Market projects higher benchmark interest rate

Interest Rate Benchmarks | Refinitiv

A scenario that was already difficult for the disinflation process took on even more complex contours, which is ex require a higher interest rate. The significant worsening of the balance of risks for inflation, in the wake of the war in Ukraine, knocks on the door of the Monetary Policy Committee (Copom) of the Central Bank, which is expected to raise the Selic, Brazil’s benchmark interest rate, again this week. While the prevailing assessment is that of a slower tightening now, the new challenges already signal the need for a higher base rate ahead.

In its last three decisions, the Copom promoted increases of 150 basis points in the Selic, but signaled that, at this week’s meeting, the magnitude of the rise should decrease. With the basic interest rate at 10.75%, the market believed the signal from the monetary authority and, of 93 financial institutions consulted by Valor between March 10 and 11, 82 expect the Selic to be raised by 100 bp, to 11 .75%.

The worsening of the inflationary scenario, however, made nine institutions project a 125 bp increase, while two – Austin Rating and UBS BB – believe that the committee will maintain the pace of interest rate hikes at 150 bp at the Wednesday meeting.

Despite this, it is clear to the market that the scenario has worsened significantly. Valor also consulted institutions about inflation this year and in 2023. The survey, conducted on Thursday, covered scenario revisions that took place after the fuel price hike by Petrobras and after a new surprise observed in Brazil’s benchmark inflation index IPCA in February. If, in the previous survey, the midpoint of the estimates indicated inflation at 5.2% this year, now the expectation is that the IPCA will close 2022 at 6.5%.

It is worth remembering, however, that this week’s Copom meeting is expected to be the last in which the 2022 calendar year will continue to be considered in the relevant horizon for the performance of monetary policy. The deterioration of expectations for 2023, which become more important, also triggers a warning signal. In February, the median indicated the IPCA at 3.4% at the end of next year and, now, the midpoint of the projections is at 3.8%.

Part of the market also adjusted its estimates for the Selic and began to see a higher rate ahead. In the Valor survey, the median of 91 projections collected points to the Selic at 12.75% at the end of the cycle (compared to 12.25% in the previous survey). A relevant part of the market, however, believes that the basic interest rate can reach at least 13% – which was stated by 44 institutions (48.3% of the total).

“When we think about the design of monetary policy from now on, we see that the Central Bank is dealing with an increasingly persistent inflation,” says Gustavo Arruda, BNP Paribas’ head of economic research for Latin America. “With a new shock on top of already high current inflation and inflation expectations above the target, what the Central Bank should do is continue in action, and that means raising interest rates for longer.”

Last week, the French bank raised its forecast for the Selic to 13.25% from 12.25% at the end of the cycle, which would take place in June. “It’s not a big change of scenery, it’s 100 bp higher. I believe that this is an adjustment for the Central Bank to coordinate inflation expectations and avoid the transmission of these shocks throughout the economy,” says Mr. Arruda.

Despite the deterioration of the inflationary scenario, the vast majority of agents continue to see a 100-point rise in the Selic rate this week as the most likely move. This is the case of Apex Capital’s chief economist Alexandre Bassoli, who projects the basic interest rate at 12.75% at the end of the current cycle.

Although he emphasizes that monetary policy “still has a lot of work to do to make inflation converge to the targets,” Mr. Bassoli still expects a deceleration in the pace of the Selic increase, from 150 bp to 100 bp, when considering the lagged effect of interest rates. “We have already advanced a lot in the cycle here in Brazil and, considering the uncertainties, this Copom guideline to produce a deceleration in the pace of growth seems reasonable. But there is still work to be done,” he emphasizes.

The economist recalls that the Copom had already mentioned “next adjustments”, in the plural, and, in the current context, there is a suggestion that the hike to be carried out this week will not be the last. “We have at least one more to go. I would expect at least two more,” he says. According to Mr. Bassoli, the probability of an extension of the cycle has increased, as the inflation figures in Brazil showed unfavorable dynamics even before the conflict, which tends to worsen.

On Brazilian stock exchange B3, the digital options market indicated, on Friday afternoon, a 66% chance of a 100 bp increase in the Selic in March. This possibility, however, has already reached more than 90%. In addition, the market has now built in higher odds of a 125 bp increase (20%) and a 150 bp increase (15%).

“In our view, even with a scenario of more perennial shocks, the Central Bank has a more limited total budget to raise interest rates, given the advanced stage of the cycle,” assesses Mirella Hirakawa, senior economist at AZ Quest. “It makes sense to go as planned and reduce the dose of adjustment.”

Although also pointing to a slowdown in pace, chief economist at Panamby Capital, Tatiana Pinheiro, notes that a good part of the factors advocates in favor of maintaining it. “Inflation surprised upwards; expectations continued to be revised upwards; commodity prices in reais also increased despite the appreciation of the real; even economic activity came in a little better than expected… These are indicators that go in the opposite direction of a reduction in the pace of adjustment.”

A focus for investors’ attention, in the current environment of high uncertainty, will be what the Copom will signal for the next steps. There are those who believe that it would be more prudent for the committee to anticipate a further deceleration of pace for the May meeting. This is the case of Fernando Honorato, chief economist at Bradesco, for whom the Central Bank should re-emphasize, as in the last meeting, the lag in monetary policy and also give weight to the transitory aspect of the shock in the balance of inflation risks.

“The Central Bank’s reference scenario projections will change significantly, but it has to assume some reversal of the commodity shock by the end of 2023, which is the horizon it is looking at. If not, we will be thinking about Selic levels above 13%, eventually, and that would involve a very big sacrifice for the activity”, evaluates Mr. Honorato. Last week, Bradesco increased its Selic forecast at the end of the cycle to 12.75% from 11.75%, but the economist expects more moderate interest rate adjustments ahead so that there is time for the Copom to observe the effects on economy.

In addition, he says that the Central Bank should emphasize the fight against the secondary effects of a classic supply shock like the current one. “If it doesn’t do that, the monetary authority will give the impression that it wants to endogenize an external supply shock, which is like saying it intends to fully combat this local effect of global inflation. It actually makes more sense to emphasize combating secondary shocks.”

For Mr. Hirakawa, with AZ Quest, what remains for the Central Bank “is to slow down the pace while maintaining the hawkish tone for the next meetings. “The Copom has to remain vigilant, but it must lengthen the cycle with more moderate doses of tightening because inflation expectations for 2023, lower than those for 2022, will become its exclusive focus after this week’s meeting,” she says.

At the other end, UBS BB started to project an increase of 150 bp and a Selic of 13.75%, in view of the increase in commodity and energy prices, which should make inflation this year and in 2023 higher than previously expected and lead to a slower normalization of relative prices. Thus, it is of “extreme importance” that no central bank, in particular the Brazilian one, allows inflation expectations to move upwards, at the risk of losing control, economists point out in a note to clients.

Source: Valor International

https://valorinternational.globo.com

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A “state plan” for fertilizers without government investment

Bento Albuquerque — Foto: Divulgação

The National Fertilizer Plan will not receive direct financial contributions from the federal government. Instead, investments in new factories for the expansion of fertilizer production will come essentially from the private sector, although companies are likely to take advantage of fiscal and tax breaks – if these facilities actually get off the drawing board.

The effort was launched on Friday by the Bolsonaro administration amid the turmoil that tripled the international prices of some agricultural inputs because of the pandemic, the energy crisis in some countries and the Russia-Ukraine war, which threatens the supply of inputs from Eastern Europe to Brazil.

“These waves of private-sector investment will guarantee Brazil’s growth in the coming years,” Economy Minister Paulo Guedes told reporters on Friday. “Brazil’s growth cannot be limited to the investment capacity of Petrobras and Eletrobras,” he said, citing behemoth state-owned companies in the oil and power industries.

The government will use direct investments to improve the country’s business environment, Mr. Guedes said. “Eliminate dysfunctional taxes, make industrial research, production and transformation easier. We will create a private-sector complex and draw those investments. The speed of response is much faster.”

The Minister of Mines and Energy, Bento Albuquerque, pointed out that the mineral industry is expected to invest about $40 billion by 2025 in the country. The post-pandemic economic recovery and the rise in fertilizer prices are also expected to make private-sector business for production in Brazil more attractive. “With this crisis, several projects are being put back into operation, such as hibernated nitrogen plants that are now economically viable. And this is also due to the 22% increase in natural gas production in the last three years,” he said.

“The increase in production is already a fact,” Mr. Guedes added, saying that “interventionist administrations” would act differently, focusing on public investments. President Jair Bolsonaro made fun of it, saying he will not create “Adubobras,” or a Brazilian state-owned company to produce fertilizers. He also said that the climate is “favorable” for the Chamber of Deputies to pass in a few weeks a bill to allow mineral exploration and other economic activities on indigenous lands.

Mr. Guedes acknowledged that food prices are likely to increase in the medium term with the indirect impact of the rise in global costs of fertilizers and grains. He is also following the unfolding of the war, which may require additional tax efforts. The minister argued that tax adjustments could reindustrialize the country, and cited the possibility of eliminating the Tax on Industrialized Products (IPI) to encourage domestic production of fertilizers.

The Economy minister also cited facilities for imports of machinery and equipment used in the production of fertilizers and the creation of tax credits from the purchase of imported inputs. “We are convinced that indirect taxes are destroying the domestic industry. The idea is to reduce the taxes that caused a decline of manufacturing in Brazil,” he said.

One concern at the moment is in cutting taxes on Brazilian fertilizers. Sales tax ICMS on these inputs are being adjusted after approval by the National Council of Finance Policy (Confaz) last year. By 2025, domestic production will gradually drop to a 4% tax from 8%, while imported products, currently exempt, will pay 4%. Luis Eduardo Rangel, a director of the executive secretariat of the Ministry of Agriculture, said that fair taxation is the starting point to make the Brazilian fertilizer industry competitive again.

According to Mr. Rangel, with the rebalancing of tax rates, it will be possible to increase the domestic production by 35% by 2025 and regain 10% of domestic autonomy. Bernardo Silva, head of the National Union of the Fertilizer Raw Material Industry (Sinprifert), said that the growth projected in the short term is not irrelevant and will help reduce the “risk” the country faces today.

The fertilizer plan, in his view, is a “good, optimistic and bold” message. Even so, the Brazil cost remains high with obstacles such as environmental permit, transportation, logistics, energy and natural gas. “We need a positive message because the industry needs heavy investments. A nitrogen plant requires investments of $1.5 billion, and needs a long time to mature. We look up to 50 years ahead. We need institutional stability and security for this,” he said.

Agriculture Minister Tereza Cristina said that it will be necessary to administer the “dose very well” to know the best time to rebalance the ICMS rates on domestic and imported products. “If the war gets worse, we have to zero taxes,” Mr. Guedes said.

Source: Valor International

https://valorinternational.globo.com

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High oil prices boost collection of states, municipalities

Are we in for another round of high oil prices? - The H Group - Salem, Oregon

Besides putting pressure on fuel prices, high oil prices are likely to contribute this year to a greater-than-expected growth in revenues from royalties and special participations — an additional amount levied on specific fields — collected by the federal government, states and municipalities.

The total value of government participation may increase to R$111.5 billion this year, potentially an all-time high, compared with R$77.82 billion last year, according to calculations by the Brazilian Center for Infrastructure (CBIE) prepared at the request of Valor.

For states and cities, the combined amount could increase to R$59.6 billion this year from R$41.6 billion last year. The distribution, however, is concentrated and benefits relatively few states and cities.

Of the total revenues from royalties and special participation projected for this year, R$42.5 billion are expected to be collected by the federal government. Part of this amount – whatever exceeds the federal government’s budget forecast – can be allocated to the fund to mitigate the ups and downs of fuel prices in the domestic market. Royalties and special participations intended for states and municipalities are unlikely to be affected. The proposal, however, is still being debated.

Currently, of the royalties received by the federal government, about 25% are allocated to the special fund, which is expected to transfer resources to states and municipalities. The remainder goes to the Navy Command and the Ministry of Science, Technology and Innovation. In the case of special participation, 80% goes to the Ministry of Mines and Energy and 20% to the Ministry of Environment.

The former director of the National Petroleum Agency (ANP) and now fiscal advisor to the Legislative Assembly of Rio (Alerj) Magda Chambriard says there is flexibility in the allocation of the portion of royalties and participations that remains with the federal government, which would allow the government to direct part of the resources to the new fund of equalization. Ms. Chambriard, who has already worked in this division, says that it is difficult to change the portion destined for the social fund, which serves Health and Education, but that it is possible to redirect the rest of the resources sent to the Navy and ministries.

“The federal government usually allocates part of these resources to specific bodies in the structure of ministries to reduce the primary deficit. But funding for [Health and Education] actions is more rigid,” she says. For her, the equalization fund is a good way out, but it should have a temporary nature, under the risk of draining resources from the federal government in a scenario of continuous rise in oil prices. “Money is short, so it is not appropriate to give this instrument a permanent character.”

According to CBIE projections, R$36.2 billion in government participation are expected to be allocated this year for the states and R$ 23.4 billion for cities. The other participations, such as the rate of occupation or retention of area, signature bonus payments and others, are seen as totaling R$9.4 billion.

The calculation considered an increase in the production of oil and liquid natural gas (LNG) to 3.1 million barrels a day in 2022 from 2.9 million barrels a day on average last year. It also considered an average price this year of $95 a barrel, 34% higher than the average price of $70.86 last year. The average exchange rate for 2021, of R$5.4 to the dollar, was maintained for this year. The 2022 values were projected based on the governmental participations received last year.

The expected increase in revenue from royalties and special participation, therefore, has a structural component, from the increase in production already expected for 2022 and for the next few years, and a cyclical component, given mainly by commodity prices, said Adriano Pires, head of CBIE.

The production of the sector this year is expected to virtually double by 2027 to between 5 and 6 million barrels per day, Mr. Pires said. Such an increase is likely to be driven by oil from the pre-salt layer, a vast reserve off the coast that accounts for 70% of production and is expected to reach 90% in five years, he said.

Even if prices fall in relation to current levels, Mr. Pires said, the collection with participations related to oil is expected to grow due to the higher production volume. “This money can cause a revolution in the public accounts and it is necessary that governments start thinking about what to do with it.”

Economist Sol Garson, a specialist in public accounts, says that high oil prices are expected to raise revenues with royalties and special participations, but in a very concentrated way among states and municipalities, since they are determined by the existence of oil wells.

Ms. Garson, Rio’s former finance secretary, is also concerned about what additional funds from oil would mean for public accounts. Even if states set aside these funds for social security, for example, they can reduce the contribution of the Treasury in the year and thus free up resources for other functions. In São Paulo, the resources are fully allocated to SPPrev, an agency that manages the state’s pension system.

According to the CBIE projections, Rio de Janeiro is expected to receive 76.6% of all governmental participations paid to states, while São Paulo gets a little more than 10% and Espírito Santo will have 8.9%.

In Rio de Janeiro, Secretary of Finance Nelson Rocha said that higher production and oil international prices, now intensified by the Russia-Ukraine war, made the initial forecast for the state collection of royalties and special participations from oil in 2022 jump to R$30 billion from R$19 billion.

Secretary technicians point to an amount of R$31.7 billion, a calculation that takes into account the Brent barrel at $102.11 and the dollar at R$5.50. As a rule, most of the resources are transferred to state social security, which is in deficit, shared between municipalities and municipal funds. The last ANP official projection, published on February 9, before the war, therefore, indicated collection of $26.54 billion for Rio in the year.

If the Rio’s forecast is confirmed, oil revenues will be 63.8% higher than the R$19.35 billion of 2021. For comparison, the amount is equivalent to almost a third of the net revenue contained in the Annual Budget Law, of R$92.9 billion. It is also similar to the net current revenue of Rio’s capital city in 2021 (R$31.3 billion), discounting the proceeds from the concession of water utility Cedae’s services (R$6.2 billion).

In Espírito Santo, 40% of the oil royalties and 15% of the special participations go to the state’s sovereign fund, which aims to generate intergenerational savings mechanisms and to help and to finance the state’s economic development projects.

The Espírito Santo state government has also been following oil swings and has revised the estimates of participations revenues for 2022, said Luiz Claudio Nogueira, coordinator of the Espírito Santo oil and gas team. The projection for this year’s collection of royalties and special participations of oil rose to R$2.5 billion from R$1.4 billion. The estimate, he said, considers a barrel at $90 and exchange rate at R$5.50 to the dollar.

Source: Valor International

https://valorinternational.globo.com

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Cimed gears up to grow above market in 2022

Leader in sales volume of over-the-counter drugs expanded more than 20% in 2021

11/03/2022

Jose Roberto Lettiere — Foto: Silvia Zamboni/Valor

Jose Roberto Lettiere — Foto: Silvia Zamboni/Valor

Cimed, Brazil’s leader in OTC drugs in sales volume, grew twice as much as the country’s market for drugs last year and intends to repeat this performance in 2022. “There are still many open variables, but the plan is to grow stronger,” Chief Financial Officer José Roberto Lettiere said.

In 2021, while the Brazilian market grew 11%, according to data from the consultancy IQVIA, which audits retail pharmaceuticals, Cimed’s net revenue grew more than 20%.

According to Mr. Lettiere, heated demand for medicines and vitamins amid the Covid-19 pandemic and its sales mix allowed the pharmaceutical company to advance in revenue and return on capital employed, despite the challenges in the global supply chain, the impact of currency devaluation in costs and greater global competition for raw materials — the active pharmaceutical ingredients (APIs) used in the country are mostly imported, from China and India.

“We realized that Europe was starting to face logistical problems at the end of 2020 and we moved up the purchase of raw materials to avoid disruption,” the executive said. The challenges remained in 2021. But the vertical operating model, the focus on operating costs and agile management helped to protect the financial statement, he adds.

In the year, while the company’s net revenue grew 20.3% to R$1.58 billion, the cost of goods sold (COGS) advanced 27.6% to R$773.8 million. Recurring EBITDA rose 30.7% to R$403 million, with a margin of 25.5%, compared to 23.4% in 2020.

Net income for the year fell 15.1%, to R$242.8 million, pressured by the financial result and expenses related to the implementation of the new plant in Pouso Alegre (Minas Gerais) and the simplification of the company’s corporate structure. On the other hand, recurring net income rose 16.4% to R$255.1 million and ROCE increased five percentage points to 47.2%.

According to Mr. Lettiere, there are no IPO plans on the table right now. But Cimed could tap the capital market to finance an eventual more aggressive growth project. “Cimed wants to be the largest pharmaceutical company in Brazil. If it is necessary to go to the market for this, it will be studied,” the executive said.

At the beginning of the year, logistical challenges persist and the demand for medicines grew even faster, particularly anti-flu and anti-allergic drugs, given the advance of the omicron variant and the circulation of a new influenza virus, H3N2, in the country. But there were no problems in accessing raw materials to meet the demand, according to Mr. Lettieri.

Cimed has already obtained approval from health regulator Anvisa to transfer the production of medicines to the new factory in Pouso Alegre, in a process likely to be completed by the third quarter. With the unit, which has already received investments of R$300 million, Cimed doubles its solid production capacity, to 240 million units (boxes) per year.

In addition, R$300 million are set aside for the manufacturing complex over the next five years, increasing production capacity in other product lines.

Source: Valor International

https://valorinternational.globo.com
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Agriculture minister to meet fertilizer exporters in Canadá

Tereza Cristina will say in Ottawa that guaranteeing supply to Brazil is strategic for planet’s food security

11/03/2022

Tereza Cristina — Foto: Denio Simoes/Valor

Tereza Cristina — Foto: Denio Simoes/Valor

Agriculture minister Tereza Cristina embarks on Friday for a new round of negotiations with fertilizer exporters. This time, the destination is Canada, the main supplier of potassium chloride to Brazilian producers. She will meet with Canadian executives in Ottawa and is expected to convey the message that guaranteeing the supply of fertilizers to Brazil at this time is strategic for the planet’s food security.

The trip a few days after leaving the position at the head of the ministry is seen by people close to the minister as an extra and personal effort by Tereza Cristina to try and secure the supply of inputs for Brazilian farmers and strengthen the partnership with Canada.

Since last year, she has been in contact with Canadian potash companies and has tried to make them expand exports to Brazil by at least 500,000 tonnes.

On Sunday, the minister will meet with executives from Brazil Potash, a company controlled by the Canadian investor group Forbes & Manhattan. The subsidiary has the concession for the Autazes deposit, in Amazonas, whose exploration remains blocked by environmental questions. In full operation, the project can supply 25% of the national demand for potash, according to the National Fertilizer Plan.

On Monday, the meeting will be at Canpotex, a joint venture between Nutrien and Mosaic. The fertilizer giants exported 3.7 million tonnes of potassium chloride to Brazil in 2021 and make 85% of the product in Canada.

The mission, however, will not be easy. The fertilizer agenda is basically of the private sector, and the government has no power to regulate purchases or enter into trade agreements. The minister’s role will be to strengthen partnership ties. It will place Brazil as a reliable customer that can increase potash purchases.

Main customer of the product that leads the Canadian trade balance, Brazil supports the expansion plans of Canadian potash exporters. This does not mean, however, that the offer will be broadly expanded to the point of filling possible deficiencies with the closing of the supply channels from Russia and Belarus. Production growth capacity is limited.

These are multi-billion dollar investments that do not take immediate effect. The Canadian private sector will also assess the risk of making high investments considering the possibility of the market “turning around” again. An eventual normalization of the geopolitical scenario in Eastern Europe in the short or medium term could flatten potash prices, which are currently rising sharply, and put countries competing in exports back into play.

Meanwhile, the federal government launches this Friday the National Fertilizer Plan with the purpose of reducing Brazil’s 85% dependence on other countries, mainly Eastern Europe. This is not the first attempt and three other programs with the same purpose have existed in the past.

The plan is a “modern mapping,” in the words of a senior executive in the industry. “The work has been well conducted. But there is no miracle that can be done. One has to look at whether exploration is feasible,” he said. Although Brazil has enough minerals for local production, there are issues such as the quality of the mines and sensitive points such as their location.

The availability of natural gas – the raw material for nitrogen products – at a viable cost is also challenging.

Structural issues such as logistics, as well as taxes, are mentioned by sources consulted by Valor – and addressed in the government’s plan. The document mentions the need for convergence with the National Logistics Plan and other public policies such as the New Legal Framework and the New Gas Market Program (in the chapter that mentions feasibility strategies for nitrogen plants).

Source: Valor International

https://valorinternational.globo.com
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Brazilians face trial by fire after international diversification

Portfolios have suffered losses as the real appreciated and benchmark indexes declined

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11/03/2022

Giuliano De Marchi — Foto: Silvia Zamboni/Valor

Giuliano De Marchi — Foto: Silvia Zamboni/Valor

Brazilians embraced international diversification and allocated part of their assets to strategies unrelated with the country in recent years. Now they face a trial by fire. With the appreciation of the real and benchmark indexes like S&P 500 going south, some portfolios have suffered double-digit losses in 2022, especially those without currency hedging. The international scenario, already concerning due to the change of monetary policy in the United States, now includes a war in the European backyard with Russia’s military invasion in Ukraine. And withstanding the exchange rate and external volatility seems to be even harder at a time of rising interest rates here – the Selic, Brazil’s benchmark interest rate, went to 10.75% per year from the ultra-low level of 2% at the beginning of 2021, and there are new hikes ahead.

With such a combination, the assets of foreign asset-management firms that distribute shares through local vehicles shrank to about R$63 billion at the beginning of March from R$81.7 billion at the end of 2021, while the number of investors fell to 360,000 from 480,000, data compiled by J.P. Morgan Asset show. The reduction comes after years of strong expansion. The segment totaled R$16.5 billion at the end of 2017, with around 50,500 shareholders. Last year alone, it doubled in size after having closed 2020 with almost R$44 billion and 212.500 investors.

The movements of the Brazilian exchange rate and the S&P 500 in the first months of 2022 alone would mean a 20% drop for global funds without hedging, said Giuliano De Marchi, head of Latin America at J.P. Morgan Asset. He sees a generalized sale of risk assets driven by the Russia-Ukraine conflict, but says that the diversification of currencies and geographies continues to make sense in the long run. With the foreign exchange rate at R$5 to the dollar in Brazil and foreign assets at a discount, the moment is, in theory, more favorable than when the currency was at R$5.70 and global equities at their peak. The prevailing assessment is that the dollar will remain as a safe-haven currency, especially when the Federal Reserve sets in motion its roadmap to increase interest rates.

“There is no basis for Brazil to continue at this speed of appreciation,” Mr. De Marchi said, referring to the real and the local benchmark index Ibovespa, which have been driven by foreign capital. “There are other markets, not only the United States, with opportunities to perform as well or better than Brazil. The goal is to have diversified returns, because putting 10% to 20% in other markets helps in moments of volatility.”

Although there is no predictable outcome to the Russia-Ukraine conflict, J.P. Morgan’s thesis is that it will not fundamentally affect the growth of the global economy in the post-pandemic era. The Federal Reserve may slow the pace of interest rate increases, but the direction was given to contain inflationary pressures that tend to be potentiated by a war coupled with rising commodity prices. “China is going to continue to grow strongly. It’s a one-in-a-lifetime transformation, which is shifting the relevance of Western companies to those of East Asia,” Mr. De Marchi said. “But assets are going to face volatility. You need to have a minimum investment horizon of two years.”

The executive says that Brazilians currently prefer portfolios with currency hedging, which cushions the swings of the exchange rate. But those who buy Brazilian Depositary Receipts (BDR) on the stock exchange have pure international exposure, although they make the allocation in reais. “For the next few months, the big question mark is whether the investor will hold out. We expect withdrawals, people go through this. But the most important time to buy is during the crises of market volatility, when the assets are at a discount.”

The natural reaction of investors who made international investments for the first time is to rethink the strategy, said Marcus Vinicius Gonçalves, CEO of Franklin Templeton in Brazil. “With high interest rates, appreciation of the real, falling stock markets abroad and all the geopolitical tension, they may not understand why it makes sense to diversify. It’s a huge financial education exercise,” he said.

The executive added that despite being a difficult exercise, Brazilians cannot lose sight of the foreign market, which is a thriving one. “The opportunities are not going to disappear because of what the world is experiencing this year. The companies are not going to stop presenting good results. The perception of risk has changed, but it’s not because the return here has improved that the investor should bring his money back and leave [foreign funds].”

Although the war was something unthinkable about two months ago, Mr. Gonçalves recalled that the conflict highlights how useful is being exposed to diverse markets. “Just think about a Russian investor who had savings in the country, based on a currency that had $600 billion in reserves that were embargoed, and can’t withdraw the money.”

In this shorter period, virtually all portfolios suffered, including stocks, currencies, global fixed income and technology-related funds, the executive said. Companies based in Europe that operate in Asia had their prices revalued due to expectations of reduced consumption, such as the luxury market. Long-short funds, for instance, faced losses of 4% to 5% instead of 15% because they can short certain assets.

For those who do not have any exposure abroad, maybe it is time to set up operations without currency hedging, under the premise that the global economy will not go into recession in 2022 and that the Fed may even be less aggressive in the monetary correction process at the beginning, but will have to face inflation because of energy prices. “The global liquidity scenario can be impacted. It can have transmission mechanisms to the financial system, it has to be closely monitored not only because of Swift [the international payments chamber, from which some Russian banks were banned], but also because of banks in countries like Italy and Germany exposed to Eastern Europe.”

As much as Brazilians have made a move toward international assets, the total represented little more than 1.2% of the fund industry at the end of last year, said Daniel Celano, who leads third-party asset management at Schroders Brasil. For the investor who feels like he is missing out on the foreign capital party in the local stock market, he recalled that in order to really enter the ranks of long-term foreign investors, the country needs to start growing again. In the short term there are presidential elections and a poorly solved fiscal situation. For now, the local market is also benefiting, along with other emerging economies, from the capital flight from Russia.

With higher interest rates in Brazil, Mr. Celano says he sees demand for funds with currency hedging, but some institutional clients who had protection have fully or partially dismantled it now that the exchange rate is closer to R$5. Foundations that had not yet taken the international step, but approved the investments in committee, however, are adopting a wait-and-see approach.

Source: Valor International

https://valorinternational.globo.com

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Senate passes bill that changes sales tax collection

In reaction to fuel hike, senators also approved change in Petrobras pricing policy

11/03/2022

Rodrigo Pacheco — Foto: Claudio Belli/Valor

Rodrigo Pacheco — Foto: Claudio Belli/Valor

The Brazilian Senate Thursday passed by 56 votes to 8 the final text of the draft supplementary bill 11, 2020, which changes the sales tax ICMS receipts in the states. The Senate, therefore, concluded the appreciation of the so-called “fuel package” — which also includes bill 1472, aimed at changing Petrobras’s pricing policy. Now, both bills will be analyzed by the Chamber of Deputies.

Also passed on Thursday by 61 to 8 votes, the bill 1,472 amends and creates a tariff stabilization mechanism. The proposal is criticized by the economic team, but it was considered as part of an agreement built between the leaders of the Chamber and the Minister of Economy, Paulo Guedes. The text creates a kind of “gasoline voucher,” at a cost of approximately R$3 billion, intended for recipients of the cash transfer program Auxílio Brasil.

The approval of the two bills took place on the same day that Petrobras announced a new fuel price hike, which generated annoyance among both ruling and opposition senators. “The announcement of the Petrobras price increase imposes on the Senate the consideration [of the fuel package] still today,” Senate President Rodrigo Pacheco (Social Democratic Party, PSD, of Rondônia) said earlier in the afternoon.

In addition to allowing changes in ICMS levied on fuels, the bill establishes the exemption of the social taxes PIS and Cofins rates, both in the domestic market and in imports, for diesel, biodiesel, LPG (petroleum and natural gas) and aviation kerosene, until December 31, 2022. Initially, the text did not consider the possibility of also exempting the import tax rates, but this was adjusted in the last opinion of the rapporteur, Senator Jean Paul Prates (Workers Party, PT, of Rio Grande do Norte).

The bill 11 considers final details to the single-phase receipts of ICMS on fuels in the states, which will be pending regulation by the governors to be enforced — through the National Council of Finance Policy (Confaz). This regulation is necessary especially for the adoption of a uniform national rate. In addition, the text proposes an emergency transition rule for diesel, in a gesture to please truckers, who are the electoral base of President Jair Bolsonaro.

According to the project, until the diesel tax single-phase receipt is adopted — and the corresponding unification of the rate — the reference value for stipulating the tax will be the moving average of the average prices collected from the final consumer in the five years prior to its fixing.

In a scenario of ICMS unification, the governors may opt for an ad rem rate, when the ICMS is charged from a fixed amount per liter. Currently, the states practice the ad valorem model, which uses a percentage of the price value.

Finally, bill 11 brings a trigger for the possible variation of the ad rem rate. Mr. Prates’s text says that whenever the weight of the ad rem rate is higher or lower by 5% than the moving six-month average of the national average price, the states and the Federal District (Brasília) must necessarily raise the tax. This proposal was suggested by Senator Oriovisto Guimarães (Podemos, of Paraná) and accepted by the rapporteur.

The rapporteur’s text also guarantees the so-called “gas voucher,” which aims to put in place a subsidy for low-income families when purchasing LPG (liquefied petroleum gas) cylinders. Senator Prates proposes expanding the service to 11 million families by 2022. This number is double the target in relation to the values originally approved in the Annual Budget Law. In the rapporteur’s estimates, to serve this additional public, it will be necessary to increase the program’s budget to R$1.9 billion.

As for the “gasoline voucher,” the article says that payments will be made monthly as follows: R$300 for self-employed drivers of individual transport, including taxi drivers and app drivers, drivers or pilots of small boats with engines of up to 16 HP and app motorcycle pilots, provided they have a monthly family income of up to three minimum wages (a little more than R$3,600).

Source: Valor International

https://valorinternational.globo.com

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Rising fuel prices mean strong impact on inflation

Increases announced Thursday for gasoline (18.7%), diesel (24.9%) and gas (16%) is expected to raise Brazil’s official index by 1.52%

03/11/2022

Petrobras raised fuel prices as oil escalates — Foto: Divulgação/Petrobras

Petrobras raised fuel prices as oil escalates — Foto: Divulgação/Petrobras

The adjustment announced Thursday by Petrobras in the prices of gasoline, diesel and gas (LPG) did not surprise the market, but came higher and faster than the vast majority of economists expected, which caused immediate revisions in inflation expectations. The adjustment came after 57 days without hikes and was influenced by the Russia-Ukraine war, which caused the price of oil on the international market to skyrocket.

The hikes announced Thursday by Petrobras for gasoline (18.7%) diesel (24.9%) and LPG (16%) will probably lead to an impact of 0.4 percentage points (p.p.) on the official inflation, as measured by Brazil’s benchmark inflation index IPCA for March, and to a rise of 0.35 p.p. in the IPCA for April. In other words: a total impact of 0.75 p.p. on the rates of March and April’s indicators. These calculations were made by André Braz, the economist at the think tank Fundação Getúlio Vargas (FGV) who oversees the General Price Indexes (IGPs). Before the company’s announcement, the economist expected an annual IPCA around 6% to 6.5% by the end of the year.

It means that in the event that no other product but fuel saw prices increase, the official inflation rates for March and April would already swell by at least 0.75% in both months. In the case of the IGPs, the specialist reckons hikes of 0.75 p.p. on the IGP-DI for March, and 0.35 p.p. on the IGP-DI for April, caused by increases after 57 days on the prices of the three fuels made by Petrobras and affected by the war in Ukraine, which induced the price of oil to skyrocket.

Soon after the announcement, LCA Consultores raised IPCA expectations for the end of 2022 to 6.5% from 6.01%. “The direct impact of these diesel and gasoline increases on the IPCA is 0.5962 percentage points,” economist Fábio Romão said.

LCA now projects a 10.58% inflation for the transportation group at the end of the year – the previous forecast was 8.72%. The projection for the food and beverage group varied less, to 7.16% from 7.02%. “Specifically on food, I have very recently incorporated the effects of commodity hikes via the war. Hence the modest change in this update. In fact, before all this adjustment caused by the Russia-Ukraine [war], we had +5.8% for food and beverages and now it is at +7.16%,” Mr. Romão said.

J.P. Morgan also raised its projection for IPCA in 2022 to 6.5% from 6%, also incorporating the prospect of even higher prices for other commodities.

“Petrobras announced increases of 19.2% and 24.9% in gasoline and diesel prices, respectively. This is higher and earlier than our assumption of two 8% increases between March and April,” economists Vinicius Moreira and Cassiana Fernandez wrote in a report. In their estimates, the larger-than-expected hikes adds about 0.15 percentage point to the bank’s IPCA forecast. “As it came earlier than expected, it increases our inflation estimates for March and April, but has a downward effect in May, as we do not expect another increase in mid-April,” they say. The February IPCA, which will be released on Friday, will be important to adjust short-term expectations, they added.

Santander has also signaled that it will update its inflation estimate. “We were already considering a 10% adjustment in our scenario. Therefore, the surprise in relation to our projection for the gasoline increase was lower, by 9 points, which should add 0.17 p.p. to the annual inflation,” said Daniel Karp, an economist at the Spanish bank in Brazil, pointing out that the IPCA increase in the current month is expected to be raised to around 0.95% from 0.81%. “For 2022, our official forecast is 6%, but after the recent commodity shocks and the gasoline adjustment, the tendency is for the number to go to around 6.7%,” he added.

Mr. Braz, with FGV, says that, as the conflict in Eastern Europe shows no signs of ending in the short term, there is no way to know for sure if oil prices will continue to soar. Brent crude trades above $100 since the war started, he recalled, and there is no way to know if there will be other adjustments in fuels.

The first preview of the General Price Index (IGP-M) for March, unveiled on Thursday by FGV, showed stability, compared to a high of 1.38% in the same preview in February, favored by a drop of 11.77% in the price of wholesale iron ore. “But with the hike [of fuels], this first preview [prepared before Petrobras’s announcement of more expensive fuels] no longer represents the reality of inflation,” he said, adding that the first preview is outdated.

Another warning sign mentioned by him, besides possible new fuel price increases due to the war, is the fact that indirectly higher fuel prices make other non-oil related products more expensive. “It’s going to increase freight costs, production cost,” he said, noting that the country’s item transportation logistics are dependent on trucks, which run on diesel.

“Those hikes will spill over to other sectors,” he said. Mr. Braz also recalled that there are other products that take petroleum in their preparation, such as PVC pipes, for example, which are expected to become more expensive because of the rising barrel — putting pressure on inflationary indicators.

Outside the oil sector, the specialist also reiterated the warning of a rise in prices abroad of commodities from the agricultural sector, also because of the war. This is because the conflict region is a producer of wheat, rye and oats, items that have a long chain of products in Brazilian retail.

“The war is far from over” he said. “And even if it ends, sanctions on Russia are expected to remain,” he said, noting that this will restrict access to products from Russia, such as wheat for example, in the global supply, which raises prices in the domestic market.

He made one warning, though. It is not impossible that oil prices to go down just as they skyrocketed when the conflict started, depending on the resolution of the war. “We have to take into account that oil is still fluctuating,” he said. “We have to wait and see how the post-war will be and how the relationship of other countries with Russia will be,” he said.

Source: Valor International

https://valorinternational.globo.com

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Surging oil prices put pressure on Petrobras

Possible government interference is seen as “acceptable” amid volatility caused by war in Ukraine

10/03/2022

The strong rise in oil prices in the international market in recent days as a consequence of the Russia-Ukraine war has put pressure back on the pricing policy of Petrobras. As a result, the discussion about how government interference drives stocks down has re-emerged as the state-owned oil company’s share prices are traded at levels very distant from those of its main international peers.

Even as Petrobras has surged around 13% in 2022 and almost 100% in 12 months, the multiples most used by the market, such as the price-earnings ratio, are still quite lagging when compared to the major U.S.-based and European oil companies. Taking into account Petrobras’s price in dollar terms, the P/E is around 4.4 times, while peers like TotalEnergies (8.3 times), Shell (10.4 times) and Chevron (19.9 times) boast higher multiples.

Petrobras’s stocks are historically traded at a discount compared with its peers due to the uncertainty caused by potential government interference. However, the new possibility of a potential price freeze or subsidy is seen as acceptable by the market, given the exceptional moment.

Since 2016, Petrobras has adopted the international parity method to sell fuels, matching prices with what it pays to import the oil used in production as a way of not taking losses. Since January 11, the state-owned company has not made any adjustments and the disparity between the sale price at refineries and the import price has widened to around 30%. Nicolas Borsoi, the chief economist of Nova Futura Investimentos, recalled that the lack of clarity of the mechanism is even more evident in a moment of crisis like the current one.

“Since the policy was put in place, there has always been controversy about the intervals between adjustments and whether it should include currency hedging. The market has always seen it as a cushion, despite being a reasonable one, and now controversies are in the spotlight because of the international market volatility,” he said.

Ilan Albertman — Foto: Leo Pinheiro/Valor

Ilan Albertman — Foto: Leo Pinheiro/Valor

Petrobras investors price in factors that have already been overcome by foreign peers, such as the fact that it is a semi-public company, the political risk and the lack of a real sustainability agenda, which justifies the divergence, said Ilan Arbertman, an analyst at Ativa Investimentos.

“Everyone involved needs to calm down, understand that we are in an exceptional moment, that oil prices that high are not a normal thing but a consequence of what is happening between Russia and Ukraine,” said Pedro Galdi, an analyst at Mirae Asset. There is no way Petrobras can pass on surging oil prices all at once, he added.

“They will have to pass on part of it and create some escape valve for prices, especially if the conflict continues. Petrobras’s refining unit can’t take such a big loss if oil remains at these levels for the next few months,” he said. “Everyone needs to work together.”

Mr. Arbertman believes that any solution that does not substantially change Petrobras’s economic and pricing policy fundamentals would be well accepted by the market. “Petrobras must be more transparent to the market, show how far it can handle this difference, and reiterate its support for parity.”

The analyst points out that a freeze on fuel prices, as has been suggested by the federal government, would generate destruction of Petrobras’s market cap, which would cause discomfort to investors, who would remember what happened in the last crisis involving the company.

“Some solutions discussed, such as using dividends owed to the government to subsidize fuel or creating a reserve fund as a way to ease the pressure on the pricing policy, without changing it, would be ideal,” he said. Avoiding an impact on the finances of Petrobras, he said, which have improved in recent years, would help investor confidence.

Goldman Sachs says that the creation of a new fuel subsidy program tends to be positive for Petrobras because it reduces risks to the profitability of the company’s operations in the short term. For the U.S.-based bank, the state-owned company would be reimbursed for the difference between domestic and international prices.

The government is discussing the recreation of a subsidy program similar to the one put in place in 2018 after the truckers’ strike. The topic emerged after the rise in the price of a barrel of oil in the international market with the crisis between Russia and Ukraine in recent weeks.

In a report, BTG Pactual points out that even in a situation of price controls, the good momentum of the Petrobras’s upstream business, which benefits from the rise in oil prices, would mitigate the effects of the deterioration of margins in refining.

Analysts Pedro Soares, Thiago Duarte and Daniel Guardiola wrote that Petrobras is today a much more structured, less leveraged company with lower production costs, which reduces the pressure for an immediate price adjustment.

Mr. Arbetman acknowledged that Petrobras is more structured now, but recalled that the company would not reap benefits with upstream is doing well and refining is not. “The market analyzes Petrobras as a whole. There is no point in looking at the segments separately because invariably, in terms of valuation, the asset ends up losing value.”

Mr. Borsoi, with Nova Futura Investimentos, recalled that besides the current volatility, Petrobras’s investors are also already considering the presidential elections, in October, which may mean a turning point in Petrobras’s pricing policy. “It remains to be seen whether the commitment will be maintained,” he said.

He believes that if the market considers that the government seeks solutions in order to solve social problems with the company, as was done in 2016, shares may drop as a result. “Today, the market still sees it as an exceptional situation, of war, but it is wary because of Petrobras’s history.”

Source: Valor International

https://valorinternational.globo.com
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Citrosuco sets ESG targets for 2030

World’s largest exporter of orange juice vows to have 100% of its supply chain sustainable

10/03/2022

Mario Bavaresco — Foto: Divulgação

Mario Bavaresco — Foto: Divulgação

Citrosuco, the world’s largest exporter of orange juice, has just defined its commitments in the environmental, social and governance (ESG) fields by 2030.

The Matão-based company controlled by the Fischer and Votorantim groups confirmed that, by the end of the decade, 100% of its supply chain will have to adopt measurable and certified sustainable socio-environmental practices, and now projects that, with efforts in this and other fronts, it will reduce its gas emissions by almost 30% in scopes 1 (related to the direct operations of the company itself) and 2 (involving the consumption of electric power).

CEO Mario Bavaresco said that the commitments unveiled now are in line with practices already in place for more than a decade.

Currently, 100% of the company’s own orange production follows the necessary sustainable agriculture parameters, and the same happens with about 65% of the independent fruit suppliers. There are about a thousand suppliers in total, and those that have not yet reached the required standards (usually the smaller ones) are moving in this direction with the company’s guidance.

With revenues estimated by the market at between R$3 billion and R$4 billion per year, Citrosuco has already certified 1.9 million hectares of its own orange production, spread over 25 farms in São Paulo and Minas Gerais states.

The company estimates that its orchards already capture more than 500,000 tonnes of carbon dioxide. With the goal of reducing emissions in scopes 1 and 2 by 28% by 2030, the volume removed could reach 1.6 million tonnes by 2030. For the reduction of scope 3 emissions, for which the company’s responsibility is indirect, the international criteria are still being refined and the targets, likewise.

Besides pursuing 100% socio-environmental compliance in its orange supply chain, with a focus on legal reserves, permanent protection areas, soil erosion, waste management, use and disposal of agrochemical packaging, and agronomic and labor issues in the agricultural areas under its influence, Citrosuco also wants to foster biodiversity.

Clauber Andrade, the company’s head of sustainability, points out that more than 19,000 hectares of conservation areas are already being managed. Besides, advances will continue to be made with increased production of bees and honey, expansion of native seedling nurseries, and monitoring of fauna and flora. As it uses irrigation on several farms, the company invests in the management of water resources.

With about 400 employees, besides those hired during harvests, the world’s largest exporter of orange juice also states that it has among its pledges the promotion of diversity, equality and inclusion. “We want to provide greater representation of women and blacks in our leadership. By 2030, we have committed to expand opportunities and access to leadership positions by women and blacks, reaching at least 30% representation,” Citrosuco said.

“All the commitments we have established represent a great challenge, and when we manage to achieve them, we will have others. But we will have a 100% sustainable production, more efficient and with higher productivity,” Mr. Bavaresco said. Over the past four years, Citrosuco has invested more than $400 million in the development of new projects, technologies, innovation, modernization and increasing capacity and productivity.

Source: Valor International

https://valorinternational.globo.com
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