Government prepares “significant” spending review package

Plan to be presented by December aims to establish measures as state policy, ensuring their continuity regardless of the administration in power

10/15/2024

A “significant package” of spending review measures is expected to be presented this year, an official of the economic team told Valor. The aim, the person explained, is to position these measures as state policy, meaning an effort that should continue regardless of which administration is in power.

Experts are considering announcing the measures after the municipal elections. While details of the proposed changes have not been disclosed, one criterion will be the alignment of a given expense with the fiscal framework. If the expense is incompatible, the government would face two options: change the fiscal rules or “do what needs to be done.” The Finance Ministry’s preference, the source said, is to uphold the framework.

To ensure the package’s approval, the plan is to appeal to both the legislative and judicial branches for a pact on the sustainability of public finances.

The measures, the person noted, are in line with a report by rating agency Moody’s, which earlier this month upgraded Brazil’s sovereign rating to just one notch below investment grade. The agency observed that the credibility of the fiscal framework is at a “moderate” level, reflected in relatively high debt costs. However, it believes that the potential for sustainable economic growth and the adoption of measures that support compliance with the fiscal framework justify the positive outlook.

The announcement of the spending review program was first mentioned by Finance Minister Fernando Haddad at an event hosted by Itaú Unibanco on Monday (14). When asked about changes to personal income tax (IRPF), he said the proposal was not yet ready and that before presenting it, he intended to submit a spending review program to Congress.

The importance of addressing spending adjustments was echoed by incoming Central Bank President Gabriel Galípolo at the same event.

The end of municipal elections is the target date for presenting these measures, as outlined by experts involved in the program’s development. Some believe the best window for approval is at the end of this year, during the final stretch of the current Lower House speaker and Senate president’s terms.

As reported by Valor on October 8, at least one spending review measure is expected to be sent to Congress before the end of 2024. The current trend suggests a more comprehensive package will be submitted.

The government’s spending review has three key pillars. The first is a detailed audit of programs such as Social Security, the Continued Payment Benefit (BPC), and unemployment insurance for fishermen. The second is the redesign of programs like the salary bonus and unemployment insurance. The third focuses on “modernizing” the indexation of expenses, ensuring their growth aligns with the fiscal framework.

“Submitting measures to curb mandatory expenses is a step toward normalizing the situation,” said Alexandre Manoel, chief economist at AZ Quest. It’s also an opportunity to reverse a negative trend. “We are heading towards a crisis via the credit channel.”

The financial market’s pessimism about public finances, which has driven future interest rates to around 13%, stems from doubts over President Lula’s support for the program proposed by the economic team, Mr. Manoel said.

The economic team’s strategy assumes that by 2025, fiscal policy will no longer be expansionary, as it has been until now with the injection of funds into the economy. At the same time, interest rates are expected to remain high, resulting in an economic slowdown, Mr. Manoel explained.

The most pessimistic view is that the government will not tolerate this scenario and will change the fiscal framework, he said. However, submitting the review measures would signal support for the current strategy.

There is an overreaction in the current wave of market pessimism regarding fiscal policy, said Fernando Montero, chief economist at Tullet Prebon Brasil. However, he noted similarities between the evolution of public finances under the current government and during the Dilma Rousseff administration.

The Brazilian real gained ground against the U.S. dollar after statements from Mr. Haddad and Mr. Galípolo. “The market is so bad right now that even narratives are affecting prices,” Mr. Montero joked. “At least it’s the right narrative.”

For Paulo Bijos, a budget consultant for the Lower House who led the Federal Budget Secretariat until mid-year, “the spending review is the most important agenda for Brazil right now.”

Alexandre Manoel — Foto: Rogerio Vieira/Valor
Alexandre Manoel — Photo: Rogerio Vieira/Valor

By Lu Aiko Otta, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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With a long-term view, Mitsubishi’s Agrex invests R$700m in Brazil

Investment will drive expansion of input distribution, agricultural production, and strategic acquisitions

10/14/2024

Yoshihiro Enosawa — Foto: Gesival Nogueira Kebec/Valor
Yoshihiro Enosawa — Photo: Gesival Nogueira Kebec/Valor

Agrex do Brasil, a subsidiary of Mitsubishi Corporation, plans to invest R$700 million to expand its input distribution, agricultural production, and infrastructure operations. The funds will support new dealerships, increased soybean and corn production, an expanded seed business, and the construction of storage facilities, with acquisitions also part of the growth strategy.

This marks Agrex’s most significant investment since acquiring control of Los Grobo in 2013, transforming Ceagro Los Grobo into Agrex do Brasil.

“Mitsubishi Corporation is confident in further investing in Agrex do Brasil—a critical asset in ensuring international food security,” says Yoshihiro Enosawa, president and CEO of Agrex do Brasil.

Globally, Agrex operates in Brazil, the United States, and Australia, where it merged with Riverina in 2017. Its production primarily supplies Japan, China, and Singapore.

Mr. Enosawa, with experience leading Agrex’s operations in Australia and the U.S., identifies Brazil as the company’s most promising market. “In our long-term vision, Brazil’s potential for expansion is unmatched. Australia and the U.S. offer limited room for additional grain planting,” he explains.

Despite the challenges Brazilian farmers faced in the 2023/24 season—driven by lower production and commodity prices—Agrex remains optimistic about long-term growth. Mr. Enosawa is confident that future harvests will benefit from improved yields and technological advancements.

“Many producers are struggling with debt, and dealers are facing market difficulties,” says Kenji Akiyama, Agrex do Brasil’s strategy and planning director. “We believe our role is even more crucial now, helping customers grow through these challenges.”

For the 2024/25 harvest, Agrex do Brasil anticipates a more stable year, with productivity aligning with historical averages. “It should be a solid year for our clients’ finances. Prices won’t make it extraordinary, but it will certainly outperform the previous season,” says Rafael Villarroel, Agrex do Brasil’s operations director.

The company generates annual revenues of around R$5 billion and focuses on producing, sourcing, and selling soybeans, corn, and sorghum. Its operations are concentrated in Matopiba—the confluence of Maranhão, Tocantins, Piauí, and Bahia—as well as in Pará, Goiás, and Mato Grosso. Agrex also owns Dimatre, a soybean seed company, and holds a 50% stake in Fertgrow, a fertilizer firm. In June, the company spearheaded a R$68 million fundraising effort for Gênica, a biological inputs company based in Piracicaba, São Paulo.

According to Kenji Akiyama, strategy and planning director, the company’s acquisition strategy includes both familiar regions and emerging sectors, such as ethanol. “We are exploring opportunities in ethanol, with some acquisitions already in negotiation,” he notes.

While Agrex does not disclose its total grain sourcing volume, it reported 2 million tonnes sourced from Matopiba (bordering the states of Maranhão, Tocantins, Piauí, and Bahia) alone for the 2023/24 harvest. Some of this output comes from Agrex’s own farms, which span 24,000 hectares of soybeans and over 10,000 hectares of corn across Maranhão, Piauí, and Tocantins. “We plan to expand the planting area, though the exact scope is yet to be defined,” Mr. Akiyama adds, indicating that the expansion will be driven by leasing agreements. The company also aims to more than double its soybean seed production over the next five years, leveraging partnerships with “a few dozen” seed multipliers across Brazil.

Additionally, Agrex is expanding its retail footprint, currently operating 22 Agrex and Synagro stores, with plans to open two new branches soon and grow the network to 30 units by 2028.

“We are also investing in storage and transshipment infrastructure,” Mr. Villarroel notes. Agrex holds the concession for Lot 4 of the Porto Franco rail terminal (Maranhão) and manages transshipment operations at Porto Nacional (Tocantins). This rail network facilitates grain shipments to the port of Itaqui in São Luís (Maranhão), “providing cost efficiency and logistical flexibility,” adds Mr. Akiyama.

Reaffirming Mitsubishi Corporation’s long-term commitment to Agrex do Brasil, Yoshinori Nagata, general manager of Mitsubishi’s global grains, oilseeds, and feed materials department, visited the company’s headquarters in Goiânia last week alongside other senior executives. “With enhanced productivity and robust exports, Brazil is consolidating its role as a global leader in agricultural production, driving both world food security and national economic development,” says Mr. Nagata.

*By Cibelle Bouças, Globo Rural — Goiânia

Source: Valor International

https://valorinternational.globo.com/
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Lower House to debate changes in state representation in Congress

If the measure moves forward in Congress, seven state caucuses would gain seats, while seven others would lose

10/14/2024

Caroline de Toni — Foto: Vinicius Loures/Câmara dos Deputados
Caroline de Toni — Photo: Vinicius Loures/Câmara dos Deputados

Following the progression of measures aimed at curbing the powers of the Supreme Court and the anticipated approval of a bill granting amnesty to participants in January’s coup-mongering acts, the Lower House’s Constitution and Justice Committee (CCJ) has a new controversial topic on its agenda. The committee is considering a proposal to adjust the size of congressional caucuses based on the 2022 Census results.

If the proposal advances in Congress, seven state caucuses would increase in size, while another seven would see a reduction in their number of seats.

Speaking to Valor, CCJ Chair Caroline de Toni said the topic will be a priority for the committee in the coming months to prevent the Electoral Court from intervening due to legislative inaction. “It will be our priority. If we don’t regulate it, the TSE [Superior Electoral Court] will,” Ms. de Toni said.

In the proposed new composition of the Lower House, Santa Catarina, the state of the CCJ chair, and Pará would each gain four seats, bringing their totals to 20 and 21, respectively. Meanwhile, the caucus from Amazonas would increase to 10 from 8 legislators, and Ceará, Goiás, Minas Gerais, and Mato Grosso would each gain one additional lawmaker.

Conversely, Rio de Janeiro would lose four seats, dropping to 42 from 46, while the caucuses from Bahia, Paraíba, Piauí, and Rio Grande do Sul would each lose two seats. Alagoas and Pernambuco would each elect one fewer legislator.

Alagoas is the state of the current Lower House speaker, Arthur Lira. Bahia and Paraíba are home to the three main contenders to succeed Mr. Lira in 2025: Hugo Motta (Paraíba), Elmar Nascimento (Bahia), and Antonio Brito (Bahia), leaders of the Republicans, Brazil Union, and the Social Democratic Party (PSD) in the House, respectively.

Thirteen other states—Acre, Amapá, Federal District, Espírito Santo, Maranhão, Mato Grosso do Sul, Paraná, Rio Grande do Norte, Rondônia, Roraima, Sergipe, São Paulo, and Tocantins—would retain their current caucus sizes.

If the proposal progresses through both the Lower House and Senate, the new configuration will take effect starting in 2027, directly impacting the 2026 elections.

No adjustments have been made since 1993, and the Supreme Court has given Congress a deadline to redistribute seats.

The Constitution stipulates that each state must have between 8 and 70 congresspeople, based on its population size. The last adjustment was made in 1993.

The proposal also suggests that in the year preceding each election, the number of seats should be automatically adjusted according to the latest population data.

In August last year, the Supreme Court unanimously voted to require Congress to redistribute the seats each state holds in the Lower House by June 30, 2025. In his opinion, Justice Luiz Fux outlined that the Lower House should consider the maximum number of legislators, currently 513, along with the latest Census data.

The Court also decided that if Congress fails to pass the supplementary law by the stipulated deadline, the Superior Electoral Court (TSE) must determine the number of legislators for each state and the Federal District by October 1, 2025.

During a public hearing requested by rapporteur Danilo Forte, participants highlighted the necessity of revisiting the seat distribution but also noted potential challenges, such as the conflict between states losing and gaining seats, the lack of public support for increasing the overall number of legislators, and the need for compliance with constitutional principles in the distribution.

At the close of the hearing, Mr. Forte emphasized the need for the legislature to act decisively. “I urge [the congresspeople] to help me devise a solution to this issue before the TSE steps in for us.”

*By Marcelo Ribeiro, Raphael Di Cunto — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Brazil seeks to prevent abrupt taxation of multinationals

Government’s presumed 9% tax credit for industrial groups and global consolidation of foreign subsidiaries will expire by December

10/14/2024

Daniel Loria — Foto: Washington Costa/MF
Daniel Loria — Photo: Washington Costa/MF

The federal government is evaluating alternatives to prevent a sharp tax increase for Brazilian companies operating abroad starting in 2025. By December, the presumed 9% tax credit granted to Brazilian industrial companies with foreign operations and the global consolidation of foreign subsidiaries, which allows companies to offset profits with losses, will expire.

“We are considering whether to simply extend the benefit for another two years or make a more structural revision of these rules, taking advantage of the context of Pillar 2,” Daniel Loria, program director of the Special Secretariat for Tax Reform, told Valor. “We are looking into this issue and won’t just sit back.”

The presumed tax credit and global consolidation are part of the Universal Basis Taxation (UBT), which aims to prevent double taxation of Brazilian companies operating abroad.

For tax expert Breno Vasconcelos, a professor at Insper, extending the UBT “would be an important measure to ensure the competitiveness of Brazilian companies with investments abroad.”

“Currently, profits of foreign subsidiaries are taxed in Brazil at a nominal rate of 34%, well above the average rate applied by OECD countries (approximately 23.3% in 2022). This high rate creates a disadvantage for companies with overseas production activities,” he said. “The 9% presumed CSLL (Social Contribution on Net Profit) credit reduces this inequality, putting Brazilian multinationals on a more level playing field with those headquartered in OECD countries.”

Experts fear that these rules could somehow clash with Pillar 2, which establishes a minimum 15% tax on multinationals, announced by the government two weeks ago. However, Mr. Loria sees no conflict.

Pillar 2 is part of an international effort led by the Organization for Economic Co-operation and Development (OECD) to combat tax erosion through the relocation of companies to tax havens.

After a decade of studies, Brazil has begun aligning itself with this initiative by adopting the Global Anti-Base Erosion (GloBE) rules, under provisional presidential decree, or “MP”, No. 1,262/24. Another 36 countries have already done the same. GloBE rules are part of Pillar 2.

“The interaction between the UBT and the global minimum tax based on GloBE, developed within the OECD framework, is a highly relevant issue for Brazilian companies subject to both,” said tax expert Ana Lúcia Marra, a partner at Machado Associados.

One concern, she said, is whether the countries where Brazilian companies operate will consider the Corporate Income Tax (IRPJ) and the CSLL collected in Brazil due to the profits of foreign subsidiaries when verifying if the effective minimum tax rate has been reached.

Another key point in this discussion is whether Brazil’s UBT is equivalent to the Controlled Foreign Company (CFC) tax regimes referred to in the OECD’s GloBE rules. She explained that CFC rules are typically applied when there is evidence of abusive practices that may result in profit shifting to low-tax countries. In contrast, Brazil’s UBT applies more broadly. The treatment of profit differs under each rule.

“It will be necessary to verify whether other countries that have implemented GloBE will consider IRPJ and CSLL as taxes paid on the profits of subsidiaries in other countries, rather than on the profits of the parent company in Brazil, in order to avoid double taxation,” Ms. Marra said. “The conclusion on this matter will depend mainly on how other countries interpret Brazil’s universal basis taxation rules as being equivalent to CFC rules.”

The provisional presidential decree has sparked opposition from the Parliamentary Entrepreneurship Front (FPE), which called it the “Unfair Competition MP” and claimed that the government’s strategy of seeking fiscal adjustment through increased revenue has run its course.

The parliamentary group believes that the decree “favors the profits of foreign companies over domestic ones.” In their view, Brazilian companies will face a 34% tax burden from IRPJ and CSLL, while foreign companies will pay only 15%.

“The statement is incorrect in claiming there are different tax burdens for Brazilian and foreign companies,” Mr. Loria said.

What the decree does, he explained, is establish a minimum threshold for paying taxes on profits in Brazil. The nominal rate applied in the country is 34%, considering both the corporate income tax and the social contribution on net profit. This applies equally to both domestic and foreign companies.

The decree stipulates that if the effective tax payment, after deductions and special treatments, falls below 15%, an additional CSLL levy will be applied to bring it up to the minimum threshold.

Since the minimum taxation is likely to be adopted globally, the decree effectively ensures that any additional amount collected to meet the 15% will be retained in Brazil, rather than paid to another country.

“We are following the rules of an international agreement to which Brazil had already committed and on which we have been working for ten years,” Mr. Loria said. “There is no different treatment for domestic or foreign companies, no tax increase—just a 15% minimum threshold, which most companies already meet.”

The rule will apply to groups with annual revenues of at least €750 million. Data from Brazil’s Federal Revenue indicate that, out of the 7,980,287 active companies in the country in 2022, only 0.11% (8,704) meet this criterion. Of those, 957 belong to groups with low taxation.

The details of the decree’s implementation are currently open for public consultation, allowing stakeholders to suggest changes.

The minimum taxation will begin affecting revenue collection in 2025, when R$3.44 billion is expected. In the following year, this amount is projected to rise to R$7.28 billion, reaching R$7.69 billion in 2028. The government expects revenues to stabilize around R$8 billion per year.

*By Lu Aiko Otta, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Small consumers could drive free power market to R$120bn by 2040

Nearly R$52bn may stem from low voltage migration, says strategy&; free supplier choice could capture 65% of the market

11/10/2024

The complete opening of Brazil’s electricity market to consumers on low voltage connections could generate an estimated R$120 billion by 2040. Of this total, R$52 billion would come from new consumers migrating to the free market, where they can choose their electricity supplier and contractual terms, according to projections by Strategy&, a PwC consultancy analysis arm.

If market liberalization occurs by 2030, Strategy& forecasts a significant increase in the volume of electricity traded in Brazil, potentially representing up to 65% of the total electricity market by 2040. Data from the Energy Research Company (EPE) reveals that the regulated market, managed by utility companies, currently includes over 90 million consumer units, half of which are residential.

There is anticipation within the energy sector that starting January 2026, the option to migrate will extend to industrial and commercial energy users on low voltage. Full liberalization, including residential and rural properties, is projected for January 2030, although this shift still requires studies and regulatory changes that have yet to be outlined.

Since the beginning of the year, the free market has allowed any energy consumer on high voltage networks over 2.3 kilovolts (kV) to migrate, typically involving customers with electricity bills exceeding R$10,000 monthly. For instance, a supermarket chain could have moved several stores to the free market. The latest data from the Electric Energy Commercialization Chamber (CCEE) indicates over 16,000 consumer units have transitioned to the free market.

The Brazilian Electric Energy Agency (ANEEL) reports that 31,400 energy consumers have notified their respective distribution companies about migrating to the free market this year and in 2025, averaging 2,500 migrations monthly.

Adriano Correia, a partner and leader of the energy and utilities sector at PwC Brazil, notes that it is crucial to see how market liberalization is structured within the Brazilian Congress. Technically, he believes it could be very beneficial for the energy market.

Mr. Correia sees potential for new investments to cater to a new consumer profile with a lower average ticket than currently observed. Future investments, he stated, are likely to involve initiatives like new types of energy consumption meters, specific marketing models, process automation, and establishing new commercial and communication channels with consumers.

He cites the example of a retail chain negotiating a migration to the free market, which required the installation of electric vehicle chargers in store parking lots as a condition for closing the deal. The commercializer agreed, he recalls.

“We can imagine, for instance, contracting energy efficiency services. Or, later on, combining the free market with distributed generation. There’s a vast field to explore for interesting solutions and, further down the line, to sophisticate the market,” Mr. Correia said.

One of the most anticipated regulatory measures is redesigning the role of power distribution companies. Currently, they purchase energy in auctions and manage distribution to regulated market clients through the transmission network. With the expected redesign, a regulated marketer will emerge, responsible for buying energy in auctions and negotiating it with distributors. These companies will then be compensated solely for delivering the energy to consumers.

Mr. Correia emphasizes that with this separation, distribution companies will be able to act more assertively to retain customers, maintaining scale and financial margins.

*By Fábio Couto — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Core retail sales drop 0.3% in August, below expectations, IBGE says

The median estimate from 26 consultancies and financial institutions surveyed by Valor Data expected a 0.6% decline in the period

11/10/2024

Core retail sales volumes dropped 0.3% in August compared to July, in seasonally adjusted terms, according to the Monthly Survey of Trade (PMC) released by the Brazilian Institute of Geography and Statistics (IBGE) on Thursday (10).

The decline was smaller than anticipated, as the median estimate of 26 consultancies and financial institutions polled by Valor Data was a 0.6% drop, with projections ranging from a 1.8% fall to a 0.2% rise. In July, core retail sales had advanced 0.6% compared to June.

Year-on-year, core retail grew 5.1% compared to August 2023. The sector has shows a 4% increase in the 12 months through August and a 5.1% rise in 2024.

The 5.1% gain year-on-year was higher than expected. The median forecast was a 4.1% rise, with projections ranging from a 2% to 5.7% increase.

Core retail’s nominal revenue remained stable in August compared to July. Year-on-year, it rose 9.8%.

Sales declined across most of the core retail sector in August, with seven of the eight activities surveyed by the PMC reporting drops compared to July.

PMC data also show that five out of eight activities saw year-on-year growth compared to August 2023. Overall, core retail grew 5.1% in this comparison.

From July to August, the following segments experienced declines: personal and household goods (-3.9%); books, newspapers, magazines, and stationery (-2.6%); office, IT, and communication equipment (-2%); furniture and appliances (-1.6%); textiles, clothing, and footwear (-0.4%); fuels and lubricants (-0.2%); and hypermarkets, supermarkets, food products, beverages, and tobacco (-0.1%).

The only positive outlier was the pharmaceuticals, medical, orthopedic products, and cosmetics segment, which grew 1.3% between July and August 2024.

Year-on-year, core retail grew 5.1% from August 2023, with a 4% increase in 12 months and a 5.1% rise in 2024 — Foto: Gabriel de Paiva/Agência O Globo
Year-on-year, core retail grew 5.1% from August 2023, with a 4% increase in 12 months and a 5.1% rise in 2024 — Photo: Gabriel de Paiva/Agência O Globo

*By Lucianne Carneiro, Valor — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Attorney General’s Office issues notice to YouTube, TikTok, Kwai, Meta

AGU is requesting information on measures taken to manage gambling and betting ads directed at minors

10/09/2024

Brazil’s Attorney General’s Office (AGU) has issued an extrajudicial notice to YouTube, TikTok, Kwai, and Meta (including Instagram and Facebook). The notice seeks information on the steps being taken to manage advertising related to gambling or betting that might be directed “by and for” minors.

The notice also inquires whether the platforms’ “terms of use” include specific rules for protecting minors and if there are designated channels for reporting inappropriate advertising on this issue. The AGU recalled that both the operation and advertising of these activities to individuals under 18 are prohibited by law.

“Considering specifically the advertising of games disseminated through digital platforms, there’s no doubt that those directed by and for minors are unequivocally abusive/illegal. This holds true whether the advertising comes from regulated companies or those in the process of regulation (fixed-odds betting firms) or from gambling (a criminal offense), as both the operation of these activities and their advertising are prohibited for children and adolescents, as evidenced by the following provisions of sports betting legislation, in addition to the entire protective legal framework for children and adolescents,” states the notification.

The notification further emphasizes the need to differentiate between fixed-odds betting firms, which are in the process of regulation in Brazil, and gambling, which is illegal and classified as a criminal offense.

According to the AGU, these notifications are part of an ongoing administrative process within the office, initiated following a request from the Ministry of Health regarding the topic of betting games and their impact on federal public policies, particularly those related to the mental health of the population.

The document notes that, according to the Department of Mental Health, Alcohol, and Other Drugs of the Ministry of Health, “Gambling Disorder” has been included in the International Classification of Diseases (ICD-11), showing similarities with disorders related to substance use.

When reached by Valor, YouTube , TikTok, Kwai, and Meta declined to comment.

According to a study by consultancy firm Kantar Ibope Media, online sports betting companies invested a total of R$2.3 billion in internet and TV advertising from January to August this year. Of this amount, R$960.3 million was spent on digital media advertising.

*By Mariana Assis — Brasília

Source: Valor International

https://valorinternational.globo.com/
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September sees 0.44% rise in consumer prices, falling short of expectations

12-month inflation climbs 4.42%, according to IBGE data

10/09/2024

September sees 0.44% rise in consumer prices, falling short of expectations
September sees 0.44% rise in consumer prices, falling short of expectations — Photo: Daniel Wainstein/Valor

Brazil’s official inflation rate, tracked by the Broad Consumer Price Index (IPCA), increased to 0.44% in September, following a 0.02% drop in August. In September 2023, the IPCA recorded a 0.26% rise. These figures were released on Wednesday by the Brazilian Institute of Geography and Statistics (IBGE).

The September rate was slightly below the median forecast of a 0.45% increase, gathered from 39 financial institutions and consultancies surveyed by Valor Data.

Over the 12 months leading up to September, inflation rose 4.42%, compared to 4.24% up to August. The median estimate by Valor Data was 4.43%, with projections ranging between 4.21% and 4.51%.

The 12-month IPCA result exceeded the core inflation target set by the National Monetary Council (CMN) and pursued by the Central Bank, which is 3% for 2024. However, it remained within the permissible deviation of 1.5 percentage points, either up or down.

From January to September 2024, the IPCA increased by 3.31%. During the same period in 2023, the cumulative rise was 3.50%.

Among the nine spending categories used to calculate the index, housing shifted from a 0.51% decrease to a 1.80% increase between August and September, driven by a 5.36% hike in electricity prices. Food and beverages moved from a 0.44% decline to a 0.50% rise. Transportation went from 0% to 0.14%, and health and personal care increased from 0.25% to 0.46%.

In negative territory were household goods (from 0.74% to -0.19%), personal expenses (from 0.25% to -0.31%), and communication (from 0.10% to -0.05%). Education rose less (from 0.73% to 0.05%) and clothing (from 0.39% to 0.18%).

The IBGE calculates Brazil’s official inflation based on the consumption basket of families earning between one and 40 minimum wages, covering 10 metropolitan regions, along with the cities of Goiânia, Campo Grande, Rio Branco, São Luís, Aracaju, and Brasília.

Spread of inflation

Inflation became more widespread among the general items that make up the IPCA in September. The so-called Diffusion Index, which measures the proportion of goods and services with rising prices, increased to 56.5%, the highest since May (57.3%), up from 56% in August, according to Valor Data calculations that consider all items in the basket.

Excluding food, one of the more volatile groups, the index fell from 61.7% to 54.7%, returning to levels similar to June (54.5%) by these measures.

Core inflation average

The average of the five core IPCA components monitored by the Central Bank saw a slight decline to 0.22% in September, from 0.24% in August, according to calculations by MCM Consultores.

In the 12-month accumulated IPCA, the average of the five core components adjusted slightly from 3.80% to 3.81%.

The annual inflation target set by the Central Bank is 3% for 2024, 2025, and 2026, always with a tolerance range of 1.5 percentage points above or below.

*By Lucianne Carneiro, Valor — Rio de Janeiro

https://valorinternational.globo.com/
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Fiscal risk pushes real market interest rates close to 7%

Medium-term NTN-B rates surpass 6.7% amid uncertainty and Selic tightening cycle

10/09/2024

Luciano Rais — Foto: Gabriel Reis/Valor
Luciano Rais — Photo: Gabriel Reis/Valor

Growing distrust in fiscal policy, combined with the beginning of the monetary tightening cycle, has led to a sharp rise in real market interest rates, reflected in B-Series National Treasury Notes (NTN-Bs)—Brazil’s inflation-indexed bonds—which are now nearing the psychological 7% mark for some maturities. At Tuesday’s (8) weekly National Treasury auction, three-year bond (May 2027) rates hit 6.709%, raising concerns about the government’s increasing financing costs and worsening debt structure.

The recent spike in real market interest rates mirrors stress levels last seen in early 2016 during Dilma Rousseff’s administration.

“Brazil has experienced fiscal distortions and some uncertainty around the Central Bank, but the latter is being addressed,” said Luciano Rais, head of fixed income at Santander Asset Management. However, he warned that the fiscal risks continue to rise. “The current agenda is more focused on boosting revenue rather than cutting spending,” he added.

“The market is mainly suspicious of the structural side. While the deficit is a key concern, it’s being tackled with temporary revenue sources, whereas spending increases appear permanent,” Mr. Rais continued. He also noted that despite restrictive interest rates, economic growth remains strong, which is a concern for the Central Bank as it resumes its tightening cycle.

“The Central Bank’s rate hikes are impacting NTN-B and fixed-rate bond yields. Although longer-term NTN-Bs offer attractive yields, these higher rates don’t seem unjustified. Expected real interest rates will need to rise further,” Mr. Rais explained.

Ronaldo Patah, Brazil strategist at UBS Global Wealth Management, agreed that fiscal uncertainty and the recent monetary tightening have fueled the surge in NTN-B rates. He pointed out that while U.S. Treasury movements have been more restrained—with the real U.S. 10-year rate rising only slightly from 1.74% at the beginning of the year to 1.77% now—the Brazilian 10-year NTN-B rate has soared from 5.4% to 6.5%.

Mr. Patah added that even if the government meets its primary fiscal target for this year, lingering doubts over whether it can achieve a zero deficit next year are contributing to a roughly 100-basis-point increase in real interest rates as risk premiums become embedded in bond prices.

“Without new measures and relying on non-recurring revenues like this year, the expected deficit for 2024 is 0.8% of GDP—well short of the zero target,” warns Mr. Patah, noting the possibility that the government may need to revise its fiscal framework targets. Such a revision could worsen the perception among financial agents, potentially driving real interest rates even higher.

Mr. Patah points to two negative signals on the fiscal front: the government’s push to extend the gas allowance and its proposal to exempt individuals earning up to R$5,000 a month from paying income tax. However, he acknowledges that Moody’s upgrade of Brazil’s sovereign rating, with a positive outlook, might encourage the government to pursue fiscal balance to reclaim its investment-grade status.

Amid these challenges, Luiz Alberto Basqueira, partner and head of fixed income at Ace Capital, sees a negative bias in medium- and long-term real interest rates. His concerns center on Brazil’s public debt trajectory and the recent deterioration in its structure. “We don’t like the level of nominal interest or real rates, particularly in the medium and long term. This is a bias, and we are reducing our exposure to these parts of the curve,” he explains.

Mr. Basqueira also highlights potential external pressures on rates. He suggests that the U.S. Federal Reserve, which has started its monetary easing at a pace of 50 basis points, may not be able to deliver the number of rate cuts the market anticipates. Additionally, with Donald Trump remaining a frontrunner in the U.S. presidential race, Treasury yields could face upward pressure, which would likely spill over into the Brazilian market.

According to Mr. Basqueira, Ace Capital’s strongest conviction in the interest rate market comes from a more pessimistic outlook on inflation. “Beyond structural factors like strong economic activity, a tight labor market, exchange rate fluctuations, and unanchored inflation expectations, we see heightened risks linked to climate issues such as heat and drought. We are particularly pessimistic about food inflation, which we expect to reach 8% this year and 7% next year—well above market projections,” says Mr. Basqueira, adding that he favors long positions (betting on the rise) in short-term “implicit” inflation.

Mr. Basqueira also highlights that competition for funds with the credit market is another factor pressuring medium- and long-term real interest rates. “The demand for hedging from credit funds has contributed to the upward pressure on the real interest rate curve,” he explains.

Moreover, the substantial issuance of incentivized bonds has negatively impacted government bonds. “In addition to the competition, the government misses out on revenue due to the tax exemption for these bonds. They undeniably divert resources that could help finance public debt,” he notes.

As of last month, NTN-B issuances made up just over 10% of the total for the year, as the National Treasury has chosen to focus on selling post-fixed Financial Treasury Bills (LFTs), which are tied to the Selic, Brazil’s benchmark interest rate. This shift has raised concerns among market participants about the composition of the public debt.

“If the government believes that current interest rates are too high and expects them to fall, it makes sense to shorten the debt by selling LFTs, which are indexed to the Selic rate. In a rate-cutting cycle, the cost of the debt would drop quickly. However, if the debt is shortened and the government fails to regain fiscal credibility, the debt structure becomes more vulnerable,” warns Mansueto Almeida, chief economist at BTG Pactual and former Treasury secretary.

“You shift from long-term financing, like the NTN-B, to shorter-term financing with LFTs, which have a maturity of up to six years. This creates a more fragile debt structure,” explains Mr. Almeida. “Selling an NTN-B at a 6.5% interest rate is very expensive. If the government is confident it can take steps to demonstrate its commitment to fiscal policy and bring down that interest rate, it might make sense. But if those actions don’t materialize, if market doubts persist, and if long-term rates remain at this elevated level, the government will be adding to the fragility of its debt financing.”

Mr. Rais, from Santander Asset Management, adds that there is ongoing debate among market participants over whether the Treasury is facing a lack of demand for NTN-Bs or is simply unwilling to accept the high market interest rates. “If the Treasury has demand but chooses not to issue NTN-Bs due to the high rates, it may be a risky move to leave the debt more exposed to post-fixed rates,” Mr. Rais says, highlighting the potential risks if the Selic rate needs to rise further.

*By Gabriel Roca, Gabriel Caldeira, Victor Rezende — São Paulo

Source: Valor International

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