Analysis: Central Bank avoids new hints amid unchecked inflation

Central Bank building — Foto: Jorge William/Agência O Globo

Central Bank building — Foto: Jorge William/Agência O Globo

In an environment that is more uncertain than usual, the Central Bank’s Monetary Policy Committee (Copom) has chosen, in the minutes of last week’s meeting released on Tuesday, to describe in more detail how it sees this scenario, instead of signaling what its next steps could be. Even if the policymakers look to a longer horizon and adopt a cautious stance, the deterioration in the inflationary picture is likely to continue in the short term.

Last week, the Copom raised the benchmark interest rate to 12.75% per year from 11.75%. In the minutes in which it detailed the reasons for the decision, the committee invested in a section, much broader than the previous one, called “scenarios and risk analysis.” There, the Central Bank discusses risks that range from the war in Ukraine to the “Chinese policy to fight Covid-19” to the “persistently high demand for goods,” including in the United States. The policymakers also acknowledged that they discussed in the meeting “some likely explanations for the difference between the projection in its reference scenario [of the Central Bank] and the analysts’ projections” – a point that has been drawing the market’s attention for some time. Perhaps even more indicative is the fact that it has included the baseline inflation scenario in the section dealing with risks. In March, for example, this scenario was presented in the section that dealt with the economic situation. In other words: the main pillar on which the Copom relies to make its decisions about the Selic has lost reliability to some degree.

“The Committee judges that the uncertainty in its assumptions and projections is higher than usual,” it said on Tuesday regarding the baseline scenario.

In the opposite direction, the section that addresses the discussion about the conduct of monetary policy was much leaner in Tuesday’s minutes. The Copom affirmed that it opted “to signal as likely an extension of the cycle, with an adjustment of lower magnitude [than 100 basis points] in the next meeting.” But it said it decided on this signal, among other factors, since it “reinforces the cautious monetary policy stance and emphasizes the uncertain scenario.”

This does not mean that inflation will not get worse in the short term. In the Quarterly Inflation Report, a comprehensive document that details its assessment of the economic situation, the Central Bank projected that the Extended Consumer Price Index (IPCA) would be 1.02% in March – but the actual rate was higher, of 1.62%. Central Bank President Roberto Campos Neto acknowledged he was surprised by the reading.

April’s IPCA-15, a barometer for Brazil’s full month official inflation, continued to show deterioration, rising 1.73%. It was the highest level for April since 1995 and the also highest monthly rise since February 2003. As a result, the 12-month inflation rose to 12.03% in April from 10.79% in March. Besides the high readings, analysts have drawn attention to negative data, including qualitative aspects of inflation such as the diffusion index, which measures the number of products whose prices rose during the month. In Apex Capital’s calculations, the indicator reached 76% in April’s IPCA-15, the highest in almost 20 years.

To steer the Selic, Brazil’s benchmark interest rate, the monetary authority is currently aiming at 2023, for which the inflation target is 3.25%, with a tolerance interval of plus or minus 1.5 percentage points. But such a high and widespread inflation makes it difficult to bring the trajectory of prices to this target. As Valor reported Tuesday, inflation expectations have been deteriorating, both in the case of implicit projections in government bonds and in the estimates made by financial firms, consultancies and asset managers. Some firms project inflation of around 10% for this year. The Central Bank’s baseline scenario projections are 7.3% and 3.4% for 2022 and 2023, respectively. It is worth mentioning, also considering long-term inflation, the 8.87% adjustment made Monday by Petrobras in the price of diesel at the pump, which has a broad impact on the production chain.

In Tuesday’s minutes, the Copom acknowledges that the situation is serious, stating that “consumer inflation remains high, with increases spread among several components, and continues to be more persistent than anticipated.”

“Whereas inflation of services and industrial goods are still high, the recent shocks have led to a strong increase in the components associated with food and fuels. Recent readings were higher than expected, and the surprise came on both the more volatile components and the items associated with core inflation,” the Copom said. “As for the more volatile components, the increase of gasoline prices is still noteworthy, with greater and faster impact than anticipated. The inflation of the components more sensitive to the economic cycle and the monetary policy continues elevated, and the various measures of core inflation are above the range compatible with meeting the inflation target.”

The format of the minutes’ wording may have changed, in part, because of the presence of Central Bank’s new director of economic policy, Diogo Guillen, appointed at the end of April. But it is hard to deny that, in the face of such external and internal uncertainties, the monetary authority has been opting for a more cautious stance since last week. It is also clear that the inflationary environment continues to worsen in the short term.

Source: Valor International

https://valorinternational.globo.com

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Brazil has chance to consolidate in another level, former minister says

Joaquim Levy — Foto: Silvia Costanti/Valor
Joaquim Levy — Foto: Silvia Costanti/Valor

Brazil has a double opportunity for the coming years. The country can both consolidate itself at another level as an important commercial and international business partner in view of the reorganization of value chains and become a global reference in clean energy and decarbonization. This is the view of Joaquim Levy, a former Finance minister, now head of economic strategy and market relations at Safra. He spoke to Valor in New York during Brazil Summit 2022, an event held by Financial Times in partnership with Valor.

Mr. Levy said that one of the country’s advantages in a changing global environment — caused by the pandemic and sharpened by the war in Ukraine — is precisely the fact that Brazil is far from conflict areas, besides having a lower geopolitical risk profile.

“For many years, Brazil has built a reputation of stable democracy, of continuity with respect and convergence, and this is the most important thing for foreign investors,” Mr. Levy said. “Countries are reassessing their supply and value chains,” he added. “Brazil’s characteristics have great value [for international investors] if they are associated with the confidence of the predictability and transparency of the administration.”

In the economist’s view, “we have already seen some sign that foreigners are returning to look at Brazil in a different way [in view of the recent deterioration of the image abroad], if we signal in that direction.” According to Safra’s executive, “we are a country that can be trusted, that contains animosities and has predictability.”

In parallel, Brazil has a great opportunity in the fields of clean energy and carbon credit. “We have a tested and competitive biofuel power source that can be combined with an electric engine to deliver a huge productivity gain,” he said

According to the economist, Brazil would have great sectorial advantages, in addition to having production and employment growth, “with the electrification of the economy.” Mr. Levy says that he himself conducted a study, yet to be published, that supports this thesis.

The former minister reinforces that natural assets are another source of new income generation for the country. “Planting trees or just letting the forest come back is a carbon sequestration machine that has no parallel at the moment. Today there is nothing more efficient and cheaper than allowing the forest to regenerate. That captures 10 to 15 tonnes of carbon per hectare per year.”

Investment in renewable energy, in Mr. Levy’s view, helps to increase productivity in the economy. “Today, having renewable electricity is cheaper than other sources,” he said. “Wind and solar energy are much cheaper; it’s the cheapest power generation we have.”

This cost reduction, according to him, in itself generates an increase in productivity. “When we produce something cheaper, there’s more productivity, if you have a car that runs twice as much, there’s an increase in productivity, if you have a steel mill that doesn’t pay a surcharge due to the use of coal, there’s an increase in productivity,” he said.

According to Mr. Levy, “for a good period there will be an increase in total factor productivity.” This occurs because less cost and more funds for investments are reflected in more employment. “If unemployment has gone down, without affecting salaries, there is an increase in labor productivity. An example was the period between 2000 and 2010, when total factor productivity increased substantially because the country grew using resources it already had to a large extent without spending [more than it collects].”

The former minister also says that “no doubt Brazil can become a world reference in the use of low-cost clean energy.” To be so, he said, the country needs to organize and incorporate those priorities into its growth strategy. “If we do this, we can quickly become a reference and, in the carbon credit aspect, we can become an international supplier,” he said.

Mr. Levy defends that the government needs to have a clear plan on how it is going to face the big issues of the economy, such as stimulating the increase in productivity and fiscal balance. “When you have a plan, the money appears and the government doesn’t need to keep on spending, spending and spending,” he said. “The biggest difficulty in Brazil is the uncertainty about the direction in which the government is heading, and this makes financing difficult,” he added.

He believes that if foreign investors have clarity about the directions of the economy, more capital begins to enter the country and in a more sustainable way. “Establishing clear goals can bring more capital to Brazil, which reduces pressure on public spending,” he said. “This way, the government can use the money with more discipline, which allows domestic interest rates to fall.”

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Six state-run firms will pay R$46bn in dividends to government

The profits of Brazil’s six main state-owned companies last year will mean R$46 billion in primary revenue for the federal government, according to the calculations of the Economy Ministry. In 2021, Petrobras, Banco do Brasil, Caixa Econômica Federal, Brazilian Development Bank (BNDES), postal company Correios and power utility Eletrobras reported a positive net result of R$186 billion, as calculated by the ministry after the end of the companies’ meetings, in the last week of April.

Part of that amount was already paid by Petrobras last year. Even so, the federal government is expected to receive the largest portion this year.

“In a normal process, the money is expected to come in this year,” a source within the economic team said. “Sometimes the company withholds dividends. It approves them, but if it lacks cash, it withholds dividends to pay later, when the situation improves.”

Petrobras alone accounted for R$107 billion of last year’s R$186 billion combined profit. But the source says that even not taking into account the oil company’s data, the total profit “is a great result.”

“It’s about stability, more than the figure. It’s been a few years now that we have only positive results in almost all companies. It is no longer so common variations between positive and negative spread across the portfolio,” the source said, citing overhauls started during the Michel Temer administration, such as the Law of State-owned Companies. “Some companies are still unable to break even, but they are small and have acute, historical problems.”

Three other companies appear in an intermediate group in terms of results: BNDES, with net income of R$34.1 billion, Banco do Brasil (R$21 billion) and Caixa Econômica Federal (R$17.3 billion).

But the source also highlighted the performance of Eletrobras and Correios, two companies with lower profits (R$5.7 billion and R$1 billion, respectively) that Economy Minister Paulo Guedes often classify as having good chances of being privatized. “Correios has turned results around,” the source said, recalling losses in previous years.

The most recent projection of the Economy Ministry, presented in a report of primary revenue and expenditure for January and February, was that the collection of dividends and participation would reach R$39.2 billion this year. The figure was revised in relation to the estimate of the annual budget law, approved at the end of 2021, which was R$26.3 billion. The report for the March-April period, with possible new projections, will be released next week.

Last week, President Jair Bolsonaro (Liberal Party, PL) again criticized Petrobras’s pricing policy, saying that the R$44.5 billion profit reported by the company in the first quarter of this year was “a crime” and “a rape.” The result, driven mainly by the high oil prices in the international market, was 38 times – or 3,718% – higher than the one seen in the same period of 2021. On Monday, the oil company raised the price of diesel at the pump by 8.87%.

Alexandre Manoel — Foto: Gabriel Reis/Divulgação
Alexandre Manoel — Foto: Gabriel Reis/Divulgação

Alexandre Manoel, chief economist at AZ Quest Investimentos, says that the total payment of dividends to the federal government in 2022 is expected to exceed the estimates presented so far by the Economy Ministry. “For Petrobras alone, we expect the dividends paid to the federal government to be above R$60 billion,” he said. He points out that the ministry’s calculations are typically more conservative and that AZ Quest’s projections also take into account the oil company’s figures for the first quarter of this year.

Mr. Manoel also recalled that, due to the spending cap, which limits growth in public spending to the previous year’s inflation, a better-than-expected performance in tax collection tends to improve the primary result, the main measure of the situation of public accounts. The asset manager also has a “conservative” projection for this year, of a primary deficit of R$37 billion. But if the AZ Quest equity analysts’ estimates for the performance of Petrobras are considered, “it is very likely that the federal government will have a positive primary result.”

In addition to commodity prices in the international market and the lower exchange rate, Julia Braga, an economist and professor at the Fluminense Federal University, cites another reason for the “substantial” profits reported in 2021 by large state-run companies: the “historically low cost of labor” in the country.

“Labor income indicators are stagnant or even lower in real terms than in 2012,” she said, citing figures from the Brazilian Institute of Geography and Statistics (IBGE).

Gabriel Leal de Barros, a partner and chief economist at Ryo Asset, estimates that the federal government will receive R$41 billion in dividends in 2022, but says that the adjustment made by Petrobras on Monday means that collection could be even higher.

Source: Valor International

https://valorinternational.globo.com

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Soy exports expected to reach record $58bn

Soy export in Paranaguá — Foto: Fabio Scremin/APPA
Soy export in Paranaguá — Foto: Fabio Scremin/APPA

With upward revisions, especially regarding prices, the Brazilian Association of Vegetable Oil Industries (Abiove) started to project the revenue of soy exports (beans, meal and oil) at $57.953 billion in 2022. The record amount is $6.51 billion higher than what was forecast by the association in March and, if materialized, will represent an increase of 20.7% year over year.

For soybeans, Abiove now estimates revenues of $46.32 billion, resulting from shipments of 77.2 million tonnes at an average price of $600 per tonne. The previous calculations indicated $41.181 billion (77.7 million tonnes at $530 per tonne). In 2021, revenues totaled $38.636 billion (86.108 million tonnes at $449 per tonne).

As for soy meal, the current scenario for 2022 indicates $8.51 billion in revenues, with sales of 18.3 million tonnes and an average price of $465 per tonne. In March, Abiove estimated revenues of $8.052 billion (18.3 million tonnes at $440 per tonne). Last year, the amount reached $7.37 billion (17.21 million tonnes at $428 per tonne).

For oil, Abiove revised its projection for export revenues to $3.123 billion, the result of 1.8 million tonnes shipped at $1,735 per tonne. In March, the projections indicated $2.21 billion (1.7 million tonnes at $1,300 per tonne). Last year, import revenues totaled $2.017 billion (1.651 million tonnes at $1,222 per tonne).

The price adjustments are in line with the curves seen in the international market since the beginning of the year and confirm analysts’ assessments that there should be no significant drops in the coming months, in view of the lower grain supply in Brazil, Argentina, and Paraguay due to weather problems, the effects of the war in Ukraine on the wheat and corn markets, and heated demand in India.

The trend of increasing the planted area in the United States in the 2022/23 season has not been enough to bring prices down. Brazil is the global leader in production and exports of soybeans, followed by the U.S.

Also in the new report it released on Tuesday, Abiove adjusted its estimate for the 2021/22 soybean harvest in Brazil to 125.4 million tonnes, 9.7% less than in 2020/21. Processing this year was maintained at 48 million tonnes, just above 2021, with production of 36.685 million tonnes of meal and 9.7 million tonnes of oil.

Source: Valor International

https://valorinternational.globo.com

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Embraer completes business combination between Eve, Zanite

Embraer’s Eve and Zanite agreed to merge air mobility businesses — Foto: Divulgação
Embraer’s Eve and Zanite agreed to merge air mobility businesses — Foto: Divulgação

Embraer unveiled that it has completed the business combination between its subsidiary of air vehicles for urban mobility — the so-called “flying cars” — Eve, and U.S.-based Zanite Acquisition. The merger gives rise to a new company, Eve Holding, now listed on the New York Stock Exchange. Embraer closed down 7.98% on the B3.

Embraer Aircraft Holding holds 238.5 million shares of Eve Holding common stock, representing approximately 90% of the existing common stock. The remaining shares are held by Zanite’s market shareholders — by the sponsor and certain third party investors that entered into subscription agreements to purchase common shares at the closing of the business combination, Embraer said.

“The business combination is in line with the company’s innovation and growth strategy, and its consummation reinforces the company’s commitment to achieving these goals,” Embraer said. The merger was unveiled in December last year.

In a note, Eve co-CEO Andre Stein said the transaction provides the startup with “growth capital and positions Eve well to execute its development plans, aided by our ongoing strategic partnership with Embraer.”

“We intend to further strengthen our position as a leading global UAM [urban air mobility] player by delivering an effective and sustainable new mode of urban transportation,” he added.

Co-CEO Jerry DeMur indicated that the closing of the deal puts Eve on course to continue developing its solutions.

Last week, Eve revealed that since December its order backlog rose to 1,825 units from 1,735 electric vertical take-off and landing vehicles (eVTOLs), made through non-binding letters of intent from 19 customers. Among the customers are fixed-wing operators, helicopter operators, sharing platforms, and leasing companies.

Source: Valor International

https://valorinternational.globo.com

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Fertilizer sales expected to decline due to high prices

War intensifies battle between fertilizer giants in Brazil - Murray Advogados

Input retailer Disam, which has 27 stores spread throughout agricultural producing regions in the state of Paraná, recently stopped selling fertilizers. According to head of commercial Carlos Zorzetto, producers do not want to pay the current high prices. In the state of Rio Grande do Sul, another important agricultural producing region, fertilizer application is expected to decline between 10% and 15% this year, with a projected consumption of 4.6 million tonnes. In the state of Mato Grosso, Brazil’s heavyweight soybean-growing region, fertilizer sales are also expected to decline.

The reflections of the new high prices of nitrogen, phosphates, and potassium in 2022, which have already risen between 100% and 200% last year, are beginning to gain concrete contours in the day-to-day in the field at an important time of the year. In the second and third quarters there is a concentration of purchases of inputs, especially for the 2022/23 season, which begins in September.

A projection recently elaborated by consulting company MacroSector, specialized in agribusiness, points to a $7.3 billion expenditure with imports in the second quarter, an amount that, if becomes a reality, will represent an increase of 193% in comparison with the same period of 2021. “We have already seen a 300% increase this year in potash,” says Mário Sérgio do Prado, CEO of Coonagro (Paraná). The cooperative has a mixing machine.

The high disbursement projected by MacroSector for the current quarter, however, is expected to buy only 8 million tonnes – 2% less than the volume purchased by the country in the same period of 2021. In the first quarter there was already a decrease. Brazil bought 8% less chemical fertilizers than in 2021, spending 109% more, Secretariat of Foreign Trade (Secex) data indicate.

In April, partial data showed a 10% increase in the volume imported in relation to the same month in 2021. “There was a movement of anticipation of purchases,” recalls Fabio Silveira, managing partner at MacroSector. There can be a gap of 45 to 60 days between the signing of fertilizer contracts and delivery, especially in a geopolitical context like the current one. The concentration, therefore, does not necessarily represent an evolution in the volume imported during the year.

According to Mr. Silveira, the trend is that the scenario will repeat itself in the third quarter. “Everything indicates that, with this, we may see a reduction in the cultivated area. But there will be no shortage of food,” he concludes. Producers have sought alternatives to maintain productivity per hectare and the margin of their business.

In the state of Rio Grande do Sul, for example, one way to mitigate the impact of prices has been to choose nutrients with less technology applied. “If the producer used a premium formula, he now chooses a less concentrated one,” says Diego Wasmuth, input commercial manager with Cotrijal, based in Rio Grande do Sul. Without this, the drop in application in the state would be 20%, continues Mr. Wasmuth.

“Each soil is different,” says Mr. Prado, with Coonagro. According to the executive, the land in Paraná, for example, has a fertilizer bank due to years of planting techniques. If a producer in the region applies 30% less fertilizer, there will not be a significant impact on productivity this year.

The point of view is similar to that of SLC Agrícola’s CEO, Aurelio Pavinato. In a recent interview with Bloomberg, he told that the company, which grows soybeans, corn and cotton, plans to use between 20% and 25% less fertilizer in the 2022/23 season. “It is possible to cut fertilizer in one year and have zero impact on production,” he said.

In the state of Mato Grosso, the Mato Grosso Institute of Agricultural and Livestock Economy (IMEA) is concluding a survey on input sales. “But there is already a certainty that the application of fertilizers will be lower, especially for those who left it to the last minute,” says IMEA’s superintendent Cleiton Gauer. With the increase, fertilizers now represent 46% of the costs (average so far) in soybean in the state, against 33% in the previous season.

Source: Valor International

https://valorinternational.globo.com

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Inflation expectations put pressure on Central Bank

The challenge of inflation, which was already a tough one, has become even more arduous. Inflation medium-term expectations are increasingly unanchored considering projections of market economists and the inflation priced into financial assets. The consequence is clear in the behavior of the interest rate market, which has come under pressure amid the perspective of even higher rates for a long period of time.

Strong swings in the rates of the NTN-Bs, the government bonds pegged to Brazil’s official inflation index IPCA, shows a worsened perception of inflationary risk ahead. The inflation priced by NTN-Bs maturing in August is close to 9% — it reached 8.73% on Friday. Expectations seem to be increasingly unanchored even for those with longer maturities. The inflation priced by the NTN-B maturing in August 2050, which started the year at 5.19%, reached, at the end of last week, 6.39%.

“The market has been pricing the gasoline lag in recent days. People start to account for the impact of the adjustment on fuel prices and its side effects. From there, they start to include inflation premiums in the curve,” said Pedro Nunes, ACE Capital’s fixed income manager, when justifying the strong upward movement of inflationary expectations in the market. On Monday, Petrobras unveiled an 8.8% adjustment in diesel prices at the refineries but kept gasoline prices unchanged.

The strong rise in fuel prices abroad also helps explain the recent advance of the breakeven inflation, said Maurício Patini, Brazil interest rate manager at Absolute Investimentos. He added that the current inflation data for the first quarter of the year also help explain the rise in market inflation, since they are higher than expected.

According to Mr. Patini, this generates more revisions due to the high correlation with a large part of regulated prices “and shows that the Central Bank’s job has become more difficult, given that inflation is widespread.”

Not coincidentally, interest rate futures have been under considerable pressure in recent days, as the market begins to see more clearly the Selic, Brazil’s benchmark interest rate, at an even higher level for a longer period. “People have the end of the cycle in their minds, but we believe that since inflation is rising, it is difficult for the Central Bank to indicate that it will stop. It is a very big risk. We think that a 50-basis-point hike in the next meeting is the floor,” said Mr. Nunes, with ACE Capital.

For him, the likely adjustment in gasoline prices and a still very pressured external inflation show how difficult Central Bank’s job is now. “I think it is very risky for the Central Bank, as the policymaker, not to keep inflation in check and then be forced to raise interest rates again later on. He can’t take that risk. That is why we think the Central Bank could end up raising interest rates a little more,” Mr. Nunes said.

The concern regarding an even more challenging inflation is also materialized in the projections of market economists. Last week, J.P. Morgan raised its projection for the IPCA in 2022 to 9.1% from 8%; Safra increased its estimate to 8.1% from 7.3%; Itaú Unibanco now sees the IPCA at 8.5%, and no longer at 7.5%; Banco do Brasil raised its projection to 8.5% from 7.8%; and BNP Paribas now expects inflation to end the year at 10%, and no longer at 8.5%.

Part of the recent worsening of expectations reflects agricultural supply shocks; the proximity of the summer in the United States., which is likely to increase demand for diesel; and the possibility of European sanctions on Russian oil. “We are very likely to experience a period of major supply shortages in the next two, three months,” said Carlos Thadeu Freitas Gomes Filho, a senior economist at Asset 1. His concern is translated into a projected IPCA of 9.5% in 2022, with chances of reaching 10% with the gasoline adjustment, and 5% in 2023.

In BTG Pactual Asset Management’s macroeconomic scenario review, economist Stefanie Birman reveals that the firm now projects inflation rates of 9.7% this year and 6% in 2023. “We saw a broader rise in expectations,” she said. Ms. Birman also pointed out that, regarding the IPCA in the short term, BTG Asset expects that, in the March-May period, the IPCA will be 1 percentage point higher than the Central Bank’s projected in the March Inflation Report. Then, the monetary authority estimated that the IPCA between March and May would be 2.1%.

Paulo Val — Foto: Leo Pinheiro/Valor
Paulo Val — Foto: Leo Pinheiro/Valor

The prospect of higher, resilient global inflation is increasingly present in the composition of scenarios, said Paulo Val, chief economist at Occam. “Without a doubt, it will be challenging for our Central Bank. In the past decade and the decade before, global inflation was a disinflation drive for us, and that is an important thing that has changed,” he said. Occam projects the IPCA at 8.4% this year and at 4.6% next year, with an upward bias on both forecasts.

Mr. Val expects another 50-basis-point hike in the Selic in June, to 13.25%. Then, according to him, the Central Bank is likely to wait the elections to evaluate what the new fiscal policy will be. “If they are consolidation policies, that really control spending more clearly and society perceives it that way, I think it eases monetary policy a little bit.”

The fact that inflation has been above the center of the target since the end of 2020 and above the top of the target range since the beginning of 2021 weighs on the longer horizon, Mr. Val said. “It’s a long period already.”

In addition, fiscal policy can be a big question mark in perspectives. “You have this uncertainty about what the fiscal framework will be starting next year, regardless of who wins the elections. This fans inflation,” he said. Besides this and the external challenges already mentioned, there is the fact that emerging countries have a more chronic inflation problem, Mr. Val said. “This whole environment of uncertainty around inflation generates demand for more premium, even over longer horizons.”

Source: Valor International

https://valorinternational.globo.com

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Projections for activity in 2022 improve despite inflation

The analysts’ mood with the Brazilian economy this year has improved, in the wake not only of a higher-than-projected carry over from 2021 to 2022, but also of stronger current data for the first and second quarter. The assessment is that the first half of the year will be positive, despite the discomfort with rising inflation, due to the recovery of employment, the normalization of services and the extra drive to consumption and credit with government measures. For the second half of the year, however, when the effects of monetary policy on activity should become clear, a falling GDP are expected. In addition, estimates for growth in 2023 waned throughout the year.

The Focus survey’s median of expectations for the 2022 GDP went to 0.7% from 0.3% at the beginning of the year – but there were projections of recession. Financial institutions have promoted revisions to numbers closer to 1%, as did Safra (to 0.8% from 0.2%) and Barclays (to 1% from 0.3%) last week. “Retail trade and agriculture have contributed to economic activity in the first quarter of 2022, proving more positive than anticipated,” says Safra, raising its GDP estimate for the period to 0.7% from 0.3%.

The still ongoing normalization of services – especially those provided to households, but also government services – will be a “big driver” for this year’s GDP, especially in the first quarter, points out Wether Vervloet, economist at ACE Capital. The company, who came to project contraction of 0.5% for the 2022 GDP at the turn of the year, now forecasts a 1.5% growth, with 1.1% in the first quarter and 0.6% in the second. “The data that has been coming out over the year has also been strong.”

The S&P Global service sector Purchasing Manager’s Index (PMI), for example, reported its highest growth in 15 years in April and helped push the private sector manufacturing index (composite PMI) to the highest since October 2007, despite the slowdown in manufacturing, which is not expected to make a very favorable contribution to 2022 GDP.

Last Friday, Itaú raised its projection for inflation in 2022 to 8.5% from 7.5%, but kept the GDP at 1%. According to the team led by Mario Mesquita, the rise in commodities, fiscal stimulus and the reopening of the economy are contributing positively, and the first half is expected to be “robust”.

The expectation is 1% for the GDP in the first quarter and 0.6% in the second, “but our daily indicators at the end of the first quarter (with a relevant statistical carry over effect for the following quarter) and the beginning of the second quarter (data from April) indicate a risk of increase of this projection,” Itaú says.

Economists are also warning about employment. “The latest data on the labor market, together with the improvement in some confidence indicators, confirms more dynamism in consumption/services in the coming months,” writes Roberto Secemski, chief economist for Brazil at Barclays.

The effect of measures since the turn of the year, such as the 10.2% hike of the minimum wage and the expansion of cash-transfer program Auxílio Brasil, which replaced Bolsa Família, may have been underestimated at first, according to Rodrigo Nishida, economist with LCA Consultores. Add to that policies for this year – within the electoral logic, he notes – such as the access to the Workers’ Severance Fund (FGTS) and bringing forward the payment of 13th salary, a year-end bonus, for retired people, as well as the apparent dissaving of families.

Igor Velecico — Foto: Silvia Costanti / Valor
Igor Velecico — Foto: Silvia Costanti / Valor

Igor Velecico, chief economist at Genoa Capital, adds that the increases in the state civil service’s wages and the appreciation of the exchange rate, in relation to the beginning of the year, also have an effect on the available income of families. And, in his assessment, credit is still expanding at strong rates. “It is a little more resistant,” he says.

Genoa, which has also projected a 0.5% contraction for the 2022 GDP, now expects a 1.5% increase, and Mr. Velecico indicates that a range up to 2% seems adequate. Fernando Honorato, chief economist at Bradesco, projects 1% for the GDP in 2022, but also did not rule out, during an event, the chance of reaching 2%.

More cautious, Silvia Matos, coordinator of the Macro Bulletin of the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV), maintains the GDP growth projection for 2022 at 0.6% and says she will be surprised with an advance very close to 1% in the first quarter — the FGV Ibre expects 0.4%. “There was a certain bad mood, I never had recession [for 2022]. But the drivers for maintaining growth in the year are weak, services should lose steam, there is very high inflation eroding purchasing power,” she says.

Mr. Nishida, who for now projects the 2022 GDP at 0.7%, says he shares the feeling that activity is stronger, at least in the short term. “But we are a little wary of revising too much upward. It’s still a complicated scenario, with several shocks. Internationally, you have the war and, recently, circulation restrictions in China, which threaten to make supply chains worse again.”

The effect of the strong cycle of interest rate hikes underway since March 2021 is also expected to affect growth in 2023. The projections for next year’s GDP expansion went to the current 1% from 1.8% at the end of December 2022.

Source: Valor International

https://valorinternational.globo.com

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Decolar expands focus on Brazil after $22m in acquisitions in 2 years

In the last three years, of the five acquisitions made, three were in Brazil — Foto: Pixabay
In the last three years, of the five acquisitions made, three were in Brazil — Foto: Pixabay

Despegar, the Argentine travel group that controls Decolar, has increased its efforts to grow in Brazil. In the last three years, of the five acquisitions made, three were in Brazil, said Marcelo Grether, the company’s chief M&A and new business officer. In total, about $22 million were invested to bring Brazilian businesses to the group. The most recent one was the acquisition of ViajaNet, an online tourism agency, for nearly $15 million – the largest purchase to date.

“ViajaNet is a 13-year-old company that knows a lot about technology, which is key for us. We aim to grow a lot in Brazil, acquire more companies and look for deals. And this is a company that, along with Koin [a platform partly owned by Despegar since 2020] will help Decolar to be more important, relevant and competitive,” he told Valor.

Under the terms of the agreement signed to buy ViajaNet, 60% of the purchase price will be payable at closing; 20% in 24 months after the acquisition, and the remaining 20% 36 months after the acquisition. To move forward with the deal, Decolar was advised by law firm Tauil & Chequer Advogados, while ViajaNet was advised by Kroll Corporate Finance.

The talks involving the sale of ViajaNet were first reported by Valor in January. The news then was that the crisis caused by the pandemic in the industry has put the travel agency business in jeopardy and encouraged several mergers and acquisitions in recent months, such as that of Flytour and Queensberry. In January, Valor reported that ViajaNet would be the next and that Decolar was interested in cutting a deal.

ViajaNet reported audited revenues of nearly $30 million in 2019. During 2021, ViajaNet’s online sales accounted for 98% of total sales, with 88% of gross bookings originated in the B2C channel and the remainder via the B2B channel. In addition, 98% of gross bookings were within the air segment of Brazil’s travel market. According to Decolar, this gives the company the opportunity to cross-sell its portfolio of lodging and other travel products to ViajaNet’s customers.

Both companies will maintain their brands and work independently in their commercial management. The closing of the transaction is expected to take place in the second quarter of 2022.

Despegar remains on the lookout for acquisition opportunities, moves that have been encouraged by the crisis caused by the pandemic in the industry, Mr. Grether said. “Three things are important to us in acquisitions. One is the location – our focus is on Latin America, especially Brazil. The companies must add value, with great synergies. In addition, integration is as important as the purchase. When we buy something, it has to be something that adds synergy quickly.”

The company has seen a firm recovery in demand, especially after March, when the omicron variant of coronavirus started to affect the tourism industry, the executive said. He declined to elaborate citing that the group will report results next week.

The company reported revenue of $124.6 million in the fourth quarter, up 134% year over year, but 14% below pre-pandemic levels. The group also saw net loss of $10.7 million in the quarter, compared with $28.8 million a year earlier.

Source: Valor International

https://valorinternational.globo.com

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CPP sees favorable moment for long-term investors

John Graham — Foto: Silvia Costanti / Valor
John Graham — Foto: Silvia Costanti / Valor

John Graham, CEO and president of CPP Investments, doesn’t feel uneasy about investing amid a geopolitical conflict coupled with rising inflation and interest rates in the developed world. At the head of a Canadian investment manager with more than $550 billion in assets under management worldwide, the executive believes that in times like these markets favor long-term investors.

“The best time to invest is when there is fear in the market. The way I think about investments is from the bottom up, from company to company and sector to sector,” Mr. Graham said. In the first half of last year, despite all the concerns brought by the pandemic, CPP took part in several fundraising rounds of Brazilian companies, including Nubank and Iguá, a basic sanitation company.

The best way to protect capital in the face of unchecked inflation around the world is a diversified portfolio, Mr. Graham said. CPP achieves that by having 85% of its portfolio abroad. That amount is divided into real assets, equity stakes and other projects around the world. “I am very grateful that we have built a global footprint, because it helped us a lot during the pandemic,” he said.

The executive believes that real assets such as real estate and infrastructure are naturally protected against inflation. This investment class is precisely the most important for the group in Latin America. The region accounts for 10.1% of CPP’s real assets, 1.2% of investments in private equity, and 8.3% of credit. CPP has $26.2 billion invested in Latin America.

With a strong focus on sustainability-related investments, CPP is one of the controlling shareholders of power generation company Auren in Brazil, together with Grupo Votorantim. One of Auren’s main assets is a hydroelectric power plant, Porto Primavera, which also boasts a renewable power complex that includes solar and wind power generation.

Tania Chocolat, managing director of CPPIB in Brazil, still sees several opportunities in infrastructure in the country and said that the fund is aware of them. “We have achieved greater regulatory stability and today we are in a better position than 25 years ago. There is still a lot of room for investments in sewage systems, for example. It is a way of supporting the country considering the substantial infrastructure bottlenecks we have.”

Mr. Graham recalled that sustainability is much more than just investing in renewable power. “We believe that the global economy will try its best to make a transition to carbon neutrality by 2050. And many calculations are made about whether this will cost $60 trillion or $70 trillion. Either way it’s a big figure, and this economic transition will require patient, long-term capital and partnerships,” he said.

CPP’s portfolio is expected to grow to $1.7 trillion by 2040. The firm’s annualized rate of return is 11.6% for the past 10 years.

John Graham revealed that one of his goals is to have a larger stake in emerging markets in the next five years. “In five or six years, we envision continuing to invest in emerging markets and we expect the percentage in those markets to continue to increase because the importance of emerging countries in global GDP will grow.”

Mr. Graham also said that he sees sustainability and technology as the two main trends of the future. “All companies need to think about what the role of technology is in their industry.”

CPP has expanded its exposure to growth companies, especially startups. “We opened an office in San Francisco to be closer to the U.S. technology industry,” he said.

Source: Valor International

https://valorinternational.globo.com

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