R$1.14bn acquisition was unveiled in October and concluded after approval by antitrust regulator CADE
02/06/2022
Softys, a subsidiary of Chilean group CMPC, took over Carta Fabril, owner of the brands Cotton and Coquetel, on Wednesday and overtook Santher, becoming the leader in the Brazilian market of toilet paper, with a market share close to 30%.
The R$1.14 billion acquisition was announced in October and concluded after approval by antitrust regulator CADE, 15 days ago.
With the deal, the third acquisition by the Chilean group in the tissue paper sector in the country since 2009, Softys Brasil now has 4,000 employees and a production capacity of 370,000 tonnes per year of tissue paper and almost 6 billion units of personal care products in five plants.
Carta Fabril operates two plants, in Goiás and Rio de Janeiro, with a production capacity of 100,000 tonnes per year. The unit in Rio, according to the chief executive of Softys Brazil, Luis Delfim, is today the most modern among the 23 factories of the Chilean group. “This asset was one reason why we decided to make the purchase offer,” he told Valor.
Gonzalo Darraidou — Foto: Silvia Zamboni/Valor
According to the chief executive of Softys, Gonzalo Darraidou, another factor taken into consideration was the possibility of expansion in the two Carta Fabril factories. The projects are already underway and will require about $30 million in investments.
“The idea is to maintain certain [Carta Fabril] brands and enhance Softys brands,” he added, referring to the portfolio analysis that is underway. It is already certain, however, that the Cotton brand of toilet paper will be maintained, given its strength in the Rio de Janeiro market.
According to Mr. Darraidou, efforts are now focused on integrating operations and capturing the relevant synergies that have already been identified. Therefore, today, Softys says it is not evaluating new acquisitions. Despite that, the company has been named as one of the potential buyers of Kimberly-Clark assets to be put up for sale in Latin America.
Softys owns the brands Elite, Kitchen, Sublime, Babysec, and Ladysoft, among others. With the acquisition, plus investments in expansion, it will increase its diaper production capacity to 2.5 billion units per year, similar to that of leaders Procter & Gamble (P&G) and Kimberly-Clark in Brazil.
Companies will invest more than R$2 billion in two projects with total capacity of 738 MWp
06/02/2022
Adriana Waltrick — Foto: Silvia Zamboni/Valor
The Chinese interest in the Brazilian power industry is confirmed with yet another acquisition by Spic Brasil, a subsidiary of the state-owned State Power Investment Corporation of China (Spic), this time in the solar segment. The company bought controlling stakes of 70% in two greenfield solar projects from Canadian Solar and will invest more than R$2 billion. The acquisition is subject to approval by the antitrust regulator CADE.
The plants have a generating capacity of 738 megawatts of power. The largest project, Marangatu, is located in Brasileira (Piauí) and will have an installed capacity of 446 MW. The smaller one, Panati-Sitiá, in Jaguaretama (Ceará), will have 292 MWp of installed capacity.
The plants will be able to generate electricity equivalent to the annual consumption of more than 900,000 homes. Spic operates in thermal, hydro, and wind generation, and this is the company’s first foray into the solar segment in Brazil. Worldwide, the group has extensive experience in the sector. For Canadian, the sale is expected to monetize 2.3 GW of power in scaled solar projects in Brazil.
CEO Adriana Waltrick told Valor that the company intends to be among the three main private-sector players in power generation, with about 10 GW installed by 2025 and growth in renewable sources.
If everything goes right, operations are expected to begin by the end of 2023, increasing net operating revenue by 12% and jumping to almost 4 GW of capacity from the current 3.1 GW, in addition to 1.7 GW of wind and solar in the pipeline.
“Brazil has a great potential in solar and wind. However, we have several goals in Brazil and worldwide to reduce fossil fuels. As a group, we have several goals to neutralize our carbon footprint by 2030,” Ms. Waltrick said.
Of the amount invested, Spic intends to fund 60% with project finance and 40% with equity, split between Spic (70%) and Canadian Solar (30%). The executive understands the current situation of high-interest rate and capital cost increase but considers that this is a long-term investment in a temporary context.
“All the funding is being contracted. We expect to close the deal in the next 90 days, so all funding and equity structures will be advanced”, Ms. Waltrick said.
The strategic partnership between the companies marks Spic’s entry into the solar segment and will lead to a joint venture in the future, the executive said. She knows that at the current moment the production chains of the solar segment are under pressure due to intermittent operations in Asian factories, lockdown measures in China, and the escalating cost of international freight, which can make capital expenditures oscillate.
“The economic situation is challenging in all global logistics and supply chains, and for the power industry as well. But we have brought one of the world’s largest solar implementers, and we are the world’s largest solar operators.”
Because these are centralized generation plants, that is, large, she believes that scale makes the difference in the acquisition of equipment. The choice of technology has not been defined but is in the final phase.
The bet of the Chinese on this asset shows that even in adverse issues, the electric sector is still the crown jewel. Since the purchase of Pacific Hydro, controlled by the government of China, it owns the wind farms Millennium and Vale dos Ventos (Paraíba). In 2017 it bought the São Simão plant for R$7.18 billion. And in 2020 it bought a slice of the thermoelectric projects GNA I and GNA II, in addition to participation in future expansion projects GNA III and GNA IV.
There are many assets in the market for sale — such as hydroelectric plants of EDP, Ibitu, and Rio Energy, among others — and Ms. Waltrick does not deny that she is mulling over new mergers or acquisitions. However, she does not reveal what she is considering. “We are ambitious. We want to look at the sector very carefully.”
Unemployment rate falls to 10.5% in April, to 11.3m people
06/01/2022
The labor market continued to surprise analysts in April. Even though the projections foresee a worsening in the second half of the year, in line with the deceleration of the wider economy, the better-than-expected numbers have already led some to place a positive bias towards unemployment at the end of the year.
According to data from the Continuous National Household Sample Survey (Pnad Contínua), it fell to 10.5% in April from 11.1% in the quarter ending in March, reported the Brazilian Institute of Geography and Statistics (IBGE). Thus, 11.349 million Brazilians are still unemployed in the country.
The result was below the projections compiled by Valor Data, which ranged from 10.7% to 11.2%, with a median of 11.9%.
Compared to the previous quarter, the number of unemployed fell by 5.8% to 11.349 million. This is the lowest level since early 2016. The employed population advanced 1.1%, to 96.5 million people, the highest since records began, in 2012.
Adriana Beringuy, coordinator of IBGE’s Household Sample Survey, pointed out that the growth of the employed population has been spreading among the different economic activities and remained high in the first months of the year, contradicting the expected seasonality.
In her assessment, this shows that the economy is somewhat closer to normality, with less effect of the pandemic. “Information technology activities provided the necessary infrastructure for the economy in this more virtual environment. Now, especially in the second half, other activities have signs in the occupation, such as services,” she said.
Despite the improvement, the occupation level (the proportion of employed people within the working-age population) is still at 55.8%, a far cry from the levels of 57% in 2015 and 58% in 2014.
Caio Napoleão, an economist at MCM Consultores, highlights the fact that the unemployment rate fell despite a rapid recovery in the labor market participation rate. “This drop in the unemployment rate had been occurring very much at the expense of a labor force that remained stable, as well as a participation rate that had been stuck near 62% since the third quarter of last year, seasonally adjusted, one point below the pre-pandemic level,” he said. “Only there was a sharp correction last month, the participation rate came back to 62.7%. Even so, the employed population grew to the point of more than compensating for this,” he points out.
According to Mr. Napoleão, one factor that may have helped the participation rate jump in the month was the return to in-person classes, which led mothers who previously ended up staying at home to care for their children to the labor market. “That is a strong hypothesis, because the participation rate was more lagging for women than men,” he notes.
For Tiago Barreira, an economist at iDados, the market improvement still has some room to grow, given that the labor force has not yet resumed its pre-Covid crisis levels. Still, this trend is expected to lose some strength, given that the participation rate is already close to that seen at the pre-pandemic level – 62.4% currently, compared to 63.7% at the end of 2019.
Mr. Barreira also recalls that the participation rate may stabilize above the levels seen before the pandemic, since, because of issues such as the Social Security reform, which encouraged people to stay longer in the labor market, the participation rate may be on a structural upward trend.
In Santander’s calculations, the monthly unemployment rate fell to 9.4% in April, seasonally adjusted. This is the first time the indicator falls below double-digit levels since December 2015. And, despite predicting a slowdown in job generation in the second half, because of issues such as the monetary tightening conducted by the Central Bank, the April result puts a positive bias to the bank’s projection for the Brazilian labor market. At the moment, the average rate for 2022 is at 12.7%, but already under revision.
The same happens with MCM’s estimate, currently at 10.2%. “These are numbers that still can change, given that recent data signal something better,” Mr. Napoleão said.
On the other end, Tendências understands that the improvement observed in the last few months is “fruit of a return to normality,” and not a change in market dynamics. In a report to clients, economist Lucas Assis considered that the rise in interest rates, as well as domestic political uncertainties and the global slowdown expected in the second half of the year should reverse the current trend, causing the unemployment rate to reach 10.8% by December.
Official tells Valor measure is about wrongdoings, not deforestation
06/01/2022
Five years after imposing stricter controls on the sales of Brazilian chicken meat, the European Union has signaled that it has no plans in sight to suspend the measure, despite persistent demands from the Brazilian side.
In Brazil, the complaint is that the EU’s Directorate General of Health (DG Health) is, in practice, linking sanitary and phytosanitary measures (SPS) to deforestation issues, delaying the search for a solution to the problem, which affects millions of dollars in business.
To Valor, the EU said that “this is not correct”. According to a senior European official, “the current measures [of strengthened control over meat] are related to cases of fraud involving authorities and to the results of successive audits that have identified repeated deficiencies that demonstrate the unreliability of the Brazilian certification system.”
The official recalled that the strengthened control — 100% documents and 20% through physical and laboratory inspection (in Brazil and the EU), something unusual — was adopted in 2017 after the operations “Carne Fraca” and “Trapaça” in Brazil, which had negative results in the EC audits in the segments of meat and fish.
The source noted that while the fraud scandals involved officials at the Agriculture Ministry in illegally exporting cargoes to the EU and other countries, the 2017 audits showed “that the deficiencies identified by previous audits had not been corrected, despite the promises made.”
According to the EU, “in these circumstances the protective measures cannot be lifted and the authorization of additional sellers (re-authorizing the pre-listing procedure), additional products (pork, dairy, eggs) or additional production areas (for export) cannot be considered until a follow-up audit shows that corrective measures have been implemented to rectify the deficiencies and prevent fraudulent export practices.”
“For the EU, only a favorable outcome of an audit in Brazil will allow the European Commission to propose to the 27 member states to lift the current control on Brazilian chicken meat.” The commission has included an audit in Brazil in its work program for 2022. However, it has already warned that the feasibility of doing it “will depend on the evolution of the audit backlog caused by the pandemic and the need to ensure the safety of auditors in the current epidemiological situation of Covid-19.”
The strengthened control causes an additional cost that is ultimately discounted from the price of chicken. The EU mentions this “lack of confidence” in the Brazilian sanitary certification system (and despite all the controls), but also has Brazil as the supplier of 20% of all the chicken meat it imports.
Between January and April this year, the block imported 71,700 tonnes of Brazilian chicken meat, 27.8% more than in the same period last year, according to the Brazilian Association of Animal Protein (ABPA).
The finding, both in Brazil and in Europe, is that there has been a deterioration of the dialogue with DG Health of the EU. The situation has worsened since November, when Brazil denounced the EU at the World Trade Organization (WTO) because of “discriminatory sanitary controls for the detection of salmonella in salted chicken and turkey meat with pepper.”
There has been a “gigantic logjam” in bilateral talks ever since, deepening the sanitary mess started under the previous administration. In 2017, soon after the announcement of “Carne Fraca”, the EU sent an audit team to Brazil, with Irish veterinary inspectors, despite all the pressure that European producers were putting in the opposite direction.
The Europeans inspected several businesses and returned with a good impression. A draft of a positive report was ready when “Trapaça” broke out, involving food processing giant BRF and third parties laboratories that controlled the exported chicken meat.
The Irish vets felt betrayed, as they were not informed that this additional Federal Police operation was underway. Officials from the Ministry of Agriculture knew, as they were following the Federal Police, but apparently were forbidden to inform them. The Irish inspectors were left with their reputation threatened, since they advocated a return to normal relations with Brazil.
The situation was made worse when the then Minister of Agriculture, Blairo Maggi, did not remove BRF from the list of exporters even after the scandal involving the company. This forced the EU to issue a specific regulation removing all the company’s units, and a few others, from the list of exporters to the European market, which is unusual. Normally, Brussels suggests the blockade and the exporting country itself removes the meat packing plant from the list, which makes it easier to return.
After this, BRF, which has long ensured that there were no wrongdoings in its products, filed a complaint at the EU court disputing the regulation that barred its sales. It failed and was banned from exporting for human consumption, while entering in the radar zone of European surveillance. On top of that, the Europeans don’t even want to schedule meetings to talk about the suspension of the strengthened control.
Roberto Campos Neto said new bill will improve proposals already in Congress
06/01/2022
Roberto Campos Neto — Foto: Billy Boss/Câmara dos Deputados
Central Bank President Roberto Campos Neto highlighted the regulatory challenges regarding crypto-assets and said the monetary authority will regulate brokerages in the segment. “We like the bill [making its way] in the Chamber [of Deputies] and the Senate. We will have a third [bill] to improve it,” he said during a public hearing at the Chamber on Tuesday.
Mr. Campos Neto pointed out that “crypto-assets came with blockchain” and that he expects “great gain from this technology.”
The Central Bank is working on developing its own digital currency with encrypted technology, which will be able to combine functionalities similar to those of cryptocurrencies. The digital real project is in its initial testing phase. Before the new version of the Brazilian currency is issued, the monetary authority hopes to have formal authorization to use the new technology.
Regarding monetary policy, the president of the Central Bank stated that “raising interest rates is always bad” and “we end up having to restrain the economy and affect an important part of productivity,” but pondered that living with high inflation can generate a greater dose of monetary tightening later.
“Our job is always to do our best to bring inflation to the target, but with the minimum of destruction to the productive fabric of the economy,” he said. Mr. Campos Neto pointed out that the monetary authority can make two mistakes: go too high or too low. In the second case, according to him, inflation tends to get out of control, which then needs to be corrected. “The last two times this happened, Brazil had to go into recession to correct this,” he said.
Mr. Campos Neto also spoke about discussions regarding the possible change in the inflation target in Brazil but emphasized that the monetary authority’s mandate is to pursue the percentage defined by the National Monetary Council (CMN). “There is a provocation in the sense that inflation in the world is higher, so would it not be necessary to change the target [in the country]? It’s a CMN issue, the Central Bank is one vote of three, our mandate is to follow the target.”
According to him, the current regime brings credibility to the monetary policy. “The target is decided at the CMN. When we see next year’s target, Brazil is closer than other countries. One element of price formation is based on expectations,” he said. Earlier, Mr. Campos Neto had cited a “new literature” on the subject but refused to comment.
In his presentation, Mr. Campos reinforced that more volatile products, such as food and fuel, which are less sensitive to monetary policy, ended up contaminating other items within inflation, which led the Central Bank to respond more forcefully, raising interest rates more. “In the core [of inflation] we take out what is volatile, and when it is high, it means that the volatile items have contaminated extensively. Today the cores run at 10%, we see several chains with contamination.”
Mr. Campos Neto also pointed out that the food and commodities shock, worsened by the war between Russia and Ukraine, is positive for the country, which is an exporter of these products but creates a social problem. About economic activity, he said he expects the projections for this year’s GDP growth to be revised upwards.
Source: Valor International – https://valorinternational.globo.com
After arriving in Brazil with the purchase of a paper mill in 2020, the European group Klingele Paper & Packaging is investing in cutting-edge technology to grow in the Brazilian market of corrugated boxes, particularly in the segment of premium packaging for fruit.
With investments of €3 million, Klingele Embalajes Canarias, a company of the group with headquarters and factory in Tenerife, Spain, is receiving a new, high-end German rotary printing press to meet the requirements and quality demands of large exporters of fruit in Brazil.
In this market, packaging can cost more than the fruit itself and the new equipment offers five-color printing, the most sophisticated in the field. “We are investing in the machine because of Brazilian fruit exports,” said Kelly Ribeiro, the regional commercial manager at Klingele Canarias.
In the next harvest, the expectation is for sales of 12,000 tonnes of boxes in the country. Besides farmers, clients in the fish farming and animal protein sectors are on the radar of the company, which has a conversion capacity of 30,000 tonnes a year in Spain.
The boxes supplied to the Brazilian market leave from Tenerife using the kraftliner produced at the Nova Campina (São Paulo) plant and shipped to the box-converting unit in Spain, among others of the group. The São Paulo-based unit has an annual production capacity of 162,000 tonnes of kraftliner.
The group, one of the major European manufacturers of paper and packaging, arrived in Brazil in the middle of the pandemic by buying a plant Klabin had acquired from International Paper (IP) Embalagens, for R$196 million.
For now, the executive said, there are no plans to install a conversion unit in the country. In the future, when the business has scale, this possibility can be evaluated.
According to Ms. Ribeiro, who joined Klingele nine months ago with the goal of expanding sales in Brazil and other countries in Latin America, the fact that customers in the country take advantage of the “drawback” regime when importing packaging and exporting fruit also favors the current model of exporting kraftliner and importing boxes.
In the next few days, the executive will visit the Bahia Farm Show, an agribusiness event that brings together fresh fruit producers, and will visit large producers in Mossoró (Rio Grande do Norte) and Petrolina (Pernambuco). The ambition is to return to Tenerife with new clients and contracted commercial representatives.
With consolidated revenues of more than €1 billion last year, the Klingele group bets on the integration of operations to remain competitive and protect itself from the risks of paper shortages, as seen today in the world, and the pressure of costs. Because of the integrated production model and a competitive contract with MSC to serve the Brazilian ports, says the executive, Klingele managed to freeze the prices of packaging for fresh mango and lemon until July, despite the historical prices of kraftliner and the escalating freight.
High education companies are going to court to open medical schools, without going through the scrutiny of the More Doctors program law, which defines several requirements. Since last year, 400 places were authorized after injunctions forced the Education Ministry to analyze requests to open these courses without taking part in the federal program. With the favorable decisions, companies now seek similar injunctions and have already filed 180 suits, according to Anup, a trade group that represents private universities.
Lawyers are telling judges that the private education sector is free, so schools should not be forced to launch medical courses through public calls, as required by the More Doctors program and unlike what happens with other courses. Another justification is that there is a shortage of doctors in the country, with the need to call Cubans to regions far from large cities. The opening of medical courses was halted in 2019, in a moratorium valid by April 2023, according to a federal law.
Three education companies launched medical courses since last year. Bahia-based network UniFTC got 199 places in the Feira de Santana unit. Faculdade de Educação de Jaru, in Rondônia, was authorized to offer 120 places; and college Dom Bosco, with a unit in São Luiz (Maranhão), got 84 spots. These three educational companies obtained 403 places in the past year and a half. For comparison purposes, in this same period, 800 More Doctors spots were released through a public call. These 800 places were authorized in 2018, but only now the Education Ministry released them.
Educational groups that take an injunction to open medical courses manage to circumvent the More Doctors program and the five-year moratorium. The ordinance that prohibits the opening of new medical courses for public and private institutions until April 2023 was instituted after strong pressure from the Federal Council of Medicine, which complained about the quantity of low-quality courses and excess of students. In 2020, there were 142,500 students enrolled in medical courses, in the private sector.
About 75% of the private courses are located in São Paulo, Minas Gerais, Rio de Janeiro, Santa Catarina, Bahia and Rio Grande do Sul, since the institutions opted for the most populated regions. This is one reason for the current shortage of doctors in the North and Northeast regions, and in smaller cities. Given this scenario, in 2013 the government created the More Doctors law, which defined that private colleges can only operate medical courses in cities lacking professionals. Sixty-seven municipalities were chosen, and the colleges selected to operate in these cities must make commitments, such as transferring 10% of revenues from tuition fees for the municipalities to invest in public health. To serve the students, the city’s public infrastructure must have, for example, at least five public beds for each student, a hospital with 100 inpatient units, among other requirements. If the transfers are not sufficient, the college can invest more funds. By obtaining a court injunction, colleges are not obliged to follow these rules and can open their units in larger cities, which end up attracting more students.
“More Doctors program is a socially-oriented public-private partnership. The program serves private schools, but requires investments in public health in return. When another company manages to open medical courses through an injunction, this public policy is broken,” said Elizabeth Guedes, head of the Anup, which has already complained to the ministries of Education and Health, the Federal Attorney General’s Office (AGU) and the Federal Council of Medicine (CFM). “These courses are not illegal because they took court injunctions, but they are immoral,” she added.
“With litigation, the only restriction of More Doctors is no longer being met, which is the public call, which defines the region to install a medical school by social criteria,” said the physician Julio Braga, coordinator of CFM’s Medical Education Commission.
Bahia-based UniFTC Network, which obtained 199 places in Feira de Santana, says that the reason for filing a suit was the lack of medical schools in the region. “Health indicators already clearly demonstrated the lack and the social demand for the formation of doctors in the region, which has more than 3 million inhabitants. Until then, there was only one medical course at the State University of Feira de Santana, with only 35 places,” said Ihanmarck Damasceno, academic vice-president of UniFTC.
Esmeraldo Malheiros, a lawyer specialized in education who worked 35 years at the Education Ministry, says the injunctions are fair. “Private education is free, and educational institutions are free to operate. You can’t create barriers and have a protected market,” said Mr. Malheiros, whose office was the first to obtain a favorable decision, which encouraged others to file similar requests. Another point raised by Mr. Malheiros is that the requirement of the More Doctors calls for bids benefits large groups, which can prove better cash flow. “The large groups, which have more regulatory experience, got 70% of places authorized,” he said.
According to data from Hoper, a consulting firm specializing in education, in 2020 there were 142,500 students enrolled in private medical courses, 27.6% of them concentrated in eight major groups: Afya, Ânima, Cruzeiro do Sul, Kroton, Ser Educacional, Tiradentes, Uninove, and Yduqs.
The lawyer says that injunctions are for the Education Ministry to analyze the requests, not to approve the courses. “The ministry is free to approve them or not. If the course is bad, it rejects it. The issue is that with More Doctors, the Education Ministry doesn’t even analyze the request,” Mr. Malheiros said. The head of Anup argued that the ministry has the autonomy to analyze the requests, but the injunctions exert additional pressure. After receiving and analyzing the documents from the request to open a course, Education Ministry representatives make several visits to the college that made the request. By the normal rites, this process takes months, even years.
The wave of lawsuits may affect the market, which has already been suffering the impact of increased competition. The average tuition fee remained around R$8,300 and R$8,400 between 2019 and 2021. In the previous seven years, there was an upward curve, according to Hoper.
In 2020, the ratio of candidates for each place was 8.6 in the private sector. In 2013, there were 31 students vying for each medical school place. The estimate is that the year will end with 239 private courses, practically twice as many as in 2014.
The Education Ministry and Faculdade de Educação de Jaru did not immediately reply to a request for comment. Dom Bosco declined to comment.
The risk-averse behavior in financial markets around the globe this year — together with the upward movement of short and long-term interest rates both in Brazil and abroad —generated a strong deterioration in financial conditions. The effects on the economic activity have not been strong so far, given that measures adopted by the government and the process of reopening the economy have boosted growth in the short term. But the impact is likely to be felt in the second half of the year.
ASA Investments’ Financial Conditions Index (FCI) is close to the maximum since records began, in 2009. Several times this month, it beat the record of 2.28 of April 8, 2011 — on the 9th of this month, it reached 2.44. This Monday, it showed a slight accommodation, to 2.13, but still at a very high level.
The indicator combines price components (commodity indexes, oil prices and exchange rates) and market variables, such as national and international stock indexes, as well as the behavior of interest rates in Brazil and overseas. When they are negative, financial conditions are expansionary – favorable to the economic activity. When they are above zero, they indicate tight conditions, that is, contractionary.
“The trend seen since last year is a reversal [of financial conditions]. At the end of 2020, the indicator reached the negative minimum and began to reverse with quite impressive speed in the direction of the contractionary territory. At the beginning of this year, it was still negative and was advancing quite a bit [until reaching the positive field],” said Leonardo França Costa, an economist at ASA Investments.
The main movement towards the contractionary territory was oil prices, which skyrocketed since the beginning of the war in Ukraine, says Mr. Costa. In addition, the Brazilian and international interest rates have risen sharply since the beginning of the year. While the 10-year interest rate is around 3% in the United States, the return of the 10-year German Bund already exceeds 1% — much higher levels than those seen at the end of last year. In Brazil, almost the entire yield curve is around 12%.
Given the movement to higher interest rates around the world, equity markets have suffered this year, which also helps to tighten financial conditions.
Analysts, however, evaluate that the financial conditions may reach even higher levels, given the ongoing monetary tightening in the United States, which could affect Brazilian economic activity, especially in the second half of the year.
From a quality point of view, there has been a worsening in almost all the most common components of financial conditions this year, said Leonardo Porto, Brazil head economist at Citi. Besides interest rates and the global stock markets, he highlights the behavior of country risk, measured by the five-year Brazil Credit Default Swaps (CDS), which is around 230 points against 205 at the end of 2021 at the same time that the Volatility Index VIX, considered Wall Street’s “fear barometer,” also rose strongly.
“These are variables that point to tighter financial conditions that hurt economic activity. So far, all of them are heading in the same direction, of turning the financial conditions indicator into a more restrictive one throughout this year”, he says. According to Mr. Porto, the only factor that has helped contain an even more restrictive environment is the strong performance of commodities, important for an exporter country like Brazil.
Still, the economic activity seen in the GDP to be released on Thursday, however, is likely to show acceleration. The median of the projections collected by Valor indicates a 1% growth in the first quarter and 1.4% for the whole year 2022, while two weeks ago, the market expectation was that the GDP for this year would be around 0.8%. The expectation for the 2023 GDP fell to 0.7% from 0.9% on May 12.
Eduardo Yuki — Foto: Ana Paula Paiva/Valor
“We had some temporary effects, which helped the activity in the short term,” said Eduardo Yuki, executive superintendent of macroeconomics at Safra. He cites the positive performance of the soybean harvest at the beginning of the year and government programs, such as the payment of the salary bonus moved ahead, as well as the year-end bonus called thirteenth salary, for retirees and pensioners, and the authorization to withdraw money from Workers’ Severance Fund (FGTS).
“All of this helps the activity in the short term. The point is that, if you bring forward factors such as the bonus and the thirteenth salary, you won’t have them up front and, when the end of the year comes, we will have two effects together, since those payments were moved ahead and we will see the impact of the financial conditions more strongly,” warns Mr. Yuki. Safra believes that the economy is expected to have a much more moderate performance in the second half “and, for this reason, we have a view that an important part of what happened to the activity was supported by temporary effects,” the economist said.
He does not see room either for a big relief in financial conditions ahead. To the extent that the policy interest rate Selic rate may rise to 13.25% and remain around 13% for quite some time, in Safra’s view, the economic activity throughout 2023 will also be affected.
“Our perspective, looking at how the indicator is constructed, is that it will tighten a little more. One of the premises is precisely in global conditions, because we know that the U.S. Federal Reserve has a cycle of interest rate increases to make. This could tighten financial conditions in the U.S. and, consequently, ours as well. So, the contractionary territory is expected to remain,” Mr. Yuki says.
For the Safra economist, next year could start with a modest performance around the globe, “precisely because of the need for the world as a whole to make a monetary tightening cycle to control price pressures.” Consequently, in Mr. Yuki’s view, this environment is likely to make Brazilian GDP grow below potential in 2023. “It is the pace that will help the disinflation of the economy over time.”
In the view of Santander Asset Management’s chief economist Eduardo Jarra, the tightening of financial and monetary conditions into the economy will be seen more intensely in the second half. He emphasizes that the current environment takes place at a level of risk aversion different from the one experienced in recent years and that the uncertainties that are already present in the scenario will remain, especially those related to inflation in the United States and the path of U.S. interest rates.
“It seems that we will carry those questions with us as the economy moves towards a more advanced stage of the economic cycle. The international environment will probably continue to be heavy and in Brazil the electoral environment in the second half will likely generate an increase in volatility,” points out Mr. Jarra.
Evaluating the scenario as a whole, the economist says he believes there is an indication of even tighter financial conditions in the second half. “We may see negative GDP readings in the second half [of 2022], and for next year we are expected to continue to carry over the effects of tight monetary policy,” he notes. For him, there may be a scenario in which the Selic only begins to be reduced in the second half of 2023. In addition, Mr. Jarra points out that, although the international scenario may become less uncertain, “it is still not a positive environment.”
Economists were taken by surprise with the data for the Brazilian economy, especially in March, and raised their projections for the GDP in the first quarter of this year, opening space for a more positive view of the activity both in the following three months and in 2022. The year, however, is likely to have two opposite configurations: a stronger economic performance in the first half of the year and a likely technical recession (two consecutive quarters of falling GDP at the margin) in the second half.
The GDP is expected to have grown 1% in the first quarter of 2022, compared to the fourth quarter of 2021, seasonally adjusted, according to the median of the projections of 82 financial institutions and consulting firms consulted by Valor. Almost half of the respondents bet on even higher increases, with the maximum reaching 2.6%, for a minimum of 0.1%. Only two banks expect a drop. In comparison with the same period in 2021, the median of the projections of 76 institutions indicates a high of 1.7% from January to March this year.
The forecasts for the GDP in 2022 have moved a lot and in a short time. Since the last Valor survey, with 72 institutions and published on May 12, the median went to 1.4% now from 0.8%, with 96 estimates. The projections vary from zero to 2%. The Central Bank’s Focus survey, which serves as a compass for the market and the monetary authority, usually has between 80 and 100 respondents, but has not been published since April 29 because of the civil servants strike.
The GDP increase in the first quarter is expected to be boosted on the supply side by services, which, according to the median, rose 1% compared to the fourth quarter of 2021 (3.3% compared to the first quarter of last year). “Transportation is likely to lead, which has to do with the return of circulation and a boost from e-commerce to the postal services. And there is a big highlight for “other services’, which include those provided to families and which went through a certain euphoria after the omicron wave,” says Tiago Negreira, partner and economist at Macro Capital.
Even trade — which is part of services in the National Accounts — will probably offer a positive contribution for the quarter compared to the end of 2021, he says. “The drop in unemployment seems to be contributing, with recovery in the total wage bill, in addition to the government’s own aid programs, authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts, but that is something for the second quarter.”
The recovery in services (although somewhat delayed by the omicron) was already on the radar, so that, for Pedro Ramos, chief economist at Sicredi, there were surprises in other segments as well. “Industry had shown weakness in previous quarters and there was a moment when it was thought that agribusiness might weaken, because of crop failures, but we should still see growths on the margin and we may have record harvests in the year,” he says.
Valor’s survey indicates a rise of 0.4% in industry and 1% in agriculture in the first quarter, compared to the three immediately preceding months. In relation to the first quarter of 2021, however, they are expected to fall by 1% and 3%, in that order.
On the demand side, in line with the expansion in services and a more resilient trade, the positive contribution to the GDP from January to March should come from household consumption. The median expectation is for 1% growth in the margin and 2.5% in relation to the same period in 2021.
The Gross Fixed Capital Formation (GFCF), on the other hand, is expected to remain stagnant in the first quarter, which, according to economists, is not necessarily a bad thing: “It rose 17% in 2021, it was at a very high level. If you think that this investment was raised based on interest at 2% and a lot of transfer to the economy, we could imagine that, when the Selic reached the level that we project, this will go down,” says Mr. Ramos.
The GDP of the first quarter will be very important for the growth of the year, according to Luana Miranda, economist at GAP Asset. Based on data from the fourth quarter of 2021, the carryover for 2022 was 0.3 percentage points. With the consolidation of the first quarter, for which GAP expects a high of 1.3%, the carryover would rise to 1.9 points, according to Ms. Miranda.
“We do not have a high projection of 1.9% of GDP this year because we expect a fall in the second half due to the lagged impacts of monetary policy,” she says, predicting a 1.5% growth in Brazilian activity in 2022.
Ms. Miranda recalls that, after the better-than-expected result in the first quarter of last year, there was a wave of optimism that pushed up the GDP estimates for 2021. One has to be careful with that, she says. “I believe the first half of the year is given and will be good. The question is what the impact will be in the second half.”
Preceding data shows household services still in the spotlight in April, Ms. Miranda says. For the second quarter GDP, the median expectation of economists is a deceleration, but there would be a rise of 0.4%, compared to the first quarter.
“The carryover from the first quarter to the second quarter is positive, but the growth factors are already starting to become more limited,” says Mr. Negreira, with Macro Capital. The manager, who projects 1.9% for the GDP in 2022, expects, as do most economists, contractions in the third and fourth quarter of the year.
Besides monetary tightening, the exhaustion of the process of reopening services and the uncertainties surrounding the electoral process will probably weigh. One question is also whether the labor market will remain resilient given the worsening financial conditions, Ms. Miranda notes. At some point, she says, this will hit the companies.
Tendências Consultoria, which has a more modest GDP estimate for 2022, of 0.6%, highlights the role of inflation, systematically revised upwards, in the perspective of weaker quarters ahead. The international scenario is not very helpful either, points out economist Thiago Xavier. Despite bringing commodities up, it has been, he says, the stage for downward revisions of growth, inflation upwards, with monetary tightening. “The world, from the point of view of growth, has been a frustrating and limiting factor for the Brazilian GDP.”
The inflationary scenario already called for caution and indicated a great challenge ahead for the Central Bank. The concerns of market players, however, have increased as inflation has raised a red flag, with an even more persistent character, while the monetary authority has given signs that the end of the tightening cycle is near. The deterioration of the scenario continued to materialize in market projections: the escalation of inflation expectations continued and an increase in the Selic policy interest rate beyond June entered the debate strongly.
Between May 24 and 27, Valor consulted 101 financial institutions and consultant firms about projections for inflation and policy interest rates this year and in 2023. Since the last survey, published on May 12, the median of expectations for Brazil’s benchmark inflation index IPCA increased to 8.9% from 8.35% this year and to 4.5% from 4.2% in 2023.
Regarding the Selic rate, the median of the estimates remained at 13.25% at the end of this year but increased to 9.63% from 9.5% at the end of 2023. The simple arithmetic average of the projections for the Selic at the end of this year also rose, to 13.48% from 13.39%.
With the basic interest rate at 12.75%, the Central Bank has contracted a new increase in the Selic rate in the June meeting, at the same time that it has given increasingly clear signals that it wants to end the monetary tightening cycle that started in March 2021. Nevertheless, the monetary authority has started to adopt a more data-dependent strategy.
Part of the market has migrated to a scenario foreseeing a hike in August. Two weeks ago, 25% of the estimates indicated a rise in interest rates in August. In the current survey, this scenario is already defended by about 36% of the institutions.
Fernando Rocha — Foto: Leo Pinheiro/Valor
“There is a desire to stop, but we still have very bad inflation. In every month, the [mid-month inflation index] IPCA-15 and the full IPCA have been surprising us negatively,” says Fernando Rocha, chief economist at JGP. He expects the Central Bank will try to end the cycle but will not succeed. That’s why JGP projects the Selic rate at 14.25% at the end of the cycle.
“I see the risk of the Central Bank stopping and inflation expectations getting even worse. If current inflation were a little better, showing signs of slowing down, I believe it [the monetary authority] would be more comfortable, but it is getting worse and spreading,” observes Mr. Rocha. The scenario projected by JGP is one of the most complex for disinflation in 2023, as it foresees the IPCA at 5.6% next year.
Brazil’s mid-month inflation index IPCA-15 for May scared the market about the dynamics of inflation. The acceleration of the cores raised the alarm among economists regarding scenarios of even more persistent inflation ahead.
“The IPCA-15 had a very bad quality indeed, really bad. The Central Bank, in fact, has already raised interest rates a lot, but we are afraid that it will end up stopping the cycle with an inflationary situation of this nature. This could further de-anchor expectations”, points out the chief economist at Truxt Investimentos, Arthur Carvalho, whose projection indicates the Selic at 13.75%.
He argues that it is better for the Central Bank to keep raising interest rates now in order not to run the risk of having to raise the Selic even more in the future due to the chance of further de-anchoring of expectations.
Mr. Carvalho notes that there has been a change in the monetary authority’s strategy, which has become more dependent on data. “Before, the Central Bank was very explicit and now it is no longer being so, in order to try to see if, as time goes by, it can get some evidence that the monetary policy is working. So the best thing right now is to slow down to buy time,” he argues.
Claudio Ferraz, chief economist for Brazil at BTG Pactual, is also attentive to the unfavorable surprise of the IPCA-15. “A highly disseminated inflation, with very high cores, is the kind of composition that leads one to reassess the short and medium-term scenario, impacting longer-term projections,” he says.
The prospect that the cycle of Selic hikes will end with the rate at 13.25% gained less clear features, in the economist’s view. “Although we expect a 50 basis points increase now in June, the risks are up. They have been growing in the sense that we might have another high in August,” he says.
Mr. Ferraz, however, says that clearer signs of an economic slowdown could prevent the Central Bank from extending monetary tightening into the second half of the year. “The debate could grow if the activity data in June and July start to show a sharper weakening. There is still a long period for the Central Bank to monitor economic indicators, but in that sense, it depends on the data.”
At least in the short term, economic activity has shown resilience, despite the tightening of monetary and financial conditions observed since the end of last year. “If demand proves more resilient than expected, the Central Bank’s job will become more difficult. However, we believe that due to the lag in the monetary policy action, of about nine months, most of the effect of the real interest rate tightening will be observed in the second half,” says Andressa Castro, chief economist at BNP Paribas Asset Management.
For her, it is not possible to draw hasty conclusions about the monetary policy action based on the positive surprises of recent months in activity. “In this sense, the main indicators to monitor will be the pace of consumption of excess savings, which has contributed to the resilience of demand, and the performance of the most credit-sensitive sectors, such as construction and discretionary consumption,” she emphasizes.
Ms. Castro, however, notes that if the gap between 2023 inflation expectations and the target continues to increase, it could generate additional pressures on the Central Bank. “According to our models, if expectations rise above 5%, a movement that is already starting to happen, it would be necessary to tighten the Selic more, entering the second half of the year, to avoid an even greater de-anchoring,” she says. For Ms. Castro, this scenario would increase the chances of the Selic approaching 14% — which is not in BNP Paribas Asset’s baseline scenario at the moment.
In fact, de-anchoring of expectations has proven to be even more pronounced. Of 99 estimates collected in Valor’s survey for the IPCA in 2023, 24 already indicate that inflation will end the next year above the target cap.
“There is no longer any discussion about the dangers of inflation spreading. This is already a fact,” says Dalton Gardiman, chief economist at Bradesco BBI. He points out that in his estimate of 8.5% for the IPCA in 2022, some effect of the reduction in sales tax ICMS on fuels and electricity is already considered.
However, there is a prospect of major disinflation next year, given the prospect that global economies — Brazil included — will lose traction in 2023. “The big theme and the biggest challenge in the year 2022 is inflation. I believe that this theme will become growth in 2023,” says Mr. Gardimam. Because of that, he projects stagnation of the economy next year and inflation at 4.5%.
(Anaïs Fernandes and Marta Watanabe contributed to this story)
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