Ambev, the owner of beer brands Brahma, Skol and Antarctica, is presenting a “new chapter” of its history to investors this Tuesday. “To say we are a beverage company no longer represents us entirely,” CEO Jean Jereissati told Valor. The group wants to be, more and more, a platform, which goes beyond selling beer or soft drinks and includes food and even services, such as credit and renewable power generation.
Ambev has been successful until now with a model of strong expansion, search for efficiencies and inorganic growth. “The company conquered the world,” the executive said. “But when we turned 20 [in 2019], we rethought what the next 20 years would look like, and it became clear that what brought us here was not what would take us there.”
The company now wants to make alliances, like the ones it already has with BRF, M. Dias Branco or Pernod Ricard to sell its customers salami, cookies and vodka.
The Covid-19 pandemic in 2020 has somewhat opened the “technology window” for the company to put into practice what it began discussing as recently as late 2015 and early 2016. “The world went to online retail, it is digital now, and we were prepared when the pandemic came.”
If before only 15% of around 1 million customers were digital, today 80% are. “[The digital channel] was an option before. Now it is our core business. That’s where everything happens.”
Increased digitalization has had a major impact on the operation, speeding up the business. A bar, for example, can place orders through the Bees platform. This has given Ambev’s salesperson more time. Before the pandemic, a salesperson had only seven minutes to talk to a customer – there are 5,000 salespeople for a portfolio of one million customers. With Bees, a bar or restaurant ends up being in contact with the company for 37 minutes.
Digitalization also increased the umbrella of activities and the productivity of the salespeople, now called representatives by the company. The same 5,000 workers that served 750,000 customers in 2019 now deal with 1 million and will serve 1.2 million soon, the executive said.
To do so, a workforce of another 5,000 people has been assembled, with programmers and developers working on improving the several technologies used by Ambev and to creating new products and services. One priority is to improve logistics. The company started using small warehouses as distribution centers and motorcycles to speed up deliveries.
“Our acquisitions now should be more about improving our capabilities, in technology and logistics, and making alliances,” Mr. Jereissati said. The company plans, for example, to develop or buy a company that has created software for managing orders.
In the last three years, the company’s investments, including innovation, totaled R$17.5 billion, or R$7.77 billion last year alone.
In the last two years, the company has launched and managed to consolidate digital services such as the end consumer sales app Zé Delivery and Bees, for sales to bars and restaurants.
The platform Mr. Jereissati puts at the center of his strategy includes offering credit to customers. From the beginning of the pandemic until the end of 2021, the mass of credit offered to small retailers has doubled and is expected to double again this year. Sanitary restrictions, which required the closing of bars and restaurants for months on end, caused a crisis in this segment. For this reason, Mr. Jereissati said, “we were very flexible and rolled over the payments.” Fintech company Bees Bank, formerly called Donus, has 250,000 digital accounts.
This new operating model helped Ambev to sell 180 million hectoliters in 2021, a record level. Net revenue grew 24.8%, to R$72.85 billion. According to him, the year was less about big industry growth and more about market grabbing. “We were very countercyclical in the pandemic.”
Competition became fiercer. Heineken complained to antitrust regulator CADE this year against Ambev’s exclusivity contracts with bars. Mr. Jereissati showed itself to be calm. “It represents very little of our sales.” According to sources heard by Valor, exclusivity contracts account for about 2% of Ambev’s revenue.
Central Bank President Roberto Campos Neto downplayed concerns about the sharp acceleration in March inflation, seeking to contain the market’s reaction to the latest reading of the IPCA, Brazil’s official inflation index, unveiled Friday. Inflation was up 1.62% in the month, above the median of 41 projections compiled by Valor Data, of 1.32%.
The financial market followed Monday morning a live-streamed event with Mr. Campos Neto, held by Arko Advice and the Traders Club (TC), in search of signs about a possible extension of the monetary tightening cycle after the news on inflation.
Mr. Campos Neto said that the reading represents a “small” surprise, before explaining that the Central Bank needs to better analyze the data before unveiling its findings.
The central banker had been saying he saw a final interest rate hike in May, to 12.75% per year from the current 11.75%, as the more likely outcome. He did not repeat this message on Monday. But this seemingly does not mean he will tighten further, as he had already failed to repeat the signal in a statement at another event last Thursday, before the latest figure for the IPCA was released.
Mr. Campos Neto tried to soften the bad news in several moments. He said the monetary authority had already been calling attention to the fact that when oil company Petrobras raises fuel prices, the increases hit the pumps more quickly, although in the end the pass-through occurred at an even faster speed. According to him, this faster pass-through in a month means that, in the subsequent period, there will be compensation.
Mr. Campos Neto also said that it wasn’t only in Brazil that there were surprises in the most recent inflation reading, as several other countries faced the same situation. He highlighted the role that the recent appreciation of the real against the dollar may have in avoiding a strong impact of the rise in commodity prices in inflation.
According to him, the stronger real is not completely priced by the financial market, since many analysts are still working with a foreign exchange rate between R$5.25 and R$5.35 to the dollar. “When I look at the estimates I get from the inflation market, some people have already fully considered the [new] exchange rate, while others haven’t yet,” he said.
In other words, Mr. Campos Neto highlighted the exchange rate as a positive factor that could affect the market’s inflation expectations, at a moment when economic analysts are raising their projections in response to faster inflation.
And Mr. Campos Neto also said he was comfortable with the appreciation of the real, saying that it doesn’t demand interventions from the Central Bank. He signaled that he might start selling dollars on the market if there are impacts from the withdrawal of stimulus in the United States.
Mr. Campos Neto was asked if there was any special concern with services inflation. He answered that these prices had been showing the expected behavior during the reopening of the economy. But industrial goods prices failed to drop as expected. “[Service] inflation somewhat reacted in the way we expected,” Mr. Campos Neto said.
Some negative things mentioned by Mr. Campos Neto deserve attention. For example, he cited rising wages for the first time and spoke of high core inflation and the prices of clothing and food away from home, which showed a “surprising increase.”
But overall, he was quite careful to avoid definitive conclusions, claiming more than once that one must carefully study the data. He also recalled that the interest rate hikes made since last year have not yet had time to be seen in the economy.
In other words, Mr. Campos Neto’s entire speech was designed to acknowledge that the IPCA was higher than expected, but that it is undecided whether an additional monetary policy response will be necessary.
The states started this election with accelerated investments, even with more restrained revenue growth. The combined investments of 26 states and the Federal District totaled R$4.24 billion in the first two months of the year, up 115% year over year.
The data shows, according to experts in public accounts, that these expenditures by states are likely to remain strong after a boost in 2021, when investments closed the year with a real increase of 83.6% compared with the previous year. Financial surpluses from previous years are expected to help this, even though revenue flow has already shown a slowdown at the beginning of the year. State governments ended last year with R$140.2 billion in cash, R$61 billion more than the previous year.
According to data from the fiscal reports of the states, the collection of sales tax ICMS totaled R$85.4 billion in the first two months of the year and is already behind inflation, with a real drop of 3.2% against the same period last year. ICMS is the main tax collected by state governments. Current revenues, which include other taxes and transfers from the federal government, advanced 2% in real terms in the same comparison.
The revenue and expenditure data for the first two months were collected by Valor from the fiscal reports submitted by the states to the National Treasury Secretariat (STN). The expenditures with investments considered the primary capital expenditures. The values for the first two months of 2021 were updated by Brazil’s benchmark inflation index IPCA.
For specialists, even though the situation is heterogeneous among the states, with considerable gains in ICMS collection or in specific revenues in some of them, the picture shows that the generalized and accelerated advance in tax revenues seen last year did not continue into 2022, said Manoel Pires, coordinator of the Fiscal Policy Observatory of Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre/FGV). For him, the scenario points to the end of a period of “fiscal bonanza.” The growth of current revenues as a whole, he says, should give way during the year and follow more the performance of tax collection.
The collection of revenues during the year is fraught with uncertainty, said Ursula Dias Peres, a professor of public policy at the School of Arts, Sciences and Humanities (EACH) of the University of São Paulo, and a researcher for the Solidarity Research Network. Besides the effects of the economic slowdown, she said, state revenues will still suffer the impacts of tax changes.
Among them, Ms. Peres highlights the change in the calculation of ICMS on fuels as well as the cut by the federal government in the rate of the Industrialized Products Tax (IPI). This tax finances the State Participation Fund (FPE), which is likely to impact the states that have an important source of revenue in the federal constitutional transfers.
Marco Aurelio Cardoso, secretary of finance of Rio Grande do Sul, says that the collection of ICMS in the first quarter of this year grew 9% in nominal terms compared to the same period in 2021, with a small real drop. For him, this is likely to be the trend for the year. “We don’t believe in a real growth of ICMS this year. At most we will restore inflation [in the collection] and probably stay a little below it.”
In Alagoas there is also a slowdown in the tax collection, said George Santoro, the state’s secretary of Finance. From January to March, ICMS revenue was about 1% higher than the same period last year. For 2022, the expectation is for real growth between this same rate and 2%, which, if realized, will represent a great deceleration in relation to the real increase of 10% in 2021 against the previous year, a level of growth “that won’t come back.”
Even with uncertain scenario for revenues, Ms. Peres said, the investments scheduled for the year are likely to be financed by surpluses in 2020 and 2021. In 2020, she recalled, in good part as a result of extraordinary transfers from the federal government as a bailout for states and municipalities to combat the economic effects of the pandemic and, last year, due to the surprising behavior of tax collection.
“The surplus was big,” Mr. Pires said. “As tax collection was much higher than what budgets projected, in which a much more conservative scenario predominated, most states managed to turn tax collection into cash. The primary result last year was at historical peaks.” This, he said, will help many states balance spending this year, including investments that typically grow in election year. “The revenue slowdown becomes an important focal point for next year’s budget.”
Mr. Cardoso says that in Rio Grande do Sul the expectation is to expand investments to around R$3 billion in 2022, compared to R$2.3 billion last year. The state expects to receive a green light to join the Fiscal Recovery Regime (RRF) offered by the federal government until the end of May.
In Alagoas, where investments accelerated in 2021, the forecast is to keep the works at an accelerated pace this year. According to Mr. Santoro, the investment committed in 2022 is expected to reach R$3.1 billion this year. Last year it was R$3.7 billion.
In a statement, São Paulo’s Secretary of Finance says that the forecast for investments in 2022 is R$27.1 billion this year, of which R$20.5 billion from the Treasury and R$5.3 billion from financing. In 2021, the state invested R$25.4 billion, and in 2020, R$11.2 billion.
The ICMS collection forecast in the budget is R$191.4 billion and the Secretary of Finance says that any revisions will be made throughout the year. Fuels represent about 11% of the ICMS collection and the freezing of the reference price until June and the eventual loss will be measured throughout the year. As for diesel, the adoption of the ad rem rate, according to the secretary, is likely to have a neutral effect for São Paulo consumers.
“The collection will not perform as if the ICMS continued to be levied on current market prices,” says the note. According to São Paulo’s secretary of finance, the collection still showed real gains in the first quarter, compared to the same period last year. In the first two months, there was a real advance of 0.3% considering the ICMS data from fiscal reports, updated by the IPCA.
On the expenditure front, the surge in investments compares with other spending categories. Personnel expenses and social taxes fell 0.72% in real terms in the first two months of the year in relation to the same period last year. Current expenses, which besides personnel also include costs, fell 1.64%.
This, however, is a picture that may change during the year, since it still reflects in large part the Complementary Law 173, which restricted adjustments of salaries of public servants until the end of last year, Ms. Peres said.
In the first months of the year, she said, there was pressure for real adjustments and increases, which can make a difference in this expense as of the next months. According to the Superior Electoral Court (TSE), because of the elections this year, real salary increases could be granted to public servants until April 5, but adjustments below inflation have a longer deadline. The increases, the researcher said, can make a difference in personnel expenses in the coming months and become permanent expenses of the states.
The March inflation numbers, which came in well above consensus expectations, once again increased the market’s distrust that the Central Bank will be able to meet its goal of ending the cycle of interest rate hikes at the next Monetary Policy Committee (Copom) meeting in May.
The skepticism of financial agents was reflected in the increase in bets that the end-of-cycle interest rate will be higher than the Central Bank had signaled in its last monetary policy meeting, 12.75%. The negative surprise with benchmark inflation index IPCA pushed future rates to price the Selic policy interest rate around 13.25% for the end of 2022.
“In terms of monetary policy, today’s [Friday’s] result strengthens our scenario that the Central Bank will need to revise its inflation projections of 6.3% for 2022 and 3.1% for 2023, and then revise its baseline scenario for monetary policy to interrupt the tightening cycle in May. We maintain our bet that the Central Bank will increase the benchmark interest rate by 100 basis points in May, 75 basis points in June and 50 basis points in August, to 14%,” Credit Suisse professionals wrote in a report.
There are also scenarios of even higher interest rates in Brazil. According to investment bank Haitong’s chief economist for Brazil and professor at the Getúlio Vargas Foundation, Marcos Ross, the widespread price hikes may force the Copom to raise the interest rate beyond 14%.
“Thinking about the balance of risks, there is no way to think that the Central Bank will be comfortable with this data, it is a number that will have an impact on expectations. I believe that reality will impose itself and the Copom will not stop tightening in May,” he says.
After the release of the index, Haitong revised its IPCA estimate for 2022 to 7.4% from 6.8%, and for 2023, to 4.1% from 3.7%. The basic scenario of the bank for the Selic is that the Central Bank should opt, in the end, for making a gradual end of cycle — the monetary authority had been signaling its intention to close the interest rate hike in the next Copom meeting, in May. “We see another 100 basis points hike and a reduction in the pace, from 75 basis points and 50 basis points in August”, says Mr. Ross, citing the bank’s projection of a Selic rate at the end of the cycle of 14%.
In an alternative scenario, Haitong predicts that the lower doses of tightening planned for June and August may increase, in the face of current pressured and widespread inflation. “The risk is, instead of another 75 basis points hike, there will be another 100 basis points hike, and 50 basis points of hike will turn into 75 basis points,” he says. “So I imagine, in an alternative scenario, that the Selic could exceed 14%.”
At Bank of America, the data generated a revision of year-end inflation expectations to 8.0% in 2022 and 4.5% in 2023. “All in all, this corroborates our view that the Central Bank will not be able to interrupt the tightening cycle in May. We expect a final 50 basis points hike in June, raising the Selic to 13.25%, but the risks are up,” write professionals with BofA, in a report signed by the head of economics for Brazil and Latin America strategy, David Beker.
After investors migrated en masse from riskier strategies to fixed income as interest rates rose, they may now feel they have left money on the table. Those who left the macro hedge funds, funds in which managers base their positions according to the several economic scenarios, will look in the rearview mirror and see average returns of 7.3% in the first quarter, or 304% of the interbank deposit rate (CDI), according to Anbima, the association of securities firms.
With the increased volatility seen in the markets throughout 2021, especially in the second half, many people started this year settling for more conservative strategies, which signaled double-digit-level returns – and, in fact, the Selic, Brazil’s benchmark interest rate, is at 11.75% and may reach 13% with a new adjustment by the Central Bank’s Monetary Policy Committee (Copom). But the CDI, the starting point for most mixed and fixed income portfolios, yielded 2.4% from January to March.
Based on Quantum Axis’s sample, there are at least three dozen portfolios with returns of more than 6% in the first three months of the year, almost half of the current basic rate. On the top end, Vista (27.8%), SPX (25.3%), XP (16%), Capstone (14.6%) and Vinland (14%) funds stand out. Gap, Legacy and Novus had returns above 10%, while Kairós, Ibiuna, Kapitalo, Sparta, Neo and Garde were in the 8% to 9% range. The Verde fund, which had disputed openings during the pandemic, saw gains of 7.13% in the first quarter, after a rare negative year in 2021 (-1.13%).
Looking at short-term performance is not the best math for funds that are recommended for horizons of at least three years. But it is educational to realize that aborting an investment plan and just going with the flow can come at a cost.
“I’m very critical of that move, it was ignorant. They withdrew a big lot, migrated to fixed income, and now they are chasing their tails,” said Felipe Arslan, the partner in charge of investor relations at Vinland Capital. “The question I hear most from investment advisors, after congratulating us for the 2021 performance, is whether the fund will continue to perform well.”
Since the portfolios have performed well over the past three years, Vinland did not feel the R$41 billion outflow from multimarket funds in the first quarter. “We got right the rise in interest rates and will try to the same as it falls. Hedge funds are designed to yield the CDI plus something, and the environment in which it operates is much better when interest rates are at 11%, 12% than when they were at 2%,” he said.
The job of hedge funds is to find out what is or isn’t in the asset prices, not to get the “final details” right, said Caio Santos, the partner in charge of investor relations at Ibiuna. And as the monetary policy rarely stands still, it is at the turning points that most money is made. “If the manager understands interest rates and knows how to operate [according to] inflation, currencies and the stock markets, this translates into other positions,” he said.
Mr. Santos points out that the funds will have worse phases, no manager will get it right all the time, but “there is no point in the investor leaving his ‘asset allocation’ and flying to the 1% [a month of fixed income].” When the Selic was lowered to 2% a year, many risk-averse people revised their portfolios and went to more volatile products. Then the game turned and there was a movement back, the investor may have taken a risk for which he was not prepared. “But it’s medium and long term, there’s no point in looking at the shorter windows.”
Carlos Woelz, founding partner of Kapitalo, recalled that hedge funds are “CDI+” strategies, “for better or worse,” and that there is still a work of financial education to be done with investors and with those who serve the client. “It is not reasonable to look at the returns of past years as a reference and expect the same return when interest rates are at 15% and when they are at 2%,” he said. He rejects the thesis that it is harder to outperform the CDI when the rate is high. “The manager invests the cash in CDI, it makes no difference.” Investing in macro hedge funds because of boom or bust cycles is the wrong motivation, he said. “You have to invest because you believe in the management team.”
Mr. Woelz puts his thesis into Excel and shows that the main hedge funds saw in 2021 average returns of 5.23% (118% of the CDI). In 12 months, the percentage rises to 11.29% (175%). In the first quarter it was 6.61%, or 272% of the rate.
Belgian multinational Solvay is expected to receive bids for Coatis in the coming weeks, sources say. The solvents division, which has headquarters and manufacturing activities in Brazil, has drawn interest from investment funds operating in the country, in addition to foreign competitors.
The business is valued at about R$2 billion and is the target of interest of private-equity firm Advent, which has investments in the chemical industry, U.S.-based Altivia and Asian Indorama, which already owns Oxiteno. Lazard, which is advising Solvay, is expected to receive bids by the end of April.
With net sales of €745 million last year, up 58.6% from 2020, Coatis is growing fast, driven by higher chemical prices and increasingly robust demand for green oxygenated solvent Augeo. This family of solvents, obtained from a renewable source (glycerin), replaces petroleum-based products and is used mainly in cleaning products and air fresheners, fragrances and personal care items. Most of the production is exported.
This business division of Solvay, which owns Rhodia, is also one of the world’s largest producers of phenol and polyamide products and intermediates, representing the group’s main business in Latin America.
Coatis is on the block as the group plans to split businesses into two independent, public companies in order to “enhance strategic focus and unlock growth opportunities,” according to the group’s announcement.
Three weeks ago, Solvay said it intends to bring its soda ash, peroxides and silica businesses, as well as Coatis, under the first new company, “EssentialCo.” The second, “SpecialtyCo,” will bring together specialty polymers, high-performance composites and most of the Solutions portfolio, which includes the Novecare, Technology Solutions, Aroma Performance and Oil & Gas units.
The group has been moving out of niche markets for some time now. About five years ago, it began a comprehensive restructuring of its assets and divested different businesses globally, with the aim of concentrating on specialty chemicals and advanced materials.
In the process, it significantly reduced its stake in the PVC business and sold operations in Europe, Asia and Latin America – Brazilian Unipar acquired Solvay Indupa, which produces PVC in Brazil and Argentina. In the following years, it continued to divest assets while struggling with high debt.
The Brazilian petrochemical industry has been going through an internationalization drive in recent months. The main asset of the sector is petrochemical company Braskem, which is up for sale. Controlled by Novonor (formerly known as Odebrecht) and oil giant Petrobras, the company has drawn the interest of the U.S. asset manager Apollo – Brazilian group Unipar and J&F, the holding company of the Batista brothers, owners of meatpacker JBS, are also in the race, as reported by Valor. Furthermore, BTG Pactual is still committed to the proposal of buying Novonor’s debt, which is guaranteed by Braskem shares.
Last week, the Asian Indorama concluded the acquisition of Oxiteno, a chemical division formerly owned by the Brazilian company Ultra. Best known in Brazil for its leadership in the PET resin market, used in plastic bottles, Indorama Ventures disbursed $1.48 billion and reached the top of the ranking among ethylene oxide and surfactants producers in the Americas.
Advent, Lazard and Solvay declined to comment. Altivia did not immediately reply to a request for comment.
Friday’s disclosure of Brazil’s benchmark inflation index IPCA for March exceeding the ceiling of the projections enhances the signs of a persistent rise in prices, which should require higher levels of interest rates, with a direct effect on the population’s purchasing power. This environment brings more uncertainties to a consumption scenario that is already more unequal and complex for business.
On Friday afternoon, banks and economists began to revise upward projections for inflation and the Selic policy interest rate in 2022 and shares of highly credit-dependent chains closed in sharp decline in the trading session.
Two recently concluded surveys, from research companies GfK Brasil and NielsenIQ, obtained by Valor, which cross-reference income and purchase profile, show the effects of the crisis at the client end. There is a decrease in the participation of the poorest in trade sales, and a greater dependence of industries and retailers on the demand of the richest – a clear sign of increased social inequality. In addition, the percentage of people afraid to spend, even with money in their pockets, is at 45%, almost half of the surveyed sample, and above the global average.
“There is an effect of the current scenario, and also remnants of the previous crises, of 2015 and 2016, which add to the pandemic,” says Jonathas Rosa, retail executive at NielsenIQ.
According to the GfK survey, the upper and upper-middle classes reached a 56% share in the sale of durable goods (TVs, refrigerators, washing machines) from October to December 2021, the highest rate in 12 quarters (three years), the survey’s analysis period. From January to March 2020, with the health crisis in its initial phase, these classes accounted for 51% of purchases and, a year earlier, for 50%.
Those with lower income (low and lower middle classes) participated with 39% of sales at the end of 2021, when the Selic and inflation already weighed on credit costs and purchases, versus 47% at the end of 2020, the period when the emergency aid was paid. According to the survey criteria, low income means families with a monthly income (before taxes) of less than R$1,600; lower middle class, from R$1,601 to R$3,000; upper middle class, from R$3,001 to R$5,200, and in the high class, above R$5,201.
The survey concluded that the “safe” income of employed people (part of them, classes A and B) and pensioners are sustaining the consumption of durable goods. Employed workers accounted for 49% of purchases in the fourth quarter, the highest rate since the beginning of 2020. The unemployed participated with 14%. Between October and December 2020, with emergency aid being distributed, employed people made 44% of purchases, and the unemployed accounted for 18%. Between 10,500 and 11,500 people were surveyed each quarter in questionnaires covering in-store and digital sales.
“There are resources left in the higher income population, but the lower class is in need of more stimuli, which take some time to be reflected in consumption,” says Felipe Mendes, head of GfK Brazil. In the second quarter, he understands that poorer workers will still bear stronger pressure on their expenses, “but it is possible that the increase in the minimum wage, high percentages of collective bargaining and the return of the [cash-transfer program] Auxílio Brasil, in the role of demand stimulators, will improve the situation of this group after May or June.” There will also be the impact of the drop in energy prices, with the change of the flags, and possible retreats in the unemployment rate, but he reminds that there will still be the after-effect of the rising interest rates since 2021. “There are negative and positive factors, and we will have to follow their effects, but it will be a difficult balance.”
Mr. Mendes highlights that when the crisis started, the poorest bought more “survival items”, growing their participation in microwave or stove sales. “With Auxílio Brasil, they took the opportunity to equip their homes, and their participation grew in items in general, until 2021 comes and they lose their position in most products.” The upper class, on the other hand, reduced its participation in sales for a brief period in 2020, but regained its position in total, and today there is a dispute for its income among segments, such as tourism and services.
Data from the Nielsen survey show a higher rate in Brazil (45%), compared to the rest of the world (at 38%), of people who, despite not having been affected by the crisis after 2020, do not feel so confident to buy. “Those people need to be convinced to spend,” says the 64-page study. Those who saved money in the crisis and are even more comfortable with their situation (called “small but powerful group”) are 6% in Brazil, the same global average, by the survey concluded in March, in 16 countries.
There are still the “strugglers”, in financial difficulty until now, (22% in the country and 23% in the world), the “recovered”, who have experienced losses, but have already recovered (19% and 21%, respectively), and the “unchanged”, who have not felt anything (8% and 12%, respectively). According to Mr. Rosa, with NielsenIQ, about 80% of the population is in the range of those most susceptible to the crisis (struggling, cautious and recovered).
“We have been following these groups since 2016 and 2017, when inflation and unemployment also exploded. And these groups have experienced many cyclical processes, many ups and downs, so they entered the pandemic already very weakened,” he says.
As the consumer market is strengthened by the expansion of scale and production, the loss of income in the lower classes compromises investment plans and job creation. This is also why this volatility worries the sector. “The tight retail margin makes it depend on a lot of volume to dilute costs, and if the base starts to flatten, it is a warning sign”, says economist Fabio Bentes, with the National Confederation of Commerce of Goods, Services and Tourism (CNC).
Within this logic, José Jorge do Nascimento Jr., president of Eletros, the electronics industry association, says that part of the sector that sells high value-added items, focused on classes with higher purchasing power, is “well satisfied”. “But in general terms, the market has been bad since October. There are no really relevant new investments and there is also the announcement [in March] of the 10% drop in the import tax for some goods, which brings insecurity to companies,” he says.
“The income of the great mass of consumers is crushed. For example, in 2020 and part of 2021 we sold many robot vacuum cleaners, which cost R$2,000. We sell a certain number of them, but ten times more of conventional vacuum cleaners, which cost R$300, R$400. It is very good to sell the robot, but it is not the one that really generates tax collection and volume,” he adds.
For Mr. Bentes, with CNC, the announcement of an IPCA of 1.62% in March (the highest for the month since 1994), above the ceiling of the projections, adds risk to the scenario in the short term – until December, the association projected a rise of 0.9% in trade sales in 2022, and this year revised it to 0.5% (discounting inflation). However, it says it is necessary to consider “compensatory factors” throughout 2022, with a greater effect in the second half of the year.
“A real appreciated against the dollar helps today, with stocks entering the stores less expensive, and there is still a ‘gap’ between wholesale and retail prices, because the chains have not been passing on all the pressure that comes from the factory floor,” he says. “The wholesale inflation, which has already been 25% in 12 months, until December, in total until February is 20%, and we expect that the retail market will still pass on half of this, due to the macro scenario that is still difficult.”
On Friday, Itaú revised the projection for the IPCA in 2022 to 7.5% from 6.5% and expects the monetary authority to continue raising the Selic to up to 13.75% per year. Also on Friday, Santander Asset raised its IPCA estimate to 7% from 6.5% and sees interest rates at 13.75% for the year – 50 basis points above the previous analysis.
In Friday’s trading session, the shares of Via, Americanas and Magazine Luiza, with business more linked to credit, fell 7.93%, 7.72%, 6.55%, respectively. In the view of the head of equity research at Itaú BBA, Thiago Macruz, this decline needs to be analyzed from the standpoint of the cost of capital, pressured in a scenario of persistent inflation and high interest rates over a longer period. “Retailers more exposed to the C class even tend to have a better second half, but partly because of the comparison base of this easier period over 2021,” he says.
The alignment of Brazil to the transfer pricing standard of the Organization for Economic Cooperation and Development (OECD) will prevent the country from facing revenue losses totaling billions of reais per year, Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the OECD, told Valor.
Brazilian authorities and Mr. Saint-Amans will detail the new Brazilian system on Tuesday in Brasília, the result of convergence between the OECD and the Secretariat of Federal Revenue. According to him, the final phase of the studies started in February 2018 found a surprising extent of losses for Brazil because of the current system.
“If we say that Brazil loses revenue today, and that by changing the rules it will lose less, it means that companies will pay more tax,” Mr. Saint-Amans said. “Someone can argue that this is not good for investments. In reality, since the situation is complex, it is not incompatible with an improvement of the corporate tax regime in Brazil.”
Transfer pricing is an issue that all multinationals face. It can be used to move profits from one country to another. It concerns the amount charged when goods or services are sold between two companies in the same group in different countries. It can allow them to legally reduce their tax liability, for example, by accounting for low or overpriced transactions or by moving profits to low-tax jurisdictions such as tax havens. For some transactions, it may be relatively easy to set transfer prices and for tax authorities to control them. But there are more complex transactions, involving, for example, intangible assets and certain financial transactions, which are more challenging for tax authorities to control.
The Brazilian system, with a fixed margin, was originally designed to be simple and easy. But the OECD assessment is that it is detached from commercial reality and has resulted in multi-billion revenue losses and double taxation problems.
To join the OECD, Brazil will adopt a new system fully aligned to the organization’s standard, which seeks to determine the appropriate market price in the transaction. At the same time, simplification measures will be developed to achieve the objectives of the old system, but based on economic reality. Brazilian authorities are to determine when a bill will be presented to Congress and how the system will be gradually put into practice.
Mr. Saint-Amans is one of the world’s leading experts on taxation. He is at the center of the fight against tax evasion. And he was a key player in the creation of the global minimum tax of 15% on multinationals, the biggest overhaul of the international tax system in decades. Read below excerpts from the interview before his trip to Brasília:
Valor:Does the Brazilian transfer pricing system pose detrimental effects on Brazil?
Pascal Saint-Amans: Yes, it does. We identified quite a while ago that the Brazilian transfer pricing policy was atypical, very different and not in line with the OECD standard. To facilitate a change, we decided with the Ministry of Economy and the Secretariat of Federal Revenue to do an analysis. This work is now being finished and has led to some very surprising findings. We thought that the Brazilian system was quite different but a very robust one, which protected Brazil’s tax base. The reputation of Brazil was of a “tough guy,” very strict. The study showed that the Brazilian system had many flaws and led to many revenue losses. The main lesson of this work is that, in a constructive, relaxed way, we were able to make a common analysis of the situation between the OECD, on one hand, and the Federal Revenue, on the other, and realize the deficiencies and some advantages, but that are limited, in order to reach these common findings that will facilitate Brazil’s approximation and alignment to international standards.
Valor:How does this loss of revenue by Brazil happen, in practice?
Mr. Saint-Amans: Multinationals are currently able to legally transfer profits generated by operations in Brazil to low or no tax foreign jurisdictions by exploiting some of the divergences between the Brazilian transfer pricing structure compared to the international standard. A concrete example is the case of a company with high-value products that benefit from cheap production factors. Due to the Brazilian system of fixed margins, the company can legally leave only a small amount of profit in Brazil, say 15% of the production cost, while the real added value is close to 100%! The product will be sold to another company in the group in a low tax country and resold from there to other countries. Because of the fixed margin, the profit will have been transferred out of Brazil. This is just one example. Many other situations arise in relation to other transactions that affect all sectors of the Brazilian economy, including transfers of valuable assets, including intangible assets, as well as financial transactions.
Valor:How much tax revenue does Brazil lose per year in this case?
Mr. Saint-Amans: I don’t have precise figures, but we are talking about quite large amounts, billions of reais, no doubt. This study is based on the country-by-country reporting adopted in the BEPS (Base Erosion and Profit Shifting) case. Examining this study, Brazil realized that a good part of the tax base that should have remained in the country was transferred to countries that offered advantages. The Brazilian transfer pricing, which gave the impression of being solid, with a fixed price in the transaction depending on the activity, in practice was easily circumvented or even used to transfer profits abroad. The system favors transfer abroad, with loss of revenue, as it is also rigid in some fields, which is an obstacle to better integration of Brazil in the value chains.
Valor:How much would Brazil lose, then?
Mr. Saint-Amans: These are large amounts, not secondary values on a company.
Valor:Many multinationals use this practice, of avoiding paying taxes in Brazil?
Mr. Saint-Amans: The answer is yes. It is something that is systematically used, which is logical. There is a tax system with its advantages and its disadvantages, and companies deal with it. The advantage of this system, and this is why we wanted to build a common answer with the Federal Revenue, is that it is simple to handle. It doesn’t need many tax auditors or many controls, because there is a fixed margin determined beforehand and companies have no choice. With the OECD transfer pricing, on the other hand, you have to examine it transaction by transaction. We acknowledge that it is complicated, sophisticated and needs more resources in tax administration. That said, we try to understand how the OECD itself could simplify things. Brazil is going to align itself with the OECD rules, and in turn the OECD moves in the direction a little on the positive side of the Brazilian system.
Valor:For example?
Mr. Saint Amans: What we have done in recent years at the OECD is to modify the transfer pricing standard. In the BEPS project, we have three measures on transfer pricing. First, we say that if [the company] wants to locate intellectual property in a country it has to have substance. Second, we can simplify the benchmarks for the price of raw materials, such as oil, and look at the market price as Brazil and Argentina do. So we acknowledge that this so-called “sixth method” is not incompatible with the OECD standard. We also developed the global agreement announced in October 2021 with two pillars: Pillar 2 introduces a minimum global tax of 15% on multinationals – and Brazil should ask itself if it will put this tax in place; we will work closely with Brazil to see if it is possible. And Pillar 1 includes two things: the biggest multinationals – notably U.S. and European ones, with a combined profit of $700 billion a year – will leave a 25% share of profits in the countries of markets according to some criteria when this political agreement is legally in place, whether the company has a physical presence in the country or not. We will have $125 billion to $ 200 billion a year redirected to these markets. Brazil is a big market. Therefore, it is a fundamental change. In addition, when a company has distribution activity in a country, which is underpaid, we will also simplify rules, as Brazil does, for the company and the country to have more legal security. It will be an approach that respects the principle of full competition, only more simplified. Brazil has two reasons to align itself with the OECD rules: they are more robust, and the Brazilian rules are quite fragile.
Valor:What legal changes will Brazil have to make, then, to align itself with the OECD system?
Mr. Saint Amans: Brazil needs to pass a law that will call into question its fixed margin principles and acknowledge the relevance of a transactional approach. I understand that this bill is well advanced, but the political question now, which does not belong to us, is about the timing for this legislative change. We understand that Brazil will hold elections this year. But these are technical and bipartisan works. We are confident that this work will result in a possible majority in Brazil after the elections.
Valor:In other words, will Brazil need to join the Arm’s Length Principle at the heart of the OECD standard?
Mr. Saint Amans: Yes. This means we should transact as if we were not in a family. In family, we embrace each other. When we are foreigners, we are at arm’s length. The principle forces a company, when doing internal transactions, to put the market price, which would be as with an independent entity and not as with someone in the family. It is a rule that dates back to 1928. Every internal transaction must be done at market price. This system has its weaknesses, because in an open world, with tax havens, companies are interested in locating their profits in countries where there is little taxation. That is why we introduced the BEPS.
Valor:With the change in transfer pricing in Brazil, will the multinationals pay more taxes?
Mr. Saint Amans: Yes, If we say that Brazil loses revenue today, and that by changing the rules it will lose less, it means that companies will pay more tax. Someone can argue that this is not good for investments. In reality, since the situation is complex, it is not incompatible with an improvement of the corporate tax regime in Brazil. It is just that the current system has many drawbacks. I am not saying that Brazil was very bad and the rest of the world was very good, no. But the simplicity of the Brazilian system runs into the problem of double taxation.
Valor:The OECD says that the change will help Brazil in global value chains. How?
Mr. Saint Amans: It has to do with what we just talked about. Brazil has its own rules, which fundamentally integrate poorly with the rest of the world. We found that companies were not necessarily making all the investments that they could make in Brazil. We think that it is not only the fiscal obstacle, but there is a fiscal obstacle that is substantial. And if it is solved, it could facilitate better integration.
Valor:Is the transfer pricing change key for Brazil to join the OECD?
Mr. Saint Amans: Of course. To join the OECD, Brazil needs to be in compliance with OECD standards.
Valor:In other words, the country must do this in two, three years?
Mr. Saint Amans: It has to do this before it can join the OECD. There is a tight schedule. It depends on how fast Brazil wants to get in, but clearly it is one of the important points of the country’s accession to the OECD. But, I insist, it is not a pressure imposed by the OECD, we built this together.
Valor:Economy Minister Paulo Guedes recently went to the OECD and talked to you about a tax overhaul in Brazil. Is this a factor for accession?
Mr. Saint Amans: The question of tax policy in general is not a matter of accession. We have standards like tax information exchange with Brazil, the country applies BEPS and has engaged in providing reliable information for our statistics. In contrast, the OECD has recommendations in this field, which countries are not obliged to apply. What we see from Brazil is that its tax burden is high (33.9% of GDP in 2021) and with a VAT (value-added tax) system that is not good, because of the federal structure and the way it is shared between the federal government and the states. The work that has begun on simplifying and improving the effectiveness of VAT is very important, and ensures revenue without economic distortion. VAT is a very good tax that can be a little regressive, and we need to pay attention to this. And in Brazil it is not so effective.
Valor:In Brazil, do you pay a lot of tax?
Mr. Saint Amans: The VAT in Brazil is not effective, it generates income but also causes obstacles to the fluidity of exchanges, it makes life more complicated. In corporate tax, the revenue could be even higher while making life easier for companies. An OECD recommendation could make tax overhaul to be more effective, less penalizing for the fluidity of business. Today, the Brazilian system compared to other Latin American countries has a level of mandatory taxation that is higher, but it goes with a level of state development that is higher than other countries in the region.
The president of the Chilean low cost airline JetSmart, Estuardo Ortiz, pointed out that the company continues with its plan to start a domestic operation in Brazil, but that it will wait until demand picks up before taking new steps. In a separate development, the company announced Thursday the authorization from the Peruvian government to operate domestic flights. This is the third country in South America where the airline will have local flights, besides Chile and Argentina. At the same time, the executive pointed out that the company expects to resume flights to Brazil in the second half of the year, as the Chilean government signaled today that it will loosen health restrictions on international travelers.
“Operating the domestic market in Brazil is a project we’ve always considered and we’ve worked very closely with National Agency of Civil Aviation (Anac) on it. It is not going to be so soon, we are still very early in the recovery of the air market. We will see how the market behaves to decide later”, said the executive, talking to journalists after a panel at Wings of Change, an International Air Transport Association (Iata) event that discusses the sustainable future of aviation.
Before the pandemic shook the global air market, several companies sought Brazilian regulators to start the certification process to operate in the domestic market — among them were Air Europa and Norwegian. Intentions gained momentum when Brazilian regulators allowed, in 2019, international groups to set up a company to operate in the domestic market — with the release of 100% foreign capital. The pandemic, however, has caused many of plans to be postponed.
On the JetSmart side, Mr. Ortiz said the focus now is on starting operations in Peru in the second half of the year. JetSmart arrived in Peru in 2017 on international routes connecting the capital Santiago to Lima, Arequipa and Trujillo. The operation will be with Airbus A320neo.
On the side of international flights to Brazil, the company recently closed down the operation it was performing connecting Santiago and Foz do Iguaçu — the only route to the country. The flights, he said, were focused only for the summer season.
The executive said that the company tried to negotiate with the government of Paraná a reduction in the taxes on fuel, but it failed — Brazil is known for having one of the highest rates on the oil product in the world. Talks with the government continue.
* Cristian Favaro traveled at the invitation of the International Air Transport Association (IATA)
Brazilian companies are likely to find room to raise funds abroad again in the coming months despite several risks in the international landscape. The cost of operations is up following the recent rise in the yields of U.S. Treasuries, but there are signs that global investors are once again looking at this model as an alternative for companies that need to raise higher volumes of funds with longer terms.
Samy Podlubny, head of debt capital markets and structured debt at UBS in São Paulo, believes that there is a potential for 10 to 15 companies to make external issues in the next window, which typically opens between April and May. Of these, six are discussing the operation with the bank, and two or three have already submitted documents.
“Of course, not all of them will actually raise funds, but it is a fact that, at the current level of volatility, deals are likely,” he said.
VIX, an index that measures the volatility of options on S&P stocks and is seen as a barometer of the appetite for risk in the global market, is around 20% this week after exceeding 36% earlier this month. This relief has already paved the way for some Latin American companies to tap the market. “They are companies from countries with an investment grade, which come out ahead, which shows that the market is buying again,” he said.
Bank of America’s monitoring of the secondary bond market shows that after rising strongly for months, the total cost of these securities has slowed down in recent weeks. The average rate of a basket of securities is now close to 5.6% after peaking at 5.8% in mid-March. In June last year, when the market still did not anticipate any interest rate hike by the U.S. Federal Reserve, this rate was close to 3.7%.
“There is still volatility, with good days and bad days, but the environment is constructive,” said Caio de Luca Simões, head of fixed income at Bank of America. The market is going through a peculiar moment in which assets from Latin American emerging markets are performing better than those in Eastern Europe because of the war in Ukraine.
Besides the fact that it is now clearer which countries, companies and industries will be most affected by the Russia-Ukraine war, Mr. Simões links this improvement in the environment for external funding to the fact that it has already become clearer what the Federal Reserve is expected to do regarding monetary policy. “The Fed has already signaled that it is going to raise interest rates, that it is not going to stay behind the curve,” he said. Thus, the so-called “price shift” may have already occurred.
Another factor that may help boost this market is the fact that there have been few offerings this year. According to Mr. Simões, so far Latin American issuers have issued 49% less than the volume seen in the same period of 2021. This means that funds have room and interest in absorbing primary issues.
Rodrigo Fittipaldi, head of fixed-income issues at Credit Suisse in Brazil, the dominant variable at the moment is the behavior of interest rates in the United States. The behavior of the U.S. curve, which underwent a major correction in the last few months, has caused a lot of uncertainty and impacted the global debt market, he said. At the same time, higher commodity prices ended up providing a counterpoint and bringing support to assets of emerging markets. “The level of the spread [rate paid above the 10-year U.S. interest rate] has now settled down. If the interest rate scenario in the United States stabilizes, then this spread may close even more,” he said.
Mr. Fittipaldi believes that there is room for a total volume of about $15 billion in issues this year, compared to $30 billion raised in 2021. A good part could materialize between April and May. “Some issues were shelved because the market was too volatile,” he said. “The best window is now, but I don’t rule out that the market will remain active in the second half of the year, even with elections, since the political noise seems to have subsided.”
Mr. Podlubny, with UBS, also notes that the local debt market has been a good option for many companies, as it offers price conditions that are often better than those seen abroad. On the other hand, terms here are shorter and there is no room for very high volumes of funding. “The local market is liquid but does not have the same depth as the international market, and companies do not always get the term they need,” he said. “But local money is cheaper.”
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