Because of Brazil, EU-Mercosur agreement is likely to be jeopardized — Foto: Roque de Sá/Agência Senado
Emmanuel Macron’s reelection as president of France for the next five years means continued French resistance to the European Union-Mercosur free trade agreement on its current terms. What might change depends more on what will happen in the October presidential election in Brazil.
This is the assessment of Professor Gaspard Estrada, executive director of the Political Observatory of Latin America and the Caribbean (Opalc) at Sciences Po University, in Paris. He notes that in the debate between Mr. Macron and far-right candidate Marine Le Pen last week, this was reflected when both mentioned “chicken from Brazil”.
Ms. Le Pen complained about “a whole series of EU policies that I disagree with,” citing “the multiplication of free trade agreements in which German cars are sold, sacrificing farmers to competition from Brazilian chickens or Canadian meat.”
To which Mr. Macron retorted: “What chicken from Brazil?”, recalling that he had “opposed” the EU’s agreement with Mercosur because “when we ask things of our farmers, we ask the same thing of the other side.”
“We refused to move on this issue because there was no respect for the Paris Agreement commitments, respect for biodiversity and [also] we fought against imported deforestation,” Mr. Macron said.
In this scenario, notes Mr. Gaspard, “until there is a real change in the Brazilian environmental policy, it will be difficult for the implementation of the EU-Mercosur agreement to prosper.”
The professor notes that environmental policy is part of a general political change “and this can only happen with an alternation of power, because the Bolsonaro administration has shown that it will not change its environmental policy and that France is not on its radar.”
He mentions the public squabbles between the two presidents, when Mr. Bolsonaro spoke ill of Mr. Macron’s wife and the occasion when he refused to receive the French Chancellor, Jean-Yves Le Drian, claiming he had to go to the barber.
“What can unlock the knot on the EU-Mercosur agreement is a political agreement between leaders,” he adds. “We must not forget that the conclusion of the agreement was announced with Messrs. Bolsonaro and Macron in power, and before the political problems. Everything can also end with agreement, but for that you need to have people at the table with the will to make agreements.”
For Mr. Gaspard, if Mr. Lula da Silva is elected, “there will be an important change in the bilateral relationship, a relaunch of the strategic partnership”. He recalls that last year, Mr. Lula da Silva was received by Mr. Macron at the Élysée Palace with a head of state protocol. And that, a few days before the French election, Mr. Lula da Silva made a statement of support for Mr. Macron to defeat the far-right.
Once the impasse between Brazil and France is overcome, Europe’s very relationship with Latin America in general could improve, Mr. Gaspard believes. He notes that Ms. Macron has never visited the region in his five years in office, with the exception of his participation in the G-20 in Buenos Aires.
He notes that there is a lack of interest in Latin America on the part of European capitals. Now the Spanish prime minister Pedro Sánchez is trying to return to the region, but more forceful and ambitious initiatives are still needed. Without France or Germany, it is difficult to go ahead with larger rapprochement projects.
For Mr. Gaspard, in the context of the strategic rivalry between the United States and China, France and Latin America have everything to increase their strategic partnership – and profit from it.
Four of the ten occupations that employ young people the most in the country have low schooling requirements – less than eight years at school. The account considers the number of young people in relation to the total number of workers in a given activity. A similar situation is seen also among the activities with the highest absolute number of workers between 15 and 29 years: four of the top 10 have incomplete elementary school as their most frequent schooling.
The information is in a survey carried out exclusively for Valor by consultancy IDados, based on microdata from the Continuous National Household Sample Survey (Pnad Contínua) for the fourth quarter of 2021, the most recent for the indicator.
Among the activities that appear in the study are pedal- or arm-driven vehicle drivers, call center workers, domestic service workers in general, and elementary building construction workers.
This picture can be seen at a moment in which there is an advance in the level of education of young Brazilians. For the sake of comparison, 14.9% of Brazilian workers between 15 and 29 years already have completed higher education, and only part of them would be old enough to do so.
Adding the 12% of those who have incomplete education, the portion with higher education exceeds a quarter of the workers in this age group (26.9%). In addition, 42.9% have completed high school. The share of those who have only completed elementary school, on the other hand, is much lower, at 17.2%.
The data suggest, according to specialists, that young people enter the market in occupations that contribute little to their professional development and that there is also a mismatch between the advancement of the level of education of young people and the opportunities offered by the labor market.
“There are many young people with a college degree (complete or incomplete) in this age group of 15 to 29 years. However, the occupations that employ young people the most generally require less than this, such as complete high school or even incomplete elementary school. This suggests that there may be a mismatch between the young people’s education and the qualification required for the occupation,” said Bruno Ottoni, a professor at the State University of Rio de Janeiro (UERJ) and a lead researcher of the labor market at consulting firm IDados.
The economist, who led the study, said that, far from criticizing the occupations that appear at the top of the list that most employ young people, it is necessary to evaluate that many are activities that give few opportunities for development for young people, compromising the professional future.
“All work is worthy, but the question is what kind of work the market is managing to offer our young people. Are they jobs where they see long-term prospects? Are they jobs where they will be able to take advantage of their education? Our young people are in occupations that are great from a job standpoint, but in general don’t offer long-term career prospects,” he said. “We have more qualified young people, but there is a structural characteristic of the Brazilian labor market that today is not managing to generate better jobs for these young people.”
Along with lower educational requirements, the profile of the occupations presented in the study is also lower paid and more unstable, said Stélio Coêlho Lombardi Filho, a professor with the School of Economics at the Federal University of Bahia (UFBA). Young people typically have less experience and end up having to take jobs with lower requirements, usually in sectors such as services and commerce, as well as administrative support, he said.
“With the resumption of the economic activities, young people have managed to find available jobs. But these occupations, in general, have a lot of instability and high turnover, low qualification requirements and low wages,” said Mr. Lombardi Filho, who is also a researcher at UFBA’s Economy of Labor research group. “These young people often manage to overcome the barrier of the first job, but almost always they are in a situation of instability that prevents them from making the transition to adulthood, from having the autonomy to raise a family.”
Despite they usually face greater obstacles to enter the job market due to lack of experience, young people tend to suffer more in moments of crisis such as the current one. Companies tend to take less risk and, therefore, avoid hiring professionals who require higher investments in training, Mr. Lombardi Filho recalled. The professor mentions the so-called “scar effect” — which usually marks the professional trajectory of those who entered the market in moments of crisis.
“This outlook of the occupations that most employ young people reflects not only the bad moment of the economy as a whole, but also the fact that young people are already a very sensitive group in the labor market. They form a group with a higher turnover rate, they have higher unemployment rates, lower salaries, and are more in the informal market. And they accept it, especially because they need to gain experience,” said Solange Ledi Gonçalves, a professor at the São Paulo State University (Unesp).
In her view, there is currently a higher mismatch between the level of education of young people and the qualification of the positions available in the job market, which compromises the capacity of professional growth of young people, as scientific papers on the subject found.
“Papers show that, by accepting a job that is not compatible with their level of education, the young person may have more difficulty in growing in the job market later on, and this can impact their career progression. For example, if you have a higher education, but started working at McDonald’s, you may have more difficulty after getting a junior analyst position, which is more consistent with higher education, because you spent that time there,” she said.
An appreciated real against the dollar may help the Central Bank to project inflation less distant from 2023 target — Foto: Scott Eells/Bloomberg
In the coming days, the evolution of the exchange rate will be fundamental in the inflation projections that will support the decision of the Monetary Policy Committee (Copom) of the Central Bank next week.
An appreciated real against the dollar, as seen earlier last week, may help the Central Bank to show an inflation projection less distant from the 2023 target and therefore reduce the pressure for a stronger monetary tightening.
On Friday, however, the real weakened sharply against the dollar as a result of a signal from Federal Reserve Chair Jerome Powell that a 50 basis points hike in U.S. benchmark interest rates is on the table.
The Brazilian Central Bank intervened in the exchange rate, with a sale of $571 million. The action was justified to maintain functionality in the exchange rate, in a market session squeezed in the middle of a long holiday. But in the end, it prevented a further weakened real.
Another doubt is the uncertainties about the Chinese economy, with the prospect of a more severe lockdown being enacted in Beijing to contain the latest wave of coronavirus contagion in the country. Iron ore prices dropped about 10% on Monday.
The exchange rate has no direct relation with monetary policy, but has gained prominence recently for two reasons.
One was Central Bank President Roberto Campos Neto’s remarks that market sectors were not taking into account the new, lower exchange rate in their inflation projections.
There hasn’t been a reliable indicator of market projections for inflation since March 25, when the Central Bank servants’ strike began. The Central Bank promises to release the Focus survey this Tuesday. But informal surveys, such as that of XP Investimentos, indicate that the market’s inflation projection for 2023 may have risen to 4%, against an inflation target of 3.25% for the year.
Another fact that gives greater visibility to the exchange rate, within monetary policy decisions, is that the so-called pass-through of exchange rate variations into inflation has increased.
A 10% rise in the exchange rate leads to a maximum effect of 1.1 percentage points on inflation 12 months ahead. In the longer term, between 18 and 21 months, this effect falls to somewhere between 0.6 and 0.7 percentage points.
It can make a big difference. Last week, the exchange rate even oscillated around R$4.6 to the dollar, or 8% below the market consensus, which informal surveys indicate is close to R$5 to the dollar.
This translates into an inflation projection about 0.5 percentage point lower for 2023. It may help the Copom to present an inflation projection closer to the target.
The expected inflation under relative control, in turn, would avoid taking the benchmark interest rate much further over the 12.75% per year signaled by the Copom in March for the end of the monetary tightening cycle.
The São Paulo state government is expected to auction on Wednesday the northern stretch of Rodoanel Metropolitano. With the new concession, the expectation is to finally conclude the construction of the beltway of Greater São Paulo, which began in 1998.
The contract provides for R$3 billion in investments over 31 years. Of this amount, R$1.7 billion will be used to complete the work – about 25% of the northern stretch, which is 44 km long and passes through São Paulo, Guarulhos and Arujá, has yet to be built. The beltway is expected to be fully delivered in two years.
The project will be a public-private partnership (PPP), a model in which the government contributes part of the funds. In total, the state of São Paulo is prepared to inject around R$2 billion (excluding monetary corrections): in addition to an initial contribution for the work, of up to R$876.7 million, the project includes annual payments to the concessionaire of up to R$41.65 million.
However, the amount disbursed by the government may fall, depending on the level of competition. The winner will be the one offering the biggest discount on the public contribution. According to the public notice, the interested parties must propose a discount on the value of the annual payments. If this reaches 100%, the discount on the initial contribution becomes valid.
The perception in the market is that there will be interest in the project, despite the challenging scenario. Traditional operators such as CCR, Ecorodovias and Pátria are seen as candidates.
Ecorodovias has not cited Rodoanel on its list of priorities. However, the group is considered a possible interested party because it won the first auction of the stretch, held in 2018. At the time, the bid notice only provided for the operation of the road, since the work would be completed by the state government. In the end, however, the contract was not signed and the model was changed.
CCR already operates the Rodoanel Oeste (west stretch) concession and, therefore, reportedly has synergies with the northern stretch. Another company in this situation is Bertin group’s SP Mar, which operates the south and east stretches of the beltway. Although the concessionaire is under protection from creditors, analysts do not rule out an attempt to dispute the asset through a consortium.
Ecorodovias and Pátria declined to comment. SP Mar says it has not made a decision and is awaiting a response from shareholders and investors. CCR did not reply to a request for comment.
“The expectation is for competition. Although it is not common in São Paulo, the PPP model for highways is well seen among companies, due to the state’s history of being a good payer and other successful experiences with projects in this model,” said Rafael Vanzella, a partner at law firm Machado Meyer.
For Eduardo Ramires, a partner at Manesco Advogados, a limited dispute is expected. He points out that, besides the project’s challenges, such as expropriations and environmental issues, there is an unfavorable situation aggravated by the war in Ukraine that puts pressure on the construction costs and generates uncertainty regarding the highway’s traffic. In addition, he highlights the risk for the new concessionaire of taking over a work largely built by third parties. “The operator assumes responsibility for the work already done. This succession always raises concern,” he said.
In relation to this point, the São Paulo state government has highlighted the hiring of an independent report prepared by Instituto de Pesquisas Tecnológicas (IPT) on the state of the works. In addition, in a period of six months after the signing of the contract, an independent firm will be able to point out possible divergences in relation to the structure, which will be taken to a technical commission.
The São Paulo state government has been trying to get the Rodoanel Norte highway off the drawing board for at least 10 years, during which time more than R$7 billion have already been spent. In addition, the project was targeted by the anti-corruption task force Car-Wash Operation and marked by investigations for suspected embezzlement.
In 2012, when the first tender for the Rodoanel Norte was held, the project was divided into six lots, which were won by construction companies such as Mendes Júnior, OAS, Acciona and Construcap. In view of the delays, the six contracts were terminated – three of them at the end of 2018, and the others in May 2019.
Besides the inclusion of the work in the contract, another point of attention in the project is the inclusion of the “free flow” collection system (no toll plazas and payment calculated by kilometers driven), still innovative in the country, said André Bogossian, a lawyer with Stocche Forbes.
“There are doubts about how the payment and default will be, because there is no culture of automatic payment in the country,” he said. He highlights that, to mitigate this uncertainty, the São Paulo state government included risk sharing mechanisms in the call for bids.
TIM Brasil snatched the largest slice of Oi Móvel in the alliance it made with Telefonica and Claro to buy the asset from the telecom in judicial recovery. In the acquisition, completed on April 20, TIM got about half of the spectrum and sites, and 40% of Oi’s customers. With the additional revenue, savings in capital investments and expenses, cost cutting, elimination of duplicate equipment and expansion, TIM estimates R$16 billion in synergy gains over the long term.
TIM CEO Alberto Griselli explains that the synergies are made of several components. The technical synergies, related to investment optimization, with cost savings, are equivalent to R$12 billion of the total estimated for the company. The value is attributed mainly to frequencies, the spectrum that the company receives with the purchase of Oi Móvel.
Frequencies are like paths in the air through which telecommunications data travel. TIM brings to its network almost 50 megahertz of spectrum from Oi. Among competitors, it had the least spectrum, a valuable asset for the companies. In addition, it receives contracts for the use of 7,500 sites – places equipped with antennas or base transceiver stations (ERBs) and electronic equipment for communication.
With this, TIM will be able to reduce network sharing costs, launch more services, expand infrastructure, improve signal coverage and service quality for its customers and those coming from Oi. Currently, it is the telecom with the largest 4G coverage, present in almost 4,800 municipalities (96.5%) and plans to reach the whole country this year. In 3G, its rate is a little over 91%, with Vivo in the lead (97%).
“We will continue to invest a lot, but less than it would be if we didn’t have Oi’s frequencies,” says Mr. Griselli. The company’s industrial plan foresees investments of R$14.5 billion over the next three years.
According to the calculations of telecoms regulator Anatel, the total synergies with the sale of Oi Móvel would be at least R$13 billion from 2021 to 2030. Tim is supposed to have the biggest gain (R$8 billion), followed by Telefônica, owner of Vivo (R$ 4.9 billion), and finally Claro (from R$270 million). These gains are based on the combined operations of each telecom company with Oi’s assets, involving issues such as duplication of base stations, operation contracts, revenue from migrated clients, among others.
Mr. Griselli explains that TIM’s calculations, compared to Anatel’s, are broader and consider several other factors. “We did the cash flow of the synergy, both revenue and cost, translated to present value, which reaches R$16 billion,” says the executive. This value includes calculations related to the technical and commercial parts, and fiscal goodwill (about R$700 million) linked to the purchase, which must be amortized by 2042.
Net present value is the formula that determines the present value of future payments discounted at an estimated interest rate, minus the initial investment cost.
The executive predicts that 50% of the synergies will be achieved by 2030, with the other half becoming a constant part of the earnings resulting from the acquisition.
Even in the long term, the gains are considerable for the Italian subsidiary, which paid R$6.98 billion for its participation in the acquisition. The total price for the asset was R$15.92 billion. In this account, Telefônica assumed R$5.37 billion, and Claro, R$3.57 billion
Another part of the gains will come from commercial synergies. The company bought the revenue that comes with the customer and receives an EBITDA margin of 60% to 70%. against TIM’s EBITDA margin of 48.4% in 2021.
TIM adds around R$1.8 billion to its revenue in the period from May to December this year. If the value is projected for 12 months, it reaches R$2.7 billion, says Mr. Griselli. In 2021, the net revenue of Telecom Italia’s subsidiary was just above R$18 billion.
This does not mean that this indicator will rise for the operator, because there are several factors involved. TIM separated its fiber network and sold its control to IHS (which created I-System) to operate with neutrality. But it will pay rent to use the network and deliver broadband. In addition, it has the investments it is making in 5G. “When we add it all up, the margin stays as it is, at 50%. It goes up a little bit and goes back to 48%,” said Mr. Griselli.
After years of being indicated by the market as a potential buyer of Oi, even before the company filed for judicial recovery in 2016, TIM Brasil finally justified part of the market’s expectations. It did not buy the company in a closed package, but in the case of Oi’s mobile assets, TIM took the largest share of customers and infrastructure in the alliance it formed with Telefônica Brasil and Claro Participações.
“When we add it all up, the margin stays as it is, at 50%. It goes up a little and goes back to 48%,” says Mr. Griselli. In addition, there are the investments in 5G that, according to Anatel’s schedule, is expected to make it debut in all capital cities and in Brasília by July.
Oi’s clients became TIM automatically on the 20th, but the number migration will be gradual, over a year. The same happens with the clients who switched to Vivo, a Telefonica’s brand, and Claro. Each telecom has signed a contract with Oi to continue serving those customers during the transition. Those who want to, can do number portability and take their cell phone to the new operator. Those who prefer another provider, are released by regulation.
“Oi’s client will realize the improvement in technical quality, Oi has less 4G coverage. With TIM, they will have 4G everywhere,” says the executive, confident in the permanence of users. By regulatory force, Oi’s plans will be maintained for all who are migrating. But TIM intends to analyze the profile of this public and offer higher value packages. With more bandwidth capacity per client, Mr. Griselli says that TIM’s clients will also perceive more quality.
With this larger mass of users, TIM will need to increase the number of agents in its own call center, with 1,500 people working remotely today. The vast majority of the service is done through outsourced companies.
To explain the effects of the transaction on its business, TIM will hold a conference call with market analysts on Monday at 10am.
With Oi’s exit from the mobile market and the distribution of its around 41.4 million clients among the trio of telecom companies, TIM continues as third in the ranking, going from 52 million clients to 68 million. At the top, Vivo, a Telefonica’s brand, increased from 84.6 million to a little over 97 million, followed by Claro, which went from 71.2 million to 84 million.
Rise in ore prices should activate projects that were on stand-by in Brazil — Foto: Marcos de Moura e Souza/Valor
In a new cycle of strong growth, iron ore prices have attracted two major economic groups to the industry. The holding company J&F — owner of the giant meatpacker JBS — unveiled the purchase of mining company Vale’s assets in Corumbá, Mato Grosso, earlier this month. In August, Cosan, owned by businessman Rubens Ometto Silveira Mello, debuted in mining by buy buying the port of São Luís, Maranhão, with plans to bring ore from Pará.
Although these are still modest mining projects, the two giants are willing to make multibillion investments for this new business division to become relevant for the groups’ revenues, sources say.
J&F’s plans are not restricted to keeping the two mines recently acquired from Vale, with a capacity of 2.7 million tonnes that may be expanded to 6 million tonnes. After buying the mines, J&F mulls new opportunities in the industry, aa source familiar with the group said. “This was the first step,” the source, who spoke on condition of anonymity, said.
Just as it did in the animal protein industry, J&F plans to be a relevant player and build the “JBS of mining,” the source added. Acquisitions have been a regular strategy of the Batista family to advance in the markets in which they are interested in.
Vale confirmed the sale of the mines to J&F, as Valor reported two weeks ago. The deal valued the assets at $1.2 billion by the enterprise value. Considering this EV and the EBITDA of $110 million, the transaction boasts an “attractive” multiple of 10.9 times for Vale, according to Bank of America.
For analysts Caio Ribeiro, Leonardo Neratika and Guilherme Rosito, the sale shows the mining company’s commitment to “enhance and simplify its portfolio and focus on high quality assets.” Compared to Vale’s other operations, the Central-West system represents a lower-quality asset, with EBITDA per tonne of iron ore of $41, compared to the company’s average of $102 per tonne, they noted.
In J&F’s view, however, the deal was not expensive, another source said. A good part of the $1.2 billion attributed to the assets refers to take-or-pay contracts signed with Hidrovias do Brasil until 2039. Therefore, the amount the Batistas will have to disburse effectively will be $150 million, and the debts of the operation total R$1 billion, well below the enterprise value. By closing the deal, J&F indicates that it sees room to increase gains in the operation, which could include expanding production, it said.
J&F decided to enter mining because it considers the industry resilient and because there are assets in the market that can be better exploited. “We are shopping. We will look at growth in all acquired businesses, including but not limited to mining,” one source said.
Also with business fields considered resilient, Cosan intends to advance in mining. The group’s plans for the industry are old — Rubens Ometto Silveira Mello tried to buy pension fund Previ’s stake in Vale, but the deal did not go ahead.
In August last year, Cosan bought the port terminal from China Communications Construction Company (CCCC) with the goal of integrating logistics and mining. At the time, it also unveiled that it had joined businessman Paulo Brito, founder of Aura Minerals, to start mining exploration in Pará and export the production through Vale’s railroad to Maranhão.
The partnership is still being defined — the parties are discussing each other’s stake in this joint venture, sources say. Mr. Brito holds mining rights in the Carajás region, where Vale’s mines are located. The idea is to produce from 2025 on about 10 million tonnes of iron ore a year and triple this volume in the following years.
Cosan picked Juarez Saliba to lead the business. He previously worked with Vale and will also be a minority shareholder in the ore project.
Cosan said in a statement that it is entering the mining and logistics market with a robust project for iron ore exploration in Pará, with distribution through a private port in Maranhão. “The project will rely on the group’s consolidated expertise in the logistics sector (rail and port) and as a strategic partner, with the ambition of becoming a relevant player in the sector in the coming years.”
According to the group, the company that will manage the mining and logistics business will have advisors and executives with experience in the sector, in order to guarantee even more traction to its development.
For Patricia Muricy, a partner at Deloitte Brasil in charge of the mining industry, the high price of mineral commodities is likely to draw both new entrants and private equity funds. “This movement also means an opportunity for large mining companies willing and in need to reorganize their portfolio, focusing on assets with higher performance, lower socio-environmental impact, lower carbon footprint, very much in line with the public commitments made regarding ESG.”
For Ms. Muricy, it is important that new entrants evaluate aspects relevant to all stakeholders and not be restricted to a simplistic economic and financial analysis, because there are many other risks that can make the expected profits unfeasible.
For industry sources consulted by Valor, this new moment of high ore prices is expected to activate projects that were on stand-by attracting investors. Among them, the expansion plans of mining company Bamin, in Bahia.
According to people familiar with the matter, Bamin has been trying to find a financial investor for the project. However, the investment demanded by Bamin is considered high for the entrance of a new partner.
In a statement, Bamin said it has a large integrated project of significant relevance to Bahia, including the Pedra de Ferro mine, in Caetité, the construction of the South Port, in Ilhéus, and section 1 of the Fiol railroad. “These are large-scale projects that arouse the interest of several partners, with whom the company will always be open to talk.”
Another project that was put on stand-by but may be reactivated is the Manabi ore exploration project, in Minas Gerais, according to another source familiar with the matter. Getting this mine off the ground depends on logistics (rail or pipeline) and port facilities. It is close to Anglo American’s mine and Vale’s railroad. No spokesman for the company could be reached for comment.
In iron ore, the big challenge for newcomers is to define if they want to be big – projects above 20 million tonnes per year – and have cash flow to set up the project, said José Carlos Martins, a partner at Neelix Consulting & Metals who worked as head of ferrous metals at Vale for a decade. Many investors prefer to be small and sell their production to Vale or CSN.
Depending on the project, the investment is in the range of billions of dollars and usually takes three to five years to be put in place. There are usually delays because of environmental permits and problems in logistics works (railroad and port). “In Brazil, there are at least 20 projects waiting to get off the drawing board. There is space in the market at the moment. The critical factors are the ones I pointed out, besides the demand scenario, and prices, which must be considered,” the consultant said.
Luiz Barsi’s office is not located in São Paulo’s Wall Street, Faria Lima Avenue, where most of Brazil’s investment banks and asset management companies are based. Instead, the investor, worth over R$4 billion, received Valor in the office of Boa Vista Investimentos in downtown São Paulo, a financial hub of decades ago.
In this austere environment, with several pictures and memories of the open outcry auction of the old exchange Bovespa, the first one to arrive is Mr. Barsi’s daughter, the entrepreneur Louise Barsi, who is flying solo in the financial education segment through a platform called Ações Garantem Futuro (AGF), or Stocks Guarantee the Future.
She summarized which are, according to their methodology, the best industries to invest in stocks. “There is this acronym BESST [in Portuguese]: banking, power, basic sanitation, insurance and telecommunications.”
Luiz Barsi, 83, is a historical advocate of investing in stocks of companies that pay good dividends with the goal of long-term gains. And the method pays off. The investor says he received R$300 million in proceeds in 2021 alone.
Today, the super-investor’s new bets are the power company Auren, the sugar-and-ethanol firm Cosan, Vibra Energia, owner of gas station network BR, and Banco Mercantil.
While most of these positions are in line with his classic strategy of seeking discounted stocks of companies that pay good dividends and have predictable revenues, the way of thinking has been partly updated. Auren stands out, for example, for focusing on renewable power. “Tesla sold over 350,000 cars in the United States in 2021, so there is a strong trend of fossil energy sources having less potential in the future.”
Controversially, he criticized the passionate recommendation that influencers on social media make of a dividend portfolio focused on real estate funds. “Real estate funds are a confidence game,” he said. Mr. Barsi also complained about speculators who sell shares short, and says he still believes in the recovery of reinsurer IRB Brasil – shares are down 90% since the peak, in January 2020.
His stock market recommendations and analyses often include criticisms, targeting bankers and something he calls an attempt to turn Brazil into a “nation of loan sharks.”
Read the interview below.
Valor:You began your career identifying the industries that had the best chance of enduring. At the time they were food, basic sanitation, power, mining and finance. Now, in 2023, if you were to redo this analysis, which sectors do you see as having the capacity to endure and grow?
Luiz Barsi: Not much has changed. Within those sectors, there are a lot of vital necessities, like food.
Louise Barsi: There is this acronym BESST [in Portuguese]: banking, power, basic sanitation, insurance and telecommunications. Those are the best industries to start filtering.
Luiz Barsi: I am buying today the shares of three companies: Auren [a result of the merger between the power assets of Votorantim and the parent company of Cesp], Cosan and Vibra Auren carries within itself an interesting component, which is to continue investing in a solar power mix. It already has a hydroelectric power mix and owns a large plant, Porto Primavera, which belonged to Cesp.
Valor: Is it important for you that it is a company that invests in solar power and other renewable sources?
Luiz Barsi: We are looking at what the world is looking at, which is clean power. We were recently in Miami and drove around several times in electric cars. There is a strong trend of fossil energy sources having less potential in the future.
Valor:Can you unveil something about your investment portfolio?
Luiz Barsi: I do not buy stocks to sell tomorrow. I have shares of Banco do Brasil I bought for R$0.60. I have shares of Klabin I bought for R$0.17. I have shares of Suzano I paid around R$2 or R$3 each. Unipar, which I bought for R$0.25 and is worth R$100. I also have some from [gun maker] Taurus. Besides this, I have Transmissão Paulista, Taesa and Cemig. So, these are securities that I am not going to sell, but that continue to distribute good profits.
Besides this, I have been buying a little bit of Banco Mercantil shares, for strategic reasons. I buy them at R$10 and they pay a higher dividend than Itaú, Itaúsa and Bradesco. But it is difficult to buy the shares. There is virtually no liquidity. When a seller shows up, you try to squeeze him down to his price.
Valor:What about you, Louise?
Louise Barsi: It depends, because as the market capitalization changes, your portfolio gains a different weight. Today, from some movements I made in the portfolio, I believe 30% is in insurance: BB Seguridade, Caixa and IRB Brasil. The second largest slice is in banks, and there is a part equally distributed in power and basic sanitation. In power, I have a good position in AES, Cosan and Eletrobras.
Luiz Barsi: I have a good position in Eletrobras as well, but I bought it for R$3.8 each, and today they are worth R$40.
Valor:Barsi, how do you see value investing today? Is there any difference with how it used to be? Because today, when we look at the U.S. stock markets, we see the Tesla phenomenon and more and more growth theses doing better than value theses. Do you think this scenario has really changed?
Luiz Barsi: You see, these are companies that we don’t buy. They have already reached a level that you can only convince an investor from a developed country to buy, not from a country like Brazil.
Of those who operate in the stock exchange in Brazil, there are probably not 1% of investors. Most want to buy and sell all the time. It is very interesting for the stock exchange to have speculators and not investors. The stock exchange wants brokerage fees, remuneration. Of course, it will not give preference to those who buy and hold.
Most people don’t talk about this, but it is important to talk about it. A country, when it chooses to have a stock market, and makes a place available to negotiate, it has to do so in a way that the values meet in a natural way, that there are no pressures for price formation. Here in Brazil, as in other countries, the stock exchange allows citizens to rent shares and sell them in the market. Thus, you create a selling pressure on certain stocks, and the price made is not natural, it is forged. It is a manipulated price.
Some companies have more than 13% of their shareholder base leased. We don’t have an investor structure capable of withstanding pressure of this nature. This causes that stock to assume a condition that is not the reality.
Valor:Is this the case with IRB?
Luiz Barsi: The Instituto Brasileiro de Resseguros [IRB] has a sector of activity similar to electric power. This company, which should be in a different situation than the one it face today, has two major shareholders, Itaú and Bradesco. So, they have the obligation to rebuild the company. You take out insurance with Bradesco or Itaú, and this insurance contract is not good. Why would Bradesco keep this contract and not pass it on to IRB?
IRB today is an institution you can trust. They are people that you believe would never do something like what was done before [the doctoring of results reported by Squadra in 2020]. That’s why we are fighting and discussing. I know IRB won’t be good for two days from now, but it will be good for a while from now.
Valor: A question for both of you. What do you think about cryptocurrencies?
Luiz Barsi: Cryptocurrency is a fantasy.
Louise Barsi: I’m a big believer in the technology behind it. As an investment, just like any other currency, we don’t put money on it.
Luiz Barsi: It is not good either as an investment or to hold on. In my interpretation.
Louise Barsi: Nothing against those who invest.
Luiz Barsi: Nothing against those who invest, but those who invest will lose. It is a matter of time.
Valor:And how do you see the elections this year? Between Luiz Inácio Lula da Silva and Jair Bolsonaro is there anyone who is better for the market?
Luiz Barsi: What is Lula’s level of education? He doesn’t even know. How well educated is Bolsonaro? He was a lawmaker for many years and is an expert in rachadinha [a kickback scheme where aides return part of their earnings, sometimes for no-show jobs]. If [former judge Sergio] Moro is a candidate I will vote for him. If he is not a candidate, I don’t want to repeat tragedies. I prefer not to vote.
Valor:What about a runoff between Lula and Bolsonaro?
Luiz Barsi: I won’t vote for either of them, neither in the first nor the second ballot. The vision that I have of the politician is the worst imaginable.
A citizen who worked a lot and does a lot is [former infrastructure minister] Tarcísio Freitas. I’m going to vote for him for governor [of São Paulo]. I see in him a person who wants to make the country grow.
Brazilians still need to learn how to vote. We have always been allowed to vote not for the best, but for the least-worst option. The problem is that this time there is not even a least-worst option in the presidential election.
Valor: How do you see Brazil in terms of its capacity to draw investment, considering that of the BRICS countries only Brazil and India are viable?
Luiz Barsi: The money that comes in here is speculative. The exchange rate has fallen now because many dollars have come to Brazil, but the guys are investing here to get interest rates at 12% a year.
Our government has an extremely compromised management capacity. Less than a year ago, our benchmark interest rate was less than 3% and today it is 12%, which generates opportunities for others and not for us.
Valor:You have always been a great defender of the thesis of investing in stocks to earn dividends and reinvest these dividends. But these big investment sites now look at this strategy more in terms of real estate funds than in terms of stocks. Do you think stocks are still better for building a dividend portfolio than real estate funds?
Luiz Barsi: Real estate funds are a confidence game. So are funds in general. Private pension is another one. Run away from funds. You make the fund owners rich. They charge you management fees, success fees, performance fees, and I don’t know anyone who has made money with funds besides bankers.
Valor:What tip would you give to investors who are just starting to invest?
Luiz Barsi: If they are going to buy stocks in the market now, the first thing is to define a focus, a guideline, and be aware that they will only make money in the medium and long term.
The other thing is to create criteria. My most important criterion is that of priority. If someone comes to me saying that he wants to sell me a Mercedes, I will say no, because it is not my priority. My priority is to grow my monthly income portfolio.
I go on exorcising everything that is not my priority. I don’t do anything on impulse. You don’t impose this rule to everything, but to superfluous things, yes.
Valor: You, when you started investing, realized that the INSS [National Institute of Social Security] was going to collapse and it was not a valid way to look at your income in the future.
Luiz Barsi: The state doesn’t have the competence to manage Social Security funds in order for it to be always positive. Brazilians prefer to continue to believe that someone like Lula is a great manager and that the INSS works. We have a shameful retirement burden. In the old days, the citizen retired as an executive and after ten years was destitute. Until today the Brazilian people have not looked at this.
Valor:Do you still don’t believe in Social Security despite the 2019 reform?
Luiz Barsi: This reform was a flight of fancy. It will make up for one or two years. Three or four years from now it will have to be done again. Thirty years ago, you went to Volkswagen, took a picture of the company and saw 15,000 employees working there. Today you have a thousand robots. Robots don’t contribute to the INSS.
Valor:How did you saved money for the first time, and how was the process of starting to save money after beginning to work as a shoeshine boy?
Luiz Barsi: That of being a shoeshine boy happened when I was a nobody, a kid with no culture. I couldn’t do anything else. But then I studied, got a job, and found out that this was not what I wanted. I started to invest in a way to take risks. I am not an economist who ran after the paycheck.
Valor:But how was it to invest in stocks for the first time?
Luiz Barsi: I thought: who has a decent and permanent monthly income? The business owner. Then I said: I want to be a business owner. But I didn’t have any money for that. The first thing I thought was that I wanted to be the owner of Banco do Brasil, but I will never own Banco do Brasil. Then I realized that I could become a small owner by buying shares.
If you buy stocks permanently, maybe you can get to a plausible situation of having a monthly income. How long does it take a guy to retire? 30 years? What if I buy 1,000 shares a month for 30 years? It was possible to do this in Cesp, for example, which paid two dividends a year, according to its bylaws, and had a priority minimum dividend for preferred shares, besides paying a bonus of 10% a year when it still had shares with a nominal value of R$1 in its bylaws. I thought, what if I buy 1,000 CESP shares a month for 30 years? I put it on paper and after I did that, I was convinced that anyone doing the same would be successful in terms of a monthly portfolio.
I called this work “Ações Garantem o Futuro” [“Stocks Guarantee the Future”]. If I did the same today, I would call it “Stocks Guarantee a Great Future.” I followed that work religiously.
Valor: What do you think will be your greatest legacy in the financial market?
Luiz Barsi: My greatest legacy will be to get people to invest in wealth generation and not to be loan sharks. Those who lend money are loan sharks. If they put money in a savings account, they are a loan shark.
Valor:What is your main objective or goal in the financial education work?
Louise Barsi: I think that a small seed was planted more recently with the interest rate at 2%, which made Brazilians awake to risk-taking. We have to demystify this concept that stocks are a very risky investment. It is only risky if you don’t know what you are doing. But it is possible to take risks in fixed income as well and lose money.
Luiz Barsi: Did you know that stocks are safer than fixed-income investments? In 1989, when [former President Fernando] Collor changed the currency structure, he took everything that was in fixed income, except stocks. If he had taken stocks, that would mean to nationalize all the companies in the country. So, stocks, in my modest interpretation, are safer than any fixed-income investment. I have been a fighter for an investment culture in this country.
Valor:And what are the main challenges in this goal?
Louise Barsi: You don’t create a culture overnight. I was in Israel for studies and it’s a country that has a very recent history, with an extremely hostile land for agriculture and surrounded by unfriendly neighbors, so necessity became the mother of invention there. The country has invested in military technology to defend itself from its neighbors. If they don’t have an arable land, they sought technology for desalination and irrigation. Thus, they became a startup nation.
In Brazil, it is difficult to make this revolution because you don’t need to develop the capital market. Here, with little effort a rentier can make money. You don’t have a combination of incentives that is pro capital market.
It is a very generational work. A generation previous to mine started to realize that they have to invest in the future, they can’t count on the INSS. We need these fruits to be passed on to the following generations. Many parents come to us asking for tips on how to make a pension portfolio for their children. It is important that parents pass this on to future generations.
It is a long-term job, but since we already invest in the long term, it is not a problem for me that my objectives are also for more distant horizons. And looking at the curve of new individual investors in the market, we can see that this advance of financial influencers has helped.
Luiz Barsi: It was higher than expected, because more and more people are coming up who say they started to trade in the short term and only lost. Maybe this can be an unpleasant experience, but it will teach you that in the market you will only win if you don’t consider yourself a minority shareholder. Consider yourself a small owner, because the minority shareholder can sell the shares, the small owner won’t sell, because the bigger owner won’t sell either.
In 1970-71 I thought I should be the owner of Banco do Brasil. Today I am not the owner, but I am the biggest individual shareholder. It was the criteria. This is the lesson I would like to leave.
The production of steel and cement is the largest emitter of CO2 among industrial companies around the world, with 15% of the total, and both sectors are racing to meet targets for reducing greenhouse gases. In this vein, Companhia Siderúrgica Nacional (CSN) starts a pilot project with technology from the Portuguese company UTIS, which will use green hydrogen in the production process of some areas of the plant, located in Volta Redonda, Rio de Janeiro. This is one of the technological solutions, among several in the world, that are being developed to cut carbon emissions from industrial processes.
The technology from UTIS has already shown results in cement plants, solid waste combustion and biomass, but this is the first time it will be used by a steel mill, said Felipe Spiri, the chief executive of CSN Inova Open and co-founder of CSN Inova, the company’s arm that invests in innovation and technology projects.
CSN’s management team ordered to lower the use of fossil fuels (petroleum coke and metallurgical coal) and natural gas, Mr. Spiri said. This is both to comply with environmental standards and achieve cost savings. Coke and coal are imported and traded in dollars.
According to the executive, who majored in economics at Unicamp, has a master’s degree from Insper, and has worked in several departments within CSN, the project with UTIS has great potential to help CSN, as well as other steel companies, to meet decarbonization goals using less of fossil fuels. He said that the company has acquired and deployed, since 2020, UTIS technology in cement production.
The use began in the integrated plant of Arcos, Minas Gerais, where it obtained a reduction of 12 kilograms of CO2 per tonne of cement produced. The process is coupled, in four containers, to one of the two kilns in Arcos, generating gains, besides the reduced use of coke, in the productivity of the clinker kiln and power consumption. CSN Cimentos is expected to also take the technology to the plant acquired in Paraíba, and in the future to others.
This week, technicians from UTIS are in Volta Redonda to define where to start using the technology. This stage will last three months, Mr. Spiri said, because all the production flows will be mapped to test the technical and economic viability of UC3 (Ultimate Cell Continuous Combustion). The targets are the blast furnace (which uses coal and coke), steelmaking gases and natural gas, sintering (which agglomerates fine ore) and the hot-rolling mill.
The electric furnace of the long steel mill, for example, is a potential production area to receive UC3 technology initially. It is smaller than the large-flat steel mill.
The goal is to start the injection of green hydrogen in a controlled manner in the second half of the year, in one or more defined areas. The system, in containers – where the electrolysis process occurs, which generates hydrogen –, according to CSN, is easy to install, using renewable power and water, including from the sewage system. The size of the equipment, which will be imported from Europe, will also be defined.
The systems, Mr. Spiri said, have a price range that goes from €100,000 to €1 million. It depends on the capacity of green hydrogen to be generated and injected. According to him, CSN obtained financing from Finep (federal agency that supports innovation in industries) for the cement plant project. But it could not repeat it for the steel project. In all, including other efforts, R$45 million were financed.
According to Mr. Spiri, CSN works to reach in 2030 the CO2 reduction target that the rest of the sector has set for 2050. A bold goal for the eight-year timeframe.
UTIS was founded in 2018 as a joint venture between Ultimate Cell and the Secil group (cement). At the end of 2021, the Semapa group joined the company. UC3 targets energy efficiency and continuous combustion processes in industries.
The results of Brazil’s largest banks in the first quarter may help foresee the pace for the rest of the year, which is still a major unknown. On the one hand, the economy has been doing better than expected and credit growth has also surprised positively, which is likely to guarantee a good performance from January to March. On the other hand, high interest rates and inflation will lead to an expected increase in default rates throughout the year.
The projections of six banks collected by Valor indicate that Itaú Unibanco, Bradesco, Santander and Banco do Brasil (BB) are expected to have a combined profit of R$23.697 billion in the first quarter, up 0.5% from the fourth quarter – when there was a record – and an advance of 8.5% in comparison with the same period in 2021. The annual performance is expected to be the weakest since the fourth quarter of 2020, when numbers were still down due to the pandemic. The earnings season will begin next Tuesday, with Santander.
For UBS BB analysts, the default rate will be the most closely watched indicator in the financial statements. Still, they say that despite the expected deterioration in asset quality, banks are expected to show good operating trends, with year-over-year low-double-digit growth and improved margins for loans. There may be a small increase in provisions for bad debt, but some firms are likely to continue using some of the cushions built up in the pandemic, which would hold back that advance.
“We are positive about the dynamics of the results of Brazilian banks… Overall, we forecast earnings expansion for most of the banks we cover,” UBS BB said. Goldman Sachs takes a similar view, predicting resilient operating trends. “We expect Brazilian banks to sustain relatively stable ROEs as financial margins remain resilient and the cost of risk remains under control, with healthy loan growth, even if the default rate shows some deterioration.”
J.P. Morgan goes along the same lines, but with a slightly more cautious view. For the U.S. bank, the expected rise in defaults favors the large incumbent banks, which have a more diversified revenue base. “In Brazil, we see rising spreads, but asset quality worsening at the margin, in a potentially faster trend than initially anticipated.” According to the report, there could be sharper worsening in individual defaults, especially unsecured consumer loans and credit cards, which are under pressure as the year begins with high inflation and household debt also high.
“We believe that the deterioration in asset quality is likely to dominate the discussions and will probably prevail over strong net interest margin developments in the first quarter results. The first signs of how severe the scenario for Brazilian banks may be is expected to start to emerge in the first quarter,” Bradesco BBI analysts said.
Bank of America says that net interest income will probably benefit from a higher rate environment, although lower treasury earnings will limit total interest income growth to around 5%. They also warn about administrative expenses, which remain a point of concern, reflecting recent salary increases.
In a report in February, when the 2022 guidance was released, BofA said the discrepancies in projections made “Itaú came from Mars and Bradesco from Venus.” While Bradesco’s projections suggest 8% profit growth this year, Itaú’s forecasts indicate twice as much: 16%. “The 2022 guidances for Bradesco and Itaú include large disparities related to financial margin; bad debt provisions; revenues from tariffs and insurance; and effective tax rate. On the other hand, both indicated similar growth in loans and operating expenses,” the analysts said. Now, the first quarter results may give clues about who is right.
Itaú will probably have the highest year-over-year growth in profit, up 14.1% to R$7.3 billion. “We project total credit growth of 13.2% year over year. The retail portfolio is likely to remain robust, but with a different profile from previous quarters (growth in home loans may decelerate, while personal loans may expand faster),” UBS BB said. The analysts said that the recent appreciation of the Brazilian currency may have a negative impact on growth, since the bank’s portfolio in the rest of Latin America represents almost 25% of the total.
Bradesco will likely have a 3.7% expansion in profit, to R$6.754 billion. For Goldman Sachs, despite a solid 18% expansion in the portfolio, the financial margin is likely to fall in the transition from the fourth to the first quarter, and the default rate will rise. “Fee income and expenses are likely to be seasonally worse. We estimate expense growth to reach 10%, limiting profit expansion.”
For BB, estimates are for a 14.1% rise in profit, to R$5.604 billion. Analysts see a low level of provisions and the margin benefiting from the growth in lines with higher spreads. At the same time, Banco do Brasil’s pension fund Previ’s results are expected to make a significant positive contribution. “Given the higher risk quarter, we favor less risky operations, such as Banco do Brasil and Itaú, over Nubank and Santander,” J.P. Morgan said.
In the case of Santander, the forecasts indicate profit of R$4.039 billion, an improvement of 0.7% year over year. BTG foresees an increase of 41.3% in provision for doubtful debts. In addition, analysts point out that the result of treasury, which was very strong in an environment of low interest rates, is likely to lose strength with the increase in the Selic. “Santander ended the fourth quarter with a coverage ratio of 220% (the lowest among large Brazilian banks). We believe this will fall even more in the coming quarters,” UBS BB pointed out.
Market consensus has migrated to more appreciated exchange rates at the end of the year — Foto: Scott Eells/Bloomberg
In view of the strong appreciation shown by the real against the dollar in the last few days, the market consensus has increasingly migrated to more appreciated exchange rates at the end of the year. If at the end of March, when the exchange rate was already at R$4.70 to the dollar, economists were still projecting R$5.25, now the number of analysts who see a chance for the rate to end the year below the R$5 threshold has been growing.
The shock that raised the prices of commodities helps to explain about 65% of the real’s appreciation this year, while high interest rates account for the other 35%, said Guilherme Loureiro, the chief economist at Trafalgar Investimentos. “And these are things that are here to stay. The commodities scenario is more stretched than our previous estimates and so is the interest rate scenario, since we are likely to have a very high Selic [Brazil’s benchmark interest rate] at least until the end of the first quarter of next year,” he said.
In Trafalgar’s view, the situation now looks different from the one seen at the beginning of the exchange rate appreciation process. On Wednesday, the rate closed the trading session at R$4.6194 to the dollar, close to the long-term fair value, which, according to the asset manager’s calculations, is between R$4.50 and R$4.60.
In a survey with 74 financial and consulting firms published by Valor last week, the midpoint of the estimates for the exchange rate at the end of the year was R$5 to the dollar. BTG Pactual (R$4.80), Itaú Asset Management (R$4.80) and Western Asset (R$4.90) are some of the firms that already see the exchange rate below the psychological level of R$5.
“The exchange rate keeps surprising,” said Daniel Tatsumi, a currency manager at ACE Capital. He notes that commodity prices continue to rise and the interest-rate differential remains high – factors that support the real right now. “We don’t think that, after appreciating 20% [against the dollar], the real will rise more 20%, but the direction remains the same.”
For Mr. Tatsumi, the exchange rate may start to become a little more “stationary” after the expressive appreciation of the real this year. “That foreign flow that was coming in has diminished a lot and the position of the local investor is at a very favorable level for the real, which we didn’t used to see in the recent past. We think that the exchange rate continues to improve, but the great appreciation is behind us,” he said.
One risk mentioned by ACE’s manager for the scenario projected for the exchange rate is the possibility of the U.S. Federal Reserve put in place a more aggressive monetary tightening. “If the U.S. raises interest rates with growth and without risk-off, it could be a risk for the real, and the dollar could strengthen again. We already see this in relation to currencies of countries with low interest rates,” Mr. Tatsumi said, referring in particular to the yen.
However, he stressed that the appreciation of the real, although surprising, is well justified. “We are far from saying that there was an exaggeration. Everything was moving in the direction of a more appreciated real,” he said. Regarding the short term, however, he notes that seasonal adjustments may somewhat weaken the real, remembering that in May and June the trade flow is expected to begin to decrease and there may be an outflow of dividends. Mr. Tatsumi notes that a relevant part of the flow comes from abroad, which matches with a seasonally negative period in the coming months.
Looking further ahead, Santander expects, in its baseline scenario, the exchange rate at R$5 to the dollar at the end of this year. Before, the bank expected that the exchange rate would end the year at R$5.4 to the dollar.
In a scenario review released last week, Santander’s economists pointed out that they expect some weakening of the real against the dollar below current levels throughout the second half of the year, “in the wake of the faster normalization of monetary policy in advanced economies and of some volatility generated by the debate about the direction of economic policy after 2023.”
Nevertheless, the bank’s economists say they understand that the rise in commodity prices and a likely structural change in the allocation of funds dedicated to emerging markets, caused by the conflict between Russia and Ukraine, in addition to the still significant interest differential, “is likely to result in a more appreciated exchange rate than we had imagined.” Santander believes that interest rates in the U.S. could reach 3% by the end of this year and 3.5% in 2023, while the projections for the Selic point the benchmark rate at 13.25% this year and at 10% in 2023.
In the view of Alfredo Menezes, founding partner of Armor Capital, the behavior of the exchange rate will depend on how the scenario will look until the end of the year, the terms of trade and the dynamics of monetary policy in the U.S. “If the Fed is more austere than the market is expecting, commodities could give way a bit and then the terms of trade will not be so good.”
For him, in general, the scenario is more nebulous in the second half of the year. Mr. Menezes even says he believes that the flow to variable income, which has favored the real appreciation this year, is unlikely to perpetuate until the end of 2022. In addition, he notes that the end of the year “always has a tighter flow due to remittances,” which is expected to lead the exchange rate to something between R$5.1 and R$5.2 at the end of the year. “But nothing prevents it from falling again in January 2023.”
The external scenario is one reason mentioned by Citi economists for foreseeing the exchange rate at R$5.19 to the dollar at the end of the year. “We expect a less benign global environment for emerging markets behind the expected assertive U.S. monetary tightening, which may have negative implications for emerging market currencies, as seen in 2013 during the taper tantrum [when the Fed reduced asset purchases].”
In addition, Citi professionals point out that a potential strengthening of the dollar and lower commodity prices “could exacerbate the negative impacts on the real.” They note that further strengthening of the dollar generally “is often accompanied by falling commodity prices, which can reinforce the headwinds to the real.” Citi, however, points out that this movement has not been seen so far this year.
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