Jose Claudio Securato — Foto: Sergio Zacchi / Valor
Finance executives are less optimistic about the future of the Brazilian economy. In the first quarter, the CFO confidence index (iCFO) stood at 131.6 points, the lowest level since the end of 2020, when it was at 121.3 points. Input costs, domestic market demand, competitiveness and competition, labor costs, and inflation were the main points of concern indicated by the executives.
The data were collected in a quarterly survey by the Brazilian Institute of Finance Executives (IBEF) in partnership with Saint Paul Escola de Negócios. The most recent edition shows that the confidence of executives dropped in the three dimensions analyzed: macroeconomics, sector and company of operation.
José Cláudio Securato, head of the administrative council of IBEF-SP and CEO of Saint Paul & LIT, explains that the data show a short-term concern of executives, heightened by factors such as the war in Ukraine, growth slowdown in China, and the elections in October. He points out, however, that the index remains at a relatively high historical level and that the executives’ view on investments, for example, indicates a more optimistic perspective regarding the medium and long terms.
The iCFO aims to capture CFOs’ confidence in the future performance of the country and businesses in the following 12 months. The scale ranges from 20 to 180 points, with 100 representing neutral expectations. Thus, the result indicates that executives remain positive about the economy, although this level is falling.
Right at the start of the pandemic, the index fell to 121.3 points in the first quarter of 2020 and 89.5 in the second quarter from 132.8 points at the end of 2019. It then started to recover and reached 144.1 points in the second quarter of last year, the highest since records began, in 2016. In recent quarters, however, it has fallen again. “We are back to the pre-pandemic level,” Mr. Securato said.
The index is divided into three components. The iCFOm, which measures confidence in relation to the macroeconomy, was the field of the greatest volatility throughout the historical series. In the first three months of this year, reflecting the instability of the macroeconomic scenario, it reached 122.5, down 3.9 points compared with the previous quarter. The results of iCFOs, which refers to the sector, and iCFOe, referring to companies, also fell to 138.7 and 133.4 points, respectively.
Mr. Securato points out that, while the confidence index itself shows the concern of businesspeople in the short term, data about investments and funding reveal a more optimistic view in relation to the future.
“The investment outlook is focused on fields such as the expansion of installed capacity, new lines or business units, mergers and acquisitions. These are not items that will generate short-term results, so there is a vision that in the medium and long term these companies continue to believe in Brazil,” Mr. Securato said. In relation to the destination of the investments foreseen for the following 12 months, the field most cited by the executives was the expansion of the installed capacity, mentioned by 26% of the respondents.
Considering the origin of funds to finance investments, the first positions are occupied by cash reserves, an option mentioned by 30.5% of the participants, and reinvestment of profits, mentioned by 23.2%. “The way these companies raise funds does not depend on the scenario we are experiencing,” the executive said.
The lower optimism is reflected in the outlook for profitability and earnings in the following 12 months. In the last quarter of 2021, 64.7% of the participants expected a higher return on equity, compared with 56.4% now. The expectations of EBITDA margin increase dropped to 67.5% from 74%. In addition, 61.8% of the respondents expect a higher cost of debt in the next 12 months.
The survey also shows projections for macroeconomic parameters. On average, executives expect the Extended Consumer Price Index (IPCA), Brazil’s official inflation index, to be 8.3% this year. As for GDP, they expect growth of 1.5%. The average expectation for the foreign exchange rate was R$5.32 to the dollar, and for the benchmark interest rate was 12.3%.
So far, 84 blocks have been approved in 17 states based on the rules of the new framework — Foto: Cléber Júnior/Ag. Globo
The formation of regional sanitation blocks, one of the great changes brought by the new legal framework for the industry, has faced challenges. One major obstacle is that municipalities are unwilling to join the model, which in some cases can turn projects unfeasible.
One example is the regional unit of Rondônia. The block may become economically and financially unfeasible if Porto Velho does not participate. The capital city, on the other hand, is about to launch a call for bids for its municipal concession.
The state has signed a partnership with the Brazilian Development Bank (BNDES) for studies of a regional project. However, Porto Velho says that it will go ahead with the project. Public hearings held in recent months were marked by protests of the state company, which suggests litigation is likely. The state government and the city hall did not immediately reply to a request for comment.
Another case is Rio Branco, which in 2021 decided to take over the services. As a result, the regional block of Acre, which was about to be auctioned, was made unfeasible as well.
The participation of capital cities is key due to the high degree of dependence on the states, said Felipe da Cruz, a research economist at the State University of Rio de Janeiro (UERJ), who took part in a study on the regionalization of the industry.
The study, conducted with data from 2018, reveals a large weight of capital cities in the states’ collection of water and sewage services. In nine of them, the participation exceeds 50%. The greatest dependence is seen in the North region – Acre, the capital city accounted for 70.06% of the revenue.
“It is challenging. Cities that are regional leaders have fewer incentives for voluntary participation because they know they will pay for other municipalities,” he said.
Cities do not always have the option of staying out of the block. Mr. Cruz recalled the case of Rio de Janeiro. The capital city of the namesake state has a large weight (65%) and was unwilling to join the regional block. But the city ended up joining the effort because it is part of a metropolitan region – in cases like this, the city is forced to participate because structures are shared.
The new sanitation law provides for different forms of regionalization, which can be either compulsory (such as micro-regions, in which cities are forced to participate) or hybrid (regional units, where participation is voluntary), said Rodrigo Bertoccelli, a partner at law firm Felsberg Advogados.
Analysts who follow the matter say that the mandatory model makes participation easier but does not eliminate resistance. First, a complementary law is required for that, which is more difficult to approve than ordinary law. Besides this, the definition of the governance and internal rules of the block is complex.
Convincing municipalities is even harder in the states that have chosen regional units, like São Paulo. In July 2021, the state approved the division into four regions: the municipalities operated by water utility Sabesp remained in a block and the others were divided into three others. However, many cities are raising questions, and participation has been low. The same challenge is faced by Rio Grande do Sul.
“It is necessary negotiation and a convergence of interests that is not simple. This model has not worked so well so far because municipalities are blocking it – in many cases because they are not aligned politically,” Mr. Bertoccelli said.
Other states have not even managed to approve laws to create regional blocks, such as Minas Gerais, Mato Grosso, and Goiás.
Goiás proposed two micro-regions, but the municipalities presented a counterproposal. “It is now up to the regional lawmakers to hold negotiations with all the interested parties so that the best alternative can be reached,” the Secretariat of Environment and Sustainable Development said in a note.
The governments of São Paulo, Rio Grande do Sul, Minas Gerais, and Mato Grosso did not immediately reply to requests for comment.
Aware of the obstacles, the federal government has already extended until March 2022 the deadline for the states to create regional blocks.
So far, 84 blocks have been approved in 17 states based on the rules of the new framework. Besides the three states that are still trying to approve the laws, three others (Acre, Pará, and Tocantins) have not prepared a regionalization proposal, according to data by Abcon, a trade group of private-sector water utilities, updated in May.
However, besides the approval of the laws, it is necessary to put in place the operation of the regional blocks, which is another challenge, said Fernando Vernalha, with law firm Vernalha Pereira Advogados.
One obstacle to regional services is the several contracts in force in the municipalities, which end at different deadlines. “The ideal would be to replace all municipal services by a regional operation, but contracts must be respected. It will be hard to regionalize in the short term.”
Renato Sucupira, a partner at BF Capital, says that there is a natural difficulty for municipalities to join. However, he highlights that the new law has already achieved important advances.
Goal is to eliminate wharfage services or terminal handling charges — Foto: Leo Pinheiro/Valor
The government has a decree ready to change the way import tariffs are collected. With this, the economic team believes it will achieve an additional reduction of 1.5 percentage point of the rates on imported goods.
The idea, according to aides to Minister Paulo Guedes (Economy), is to eliminate wharfage services, or terminal handling charges, from the tax calculation basis. Wharfage is the loading and unloading work of cargo in general at port terminals.
Today the tax rates on imported goods are applied taking into account the terminal handling charges. Government sources argue that Brazil is one of the few countries in the world to adopt this practice. Not even other Mercosur members, including Argentina, do so.
The provisional measure that changes the collection system already has the approval of the ministries involved and the Presidency’s Sub-Office for Legal Affairs. A final analysis is being made by the Federal Attorney General’s Office (AGU) to completely rule out the risk of illegality because of the proximity to the election period. If it passes, the provisional measure will be signed into law by President Jair Bolsonaro.
The Economy Ministry expects a 10% linear reduction in import tariffs. The Common External Tariff (TEC) is currently at 11.6%. This would mean, approximately, a cut of 1.5 percentage points.
It would be, in practice, the third cut in TEC made by Brazil. Last year, there was already a 10% reduction in the rate. This month, the Brazilian government announced another 10% cut. Both, however, are temporary and valid until the end of 2022.
In the case of removing terminal handling charges from the calculation basis, this is a definitive change, in principle. It is an old plea of the private sector, led by the National Confederation of Industry (CNI), and the government prefers not to talk about “loss of revenue”, considering that the import tariff is essentially a tax of a regulatory nature.
According to the ministry, the estimated loss of revenue with this change is R$ 461.3 million in 2022 but falling in the coming years. The economic team emphasizes, however, that the most important is the reduction of the so-called “Brazil cost” and the gain in competitiveness with the measure.
“The cap rate in the customs value has always been incompatible with the rules of the World Trade Organization (WTO), because it distorts the competitiveness of productive sectors in domestic and foreign markets,” says Leandro Barcelos, international trade coordinator at BMJ Associated Consultants.
“Brazil is still one of the only countries that charge this tax, generating an additional cost in the acquisition of inputs used in the production chain. The removal of the wharfage tax would be a good thing in the government’s strategy to relieve the import tax base. The removal of the tax would significantly reduce industrial costs and increase, in the medium term, the competitiveness of Brazilian industry, and would directly impact the reduction of product costs for the final consumer.
Pague Menos talks about opening 120 new stores, 50% above last year — Foto: Divulgação
More than two years after the beginning of the pandemic, retailers have resumed investments in store openings and land purchases, at the same time they have been increasing disbursements in the digital arena — the business that has supported part of the retail results. This increases the need for the chains to expand their spending in the year, in a scenario where there are already new pressures on the cost of building the stores. There was an increase of up to 50% in the value of each new store this year compared to 2020 — in an environment of more expensive money in the market.
An analysis by Valor shows that the investments of 15 public retailers — considering those with data available between 2019 and 2022 — reached R$1.9 billion from January to March this year, 35% higher than in early 2019, the year before the health crisis, when the combined figure reached R$1.4 billion. The analysis considered the amounts reported by the companies in the quarterly financial statements. When taking into account the annual expansion rate of the decade, the projection was that this figure would be reached a year ago, but the pandemic held back investments. This delay increases the need for accelerating projects, despite the uncertain consumption environment and high interest rates making capital more expensive.
“What is happening again is a greater allocation of funds for organic expansion, because it is not possible to keep this part of the business in the ICU for a long time, as it was. And stores are key in the strategy of online sales today. It happens that the disbursements in logistics, distribution and systems have already grown in 2020 and 2021, and it is also an investment that needs to be accelerated,” said Alberto Serrentino, partner and founder of Varese Retail.
“Right now, this investment management is much more complex within the management teams. One thing is to invest under good conditions. Another one is with the CDI [interbank deposit rate] at the level it is. The return on capital analysis in the current environment has become more critical, but nobody doubts that companies must occupy new spaces again.”
Data from January to March compiled by Valor show, for example, that Via (owner of Casas Bahia and Ponto chains) opened 22 stores in this period — the highest number since 2019 — while Centauro opened four, a record in the period. In the building material chain Quero-Quero, there were 14 openings, an unprecedented number in this period. For the year, Renner projects 40 openings, versus 32 in 2021, and in food retail, Grupo Mateus estimates 45 to 50 openings, compared with 44 in 2021. Pague Menos talks about 120 new stores, 50% above last year. Raia Drogasil projects 260 stores, 20 above 2021.
Despite the strategic function of the new stores, an aspect raised by the companies themselves recently, in first-quarter conference calls, was the increase in the cost of construction of the units, and the storage centers. Even when leased, they saw an increase in rent. “The bill today is for a 40% to 50% increase in construction costs compared to before the pandemic. Steel, aluminum, copper, everything went up and was passed on,” said José Barral, a consultant and a board member in some retailers.
According to Luiz Novais, chief financial and investor relations officer at drugstore chain Pague Menos, there is strong inflationary pressure on investments. “We are suffering with this. Before, we imagined that the average investment cost for opening a store would be R$1.1 million, and this average value is closer to R$1.35 million now. So, there is a great pressure. But even with these two components we have a very good rate of return, above 18%, a level above the cost of capital, that is, we remain very optimistic with new stores,” he told analysts a few weeks ago.
For Mr. Barral, companies with the right geographic expansion strategy, in areas that prove to be more resilient or with already tested models, will come out ahead in this resumption of expansion. “But I am still a little skeptical about this, because we have to remember that investments in new stores affect the [operating profit] margin initially, and we have already entered the pandemic with certain chains opening too many stores.”
The management team of Assaí, which projects 50 openings in the year, 40 of them being conversions of Extra’s stores, states that the increases in materials occur mainly in steel and concrete because of the war in Europe. The plan is to renegotiate with suppliers. “There is an impact on the conversion costs, especially steel. But it’s not easy to negotiate because there’s not much to do,” CEO Bemiro Gomes said. Each new cash-and-carry store costs between R$70 million and R$85 million on average now. Two years ago, the cost ranged from R$50 million to R$60 million.
In the listed companies analyzed by Valor, the disbursements in structure for digital operations also advanced rapidly this year. The analysis shows that from January to March there was a growth in the value of intangible assets – such as software, licenses and brands – three to five times the value recorded in 2019.
In this line of fixed assets are real estate, renovations, land, machinery and equipment. But this is partly due to the effect of the base of comparison. The combined physical assets of companies is higher than that recorded as intangibles because this line had a greater expansion in recent years, after the 2020 pandemic.
In the first quarter of this year, companies such as Renner, Riachuelo, Centauro and Soma more than doubled the added value in their intangibles, which include, for example, license renewal and systems. In the specialists’ view, these are disbursements that cannot be interrupted, especially in projects that are still gaining traction.
“Technology products can run on their own for a while, but they can’t survive without updates. You can’t unplug them quickly. That’s why these investments are still at a high level, and this is likely to continue for a few years. But I don’t see this as an issue. The leading companies in the industry have access to resources in various channels and have been able to sell to the market the idea of their growth plans in digital and physical stores,” says a consultant specialized in online marketplaces.
Trade groups, analysts and developers included in Green Yellow House have been calling for a new update of the housing program subsidies — Foto: Tomaz Silva/Agência Brasil
The Brazilian Chamber of the Construction Industry (CBIC) unveiled this week the sector’s data for the quarter, which shows stability compared to the beginning of 2021. Sales are up 1.4%, while new launches fell 2.6%. But the results hide the most complicated situation of properties in Green Yellow House. New launches included in the federal housing program dropped 25.6% year over year, to 22,300 new units.
Trade groups, analysts and developers included in Green Yellow House have been calling for a new update of the housing program subsidies. The idea is to increase prices of units without seeing customers lose purchasing power, as their income is already pressured by high inflation in Brazil. Building projects aimed at this public are unattractive or even unviable without such update, they say.
This change will come, the new minister of Regional Development, Daniel Ferreira, told Valor. The value of the subsidies will be increased by 12.5% to 21.4%, depending on the location of the project, household income and other criteria. The cap of the amount borrowed remains at R$47,500. The measure will be put in place in June and last by the end of the year. The ministry wants to include 400,000 contracts in the program this year, compared with 91,000 so far.
Now, it remains to be seen if the update will be enough to speed up the segment, which accounts for 42% of the launchings now, compared with a 57% slice in the beginning of 2020.
So far, the rise in launches and sales of units not included in the program offset the drop of projects in the Green Yellow House, but high interest rates hinder new sales.
Besides developers, companies that provide services to the home construction industry also expect the housing program to recover. Versátil, a company that rents scaffolds and props for buildings in Paraná and Santa Catarina, reports an 85% occupation rate, a level above the historical average of 60%. The company plans to keep up the pace at least until mid-2023, when the projects launched in recent years will be ready. After that, Versátil expects changes in the Green Yellow House to keep demand for construction work heated.
Since 2020, the company has already increased by 50% the amount charged to lease its products, due to higher steel prices. This increase is another obstacle for real estate developers, who have reported thinner profit margins due to higher costs.
Considering the combined first-quarter results of public developers, gross margin fell 3.2% year over year, while net profit dropped 14.3%. In a report released on Wednesday, XP cited real estate as one of the sectors in which companies that delivered lower-than-expected results for the first three months of the year.
The Brazilian Association of the Construction Materials Industry (Abramat) blames the prices of raw materials and freight, in addition to taxes – which also hit producers – for the increases. In the year through April, revenues fell 9.3% year over year in the industry, according to the Abramat index. In 12 months, they declined 2.3%.
The members of the Brazilian Association of Manufacturers of Ceramic Tile (Anfacer) also reported bad results in the quarter. The output dropped 2.6%, while ceramic tiles sales fell 11.4%.
Amid the bad news of falling sales, at least the pace of new price increases is also likely to slow down. Celso Petrucci, vice president of CBIC, said that the phenomenon of rising costs is expected to lose steam throughout the year. The National Index of Construction Cost (INCC) is up 11.54% in 12 months, compared with the country’s official inflation of 12.13%.
In the business buildings segment, two deals closed last week suggest a recovery in occupancy and rental value, at least among high-end units, analysts say. BR Properties sold more than half of its portfolio to Brookfield for R$5.9 billion, which included 12 business towers and two plots of land for industrial warehouses. The following day, GTIS Partners sold its 62% stake in Infinity Tower, a high-end building near Faria Lima Avenue, for R$850 million. The buyer was a group formed by companies Lucio, AMY and Omar Maksoud Engenharia, which already owned the rest of the building.
The cap for sales tax ICMS rates on certain items, as proposed by the Chambers of Deputies and approved on Wednesday, may reduce inflation projections in the short term by 1 to 1.5 percentage points, while generating revenue losses for states and municipalities of R$65 billion to R$70 billion per year, especially as of 2023, economists estimate.
The current measure goes against what is done in most parts of the world, say some specialists, especially when it comes to fossil fuels, which usually suffer higher taxation.
Deputies approved a bill defining fuel, electricity, natural gas, communications and public transportation as essential goods and services, implying that they would have a 17%-18% cap for ICMS collection. Today, states usually apply rates as high as 30% on these items, especially fuel and energy.
The eventual impact of the measure on prices will depend on the rate charged by each state, but the governing coalition expects a reduction in gasoline, gas cylinders and electricity bills before the October election. “It is the latest attempt by Brasília to ease inflation after another bill to reduce the ICMS tax on diesel prices did not yield the expected results,” said Roberto Secemski, Brazil economist at Barclays.
On Tuesday, even before the decision at the Chamber of Deputies, J.P. Morgan added the possibility of the bill’s approval to its scenario and reduced its projection for benchmark inflation index IPCA in 2022 to 8.7% from 9.1%. “Considering an 80% pass-through to final consumers, we estimate that the gasoline tax cut reduces this year’s IPCA by about 40 basis points [0.4 percentage point]. For energy, we assume a 100% pass-through, as this price is controlled at the consumer level, which would reduce this year’s IPCA by about 30 basis points,” wrote economists Vinicius Moreira and Cassiana Fernandez.
The justification for the project among politicians is that states and municipalities have fiscal space and “surplus” cash. Ítalo Franca, an economist at Santander, notes, however, that the revenue of the states has risen by cyclical factors, such as high oil prices and high inflation. “When the disinflation process comes, revenue tends to fall,” he said.
In addition, expenses are normalizing, increases for civil servants have already been granted, but if inflation remains high, the pressure for increases ahead is likely to continue. “This can cause problems for the states’ accounts. In the broader picture, this revenue tends to fall. If the government wants to reduce taxes, I think it is positive, the tax overhaul is one of the focal points, but they cannot let mandatory expenses grow,” the economist said. “We contract a problem for one, two years from now. We are postponing it.”
Felipe Salto — Foto: Wenderson Araujo/Valor
If the states get into a tight spot further down the road, however, the problem returns to the federal government, notes the economist, as they need to enter government support schemes. Felipe Salto, secretary of Finance of São Paulo, said that the bill may reduce by R$0.10 to R$0.12 fuel prices in the pump, but the reduction will be rapidly offset by the effect of high oil prices driven by the war in Ukraine. According to him, the state will lose R$8.6 billion a year with the measure.
Fuels, electric energy, and telecommunications represent 31.7% of the states’ total ICMS collection, according to data from the National Council of Finance Policy (Confaz) organized by economist Sergio Gobetti, a specialist in public accounts.
“There is a high chance of litigation of this issue,” Citi comments in a report. “As this is an election year, it is not yet clear whether states would raise taxes on other goods to offset the negative impact of this bill on tax revenues.”
Although, in theory, there is fiscal space for the measure, Gabriel Leal de Barros, chief economist at Ryo Asset, says the ICMS is a tax with many problems and the focus of Congress should be on more structural solutions, such as the approval of the dual value-added tax – a single value-added tax encompassing the federal collections and another for state and municipal collections. Mr. Gobetti says that with the creation of the Tax on Goods and Services (IBS) in the model of a VAT, the tax overhaul is the best solution to standardize the tax burden on goods and services and end some distortions that exist in the ICMS.
“We are still focused on building up, and on the same strategy. In five years, we’ll talk.” This is how Nubank founder David Vélez reacted when asked in Davos, Switzerland, where the World Economic Forum is being held, about the fintech’s new dive in the stock market, which gave it a lower market capitalization than rival BTG.
“Until then, you’re going to have crises and cycles. It’s Latin America. But in the long run…” Mr. Vélez told Brazilian reporters after speaking at a dinner dedicated to Latin America, in which he told the story of Nubank.
Mr. Vélez noted that the market capitalization of Latin America’s banking industry is $1 trillion, while the region has 250 million unbanked people. According to his view, the digital model is much more profitable than traditional lenders, as these banks have no branches, for example.
Asked about derisive comments in the market that the value of the fintech seemed unreal, the Nubank founder smiled. “That’s great because being ignored is the best thing that can happen,” he said. “We were ignored in Brazil for three to four years. Nobody was looking at us. We went through the four Gandhi phases: first they ignore you, then they laugh at you, then they fight you, then you win,” he said, misattributing the quotation to Mahatma Gandhi. “Now we go back to being ignored,” he added.
Nubank, once the most valuable bank in Latin America, now has a market capitalization of $15.53 billion (R$74.7 billion), the sixth-highest among Brazilian banks, behind the likes of Itaú (R$236.5 billion), Bradesco (R$194.6 billion), Santander (R$126.1 billion) and BTG (R$99.33 billion).
Asked about when he estimates that Nubank will recover the IPO price, he replied that it is impossible to know. But reiterated that “we are still an ant, and our strategy is long term.” He said Nubank is focused on Brazil, Mexico and Colombia and getting close to 60 million customers – mostly in Brazil. “We still have to grow with that base,” he said.
In Davos, he took advantage of contacts with other fintechs, but said he has no plans for partnerships at the moment. “Since we are the biggest in the world, we get a lot of emails from neo banks abroad,” he said. Sometimes Nubank invests in other companies, as happened with a bank in India. And all this with an eye on the potential for the next 20 years.
CADE did not disclose how many stores will be sold or the deadline for the deal — Foto: Divulgação
Antitrust regulator CADE approved, with restrictions, the acquisition of Big by Atacadão — Carrefour’s Brazilian subsidiary. It will require the sale of some self-service units (supermarkets, hypermarkets, cash-and-carry stores, or buyers’ clubs) of the Big group. The decision was unanimous. The CADE did not disclose how many stores will be sold or the deadline for the deal. A source told Valor that 14 stores are on the list.
This number increases by six stores the initial proposal made by Cade’s General Superintendence. In January, it had suggested the approval of the operation provided some conditions (remedies) were met, such as the sale of units. Behavioral remedies were also set, which concern the monitoring of the operation’s compliance or other market conditions that are usually simpler than the sale of units (considering a structural remedy).
The deal analyzed by the CADE consists of the acquisition by Atacadão of all shares of Big Brasil group. The purchase was announced in March, for R$7.5 billion — in value, it’s the largest ever in Brazil’s retail market. The deal turns Carrefour into the second-largest retailer in Latin America, behind Walmex, Walmart’s operation in Mexico and five other Latin countries.
In practice, Atacadão is buying 386 stores. Big, which is controlled by the management company Advent and Walmart and comprised of seven brands (Big, Big Bompreço, Nacional, Super Bompreço, Sam’s Club, Todo Dia and Maxxi Atacado), concentrated the supermarket and hypermarket chains that belonged to Sonae, in the South region, and Bompreço, in the Northeast.
Of these seven, Big and Maxxi will probably disappear, according to information obtained in March. Hypermarkets BIG and Bompreço will be converted into Carrefour, Atacadão or Sam’s Club stores. Maxxi will probably become Atacadão. With Big, Carrefour will have 876 stores and R$100 billion in annual sales.
This will be the third time since 2016 that Big and Bompreço brands will undergo changes. From 2016 to 2017, years after Walmart bought the assets in the country, the company removed the name Big and started using Walmart in stores in the South region. In 2019, after selling the operation to Advent, the brand returned. Now, again, it will stop being used. In the Northeast, the group is expected to keep elements of the Carrefour brand, along with the name Bompreço.
With this Wednesday’s approval, Carrefour reaches a goal before facing its biggest challenge in recent years, in the view of experts: setting up a mega infrastructure of systems, logistics and integrated distribution, which is the basis for retail and wholesale to operate in a profitable and harmonious manner.
The issue came on the recommendation of the General Superintendence (GS), which recommended the approval but imposed some conditions (remedies). According to the GS’s opinion, the companies involved in the business are currently competitors in three markets: self-service retail, wholesale distribution of products (mainly food and other goods), and retail fuel resale. For the GS, the problem would lie in the self-service.
The vote of the rapporteur, member Luiz Augusto Azevedo de Almeida Hoffmann prevailed. For Mr. Hoffmann, some problematic situations were identified in some places, such as stores very close to Big and Carrefour, while those of competitors were very far away. Thus, the operation in some cities would require adjustments in the divestment package proposed by the GS, according to the rapporteur, increasing the number of stores that the company would have to get rid of.
The number of stores to be sold and the deadline were considered confidential and were not disclosed in the session. The number of stores to be divested was increased by the CADE, according to the rapporteur, and the CADE was aware that the company has already received proposals to sell some units and there would be interested parties in others. Therefore, for the rapporteur, the operation could be implemented before the conclusion of the investment.
If necessary, for the sale of the stores, a divestiture trustee may be required, in addition to the general monitoring expected to be implemented. If the obligations are not fulfilled in the foreseen period, there will be penalties.
(Adriana Mattos and Raquel Brandão contributed to this story)
Faced with a complicated scenario for inflation, which threatens to stay above the target cap for the third year in a row, as well as an exchange rate that may remain depreciated, despite a super-attractive interest differential compared to foreign countries, Brazil may face the possibility of having to “sacrifice” economic growth to control the pace of price hikes. This analysis comes from Solange Srour, chief economist of Credit Suisse Brazil. According to her, the country may have to face expansion rates around 1% or below in the coming years to enforce the target system.
The higher- than-expected reading of mid-month inflation index IPCA-15 for May strengthened the understanding that the Central Bank, contrary to its recent communication, will need to extend the monetary tightening cycle until August.
This change is close to the scenario already outlined by the Credit Suisse team, for whom the monetary authority will end the tightening cycle with the Selic interest rate at 14%. Despite the fact that the price dynamics continue to be qualitatively bad – a deflation was expected in May, but it does not look like it will happen – the economist sees a low chance that the cycle will extend much beyond its current projection.
On the other hand, Ms. Srour believes that the idea of trying to “exchange” an additional increase in the Selic in August for a more distant start to the cycle of cuts is risky. A recent study by Credit Suisse shows that since 1999, when the inflation targeting regime was implemented, the Central Bank has never ended a tightening cycle before seeing expectations stabilize or converge back to the target – which is not the case today. The same happens with the break-even inflation measures, which continue to deteriorate. “If the Central Bank stops in June, it will need to change communication,” she says, citing the decision to bring forward the change of monetary policy horizon and also new inflation projections.
Read the main excerpts from the interview below:
Valor:Credit Suisse recently raised its 2022 GDP projection to 1.4% from 0.2%, but cut 2023 projection from 2.1%. That is, the fall next year will more than offset the rise this year. Why is that?
Solange Srour: Starting in the second half of the year, we will see not only the lagged effect of monetary policy on activity, but also the high inflation starting to strongly affect disposable income. At the beginning of the year, it is harder to notice this because most salaries are raised by June and July, so people feel they have a higher income, then consumer spending gains steam. But as the year comes to an end, this is lost. Another factor that holds back GDP expansion next year is global growth. We are seeing substantial revisions of projections, this year driven by China and Europe, next year more by the United States, because we believe that the monetary policy there will be tighter than anticipated. Besides this, we cannot rule out the uncertainty about the prevailing agenda in Brazil from 2023 on. Today, this seems to be a topic that the market does not want to discuss much, but it certainly affects investment and consumer spending decisions. If there is too much uncertainty, this affects current activity. Current investment is not so weak because the commodities sector has holding up the ends, but the other industries already see a relevant drop, which is likely to be accentuated in the second half of the year. Considering a real interest rate of 6% in the next few years, it is very difficult to think of a higher growth rate than something close to 1%, which is what we project for 2023. On the contrary, we risk seeing a lower rate than that.
Valor:Why will we need to keep real interest rates so high?
Ms. Srour: Every time Brazil had a real interest rate as high as the current one, we also had a very expressive currency appreciation that helped to bring down inflation. This time, we see real interest rates high for a long time without a strong real. It reached R$4.6 to the dollar just to return to R$5, and is still oscillating. A stronger real is not enough. It must be seen as something more permanent in order for us to see a pass-through effect. The price takers need to see a consistent appreciation in order to pass this on to prices. There is a lag in all of this. So, if this happens, it will help a lot. If it doesn’t, the weight will fall on activity. A 1% growth is not enough to bring inflation down fast. Without a strong real, disinflation is going to be much more costly, slower and gradual, especially because inertial inflation increases after two and a half years of very high inflation.
Valor:Why do you believe the real will remain weak?
Ms. Srour: If you look at the fundamentals of a given model, commodities and real interest differential, the real should have been stronger in the past two years. There are several reasons for that. The main one is the uncertainty about what Brazil will be like over the next few years. It is very difficult to draw medium-term investments if it is unclear what is going to happen. Much of this uncertainty is related to the fiscal situation. As much as the spending cap [a rule that limits growth in public spending to the previous year’s inflation] is up, several expenses are held back, including pay increases for civil servants. There are also developments out there. The tightening of the U.S. monetary policy may strengthen the dollar, should the Federal Reserve need to tighten further than expected. And the slowdown in China may also be longer and start in 2023, which also makes it more difficult for the real to appreciate.
Valor:We have seen a very intense cycle of Selic (Brazil’s benchmark interest rate) hikes in the last months. Wasn’t it time for it to start having an effect on the activity?
Ms. Srour: I don’t think that it is not having an effect. Credit is more expensive, spreads are on the rise. The activity is not showing that because the effect of the opening has been much more intense and much slower than expected. Economists thought that the effect of the reopening on the economy would peak between January and February, but people seem to have accumulated some savings, so we see a very strong effect in services and consumer spending. This is not happening in Brazil alone. The same happened in Europe, where recent indicators from some countries did not come as bad as expected, precisely because of the longer effect of the opening.
Valor:In its statements, the Brazilian central bank has been trying to support a longer cycle of high Selic instead of additional hikes later this year.
Ms. Srour: Our study shows that in all monetary tightening cycles, the monetary authority paused when the difference between inflation expectations and the target was falling. In the current cycle, the Central Bank is trying to end the tightening while the gap is still rising. If this happens, it will be the first time. We believe this is complex, dangerous, considering that we have been missing the [inflation] target for two years. It is complicated to stop the cycle with expectations still rising and risking being above the target for the third year in a row. We have projected that the Selic would rise by August for some time now, which has now become a more consensual scenario. The [last reading of] IPCA-15 [Brazil’s mid-month inflation index, known as a reliable predictor for official inflation] was qualitatively bad and is likely to worsen projections for 2023.
Valor:Will the Central Bank still follow the path it has communicated?
Ms. Srour: If the Central Bank stops in June, it will need to lengthen the convergence period, admitting that the monetary policy horizon is now 2023 and also, to some extent, 2024. This is something we expected to happen in August, which is when the Central Bank typically starts to give more weight to the following year. So it will need to say that, or even that it will pursue this adjusted target, and no longer that of 2023. I think it is more likely to lengthen the horizon, but this will only be more credible if it puts projections closer to those of the market – today the Central Bank’s projections are very far from them. If the Central Bank wants to signal that it will stay put for a long time, but its projections are low, nobody will buy this for a long time, since the Central Bank’s own projections allow it to start cutting earlier as well. That is why I think it is very complicated to reconcile all this: to stop rising in a bad environment, with expectations moving away from the target, and to extend the horizon as it argues that it will stay still for a longer time to try and prevent expectations from unanchoring further.
Valor:Do you see any chance of the Selic going beyond the projected 14% a year?
Ms. Srour: I do not think the Central Bank will go much beyond 14%. We cannot rule it out at all, given what we have seen about inflation in Brazil and in the world. But I think it is very difficult to go beyond this because the Central Bank has communicated that the cycle is nearing its end, financial conditions are tight and this is going to have an impact on activity – it should already be influencing it, but some extraordinary factors, mainly fiscal, are preventing this. The real ex-ante interest rate is at a very high level, close to the peak. But we cannot rule out that the next move will be a hike, or that the cycle will stop for very long, especially because it may stop for the first time with a very large gap between expectations and the target.
Valor:How do you see the new change of Petrobras CEO?
Ms. Srour: We are facing a global problem of energy and food prices. Several countries, supported by international mechanisms, are creating policies to mitigate this shock. I believe Brazil should be adopting some more transparent measure for the budget, as was done by [President Michel] Temer at the time of the truck drivers’ strike. It could be even an extraordinary credit, instead of trying to make Petrobras hold prices or reduce taxes, because tax collection is surprisingly well, but this is something temporary, and tax breaks tend to be more permanent. A transparent mechanism avoids a greater impact on inflation and also a greater political impact.
The lack of engagement of the federal government is leaving Brazil out of an innovative initiative by three countries — the U.S., Norway, and the United Kingdom — and a group of large companies with an initial $1 billion to protect forests.
It is the Leaf Coalition (Lowering Emissions by Accelerating Forest Finance). It pays countries or local governments for their performance in stopping deforestation faster, while helping them achieve their Nationally Determined Contributions (NDCs) under the Paris climate agreement.
In an interview with Valor, Eron Bloomgarden, founder and CEO of the Emergent organization, which launched the Leaf Coalition, said 20 major companies are already participating. They include Salesforce, Amazon, Nestlé, Unilever, BlackRock, Burbery, EY and Walmart, for example. Another five are about to be announced.
According to the executive, many companies are interested in paying for the reduction of deforestation in the Amazon, but that it takes political will to make this happen.
The way the coalition operates is with an open call for proposals. In the first call, last year, the coalition received 35 project proposals, half of them from countries such as Costa Rica, Ecuador, Ghana, Nepal, Vietnam, and half from states or municipalities, which together cover more than half a billion hectares of forest.
In the case of Brazil — a country considered key to combating deforestation globally — the federal government has not presented any proposal, but eight states (Acre, Amapá, Amazonas, Maranhão, Mato Grosso, Pará, Roraima and Tocantins) have made proposals in order to have access to resources — and the Legal Amazon Consortium wants to sign a memorandum of understanding.
However, without Brasilia, the situation is complicated. “The states need approval from the federal government to participate. We will not sign a contract [with the states] unless there is approval from the federal government,” Mr. Bloomgarden said. And so far, there is no sign of engagement from Brasilia.
According to the executive, Brazil is a green superpower that should be thinking “about how to preserve this asset to help solve the issue of climate change and for its economic growth.” He says that what the Leaf Coalition is trying to do is “provide a very clear path for companies to help support Brazil by paying to reduce deforestation.”
“Unfortunately, the trends are going in the other direction, at least in Brazil, where there was almost a 65% jump in deforestation in the first three months of 2022 compared to last year. So, the problem is an urgent challenge. We are ready to be a partner,” he added.
Under the Leaf Coalition, emissions reductions are made across entire countries or large states and municipalities through programs that involve key stakeholders, including indigenous peoples and local communities, in five-year contracts. The initiative will use satellite imagery to verify results over wide areas. The monitoring would, at least in theory, prevent governments from protecting forest in one place only to let it be cut down in another area, for example.
A global effort that already exists called REDD+ is seen as affected by bureaucratic problems, for example. The Leaf Coalition says that while the international community has historically paid $5 per tonne of CO2 avoided, it pays a minimum of $10. And if the companies buying the credits sell them above that amount later, the extra resource goes to the country or state.
This new model of public-private finance for forests is attracting growing interest, and an illustration of this is Mr. Bloomgarden’s participation this time at the World Economic Forum in the Swiss Alps.
“At COP 26 in Glasgow it was the first time that nature and forests played such a large and relevant role,” he says. “And now this idea of protecting, preserving, restoring nature as a climate solution is high on the international agenda. There are many other things happening in the world with Ukraine and Russia, and the pandemic. [But] there’s urgency to do that now, both for companies and for biodiversity communities.”
“Companies are saying: you build climate strategies for the next 5-10 years. We would like to use high quality credits, say from Brazil, to protect forests,” he says. According to the executive, if it is shown that there is high-quality supply and political will on the ground, the initial $1 billion fund could reach $10 billion.
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