Federal government pushed bill through Congress to try and fight high inflation
06/15/2022
Arthur Lira — Foto: Paulo Sergio/Câmara dos Deputados
Chamber of Deputies passed Tuesday by 308 votes in favor and none against a complementary bill that cuts state tax ICMS on fuel, electricity, communications and public transport. Yet, technical problems in the lower house’s voting system meant that the conclusion will have to occur on Wednesday because two amendments from opposition parties were still pending. After this, the bill must be sent for President Jair Bolsonaro to sign it into law.
The problem with the conclusion is the lack of quorum. Most deputies had travel plans and the session on Wednesday, the day before a holiday in Brazil, would be empty. Chamber Speaker Arthur Lira (Progressive Party, PP, of Alagoas) apologized for the failure but determined that the absentees will lose part of their salaries to try and raise the number of voters.
Before the voting system failed, the lower house approved the Senate’s innovation of reducing to zero federal taxes PIS/Cofins and Cide on gasoline, ethanol and natural gas vehicle until December 31, without the need for the government to compensate for the revenue waiver. The exemption is already in force for diesel and cooking gas but has had little effect on final prices.
The bill that reduces the ICMS tax on fuel and energy is another attempt by the government to contain inflation.
Earlier on Tuesday, the federal government had requested Petrobras to wait a little longer before increasing diesel and gasoline prices, sources say. The administration wanted the oil company to hold the hikes until the bill to limit the sales tax ICMS to 17% on fuels, power, telecommunication services and public transportation was voted in Congress.
Estimates from sources close to Petrobras indicate that diesel is being sold at the state-owned company’s refineries 18% below the import parity price, while gasoline prices are 20% lower. The Brazilian Association of Fuel Importers (Abicom) estimates that gasoline and diesel sold by Petrobras were 16% below the foreign market on Tuesday. The consultancy StoneX calculated the need for a 23.1% hike in diesel and 10.4% in gasoline based on Tuesday prices.
Holding prices has become strategic for the government, given the high inflation and the elections calendar.
Valor found out that there was a meeting on Tuesday, between Petrobras CEO José Mauro Coelho and Minister of Mines and Energy Adolfo Sachsida in Brasília. The meeting was also attended by Petrobras chair Marcio Weber. Fuel price hikes were discussed in the meeting, but the issue was not solved, sources say.
Petrobras would be ready since Tuesday to increase the prices that would partially offset the diesel and gasoline disparity in the refineries. After the request of the government, however, it decided to wait, Valor has learned.
Some people believe that Petrobras is unlikely to hold a hike in the very short term, although political pressure may postpone it for a few days.
According to a survey by the National Petroleum Agency (ANP), the price of regular gasoline at gas stations in the Southeast region averaged R$7.160 per liter during the week of June 5-11. For diesel, the average price in the region was R$6.794 per liter in the same period.
At the same time, the delay to choose the new nominees for the Petrobras board continues.
The documents of the nominees have not yet all been sent for analysis by the Eligibility Committee (Celeg), linked to the Personnel Committee (Cope), which is in charge of evaluating the candidates’ compliance with the company’s internal rules and the state-owned company’s law.
The change in senior management at Petrobras is part of the government’s strategy to try and control fuel prices.
*By Raphael Di Cunto, Luísa Martins, Francisco Góes, Gabriela Ruddy — Brasília, Rio de Janeiro
Caixa has grown in agribusiness and wants bigger share; BB fears delays inreleasing credits
06/15/2022
Soy planted in Mato Grosso: state-owned banks compete for clients in Brazilian farms — Foto: Ruy Baron/Valor
Banco do Brasil (BB) and Caixa Econômica Federal are fighting behind the scenes a fierce dispute for the funds of Crop Plan 2022/23. BB, which historically has always been the largest funder of the agricultural sector, fears that it may be left without a sufficient amount to meet the demand of its customers. Caixa argues that it is the largest bank in the country (in credit portfolio and number of customers) and that it makes no sense to stay out of a segment that represents almost a quarter of the Brazilian economy.
The imbroglio has even entered the radar of the Ministry of Economy, one of the organizations responsible for deciding how the funds will be divided. “There is a dispute for space, with Caixa trying to grow,” says a source.
Some in the sector fear that the competition will slow down the procedure to tap the funds. Following the jargon that there is a right time to plant, farmers need funding at the right time – as early as possible – to buy the technological package (seed, fertilizer, pesticides, machinery and so on) that will be used.
The dispute between the two government-controlled banks is not only technical, but also political. BB, led by Fausto Ribeiro, has the sympathy of the Ministry of Agriculture and also of several members of the rural caucus in Congress. Caixa, on the other hand, is led by Pedro Guimarães, who is close to Economy Minister Paulo Guedes and to President Jair Bolsonaro.
Valor has found that Caixa’s demand was over R$50 billion in subsidized funds, six times more than the R$7.3 billion operated in the 2021/22 season. BB wants R$60 billion, above the R$43 billion of this season. Altogether, the government is expected to release about R$120 billion in subsidized financing in the cycle that begins in July, above the R$88.5 billion in the previous year.
These subsidized funds are money lent by banks to rural producers through financing in Crop Plan lines, that receive government support in subsidizing interest rates. With this, instead of the farmer contracting operations with market interest rates, the government guarantees lower rates and subsidizes the difference in rates to lenders.
Last year, the Crop Plan had a total of R$251.2 billion, of which R$162 billion were non- subsidized funds, and R$89 billion were subsidized. BB took 48% of the subsidized volume. However, with the voracious appetite of Caixa and more and more banks participating in the program, the bank’s fear is to have an insufficient share to meet the demand of its clients. In this case, the borrowers can always go to another bank, but they would lose time to open an account, send all the documents and wait for the loan to be approved – which can take much longer.
The sector is in a hurry. The new Crop Plan begins on July 1st, which means that the government has a few days to arbitrate the dispute between banks and define who will get what. Passed in early 2020, the so-called Agro Law changed the program and the number of banks increased significantly. It went to 12 in 2021 from five that year, and is likely to reach 21 now, but Caixa is the most relevant.
A former secretary of the Ministry of Agriculture says that the teams that draw up the Crop Plan follow technical rules and that Caixa does not fit into many of them, which would reduce Mr. Guimarães’s chances of having his request granted. Still, considering the qualitative bias used by the government, it is possible that, politically, Caixa ends up winning a bigger slice.
“Caixa is pushing to divide the cake of the Crop Plan, which brings an unnecessary risk to the agricultural sector. We run the risk of ceasing to be the granary of the world,” a person familiar with BB’s plans said.
A source close to Caixa says that the bank has full operational capacity to meet the demand and that what irritated Mr. Guimarães was an attempt to exclude the bank from the program, and that the lender’s management team considers its debut in the 2021/22 harvest a success.
Operational capacity is one key point in the discussion. At the peak of the harvest, BB can do more than 4,000 transactions a day. In a recent presentation to the Parliamentary Agricultural Front (FPA), the bank’s CEO said that it executed 486,500 transactions in the current Crop Plan, while the cooperative system made 347,600, and Caixa only 11,700. BB says behind the scenes that Caixa failed to use all funds, an accusation rejected by the rival.
Sources say BB approached Caixa some time ago, seeking a greater synergy between the federal government banks. The idea was for BB to virtually leave the housing market for individuals and start distributing Caixa’s products in its branches. Caixa would give up agribusiness, leaving BB, which has more experience in the sector, to lead the segment. The proposal, however, would have been rejected by Mr. Guimarães, who argues that more competition is good for the system.
Behind the scenes and even in public events, Mr. Guimarães has already admitted that Caixa had some mishaps at the beginning of its operation, but that it has fixed them and has improved month by month. Proof of its success is that it went from eighth to second place in rural credit in two years. It plans to reach 100 agencies specialized in agribusiness.
In one of the most important agricultural shows, Agrishow, Mr. Guimarães was supposedly questioned by agricultural machinery manufacturers about the delay in releasing funds. On the stage of the event, he pushed back on criticism. “We were here and there are several criticisms in relation to Caixa. Great. That is why I am here, to learn. Today we are only ‘very bad’. The day that Caixa is ‘so-so’, we will be the biggest agribusiness bank in Brazil.”
At the beginning of the month, Caixa disclosed that it registered a monthly historical record of rural credit contracting in May, with R$6.1 billion granted for rural transactions. “The results highlight Caixa’s stance to support the Brazilian agribusiness, benefiting especially family farmers, such as fishermen and fish farmers, small and medium-sized rural producers, as well as cooperatives and agribusinesses,” the bank said.
Caixa’s foray in agribusiness makes sense because small producers often have a correlation with the social programs managed by the bank and also because it has a high potential to generate cross-sell, or the sale of more products to the same customer. Some crops have two or even three harvests per year. Besides this, farmers need credit cards, insurance, financing for machinery and so on. “In housing credit, Caixa will only see the client again 10 years later. In the case of agribusiness, they may see them three, four times in a year,” a source said.
Last month, when disclosing the bank’s earnings report, Mr. Guimarães commented that Caixa already uses 3% of what it raises in savings for rural credit and that it could reach the limit of 10%, if necessary. “We have total capacity to do housing and agricultural credit. We have R$10 billion for agro and we can go to R$36 billion.”
The bank has almost R$360 billion in savings deposits. Currently, Caixa does not comply with the percentages of directing savings to rural credit, which can be done with a communication to the Central Bank. If it opts for the hybrid system, it can maintain 90% of the volume in the real estate sector and allocate 10% to the rural sector. The bank would have an enormous amount of funding, but also the obligation to use these funds, under penalty of paying the financial cost to the Central Bank at the end of the harvest.
Mr. Guimarães had already said the bank has a market share of 4.5% in agribusiness and hopes to end the year with 10%, and that the plan was to achieve leadership by 2024.
Another crucial point that has opposed BB and Caixa is the Central-West Constitutional Financing Fund (FCO), which is operated by BB. Caixa thinks it is unfair that BB has exclusivity in the FCO and argues that this gives it an advantage in agribusiness, since the region concentrates the largest products in the country.
The FCO credit operations are subject to the so-called “del credere,” a commission of up to 6% received by BB due to the credit risk assumed. “With this fee, they can charge lower interest rates and endure a much higher default. We can’t compete with them. And 90% goes to big producers,” a source close to Caixa said.
BB and Caixa declined to comment.
*By Álvaro Campos, Rafael Walendorff, Estevão Taiar — São Paulo
Future curve suggests barrel north of $110 by the end of the year, 10% above Central Bank’s main scenario
06/14/2022
The main scenario for oil prices used by the Central Bank’s Monetary Policy Committee (Copom) to fine-tune its interest rate policy is being called into question amid new pressures on the commodity.
The Central Bank adopted a scenario A for oil at its March meeting to avoid dealing with the volatility of prices, which at the time were over $120 a barrel.
Instead, the committee assumed that “oil prices follow approximately the futures market curve until the end of 2022, ending the year at $100/barrel, and then start increasing 2% per year in January 2023,” according to the English version of the minutes of the 245th meeting of the Copom.
Lately, however, the future curve suggests a barrel north of $110 by the end of the year, which means a 10% higher price. The Brent oil price was around $120 a barrel earlier on Monday.
Etore Sanchez, the chief economist of Ativa Investimentos, says that a portion of the fuel price used in the Central Bank’s models is formed from the opinions of industry experts. “Because it is discretionary, it can end up mitigating the worsening,” he said.
Mr. Sanchez estimates that the price of gasoline in the domestic market is about 35% below international prices. Many other market economists are finding similar spreads in their calculations, around 30%, and some believe that Petrobras will soon be forced to raise its prices.
This spread tends to mitigate at least part of the price drop expected if the government achieves all its objectives with a package aimed at cutting federal and state taxes, partly temporarily.
The fuel price hikes surprised Central Bank’s directors, who in recent statements have highlighted the fact that the Brent oil price is no longer such a reliable indicator of the evolution of prices of oil products.
Central Bank President Roberto Campos Neto — Foto: Billy Boss/Câmara dosDeputados
As many had predicted, the adoption of scenario A by the Central Bank has made it difficult to keep inflation expectations in check. Many analysts have maintained the previous practice of projecting inflation based on the current price of the product.
This is one factor among many others that explain the detachment of the Central Bank’s inflation projections for 2023, which at the Copom’s meeting in May was 3.4%, from market projections.
Market expectations for inflation in 2023 are already at 4.6%, according to an analysis published Monday by Valor, compared with the Central Bank’s target of 3.25% for the year.
Restrictions on Brazilian steel were imposed in 2018 during the Trump administration
06/14/2022
Restrictions on Brazilian steel were imposed in 2018 during the Trump administration — Foto: Reprodução/Severstal
The Biden administration has signaled to Brazil that it will not meet so soon the demand to review the quotas that limit the ingress of domestic steel in the U.S. market — although it has already made agreements with the European Union and Japan.
Valor has learned that the U.S. deputy secretary of commerce, Don Gaves, advised Brazilian representatives when he was in Brasília about a month ago that there was no political climate yet in the U.S. to deal with the review of the situation of Brazilian steelmakers.
However, the number 2 at the Commerce Department “promised to make the best efforts,” according to a source.
When asked recently in an interview about lifting tariffs on steel from China, the U.S. Trade Representative Katherine Tai said that “with respect to the tariffs, our approach, as with everything in this relationship, is to be strategic.”
The restrictions on Brazilian steel were imposed in 2018 during the Trump administration, despite President Donald Trump ideological affinity with the Bolsonaro administration. That was when Mr. Trump, amid trade tensions with China, decided that foreign steel threatened to “weaken national security” and imposed an additional 25% tariff on imports of steel products and 10% on aluminum imports, causing tremendous irritation in Washington allies who saw the measure as retaliation.
Of the $2.3 billion of steel that Brazil exports on average to the U.S. per year, 85% is semifinished products, that is, raw material for the American steel mills to make the final product.
Under President Joe Biden, the U.S. and the European Union reached in October an agreement whereby Washington kept the additional tariffs, but exempted a specific portion, allowing European companies to sell a certain “historical volume.”
Later, Washington struck a deal with Japan, another major ally, eliminating tariffs since April within an import quota of 1.25 million tonnes of Japanese steel — a volume still lower than the 1.8 million tonnes exported by Japan in 2018.
In the case of Brazil, the assessment in Brasília is that the Biden administration has no appetite to deal with trade. Last week, during the Summit of the Americas, the U.S. insisted on redesigning supply chains amid the new geopolitical situation, but showed nothing concrete, according to a source.
Brazil takes to WTO proposal to expand access of companies in public bids
06/13/2022
Lucas Ferraz — Foto: Edu Andrade/Ascom/ME
In negotiations to join the Agreement on Government Procurement (GPA) of the World Trade Organization (WTO), Brazil will make this week a new offer that expands accession for foreign companies in the country’s public procurement. This includes giving more room for foreigners to participate in bids in financial services subsectors and also in more states.
On Monday, Brazil will also submit to the WTO the request for accession to the organization’s Agreement on Trade in Civil Aircraft, as revealed by the Economy Ministry’s secretary of foreign trade, Lucas Ferraz, who is in Geneva for the conference of trade ministers.
The secretary said the negotiations to enter the GPA are advanced, “with preservation of our public policy space, especially the one focused on stimulating small and medium enterprises, health, and science and technology.”
For him, “Brazil’s joining the GPA will represent a turning point in the fight against corruption in public procurement in the country, increasing the efficiency of public spending and aligning Brazil’s regulatory framework with international best practices.”
According to the secretary, after the internal consultation process, “the country will be able to make some movements in financial subsectors,” confirming that this includes the insurance area.
So far, Brazil has increased to 10 from 6 the number of states, plus the Federal District (Brasília), that will allow foreign participation in public procurement of goods, services, and works. But industrialized countries are asking for the inclusion of states with “substantial procurement volumes,” such as São Paulo, Rio de Janeiro and Bahia.
Mr. Ferraz informed that the number of states to be presented in the new offer will be substantially higher. “In recent weeks, we have had strong demand from federal entities to join the agreement, after clear evidence of its benefits for public administration,” he said.
The expectation was that it could be accepted at the current WTO ministerial conference in what is known as the “anti-corruption deal” in global trade rules. But the appetite of industrialized countries is great and demands for further concessions continue.
Australia presented new demands last week. One of them is for Brazil to offer access also to bids in construction services of the Ministry of Defense. It also asked the inclusion in the procurement list of the National Nuclear Energy Commission and the Brazilian Space Agency.
Brazil had already signaled that it could improve its offer but warned its partners to keep their feet on the ground, because it would not give the full opening demanded by some. The Brazilian evaluation is that what is on the table is already an ambitious offer, especially being the first Latin American country to join this agreement.
As for seeking accession to the WTO Agreement on Trade in Civil Aircraft, the goal, according to the Economy Ministry, is to try to facilitate the country’s access to a world market estimated at around $3 trillion. Brazil is the only relevant aircraft producer and founding member of the WTO still outside the agreement, which came into force in 1980 and brings together 33 members of the organization.
This agreement eliminates the import tax on civil aircraft, their parts, pieces and other goods used in air services. It also prohibits quantitative restrictions, licenses, and certifications that restrict trade and are contrary to the General Agreement on Tariffs and Trade (GATT).
A participation in the agreement, according to Brazil, has the potential to reduce the negative impact of the Covid-19 pandemic on the airline industry, aggravated by the war in Ukraine, according to the government.
Selic rate is expected to be raised to 13.25% on Wednesday because of worsening inflation and fiscal risk
06/13/2022
With the Selic policy interest rate already in double digits since the beginning of the year and in significantly contractionary territory, the Central Bank’s Monetary Policy Committee (Copom) meets this week to deliver a new interest rate increase. The market consensus points to a 50 basis points hike, which would take the basic rate to 13.25%.
The decision, however, became even more uncertain. The de-anchoring of inflation expectations for 2023 has intensified since the last decision and, in addition, the deterioration in the balance of fiscal risks has given additional support to the possibility of a further increase in the Selic in August – a scenario that has already been captured in the survey carried out by Valor.
The survey was carried out between Thursday and Friday, after the release of Brazil’s benchmark inflation index IPCA for May and included 91 financial institutions and consulting firms. The midpoint of the projections collected by Valor indicates that the Selic rate should be raised by 50 basis points this week and by another 25 bp in August, when it would reach 13.5%, at the end of the current monetary tightening cycle. In the survey released on May 30, the consensus pointed to a Selic rate of 13.25% at the end of the cycle.
The increase in expectations for the Selic rate comes in the wake of a further deterioration in expected inflation ahead. If, in the survey carried out before Copom’s May meeting, expectations for the IPCA in 2023 were at 4%, they are now at 4.6%. It is worth remembering the relevant horizon for monetary policy currently includes only calendar year 2023 and that next year’s inflation target is 3.25%.
Cassiana Fernandez — Foto: Divulgação
“We expected that inflation would have already slowed down and the truth is that there is still inflationary pressure that is still very widespread and quite worrying in the composition,” notes J.P. Morgan’s chief economist for Brazil, Cassiana Fernandez. She also notes that this process has been reflected in the increase of inflationary expectations, especially in the relevant horizon for the Central Bank’s actions.
On Friday, J.P. Morgan began to see, in its baseline scenario, an even more extensive cycle of monetary tightening, with a final increase in the Selic in August. Ms. Fernandez notes that the Central Bank has promoted a very aggressive tightening cycle, raising the Selic by more than 1,000 bps since March 2021, which justifies the feeling that the cycle is nearing its end.
“The point is that it is still difficult to calibrate that end. And that is why I expect the Central Bank not only to deliver a 50 points hike, signaled in the last communication, but also to leave the door open for future movements, recognizing that, since the last meeting, there has been a worsening in the inflation scenario,” she says.
Fernando Gonçalves, superintendent of economic research at Itaú Unibanco, says it is unlikely that the Central Bank will interrupt the tightening cycle on Wednesday. “Even with the slightly better IPCA number for May, the cores are still extremely high and inflation has all the peculiarities of being persistent, quite widespread,” he says.
Itaú understands that Copom may indicate it foresees a new Selic increase in the August meeting. For Mr. Gonçalves, the statement may be similar to the last month’s decision, in which the committee gave strong signals, but opted to leave the next steps of monetary policy open, depending on the data.
Besides the two 50-point interest rate increases expected by Itaú, Mr. Gonçalves believes that in order to materialize the process of convergence of inflation expectations to the target, interest rates will need to remain at a high level for a very long period. “We can only see a cut in interest rates in the middle of next year. We know that long periods of relative stability in the Selic are not common in Brazil, but it will need to remain stationary to start exerting a greater influence of interest rates on the economy,” he argues.
Valor’s surveys have already captured an upward trend in expectations for the Selic rate at the end of 2023. Before the Copom meeting in May, the midpoint of the projections pointed to a basic interest rate of 9% next year. Now, the expectation is for a Selic at 9.75%, when bets that it will remain above 10% have increased.
The effort to try to cheapen fuel prices via tax exoneration is a fact expected to increase the uncertainties in the decision. “It has a considerably large deflationary potential, but the impacts would be temporary. Besides, the measures imply a worsening of the fiscal framework. As the discussion is ongoing, it may enter laterally in monetary policy via the balance of risks,” says economist Leonardo Costa, with ASA Investments.
For him, the measures worsen the balance of risks for meeting the targets in 2023. “Observing the attempts to control administered prices, I consider it an additional risk for the balance next year. Obviously you gain in inflation in the short term, at the cost of higher inflation in the medium term,” he points out.
Elisa Machado, chief economist at ARX Investimentos, who expects a Selic at 13.75% in the cycle, also believes that Copom may leave the next steps open, given the increased uncertainty and risks.
“Not only because of this view that there is no relief on the inflation side, but also because of these changes in [sales tax] ICMS, [social taxes] PIS/Cofins… On the one hand, this represents an increase in fiscal risk and. On the other hand, there would be a reduction of inflation in 2022, which would rise again in, disrupting the relevant horizon and throwing up inflation expectations for 2023,” emphasizes Ms. Machado.
Camila de Faria Lima, chief economist at Canvas Capital, defends a more open communication by the Central Bank given the high level of uncertainty. “However, I understand that if the Copom is effectively foreseeing the end of the high cycle, it would be better to make this vision explicit and, thus, guide market expectations,” she says. For her, this could happen with the indication of yet another residual hike or with the indication that the hike to be implemented this week marks the end of the cycle.
In its basic scenario, Canvas projects the Selic at 13.25% at the end of the cycle and 10% in 2023. Ms. Faria Lima recalls that the basic interest rate is already at a very contractionary level and that the most forceful effects on the economy are expected to appear in the second half. “Taking these aspects into account, in my opinion it is completely justifiable, in the scenario we have, to establish a credible inflation target for next year, extending the convergence to the center of the target to 2024,” she says.
Victor Candido, chief economist of RPS Capital, also adopts in his basic scenario the end of the cycle this week, with the Selic at 13.25%, although he points out the risks of a new high in August. For him, the Central Bank has already fulfilled the main part of its cycle and now only a “fine adjustment” remains. “I believe it will make the 50 bp hike that is priced into the curve and say it needs to evaluate the international scenario, the new internal risks and see how inflation itself will behave,” he predicts.
UNCTAD shows optimism about Brazil’s rise, unlike the rest of the world
06/10/2022
FDI flow to Brazil in 2021 reached $50.3 billion, up 77.9% from 2020 — Foto: Scott Eells/Bloomberg
Brazil was the sixth country that attracted the most Foreign Direct Investment (FDI) in 2021, climbing three positions in relation to the previous year, the World Investment Report released Thursday by the United Nations Agency for Trade and Development (UNCTAD) points out.
The expectation is that the country can continue to attract a good volume of productive foreign investment, although the global trend now is slowing down because of the war in Ukraine.
The FDI flow to Brazil in 2021 reached $50.3 billion, up 77.9% from 2020, when the country received $28.3 billion, according to Unctad’s consolidated figures.
In January, the UN agency had estimated that the flow to Brazil could have increased by more than 100% and the country would be the seventh-largest destination for real foreign investment.
“Brazil is an interesting case,” James Zhan, head of Unctad’s investment division, told Valor. “It is typically one of the largest recipients of FDI in the region and even among the most advanced developing countries.”
He notes that there was a strong recovery of investment in Brazil in 2021, but it has not yet resumed the level of 2019, before the pandemic, when the flow reached $65 billion. Last year, the flow was driven by the reinvestment of profits that multinationals had accumulated in recent years.
For Mr. Zhan, commodity prices may encourage multinationals to increase their investments in Brazil, expand existing operations and perhaps some new investments in the extractive industries and in the production of other commodities, such as in agriculture this year.
“That could be a kind of continued increase in investments for a full recovery of FDI in the country,” he said.
In 2021, Brazil was behind only the U.S., China, Hong Kong, Singapore and Canada as a recipient of FDI. And it attracted more productive resources than India, an economy that grows about 8% annually and is pointed out as one of the drivers of global expansion.
The FDI flow of $50.3 billion last year represented 18% of the gross fixed capital formation (GFCF), a measure of the productive capacity of an economy, compared to 11.8% in 2020.
The stock of FDI in Brazil totaled $592.7 billion at the end of 2021 (or -0.4% compared to the previous year) and represented 36.9% of the GDP compared to 41.1% in 2020.
The announcement of greenfield projects in Brazil reached $23.2 billion, or 35.1% more than in 2020. Mergers and acquisitions by foreigners in the country fell 45.7% between 2020 and 2021. The volume declined to $2.7 billion last year from $14.3 billion in 2018.
Overall, global foreign direct investment flows reached $1.6 trillion last year. Reinvested profits by subsidiaries of multinationals accounted for the bulk of this amount, reflecting a record high in profits for these companies in the wake of rising demand, low financing costs, and significant government support. Multinationals’ profitability doubled to 8.2% last year on average.
As for this year, UNCTAD sees “a significant risk” of the momentum for international investment recovery stopping untimely.
The global environment for international investment has changed dramatically with the war in Ukraine. New project activity already reflects increased risk aversion among investors.
Preliminary data for the first quarter show a 21% drop in greenfield projects. And international project financing fell by 4%.
Most of the top 5,000 multinationals have revised downward their earnings estimates for 2022 — but with differences that point to risks of setbacks in the energy transition.
The oil and gas industry forecasts an additional 22% gain and the coal industry another 32%, while the renewable power industries project a 22% drop in profits.
Other factors will negatively affect FDI in 2022. The spread of Covid-19 in China (with new lockdown measures) impacts global value chains.
Rising interest rates in several countries are also expected to slow down M&A activity and dampen growth in international project financing.
Negative financial market sentiment and signs of a looming recession could accelerate a fall in FDI. But UNCTAD also points to stabilizing factors. For example, large public support packages for infrastructure investment, with implementation over several years.
Challenging scenario, with strong inflation of construction costs, is unlikely to hinder competition
06/10/2022
Brazil’s new auction of airport concessions, scheduled for August 18, is expected to draw strong interest from the private sector. The challenging scenario in the infrastructure market, with strong inflation of construction costs, high interest rates and economic uncertainties, is unlikely to hinder competition, analysts told Valor.
The highlight of this 7th round is the block of Congonhas airport, in São Paulo. Any operator interested in the asset, considered one of the federal government’s “crown jewels,” will have to take some regional airports as well – 10 of them, located in Minas Gerais, Mato Grosso do Sul and Pará. This block of airports will receive R$5.9 billion in investments. The winner will be the one who offers the highest fixed concession payment – the minimum amount is R$740.1 million.
“It is hard to imagine that there will be no competition for a block that includes Congonhas. All the large groups that participated in the last rounds are analyzing it,” said Ricardo Fenelon, with law firm Fenelon Advogados.
This is an eagerly anticipated auction, said Fabio Falkenburger, a partner at law firm Machado Meyer. “Since this cycle of concessions began, all operators have been studying Congonhas. This asset has guaranteed air passenger traffic and great potential for commercial exploration,” he said.
The resilience of domestic flights after the peak of the pandemic also makes players more confident, said Daniel O’Czerny, head of global infrastructure finance for Latin America at Citi.
The participation of some groups is seen as certain, including CCR, France’s Vinci Airports and Spain’s Aena. Other large international operators already present in the country are strong candidates, including Switzerland’s Zurich Airport and Germany’s Fraport. The investment fund manager Pátria, which has been trying for some time to enter the airport industry, is not showing much interest, but is also considered a strong candidate.
The arrival of new players is not seen as likely, but considering the importance of the airpot in São Paulo, it is not ruled out either. Groups such as France’s ADP, Australia’s Macquarie and U.S.’s Houston Airport may take part.
The other two airport blocks included in the seventh round play second fiddle, but are also seen as good opportunities. The North block, which includes the airports of Belém and Macapá, will receive investment of R$875 million. The executive aviation block, formed by Campo de Marte (São Paulo) and Jacarepaguá (Rio de Janeiro), will draw R$560 million in construction works.
The North block is expected to draw medium-sized operators, such as Socicam. Vinci and Aena are also seen as natural candidates due to possible synergies with the airports they already operate. The French group has already won a first regional block in the North region last year, which includes airports in Manaus, Porto Velho, Boa Vista and Rio Branco. The Spanish company, on the other hand, has been operating six airports in the Northeast region since 2020.
Some analysts see the business aviation block as a question mark. But the government expects a successful auction, said Ronei Glanzmann, federal secretary of Civil Aviation.
“We have seen companies totally different from those that typically participate in auctions. It is a segment that involves three businesses: general aviation, real estate exploration and, especially in Jacarepaguá, fuel supply. The perception is that there may be multidisciplinary consortiums,” he said.
The scenario of economic instability, high interest rates and fast inflation of construction inputs have hindered infrastructure auctions this year, especially those of highways. In the case of the airport auction, market players say that these factors are unlikely to make it unfeasible.
For Elias de Souza, partner at Deloitte, the crisis scenario is likely to impact mainly the attraction of new operators. “I don’t think new groups will come for this auction. The current macroeconomic scenario requires more security. But those that already operate in the country know the local risks and are likely to bid,” he said.
According to a source that follows the auction closely, the advantage of airport projects is that the impact of cost inflation is somewhat lower and, in addition, operators have a greater variety of ancillary revenues. Mr. O’Czerny also notes that the range of airport operators already present in the country is much larger than in the road sector, which favors competition in the auctions.
Vinci and Zurich declined to comment. CCR said it is “attentive to opportunities.” Aena, Fraport and Pátria did not immediately reply to Valor’s requests for comment. Socicam said it is analyzing the projects.
Meanwhile, changes in management team of oil behemoth are also in standstill
06/10/2022
Fuel prices prompted change in the command of Petrobras — Foto: Leo Pinheiro/Valor
The double-digit gap between diesel prices in Brazil and abroad means that Petrobras could immediately raise costs to refineries, sources told Valor. The company, however, continues to analyze the market situation before deciding.
Consultants’ calculations indicate that the price of diesel that Petrobras charges from distributors is between 15% and 17.5% below international parity. In the case of gasoline, there are estimates that the price the state-owned charges from distributors in Brazil is 45% below the price negotiated in the Gulf of Mexico, one of the world’s main refining centers.
Meanwhile, the management changes intended by the government in the state-owned company, as part of President Jair Bolsonaro’s strategy to try and control fuel prices, continue to face difficulties.
On Wednesday, there was a meeting of the board of Petrobras. The company’s strategic planning was on the agenda, but the discussion turned to the state-owned company’s Eligibility Committee (Celeg), linked to the Personnel Committee (COPE). Celeg/COPE verifies if candidates for the board meet the necessary requirements and have no restrictions to run for the position, according to the internal rules of the company and the State-Owned Companies Law.
In a statement released on Thursday, Petrobras confirmed that the collegiate debated the day before a request made by the federal government, the company’s controlling shareholder, to replace the current CEO, José Mauro Coelho, by Caio Paes de Andrade, who is associated with Economy Minister Paulo Guedes. But there was no decision concerning this issue. A person familiar with the company said that “the analysis [of Mr. Paes de Andrade by Celeg] has not been made yet because the information is not ready.”
Mr. Paes de Andrade was nominated on May 23, through a letter from the Ministry of Mines and Energy (MME), which requested a shareholders’ meeting to elect him as a board member — the first step for him to become the company’s CEO to replace José Mauro Coelho. On May 25, the Petrobras collegiate met and concluded that it needed to wait until the federal government sent the list of eight candidates (including Mr. Paes de Andrade) to the Petrobras board, which has not yet happened.
Mr. Coelho, the current CEO of Petrobras, was elected in the shareholders’ meeting in April by an unbundled vote, and once he is removed all other members of the collegiate elected by the same system must go through a new election. Eight of the 11 members of the Petrobras board were elected by this method, which allows votes to be concentrated on certain candidates. These are the eight positions expected to be disputed once again in the meeting, which has not set a date so far.
This list seems to have become a point of conflict between independent advisors and the government. Celeg/COPE, after having received Mr. Paes de Andrade’s documents, is still waiting for the list of the other government candidates. The government, in turn, is trying to bring forward the result of the Eligibility Committee’s analysis to know if Mr. Paes de Andrade will be approved by the company’s governance bodies. The situation has become a kind of chess game, in which each party waits for the opponent’s move to define its own move. Meanwhile, almost nothing is happening.
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