Inflation spike annuls consumption, income stimuli

Global inflation and Nepal

The inflation surge is expected to virtually annul the government’s attempt to offer support to household income and, consequently, to consumer spending, with fiscal stimulus measures such as the release of money from the Workers’ Severance Fund (FGTS) from this month on, a study by Santander shows.

Economists Gabriel Couto and Ítalo Franca estimate that withdrawals – up to R$1,000 per worker, which add up to R$25 billion to R$30 billion – will add 0.6 percentage point this year to the country’s extended real total wage bill – which includes wages, social security benefits and federal transfers. Even so, the growth projection for total wage bill has practically not changed between the October report and the one to be published Wednesday by the bank: it has gone to 3.2% from 3.3%, after plummeting 8% in 2021.

This occurs because the increase in the inflation projection to 7.9% from 6% annulled the expected growth with the withdrawals, according to Messrs. Souto and Franca. The higher inflation, they explain, reduces the real growth of the average income. At the same time that the employed population grows, the real income from work reached all-time lows, eroded by the persistent inflationary shock, they point out, in addition to lower entry-level wages for those returning to the labor market, Mr. Couto points out.

“We’ve had considerable inflationary surprises in the last few months and this directly impacts real income. The big point we can take from this update is that, even with the release of funds from the FGTS that we now include, the worsening of the inflationary picture has eroded this income,” the economist said.

Although fiscal stimuli play an important role, they say, the impact of inflation on the economy’s total income is greater. For example: the projected growth of 3.2% for the expanded wage bill this year contemplates fiscal stimuli, withdrawals from the FGTS and the IPCA (Brazil’s official inflation index) at 7.9%. In this case, the real gain in average income is 0.4%. “It’s already quite modest, especially when we look at what happened to the average income last year, when it dropped more than 4%,” Mr. Couto recalls.

If only the inflation forecast goes to 9%, the real average income would fall, reducing the growth of the expanded total wage bill to 2.5%. If the IPCA is maintained at 7.9%, but the scenario no longer contemplates withdrawals from the FGTS, there would also be a drop in the advance of the extended wage bill, but the loss would be a little smaller, to a growth of 2.8%.

The growth of the expanded total wage bill this year comes from the recovery of the labor market, the expansion of cash transfers programs Bolsa Família/Auxílio Brasil (to R$89 billion from R$35 billion) and the adjustment of social-security benefits for inflation, points out the report.

Mr. Franca stressed the mismatched effect of higher inflation on the extended total wage bill. “It ends up decreasing the value for the year. The higher [the price index] is, the more you deflate by a higher number, the more it erodes this income that is already given – the minimum wage and the benefit amounts are fixed. It ends up leading to a higher correction value for the minimum wage next year, but this increase will only be observed if inflation meets the target. We ended up losing a little of the gain [in the extended salary mass] this year because we are revising inflation upwards.”

In relation to 2023 and 2024, Santander’s estimates for the growth of the wage bill are lower, with increases of 1% and 1.8%, respectively, considering the inflation measured by the IPCA at 4% next year and 3% in 2023.

In Santander’s high inflation scenario (5% in 2023 and 4% in 2024), the extended total real wage bill would fall 1% next year and grow only 0.4% in 2024.

If Santander’s baseline scenario predictions materialize, the real total wage bill will reach 2019 levels only in 2024. “As the people who are entering the labor market take a while to recover the pre-pandemic wage levels and inflation continues at slightly more uncomfortable levels, we imagine that this recovery in average income will be a little slower, even though we have already recovered the pre-pandemic occupation levels,” Mr. Couto said.

According to economists, the projections for total income are consistent with the outlook for an economic activity in which household consumption advances 0.8% in 2022, remains stable in 2023 and grows 1.5% in 2024.

Santander estimates that the long-term elasticity between the real total wage bill and household consumption is close to 1.05 – that is, each 1% increase in the total wage bill raises consumption by 1.05%. During the pandemic, economists note, this elasticity even jumped to 1.5, which probably helped activity recover in 2021. For the coming periods, however, it is expected to return to levels closer to their pre-pandemic values (around 1), they say.

“Vaccination was crucial in recovering domestic activity and increasing social mobility; now, we believe the focus will be on inflation convergence,” the report points out.

Source: Valor International

https://valorinternational.globo.com

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Private-equity, venture capital funds invest R$11.6bn in Q1

Para quem vou vender" antes de "quanto vou ganhar": primeiro investidor da XP, Chu Kong desvenda os desafios do private equity - InfoMoney

Private-equity funds made investments of R$11.6 billion in Brazilian companies in the first quarter, up 8.4% year over year. The faster pace, this time, appears among the portfolios that invest in more mature companies, with R$5.2 billion, compared to R$1.9 billion in the same period in 2021. The venture capital portfolios, which focus on projects in early stages, allocated R$6.4 billion from January to March, with a drop of 27.3% compared to 12 months ago.

The data are from a quarterly survey held by KPMG and the Brazilian Private Equity and Venture Capital Association (Abvcap) unveiled to Valor.

The seasonal comparison may say little of what is happening in the venture capital segment as a whole, said Roberto Haddad, a partner and leader for private equity and venture capital at KPMG in Brazil. “In the last two years, it has grown enormously, doubled in size. That’s an important indicator, but in the middle of the road there are fluctuations,” he said. “The big indicator, the main one in my view, is the strength of this fund industry within the context of acquisitions and the dynamics of the Brazilian economy.”

Mr. Haddad points out that in the first quarter of 2020 the industry had invested R$5.7 billion in private-equity and venture-capital funds, but it is not possible to link the weaker performance to the Covid-19 pandemic, which entered the radar for real as of March.

The apparent strength shown by private-equity funds in the first quarter may not extend into the year, said Piero Minardi, head of Abvcap. The executive, who also leads Warburg Pincus in Brazil, believes that the segment tends to be more sensitive to issues related to the election and the macroeconomic environment. “The moment the political picture is defined, regardless of who wins [the presidential election], and there is a clear path ahead, volatility disappears. The private-equity segment invests in longer cycles, it is difficult to position today because of the risk of a setback for a certain macro policy.”

In any case, privatizations, businesses in the infrastructure segment and in more basic segments such as chemicals and petrochemicals have attracted funds with large sums of money. For Mr. Minardi, depending on the agenda, sanitation and port projects have a lot of potential. The consumer industry is also usually followed by private-equity managers with attention.

“There is a factor that can be important: the interest rate itself. The companies have to finance themselves again at a cost of 20% a year. This puts pressure on cash flow, it is a problem for those who have long-term debt, it is a factor for companies to consider selling some equity to have a better capital base and avoid the interest rate trap.”

In venture capital, the assessment is that strong activity will prevail, running somewhat independently from the economic cycles. “If innovation is good, it will do well in any situation. Great brands have emerged in crises, like Uber in 2008,” Mr. Haddad points out. “There is a giant movement in fintechs. The financial market has always been very strong and has shown strength in acquisitions. There are new banks, but also the big ones incorporating the smaller ones to get up to speed,” he notes. The insurance, health and logistics segments also tend to continue growing and attracting money.

The higher interest rates, however, may hinder funding by new companies in reais because once again the pension funds have no motivation to migrate from fixed income, that pays 5% or 6% real interest, to a higher risk asset, Mr. Haddad said.

The executive says he is already seeing a return to rationality, especially in growing and in late-stage businesses. “In the ‘A’ and ‘B’ [early] rounds, investors are also more careful. They want to know whether the company has passed the test or not.”

With R$2.5 billion invested in 15 companies, Kinea is completing the raising of its fifth fund, which totaled R$2.4 billion last year. “It was a period in which the sector suffered a lot, but we were a exception,” said Cristiano Lauretti, the company’s private-equity manager, referring to the fact that venture-capital portfolios led the investments in 2021, something unthinkable in his more than 20 years of professional career.

The operation so far was anchored by local investors, who profited from previous funds (average of 20% per year) and were encouraged to participate, despite the interest rate hike and elections in the second half. “In the past, they didn’t understand this class and when they started to understand the importance of having a certain share in variable income and within it, a certain amount in illiquid assets, they started to see the relevance of this in the different cycles that Brazil has experienced whether in recession or in good phases.”

With the new money, he says that the plan is to have eight to 10 more investments, with contributions between R$200 million and R$300 million, by minority shares. Health, education, agribusiness and technology are among the preferred industries, Mr. Lauretti said.

The venture-capital wave in Brazil was fueled by giant competitors such as Softbank, but private equity also advances at an accelerated pace, said Gabriel Felzenszwalb, a partner at Vinci Partners, an asset management company that carried out three deals in the last 12 months.

The executive considers that the cooling down seen abroad with the venture-capital thesis will also materialize here, but he sees a good moment for venture capital ahead. With Brazil well positioned to take advantage of a new commodities cycle, this impulse reaches other sectors of the economy. “With the geopolitical difficulties, global investors may eventually take a bit out of Asia and look more at Latin America and Africa; it’s an old move.”

Source: Valor International

https://valorinternational.globo.com

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Cement sales drop 2.4% in first quarter

Cement sales expected to decline by 20% in FY21 - The Economic Times

The Brazilian cement market, strongly affected by rains in some regions of the country in January and February, closed the first quarter of the year with a decline of 2.4% in sales, said SNIC, a trade association representing companies in the sector.

In March, however, there was some recovery, with a 0.3% increase in sales, to 5.53 million tonnes. This is the average monthly level that the industry seeks to maintain this year, seen as difficult due to the scenario of many uncertainties.

In the period from January to March, 14.8 million tonnes of cement were shipped in Brazil, compared to 15.16 in the same period in 2021. In total, including exports, sales totaled 14.91 million tonnes — a 2.2% contraction compared to 15.25 million tonnes in the same quarter of 2021.

When comparing sales per working day — the best indicator that considers the number of days worked and that has a strong influence in cement consumption —, says the SNIC, the product sales totaled 230,300 tonnes in March, up 2.1% from February and 4.4% year over year. Still, the quarterly result showed a 3.1% decline compared to the three first months of last year.

“The sector’s performance was not worse in March due to the demand from the real estate market,” the trade group said in a note. However, the launching performance tends not to be sustained at these levels, once the increase in real estate inventory, the drop in sales and high interest rates are likely to discourage future developments, the association said.

According to Paulo Camillo Penna, head of SNIC, self-construction, an important inducer of cement consumption, continues to slow down due to the high level of unemployment, smaller income of the population (which saw the lowest value since 2012) and the growing indebtedness of families, which was 51.9%.

“Reflecting this picture are the successive drops in retail sales of construction materials seen since mid-2021, already for the eighth consecutive month, until February,” Mr. Penna said.

According to the executive, the skyrocketing costs of cement inputs, combined with strong instability of the political and economic scenario, do not allow making a forecast of good performance as those seen in the last three years. “The ambition of the industry in 2022 is to maintain the sustainability of the sector in the face of a terribly pressured environment.”

Source: Valor International

https://valorinternational.globo.com

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Telefónica’s Vivo to open corporate venture capital fund

Telefônica Vivo vende 1.909 torres por R$ 641 milhões

Telecom Vivo announced on Monday the creation of its first corporate venture capital (CVC) fund to invest R$320 million in startups over the next five years. The amount makes Vivo Ventures one of the largest CVCs in Brazil.

The company plans to invest in 12 to 20 startups, with stakes in the range of R$15 million to R$20 million, in an average allocation of R$60 to R$80 million per year.

“We want to have stakes close to 20%. Therefore, the startup has to be big enough in the pre-money for our check to represent that percentage,” Christian Gebara, Vivo’s CEO, told Pipeline, Valor’s business website. In the average the company projects, the startup should have a price valuation around R$100 million before the investment.

Vivo has begun discussing internally and formatting the fund over the past six months, part of the company’s strategy to “Digitize to Bring Closer”, as its institutional motto states. “This means not only being the connection structure, but also being a digital ecosystem,” says the CEO.

Until now, Vivo’s investments in startups were made through Wayra, the Telefonica group’s innovation hub. Globally, Wayra has already invested the equivalent of R$300 million and, in Brazil, there were about R$25 million in a decade, with 30 startups in the local portfolio.

“Unlike Vivo Ventures, these were pre-seed and seed funding, with an average ticket of R$1.5 million. Now we can enter series A or B rounds of companies that have gone through this seed,” says Mr. Gebara.

One of the attractions for the startups, besides the capital, is the access to Vivo’s ecosystem, emphasizes the CEO — the telecom giant has more than 100 million pageviews in its base, 1,700 stores and 20 million unique users in the app, with an average of 80 million monthly interactions.

This connection has given Wayra’s startups revenues of R$70 million in 2021 with Vivo alone — Gupy, for example, is a recruiting company that was hired by the investor. “Companies can raise money with other funds, but few have this customer base, the volume of channels and the big data that we have,” says Mr. Gebara.

Wayra invests in Gabriel, a security and camera monitoring startup that currently operates indoors — if it begins to operate indoors, it may enter the smart home connection, for example, an issue in which Vivo has been engaged.

Wayra’s team will be responsible for the technical part of CVC and the business flow for the fund, which is interested in solutions in finance, health, education, entertainment, whether B2C or B2B. The company already has initiatives in these areas, such as Vivo Money, a personal credit service, and Vivo V, a health and wellness marketplace.

In Brazil, corporate venture capital funds have already made more than 200 deals in the last 20 years, amounting to $1.3 billion, according to a survey by fintech Distrito — most of this capital has been invested in the last two years. Here in Brazil, almost 70% of the CVCs are focused on the initial phase of startups, and therefore generally have lower volumes.

Sinqia’s CVC, for example, is R$50 million, and CSN’s is R$30 million. Companies that invest in more mature phases also have larger vehicles — BV Bank made R$300 million available to this type of investment in 2018, Via allocated R$200 million last year and Banco do Brasil divided this same amount in two vehicles earlier this year.

In the world, $80 billion were invested by CVCs only in 2021, according to CB Insights.

According to Mr. Gebara, Vivo will continue simultaneously with other strategies, such as partnerships in the model of the joint venture with Ânima Educação and maybe acquisitions. “The investment in startups complements our digital positioning,” he adds.

Source: Valor International

https://valorinternational.globo.com

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Thales teams up with Embraer’s Eve for “flying car”

Embraer will develop flying cars in Latin America- Olhar Digital

Thales, a heavyweight of the global aerospace industry, has joined forces with Eve to help it develop electric vertical take-off and landing vehicles (eVTOLs). Initially, the French multinational and Embraer-controlled company will conduct joint studies for 12 months starting in January, focusing on the aircraft’s systems. But the partnership can be extended to the other components of the urban air mobility ecosystem.

“This is a very promising market, but also a very new one. We will act in co-creation,” said Luciano Macaferri, Thales’s CEO for Brazil. The company, a giant in defense and digital security, already conducted research on eVTOLs, but had not joined a specific project until now.

The partnership also has a financial approach. Eve’s “flying car” or “electric air taxi,” as the eVTOLs have been called, is due to enter service in 2026 and has already secured $549 million in funding, enough to advance to the certification stage. Thales is among the investors that have contributed to the project, but the exact amount is protected by a confidentiality agreement.

According to Eve’s co-CEO Andre Stein, Thales can contribute by way of extensive experience in aircraft parts – aviation, electrical, flight control, navigation, communication and connectivity systems – and in the joint creation of solutions for eVTOL. “Bringing in another company, like Thales, makes the project more robust,” he said.

The multinational was already an important supplier of electronic systems to Embraer, used in commercial and executive jets and the KC-390 Millennium. Eve’s future suppliers are still to be selected, but the fact that Thales is participating in the eVTOL development project puts the company in an advantageous position.

According to the executives, the cooperation is not limited to Thales’s funds in Brazil. In the country, the multinational’s Space Technology Center, in São José dos Campos (São Paulo), and its Aircraft Center, in São Bernardo do Campo (in the same state), will serve as a base for the studies. But engineers in France, Canada and the United States will take part in the effort.

The Thales-Eve partnership also comes in handy from the certification standpoint, the executives note. Eve formalized in February its Type Certificate (TC) request at the National Civil Aviation Agency and will seek certifications in the United States (FAA) and Europe (EASA). The interaction of the multinational with these regulators and the possibility of exchanging information will contribute to the process.

With 1,785 units in the order backlog, Eve estimates that the price of its eVTOL will be $3 million. The electric aircraft aims to offer comfortable, low-noise, zero-carbon transportation. Initially, it will be manned, with capacity for four passengers, and there is still no formal decision on where the aircraft will be produced – what is certain is that the partner, at this stage, will be Embraer.

The listing of Eve on the New York Stock Exchange, after the merger with Zanite Acquisition, is expected to take place this quarter. Initially, the Embraer-controlled company was valued at $2.4 billion.

Source: Valor International

https://valorinternational.globo.com

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Electricity bills will be free of extra charges in 2022

Como entender a sua conta de luz? Veja 3 passos simples!

Electricity bills will come without any extra charge this year after the improvement in rainfall in the last wet season in Brazil, said Luiz Carlos Ciocchi, the director-general of national grid operator ONS.

This is possible because the reservoirs of the National Interconnected System (SIN) reached a water storage volume of 63.1% at the beginning of this year’s dry period, the best since 2012, compared with 35.3% last year, Mr. Ciocchi said. The official foresees a safer crossing from the wet to the dry period this year than happened in 2021. Hydroelectric power has a prominent role in Brazil’s power generation mix.

Brazil faced the worst drought in nine decades last year, which affected the reservoirs of hydroelectric plants and raised uncertainties about the supply of electricity. As a result, the country took measures including activating thermoelectric plants.

“We will have a very good year, very calm, which will not cause so much headache or cost so much,” the director told reporters. The dry season runs from the end of April to October.

Consumers currently pay R$14.20 for every 100 kWh consumed to cover part of the costs with thermoelectric generation. However, as of April 16, the Brazilian Electricity Regulatory Agency (Aneel) will eliminate the extra charge from electricity bills.

Brazil is expected to have up to 6,000 MW of thermal plants during the year. At the height of the water crisis last year, more than 20,000 MW of thermal plants were activated.

About the emergency contracting of thermal plants made last year until 2025, and that now are no longer necessary due to the improvement in hydrology, the executive defended the maintenance of the contracts, and ONS will tap these plants during the year. “Preserving the legal framework is very important. This brings confidence and stability,” he said.

According to Mr. Ciocchi, the cost of using these plants is unlikely to represent a significant cost for consumers. Next year is expected to be calmer from the standpoint of structure for the supply of electricity since large blocks of renewable power from wind and solar farms are expected to come into operation, although it is still difficult to predict the situation of the reservoirs.

On the other hand, Brazil still has limitations in power transmission from the North-Northeast system to the Southeast region. However, according to him, the integration is moving forward.

“Looking ahead to 2023 is like looking into a crystal ball. We still can’t say much. What we can say is that there is a lot of new generation coming in, a lot of transmission lines, so from the infrastructure standpoint, we will be better off than this year,” he said.

The reservoirs of the Southern subsystem, the only one below average, with about 50% capacity, are still a concern.

Source: Valor International

https://valorinternational.globo.com

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Ambev unveils new approach for growth

Jean Jereissati — Foto: Carol Carquejeiro/Valor
Jean Jereissati — Foto: Carol Carquejeiro/Valor

Ambev, the owner of beer brands Brahma, Skol and Antarctica, is presenting a “new chapter” of its history to investors this Tuesday. “To say we are a beverage company no longer represents us entirely,” CEO Jean Jereissati told Valor. The group wants to be, more and more, a platform, which goes beyond selling beer or soft drinks and includes food and even services, such as credit and renewable power generation.

Ambev has been successful until now with a model of strong expansion, search for efficiencies and inorganic growth. “The company conquered the world,” the executive said. “But when we turned 20 [in 2019], we rethought what the next 20 years would look like, and it became clear that what brought us here was not what would take us there.”

The company now wants to make alliances, like the ones it already has with BRF, M. Dias Branco or Pernod Ricard to sell its customers salami, cookies and vodka.

The Covid-19 pandemic in 2020 has somewhat opened the “technology window” for the company to put into practice what it began discussing as recently as late 2015 and early 2016. “The world went to online retail, it is digital now, and we were prepared when the pandemic came.”

If before only 15% of around 1 million customers were digital, today 80% are. “[The digital channel] was an option before. Now it is our core business. That’s where everything happens.”

Increased digitalization has had a major impact on the operation, speeding up the business. A bar, for example, can place orders through the Bees platform. This has given Ambev’s salesperson more time. Before the pandemic, a salesperson had only seven minutes to talk to a customer – there are 5,000 salespeople for a portfolio of one million customers. With Bees, a bar or restaurant ends up being in contact with the company for 37 minutes.

Digitalization also increased the umbrella of activities and the productivity of the salespeople, now called representatives by the company. The same 5,000 workers that served 750,000 customers in 2019 now deal with 1 million and will serve 1.2 million soon, the executive said.

To do so, a workforce of another 5,000 people has been assembled, with programmers and developers working on improving the several technologies used by Ambev and to creating new products and services. One priority is to improve logistics. The company started using small warehouses as distribution centers and motorcycles to speed up deliveries.

“Our acquisitions now should be more about improving our capabilities, in technology and logistics, and making alliances,” Mr. Jereissati said. The company plans, for example, to develop or buy a company that has created software for managing orders.

In the last three years, the company’s investments, including innovation, totaled R$17.5 billion, or R$7.77 billion last year alone.

In the last two years, the company has launched and managed to consolidate digital services such as the end consumer sales app Zé Delivery and Bees, for sales to bars and restaurants.

The platform Mr. Jereissati puts at the center of his strategy includes offering credit to customers. From the beginning of the pandemic until the end of 2021, the mass of credit offered to small retailers has doubled and is expected to double again this year. Sanitary restrictions, which required the closing of bars and restaurants for months on end, caused a crisis in this segment. For this reason, Mr. Jereissati said, “we were very flexible and rolled over the payments.” Fintech company Bees Bank, formerly called Donus, has 250,000 digital accounts.

This new operating model helped Ambev to sell 180 million hectoliters in 2021, a record level. Net revenue grew 24.8%, to R$72.85 billion. According to him, the year was less about big industry growth and more about market grabbing. “We were very countercyclical in the pandemic.”

Competition became fiercer. Heineken complained to antitrust regulator CADE this year against Ambev’s exclusivity contracts with bars. Mr. Jereissati showed itself to be calm. “It represents very little of our sales.” According to sources heard by Valor, exclusivity contracts account for about 2% of Ambev’s revenue.

Source: Valor International

https://valorinternational.globo.com

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Analysis: Central Bank seeks to contain market reaction to inflation

Roberto Campos Neto — Foto: Reprodução/YouTube

Central Bank President Roberto Campos Neto downplayed concerns about the sharp acceleration in March inflation, seeking to contain the market’s reaction to the latest reading of the IPCA, Brazil’s official inflation index, unveiled Friday. Inflation was up 1.62% in the month, above the median of 41 projections compiled by Valor Data, of 1.32%.

The financial market followed Monday morning a live-streamed event with Mr. Campos Neto, held by Arko Advice and the Traders Club (TC), in search of signs about a possible extension of the monetary tightening cycle after the news on inflation.

Mr. Campos Neto said that the reading represents a “small” surprise, before explaining that the Central Bank needs to better analyze the data before unveiling its findings.

The central banker had been saying he saw a final interest rate hike in May, to 12.75% per year from the current 11.75%, as the more likely outcome. He did not repeat this message on Monday. But this seemingly does not mean he will tighten further, as he had already failed to repeat the signal in a statement at another event last Thursday, before the latest figure for the IPCA was released.

Mr. Campos Neto tried to soften the bad news in several moments. He said the monetary authority had already been calling attention to the fact that when oil company Petrobras raises fuel prices, the increases hit the pumps more quickly, although in the end the pass-through occurred at an even faster speed. According to him, this faster pass-through in a month means that, in the subsequent period, there will be compensation.

Mr. Campos Neto also said that it wasn’t only in Brazil that there were surprises in the most recent inflation reading, as several other countries faced the same situation. He highlighted the role that the recent appreciation of the real against the dollar may have in avoiding a strong impact of the rise in commodity prices in inflation.

According to him, the stronger real is not completely priced by the financial market, since many analysts are still working with a foreign exchange rate between R$5.25 and R$5.35 to the dollar. “When I look at the estimates I get from the inflation market, some people have already fully considered the [new] exchange rate, while others haven’t yet,” he said.

In other words, Mr. Campos Neto highlighted the exchange rate as a positive factor that could affect the market’s inflation expectations, at a moment when economic analysts are raising their projections in response to faster inflation.

And Mr. Campos Neto also said he was comfortable with the appreciation of the real, saying that it doesn’t demand interventions from the Central Bank. He signaled that he might start selling dollars on the market if there are impacts from the withdrawal of stimulus in the United States.

Mr. Campos Neto was asked if there was any special concern with services inflation. He answered that these prices had been showing the expected behavior during the reopening of the economy. But industrial goods prices failed to drop as expected. “[Service] inflation somewhat reacted in the way we expected,” Mr. Campos Neto said.

Some negative things mentioned by Mr. Campos Neto deserve attention. For example, he cited rising wages for the first time and spoke of high core inflation and the prices of clothing and food away from home, which showed a “surprising increase.”

But overall, he was quite careful to avoid definitive conclusions, claiming more than once that one must carefully study the data. He also recalled that the interest rate hikes made since last year have not yet had time to be seen in the economy.

In other words, Mr. Campos Neto’s entire speech was designed to acknowledge that the IPCA was higher than expected, but that it is undecided whether an additional monetary policy response will be necessary.

Source: Valor International

https://valorinternational.globo.com

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States speed up investments in election year

Manoel Pires — Foto: Wenderson Araujo/Valor
Manoel Pires — Foto: Wenderson Araujo/Valor

The states started this election with accelerated investments, even with more restrained revenue growth. The combined investments of 26 states and the Federal District totaled R$4.24 billion in the first two months of the year, up 115% year over year.

The data shows, according to experts in public accounts, that these expenditures by states are likely to remain strong after a boost in 2021, when investments closed the year with a real increase of 83.6% compared with the previous year. Financial surpluses from previous years are expected to help this, even though revenue flow has already shown a slowdown at the beginning of the year. State governments ended last year with R$140.2 billion in cash, R$61 billion more than the previous year.

According to data from the fiscal reports of the states, the collection of sales tax ICMS totaled R$85.4 billion in the first two months of the year and is already behind inflation, with a real drop of 3.2% against the same period last year. ICMS is the main tax collected by state governments. Current revenues, which include other taxes and transfers from the federal government, advanced 2% in real terms in the same comparison.

The revenue and expenditure data for the first two months were collected by Valor from the fiscal reports submitted by the states to the National Treasury Secretariat (STN). The expenditures with investments considered the primary capital expenditures. The values for the first two months of 2021 were updated by Brazil’s benchmark inflation index IPCA.

For specialists, even though the situation is heterogeneous among the states, with considerable gains in ICMS collection or in specific revenues in some of them, the picture shows that the generalized and accelerated advance in tax revenues seen last year did not continue into 2022, said Manoel Pires, coordinator of the Fiscal Policy Observatory of Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre/FGV). For him, the scenario points to the end of a period of “fiscal bonanza.” The growth of current revenues as a whole, he says, should give way during the year and follow more the performance of tax collection.

The collection of revenues during the year is fraught with uncertainty, said Ursula Dias Peres, a professor of public policy at the School of Arts, Sciences and Humanities (EACH) of the University of São Paulo, and a researcher for the Solidarity Research Network. Besides the effects of the economic slowdown, she said, state revenues will still suffer the impacts of tax changes.

Among them, Ms. Peres highlights the change in the calculation of ICMS on fuels as well as the cut by the federal government in the rate of the Industrialized Products Tax (IPI). This tax finances the State Participation Fund (FPE), which is likely to impact the states that have an important source of revenue in the federal constitutional transfers.

Marco Aurelio Cardoso, secretary of finance of Rio Grande do Sul, says that the collection of ICMS in the first quarter of this year grew 9% in nominal terms compared to the same period in 2021, with a small real drop. For him, this is likely to be the trend for the year. “We don’t believe in a real growth of ICMS this year. At most we will restore inflation [in the collection] and probably stay a little below it.”

In Alagoas there is also a slowdown in the tax collection, said George Santoro, the state’s secretary of Finance. From January to March, ICMS revenue was about 1% higher than the same period last year. For 2022, the expectation is for real growth between this same rate and 2%, which, if realized, will represent a great deceleration in relation to the real increase of 10% in 2021 against the previous year, a level of growth “that won’t come back.”

Even with uncertain scenario for revenues, Ms. Peres said, the investments scheduled for the year are likely to be financed by surpluses in 2020 and 2021. In 2020, she recalled, in good part as a result of extraordinary transfers from the federal government as a bailout for states and municipalities to combat the economic effects of the pandemic and, last year, due to the surprising behavior of tax collection.

“The surplus was big,” Mr. Pires said. “As tax collection was much higher than what budgets projected, in which a much more conservative scenario predominated, most states managed to turn tax collection into cash. The primary result last year was at historical peaks.” This, he said, will help many states balance spending this year, including investments that typically grow in election year. “The revenue slowdown becomes an important focal point for next year’s budget.”

Mr. Cardoso says that in Rio Grande do Sul the expectation is to expand investments to around R$3 billion in 2022, compared to R$2.3 billion last year. The state expects to receive a green light to join the Fiscal Recovery Regime (RRF) offered by the federal government until the end of May.

In Alagoas, where investments accelerated in 2021, the forecast is to keep the works at an accelerated pace this year. According to Mr. Santoro, the investment committed in 2022 is expected to reach R$3.1 billion this year. Last year it was R$3.7 billion.

In a statement, São Paulo’s Secretary of Finance says that the forecast for investments in 2022 is R$27.1 billion this year, of which R$20.5 billion from the Treasury and R$5.3 billion from financing. In 2021, the state invested R$25.4 billion, and in 2020, R$11.2 billion.

The ICMS collection forecast in the budget is R$191.4 billion and the Secretary of Finance says that any revisions will be made throughout the year. Fuels represent about 11% of the ICMS collection and the freezing of the reference price until June and the eventual loss will be measured throughout the year. As for diesel, the adoption of the ad rem rate, according to the secretary, is likely to have a neutral effect for São Paulo consumers.

“The collection will not perform as if the ICMS continued to be levied on current market prices,” says the note. According to São Paulo’s secretary of finance, the collection still showed real gains in the first quarter, compared to the same period last year. In the first two months, there was a real advance of 0.3% considering the ICMS data from fiscal reports, updated by the IPCA.

On the expenditure front, the surge in investments compares with other spending categories. Personnel expenses and social taxes fell 0.72% in real terms in the first two months of the year in relation to the same period last year. Current expenses, which besides personnel also include costs, fell 1.64%.

This, however, is a picture that may change during the year, since it still reflects in large part the Complementary Law 173, which restricted adjustments of salaries of public servants until the end of last year, Ms. Peres said.

In the first months of the year, she said, there was pressure for real adjustments and increases, which can make a difference in this expense as of the next months. According to the Superior Electoral Court (TSE), because of the elections this year, real salary increases could be granted to public servants until April 5, but adjustments below inflation have a longer deadline. The increases, the researcher said, can make a difference in personnel expenses in the coming months and become permanent expenses of the states.

Source: Valor International

https://valorinternational.globo.com

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Benchmark interest rate to be still high after May

Transition of Interest Rate Benchmarks | OCBC Singapore

The March inflation numbers, which came in well above consensus expectations, once again increased the market’s distrust that the Central Bank will be able to meet its goal of ending the cycle of interest rate hikes at the next Monetary Policy Committee (Copom) meeting in May.

The skepticism of financial agents was reflected in the increase in bets that the end-of-cycle interest rate will be higher than the Central Bank had signaled in its last monetary policy meeting, 12.75%. The negative surprise with benchmark inflation index IPCA pushed future rates to price the Selic policy interest rate around 13.25% for the end of 2022.

“In terms of monetary policy, today’s [Friday’s] result strengthens our scenario that the Central Bank will need to revise its inflation projections of 6.3% for 2022 and 3.1% for 2023, and then revise its baseline scenario for monetary policy to interrupt the tightening cycle in May. We maintain our bet that the Central Bank will increase the benchmark interest rate by 100 basis points in May, 75 basis points in June and 50 basis points in August, to 14%,” Credit Suisse professionals wrote in a report.

There are also scenarios of even higher interest rates in Brazil. According to investment bank Haitong’s chief economist for Brazil and professor at the Getúlio Vargas Foundation, Marcos Ross, the widespread price hikes may force the Copom to raise the interest rate beyond 14%.

“Thinking about the balance of risks, there is no way to think that the Central Bank will be comfortable with this data, it is a number that will have an impact on expectations. I believe that reality will impose itself and the Copom will not stop tightening in May,” he says.

After the release of the index, Haitong revised its IPCA estimate for 2022 to 7.4% from 6.8%, and for 2023, to 4.1% from 3.7%. The basic scenario of the bank for the Selic is that the Central Bank should opt, in the end, for making a gradual end of cycle — the monetary authority had been signaling its intention to close the interest rate hike in the next Copom meeting, in May. “We see another 100 basis points hike and a reduction in the pace, from 75 basis points and 50 basis points in August”, says Mr. Ross, citing the bank’s projection of a Selic rate at the end of the cycle of 14%.

In an alternative scenario, Haitong predicts that the lower doses of tightening planned for June and August may increase, in the face of current pressured and widespread inflation. “The risk is, instead of another 75 basis points hike, there will be another 100 basis points hike, and 50 basis points of hike will turn into 75 basis points,” he says. “So I imagine, in an alternative scenario, that the Selic could exceed 14%.”

At Bank of America, the data generated a revision of year-end inflation expectations to 8.0% in 2022 and 4.5% in 2023. “All in all, this corroborates our view that the Central Bank will not be able to interrupt the tightening cycle in May. We expect a final 50 basis points hike in June, raising the Selic to 13.25%, but the risks are up,” write professionals with BofA, in a report signed by the head of economics for Brazil and Latin America strategy, David Beker.

Source: Valor International

https://valorinternational.globo.com

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