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Analysis: Inflation nightmare is not over

The snapshot of inflation offered by mid-month inflation index IPCA-15 in May makes it clear that Brazil is still in inflation hell, unlike what Economy Minister Paulo Guedes said last week. Inflationary pressures remain widespread, with strong increases in the prices of services, industrial products, fuels and food at home. Even with the significant deflation of electricity rates, of 14.09%, the indicator rose 0.59%, well above the 0.45% of the consensus indicated by analysts consulted by Valor Data.

The 12-month inflation rose to 12.2% in May, the highest since November 2003, compared with 12.03% in April. It is much higher than the target for this year, of 3.5%.

Almost three-fourths of the items in the IPCA-15 for May went up, as shown by the diffusion index of 74.93%. This is lower than the 78.75% reading of the previous month, but well above the 67.57% of May 2021, according to figures from MCM Consultores Associados.

Inflation is still spread throughout the economy, despite the strong cycle of hikes in the Selic. The Central Bank raised Brazil’s benchmark interest rate to 12.75% a year from 2% in March 2021. In June, the rate will probably rise another 50 basis points, and a new hike in August cannot be ruled out.

Food-at-home prices helped to slow down the IPCA-15 to 0.59% in May from 1.73% in April, but the rise is still very significant. It rose to 1.71% from 3%, still a very strong increase. The 12-month inflation in this segment rose to 16.79% from 15.4%, MCM points out.

This high, persistent inflation of food-at-home prices helps to erode the popularity of President Jair Bolsonaro, especially among the lower-income population. The IPCA-15 for May, it is worth mentioning, measures inflation between the second half of April and the first half of this month.

The picture is also concerning in services inflation, which accelerated to 1% from 0.59% between April and May. The reopening of the economy, with the end of social distancing measures due to Covid-19, contributes to the significant rise in these prices, which in 12 months jumped to 8.16% from 6.68%.

Service underlying inflation — which concentrates the items that respond most to demand — also had a significant increase. It advanced to 0.98% in May from 0.67% in April, making the 12-month inflation jump to 8.36% from 7.4%, MCM figures show. The underlying services inflation excludes the domestic services, such as courses, tourism and communications, which are less affected by the economic cycle.

The collection of bad news doesn’t end here. Industrial goods saw inflation accelerate to 1.62% from 0.87%, as the Russia-Ukraine war contributes to problems in global supply chains, a process that had begun with the pandemic.

Prices of industrial goods rose 14.41% in the 12 months to May. It is the biggest increase since MCM records began, in July 2000. Until April, the increase was 13.7%.

The average of the five cores monitored more closely by the Central Bank once again showed a difficult picture for the fight against inflation. Measures that seek to reduce or eliminate the influence of the most volatile items, these five cores rose by an average of 1.1% in May, after rising 0.87% in April, according to MCM.

As a result, the 12-month inflation went to 10.14% from 9.34%, surpassing the double-digit level. It is another sign that inflation is not concentrated in a few items.

Electricity deflation was the main factor contributing to lower inflation in May. Since mid-April the green flag was turned on, which means that there are no additional charges on the electricity bill. As a result, the item dropped 14.09% in May’s IPCA-15.

Without this effect, the indicator would have risen 1.28%, instead of 0.59%. Fuel prices, which are President Bolsonaro’s obsession, rose 2.05% in May. This is a strong increase, although lower than the 7.54% seen in April.

Fuel prices, Bolsonaro’s obsession, prompted another change in the command of Petrobras — Foto: Leo Pinheiro/Valor

The dissatisfaction with the hike of these products explains another change in the management of Petrobras —the government announced Monday night the resignation of José Mauro Coelho as CEO of the state-owned company and the appointment of Caio Mário Paes de Andrade.

The panorama for inflation, as can be seen, is still complicated. Inflation hell is not behind us. This will probably require high interest rates for a long time, which will affect economic activity in the second half of the year and next year. The return of inflation to the target path, of 3.5% in 2022 and 3.25% in 2023, will not be easy.

Change at Petrobras increases uncertainty

One day after the government’s decision to change Petrobras CEO – the third in little more than a year – the market’s perception of risk regarding the company’s pricing policy has increased even more. The oil company’s board of directors meets on Wednesday, and the meeting may be decisive to define how long its pricing policy will remain shielded from the pressures by President Jair Bolsonaro. Through the federal government, Petrobras’s controlling shareholder, Mr. Bolsonaro is trying to make changes in the company to hold back diesel and gasoline prices in a scenario of rising inflation and proximity to the presidential elections, in October.

Although Petrobras’s governance guarantees a certain protection, the successive attempts of government interference create uncertainty and instability around the company, in the view of sector specialists and financial market operators. On Tuesday, Petrobras’s common shares closed at R$34.40, down 2.85%, while the preferred stock stood at R$31.60, down 2.92%. The government’s measures to control prices at the state-owned company are expected to be the target of discussion in Petrobras’s board.

Caio Mario Paes de Andrade — Foto: Denio Simões/Valor

Valor has learned that, at Wednesday’s meeting, the oil company’s independent board members will try to postpone the extraordinary general meeting that will be called, at the request of the federal government, to replace the current CEO José Mauro Coelho, with the nominee by the controlling shareholder, Caio Paes de Andrade.

If successful, the effort will allow the company to gain up to 45 days of protection for its pricing policy. This is because, by not putting the extraordinary general meeting on the agenda at the board meeting, the burden of calling it would be shifted to the federal government, which would have to do it in the next few days.

The call for the extraordinary general meeting is one topic of the board meeting, which was scheduled even before Mr. Coelho’s dismissal. Sources linked to Petrobras acknowledge that postponing the call is not simple, especially because there is a perception that most directors are aligned with the federal government. Of the 11 seats on the board, six are nominated by the federal government, four are representatives of minority shareholders and one represents the employees.

In the ongoing changes within Petrobras, it is not yet clear whether the federal government may also change other names on the board at the extraordinary general meeting, in addition to Mr. Coelho. The government would also be interested in replacing Petrobras’s executives.

On Monday, it became clear that Mr. Coelho, the current CEO, will remain in office until the meeting is held, the date of which will only be known after it is called. There is a minimum period for holding the meeting, which is 30 days from the call. But this time can be even longer, which means that the extraordinary general meeting can take place between the end of June and mid-July, two and a half months before the first round of vote in the presidential elections. It is a shorter period than the 100 days-freeze in price hikes intended by the government.

Until the extraordinary general meeting, Mr. Coelho will remain at the head of the company, since he did not resign, but was the target of a dismissal request by the federal government. The 8.87% increase in the price of diesel on May 10 led to his dismissal. A day later, Mr. Bolsonaro fired the former minister of Mines and Energy Bento Albuquerque, to whom Mr. Coelho was linked. Without a close interlocutor in the ministry, Mr. Coelho was isolated in the government and distant from the new Mines and Energy minister, Adolfo Sachsida, who is linked to Economy Minister Paulo Guedes, as well as Mr. Paes.

Mr. Coelho couldn’t hold on to his job even in a scenario of less pressure for hikes in oil product prices. The difference between fuel prices in the domestic market and abroad has been near zero, reducing the gap, that has exceeded 20% about three weeks ago. Diesel prices at the state-run company’s refineries were negotiated Tuesday, on average, 0.4% below import parity price, according to Stonex calculations.

The Brazilian Association of Fuel Importers (Abicom) indicated an average gap of 1% in diesel oil prices. According to XP Investimentos, diesel prices are 6.7% above those seen abroad. As for gasoline, prices are, on average, 2.1% below parity, according to StoneX calculations. XP Investimentos sees, however, a discount of 11.4% in domestic prices compared to the import parity price. The last hike of gasoline prices occurred on March 11, when the state-owned company raised prices in refineries by 18.8%.

Despite Mr. Paes de Andrade’s nomination, there are doubts about whether he can fulfill the legal requirements for the position. It will be up to the People Committee, linked to the Petrobras board, to analyze his résumé. Mr. Paes de Andrade is secretary for Debureaucratization at the Economy Ministry. With a degree in Social Communication by Universidade Paulista, Mr. Paes de Andrade reports two post-graduate degrees from U.S. universities, Duke and Harvard. Before joining the government, he ran internet providers (PSTNET, Web Force Ventures and HPG) and a digital platform for the real estate market (Maber), as well as agribusiness investments. In the government, he was the CEO of Serpro, a state-owned IT company that manages government data, and secretary of privatization. Like Mr. Sachsida, who was secretary of strategic affairs at the Economy Ministry, Mr. Paes de Andrade also reported to Paulo Guedes, but was a Bolsonarist before joining the minister’s team.

The head of the Brazilian Petroleum and Gas Institute (IBP), Eberaldo de Almeida Neto, said that maintaining the fuel price policy is key to keep the market supplied and draw investments in the sector.

The executive-president of Abicom, Sérgio Araújo, said he expects Mr. Andrade, once approved, to keep the commitment with the company’s shareholders and with the market, following international prices. For consultancy Control Risks, the new change in the head of the company represents an escalation in the government’s strategy of interfering in Petrobras. Ettore Marchetti, head of investments at EQI Asset, says, however, that it is necessary to consider that many countries in the world have also made or are considering policies to cushion fuel price shocks, which is a global phenomenon. The chief economist at BV Bank, Roberto Padovani, says that the behavior of the markets suggests that they are not moving in tandem with the news. “Of course it has an impact on the stock market, but the reading is that this is another noise created in an environment of many uncertainties.”

Source: Valor International

https://valorinternational.globo.com

25 de May de 2022/by Gelcy Bueno

Murray News

Projects recreate ecosystems in Amazon, Atlantic Forest

The restoration of forests in Brazil has been gaining supporters in the private sector and also in the public sector. Despite the long and uncertain way to go to reach the government’s goal of recovering 12 million hectares until 2030, recent initiatives like the one from newcomer re.green, the multinational packaging company Tetra Pak, the Floresta Viva program, the Brazilian Development Bank (BNDES), and the award-winning NGO Sociedade Chauá are in line with the objectives of the United Nations, which declared the current decade as one of ecosystem restoration. The success of actions in the Atlantic Forest and the Amazon represents the capture of more than 18 million tonnes of carbon and the reduction of the risk of extinction of more than 1.000 species, according to a study by the International Institute for Sustainability (IIS).

“We already are in a climate emergency and in one of mass extinction of biodiversity. We have less than a decade to avoid irreversible devastating consequences. Restoration at scale helps solve both crises”, says Bernardo Strassburg, one of the founders of re.green, created with the purpose of restoring at least 1 million hectares of forests, almost 10% of the national goal, which has made little progress. The initiative is ambitious and still unprecedented in the world. Its success will allow the capture of 15 million tonnes of CO2/year. The company is led by a group of specialists (Mr. Strassburg has provided consulting services to the UN, the World Bank, and Conservation International) and has names such as Armínio Fraga, Fábio Barbosa, and João Moreira Salles on its board.

re.green, which was born with R$359 million to finance the start of its operations, will recreate ecosystems in an identical compositions of those in the Atlantic Forest and Amazon, ensuring the integrity of the forest and its biodiversity. To do so, the team will collect samples in chosen areas to sequence all living organisms in that ecosystem, ensuring greater accuracy in defining the species present and, thus, the perpetuity of the vegetation. “This technique will generate a lot of science. We are talking to funding agencies. We want the areas to be a big international science playground. We know that there is still a lot to learn,” says Mr. Strassburg. The funds will come from the sale of carbon credits and environmental services.

Tetra Pak has chosen Brazil to invest in its forest restoration project, specifically the araucaria forests in the states of Paraná and Santa Catarina, as a way to reach the world target of neutralizing its emissions until 2030. The option for the South region of Brazil is due to the threat of extinction of the araucaria forest, which originally occupied 200,000 square kilometers in the region. Today, only 3% of its original formation is in good condition, equivalent to about 6,000 km2.

Valeria Michel — Foto: Silvia Costanti / Valor

Tetra Pak’s goal is to create a biodiversity corridor between Paraná and Santa Catarina, reforesting 7,000 hectares. In the pilot project in Urubici (Santa Catarina), which started this year, methodologies will be tested to be replicated in the future for the restoration of the whole planned area. “Besides the restoration, there will also be payment for environmental services, both for the carbon to be generated and for the biodiversity, which is something new,” says Valéria Michel, Tetra Pak Brazil’s head of Sustainability.

Another initiative for the restoration of araucaria forest comes from the Chauá Society, headed by forest engineer Pablo Hoffmann, winner of the Whitley Award – seen as the “green Nobel” – for his work in the preservation of Brazilian biodiversity, research, and reforestation. Operating since 1997, Mr. Hoffmann and his team have built nurseries with more than 250 species (in general, projects use about 30 types).

The nursery has 210 types of plants native to the Araucaria forest alone. The work consists of mapping the plants in the fields, collecting the seeds, transporting them to the nursery, germinating them, and replanting them in the original system. “We always try to collect the maximum number of species with the greatest genetic diversity. This facilitates the perpetuation of the restoration over time. We focus on endangered species. This is the motivation for the project,” says Mr. Hoffmann.

The BNDES joined the forest restoration initiative through its Floresta Viva program, launched in 2021. The goal is to reach up to 33,000 hectares of restored area, capturing about 9 million tonnes of CO2. The match-funding program already has R$600 million (the goal was R$500 million but was exceeded in March) and 13 partner companies.

Source: Valor International

https://valorinternational.globo.com

23 de May de 2022/by Gelcy Bueno

Murray News

Solvay gives up selling Latin American assets

Daniela Manique — Foto: Ana Paula Paiva/Valor

Belgium’s Solvay, owner of Rhodia, closed the doors to a potential sale of assets in Latin America after deciding to split businesses into two independent, public companies. Instead, the operation will gain prominence within the global essential chemicals company to be formed from the split, said Daniela Manique, Solvay’s chief executive in Latin America. “There will be no divestment in the region”, she said.

As Valor reported last year, Solvay studied selling Coatis, a division whose operations are concentrated in Brazil, and attracted potential buyers including large domestic and foreign companies and private-equity funds.

Two months ago, however, the parent company unveiled plans to split businesses into two new companies, dubbed EssentialCo and SpecialtyCo for now, in order to “sharpen strategic focus, optimize growth opportunities.” The final names of the new companies, which will be controlled by the Solvay family and trade on the Euronext in Brussels and Paris, are expected to be confirmed in the first quarter of 2023, and they are likely to be operational by the end of that year.

“The proposed spin-off will allow each company to pursue growth and capital investments under distinct capital structures and with different underlying cash generation patterns,” Moody’s said in a report. According to the agency, “EssentialCo activities will be in more mature and highly consolidated end markets and are highly cash generative.”

“Given the large carbon footprint of its soda ash activities, the necessary high investments to facilitate the energy transition and other measures to reduce EssentialCo’s CO2 output will be very different from SpecialtyCo,” the agency said.

EssentialCo will retain the main mono-technology businesses, including soda ash, peroxides, silica and Coatis, with net sales of €4.1 billion in 2021. SpecialtyCo will keep the materials operations, covering specialty polymers, high performance composites and solutions, which last year generated net sales of nearly €6 billion.

All Brazilian assets will remain with EssentialCo, except Novecare’s plant in Itatiba, São Paulo. In addition to its own operations in the region, Solvay is a partner of PQM (Produtos Químicos Makay) in Peróxidos do Brasil. Right now, the joint venture is investing $78 million to increase the production capacity of hydrogen peroxide in Brazil and Chile.

According to Ms. Manique, Latin America will represent about 20% of the essential chemicals company’s revenues, compared with 8% now. “From this division, we expect more investments and growth for the region, which becomes relevant again,” she said. Investments in Brazil total around R$150 million a year.

Brazil is seen by Solvay as a relevant market and future source of sustainable solutions, given its potential for the green economy and the strategic location of the group’s largest operation, in Paulinia, São Paulo – near major suppliers of energy and renewable raw materials.

Solvay is a great defender of the free gas market, but has reevaluated the use of biomass for power generation in the country amid the recent appreciation of oil prices. In addition, it has a project for the use of biogas together with Raízen – which already supplies biomass to Solvay’s power cogeneration unit in Brotas, São Paulo. Next year, the company is expected to consolidate itself as the world’s leading supplier of renewable essential solvents.

According to the executive, there have always been companies interested in the assets of the group in the region, and Solvay’s stance has always been to keep the doors open for possible conversations. “Now it is closing this door to focus on the spin-off and on growth,” she said. Solvay has set up a working group to handle the spin-off, and Ms. Manique is the ambassador of this group in the region.

Last year, Solvay grossed €1.3 billion in Latin America, up 35% over 2020 – worldwide, net sales reached €10.1 billion. In 2022 so far, the CEO said, business in the region is up 15% year over year, and the company expects a positive evolution during the year, despite the uncertainties regarding economic conditions in the second half of the year.

“I am afraid of inflation and its impact on the purchasing power of Brazilian consumers,” she said. The successive lockdowns in China and the oil prices are also factors of attention. The logistical bottlenecks in the world, on the other hand, have a limited impact on the Brazilian operation, which has greater exposure to the Brazilian market both in the purchase of inputs and in the sales of products.

Source: Valor International

https://valorinternational.globo.com

23 de May de 2022/by Gelcy Bueno

Murray News

Vocational education is key for Brazil but a pact is needed

Guilherme Lichand — Foto: Thays Bittar/Divulgação

The advancement of vocational education to 40% or 50% of the places offered in high schools, from 10% now, is a strategy that can contribute to the country’s development, with increased productivity, reduced inequality, and increased opportunities for young people, experts say. Considered “revolutionary” by some, this path requires time and needs to be on the country’s agenda, with the participation of leaders from the public sector and also from companies.

Guilherme Lichand, a professor of economics at the University of Zurich, believes that it is necessary to change the way vocational education is seen in Brazil.

“There is a vision in Brazil that vocational education is inferior. People desire higher education, and see the vocational education as something for those who didn’t get there. This is not the case in Europe, where more than half of population choose vocational education and only 20% or 30% go to the university,” he said.

Brazil follows the U.S. model, in which only higher education seems suitable, he said. “This is not desirable. There are no jobs for that. Just look at the enormous student loan debt that [U.S. President Joe] Biden had to forgive. In Brazil, we will have a similar problem in 10 years.”

The view that vocational education is subservient to industry and geared exclusively to training labor is mistaken, said Olavo Nogueira Filho, the executive director of NGO Todos pela Educação.

“The key is to do it with quality. Offering vocational and technological education makes it possible to raise the quality of high school, which, besides facilitating the insertion of young people into productive activities, also makes it possible for them to continue their studies throughout their lives. It is not a second-choice option.”

For him, the data from developed European countries show this. In countries that are members of the Organization for Economic Cooperation and Development (OECD), on average 40% of high school places are connected to vocational and technological education, said Mr. Nogueira Filho. In Brazil, he compares, this rate is around 11%, and in Latin America, 20%.

Expanding the share of vocational education in the country is a strategy that can be carried out together with more investments in higher education, he added.

Examples show that vocational and technological education integrated to high school becomes much more effective when it comes to the students’ interest. He says that one challenge of high school is precisely to be attractive to young people, with an education suited to their reality.

Mr. Lichand, who has a PhD in political economy from Harvard University, points out that there are great challenges to migrate from a system that offers vocational education to 10% of high school students to one that offers it 50% of students. It is necessary, he says, to discuss how to do this on the necessary scale and how to aim for the right country model.

Since 80% of the students in Brazil’s basic education are in public schools, certainly the public sector will have a huge challenge and will need to decide what vocational education will be, whether there will be purchases of vocational education systems, Mr. Lichand.

“But we need more. It is necessary to define a country agenda and make a pact involving the public and private sectors.” In the European model, Mr. Lichand said, vocational education includes theoretical classes and also practical experience in industrial companies. “You need experience in the field and that’s why you need to partner with companies. You need to expand with quality even if the private sector accounts for part of it. The key is to understand how to certify, monitor and evaluate to ensure high-quality training, not cheap labor.”

The fields and curricula, argues Mr. Lichand, must be defined together with the companies. For the professor, the ideal time to build this would be 10 years, with companies committing to finance it in some way.

There are two major challenges in this process, he points out. Convincing the business community that the student is not cheap labor and convincing the school that the curriculum must be discussed according to the companies’ needs. “If this pact can be built, it could be the best of all worlds. There will be people trained who fit perfectly with what the industry needs. Today we have situations where there are unemployed people and companies that can’t fill vacancies.”

The private sector, says the professor, is not organized for this because it doesn’t see that it also needs to lead this process. It is not just a problem for public education. For him, it is necessary to have a national leadership in the public sector shared with business leadership as well. Without a pact, it will not work, he said, as shown by European experiences. It is a process that must involve society as a whole, with multiple leaderships.

“It could be revolutionary. Cash-transfer policies have already helped improve inequality indicators in some periods in Brazil. But low productivity is something that seems insoluble in the country. Vocational education could improve these indicators.”

Source: Valor International

https://valorinternational.globo.com

23 de May de 2022/by Gelcy Bueno

Murray News

Red-hot sanitation market taps tax-exempt bonds

The advance of basic sanitation, a red-hot market since a new legal framework came into effect about two years ago, has been increasingly financed by private-sector funds – and not only in those places that auctioned water and sewage services. The use of tax-exempt infrastructure bonds to finance projects in the industry is growing rapidly and is already at all-time high levels this year.

Individual investors are exempt from paying income tax (IR) over these bonds. Any proposal for issuing the securities must be authorized by the government in order to guarantee the tax break.

This year to last week, the National Sanitation Secretariat passed proposals for the launch of R$3.018 billion in tax-exempt infrastructure bonds by companies in the industry.

Of this total, a little more than a third (R$1.12 billion) has already been approved, and the remainder (R$1.898 billion) is on its way for that – an ordinance must be published by Regional Development Minister Daniel Ferreira.

To offer a glimpse of the pace of requests and approvals, the previous record of tax-exempt infrastructure bonds in the basic sanitation segment was R$2.8 billion for the whole year, in 2021. Companies such as Paraná state’s utility Sanepar, Águas de Teresina and Rio Claro-based BRK Ambiental were authorized in recent months to raise funds through tax-exempt bonds.

Sanitation Secretary Pedro Maranhão told Valor seven other proposals to issue tax-exempt bonds are under analysis. They total R$13.8 billion, almost five times the combined amount of the projects authorized last year.

In the secretary’s view, new sanitation concessions are not the only factor driving the market. The goal of universalizing sanitation services – 99% of regular drinking water supply and 90% of sewage collection/treatment – by 2033, set in Law 14,026/20, has also speeded up requests from state-owned companies. Besides Sanepar, regional companies like Sabesp (São Paulo), Copasa (Minas Gerais), Cagece (Ceará) and Saneago (Goiás) have issued tax-exempt bonds.

Companies managing sanitary landfills have also started to explore this source of financing. Ciclus Ambiental, for example, is tapping these securities to finance investments in works related to the management of solid urban waste.

In June 2021, the company was authorized to raise up to R$450 million for a landfill in Seropédica, Rio de Janeiro. The funds can be used to put in place a new leachate treatment plant and a 2.8 MW biogas-fired power generation unit.

“We are talking more with companies, trying to convince them that bonds are an interesting financing mechanism,” Mr. Maranhão said. “On the other hand, we did an internal restructuring and managed to reduce to four from eight months the time for analysis of requests filed with the ministry.”

In recent years, even before the approval of the new legal framework, the Brazilian Development Bank (BNDES) and Caixa Econômica Federal had already been losing ground among the sources of credit for basic sanitation. Between 2016 and 2019, they had already seen their share of loans to private-sector water and sewage companies drop to 40% from 58%.

“The demand for investments is so high that diversification of financing is necessary,” said Ilana Ferreira, the technical head of Abcon, an association of private-sector sanitation concessionaires. For her, after starting to raise funds through tax-exempt bonds, the use of the mechanism in the industry skyrocketed. She believes that the next challenge is to lengthen the terms of the securities – the redemption period is still half of that offered by power companies, a market in which the bonds are better known.

Ms. Ferreira sees state-owned sanitation companies issuing more bonds after the economic and financial verification process to keep their contracts, which occurred in March. They needed to prove they were able to universalize services by 2033. Now they need to invest to offer drinking water and sanitary sewer to millions of people.

According to a financial adviser who works structuring projects and asked not to be named, the four privatized blocks of Cedae (Rio de Janeiro) are likely to raise billions of reais through tax-exempt bonds in the coming months.

Other concessions auctioned recently – in Alagoas, Amapá and Mato Grosso do Sul – also raise the expectation of billions of reais in investments in the industry over the next few years.

23 de May de 2022/by Gelcy Bueno

Murray News

Healthcare groups lose profit margin

Hapvida was the most affected operator in the quarter — Foto: Divulgação

The 14 publicly traded healthcare companies — hospitals, diagnostic medicine laboratories, and health insurance companies — had a loss in profitability in the first quarter, when compared to the same period last year. The earnings reports were impacted by the macroeconomic environment, which led to more cancellations of health insurance plans, and by the wave of the omicron variant of Covid-19 earlier in the year, which reduced the performance of other medical procedures and generated lower revenue for service providers.

Besides this, as most of the healthcare companies are undergoing a strong process of mergers and acquisitions, which require resources and increase indebtedness, the financial result has deteriorated with the rise in interest rates, reflecting on the net income.

The most affected in the quarter were operator Hapvida and broker and administrator of medical insurance plans Qualicorp, both with great loss of clients. Hapvida, which concluded its merger with NotreDame Intermédica in February, had 431,000 contracts suspended and another 157,000 cancelled due to layoffs in companies that offered the benefit to their employees. There were 524,000 new sales, but they were not enough to cover all the losses. The same happened with Qualicorp, which gained 115,100 clients, but had 131,100 losses in its portfolio.

On the day the quarterly numbers were released, Quali’s shares depreciated 13% on the stock market, and Hapvida’s dropped almost 17%, due to the weak results, but also because of the prospects. The scenario from now on is uncertain, with high interest rates and high increases in the health insurance plans, with prices expected to swell between 15% and 20% on average.

On the one hand, the recomposition of medical inflation will provide improvement in revenue and other gains to the companies, but at the same time there is a higher risk of default and withdrawal from health insurance plans. “A weak 2022 start, but is the worst already over?” was the questioning made by Itaú BBA analysts, in a report.

Insurers SulAmérica, Bradesco Saúde, and Porto Saúde saw their loss ratio increase in the first quarter, which was offset by the improvement in the financial result. The insurers have a better indicator because they have a larger volume of reserves than the operators and are not promoting acquisitions at the same pace as their competitors.

OdontoPrev, the largest operator of dental plans in the country, also felt the impact of the economic environment. In the first quarter, the company lost 28,000 users and the average ticket fell 1.2%.

The five hospital groups – Rede D’Or, Mater Dei, Dasa, Kora and Oncoclínicas – saw the EBITDA margin fall, with variations between 0.2 to 3.7 percentage points. At the beginning of the year, the spread of omicron made the average ticket of the procedures performed in the hospitals lower. In Rede D’Or, the reduction was 3.2%, and in Mater Dei, 12%. “We see the drop in ticket, pressure of margins and high leverage as a worrisome combination for the results in the short term,” says XP in a report.

Among the diagnostic medicine chains, there is loss of profitability due to Covid and negative financial results. But the performance among them varies a lot. Fleury and Hermes Pardini reported double-digit revenue growth, but the bottom line of the earnings report was pressured by financial expenses. Alliar, taken over by businessman Nelson Tanure, had worse results in its main indicators. The company attributed the bad performance to the Covid wave, which led to a reduction in elective exams and professionals leaving the company.

In common, the executives of the companies highlighted in their conference calls with analysts and investors that the scenario in March was of recovery, with a lower volume of layoffs in the companies that contract health insurance plans. Besides this, there is a positive expectation with the increase of the tickets coming from the price hikes of the plans and the resumption of elective procedures, which generate more profit, with the easing of Covid infection levels.

Most of the CEOs and financial heads of the healthcare groups said that, despite the current level of the Selic rate and its impact on the earning reports, they do not intend to reduce the growth strategy through acquisitions. They pondered that the analyses are more careful, but there was no change in plans. Hapvida has 20 assets for purchase on the radar. Dasa informed that the acquisitions will not take place at the same pace as in the last two years. In this period, the company, controlled by the Bueno family, promoted nine acquisitions with disbursements of $2.5 billion.

In recent months, the highlight deals were the acquisition of SulAmérica by Rede D’Or and the joint investment of R$678 million by BP — Beneficência Portuguesa, Bradesco Saúde, and Fleury — in an oncology company.

Source: Valor International

https://valorinternational.globo.com

23 de May de 2022/by Gelcy Bueno

Murray News

BR Properties sells assets to Brookfield to get back in the black

Martin Andres Jaco — Foto: Claudio Belli/Valor

BR Properties agreed to sell 12 business buildings and two plots of land to Brookfield. The deal signed Wednesday is expected to generate a net result of R$5.5 billion, the company’s chief financial officer André Bergstein said.

The amount will be set aside for prepayment of debts –BR Properties’s net debt amounts to R$2.1 billion – but the company has not decided whether it will be fully paid.

The sale makes sense because the company’s portfolio is mature and able to generate a capital gain, considering that high interest rates increase the company’s debt, BR Properties CEO Martin Jaco said. “The financial cost erodes our result, but the financing was prepared to be prepaid. For that, we needed cash,” he told Valor. “We are going to eliminate this financial cost.” BR Properties expects to make cash flow positive with the proceeds of the deal.

The company is also studying which portion of the proceeds will be distributed as dividends to shareholders. The remainder is likely to be invested in the company’s logistics warehouse projects and part will remain in cash.

The company is rebuilding its portfolio in the industrial and logistics segment after having sold all such assets four years ago.

BR Properties has no plans to rebuild the size of its portfolio in the short term, the CEO said in a conference call about the deal. “The market is not easy, so we will maintain this volume for some time,” he said.

Following the approval of the sale, the next step will be to discuss new investments or a plan to take the company private.

The sale includes six business buildings in São Paulo (the entire portfolio of the segment in the city), one in Alphaville (an affluent district on the outskirts of São Paulo), one tower in Brasília and four towers in Rio de Janeiro, totaling a gross leasable area (GLA) of 385,400 square meters. The two plots of land are located in São Paulo, with a GLA of 9,300 square meters.

The deal covers more than half of BR Properties’s portfolio. Now, the industrial segment, which includes logistics warehouses and land for them, accounts for the largest area in the portfolio. The company remains in the business segment only in Rio de Janeiro, with properties like Passeio Corporate, a project with 82,800 square meters of GLA, and with a smaller project in Minas Gerais.

According to Mr. Jaco, the company is getting rid of 100% of vacant offices with the sale, which means a reduction in costs.

The company said Thursday that it will receive 70% of the value on the closing date of the acquisition of each property, and that the remaining 30% will be paid by Brookfield 12 months after the deal is closed, in amounts corrected by inflation and the interbank deposit rate (CDI).

The next steps are the approval by an extraordinary general meeting, since it involves more than 50% of the value of the company’s assets, and waiting for the approval of antitrust body CADE, which could take 45 to 70 days, Mr. Bergstein said.

Source: Valor International

https://valorinternational.globo.com

20 de May de 2022/by Gelcy Bueno

Murray News

Electricity bill reduction is new test for minister

Adolfo Sachsida — Foto: Dênio Simões/Valor

Having passed the crucial stage of Eletrobras’s privatization, which was approved by the Federal Court of Accounts (TCU), Mines and Energy Minister Adolfo Sachsida will now negotiate a proposal to reduce electricity bills, which is under negotiation with Congress, and debate the use of public money for gas pipelines. The minister did not reply to a request for comment.

Both themes are seen as key by President Jair Bolsonaro’s allies. Regarding the increase in electricity tariffs, that exceeded 20%, the concern is with the negative impact of inflation on the popularity of the president and allies in search of reelection in regional elections.

Mr. Sachsida has already begun to point out alternative paths that would lead to the reduction of tariffs, which could become a package of measures if it adds other proposals from Congress. He is also trying to avoid other legislative proposals that concern the government, such as the one that imposed on the sector the construction of 8-gigawatt gas-fired thermal plants in regions where there are no gas pipelines.

The reduction in electricity bills meets the wishes of President Jair Bolsonaro, who is concerned with eliminating risks to his reelection. The skyrocketing cost of electricity, added to the cost of fuel, increases inflationary pressure and affects his popularity.

In a meeting with Chamber of Deputies Speaker Arthur Lira (Progressive Party, PP, of Alagoas), Mr. Sachsida signaled that he will use funds from the privatization of Eletrobras to neutralize part of the tariff increase. The operation itself already guarantees the transfer of R$5 billion this year to the Power Development Account (CDE).

When approving the 2022 CDE budget, in the amount of R$32 billion, the Brazilian Electricity Regulatory Agency (Aneel) considered the contribution of R$5 billion that already make up the calculation of the distributors’ adjustments. It remains to be seen whether the minister, when making the promise to Mr. Lira, will look for a way to bring forward the transfers that the “new” privatized Eletrobras will make to the CDE over 25 years. In all, the privatization will yield a total of R$32 billion to CDE.

Another way to bring more funds from Eletrobras’s capital increase to CDE this year is to convince the National Treasury Secretariat to give up part of the R$25.4 billion that will be received as fixed concession payment for changing the contractual regime of the plants. This would require more than good will from the economic team, since it would imply breaching the spending cap rule, which limits growth in public spending to the previous year’s inflation.

In recent days, the proposal to limit sales tax ICMS rate charged on electricity bills to 17% has gained strength, which would also be applied to other essential services. On Thursday, the Chamber speaker assured that the bill that deals with the issue will be put on the agenda next Tuesday.

The Brazilian Association of Power Distributors (Abradee) estimates that limiting the ICMS charged on electricity bills to 17% provides a 15% reduction in tariffs. The calculation was based on a ruling by the Federal Supreme Court, in December last year, which had already limited the state tax on power to 17%, also considering the essential nature of the service. Abradee estimates that the average rate charged to consumers is around 27% and believes that the state lacks goodwill in enforcing the Court’s decision.

More recently, on the initiative of Senator Fabio Garcia (União Brasil of Mato Grosso do Sul), Aneel came under pressure to speed up the use of tax credits related to the exclusion of ICMS from the calculation basis of PIS/Cofins. According to the senator, Aneel allows access to only 20% of what is made available.

The tax credit, estimated at R$60.2 billion, was also generated by Federal Supreme Court’s ruling. Of this total, R$48.3 billion, which has been declared final and unappealable, have already been qualified by the Federal Revenue. However, only R$12.7 billion were considered in the adjustments, causing tariffs to fall 5%.

Source: Valor International

https://valorinternational.globo.com

20 de May de 2022/by Gelcy Bueno

Murray News

Russia became fifth-largest exporter to Brazil despite war

The value of what Brazil bought from Russia grew 142% year over year — Foto: Portos do Paraná/divulgação

The Brazilian imports of Russian products accelerated at the beginning of this year at a much faster pace than the total of foreign purchases. As a consequence, the Russians, despite being at war with Ukraine, have climbed up the ranks and became, from January to April, the fifth-largest exporter to Brazil. In the same period last year, they were in the 12th position.

China is still the absolute leader in the supply of products to Brazil from January to April of this year, followed closely by the United States. Germany and Argentina come next. Russia, in fifth place, sold to Brazil in the period a total of R$2.4 billion, practically tied in value with India, which comes right after. In relation to last year, the Russians left behind countries such as Korea, Mexico and Japan.

Brazilian purchases from Russia grew 89% from January to April this year in relation to the same period in 2021. Overall, Brazilian imports rose 28% in this same comparison.

Specialists point out that Russia’s current position among Brazil’s five largest suppliers is not permanent, but the result of a scenario that came with the pandemic and was exacerbated by the Russia-Ukraine war.

The composition of our economic activity and the items Brazil buys from Russia help explain this. Fertilizers or chemical fertilizers are the main ones and account for 70% of the basket. Coal accounts for 15%, while petroleum fuel oils represent 7.1%.

Russia is one of the largest global suppliers of fertilizers. From January to April, Russians supplied $1.65 billion in these items, which represented a quarter of what Brazil imported in the period. The value of what we bought from Russians grew 142% year over year.

The increase in value was driven by prices and purchases brought forward. The prices of fertilizers imported by Brazil jumped 130.7% in April year over year. The data is from the Foreign Trade Secretariat (Secex/ME) and is valid for all the fertilizer we imported that month. However, the input that came from Russia was also more expensive. Data from consultancy MacroSector show that the price of Russian fertilizers that Brazil bought in the first quarter of 2022 increased 149% year over year.

Price increases reflect an increase that had already been happening since the beginning of 2021, said Fabio Silveira, partner and head of the consulting firm. Under the effect of the pandemic, fertilizers became more expensive due to increased demand, shortage of supply and logistical bottlenecks. The war brought even greater fear for the shortage of raw materials.

When releasing April’s trade balance data, Herlon Brandão, Secex’s undersecretary of Foreign Trade Intelligence and Statistics, explained that, according to the agency’s survey, farmers moved up the acquisition of inputs, probably due to fear of shortages, now already under the influence of the war in Eastern Europe. The usual, he explained, is that the import of these inputs increases in the second half of the year.

Mr. Silveira recalled that the robust agricultural production last year created a kind of “euphoria” in the industry regarding the prospects for 2022. The agricultural revenue in 2021, he says, reached R$893 billion, up more than 50% year over year. Capitalized, with high expectations for this year and with fears of a shortage of inputs, farmers have moved up the purchase of fertilizers and pesticides, he said.

Weather issues, he recalled, later led to a reassessment of the 2022 harvest. In spite of that, important crops, such as grains, are expected grow around 3% in volume, he estimated.

Mr. Silveira recalled that fertilizers imported now is likely to be used for next year’s crop, since this year’s is already planted.

José Augusto de Castro, head of the Brazilian Foreign Trade Association (AEB), says prices are expected to remain high and there is no prospect of a greater adjustment, either in fertilizers or in oil as long as the war continues.

For Mr. Silveira, it is possible that in May imports of fertilizers, including from Russia, will remain high. For him, however, demand will not remain at this level, because prices are very high, with a big impact on producers’ costs. In case the account shows that the price of the agricultural product will not allow farmers to pass on costs, the purchase of fertilizers and other inputs will be reduced. Producers will, at least in part, choose to use already fertilized soil from previous harvests, which, in turn, is expected to reduce productivity, he said.

Source: Valor International

https://valorinternational.globo.com

20 de May de 2022/by Gelcy Bueno