The last month with a negative balance of foreign capital at Exchange B3 was November 2021 — Foto: Divulgação
Amid a more challenging global context for risk assets, with uncertainties over the growth of the world’s main economies and volatility in commodity prices, foreign investors withdrew funds from the secondary market of the local stock exchange, in the spot segment, in April. The total deficit was R$7.67 billion, marking the first month in 2022 in which there was an outflow of funds. Before, the last month with a negative balance of foreign capital at Exchange B3 was November 2021.
The April scenario is the opposite to that observed during the first three months of the year. In January, foreign investors invested R$23.39 billion, followed by R$20.58 billion in February and R$ 21.35 billion in March.
With the support of international investors, benchmark stock index Ibovespa had an expressive rally and, on April 1st, reached its record level for the year, ending the trading session at 121,570 points, a 16% appreciation in local currency. In April, when the external flow showed a reversal, the performance of local stocks was the opposite: Ibovespa dropped 10.10%.
In this sense, market professionals have adopted distinct visions about the possibility of the outflow continuing in the coming months. While there is caution among players with the monetary tightening scenario and slowdown in global growth, there is also the reading that Brazil is a relative winner in this scenario.
“We still see Brazil as a relative winner and remain ‘overweight’,” says Bank of America’s (BofA) Latin America equity strategy team, composed by David Beker, Paula Andrea Soto, and Carlos Peyrelongue.
“Even though the foreign flow to Brazil’s local stock exchange was slightly negative in April (there were outflows of R$7.67 billion in April, but the balance is positive at almost R$58 billion year-to-date in equities), Brazilian commodities are expected to continue benefiting from global dynamics and the weaker real supports exporters,” say the professionals. Still, according to them, the activity data in Brazil is improving and interest rates may peak soon.
In its monthly allocation strategy report, BTG Pactual’s macroeconomics and strategy team says it is constructive on local equities, a view based on the thesis that there are companies that will benefit from a resilient commodities price environment, as well as those that perform better than Ibovespa in high interest rate (financial) environments, and those more exposed to high income consumption.
The strategists, however, highlight four pillars to evaluate the current market prospects: macroeconomic scenario, corporate earnings, fundamentals and valuations, and flow. The first three topics, according to them, inspire optimism for the stock market, with flow being the only one that demands more caution.
“After a great first quarter of foreign inflows into our stock market, April was marked by a negative flow reading, reflecting a volatile commodity and market environment, in general,” the professionals state. They point out that local funds also continue to contribute negatively to this equation, as a result of the redemption dynamics that the industry continues to experience.
Also according to B3 data, institutional investors withdrew R$2.446 billion from the secondary market in April, increasing the annual deficit to R$63.519 billion.
“We understand that this vector is still not expected to improve in May due to the market context and, consequently, demands greater caution,” point out the BTG’s professionals.
B3 also informed that in April individual investors were net buyers in the secondary spot market, with a positive balance of R$4.972 billion.
The Amazon rainforest is in a trap: the elements that reflect the failure of its unstructured occupation are also the key to solutions for the territory. The largest region in Brazil reveals the worst social indices and the highest rates of violence at the same time as it has a demographic bonus, open land with enormous potential and forest – three fronts of development, well-being and wealth. The paradox of the Amazon is that its large number of young people suffer without economic options, 90% of the deforested areas are unproductive, and the forest is only valuable on the ground. Despite its riches, the Amazon rainforest has serious poverty problems.
The diagnosis of the difficulties is as complex as the size of the area. The Amazon rainforest occupies 60% of the Brazilian territory but has 13% of the population. It accounts for only 8% of the national GDP and emits more than 40% of greenhouse gases. It is a very polluting economy: it emits little carbon and generates little wealth.
Diagnosing, analyzing and searching for ways out of the three overlapping crises in the Brazilian Amazon – the social, the environmental and the Amazonian ones – are the focus of an ambitious project for the region’s economic development. “Amazônia 2030” began two years ago, has already concluded 39 of the 50 studies commissioned and involved 60 researchers from universities in the region, Fundação Getulio Vargas (FGV), business school Insper, and many other institutions in the country. It is being considered as one of the broadest and most profound diagnoses of the Amazon ever made, and is funded by the Institute of Climate and Society (iCS).
A synthesis of the results will be presented this week at an event at Princeton University, in the United States, to an audience of 100 people, 70 of whom are Brazilians. In the audience or on stage will be names such as Tasso Azevedo (MapBiomas), Suely Araújo (Climate Observatory), Armínio Fraga (Gávea), Guilherme Leal (Natura), Márcia Castro (Harvard), João Moreira Salles (Serrapilheira and Moreira Salles institutes), Ilona Szabó (Igarapé), Sérgio Rial (Santander), Candido Bracher (Itaú Unibanco and Mastercard boards of directors), Roberto Waack (Amazon Concertation), and indigenous leaders such as Txai Suruí and Juma Xipaia, among other names connected to the Amazon.
Juliano Assunção — Foto: Divulgação
The project’s mapping of knowledge gaps about the region and proposed solutions also intends to inform the electoral debate. “This is our finishing point: to have a set of concrete proposals for this year’s elections, both presidential and state governmental, drawing attention to the importance of the Amazon,” says economist Juliano Assunção, one of the coordinators of “Amazônia 2030.”
“Everything that is thought about Brazil is different in the Amazon. It is as if there were two countries, with very different social, environmental and economic realities”, says agricultural engineer Adalberto Veríssimo, an associate researcher and co-founder of Imazon, one of the main research and strategic action centers in the Amazon, and another coordinator of the project.
“The Amazon experiences a demographic bonus. The region has many young people, while the rest of the country is aging. Youth is the way to achieve economic growth, at least the chances are good,” summarizes Mr. Veríssimo. The fact is that the dynamism of the labor market is much more precarious in the North region. “Young people find the work environment difficult, with low quality and many people working informally. There is a huge discouragement,” he says.
The historic deforestation of the Amazon has not resulted in jobs and opportunities for young people. In the nine states of the Legal Amazon region, people aged between 18 and 24 find it much more difficult to enter the job market than in the rest of the country. In this age group, 42% of young people are unemployed in the Amazon, compared to 29% in the rest of Brazil.
“Among young people, in the Amazon, there is discouragement,” Gustavo Gonzaga, a professor at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio), a labor economics specialist and author of the study, told Valor at the time of its release. “There is a concept, in labor economics, which is called the scarring effect,” said the specialist. These are people who start their careers, fail to engage in the labor market, and become discouraged. “This discouragement causes them to get involved in drug trafficking, in crime, and has health implications, cases of depression.”
“If the demographic bonus has its positive side, we have not managed to take advantage of it. The Amazon is the most violent region in Brazil,” says Mr. Assunção, who is also an associate professor at PUC-Rio and director in Brazil of the think-tank Climate Policy Initiative (CPI).
Adalberto Veríssimo — Foto: Divulgação
“An important and evident agenda for the development of the region is that of young people. It is necessary to take advantage of this demographic bonus that today has become a kind of burden,” says Mr. Veríssimo.
Violence in the region, which had relatively low rates until the early 2000s, began to grow and exploded with the illicit environment of land grabbing, illegal extraction of gold and wood, and drug trafficking. The immense territory and the little presence of the state helped to spread conflicts.
The homicide rate in the Amazon in 1999 was about 70% of the rate in the rest of the country. Today it is 60% higher than in the rest of Brazil. Data from the study by economist Rodrigo Soares shows that the difference in homicide rates between the Amazon and the rest of Brazil was 12,610 more homicides in the region between 1999 and 2019, in municipalities with less than 100,000 inhabitants. “This upward trajectory of violence in the Amazon does not reveal any possibility of cooling at this time,” Mr. Assunção acknowledges.
The amount of open and unproductive land is another bottleneck for development in the Amazon. Of the 83 million hectares already deforested in the region, around 70 million hectares are underused or totally abandoned. “Only 10% have good productivity. There is a lot to recover,” says Mr. Veríssimo, who calculates this amount of land at something equivalent to the combined area of the States of Minas Gerais and Paraná. “It is a fallacy to say that it is necessary to open up forest areas to produce food. What is needed is to recover what has been lost,” he summarizes.
In the areas of lost forests there is room for forestry, pulp and paper industry projects, native forest and agroforestry planting, room to improve livestock and grain production, area for oil palm plantations. “And there’s still some area left. This means growing without deforesting,” says Mr. Veríssimo.
He recognizes that the land environment is a knot that needs to be undone and says that Congress cannot complicate the picture any further. “The right to property is important in the legal ordering of the territory,” he continues. In the Amazon, two thirds of the land are in the hands of the federal and state governments, and one third belongs to private parties.
In the Amazon, 30% of the lands are undesignated areas. They are public lands, not all of which are covered by forest anymore, already with deforested areas. “The undefinition is a good opportunity for the advance that takes place over the territories. Therefore, the role of the Brazilian government, especially the federal government, is important,” he continues. “The private sector has no way to solve that,” Mr. Veríssimo says.
“When governments or the Congress ease rules so that recent occupants who have deforested can have title to the land, there is a huge incentive for more encroachment on forests. What is worsening is the right to property instead of encouraging good land use,” summarizes Mr. Veríssimo.
There is a third fundamental element in the mosaic of development options for the Amazon – the millions of hectares covered with forest. “The problem is that we still haven’t learned how to make money with the forest, which is not an economic vacuum. We haven’t realized its potential because we haven’t seen the forest as a strategic resource that puts Brazil in the economic vanguard,” he continues. “We have done a lot of things wrong in the past and now our task is to make very good use of these areas.”
In the Amazon the population is small for the size of the region. “The development strategy for the Amazon has to be a coherent and consistent state policy. It is a non-transferable task of the state that has to create a lawful environment and organize the territory,” says Mr. Veríssimo. “We don’t have 30 or 50 years to have a clear vision of how to develop the region. We won’t be able to conserve the forest if the region continues to be poor and contaminated by illegality,” he continues.
“Amazônia 2030” does not bring immediate solutions but outlines several paths to develop the region. Illegality discourages investment in the Amazon. Developing an agroforestry economy is a huge opportunity, the researchers recommend, and reduces the pressure on the forest. Another study points to the need for infrastructure in the region. “The Amazon needs infrastructure, but one that does not increase deforestation,” says Mr. Assunção.
Another agenda to be stimulated is the digital-based economy. The region is far behind in broadband telephony. “Putting quality broadband in place would allow young people, who are disconnected from the local job market, to be, for example, programmers. They could seek another economic space unrelated to his physical surroundings,” suggests Mr. Veríssimo.
Improving the digital environment in the region would also help provide better healthcare to remote populations with teleconsultation systems. The same could happen with education.
“What needs to be understood is that deforestation is not a factor for economic growth in the Amazon, and hasn’t been for a long time,” says Mr. Veríssimo.
Together with Mr. Assunção, he will present on Thursday a summary of the project’s studies in Princeton. The event, which will take place at Princeton’s campus in New Jersey, is organized by the Brazil Lab at Princeton University. On Thursday the event is open, with broadcasting on the Brazil LAB YouTube channel.
The strategy by the Brazilian Central Bank that prioritizes keeping the Selic at a level around 13% for longer instead of raising the benchmark interest rate to even tighter levels is valid. Thomas Wu, the chief economist at Itaú Asset, believes that it is preferable that monetary policy “be a marathon, not a 100-meter dash,” considering the current interest rate.
In line with the market, Mr. Wu projects a hike of 100 basis points in the Selic rate in Wednesday’s Monetary Policy Committee (Copom) announcement, and another one of 50 basis points in June, taking the rate to 13.25% at the end of the cycle. “Maybe it can go up in August, but 50 basis points more will not change the entire strategy. The Central Bank is very close to stopping,” said the economist, who has already worked at Verde Asset and was a professor at the University of California, Santa Cruz.
In an interview with Valor, his first since he joined Itaú Asset in January, Mr. Wu points out that raising interest rates to a much more restrictive level may not be advantageous to bring inflation to the target in 2023 if this hinders the more general notion of well-being that it ultimately should represent. “What it [the Central Bank] needs to make very clear is that it will only cut interest rates when inflation starts to fall,” Mr. Wu said, acknowledging that the choice “for consistency” brings challenges. Read the interview below.
Valor:The Central Bank started to indicate in March that it wants to end the cycle of interest rate hikes. How do you see this strategy?
Thomas Wu: Any problem has three variables: its size, the dose of the medicine and the duration of the treatment. The interest rate is already restrictive, our neutral rate is not at double-digit levels, although the way we estimate the neutral real interest rate is somewhat vague. If we look at the 360-day nominal interest rate and subtract the 12-month inflation expectation showed by the Central Bank’s Focus bulletin and the neutral rate estimated by the monetary authority, we have tightening similar to that of 2015 and 2016. How big is the problem? Each month we find that the gap between inflation and the target is wider. The Central Bank, then, could set a fixed relevant horizon and, if it finds that the problem is bigger, increase the dose of the medicine and go to [a Selic of] 14%, 15%, 16%. Or, as a central bank, it also has the right to do something else. If it suspects that the dose of the medicine is starting to cause more side effects, it can think that it has already reached the size and extend the horizon. It will get there, but will take longer.
Valor:Is the Central Bank close, then, to ending the cycle?
Mr. Wu: As a strategy, the Central Bank is very close to ending. He may give 100 basis points next time and maybe 50 basis points in June. Maybe it can go up in August, but 50 basis points more will not change the entire strategy. In the estimation of models, the interest rate is already in the contractionary territory. It must make very clear that it will only cut interest rates when inflation starts to fall. It is a strategy for consistency, which does not raise the dose of medicine up high. Roughly speaking, I think it is valid, although it has its challenges. It is not easy.
Valor:What are these challenges?
Mr. Wu: To stop raising interest rates while underlying inflation is still on the rise. The statement has to be very well done and has to say that it is stopping [raising the Selic], but not because it is abandoning it. The risk of this strategy is that some people interpret that the Central Bank is not doing what it needs to do and that expectations become even more unanchored.
Valor:Inflation expectations for 2023 are already quite far away from the center of the target…
Mr. Wu: We are working with inflation above the target next year. We have 8.1% this year and 4.6% in 2023. Does this mean that we think the Central Bank will not do its job? Not at all. Inflation is a global problem. Inflation is high and accelerating around the world, and Brazil is one of the few countries where interest rates are in the contractionary territory. I don’t project inflation at the target next year because I don’t think it is necessary to put the interest rate at such a level that convergence happens in 2023. In my estimates, the rate needed for that would do more harm than good. You would anchor inflation, you would bring it to the target, but the target, in a general context, indicates more sustainable long-term growth. If you take this literally and raise interest rates to bring inflation to the target next year, maybe this more general concept of sustainable growth starts to lag further behind.
Valor:When would this convergence occur?
Mr. Wu: We have had several shocks around the world. Interest rates tackle the secondary effects. I think we are going to live for a long period with high inflation and above the target. It will take a long time for interest rates to drop. We are discussing some convergence in 2024. It is a matter of preference. Some economists will say that, unfortunately, for reasons of anchoring and credibility, there is no other way out than to take interest rates to 15%, 20%… This is also valid. I prefer it to be a marathon, not a 100-meter dash. It’s about persevering with an already contractionary dose of medicine, resisting all the pressures to cut and only start reducing interest rates when it is clear that the problem has been addressed. Starting an easing cycle at the end of next year is risky. The market has already priced it in at the turn of the year. I think it is a quite optimistic assumption, especially because we don’t know yet how big is the problem.
Valor:Major central banks around the world are also beginning to tighten their monetary policies. Doesn’t this help to contain some of this global inflation?
Mr. Wu: All central banks except Japan are saying that they are going to start doing some kind of monetary tightening, each one at a different timing of its cycle. Is a recession coming? I think it will come in the same way that we are sure that winter will come. It doesn’t mean that I am super pessimistic. But you can’t fight inflation without holding back aggregate demand. At the moment, the biggest problem is that inflation is still accelerating. A great part of it has to do with a very strong demand in the United States.
Valor:What is the asset manager’s projection for U.S. interest rates?
Mr. Wu: This terminal rate around 3% that appeared in the last FOMC meeting seems low to me. For a terminal rate to be in the contractionary territory in the U.S., the risk is for it to be above 4%.
Valor:And here in Brazil, do you see evidence of demand inflation?
Mr. Wu: We have a very high diffusion. The number of products at a high inflation rate is large, it goes beyond food. When you see something like that, you imagine it has a common demand component. Interest rates are at a contractionary level, consumer default rates are rising, but consumer spending is strong and I think it will take time to disinflate. As for the labor market, it is not wonderful, but it is resilient, it is not weakening.
Valor:Isn’t the interest rate tightening having any effect?
Mr. Wu: Like the whole market, we have been surprised by the strength of consumer spending. The question we asked ourselves was: Isn’t the interest rate in the contractionary territory? Or is the effect more delayed than usual? We concluded that it [the higher interest rate] will take longer to impact [the activity]. Corporate results are healthier. At the opposite end, individuals enter this cycle more leveraged – for a good reason, as more people have access to credit. On the other hand, we are experiencing a good moment in terms of how people feel about the pandemic, and there is pent-up demand when people are concerned. The authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts and the anticipation of the 13th salary [a year-end bonus] also help the balance of households. This is why I have the perception that the Central Bank’s strategy to disinflate the economy has to be done with persistence. It will require patience, perseverance, discipline. But we also have to be humble; the moment is one of great uncertainty.
Valor:Is it the effect of this monetary policy ahead that justifies Itaú Asset’s projection for the GDP to go to 0.2% in 2023 from 0.8% in 2022?
Mr. Wu: Yes, with great uncertainty around, but we think that these effects will be greater in 2023. It is going to be a difficult year, because we are already going to feel the tightening of interest rates more strongly in activity, but I don’t know if underlying inflation is already giving clear signs that it is heading towards the target. We have 9.25% [of the Selic for 2023], but with an upward bias.
Valor:The exchange rate has become quite volatile again in the last few days. With which perspective do you work?
Mr. Wu: Looking at the Central Bank’s strategy of a tightening cycle that started in March of last year, to anchor inflation around 2024, the importance of the exchange rate in the model is not necessarily to find out the date of the Copom cut and see how much it gave. The Fed [U.S. Federal Reserve] started to become more hawkish about raising interest rates as of November [2021] and, in general, when a central bank as important as the American one becomes more aggressive, assets that are considered riskier lose value. The exchange rate suffers, but this is not what happened until very recently. It was a surprise, but now we can understand that one of the most relevant changes this year, after all these cyclical issues have passed, is that the world changed structurally at the beginning of 2022 with the conflict [in Ukraine]. Apart from the whole tragic issue, we focus on understanding what really changes with the end of the war and we realize that the relevance of Brazil and Brazilian assets in the world portfolios has increased. Structurally, I think Brazil will see more inflows over the next few years on average. Of course, there is a lot going on right now, like the lockdown in China, the Fed raising interest rates, the conflict. Looking at the end of this year, we had, until last week, more confidence that it would be a trajectory of appreciation [of the real against the dollar]. Now we are discussing four 50-basis point hikes, it is starting to get a little more tense, so there is a risk that this year will be bad, in a structural context in which the importance of Brazil has increased.
Less than 25% of the economic analysts consulted for the Focus survey of market expectations believe that the Central Bank’s Monetary Policy Committee (Copom) will end the monetary tightening cycle this week.
This is what the map of the distribution of market expectations, released by the monetary authority, shows. Less than 25% of economic analysts believe that the Selic, Brazil’s benchmark interest rate, will end the year between 12% and 13% per year.
The Copom will release its monetary policy decision on Wednesday and it is expected to raise the Selic to 12.75% per year from 11.75%, as widely signaled by the policymakers.
The question mark is whether the Copom will continue to raise interest rates in the coming meetings. In March, Central Bank President Roberto Campos Neto said that it would most likely stop at 12.75% per year. But negative surprises in the inflation indexes released since then have made analysts reinforce bets on a deeper tightening.
The map of the distributions of expectations shows that more than 70% of analysts see the Selic between 13% and 14% per year. The median expectation stands at 13.25% per year.
Besides the higher interest rate peak, analysts see a longer monetary tightening cycle. The median interest rate forecast for the end of 2023 rose to 9.25% per year from 9% last week.
The map of the distribution of expectations shows that about 50% of analysts expect an interest rate at the end of 2023 higher than 7.75% per year, with bets up to 9.25% per year. There is a large group, of about 45% of the analysts, who believe that the Selic will exceed 9.25% per year by the end of 2023, with bets as high as 10.75% per year. Around 5% of analysts think that the interest rate will exceed 10.75% per year.
The revision of bets on the size and duration of the monetary tightening cycle is linked to the faster current inflation and higher market expectations for the price index.
Last week, the median of the analysts’ projections for Brazil’s official inflation index IPCA in 2023 rose to 4.1% from 4%. Thus, it is getting further and further away from the target for the year, of 3.25%, which is today the central target of monetary policy decisions.
Only something like 5% of analysts project inflation around the 2023 target, ranging between 2.88% and 3.48%. In March, the Central Bank projected that inflation would reach the 3.25% target, but these calculations are increasingly questioned by private-sector analysts.
Some 45% of analysts project inflation between 3.48% and 4.08%. In addition, 45% of analysts forecast inflation between 4.08% and 4.68%.
In addition to the expansion of telecommunications infrastructure like antennas and cables, the digitalization of society and the advent of 5G wireless technology will also require “invisible” services including network management and automation, with intensive use of artificial intelligence – the ability of machines to interpret data and learn. The demand for these products is already increasing, sources from this market told Valor.
The telecommunications products and services sector has room for a “gigantic” growth, according to Ranier Souza, director of engineering at Cisco Brazil.
A survey by the company found that 95% of network changes in 27 countries, including Brazil, are executed manually, which results in operating costs two to three times higher than the expenses with automation.
According to IDC, considering the years 2021-2022, 5G technology will generate the equivalent of $2.7 billion in new business involving technologies such as artificial intelligence, virtual and augmented reality, internet of things, cloud, security, and robotics.
One company that already perceives the segment’s expansion is Infovista, which projects a revenue growth of at least 50% in Brazil and Latin America. Michel Araujo, the firm’s vice president for Latin America, explains that 5G will increase the need for network automation. “In the case of a self-driving car, for example, which heavily relies on the new technology, if there is a problem that interferes in the communication cycle from the cell tower to the infrastructure of the carrier, including how the vehicle is receiving the information, this process must be automatically reviewed, diagnosed and re-established in an automated way,” he said.
Paris-based Infovista develops solutions that automatically prevent and repair problems in the network cycle. The solutions are primarily provided to carriers so they can serve corporate customers on an individualized basis, but there are also deals with businesses in general. “5G is nothing without control,” Mr. Araújo said.
The network management solutions allow a greater spread of the carriers’ signal, which brings investment gains, because the biggest expenses of the telcos are with antennas – especially because 5G has greater capacity but less coverage, which requires a larger number of base transceiver stations. Companies are also expected to save money because automation requires lean operation teams, although they need knowledge of artificial intelligence.
The Infovista executive stressed that the new technology will enable the fourth industrial revolution, with thousands of devices connected to networks including agricultural, industrial and smart city sensors.
There is also the concept of digital twins, virtual representations in real time of objects, processes and systems, which will allow a mining company, for example, to have bases in several different locations, with many connected devices. “Imagine how this company will be able to control, visualize, diagnose and make repairs within this model? It will need automation. This is the challenge,” Mr. Araújo said.
Another company in this segment is Logicalis, which emerged in the United Kingdom in 1997. According to Rodrigo Parreira, the firm’s chief executive for Latin America, the platforms for network management are old and manual operations still play a prominent role. “There are control rooms with dozens of employees sitting around, looking, trying to identify problems within carriers,” he said.
With 5G technology, which will increase the amount of data transmitted over telephone networks, it will be necessary to quickly identify the root cause of any failures. That’s why automation is important, says Mr. Parreira.
Logicalis does not focus so much on developing solutions. Instead, it works installing and maintaining the systems inside carriers and companies. According to Mr. Parreira, growth in this segment is likely to speed up in coming months in tandem with the implementation of 5G in the country. “We are working hard in this field and we are looking closely at this new transition, including some ongoing projects and initiatives, such as a partnership with IBM for cloud computing management,” he said.
For the executive, the 5G auction was meant to “shake up” the market, enabling the arrival of new providers, who will need to invest and build networks in the coming years.
Mr. Souza, with Cisco, said that the need to avoid manual tasks is inevitable and imminent, with increasingly leaner structures. He points out that the digital security field also needs automation. “In the past, when a new virus appeared, updating networks took a long time. Today, what used to take days happens in minutes. If there is no robust automation and detection solution, with artificial intelligence, a company can quickly fall victim to ransomware,” he said. According to Cisco’s global survey, 39% of the technologies used by organizations are outdated.
According to him, “a very large number of tasks are still manual and there is room to grow, which is already happening. Pandemic and increased digitalization, as well as 5G, accelerate this process.”
Eduardo Tude, a consultant at Teleco, sees further growth potential for the next few years as 5G reaches Brazilian cities. “Carriers are activating their networks and services. There will be more tests this year, not something massive. 5G has all the consumer part, but it came to enable a new type of services for companies,” he said.
J&F Investimentos — the holding company of brothers Joesley and Wesley Batista, owners of meat processing giant JBS — has intensified talks with Novonor (formerly Odebrecht) to buy the group’s stake in petrochemical company Braskem. Valor has learned that there is no official proposal on the table, but the company has already had informal talks with the creditor banks that hold the company’s shares as collateral, according to two sources familiar with the matter.
With cash on hand and plans to expand into new businesses, J&F, advised by CF Partners, is currently considered a strong candidate to take Novonor’s stake in the company which has revenues of more than R$100 billion.
Since the end of January, after the frustrated attempt of the group to sell its shares on the stock exchange, the petrochemical company has again been sought by funds and strategic groups interested in the group’s 38.3% stake. The American manager Apollo and the Brazilian Unipar are among the interested parties — the business has also been offered to the Ultra group, but Valor found out that the Brazilian conglomerate is not interested in the deal.
A source connected to the creditor banks said that there have been informal talks between the holding company and these financial institutions, but there is no official proposal on the table. “There has been an informal approach, but no commitment has been signed,” said this person in the know. The banks have shares in guarantees. They add up to about R$15 billion in debts.
With the drop of the petrochemical stocks, the business became attractive again. Monday, the shares closed at R$ 41.42 — the devaluation in the accumulated for the year is 25.2%. The petrochemical market value closed at R$ 32.8 billion — Novonor’s equivalent slice represents R$12.6 billion, according to a Valor Data survey.
There was an expectation that the follow-on could take place in April, but due to market uncertainties the operation also did not go ahead.
Morgan Stanley was hired by Novonor to find a buyer for its shares. The buyer of Novonor shares will have to extend the offer to Petrobras, Braskem’s second largest shareholder, owner of 47% of the ordinary capital and 36.1% of the total. The state-owned company has the right to tag along, which allows it to sell the shares it holds under the same conditions offered to Novonor, according to the company’s shareholders agreement.
Valor reported in April that the manager Apollo made an offer of R$44.57 per share. For a market source, however, it is not the first time that Apollo shows interest in the petrochemical assets.
According to this source, J&F would have “the power” to make a firm offer for the company. The Batista brothers hired Carlos Fadigas, who was a career executive at Odebrecht and CEO of Braskem, to evaluate the business. The executive has good contacts with the group and knows the petrochemical company well.
Another person familiar with the matter said that there is an expectation that the brothers’ holding company will make an offer, but there is no firm commitment in this regard. “That proposal would have to be presented to Novonor,” he said.
The sale of Braskem’s assets has become a complex negotiation, full of comings and goings. Last year, the company was probed to sell the assets in sliced form, but the negotiations were not taken forward. A little over two years ago, Lyondellbasell even made an offer, but gave up the deal because of problems related to Braskem’s rock salt mining in the state of Alagoas.
Braskem, CF Partners, J&F, Morgan Stanley and Novonor were not immediately available for comment. Unipar informed that it does not comment on market rumors. Apollo did not return the requests for an interview.
vJ&F Investimentos — the holding company of brothers Joesley and Wesley Batista, owners of meat processing giant JBS — has intensified talks with Novonor (formerly Odebrecht) to buy the group’s stake in petrochemical company Braskem. Valor has learned that there is no official proposal on the table, but the company has already had informal talks with the creditor banks that hold the company’s shares as collateral, according to two sources familiar with the matter.
With cash on hand and plans to expand into new businesses, J&F, advised by CF Partners, is currently considered a strong candidate to take Novonor’s stake in the company which has revenues of more than R$100 billion.
Since the end of January, after the frustrated attempt of the group to sell its shares on the stock exchange, the petrochemical company has again been sought by funds and strategic groups interested in the group’s 38.3% stake. The American manager Apollo and the Brazilian Unipar are among the interested parties — the business has also been offered to the Ultra group, but Valor found out that the Brazilian conglomerate is not interested in the deal.
A source connected to the creditor banks said that there have been informal talks between the holding company and these financial institutions, but there is no official proposal on the table. “There has been an informal approach, but no commitment has been signed,” said this person in the know. The banks have shares in guarantees. They add up to about R$15 billion in debts.
With the drop of the petrochemical stocks, the business became attractive again. Monday, the shares closed at R$ 41.42 — the devaluation in the accumulated for the year is 25.2%. The petrochemical market value closed at R$ 32.8 billion — Novonor’s equivalent slice represents R$12.6 billion, according to a Valor Data survey.
There was an expectation that the follow-on could take place in April, but due to market uncertainties the operation also did not go ahead.
Morgan Stanley was hired by Novonor to find a buyer for its shares. The buyer of Novonor shares will have to extend the offer to Petrobras, Braskem’s second largest shareholder, owner of 47% of the ordinary capital and 36.1% of the total. The state-owned company has the right to tag along, which allows it to sell the shares it holds under the same conditions offered to Novonor, according to the company’s shareholders agreement.
Valor reported in April that the manager Apollo made an offer of R$44.57 per share. For a market source, however, it is not the first time that Apollo shows interest in the petrochemical assets.
According to this source, J&F would have “the power” to make a firm offer for the company. The Batista brothers hired Carlos Fadigas, who was a career executive at Odebrecht and CEO of Braskem, to evaluate the business. The executive has good contacts with the group and knows the petrochemical company well.
Another person familiar with the matter said that there is an expectation that the brothers’ holding company will make an offer, but there is no firm commitment in this regard. “That proposal would have to be presented to Novonor,” he said.
The sale of Braskem’s assets has become a complex negotiation, full of comings and goings. Last year, the company was probed to sell the assets in sliced form, but the negotiations were not taken forward. A little over two years ago, Lyondellbasell even made an offer, but gave up the deal because of problems related to Braskem’s rock salt mining in the state of Alagoas.
Braskem, CF Partners, J&F, Morgan Stanley and Novonor were not immediately available for comment. Unipar informed that it does not comment on market rumors. Apollo did not return the requests for an interview.
Scenario of lower liquidity helped to bring down stock markets in New York and Brazil’s stock index Ibovespa — Foto: Courtney Crow/AP
The beginning of the week was turbulent in the global markets. Little by little, the market has been adjusting to a more challenging landscape, as the U.S. Federal Reserve is expected to speed up the tightening cycle. The looming scenario of lower liquidity helped to bring down stock markets in New York on Monday and Brazil’s benchmark stock index Ibovespa. At the same time, the dollar is gaining ground as yields of 10-year Treasuries returned to 3%.
It was the first time since November 2018 that the yield on the 10-year T-note reached 3%. This week, the market expects the Fed to pick up the pace, raising interest rates by 50 basis points and unveiling the start of a balance sheet reduction.
In the currency markets, the reaction has been clear. The DXY index, which measures the value of the dollar against a basket of six hard currencies, is trading above 103 points, the highest in 20 years. In Brazil, the foreign exchange rate surged 2.6% on Monday, to R$5.0708 to the dollar, which led the Central Bank to schedule an extraordinary auction of up to 20,000 foreign exchange swap contracts, equivalent to $1 billion, for Tuesday.
“The real still boasts the best performance against major currencies this year, but an important part of that stellar performance has been reversed in recent days,” Santander’s analysts wrote in a weekly report on the macroeconomic outlook. For them, the movement of the exchange rate is not much linked to local factors, but rather to the prospects of weaker global growth and monetary tightening in developed economies.
“Not even the negative result of the U.S. GDP in the first quarter reduced expectations of tighter monetary conditions ahead, as domestic demand remains firm and inflation pressures remain under the spotlight,” the analysts with Santander wrote. They also stressed that the adverse circumstances abroad “have triggered the ‘risk-off’ mode in global markets, which – along with the decline in commodity prices – has likely led to some profit taking on the real.”
The risk-averse sentiment also reached Brazilian stocks. The Ibovespa ended Monday’s trading session at 106,638.64 points, the lowest level since January. In New York, the main stock indexes fell during the day but ended the trading session on the rise – the Dow Jones rose 0.26%, the S&P 500 advanced 0.57% and the Nasdaq climbed 1.63%.
“Lockdowns in China have slowed the local economy and put further pressure on prices around the world, increasing the chances of the Fed tightening its stance on Wednesday. If we also consider the prolongation of the Russia-Ukraine war and the weakening of corporate results, we have a perfect storm that forces agents to somewhat reduce risks,” said César Mikail, equity fund manager at Western Asset.
Along this line, and considering specifically the Ibovespa, he cited the slowdown of the foreign capital flow to local assets without a recovery of domestic players, which left the market “without a marginal buyer.” Until April 28, international investors had taken R$5.9 billion from B3’s secondary market in the month.
The shock of the Treasuries yield curve took the future interest rates up in Brazil, especially the long-term ones. The interbank deposit (DI) rate for January 2027 rose to 11.98% from 11.85%, after reaching an intraday high of 12.055%. Exchange rate swings also helped the DIs to rise.
Expectations for the Fed’s decision contributed to strengthening the dollar, but the real lost ground against its peers partly because of local factors as well, said Thiago Melzer, a partner and co-founder at Upon Global Capital.
Mr. Melzer stressed that the latest polls have shown that the election will be more competitive than previously expected, which increases uncertainty. In addition, he said there was a widespread expectation that, with the consolidation of former president Luiz Inácio Lula da Silva’s favoritism in the polls, foreign investors would expand their positions in Brazil. “Most of the capital inflow [earlier this year] was driven by the electoral scenario that had been materializing in favor of Lula,” he said. “Foreign investors remember that they made a lot of money between 2002 and 2010,” when Mr. Lula da Silva was in office.
Mr. Melzer also notes that the firm appreciation of the real has left the Brazilian foreign exchange market in a more fragile position. “There was an extremely large flow to Brazil, the real was the go-to currency,” he said. He says that local investors also took positions in favor of the real through a strategy that became quite common: to be short on the dollar in Brazil and on the stock market. “It created this snowball effect and the technical position became horrible,” he said.
Ruy Kameyama and Rafael Sales — Foto: Divulgação/Rafael Magalhães
After four busy months, Aliansce Sonae and BR Malls finally agreed to merge operations and create the largest shopping mall company in Latin America. The company is born with 69 malls and R$38.5 billion in sales.
The deal has yet to be confirmed in shareholders’ meetings of both companies, but the signs are favorable. Stocks rose almost 3% on Friday before losing steam. BR Malls rose 0.96% and is up 18.77% this year. Aliansce climbed 0.14% and is up 2.33% this year. The companies’ combined market capitalization is R$13.4 billion – still behind rival Multiplan in this respect.
BR Malls CEO Ruy Kameyama and Aliansce CEO Rafael Sales spoke to Pipeline, Valor’s business website, after a conference call with analysts. The frictions of the last months turned into a harmony even in the color of their shirts.
“We have always said that this combination had strategic merits, but there were divergences regarding price perception. After Aliansce presented the third bid, the deal started to make sense for BR Malls’ shareholders,” Mr. Kameyama said.
Aliansce gave in on some points, increasing the share paid in stocks – BR Malls will own 55.1% of the new company and receive R$1.25 billion in cash. BR Malls also gave in: Aliansce will have the number of seats it wanted on the board of directors, a condition that generated resistance at first.
The decision was not unanimous within BR Malls. Director Mauro Cunha voted against the merger, citing governance issues yet to be resolved – such as the revision of a shareholders’ agreement of Aliansce’s controlling stockholders –, the timeline for the operation, which will depend on the next elected board, and the high risks of execution. For the majority of board members, however, the alignments in this item were sufficient to vote for the merger.
There will be nine board members – four appointed by Aliansce, two by BR Malls and three independent ones. “Since BR Malls has no defined controlling shareholder, in practice there are five independent directors,” Mr. Sales said.
There was a change in the clause to avoid a shareholder or block from increasing its stake. “There was a change in the poison pill to 25% from 30% and this, with the majority of board members independent, preserves the new company as a corporation but recognizes the importance of Aliansce’s long-term shareholders as well,” Mr. Kameyama said.
The control block of Aliansce, which currently holds 48.8% of the company, will hold 23% of the combined company. This group is formed by the Canada Pension Plan Investments (CPPIB), businessman Renato Rique, Germany’s Cura Brazil and Portugal’s Sonae.
The bid is 17% higher than the first one, from January, but is similar in current financial terms to the second bid, from March. The difference is in the currency: less cash, more stocks. “Since we see a potential appreciation in the share value of the new company, this creates a better opportunity for shareholders,” the BR Malls CEO said.
“In addition, the exchange ratio means a spread of almost 30% in the companies’ EBITDA multiples on the stock exchange, which was an important recognition by Aliansce of BR Malls’s value,” he added.
The synergies are initially estimated at R$210 million per year. Aliansce worked with McKinsey, while BR Malls hired Bain&Company to assess economies of scale and cost efficiency gains, reaching similar figures for the combined company.
“We will have synergies on all fronts. In the commercial one, the fact that we will become a great partner of storeowners, of entertainment, will give us the opportunity to draw and strengthen the contracts we already have. And, as much as the two companies already have efficiency, costs are lowered as the combined company is almost twice as big as the two were individually,” Mr. Sales said.
He also cites the access to capital markets of the more robust company. The merger can also unlock value in digital initiatives and integration with the brick-and-mortar network, which has demanded investments from both companies.
Aliansce and BR Malls do not expect problems from a market concentration standpoint, for competition purposes and also for portfolio strategy. “The overlap is relatively low. Our market is very little concentrated, we are going to have 17% to 20% market share just in malls, without considering retail as a whole,” Mr. Sales said.
“That is why we expect the divestment required to bring the deal into line with antitrust rules to be small, in three or four regions,” the CEO of Aliansce said
On Friday afternoon, BR Malls elected a new board of directors – with the announced agreement, it was clear that the board will lead the integration of the companies.
The merger may be confirmed in about 40 days by the shareholders. The companies will call extraordinary meetings by May 10, so that they can take place by June 9. If approved, the deal will still depend on antitrust regulator CADE’s evaluation period, between the end of the year and the beginning of 2023. The executive management will be defined by the board of the new company.
Aliansce was advised by bank BTG Pactual and law firm Barbosa Mussnich e Aragão. Itaú BBA and Spinelli Advogados are advising BR Malls.
(Felipe Laurence and Raquel Brandão contributed to this story.)
Despite the higher foreign exchange rate in the last few days, it’s still down more than 10% this year. The lower level takes time to be seen in inflation, as the Central Bank has stressed recently, including in recent private meetings in Washington. With commodity prices still high and the prospect of weak economic growth in Brazil this year, however, economists estimate a very limited contribution.
Considering commodities prices in reais – a barometer for imported inflation –, the higher exchange rate and the state of the economy (measured by the output gap), Alexandre Teixeira, an economist at MCM Consultores, calculates that the exchange rate will ease Brazil’s official inflation index IPCA by only 0.13 to 0.15 percentage point in four quarters.
“The exchange rate pass-through to domestic inflation depends on the combination between it and the prices of commodities in dollars. When commodity prices rise, the real typically appreciates, driven by a better perception of external accounts and growth conditions,” Mr. Teixeira said.
Bradesco estimates that the recent drop of about 6% in commodities in reais would bring IPCA down by 0.18 pp over the next three months. That help could be even greater. “Taking into account only the recent drop in commodities in reais, and considering a linear pass-through to inflation, it would be down 0.33 pp,” Felipe Wajskop, Marcelo Gazzano and Myriã Bast wrote in a report.
However, as the pass-through to domestic prices tends to be smaller with a stronger real or when the variations of commodities in reais are lower than 8.4%, the impact on inflation would be closer to 0.22 percentage points, the economists wrote. In addition, Brazil’s slow economic growth may encourage companies to try and rebuild their margins instead of passing on cost reductions to consumers, they say. “Thus, the 6% drop in commodities prices in reais would result in a 0.18 pp relief for the IPCA.”
The study by MCM also sought to find “nonlinearities” in the exchange rate pass-through. Mr. Teixeira concluded that the pass-through depends on the output gap (a measure of economic slack), and is more intense when it is positive – in other words, when activity is above the potential GDP. Using data from 2002 to 2019, he estimated 0.44 pp of relief on the IPCA in case of an exchange rate 10% lower. The impact would be 0.75 percentage points if the economy was overheating, and 0.22 points in the opposite case.
Another nonlinearity seen is related to the exchange rate. When the real loses ground against the dollar, the pass-through is stronger. If the opposite occurs, the relief on prices is smaller. According to MCM’s calculations, a 10% depreciation of the exchange rate results in a 0.66 percentage point pass-through, while the opposite reduces inflation by only 0.16 pp.
“All this suggests that the current exchange rate appreciation is expected to have a limited impact on inflation, especially because the prices of commodities in reais have not fluctuated so much,” Mr. Teixeira said. In the same vein, Bradesco economists say that “global inflation remains under considerable pressure, and as long as there is no greater relief from commodities in reais, the effect of the appreciation will be limited.”
Marco Maciel — Foto: Silvia Zamboni/Valor
In last December’s Inflation Report, the Central Bank calculated that an exchange rate variation of 10% causes an effect of up to 1.1 percentage point on the IPCA, recalled economist Marco Maciel, a partner at Kairós. Using as parameters an exchange rate that went to R$4.9 to the dollar from R$5.3 – a variation of almost 8% – and the pass-through modeled by the monetary authority, he estimated that the relief on the IPCA in 12 months totals 0.83 percentage point. “I think that a good part of the economists underestimates the effect calculated by the Central Bank,” he said.
This range is explained, Mr. Maciel said, by the fact that exchange rates at R$5.70 to or R$4.60 to the dollar, as seen this year, are likely to be outliers. All other things being equal, the economist calculates a pass-through of around 0.7 percentage points, which, considering the same range of exchange rate variation, brings the IPCA down by 0.53 points.
The point is that, as the exchange rate appreciates during the year, the price of commodities rises. “When I put these effects together, an exchange rate variation of 10% would have an impact of 0.4 percentage points on inflation. So that 8% drop in the exchange rate means 0.3 pp on the IPCA,” Mr. Maciel said. With that in mind, he projected 2022 inflation at 7.8% rather than 8.1%. “But the impact of the exchange rate appreciation is relatively small in my projection.”
Besides the level of activity, the volatility of the exchange rate itself – which Mr. Maciel says is high – is a complicating factor for pass-through. “There was a strong devaluation [of the real] in the last two years. Then it suddenly appreciated, and now it has started to depreciate again. Volatility matters and tends to impact inflation. If you passed on to the chain an exchange rate increase to R$5.2 to the dollar and the rate went back to R$5, you will pass it on again, but not the whole difference,” said Lucas Godoi, an economist at GO Associados.
Gustavo Arruda, BNP Paribas’s head of research for Latin America, highlighted another factor. According to him, the fact that inflation expectations lost their anchors in Brazil also influences the agents’ decision on whether to pass on this improvement. “The higher exchange rate takes some pressure off the cost, but if agents are not confident about the inflation’s trajectory and about how other costs are going to move, they are less willing to pass on this relief,” Mr. Arruda said.
“Looking at Brazil today, where expectations clearly lost their anchor, impacts such as the current appreciation of the exchange rate are likely to be smaller than expected,” the economist said. That is why he still sees the IPCA at 8.5% this year, even as other risks have diminished, such as that of surging oil prices. “Any return of the exchange rate to R$4.6 to the dollar will not change our minds.”
Amendment puts Embraer’s domestic product on an equal footing to the imported product — Foto: Divulgação
The Chamber of Deputies approved this week a change in legislation to reduce red tape and costs faced by plane maker Embraer to benefit from a tax incentive for “fictitious” export of aircraft. The measure was approved by the government and is unlikely to cause fiscal impact, lawmakers say.
The amendment puts Embraer’s domestic product on an equal footing to the imported product. “Today, Brazilian airlines receive imported aircraft more quickly and efficiently than aircraft produced in Brazil. This asymmetry in the international logistics rules was solved with the amendment, making Brazilian aviation more efficient,” the company said.
The change was presented as an amendment by the government leader in the Chamber, Ricardo Barros (Progressive Party, PP, of Paraná), to the provisional measure to simplify airline sector rules – and which was used by the deputies to prohibit charging for checking in one piece of luggage.
The provisional measure’s rapporteur, General Peternelli (União of São Paulo), accepted the amendment in plenary and the blueprint was approved. “The project only made it easier one of Embraer’s procedures, which was to make a whole process of sending it to the subsidiary abroad and sending it back here to Embraer. This will no longer be necessary,” he said.
The legislation allows a tax reduction when the aircraft is exported, but does not provide the same benefit if the sale occurs within the Brazilian territory. Therefore, Embraer used to send the aircraft to one of its subsidiaries abroad and then “reimport” it. With the amendment, the export of aircraft without leaving the Brazilian territory will be authorized if the buyer is a company based abroad, but the vehicle is delivered to a regular air transport service provider in Brazil. This is also expected to facilitate the leasing of aircraft.
According to industry sources, however, the change will not bring benefits to the large commercial aviation companies in the country, such as Latam, Azul and Gol. The main beneficiary of the change in the law will be Embraer, Brazil’s largest manufacturer. The benefit still needs to be voted by the Senate until May 16 and signed into law by President Jair Bolsonaro (Liberal Party, PL) to be valid.
According to Mr. Peternelli, this is not expected to be a problem because the government has given its approval to the change in legislation. There will be no impact on the public accounts, since Embraer already executed this whole operation currently. In addition, the mechanism can only be used by companies with regular airlines. “If a soccer player or a businessman buys a Legacy, he will not be exempt from this tax,” he said.
Mr. Barros pointed out that aircraft were not contemplated in the legislation that allows presumed export (without the need to leave the national territory). Therefore, they needed to leave the national territory to a neighboring country and perform all the migratory and customs procedures, and then be imported back to Brazil by the buyer.
“This procedure, when coupled with the other relevant regulatory processes, takes around seven days, generating additional costs to airlines, in addition to payment of aircraft lease during the mentioned period,” said Mr. Barros. “Because of this situation, the Brazilian industry loses competitiveness against large international manufacturers,” he justified, while asking for support to approve the amendment.
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