In the wake of the Russia-Ukraine war and the economic slowdown at the end of last year, the Bolsonaro administration has cut its estimate for GDP growth in 2022 to 1.5%, from the 2.1% previously projected. Despite the cut, the government’s expectation remains well above the 0.49% expected by the market, according to the latest Focus survey with analysts.
At the same time, expectations for inflation in 2022 have risen. In the projections of the Ministry of Economy, Brazil’s benchmark inflation index IPCA stood at 6.55%, compared to 4.7% expected in November. The National Consumer Price Index (INPC) reached 6.70%, against a projection of 4.25% in November, and the General Price Index – Internal Availability (IGP-DI) is expected to close the year at 10.01%, against 5.42% estimated previously.
Valor had previously reported that the government admitted a reduction of 0.5 percentage points in the growth this year, because of the war in Ukraine.
The conflict has already impacted the economy and will continue as a risk factor, said Pedro Calhmann, the secretary of Economic Policy. Besides driving inflation around the world because of the rise in commodity prices and bringing volatility to the fuel market, there are other risks: disruption of global value chains, deterioration of financial conditions and impacts on international trade and the balance of payments in Brazil.
The pandemic also continues as a risk factor to be followed, he said. It could impact growth and inflation.
Besides the effects of the war, the revision of the GDP is explained by the revision of the national accounts data by the Brazilian Institute of Geography and Statistics (IBGE) and also by the weaker activity seen at the end of 2021.
Fausto Vieira, the undersecretary of Macroeconomic Policy of the Ministry of Economy, said the government projects growth of 0.5% in the first quarter of 2022. This scenario includes growth of agribusiness (2%) and services (0.4%) and contraction of the industry (-0.8%). Economic growth in 2022 will be led by the recovery of the labor market and private-sector investments, the Ministry of Economy said.
Investments are growing because of the concessions program, said Mr. Calhmann. The contracts already signed contain commitments for expansion, and improvement of the structures granted that. In 2022 alone, those commitments reach R$78 billion. This is equivalent to a 2.3% growth in investment, with an impact of 0.45% in the GDP, he highlighted.
It is important that the government continues on the path of fiscal sustainability in order to have a medium and long-term scenario that is friendlier to investment, the special secretary of the Treasury and Budget, Esteves Colnago, says. “In January 2022 we are almost at zero deficit and heading towards surplus,” he said. But, he added, the scenario is challenging and “we need to see how it will progress.”
Since August 2020, 11 million jobs have been created, Mr. Vieira pointed out. “The participation rate is close to the historical average, but we believe it will continue to grow reaching similar levels to 2018 and 2019.” The country, however, still has a high unemployment rate. In 2021, the average annual rate was 13.2%, compared with 13.8% in 2020 and 12% in 2019.
Food sector faces new escalation of cost inflation after bad end of year for supermarkets — Foto: Divulgação
After a 2021 full of volatility and uncertainties, retail will not have an easy life in 2022. Major retailers in the country have been signaling, in conferences call on results in recent days, that the sector was already managing greater pressures on expenses, such as rents and labor, in addition to the escalation of costs of products in recent months. And the advance of the war in Eastern Europe once again concerns executives about results in the short term.
A survey carried out by Valor Data based on data from most traditional public retailers (18 reports were analyzed) shows that sales advanced less than costs and expenses at the end of 2021, while net income and profitability fell. Net revenue rose 5.3% in the fourth quarter of 2021, in nominal terms, to R$97.3 billion, compared with the previous year, with the cost of selling goods rising a little more, 6%.
When that happens, gross profit loses steam and gross margin drops — the rate fell to 25.8% in retail in the fourth quarter of 2021, compared with 26.6% in the same quarter of 2020.
Operating expenses grew 8.4%, in part, due to a weaker comparison base — the pandemic closed offices and reduced rents in 2020, but administrative and rental expenses are returning to market levels.
Summing up, this means that, when they entered 2022, companies were already dealing with more expensive inventories from purchases from industries – a reflection of the escalation of input prices, especially in food and electronics in 2021 – and also a return of expenses to higher levels. And that with sales even shrinking, in real terms.
“We had forecast the beginning of ‘normality’ after 2022. And I speak of normality in quotes, considering that it is an election year and sales are still recovering. But now we are very clear that inflation will not give in, and it should even go up, and the input and fuel costs, which affects retail distribution, tends to get worse,” said Gustavo Oliveira, partner at Tower Three (T3), with shares of retail chains in the portfolio.
For Breno de Paula, a retail analyst at Inter Research, this scenario puts more aggressive plans for store openings this year on the back burner in segments like durables retail and part of the fashion chains. “It is no wonder that, in the earnings conference calls in February and March, there was almost no mention of much more openings [in relation to 2021], because this weighs on the operating expenses, and soon affects EBITDA in a really bad time.”
“The focus now is to monetize the structures they already have, especially the marketplace, which a good part of the chains already operates. The name of the game is raising fees for sellers and charging more services to try new revenue and dilute costs,” said Iago Souza, an analyst with Genial Investimentos.
The food sector is already going through the first half of 2022 in a new escalation in cost inflation after a bad end of year for supermarkets. The year-end was better for the cash and carry segment. The combined sales of GPA, Carrefour, Grupo Mateus and Assaí rose 5.7% at the end of 2021, for a rise in costs of goods of almost 8%, and a high of up 10% in expenses. As a result, net income declined by 14%.
For an executive with 30 years of experience in cash and carry chains, with more expensive agricultural commodities and fuel, due to the war in Ukraine, inputs are already more expensive in some markets, which will weigh on the stores’ costs. “We were already dealing with a 10% food inflation in the 12 months until December, but still in this low double-digit range. But it’s up more than a point since January,” he said.
“The good news is that wholesale purchases from suppliers have grown. The corporate client is increasing inventory to protect itself from the inflation that comes from the war. February and March were better than January. The risk is that we’re basically just anticipating sales, but that’s part of the game,” he said.
According to XP, inputs such as oil, synthetic rubber, metals, grains and cotton have already risen by nearly 60%, 20%, 10%, 40% and 5% since the beginning of the year, respectively, which is expected to put further pressure on retailers’ costs. “However, the appreciation of the real against the dollar (by 10% in the same period) is expected to partially offset this effect,” said XP analyst Danniela Eiger.
At this beginning of the year, electronics chains have to focus on revising expenses as their supply chains are less pressured than the food retail. “I think that for us, unlike food, the biggest concern of the sector is with operational expenditures and reduction of stock purchased at higher exchange rate,” says the vice president of a traditional chain.
The fourth-quarter figures show that Americanas, Magazine and Via closed from October to December with total sales just 1.4% above 2020 and the biggest drop in profit among all the segments, of 36%. Sales dropped, but the cost of goods (which includes the inventory account) was stable. For Mr. Oliveira, with T3, the results of durables retail had already been declining since the third quarter, due to the effect of high interest rates and with the high exchange rate, but companies took a long time to adjust.
“In addition to the 2021 inventories that Via and Magalu must be reducing now, they carry a lower employee turnover after the crisis. The point is that this change of employees always helped to reduce labor costs naturally.”
Magazine, Via and Americanas highlighted the improvement in sales since February in a conference call. “Seeing the half full glass, the stock that will enter the chains after this reduction of the old stock will be cheaper, because we don’t see movement of transfer of the industry today, the exchange rate even fell and the war is not yet making components more expensive. So, this can help in the gross margin or we can pass it on to the customer,” the chain’s vice president said.
Some factors can help to balance this equation a little, such as the new injection of funds into the economy, with government measures, which could reach R$86 billion in the coming months, and the electricity bill, which stopped rising as in the past, one of the main lines in the sector’s cost bill.
For fashion retail, the scenario was of sales growing faster at the end of 2021 – partly due to the weak base of comparison the year before, when it was more affected by store closures –, with revenues rising 17%, gross margin gains and profit advancing 5%. Despite this scenario, as they sell non-essential goods, they have less room to pass on higher costs in times of crisis.
XP calculated in a report in March that for each 1% increase in the cost of raw materials, C&A’s EBITDA falls 3%. At Renner, the decline is 1% to 2%. “The premium chains ended 2021 under protection and will remain so this year, but the rest will face a more difficult landscape,” Mr. Souza said.
A new 10% cut in Mercosur’s Common External Tariff (CET) this year depends mainly on two measures being prepared by the federal government and linked to maritime transport. The Economy Ministry believes that the approval of these measures would help to reduce the cost of production in Brazil and pave the way for a further cut in the tariff later this year.
“Considering overhauls put in place and others that will come this year, we see room for another 10% cut in the CET,” said Lucas Ferraz, Foreign Trade Secretary of the Economy Ministry.
The CET is a kind of unified rate among Mercosur countries and is charged on imports of products from outside the bloc, although several goods are exempt.
According to the secretary, after cutting the Tax on Industrialized Products (IPI) at the end of February, the federal government will announce a reduction in the rate of the Additional Freight for the Renovation of the Merchant Marine (AFRMM) – a tax levied on maritime freight. For long-distance transportation, the rate is 25%. In addition, the Economy Ministry plans to exclude taxes from the terminal handling charge. According to calculations by the Secretariat of Foreign Trade (Secex), importing companies can save between R$600 million and R$1 billion a year with the change.
In addition to these measures, there have been reforms in recent years that have helped to lower, even as indirectly, production costs in Brazil and improve the business environment, Mr. Ferraz said. He cites as examples the new regulatory frameworks, the independence of the Central Bank and the pension reform. The Economy Ministry has even hired think tank Fundação Getulio Vargas (FGV) to develop an indicator to measure the variations of the cost of production in Brazil. The first measurement is currently being carried out.
In November 2021, the federal government had already cut the tariff by 10%. The reduction was temporary, lasting until the end of this year. This is because Mercosur rules state that any permanent cut must be consensual. To approve this cut, Uruguay wants to be allowed to negotiate free trade agreements with countries outside the bloc, regardless of whether the other members agree. Thereafter, Brazil used a clause that allows the cut on a temporary basis.
“As soon as Uruguay makes the CET move official – and it is not against it, but insists on flexibility – the cut made by Brazil will be followed by the other partners and will become permanent,” Mr. Ferraz said. “For the second cut, we will negotiate again, and we intend it to be permanent.”
Even though Argentina is “the biggest challenge,” the secretary believes that it is possible to reach an agreement on the new round with the other bloc countries, considering that since 2019 Paraguay and Uruguay “have signaled that they are in favor of even more ambitious CET cuts.” But even without Argentine support, “there is always the possibility” that countries “make the tariff reductions at times that are not necessarily coincidental.”
According to him, Brazil can use “some exception clause that gives legal grounds” for a second temporary cut, even if the first has not become permanent. “But we will always seek the negotiation route.”
Economy Minister Paulo Guedes has said more than once that the federal government may reduce the CET again by the end of the year, without elaborating. “We are starting to open the economy,” he said in February at an event sponsored by BTG Pactual. “We have lowered the CET and we can lower it again before the end of our term in office.”
Many economists are questioning technical basis and rhetoric behind Central Bank’s decision — Foto: Raphael Ribeiro/BC
Economic analysts, in general, understood that the Central Bank’s Monetary Policy Committee (Copom) signaled a rate of 12.75% per year at the end of the current interest rate tightening cycle. Yet many still see this level as the floor for the Selic, Brazil’s benchmark interest rate.
Economists and traders told Valor that the end-of-cycle signal, this time, was weaker and subject to revisions since the committee linked the future path of interest rates to the evolution of oil prices.
Others say that, even considering that the Central Bank’s intention is to stop at 12.75% per year, the inflationary scenario will remain challenging and, as a result, force the Copom to do more.
Others say that the cycle is unlikely to end up at 12.75% because, in that case, the committee will make one last sharp move in interest rates, 100 basis points. The Central Bank typically ends tightening cycles more smoothly.
There are still concerns, in part of the market, of an exaggeration in monetary policy. But even those who believe that the Central Bank has gone too far on interest rates consider it unlikely that it will deliver a rate lower than 12.75% per year. Wednesday, interest rates rose to 11.75% per year, and the Copom explicitly signaled a new 100 bp increase, which would take the Selic to 12.75%.
BGC Liquidez presents a look at the market mood shortly after the Copom’s decision in a survey of 162 economists and traders, distributed to its clients on Thursday.
Only 16% of respondents think that the Central Bank will stop at 12.75%. The most common bet, of 42% of those who took part in the survey, is that the interest rate will rise to 13.25%. On the eve of the Copom meeting, in another survey by the BGC, with 207 participants, only 26% mentioned this percentage. End-of-cycle bets of 13%, meanwhile, shrank to 6% from 27%.
This is, however, a snapshot of the moment, and many economic analysts want to wait longer for an eventual change in their bets for the Selic rate at the end of the cycle. They say the language of the Central Bank usually changes a lot between the release of the Copom statement and the minutes. Next week, the monetary authority will also release the Inflation Report, with a press conference.
Many economists are questioning, after the Copom meeting, the technical basis and rhetoric behind the decision, so they are waiting for the Central Bank to better explain what was discussed in it.
A question mark is the fact that the committee presented projections for the price index in an alternative scenario, incorporating a good part of the oil price drop that occurred until Wednesday, to show that inflation reaches the target in 2023 without a dose of interest rate higher than 12.75% per year.
Some in the market are skeptical about that, so much so that the projections for the Selic rate have risen. There was already a questioning of the monetary authority’s calculations due to the fact that the Copom’s inflation projections are below market estimates, of 3.7%.
Another point that bothers many economists is the change in the way the Copom analyzes the balance of risks. The committee basically said that the chances of inflation exceeding expectations were lower because much of the fiscal fears had already materialized in market expectations and in the foreign exchange rate.
For some, the Copom swept some fiscal uncertainty under the carpet to avoid having an inflation forecast adjusted by the balance of risks that requires an interest rate higher than 12.75% per year.
But this may just be a concern of economists, who have a more technical view of the Copom’s decision-making process. But market operators consulted by Valor on Thursday were more comfortable with the communication, despite the large number of people who think that the interest rate will have to go over 12.75% per year.
The survey by BGC Liquidez shows a divergence in the reading of the Copom statement between economists and traders. Among economists, 69% thought the message was “dovish,” or less inclined to tightening. Among traders, this percentage is 35%.
The federal government is preparing a set of measures to encourage the production and consumption of biomethane, a gas produced from the decomposition of organic materials, equivalent to natural gas of fossil origin, whose main manufacturing potential is in agriculture. The measures, which will be announced on March 21, involve tax relief on investments and attraction of international resources, according to a source who followed the discussions.
The first measure will be a decree by the Ministry of Mines and Energy to include investments in biogas and biomethane in the Special Incentive Regime for Infrastructure Development (REIDI), which suspends social taxes PIS and Cofins on contributions in new industries in the segments of infrastructure and mobility. The tax exemption is expected to reduce the cost of investments in biomethane by 9%.
The measure is supposed to equalize the tax treatment of biomethane projects to that of natural gas, which are already included in REIDI and, therefore, have the tax break. As it stands today, investments in natural gas of fossil origin end up in practice having an economic advantage over investments in biomethane, which avoid methane emissions.
The second measure will come from the Ministry of the Environment, which is expected to issue a decree to expand the resources of the Climate Fund, managed by the Brazilian Development Bank (BNDES), aimed at investments in biogas and biomethane. The expectation is to guarantee an offer of around $500 million in financing for the sector.
Biogas is already one of the energy routes planned for financing the Climate Fund’s renewable energy sub-program. Current rates range from 1.9% to 5.4% in indirect operations and stand at 1.9% in direct operations. The term of the financing agreements is 16 years, with a grace period of up to eight years.
The two decrees come as after the country joined the Global Methane Pledge during the last COP26, by which 100 countries committed to cutting gas emissions by 30% by 2030. Brazil is the fifth largest emitter of methane in the world, but the main culprit is the cattle’s enteric fermentation (belching and flatulence), which accounts for more than half of the country’s methane emissions.
Environment minister Joaquim Leite has said in recent public statements that the government also intends to create a “methane credit” instrument, along the lines of a carbon credit, which could serve as additional revenue for biomethane production projects.
In a recent event by consultancy Datagro, Mr. Leite said that methane credits could guarantee extra income to biomethane producers, both related to methane that ceases to be released into the atmosphere with the biodigestion of waste, and related to diesel that is no longer consumed in heavy vehicles and is replaced by renewable gas. The tool, however, will not be announced next week.
In recent months, ministry officials have met with representatives of the private sector to discuss the new measures. There was also a request to make the environmental licensing requirement more flexible for biogas projects with up to 10 megawatts in power.
The Italian group Prysmian, a manufacturer of phone and energy cables with seven plants in Brazil, will increase investments in technological innovations and in its main plant in Sorocaba, São Paulo, to expand its production capacity.
The overall industry figures point to a growth in fiber optics. In 2020, there were 8.9 million kilometers of cable across Brazil; in 2021, 9.8 million; and for 2022, the forecast is 10.5 million kilometers.
Alejandro Quiroz, the company’s new CEO for Latin America, told Valor he expects a positive year despite the economic crisis the country is going through, compounded by the war in Ukraine, inflationary pressures and political uncertainties.
Prysmian is developing a new fiber-optic cable technology through which it will be able to transmit the 5G signal and power supply. The company is one of the leading cable suppliers to the Brazilian market.
“The pandemic period, for us, brought an additional increase in demand for cables in telecommunications, due to the growth in connectivity, both from large carriers and smaller providers. Over the past two years, our fiber optic factories have worked at full capacity, but following sanitary protocols. At the same time, we had to deal with problems in the supply chain,” Mr. Quiroz said.
About the current Brazilian economic moment, the Mexican executive says that Prysmian is growing above the gross domestic product for the third consecutive year. “Demand in Brazil remains high,” he said.
For the Brazilian telecommunications sector, Prysmian develops cables and optical fibers for data, image and voice transmission, conventional copper and aluminum cables, accessories and specialized services.
In the energy segment, the group supplies terrestrial and submarine wires and cables for electricity transmission and distribution, in addition to specialized services and integrated solutions. The company has been active in Brazil since 1929, when it was a wire and cable unit of Pirelli. In 2005, the company became independent after acquiring rival Draka. In 2018, Prysmian bought General Cable, one of the largest cable producers in the Americas.
Regarding the conflict in Ukraine, the group believes that the war can accelerate an energy transition to renewables. “The increases in energy and fuel costs, which will affect regional economies, once again show us the need to accelerate the global energy transition. To reduce this dependency, we will look to the potential of the natural resources we have in Latin America,” Mr. Quiroz said.
According to the group, many wind and solar farms are integrated into the nationwide electric power transmission management system, but there are regions in which the connection is weak, especially between the North and Northeast with the South and Southeast regions. At the same time, the company foresees expansion in applications for the mining industry.
In Brazil, the group employs about 1,500 people in seven units: two in Sorocaba (São Paulo) and the remainder in Poços de Caldas (Minas Gerais), Vila Velha (Espírito Santo), Cariacica (Espírito Santo), Joinville (Santa Catarina) and Londrina (Paraná).
The company’s head of telecommunications for Latin America, Marcelo Andrade, said that, due to the size of the sector, it is necessary to get ahead of investments and open several initiatives.
“We invested R$50 million in telecommunications last year, but this started before in order for us to be prepared for this consumption boom,” the Brazilian executive said.
As for the future, Mr. Andrade points out two key points: increasing the coverage of broadband internet in the country and the implementation of 5G, which will increase digital inclusion and the need for fiber connected to the antennas – which will spread the signal of the new technology.
The assessment is that 5G will need 5 to 10 times more base transceiver stations than 4G. The executive says that Prysmian has innovation projects with phone carriers to develop a new network structure that can help to “clear” the tangle of wires seen in Brazilian cities, since the transmission system in the country is overhead, as in most Latin American cities, and not underground, as in Europe.
“We are designing a hybrid cable with the help of Brazilian engineers from our research center. That is, we are going to bring an optical and power cable together, so they can connect to the antennas,” he said.
The product has been tested and, at this moment, Prysmian is in the final phase of negotiations with phone carriers. In addition, the group is working on the miniaturization of the cables. “They will need more and more optical fiber to meet the capacity of 5G. A cable had six, 12 fibers before. Now it will have 24, 36, or even 288 fibers. This is called densification. The goal is to have the smallest possible cable to take advantage of the existing infrastructure,” Mr. Andrade said.
The idea of creating a “tax cushion” to soften the blow caused by fluctuations in fuel prices has come up cyclically when oil prices rise in the international market.
That’s how the government responds to pressures to “do something” to tackle the rise in fuel prices in the domestic market. The debate is dropped as soon as the price declines. This was the case in the 2018 truckers’ strike.
This once, the “tax cushion” resurfaced in an interview with the Minister of Mines and Energy, Bento Albuquerque, published on Wednesday’s edition of the newspaper O Globo.
When asked if the federal tax Cide no longer fulfilled this function, the minister said that this tax has lost this role.
Cide was created in one of these moments of high oil prices precisely to be the so-called “tax cushion.” The law that created it in 2001 says that its collection is intended to the “payment of price subsidies or transportation of fuel alcohol, natural gas and its products and oil products,” before mentioning other purposes.
But, as time went by, Cide lost this regulatory function and became a tax to raise collection. Currently, its revenues are shared with states and municipalities and linked to the financing of transportation infrastructure, for example.
The creation of a new tax to resume the original idea of Cide, however, is not the object of in-depth studies at the Ministry of Economy at the moment, the source says.
The strategy outlined by the economic team goes another way: the Supplementary Law 192, which made its way in Congress as Supplementary Law Project 11/2020, which changes the taxation on fuels. This law exempts diesel, cooking gas and aviation kerosene from federal taxes and changes the way sales tax ICMS is levied.
The economic team is now waiting for the effects of this bill, signed into law last week, before deciding on further steps.
The decline in the price of a barrel of oil to levels below $100 strengthens this line. The expectation behind the scenes now is that Petrobras can reduce its prices, as President Jair Bolsonaro demanded on Wednesday.
Braskem tried to tap market through secondary offering of shares held by Novonor and Petrobras, without success — Foto: Edilson Dantas/Agência O Globo
After the failed attempt to sell Braskem and the suspension of a secondary offering of shares in the Brazilian stock exchange B3, Novonor (formerly Odebrecht) is again studying alternatives to sell its stake in the petrochemical company.
BTG Pactual is said to be interested in buying the holding’s debts from creditor banks, which have Braskem shares as collateral. At the same time, talks with investment funds and rival companies for the sale or some of its assets have resumed, sources say.
BTG Pactual and funds focused on distressed debts once again spoke with Novonor, which seeks to generate liquidity for its securities. The “special situation” team of André Esteves’s bank is interested in buying debts in hands of Banco do Brasil, Bradesco, Itaú and Santander, as long as the financial firms agree to grant a hefty discount, a source familiar with the matter said.
According to a source, BTG’s most recent proposal was presented indirectly to Novonor through Braskem’s executives. There is no formal offer on the table yet. For the negotiations to move forward, it is necessary to have an alignment of the company’s shareholders with the banks. None of these players could sell their shares individually.
It is not the first time that funds and banks specialized in “special situations” have tried to purchase debt from Novonor, which owns 38.3% of the petrochemical company’s total capital. Braskem currently has a market capitalization of R$35 billion and is the main business of the group, which went into judicial reorganization in June 2019, with R$100 billion in debt.
The challenge in this transaction is to convince the banks to negotiate discounts. Novonor’s debts with Banco do Brasil, Bradesco, Itaú, Santander and the Brazilian Development Bank (BNDES) totals nearly R$15 billion. These banks have Braskem shares as collateral. “The value of the shares no longer covers that debt,” a person familiar with the matter said, justifying the request for a discount on the debts.
People familiar with the creditors told Valor that this proposal has not yet reached the banks and that there is no willingness of financial firms to grant discounts.
On another front, Novonor is said to be in talks with rival companies and investment funds to discuss the sale of Braskem again. Groups such as Unipar and the holding company J&F Investimentos, which owns JBS, were sought for talks. U.S-based fund Apollo was also approached, another person familiar with the matter said.
There is no firm proposal so far, but interested parties are said to have presented different structures for a potential deal. In 2018, LyondellBasell came very close to buying the petrochemical company before giving up due to environmental problems in Alagoas.
In January, the petrochemical company tried to tap the market through a secondary offering of shares held by Novonor and Petrobras, without success. Although there was demand for the shares, investors were asking for a discount.
Given the uncertainties in the market, worsened in recent weeks by the war in Ukraine, analysts believe that this is not the time for the company to resume the secondary offering.
Braskem has been preparing to migrate to the Novo Mercado, a section of the B3 exchange with stricter governance rules, which should bring gains for the shares. The original idea is to sell common shares held by Novonor after the migration. Two weeks ago, shareholders holding PNB shares in the company rejected the conversion of these shares into PNAs, a step that is preparatory to the unification of the different classes of shares into common stocks.
Apollo, BB, BTG, BNDES, Bradesco, Braskem, Novonor, J&F, Santander and Unipar declined to comment. Itaú and Petrobras did not immediately reply to a request for comment.
For the next meeting, the Copom foresees another adjustment of the same magnitude — Foto: Jorge William/Agência O Globo
The Central Bank’s Monetary Policy Committee (Copom) raised on Wednesday the Selic, Brazil’s benchmark interest rate, by 100 basis points, to 11.75% per year. This is the ninth consecutive increase. For the next meeting, the Copom foresees another adjustment of the same magnitude.
“The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy,” says the committee’s statement.
This Wednesday’s decision was in line with the median of market expectations and within what was signaled by the monetary authority at the previous meeting – at the February meeting, the Central Bank indicated it would reduce the pace of monetary tightening, but did not specify the magnitude of the next adjustments. At the time, the Selic was raised by 150 bp, to 10.75% per year
In a survey carried out by Valor with 93 financial and consultancy firms, 82 expected the Selic to be raised by 100 bp, to 11.75%. Nine projected a 125 bp increase, while two believed the committee would keep the pace of interest rate hikes at 150 bp.
The Copom meets again on May 3 and 4.
For the Copom, in the external scenario, the environment has deteriorated substantially. “The conflict between Russia and Ukraine has led to a strong tightening in financial conditions and higher uncertainty surrounding the global economic outlook”, it stated. “In particular, the supply shock resulting from the conflict has the potential of increasing inflationary pressures, which had already been rising both in emerging and advanced economies.”
The committee says that it considers it appropriate for interest rates to advance significantly towards an even more contractionary terrain and “considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into an even more restrictive territory.”
The Copom stated that “consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and on the items associated with core inflation.”
In the statement, the Central Bank stressed that various measures of underlying inflation are above the range compatible with meeting the inflation target.
Regarding Brazilian economic activity, the Copom highlighted that the release of the GDP figures for the fourth quarter of 2021 indicated a higher-than-expected pace of activity.
The committee states that “the current projections indicate that the interest rate cycle in its scenarios is sufficient for inflation convergence to levels around the target over the relevant horizon.”
The Copom published two inflation projection scenarios, both considering a rise in basic interest rates to 12.75% per year, with a fall to 8.75% per year next year.
“The committee’s actions aim at curbing the second-round effects of the current supply shock in several commodities, which appear in inflation in a lagged manner”, it stated. “The Copom judges that the moment requires serenity to assess the size and duration of the current shocks.”
“If those shocks prove to be more persistent or larger than anticipated, the Committee will be ready to adjust the size of the monetary tightening cycle. The committee emphasizes that it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate,” the statement continues.
“The Committee assesses that the uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations, but considers that this risk is being partially incorporated in the inflation expectations and asset prices used in its models. The Committee maintains the assessment of an upward asymmetry in the balance of risks.
The committee still sees both upside and downside risks to inflation.
“On the one hand, a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in its scenarios,” says the document.
“On the other hand, fiscal policies that imply additional impulses to aggregate demand or deteriorate the future fiscal path may have a negative impact on prices of important financial assets as well as pressure the country’s risk premium.”
Brazilian and foreign mining companies operating in the country said Tuesday they are against the bill sponsored by the Bolsonaro administration that foresees the opening of indigenous lands for mining projects. The companies say the issue needs a broader debate. And they are against the limited role that the bill gives to the indigenous people.
The bill establishes that the indigenous people need to be consulted on future projects on their lands, but without the power to veto them. The mining companies defend that the projects could only be put in place with the consent of the indigenous people.
The position was issued through a statement released by the Brazilian Mining Institute (Ibram), which brings together mining companies and companies that support the sector, among them giants like Vale, Anglo American, CBMM, Rio Tinto, Vallourec, Huawei, Gerdau and Votorantim.
Ibram’s president is Raul Jungmann, former Minister of Defense in the Temer administration. Mr. Jungmann took over the command of the organization recently.
The bill number 191 is making its way in the Chamber of Deputies, and it foresees the regulation of “the research and exploitation of mineral and hydrocarbon resources and the use of water resources to generate electricity on indigenous lands.”
The exploitation of indigenous lands is foreseen by the 1988 Constitution but has never been regulated.
The issue is dear to President Jair Bolsonaro and right at the beginning of his term was presented as one of the priority projects by the Minister of Mines and Energy, Bento Albuquerque, to representatives of large mining companies at an industry event in Toronto, Canada.
The discussion, however, did not move forward. It has only gained momentum now under the argument that — with Russia’s war against Ukraine and the limitations imposed on fertilizer exports from the region — Brazil could multiply its potash production if mining on indigenous lands is allowed.
The argument is not sustained by proof, since the vast majority of deposits of the mineral is not on indigenous lands. Even so, last week, federal lawmakers passed an urgency request to evaluate the proposal.
“The Brazilian Mining Institute understands that bill 191/2020, presented by the executive branch of government in the National Congress, is not appropriate for its intended purpose, which would be to regulate the constitutional provision that provides for the possibility of implementing economic activities on indigenous lands, such as power generation, oil and gas production and mining,” Ibram said in a statement.
“Since mining on indigenous lands is in the Federal Constitution, articles 176 and 231, its regulation needs to be widely debated by Brazilian society, especially by the indigenous peoples themselves, respecting their constitutional rights, and by the Brazilian Parliament.”
Ibram argues that mining can be viable in any area of the country, abiding environmental rules. But when it comes to indigenous lands, the entity adopts a stricter stance than that advocated in bill 191.
“In the case of mining on indigenous lands, when regulated, the Free, Prior and Informed Consent (FPIC) of the indigenous people is essential. FPIC is a principle provided for in International Labor Organization ILO 169 and in a series of other international directives. It established that each indigenous people, considering their autonomy and self-determination, can define their own consultation protocol to authorize activities that impact their lands and ways of life,” say the mining companies, through the Ibram statement.
The bill does not mention consent. It establishes the “procedure for hearing the affected indigenous communities,” but it does not say they have the power to say no to the project of a company that intends to exploit their lands.
In chapter 4, article 14, the project points out that: “It is up to the President of the Republic to send to the National Congress a request for authorization to carry out the activities provided for in this Law on indigenous lands.”
It continues: “The President of the Republic will consider the manifestation of the affected indigenous communities to carry out the activities referred to in the first sentence. The request for authorization may be forwarded with a manifestation to the contrary from the affected indigenous communities, provided that it is motivated.”
Although mining on indigenous land may represent new opportunities for companies, there is a view in the sector that it will only be possible to consider projects in these areas if there are transparent rules that reduce the risks of conflicts with the indigenous peoples. Another concern in the sector is that the bill may end up paving the way for mining companies that have been operating illegally for years in some indigenous lands in the Amazon rainforest – especially extracting gold and diamonds – sometimes in agreement and sometimes in open conflict with indigenous peoples.
In the note, Ibram condemned illegal mining and demanded that the activity be combated. “The preservation of the Amazon is a necessary condition for the discussions of all matters related to mining in Brazil.”
If approved by the Chamber of Deputies, bill 191 will still need to go through Senate.
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