CEO Ernesto Pousada outlines plans for expanding international presence and exploring new market opportunities
09/02/2024
Ernesto Pousada — Foto: Leo Pinheiro/Valor
Vibra CEO Ernesto Pousada said the company’s top priority is renewing the Petrobras brand across its network of fuel stations. According to him, internal research indicates that consumers identify strongly with the BR brand, particularly in segments like convenience stores (BR Mania) and oil change services (Lubrax).
However, the outcome depends on ongoing discussions with the state-owned oil company. If Vibra is unable to renew the contract for the use of the BR brand across its more than 8,000 stations, the alternative plan is to develop the Vibra brand, a move that other companies have already tested, Mr. Pousada noted. “Both parties need to advance the discussions in the coming years. Vibra is keen on renewing, but under certain conditions,” Mr. Pousada said during Vibra Investor Day on Thursday (29th).
The contract for the use of the BR brand by Vibra is set for 10 years and will expire in 2029. Petrobras has not commented on the matter.
Mr. Pousada also said that part of Vibra’s growth strategy involves increasing lubricant sales to international markets, particularly in Latin America, where the company currently has a minimal presence. The company’s market position in this sector is still very small, leaving room for growth until it becomes the regional leader, the CEO mentioned during the event.
The initial phase of international expansion will focus on the southern part of South America, in the six countries where the company already operates, said Vanessa Gordilho, Vibra’s executive in charge of business, products, and marketing. “It won’t be starting from scratch and doesn’t require much effort,” said Ms. Gordilho.
According to Mr. Pousada, the past four quarters have been dedicated to “getting the house in order.” Additionally, the CEO said that the company will continue preparing its internal processes and management for a new growth cycle, which he expects to occur in the coming years.
Another avenue for expansion is through Comerc, whose acquisition of the remaining 50% stake was announced last week. The company plans to implement a strategy to capitalize on R$1.4 billion in synergies, which includes refinancing Comerc’s debt—currently more expensive than Vibra’s average debt cost—among other initiatives, said Clarissa Saddock, Vibra’s chief renewable energy and ESG officer.
Vibra also sees opportunities in its recently formed partnership with Itaú for energy commercialization, especially given the prospects for the complete opening of the market in the coming years, and in pending projects related to micro and mini-distributed generation and energy efficiency.
Regarding natural gas, Mr. Pousada mentioned that the company does not yet have a significant presence and is seeking the “right angles” to gain access to the molecule and advance in this segment, aiming to complement its product portfolio for clients. However, the executive said that the company does not have a strong desire to enter the natural gas market, and any moves in this area will be approached with capital discipline. Mr. Pousada also projected a 15% growth in the liquid fuels market by 2030.
With expected interest rates cut in the U.S., Brazilian companies should resume bond issuance
09/02/2024
Investment banks are preparing their first meetings with foreign investors to launch Brazilian companies’ issuances in the international debt market. Around six deals are expected for September, according to sources interviewed by Valor, including issuances by Raízen and banks. Subsea engineering company Oceânica, which is new to this type of transaction and tried to launch an offer in August, is also among possible candidates.
The market expects a busy season, starting Monday (2) after the return of vacations in the Northern Hemisphere and the Labor Day holiday in the U.S. In this scenario, some issuances may be brought forward not only to take advantage of more attractive rates but also to avoid proximity to the elections in the U.S., which could increase volatility.
The year has already surpassed 2023 in the amount raised with offers abroad. Brazilian companies issued $16.4 billion in bonds so far this year, compared to $16.1 billion last year, according to data from Bond Radar. People familiar with the matter say the expectation is that transactions will reach around $20 billion at the year-end.
The banks coordinating the operations have different readings of the impact of the election in the United States on the deals. Samy Podlubny, head of debt capital markets at UBS BB, says potential issuers are currently divided into two groups: those betting on September and those looking at January 2025 to avoid an issuance during the race for the White House. “Although they know this month’s window could be complicated, given the concentration of deals in a shorter time, several companies accelerated to issue before the [U.S.] elections,” he said.
Gustavo Siqueira, Morgan Stanley’s country head of fixed-income capital markets, says companies should try the September window. However, he does not expect an impact from the U.S. elections on the markets. “We see a more active month but some deals could be delayed to October or November,” he pointed out. According to the executive, the market is liquid and investors are seeking return, which opens up room for issuing companies. “We see a recovery after two weak years.”
From the beginning of August—when a steep drop in the stock market in Japan shook global markets—until now, the conditions for raising funds through bonds abroad have improved, according to Caio de Luca de Simões, head of debt capital markets at Bank of America in Brazil. “Treasuries became more stable and net interest rate spread returned to an appropriate level, after a period of strong volatility,” he said. “We are seeing one of the best cost scenarios for fundraising in the last two years.”
Pedro Frade, in charge of foreign debt at Itaú BBA, says rates contracted in the last month, both in Treasuries and Brazil risk. However, according to him, attention is focused not only on the next Fed meeting but also on the numbers about inflation and unemployment in the U.S., which could change the market’s mood and shrink the window for issuances. “Frequent issuers benefit from shorter windows,” the BBA executive points out, explaining that these deals are typically completed very quickly, making it possible to avoid market volatility.
He estimates a concentration of deals in the first half of the month. Given these uncertainties, the number of issuers that will be able to tap into the window is unknown. “Many companies will do their math to determine if the foreign market is the right path for them,” Mr. Frade says.
One of the points to be monitored by issuers in the next window is the high level of competition with other deals by companies from the same region. According to UBS BB projections, the number of offers from companies in Latin America could reach 15 in September. From Argentine companies alone, three deals are expected.
“Investors select not only [a deal] in Brazil but in Latin America as a whole, as the budget is usually the same,” Mr. Podlubny points out. “It doesn’t mean investors are short of funds but perhaps they don’t have time to dive deep into all deals and may choose to prioritize just a few. That could have an effect, for example, on the size of books.”
Miguel Diaz, debt market specialist at Santander Brasil, says the scenario is favorable given the current rates in the U.S. market, which have caught the attention of issuers. He expects up to eight issues between September and early October.
Matheus Licarião, head of debt capital markets at Santander Brazil, says investors’ agenda is very positive after Labor Day. He is working with two possible scenarios for the month. In the first scenario, as companies understand that the market has already priced the start of a reduction in interest rates, they choose to launch deals early this month—taking some distance from the U.S. elections. On the other hand, companies could choose to wait for the Fed’s monetary policy decision on September 18.
If optimism increases after that date, the space could be open to both frequent and new issuers, the executive says. “It’s a good timing for companies [to access the market]. The question is whether it will be a good or a very good window,” he points out.
When contacted, Raízen said it is always attentive to opportunities in the capital market, thanks to its “strategic positioning, quality of management, financial innovation,” and investment grade by three rating agencies. “It’s natural that the financial community keeps us on their radar and sees us as a candidate.” Oceânica did not respond to a request for comment.
Satellite broadband company dominates Brazilian market and has already requested telecoms telegulator ANATEL to expand network in the country
09/02/2024
Starlink informed Brazil’s telecoms regulator ANATEL that it will not comply with the decision by Justice Alexandre de Moraes of the Federal Supreme Court to suspend access to Elon Musk’s social media platform X.
The information was passed informally by the company to the agency’s chief, Carlos Baigorri, as revealed by TV Globo.
ANATEL has initiated a procedure on the 30th to notify internet carriers and shut down the platform.
Starlink offers satellite internet services and, like X, is owned by billionaire Elon Musk. With the platform’s non-compliance with court decisions, Justice Moraes ordered the company’s accounts to be blocked so that the imposed fines could be paid.
According to the president of ANATEL, the company is conditioning the cut-off of access to X on the suspension of the blockade of its accounts. He also stated that the maximum sanction for a telecommunications company, in case of non-compliance with decisions, is the revocation of the license, which would prevent Starlink from operating in Brazil.
Justice Moraes ordered the shutdown of X on Friday. The measure was adopted after the platform began to disregard court decisions and refused to appoint a new legal representative in Brazil.
In May, Starlink reached 42.5% of the market, overtaking Hughesnet, which held 38.1%, according to ANATEL. In June, Starlink had 215,500 customers, mainly in the Amazon region.
Airline expected to continue buying from Brazilian plane maker just like Gol continues seeking Boeing planes despite being in financial restructuring
08/30/2024
Azul’s financial restructuring is unlikely to affect Embraer’s sales, said Antonio Carlos Garcia, the plane maker’s chief financial officer. David Neeleman’s Azul is the only airline currently operating Embraer’s commercial models in Brazil but, according to Mr. Garcia, it continues to buy planes, and will keep doing so just as competitor Gol continues to seek Boeing planes despite its ongoing financial restructuring in the U.S.
At an event at B3 to mark Embraer’s 35 years of stock exchange listing, Mr. Garcia praised the company’s partnership with Azul. “They take planes from leasing companies. We already know that the lessors will continue to extend credit to Azul, just as they do for Gol. We have a lot of confidence in Azul’s business model. Things are more complicated for them, but we think they will pull through,” he said.
Regarding the aircraft manufacturer’s performance, CEO Francisco Gomes Neto stated that the next five years would be positive due to strong demand for its planes. “Our order book has surpassed $21 billion, which accounts for more than three years of production. And we have several sales campaigns underway,” he said.
The executive recalled that Embraer faced various challenges in recent years, including the pandemic and the failure of negotiations to create a joint venture in the commercial division with Boeing. “The year 2020 was difficult, with enormous losses. But one year later, at the end of 2021, the cash flow, which was negative by R$900 million, turned positive by R$300 million. The losses turned into profits,” he said.
Similarly, margins began to recover. Rodrigo Silva e Souza, vice president of marketing and market strategy for Embraer’s commercial aviation, highlighted that since last year, the company has had better margins on aircraft sales due to a change in discount policy.
“In new sales since last year, we have been working to increase profitability and capitalize on favorable market conditions. Therefore, I believe that in 2026 and 2027, we should significantly improve profitability,” he said during the event on Thursday (29).
According to the executive, the discount policy was designed considering various factors, including the pandemic, the end of the agreement with Boeing, and Airbus’s acquisition of Bombardier’s C-Series jet program (now A220).
“These factors made us have to be more aggressive to keep the company afloat during critical years. This has already changed due to strong market demand. We no longer need to be as aggressive as before. We have basically sold out the 2025 line and a good part of 2026,” he noted. According to Mr. Souza, Embraer expects to reach 2026 producing 100 commercial planes per year.
The government’s decision to release credit to airlines using the National Civil Aviation Fund (FNAC) as a guarantor, but without the obligation to use it to purchase Embraer aircraft, did not shake the Brazilian manufacturer.
“We do not rely on mandatory customer purchases. We do see that the Brazilian market—like others—needs more connectivity,” said Mr. Souza.
“If we take two of the largest regions, São Paulo and Rio, they represent 40% of the traffic. It is a concentrated market that needs to be decentralized and new routes developed,” he said. The use of smaller aircraft, such as Embraer’s commercial jets, would be central to this strategy.
CEO Francisco Gomes Neto praised the Brazilian government for the support it has offered the company. “The perspective they have is that in other countries where planes are produced, the percentage of national production flying is 40%. Here, it is only 12%. We have only one airline with Embraer jets,” he said.
Despite no constitutional spending mandates, states increase investments in public security amid rising concerns
08/30/2024
Ursula Dias Peres — Foto: Silvia Zamboni/Valor
Despite the absence of budget allocations tied to specific revenue sources and the urgency highlighted by public opinion polls, public security has become an increasingly significant area of expenditure in Brazilian states. In recent years, spending in this sector has grown at a faster rate in real terms than the overall state expenditures.
In the first half of 2024, the combined security expenditures of Brazil’s 26 states and the Federal District amounted to R$55.76 billion, marking a 14.2% real increase compared to the same period in 2018. During the same timeframe, the total aggregated state spending rose by 9%. Meanwhile, education and healthcare expenditures saw even more significant increases of 36.5% and 37.4%, respectively.
Public security, education, and healthcare constitute the trio of state public services with the highest spending volumes. Together, they represented 37.2% of total state expenditures from January to June 2024. Among these three sectors, security is the only one without constitutionally mandated spending, which partly explains why its share of total state expenditures has grown less than that of education and healthcare.
Security spending accounted for 8.7% of total state expenditures in 2018 and 9.3% in 2023, but the share declined slightly to 9.1% this year, with a cumulative increase of 0.4 percentage points over the period. In contrast, education’s share increased to 15.1% in 2024 from 12.1% in 2018, and healthcare’s share grew to 13% from 10.3%, reflecting respective increases of 3 and 2.7 percentage points, always considering the expenditures of the first semester. Part of the spending in these three areas came from a reduction in Social Security expenditures, which decreased to 16.7% from 18.6% of total state expenditures between 2018 and 2024.
The data, which includes both current expenses and investments, were sourced by Valor from the summarized budget execution reports submitted by the states to the National Treasury. The figures were extracted between August 8 and 12 and include only settled values, excluding intra-budgetary expenses.
Experts point to several contextual factors, such as the COVID-19 pandemic and the significant revenue increases experienced by the states in recent years, to explain the current expenditure landscape in key state-provided services.
In the realm of public security, the data shows substantial spending despite the lack of mandatory allocations, as seen in healthcare and education, according to Ursula Dias Peres, a public policy professor at the University of São Paulo (USP). “There is a pressing need and substantial budgetary commitment in security, with funds coming primarily from state treasuries rather than dedicated funds,” Ms. Peres said. However, she noted significant variation among the states.
Minas Gerais, São Paulo, and Rio de Janeiro are among the states with the highest absolute expenditures on public security. In the year’s first half, Minas Gerais spent R$8.78 billion, São Paulo R$7.47 billion, and Rio de Janeiro R$7.44 billion.
Although the absolute spending figures are similar, São Paulo has a significantly larger population than Rio de Janeiro, said Vilma Pinto, head of the Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog. According to the Brazilian statistics agency IBGE, São Paulo is home to 44.4 million people, while Rio de Janeiro has 16.1 million. “Thus, the per capita expenditure in Rio is higher than in São Paulo. However, we also need to assess the efficiency of resource use. The discussion should not only focus on the level of spending but also the quality of those expenditures,” noted.
The study also reveals significant differences in the spending structure. In Minas Gerais, security expenses account for 18% of total state spending. In São Paulo, the figure is 4.7%, and in Rio, it’s 15.1%. The shares of education and healthcare expenditures also vary among the three states, though to a lesser extent. São Paulo allocates 16.1% and 10.5% of its total spending to education and healthcare, respectively. In Rio, the shares are 8.2% and 8.6%. In Minas Gerais, these figures are 15.7% and 12.3%, respectively, for the first half of 2024.
Ms. Peres attributes the heterogeneity in public security spending to the current sector management. “The Unified Public Security System (SUSP) exists in law, but the states, responsible for 80% of the financing, are the primary operators of public security. The federal government doesn’t have the same influence as it does in healthcare, education, or social assistance,” she said.
“Each state implements its own policies, with vastly different governance in public security, policing strategies, salary structures, and approaches to repression or intelligence work, including the use of body cameras. The federal government is trying to regulate these areas now, but the differences remain stark. This disparity in governance is reflected in the budgets,” Ms. Peres noted.
Minas Gerais often includes pension costs for civil servants in its security spending, which can inflate its expenditures relative to other states that do not follow the same accounting practice, Ms. Peres said. In a statement, the Minas Gerais government said the state’s public security spending includes the costs of retired military personnel, as they do not retire but rather enter a remunerated retirement status at the end of their service period as prescribed by law.
Ms. Pinto highlights that the SUSP was created in 2018. “However, there are challenges in realizing the institutional potential of this tool. There needs to be an effort to improve the governance and efficiency of these expenditures,” she said. Ms. Pinto also noted that public security has become a more recent topic of debate, driven by public opinion polls revealing widespread feelings of insecurity among the population.
In Rio de Janeiro, the lack of a comprehensive public security policy explains the high expenditures in this area, said sociology professor Daniel Hirata, from the Fluminense Federal University. He said that the state’s strategy relies heavily on police operations. Mr. Hirata added that, when analyzing police lethality, most deaths in São Paulo occur during robberies and chases. In Rio, however, lethality is higher during police operations, an “indication of the central role these operations play in the state’s security strategy.” These operations, he noted, are “extremely costly,” requiring large numbers of personnel, heavy weaponry, vehicles, and technology. “These operations are necessary. The problem is that they have become routine and the primary tool of public security, leading to very high costs,” he added. In Rio, “we are addressing symptoms rather than the root of the problem,” he said.
Overall, Ms. Peres said, there is low investment in intelligence and investigative policing. “This has led to a very complex situation today, with significant increases in crimes against assets and swindle. Our police are not focused on these issues. We have an overt police force dedicated to combating street violence and drug trafficking, but not investigative intelligence. We are facing more scams, including crimes committed via mobile phones and the internet. Addressing this requires investment in software, monitoring, and specialized training.”
A review of the sub-function data for public security expenses reported in the fiscal reports shows that, on average, 29.3% of spending in this area goes to policing across the 26 states and the Federal District. The sub-function “information and intelligence” accounts for only 2.4% of the spending. “This is very low, even though the public often demands police presence. People want to see patrols,” Ms. Peres noted. “Administratively, it is easier to spend on personnel than to manage complex bidding processes for contracts that require specific management.”
According to the 2024 Brazilian Public Security Yearbook, the swindle rate per 100,000 inhabitants increased by 8.2% in 2023 compared to 2022, while the rate of electronic swindle rose by 13.6%.
In a statement, the Rio de Janeiro government said that public security consumes a larger portion of the budget due to payroll expenses for security forces and the prison administration, “without compromising investments in health and education.” The statement noted that more than R$4 billion has been invested in the current administration, focusing on police technology and modernization. Rio, the statement said, is the state that has acquired the most body cameras for police forces—more than 13,000 units have been installed in the Military Police alone—and will soon have over 5,800 security force vehicles equipped with onboard cameras.
In a separate statement, the São Paulo government emphasized that it is among the leaders in security investments, with over R$15 billion allocated in 2023. In volume, this is nearly 15 times the amount invested by states allocating around 10% of their budget to security. The statement also highlighted that total expenditures on security, prison administration, and Fundação Casa (an institution for juvenile offenders) amounted to R$11 billion, equivalent to 6.9% of the state’s total spending.
Unlike other states, the statement added, São Paulo’s debt service payments to the federal government account for a significant portion of settled expenses (7.9%). Additionally, transportation costs (6.4%) are significant in São Paulo due to its extensive road network, which is less of a factor in other states, many of which rely more on federal highways. “These are specific characteristics of each federation unit, which do not indicate low values allocated to the sector,” the statement concluded.
*Por Marta Watanabe, Rafael Rosas — São Paulo, Rio de Janeiro
Fires surge by 915% following a series of incidents last week, leaving situation still worrisome
08/29/2024
The number of wildfires reported in São Paulo this month has increased by 915% compared to the same period last year. The only state with a worse outcome was Mato Grosso do Sul, where fire incidents rose by 1,825%.
As a result, São Paulo is now the fifth state with the most wildfire outbreaks in the country (3,483) during the period from August 1 to 26—up from 13th place during the same period last year. Currently, the state is only behind Mato Grosso, Pará, Amazonas, and Mato Grosso do Sul, according to data from INPE (National Institute for Space Research).
The series of fires that struck the São Paulo countryside last week emerged almost simultaneously and in predominantly agricultural areas, according to a survey by IPAM (Amazon Environmental Research Institute) based on satellite-mapped heat sources.
Of the 2,600 heat sources reported in São Paulo between August 22 and 24, 81% occurred in areas used for agriculture, such as those occupied by sugarcane and pasture, according to a cross-analysis of satellite images from the environmental monitoring network with land cover and usage data from the MapBiomas network. Approximately 72% of São Paulo’s territory is occupied by agricultural activities.
Satellite images show the emergence of smoke columns within a 90-minute interval, between 10:30 am and 12:00 pm on August 23. The study strengthens comparisons between the incident in the São Paulo countryside and the so-called “Day of Fire,” mentioned by Environment Minister Marina Silva. She said that President Lula’s government is investigating whether the wildfires in the state have similar motivations to the criminally induced forest fires in August 2019 in the municipalities of Altamira and Novo Progresso, both in Pará state.
After two days without fires, São Paulo state recorded three new fire outbreaks on Tuesday (27th) in Batatais (350 km from the capital), in the metropolitan region of Ribeirão Preto, prompting a task force to combat the flames. Batatais is one of the cities on the state Civil Defense’s list of 48 municipalities on high alert for fires.
The outlook for the coming days remains concerning. The São Paulo Civil Defense has classified the metropolitan region of São Paulo as at emergency risk for fires this upcoming weekend.
According to meteorologists from the state agency, the classification is due to the hot and dry weather expected to return to the state starting this Friday (30th). With no rain in the forecast, the relative humidity in São Paulo city could drop to 20% over the weekend, according to INMET (National Institute of Meteorology), and temperatures are expected to reach 30°C in the capital.
There are four stages of warnings for fire risks: low (yellow), high (orange), alert (red), and emergency (purple).
The wildfires affecting different parts of Brazil may be linked to a historic lack of rain—the most severe in the last four decades—impacting 16 states and the Federal District.
The data comes from CEMADEN (National Center for Monitoring and Alerts of Natural Disasters), which considered information from May to August for all states since 1981, the year official records began.
Preliminary figures from the center for this August show that approximately seven out of ten Brazilian municipalities are affected by some level of drought: mild, moderate, extreme, or severe.
Meanwhile, Supreme Court Justice Flávio Dino ordered the federal government to mobilize, within 15 days, the Armed Forces, Federal Police, Federal Highway Police, National Force, Military Firefighters, and environmental enforcement agents to combat the wildfires in the Pantanal and Amazon—biomes that have been suffering from fires in recent days, with smoke spreading across the country. To fund the emergency actions, the federal government may open an extraordinary credit line through a provisional presidential decree.
Justice Alexandre de Moraes ordered Musk to appoint X’s new legal representative in the country within 24 hours
08/29/2024
Alexandre de Moraes — Foto: Rosinei Coutinho/SCO/STF
Brazil’s Supreme Federal Court used its X account to announce a ruling by Justice Alexandre de Moraes against the social media platform. In the post, Mr. Moraes ordered Elon Musk, the owner of X, to appoint a legal representative for his company in Brazil. Mr. Moraes also threatened to suspend X’s operations in the country if the company continues to disregard court orders.
The official account of the Supreme Court tagged the profiles “@GlobalAffairs” and “@elonmusk” in the post and attached the document signed by the judge.
In recent weeks, the social media platform began to disclose confidential decisions from Mr. Moraes using the company’s official profile. Now, Mr. Moraes used the same method to notify Mr. Musk. On August 17, the company announced, also in a post on the platform, that it would “cease operations” in Brazil.
In the post, the justice ordered the appointment, within 24 hours, of the name and qualifications of the new legal representative of the company in Brazil, “under penalty of immediate suspension of the social media X (formerly Twitter) until the court orders are effectively complied with and the daily fines paid.”
In April, Justice Alexandre de Moraes launched an investigation into Elon Musk after the businessman announced he would defy court orders and publicly release content from profiles blocked by Brazil’s Supreme Federal Court. Mr. Musk was also implicated in a separate investigation into the activities of so-called “digital militias,” which are groups known for spreading disinformation and attacking political opponents. This investigation is targeting allies of former President Jair Bolsonaro.
After that, there were new episodes of confrontations between the justice and the billionaire. Recently, the social media platform also ignored a decision from Brazil’s electoral court to suspend the profile of Pablo Marçal, a candidate for the mayor of São Paulo.
In light of the successive clashes, justices Dias Toffoli, Luiz Fux, and Edson Fachin, rapporteurs of three cases dealing with the Internet Civil Framework and digital platforms in the Supreme Court, decided to include their cases in the court’s agenda for a vote.
Last week, they asked Chief Justice Luís Roberto Barroso for the cases to be analyzed together, preferably in November. The date of the trial has not yet been set.
Market has discussed need for rate hike in last weeks
08/28/2024
Igor Velecico — Foto: Silvia Costanti/Valor
The mounting uncertainty regarding the direction of monetary policy has been significant in recent weeks. The perception of an economy resistant to slowing down has joined the U.S. dollar’s appreciation against the real this year, supporting a growing view that the Central Bank will be forced to resume monetary tightening in September.
Alongside this perception is the recent communication from some Central Bank officials, particularly directors Gabriel Galípolo (monetary policy) and Diogo Guillen (economic policy).
Before the interest rate decision in July, few analysts projected new increases in the Selic policy interest rate, such as XP Asset Management and Novus Capital. After the policy meeting, the scenario gained significant supporters including Legacy Capital, Itaú Asset Management, and ASA. More recently, some sell-side players have also adopted this scenario, including XP and BTG Pactual.
However, there remains some uncertainty on the radar. Not by coincidence, although the interest rate curve and the COPOM digital options market continue to indicate a majority chance of the Selic tightening cycle beginning in September, the consensus in the Focus—Central Bank’s weekly survey with economists—still puts the policy rate at 10.5% per year, although the average of projections has increased.
In recent days, banks like Barclays, J.P. Morgan, and Morgan Stanley reaffirmed their projection that the Selic will remain at 10.5% per year.
The appreciation of the Brazilian real since the peak of stress, when the exchange rate reached R$5.86 per dollar, and the expected economic slowdown are cited by those who reject the view that an interest rate hike is necessary. Additionally, an imminent easing of the U.S. Federal Reserve’s policy would also factor into the equation.
Valor spoke with two market participants with differing views on the necessity of a process to raise the Selic starting in September, as has been priced in the market rates for some time now.
Igor Velecico, Genoa Capital’s chief economist, has adopted a scenario in which the Central Bank raises the policy interest rate by 25 basis points in September, reaching 12% per year by early 2025. According to him, the resumption of tightening is necessary, as the context encompasses an economy that is not in equilibrium. “And this generates inflation,” he said, projecting 12-month IPCA (Brazil’s official inflation index) at 4.3% this year and 4.2% in 2025.
“The Central Bank will gain credibility if it does the right thing. The right thing to do at the moment is to raise interest rates to address domestic imbalances and bring inflation closer to the target of 3%,” said the economist, who sees an “overheated” economic activity in the country.
On the opposite side, the chief strategist at Warren Investimentos, Sérgio Goldenstein, sees no need for an additional tightening of interest rates and projects the Selic to remain at 10.5% per year for a longer period.
“If the Central Bank promotes a cycle of a 150- to 200-basis-point increase [in the Selic], its model, over the relevant horizon, will point to an IPCA projection of 2.7%. Instead of initiating a tightening cycle only to soon have to start a cutting cycle, it seems much more coherent to keep the Selic stable, with a strong discourse,” argues the professional, who previously headed the monetary authority’s open market department.
Today’s agenda includes a Supreme Court review of excluding ISS from PIS and Cofins calculations
08/28/2024
Marcelo Montalvão — Foto: Divulgação
Four disputes about excluding taxes from the base for calculating other taxes, to be settled by the Federal Supreme Court, could impact the Brazilian government’s finances by R$118.9 billion, according to estimates from Brazil’s Federal Revenue Service included in the 2025 Budget Guidelines Bill (PLDO). One significant case involving the exclusion of Services Tax (ISS) from the PIS and Cofins (social contributions) base is set for discussion Wednesday (28) and could reduce tax revenue by R$35.4 billion.
These disputes all carry general repercussions, which means the Supreme Court’s decisions will affect all related cases across the judicial system. In the ISS matter, taxpayers see parallels to the landmark “Thesis of the Century”—the exclusion of Tax on Circulation of Goods and Services (ICMS) from the PIS and Cofins base. Yet, the outcome in secondary legal arguments and interpretations, known in Brazil as “teses filhotes,” adjudicated in both the Supreme Federal Court and the Superior Court of Justice, has been largely unfavorable for taxpayers.
Research conducted by Machado Associados and BVZ Advogados, upon request from Valor, indicates that in the higher courts, taxpayers have lost four of these secondary arguments concerning taxes on the tax base and have won three. Six additional cases remain undecided.
The most notable victory for taxpayers occurred in 2017 with the “Thesis of the Century.” In this decision, the justices clarified the constitutional definition of turnover and ruled that the state tax, ICMS, should not be included in the base for calculating federal social contributions as it does not represent corporate revenue. The majority opinion held that ICMS collections are merely transient within a company’s cash flow and are ultimately directed to state coffers (Issue 69).
Companies are leveraging the same argument in the ISS case, which involves a municipal tax and mirrors the ICMS scenario. This case was initially taken up in the Virtual Plenary in 2021 but will be reevaluated from the beginning due to a procedural request by Justice Luiz Fux. Although the votes of the justices who have since retired will be preserved, the current score stands at three votes to zero against the federal government, with room for the remaining justices to potentially revise their positions.
During the initial Virtual Plenary deliberations, the vote reached a deadlock of four to four. The rapporteur, now-retired Justice Celso de Mello, sided with the taxpayers, a stance supported by Justices Cármen Lúcia, Rosa Weber, and Ricardo Lewandowski. Justice Dias Toffoli represented the opposing viewpoint, favoring the National Treasury, with Justices Alexandre de Moraes, Edson Fachin, and Luís Roberto Barroso aligning with his perspective.
The decisive votes were pending from Justices Gilmar Mendes, André Mendonça, and Luiz Fux. Given that in 2017, during the Thesis of the Century, Justice Fux sided with the taxpayers and Justice Mendes with the federal government, tax experts speculate that the outcome could hinge on Justice Mendonça’s decision. Nunes Marques, who will not vote on the main judgment due to succeeding the former rapporteur, will act as the rapporteur for any subsequent clarifications (Issue 118).
The Attorney General’s Office of the National Treasury (PGFN) commented on the matter, stating, “The PGFN has been addressing this issue with the utmost seriousness” and “believes that Justice Toffoli’s comprehensive vote addressed the issue adequately by correctly distinguishing between Issues 118 and 69.”
Marcelo Montalvão, a partner at Ayres Britto Advocacia, who represents the National Confederation of Services (CNS) in the ISS case before the Federal Supreme Court, asserts that the underlying logic of the theses is identical. “This case was even put on hold for some time because the reporting justice, Celso de Mello, had indicated that they were connected,” he explains.
“Everything hinges on the concept of revenue or billing, which is defined as the entry of wealth into the legal entity that becomes part of its assets. ISS, like ICMS, does not fit into this category of wealth because they are transitory values,” he adds, emphasizing that “legal certainty” needs to be ensured.
Besides this case, the thesis that could most significantly impact public coffers is the exclusion of PIS and Cofins from their own tax base. A negative outcome for the Treasury could cost R$65.7 billion. The taxpayers’ argument follows a similar rationale, advocating for the exclusion of these taxes from the concept of billing. This issue (Issue 1067) is not yet expected to be included on the agenda.
Another significant matter involves the exclusion of PIS and Cofins from presumed ICMS credits, a tax benefit granted by the states, which could potentially cost the federal government R$16.5 billion.
The Superior Court of Justice ruled in April 2023 on a related issue, the exclusion of the Business Income Tax (IRPJ) and Social Contribution over Net Profit (CSLL) from benefits, resulting in a decision unfavorable to taxpayers. However, Law No. 14973/2023 altered how investment grants are taxed, rendering the justices’ decision effective only until the end of the previous year. Despite this, judges and appellate judges have dismissed the new law’s effectiveness (Issue 1182).
During the Superior Court of Justice’s deliberation on this issue, a preliminary injunction by Justice André Mendonça, the rapporteur for the PIS and Cofins lawsuit before the Supreme Court, interrupted the session, nearly halting the judgment. Granting the injunction, Justice Mendonça cited the “intrinsic relationship” between the cases as justification for suspending or nullifying the judgment in the Superior Court of Justice, given the potential “dissonance” with any Supreme Court decision.
About a week later, Justice Mendonça withdrew the injunction due to the “monetary amount discussed.” This case has been highlighted and is not expected to be on the agenda soon (Issue 843).
The discussion also extends to the exclusion of PIS and Cofins from the tax base of the Social Security Contribution on Gross Revenue (CPRB), which will impact R$1.3 billion. No judgment is expected on this issue either (Issue 1186). Both the Supreme Court and the Superior Court of Justice have previously ruled on similar cases involving ICMS in the CPRB base, with outcomes unfavorable to companies (Issues 1048 and 994).
“Although the CPRB is levied on revenue, the prevailing view was that the same rationale as in Issue 69 [Thesis of the Century] could not be applied due to the lack of legal provision,” explains tax lawyer Renato Silveira, a partner at Machado Advogados.
He notes that these discussions align with the constitutional concept of billing, which underpins the calculation of PIS/Cofins. “These are discussions that end up having something to do with the Thesis of the Century because they were developed based on the premises set out in Issue 69, but they won’t necessarily have the same outcome because they are absolutely controversial matters,” Mr. Silveira states. “The Supreme Court has been creating some distinctions,” he adds.
Taxpayers contest the Federal Revenue Service’s impact estimates. According to the tax risk annex itself, forecasts often consider the total revenue loss for that year and five years retroactively, a period during which beneficiaries can claim reimbursement of overpaid taxes in court. “The figures represent ‘the maximum impact on the treasury, which may not materialize in its entirety,’” the document says.
For instance, a study by Tendências Consultoria estimated the impact of the ISS thesis at R$2.8 billion. João Leme, a public finance consultant at Tendências Consultoria, mentions that tax estimates are only calculated when lawsuits have become final and unappealable. He notes that eventual modulation, which limits the effect of the judgment to the future, could also reduce this deficit.
Unlike macroeconomic risks, tax actions represent fiscal risks that the government has limited control over. “For specific risks, it ends up not depending on the actions of the federal government,” he states.
He explains that Ordinance No. 68 of 2022, issued by the Federal Attorney General’s Office (AGU), serves as a benchmark to gauge the impacts estimated by the Federal Revenue Service. “The total number of taxpayers is taken into account, and an estimate of refunds has been made over the last five years. So it’s always the worst-case scenario,” he clarifies. This upward estimate, he adds, can be leveraged as an argument with the ministers, “which creates pressure on the judging body.”
Frederico Bastos of BVZ Advogados notes that the outcome of the ISS case is likely to influence the judgment on other pending issues, given the similarity of the discussions. “Taxpayers still have high expectations as to whether the effects of the decision will be modulated and what criteria will be adopted in the judgment, given the high impact on both taxpayers and public coffers.”
When contacted by Valor, the Federal Revenue Service had not responded by the time this edition was published.
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