Asset managers see foreign flow to B3 losing steam

Asset Management: o que é e como utilizar nos ativos

After receiving R$73 billion in foreign funds this year to March 16, more than any full year since official records began in 1994, the secondary market of B3 may see the flow slowdown in the coming months as the global landscape for stocks undergoes adjustments, asset managers told Valor.

To be sure, global investors continue to see support for commodity-linked stocks, which account for 40% of benchmark stock index Ibovespa, but a shift in focus to assets more reliant on the local economy seems increasingly less likely, as inflationary pressures intensify and the Federal Reserve has already started its monetary tightening cycle.

The Ibovespa is up 9.8% this year, while S&P 500 is down 6.3%, Nasdaq lost 11.6% and Stoxx 600 fell 6.8%. The positive performance, however, is strongly concentrated in the blue-chip companies, those with the greatest weight in the local index, and in the mining, steel, financial and oil and gas industries, the favorites of global investors because of their liquidity.

Before the beginning of the Russia-Ukraine war, in February, analysts saw a potential migration of international capital to assets more linked to the local economy, expecting a slowdown in inflation and a reversal of the Central Bank’s monetary policy after the presidential election, scheduled for October. This scenario seems distant now.

“Central banks in Latin America had been preparing for months for this monetary tightening cycle, trying to stay ahead of the curve, but the impact of the war is essentially inflationary, with high food and energy prices. It’s not catastrophic, but it makes the landscape more challenging and delays expectations of a turnaround,” said Alejo Czerwonko, chief investment officer for emerging markets and Americas at UBS, which has a neutral recommendation for Brazilian assets.

UBS BB, the arm of the Swiss bank in Brazil, believed that the Selic could reach 13.75%. But after the local policymakers’ decision on Wednesday to raise Brazil’s benchmark interest rate to 11.75% and signal another 100-basis points hike, UBS revised its projection for the final rate to 12.75%. The difference, however, is that the bank’s analysts now predict that the rate will remain at this level by March 2023.

As a result, the environment is less favorable for the recovery of assets linked to the domestic scenario, Mr. Czerwonko said. He cites the Federal Reserve’s monetary policy decision, unveiled on the same day, as a potential watershed for the stock markets.

“Fed’s statement was tough, indicating several hikes and showing concern with inflation, which is likely to mean less liquidity and funds for emerging markets. In addition, investors have left some sectors of the U.S. stock market, such as technology, to protect themselves from interest rate hikes, but now this seems to be more priced in, so we may start to see the move lose steam.”

Along these lines, Marko Kolanovic and Bram Kaplan, with J.P. Morgan, wrote in a report that they no longer believe that U.S. growth assets have much correction ahead. “Markets can anticipate turning points, so we believe it is time to start adding risk in many fields that have experienced too strong a correction,” they argued.

Mr. Czerwonko, with UBS, also points out that Brazil’s historical problems, such as the lack of a growth rate more compatible with emerging economies, help explain why the local market took a back seat in recent years and its use only as a “tactical refuge” during commodity boom cycles.

“Besides markets such as China, India and Southeast Asia presenting consistently better activity figures, the elections, which were pushed to the back burner in recent months, are likely to gain prominence throughout 2022,” he said.

Mauro Oliveira, head of Latin America equities at Credit Suisse, said that the Brazilian central bank and the Fed released tough statements, which shows discomfort with inflation that may impact assets more dependent on local activity. However, the flow will continue, even at a slower pace, with the help of commodities, he said.

“Foreign investors are likely to tap the local market at a slower pace, with profit-taking moves in some days or even leaving some stocks. In some sectors, like construction, is very hard to invest now because of poor results and labor cost inflation. But the Brazilian stock exchange is a commodities exchange, there is no way to escape this, and this segment is likely to draw money throughout the year.”

Alexandre Reitz, head of equities at Julius Baer Family Office, follows the same path. He points out that, in communication with clients, local equities have started to carry more risk than they did at the beginning of the year due to the factors added in recent weeks.

“We could already see a recovery in domestic assets at the beginning of 2022, and this has been extended a bit further ahead. But the constructive view about commodities remains. The profitability level last year had been high and was telegraphing a correction, but the war has changed this landscape,” he said, pointing out that he has started to look for positions in more resilient domestic assets, such as the clothing sector.

Credit Suisse estimates that Brent oil, the benchmark for Petrobras, is likely to remain at the level of $100 by the end of 2022 due to persistent supply problems. Iron ore is likely to stay above $120 throughout the second half, even as discussions of control in steel production remain in China.

As for the Asian powerhouse, Messrs. Oliveira and Czerwonko saw favorably recent remarks of vice premier Liu He. He said the government will stimulate the country’s economy again and work to organize its stock market. Besides commodities, the analysts say the changes can impact Chinese assets, which trade at a discount level in some sectors compared with the Brazilian market.

As for the Brazilian real, which has appreciated firmly this year, the three financial firms see resilience at current levels, given local interest rates and high commodity prices. Mr. Oliveira, with Credit Suisse, points out that there may even be a correction in case of occasional risks, to between R$5.25 and R $5.30, but that foreigners would soon return to set up positions in the local currency.

Source: Valor International

https://valorinternational.globo.com

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Auction winners start to implement 5G mobile network in Brazil

Anatel e ABDI divulgam relatório preliminar de testes com 5G — Português (Brasil)

After years of preparation, the phone carriers that won the auction last November are beginning to put in place the fifth-generation mobile network in Brazil. Algar, América Móvil’s Claro and Telefónica’s Vivo have already started using one of the auctioned frequencies, 2.3 Ghz, to offer 5G connection in specific places. Telecom Italia’s TIM, on the other hand, is waiting for the release of the 3.5 GHz band by telecoms regulator Anatel to start operating the new technology.

For now, 5G is being offered in a band that can be used both for 5G and for 4G in the 2.3 Ghz band. Claro launched 5G in this frequency in some areas of São Paulo and Brasília; Algar did the same in Uberlândia and Uberaba, in Minas Gerais, and Franca, in São Paulo. Algar said it offers customers a better data browsing experience through the 5G 2.3 GHz network. It would be possible to download a 20-gigabyte video in about 40 seconds.

When available, a more powerful version of 5G, known as standalone, will allow downloading a movie, video, or song faster and easier. Tests done in Claro’s 5G lab in Rio show that downloading a 10-hour YouTube video in high definition would take only one minute and 30 seconds. On Netflix, a 500-megabyte video could be downloaded in 30 seconds, while on Spotify 24 hours of music will be downloaded in two minutes. Downloading the game Free Fire will take only 25 seconds.

The bands work as “avenues” through which the signal reaches the consumer. The major carriers will focus on “Avenue 3.5,” the fastest and most efficient of them all. According to the schedule of the call for bids, the standalone 5G will be working in the 3.5 GHz band in all the country’s capital cities by July 31. However, Communications Minister Fábio Faria said there may be delays in some locations until September – the maximum deadline defined by Anatel.

Despite the minister’s prediction, telecom companies, trade unions and the regulatory agency are still in talks about potentially moving up the 3.5 GHz band launch in some cities, where the satellite dish broadcast is used less. Phone carriers and suppliers have been saying that, from an operational standpoint, 5G is ready to be activated. Vivo, for instance, says it expects to launch the technology in capital cities by July 31.

Transmitted by radio waves, the new technology will need exclusive frequencies. The 3.5 GHz band, however, needs to be cleared because part of it, mainly in the interior of the country, is used for parabolic TV transmission, whose signal will be changed to another “avenue.”

The band clearing involves bureaucratic issues as well. One step was made on February 23, when Entidade Administradora da Faixa (EAF), a private-sector company coordinated by Anatel, was created to manage the bands. It will be overseen by telecoms regulator Anatel through a body known as Gaispi. The schedule may only be moved up with regulatory authorization.

Vivo says it is still adapting its network and, since the beginning of 2021, customers can already try 5G in the 2.3 GHz frequency in some locations in São Paulo, Rio de Janeiro and Brasília. The company is in the final phase of quality assurance of the service and plans to make a commercial launch soon. In the auction, the lots acquired in the 3.5 GHz frequency were those of 100 Mhz, while the 2.3 GHz frequency was divided into 40 Mhz and 50 Mhz lots – meaning a capacity about twice as small, able to offer a less robust 5G called NSA (non-standalone).

Despite its lower potential – although much faster than 4G – some carriers have chosen to go ahead and use the 2.3 GHz band. Algar will focus on expanding connectivity in the country by region. “We were the first carrier in the country to launch the 5G service, in January, for customers in the frequencies auctioned by Anatel, in the NSA standard. Since December 15, 21 neighborhoods in Uberlândia, 12 in Uberaba and seven in Franca started to count on the new fifth-generation technology,” said Márcio de Jesus, Claro’s head of retail business.

Claro’s CEO, Paulo Cesar Teixeira, says that the launch of 5G at 2.3 GHz in specific points met the great demand for data traffic. The executive also says that the phone carrier was the first to offer, in July 2020, the so-called 5G DSS, which uses 4G with some 5G features, a kind of 4.5G. Its capacity, however, is smaller than that of 5G NSA and standalone 5G. TIM and Vivo also offer the technology to their customers.

“From there, we started to foster the handset industry. It is key that clients have the possibility of immediate use. There is no point in launching a network and not being able to use it because the cell phone is not suitable,” Mr. Teixeira said. Claro is already talking to manufacturers to launch mid-range level, cheaper handsets, and bets that cell phone prices will fall as 5G gains ground in the country. “The technology will quickly reach other social classes,” he said.

At the moment, carriers are not charging more from customers to have use 5G in the 2.3 Ghz band. On the other hand, to be able to connect to the internet, one must have a device compatible with the new frequencies. For the 2.3 GHz frequency, there are already some compatible smartphones. For the 3.5 Ghz band, the supply is still low.

In a recent event held by BTG Pactual, Huawei argued for a plan to sell 5G phones at affordable prices. According to specialists, one possibility is to sell subsidized handsets to customers, at lower prices, under loyalty programs.

With the release of the 3.5 GHz band, data usage packages with 5G technology are expected to become more expensive in the first moment. Marcos Ferrari, head of Conexis, which brings together Brazil’s large phone carriers, says that companies do not have a “crystal ball” to know how long the new technology will take to be dominant and surpass 4G. For this to happen, the country must foster competitiveness and face challenges including municipal laws that block base transceiver stations, the tax burden of the sector and cable theft.

TIM’s chief technology officer Leonardo Capdeville says that the standalone 5G network will coexist with DSS and NSA in the future. The carrier’s strategy is to wait for the release of the 3.5 GHz band, which, despite higher capacity, has smaller coverage, requiring more antennas. “We are not going to race simply to claim that we have released something that is not definitive. Our choice is not to worry about being the first one, but about being the best one. And to be the best one we are going to have to use the 3.5 Ghz frequency,” he said. The executive also said that the cost of investment in the 2.3 Ghz and 3.5 Ghz bands is virtually the same, so it is better to focus investments on what offers the best technology.

According to data from Anatel, the existing coverage in the 2.3 Ghz band is still incipient. At the beginning of February, there were only 90 authorized base transceiver stations in the country. Brazil currently has about 100,000 antennas. 5G, on the other hand, will need at least five times as many.

Paraná-based Copel, another phone carrier, has already defined investments. The company joined Sercomtel and Consórcio 5G to win regional lots in the 3.5 Ghz frequency in the South and North regions and in São Paulo. Now, it has a minimum initial investment plan of R$1 billion, besides a $200 million fund to bring 5G to the Amazon rainforest region.

CEO Wendell Oliveira said that the goal is to bring the technology to the cities in 2022, before the deadline set in the call for bids for cities with more than 500,000 inhabitants, which is 2025. In Paraná, the goal is to have the new technology online in the first half of this year. “The idea is to take 5G to those who need it most, especially regions and activities where not even the internet is a reality yet. For São Paulo, the group will look closely at the commercial sector, taking the new internet to companies, ports, airports, logistics companies and the agribusiness sector,” he said.

Cloud2U, which bought a regional lot in the 3.5 Ghz band, covering locations in Rio de Janeiro, Minas Gerais and Espírito Santo, says that the company will follow Anatel’s schedule.

Winity, which has bid for the 700 Mhz lot, which will be used to connect roads and expand 4G, says that the commitments made with the concession begin as of 2023 and that the company will be the country’s first wholesale carrier. “During 2022, we will develop commercial agreements with our customers, companies that operate nationwide and in specific regions, and deploy our wholesale operating business model, where we build the network to make coverage and capacity available to our customers,” the company said.

There are, however, risks with the worsening of the economic scenario due to the war in Ukraine. Telecoms and international relations experts do not foresee sanctions against China due to its implicit support for Moscow – which could affect Huawei, a key supplier of telecoms infrastructure, including in Brazil. But the war increases inflationary pressure and the possibility of supply chain disruptions.

Mr. Ferrari, with Conexis, sees no risk for the local telecoms industry, though. “For now, the sanctions we have seen do not affect the deployment of 5G in the country. We do not anticipate any kind of problem to connecting 5G in the capital cities this year as provided for in the call for bids,” he said.

Source: Valor International

https://valorinternational.globo.com

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Government cuts estimate for GDP growth in 2022 to 1.5%

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.

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War, fuel put new pressure on retail

Food sector faces new escalation of cost inflation after bad end of year for supermarkets — Foto: Divulgação
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.

Source: Valor International

https://valorinternational.globo.com

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Maritime transport overhaul may allow 10% cut in Mercosur tariff

Lucas Ferraz — Foto: Edu Andrade/Ascom/ME
Lucas Ferraz — Foto: Edu Andrade/Ascom/ME

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.”

Source: Valor International

https://valorinternational.globo.com

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Analysis: Market sees 12.75% as floor for interest rate

Many economists are questioning technical basis and rhetoric behind Central Bank's decision — Foto: Raphael Ribeiro/BC
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%.

Source: Valor International

https://valorinternational.globo.com

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Government to launch biomethane promotion plan

Biogas, Green Gas, or Biomethane? Explained

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.

Source: Valor International

https://valorinternational.globo.com

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Prysmian gears up for 5G expansion of Brazilian telecoms industry

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.

Source: Valor International

https://valorinternational.globo.com

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Analysis: “Tax cushion” idea always returns when oil rises

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.

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BTG mulls investment in Braskem through debt

Braskem tried to tap market through secondary offering of shares held by Novonor and Petrobras, without success — Foto: Edilson Dantas/Agência O Globo
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.

Source: Valor International

https://valorinternational.globo.com

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