate, with a 64-13 vote, indicates that the situation with the parties would be more comfortable for voting in the lower house than previously expected.

*By Raphael Di Cunto, Marcelo Ribeiro — Brasília

Source: Valor International

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