Report warns that 74% of agricultural land in the region may become unviable by 2060
07/18/2024
Agriculture in jeopardy: large-scale monocultures, with intensive irrigation systems and excessive use of inputs, fertilizers, and pesticides — Foto: Valter Campanato/Agência Brasil
If the current agribusiness model is maintained in the future, with pressure on natural capital and producing major environmental impacts, the activity runs the risk of becoming unviable. Scenarios project that the viability of 74% of current agricultural land on the border between the Amazon and the Brazilian savanna (“Cerrado”) could be compromised by 2060.
This data is part of the executive summary of the “Thematic Report on Agriculture, Biodiversity and Ecosystem Services” produced over three years and launched on Tuesday by a group of 100 researchers from several fields linked to 40 institutions in all Brazilian biomes.
“We want to highlight the importance of an integrated agenda between agriculture and conservation in Brazil, alerting people to the environmental liabilities generated by conventional farming,” said biologist Rachel Bardy Prado, one of the coordinators of the report and a researcher with the soil department of the Brazilian Agricultural Research Corporation (Embrapa) for 21 years.
Brazilian ecosystems are home to nearly 20% of the planet’s described species. The country is first in the ranking of the 17 most megadiverse nations in the world. On the other hand, agribusiness is responsible for 20% of formal jobs and 27% of the country’s GDP—or R$403.3 billion in 2020. “For the most part, it is marked by large-scale monocultures, with intensive irrigation systems and excessive use of inputs, fertilizers, and pesticides,” said the note to press.
The report mentions that crops dependent on pollinators account for 55% of the annual monetary value of national production. “This service is very important and has been compromised by pesticides, the fragmentation of the landscape, and the destruction of forests,” said Ms. Prado. “Pollination is one of the essential services, like clean water.”
“The conservation and production agendas are separate. Our proposal is for them to be shared”, she added. The biologist said what has been known for years in the country, but has not become a reality: “We have to stop seeing biodiversity as an obstacle to development. It’s the other way around. This is our great wealth, for different sectors of production and especially for agriculture.”
The summary of the report was produced by the Brazilian Platform on Biodiversity and Ecosystem Services (Bpbes), an initiative launched in 2017 that brings together 120 university professors, researchers, environmental managers, and holders of traditional knowledge.
The summary indicates what is in the six chapters of the report: the first is about the benefits provided by nature, the second mentions the trajectory of land use. The third shows future scenarios, and the fourth practical solutions for managing agriculture and natural resources.
The fifth chapter discusses opportunities for greater social inclusion and income generation. The last is about governance, where the main successful examples of reconciling conservation and agriculture with international requirements have been consolidated.
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“We have to look at a multifunctional rural landscape. This means a landscape that can provide more than food, but all the ecosystem services essential to human well-being such as clean water, fertile soil, climate regulation, and pollination,” said the biologist.
Macrofiscal Bulletin is expected to endorse official growth projection of 2.5% for this year
07/18/2024
Fernando Haddad — Foto: Leo Pinheiro/Valor
The Ministry of Finance is unlikely to make any major changes to its new macroeconomic projections, according to a source consulted by Valor on Wednesday. The figures will be released this Thursday by the ministry in the Macrofiscal Bulletin.
The Macrofiscal Bulletin is important because it serves as a guide for the preparation of the federal budget and the calculations of the spending freeze—necessary for the federal government to comply with the spending limit established by the fiscal framework and the primary result target.
The economic team was working on a total expenditure freeze of R$10 billion. The official figure will be released on Monday in the revenue and expenditure assessment report.
According to the source, the tendency is for the document not to bring “major news” and to follow a “more parsimonious scenario”. Currently, the Ministry of Finance projects a GDP growth of 2.5% for this year and 2.8% for next year.
On Tuesday, President Lula said that “if the money we put into circulation in this country is circulating, we will grow by more than 2.5%” in 2024.
The statement was made at a meeting with representatives of the food industry at the Planalto Palace, where the executives announced investments of R$120 billion by 2026. Of this total, R$23 billion was already invested last year.
At the same event, Finance Minister Fernando Haddad also said that it is “likely” that the ministry’s official projection for this year’s GDP growth will be revised upwards.
“We’re always parsimonious because we don’t want to suffer setbacks. But everything indicates that, even with the calamity in Rio Grande do Sul, which affected a state that accounts for almost 8% of Brazil’s GDP, the economy hasn’t stopped growing. Even with the external lockdown, the concerns about the Fed, the repercussions on our Central Bank here, the economy continues to grow,” he said.
On Tuesday morning, after a meeting with Mr. Haddad, the president of the Brazilian National Bank of Social Development (BNDES), Aloizio Mercadante, also said that the Finance Ministry would need to recalculate its projections upwards.
“For the BNDES, we’re going to have greater growth than what has been projected so far,” he said, citing the expansion of both approvals and disbursements of credit operations carried out by the institution.
In the case of inflation indicators, the Ministry of Finance’s respective projections for 2024 and 2025 are Brazil’s benchmark inflation index IPCA of 3.7% and 3.2%; National Consumer Price Index (INPC) of 3.5% and 3.1%; General Price Index – Internal Availability (IGP-DI) of 3.5% and 3.4%.
Plan includes 2,500 City Express rooms; focus on Ibis brand investors, independent groups
07/18/2024
Vanessa Martins — Foto: Gabriel Reis/Valor
The Marriott International hotel chain is moving with its plan to enter the economy and midscale segments with the arrival of the City Express brand in Brazil. According to Vanessa Martins, top executive of Marriott Brazil, the chain has three letters of intent signed and 10 more projects under negotiation. The plan is to achieve 2,500 rooms under this brand in Brazil in the medium term—between two and four years.
Marriott’s move increases competition in the segment, currently dominated by French chain Accor with its Ibis brand.
In May, the Hilton chain also announced plans to bring its new brand Spark to Brazil and become an alternative to Ibis hotel owners when contracts for properties currently in operation are approaching their renewal period.
“The midscale and economic segments are growing not only in Brazil. In the region, Marriott entered this category with the recent acquisition of City Express. It is a 20-year-old brand, which is strong in its markets,” Ms. Martins said, in an interview with Valor. City Express currently has 150 hotels, with 10 others in its pipeline—in total, there are five brands added. The operation is focused on Mexico, Colombia, Chile, and Costa Rica.
Marriott announced the chain acquisition in October 2022 but the deal was only completed in the second quarter of 2023, after regulatory approvals.
With the deal, Marriott added 17,500 rooms to its portfolio and became the largest company in the Caribbean and Latin America region, with almost 500 properties, rivaling Accor, with around 450. In Brazil, however, Accor is the leader.
According to data from the Forum of Hotel Operators of Brazil (FOHB), the economic segment is the largest in the domestic hospitality industry, accounting for 46% of properties. The midscale segment represents 36%, while the upscale segment has 16%, and resorts account for 2%.
Accor is the market leader, with 332 hotels in Brazil, 240 of which are part of the Ibis family (including the Ibis, Ibis Budget, and Ibis Styles brands). That means 72% of the French company’s portfolio is in Brazil.
Despite leading in the region, Marriott currently has only 12 hotels in Brazil, with a total of 3,197 rooms and eight brands.
Ms. Martins said the group is more attentive to opportunities in Brazil and seeks to grow in all segments. She points out that central cities like São Paulo still have a lack of room supply, especially in the luxury segment. The company launched its first luxury hotel in São Paulo, the JW Marriott, only in 2022.
“We see many brands arriving. There is demand in the midscale market, Other brands could arrive and bring innovation. We want to be an alternative for building owners and customers,” she said.
The strategy involves expanding City Express in the country’s fastest-growing markets, including primary destinations, such as São Paulo, and secondary and tertiary destinations, which are seeing strong tourism growth—the countryside of São Paulo, for example, has been on the industry’s radar.
Low competition in the segment prompted Hilton to seek to gain ground with Spark, the group’s conversion brand. The project has been adapted for the Brazilian market. While in the United States, the average size of a Spark room is 24 square meters, in Brazil it will be 16 square meters, which is in line with the Ibis portfolio.
In the same direction, City Express rooms will start at 16 square meters but the expected average is between 18 and 22 square meters.
Marriott also sees an opportunity to use the City Express brand to attract independent hotel owners, a strong segment in Brazil. “One of the tools we have for making hotels enter our portfolio is the [Marriott Bonvoy] loyalty program. We have more than 200 million members. In Brazil alone there are 1.1 million,” she said.
Conversion is a strong strategy, especially at a time of high interest rates, which makes the construction of new buildings more expensive. Last year, 35% of Marriott’s pipeline in Latin America and the Caribbean resulted from conversion. “We are very strong in markets sought by Brazilians, like Miami and Orlando. It’s a well-known portfolio,” the executive pointed out.
The group is also advancing in other segments, with openings in the luxury sector with the W São Paulo and W Residences São Paulo—at the end of 2024—, and the Westin São Paulo (premium segment), in 2025. Globally, Marriott posted net earnings of $564 million in the first quarter, a drop of 25% year-on-year amid higher operating costs.
After the strong impact of the pandemic, the business is now favorable. The group does not disclose further details but the executive says the operation has recovered from the pandemic levels. “It’s encouraging to see the market situation today,” she said, pointing out the strong increase in the number of events, such as the Madonna concert, which took place in Rio, and the G20 scheduled for the end of the year.
Announcement made at meeting of the sector with President Lula includes contributions already started in 2023
07/17/2024
President Lula announces investments at the Planalto Palace — Foto: Ricardo Stuckert/PR
Representatives of the food industry confirmed on Monday to President Luiz Inácio Lula da Silva that R$120 billion will be invested in the country by 2026. Around R$75 billion will be earmarked for the expansion and modernization of plants, as well as the construction of new units throughout Brazil. Companies in the sector will also invest R$45 billion in research and development.
João Dornellas, president of the Brazilian Food Industry Association (ABIA), told Mr. Lula that the sector grew by 3.3% in the first half of this year, but did not give any more details about the figures. In 2023, the sector’s turnover was R$1.161 trillion.
“This meeting confirmed to the government that the Brazilian food industry is committed to the country. We continue to bet on the potential of our country. And the numbers are coming in,” said Mr. Dornellas to journalists after his meeting with President Lula.
Part of the investments had already been announced. In 2023, R$36 billion had already been invested. Among the initiatives are investments of R$15 billion by JBS to expand production in Mato Grosso, R$7 billion by Nestlé to expand factories and coffee production in Araras (São Paulo), and R$5.6 billion by BRF in meatpacking plants across the country.
The list of investments also includes R$4 billion by Coca-Cola to modernize and expand its factories; R$3.5 billion by Coamo to expand its grain storage and processing capacity, and R$3.5 billion by CMAA to expand its sugar milling and production capacity in Minas Gerais.
Other confirmed investments are by Cargill (R$2.6 billion), Nutriza Alimentos Nordeste (R$2 billion), Bunge Alimentos (R$1.7 billion), Cocamar (R$1.3 billion), Pepsico (R$1.2 billion) and Mondelez (R$1 billion). Contributions from Bauducco, Camil, Cooperativa Oeste Catarinense, C. Vale, Caramuru, Cerradinho, Comigo, Cooperativa Agropecuária Tradição, Copasul, Laticínios Tirolez, Kellanova, Natural One, Cutrale, Usinas Cariripe, General Mills and Unilever add up to another R$8.2 billion.
Agriculture Minister Carlos Fávaro said that the government has been working to “hinder less agro-industries”, with measures to reduce bureaucracy, such as the electronic certification of exports.
“We already had a strong field [production] and now we have become the world’s supermarket, as we are the largest exporter of industrialized, ready-to-eat food,” said Mr. Dornellas.
According to Abia, 61% of the Brazilian agricultural production is bought and processed by the domestic industry.
BTG will back 75% of the capital increase; company expected to be its main platform in the sector
07/17/2024
Lino Cançado — Foto: Divulgação
Power generation company Eneva is acquiring four thermopower plants from BTG Pactual and will carry out a public offering of up to R$4.2 billion to back the acquisition and reduce leverage.
In the deal, BTG commits to backing up to R$3.2 billion in the base offer at R$14 per share, which corresponds to Eneva’s shares average price over the last 60 trading sessions on the B3 stock exchange.
The deal also places the bank as a primary shareholder with the possibility to double its stake in the company, currently at 23.3%. Under the new arrangement, BTG ensures that the company will be its investment platform in energy generation and natural gas assets in Brazil. On the other hand, the bank cannot vote at the meeting to approve the deal, as it is the seller of the assets and the company’s primary shareholder.
That was one of the conflicting points identified among minority shareholders, Valor learned from two sources. There was disagreement among shareholders and management about the direction of the company.
One party defended running Eneva as a corporation (with dispersed ownership). However, the existence of two relevant primary shareholders—BTG and the Cambuhy fund—generated conflicts. Minority shareholders raised the governance issue as a sensitive point, according to these two people familiar with the matter. There was some discomfort given the fact that BTG held other assets in the sector, in addition to Eneva. The bank and the Cambuhy fund did not immediately respond to Valor’s requests for an interview.
The announcement of the deal was expected by the market. With the capital increase, backed by BTG by around 75%, the company will be able to support the acquisition of the four thermal plants (estimated at R$ 2.9 billion) and will seek to reduce its debt, says Eneva’s CEO Lino Cançado. The announcement of the deal did not excite investors in the stock market on Tuesday (16). Eneva’s shares closed the trading session with a slight increase, of 0.23%, at R$ 13.28. BTG’s shares fell 0.37%, to R$32.05. Benchmark stock index Ibovespa ended the day 0.16% down.
The question in the market is whether the other shareholders will follow this offer to avoid capital dilution. Sources interviewed by Valor argue that the shareholders need time to evaluate the offer.
At the end of last year, Eneva proposed a “merger of equals” with Vibra. The proposal did not move forward, as the fuel distributor considered that the valuation placed the company in an unfavorable position and that the share exchange ratio would not be fair as originally proposed. Therefore, negotiations did not move forward.
In a conference call with analysts and investors, Mr. Cançado said the acquisition of BTG’s thermal plants is in line with Eneva’s businesses. He emphasized that the deal will diversify Eneva’s geographic position, currently focused mostly on the North and Northeast regions.
Eneva will issue 126,071,428 new shares to BTG, considering the asset price of R$1.76 billion, to acquire two thermal plants: Tevisa and Povoação. The deal also includes BTG’s rights issue to up to 16,330,346 shares. The other two thermal plants, UTE Linhares and Gera Maranhão, are priced at R$1.14 billion. The acquisition of these two plants will be backed with the offering funds.
Due to three large acquisitions carried out by Eneva in 2022, the company’s leverage, measured by the net debt/EBITDA ratio, is 4.1 times, according to the financial statements for the first quarter of 2024. The acquisitions involved the incorporation of Focus for R$936 million, plus the acquisitions of Celse for R$6.1 billion and Termofortaleza for R$489.8 million.
“The deal strengthens Eneva’s balance sheet through the public offering and acquisitions generating cash in the short term, when Eneva is committed to a large investment program, including ongoing projects. It will also have a significant impact by reducing debt,” Mr. Cançado said.
Eneva is also considering re-purchasing 148 megawatts (MW) of installed capacity from the plants involved in the deal with regulated contracts expiring in December 2025.
Marcelo Lopes, Eneva’s chief commercialization officer, said in a conference call that there is an estimate of a potential increase in the company’s installed capacity of up to 3.3 gigawatts (GW). For Mr. Lopes, the distribution of thermal assets in three states enables access to liquefied natural gas (LNG) terminals, with around 1.1 GW located in Espírito Santo, including access to the TAG network and possible gas supply from the Sergipe hub, with the participation in the capacity reserve auction. “The acquisition gives us competitive strength to participate in the auction and meet the sector’s demand.”
Edvaldo Santana, a former director at the Brazilian Electricity Regulatory Agency (ANEEL), points out that Brazil has no problem related to energy supply or security, but rather to meeting the peak of demand, between 6 pm and 9 pm, when solar power generation stops and electricity consumption in homes remains high. Mr. Santana says Eneva could tap into relevant businesses, as the security of the service and the reliability of the electrical system have been met by thermoelectric plants dispatch during times of high demand.
With the deal, Eneva estimates the company’s revenue will grow to R$12.2 billion, from R$10.1 billion in 2023. EBITDA (earnings before interest, taxes, depreciation, and amortization) could increase to R$6.1 billion. Eneva’s net earnings of R$200 million in 2023 would be added to the thermal plants’ profit, to reach R$1.6 billion in projected net earnings. The company did not provide a deadline for achieving this target.
For Ativa Investimentos analyst Ilan Arbetman, the deal could face questions about governance, since BTG is also a relevant shareholder of Eneva. “The board approved it and the BTG member declared himself unable to vote, as reported in the conference call. It remains to be known whether the same will happen in the general shareholders’ meeting.”
Eneva expects that the meeting aimed at evaluating the deal will be held in the third quarter of 2024. The deal also pends approval by the Administrative Council for Economic Defense (CADE) and the Central Bank.
The analyst also says minority shareholders may consider the deal as positive as it provides room for the company to open new investment fronts and pay dividends. “Last year the company said it could pay dividends at the end of 2023, and then moved to the beginning of 2024. With recent acquisitions, the possibility of compensating shareholders has fallen off the radar.”
*Por Kariny Leal, Robson Rodrigues, Mônica Scaramuzzo, Felipe Laurence, Maria Luíza Filgueiras — Brasília, São Paulo
The proposed model mirrors the UK’s approach, segregating responsibilities between prudential and conduct regulation
07/17/2024
Otavio Yazbek — Foto: Silvia Costanti/Valor
The Ministry of Finance is exploring the implementation of the “twin peaks” model in Brazil. This approach would elevate the Central Bank (BC) and the Securities and Exchange Commission (CVM) to “super-regulators” overseeing the financial, capital, insurance, and pension markets.
This proposal would maintain the Central Bank’s operational autonomy, already secured by law. As told to Valor, discussions began early in Minister Fernando Haddad’s tenure and were initially planned for the third year of President Lula’s term. However, the idea has gained momentum amid debates on a constitutional amendment (PEC) to ensure the Central Bank’s financial autonomy.
The concept, already shared with a few senators and inspired by the UK system, involves one body handling prudential regulation of financial, capital, and insurance markets and another overseeing conduct and consumer protection.
Brazil’s regulatory model currently involves the Central Bank, the CVM, and the Superintendence of Private Insurance (Susep) managing regulatory and supervisory roles. According to the Ministry of Finance and various experts, this arrangement leads to overlapping functions and hampers the agencies’ ability to oversee systemic issues and monitor irregular activities effectively.
Given the complexity of implementing the new model, the Ministry of Finance is considering a phased approach to minimize disruption to these institutions and their operations. The initial step would involve integrating Susep into the Central Bank due to perceptions that Susep is currently an underpowered entity that would benefit from the structure and support of the Central Bank.
Subsequently, the plan is to bolster the CVM, enabling it to assume some responsibilities currently held by the Central Bank, while the Central Bank would take over specific duties from the CVM. Ministry experts see this reassignment of roles as the optimal arrangement.
Under the proposed restructuring, the Central Bank would be tasked with regulating and supervising financial and capital markets, along with overseeing monetary policy. The CVM, on the other hand, would focus on regulating and supervising market conduct, extending its oversight to banking activities.
Additionally, the Ministry of Finance is contemplating integrating the responsibilities of the National Superintendence of Complementary Pensions (Previc) into this model. This change would streamline the regulatory landscape by reducing the number of agencies from four to two.
Similar to how the Central Bank’s operational autonomy was established through a complementary law in 2021, this new framework would also be instituted through legislative means. While the Central Bank would retain financial autonomy, the proposal diverges from the current Constitutional Amendment Proposal (PEC) being debated in the Senate, which suggests transforming the agency into a public company—an idea the economic team opposes.
The CVM might also be granted financial autonomy under the new model. Currently, the CVM collects approximately R$1 billion annually in fees from the entities it regulates; however, its discretionary spending is capped at only R$30 million.
Drawing from the United Kingdom’s framework, which Brazil is considering as a model, the UK has the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This structure was adopted gradually, transitioning from a system where the Financial Services Authority (FSA) was the sole regulator.
In Brazil, there is a consensus between the government and the Senate that the “twin peaks” model and the autonomy outlined in the PEC should be seen as complementary measures. Consequently, the PEC will continue to progress through legislative processes. Government factions are open to modifications in the legal structure of the Central Bank, provided it does not become a “public company.”
The proposal aims to transform the Central Bank into a “Financial Corporation,” a legal framework wherein its employees would not be traditional civil servants, enabling salaries comparable to those at the Brazilian Development Bank (BNDES). This concept aligns with the organizational structures of the Federal Reserve in the United States and the European Central Bank. However, there is no unified agreement on this change among the involved parties.
The voting on the Central Bank’s PEC in the Senate’s Constitution and Justice Committee (CCJ) is currently in limbo. Davi Alcolumbre, the committee chairman, has said that he will not move forward with the deliberation until a consensus is reached.
Neither the Central Bank nor the CVM has issued comments regarding this matter. “Susep supports any proposal that enhances the quality of financial regulation in Brazil,” said Alessandro Octaviani, president of Susep. He further said to Valor, “The current administration at the Finance Ministry has been actively working to improve Susep, which will be evident in the upcoming changes.”
Otavio Yazbek, former director of the CVM and a staunch proponent of adopting the “twin peaks” model in Brazil, argues that the main advantage of consolidating functions into just two agencies is to rectify inefficiencies in supervision and misconduct enforcement within the overlapping sectors of banking, capital markets, insurance, and pensions. “Currently, not only are there gray areas, but also opportunities for contradictory regulations,” he noted.
Mr. Yazbek said, “The ‘twin peaks’ model allows for more efficient management of overlapping areas of action and the gaps in financial regulation activities, as well as better handling of innovation processes within the financial and capital markets.”
He also noted that due to the complexity of such changes, which require redefining the responsibilities of existing regulatory bodies, the implementation must be phased.
Marcelo Trindade, former president of the CVM, also commended the model, saying, “If the proposal advances in this direction, it will represent a significant progression for regulated markets in Brazil. It’s a model that has greatly developed globally and addresses crises arising from the current system’s lack of focus. This model would either eliminate or significantly diminish such issues.”
*Por Guilherme Pimenta, Lu Aiko Otta, Fernando Exman, Andrea Jubé, Caetano Tonet — Brasília
Through strategic agreements, government successfully minimized disbursements in three significant cases
07/16/2024
Priscila Faricelli — Foto: Divulgação
The federal government has successfully averted a financial hit estimated at R$169.24 billion in legal judgments handed down by the Federal Supreme Court and the Superior Court of Justice in the first half of the year. This total was tied to ten significant cases in which the courts ruled favorably on arguments presented by the Federal Attorney General’s Office (AGU) and the Attorney General’s Office of the National Treasury (PGFN).
Additionally, the government considers agreements reached in three other cases as victories. These settlements will result in disbursements totaling R$5.5 billion, a figure significantly lower than initially projected, though the federal government has not disclosed the initial amount. This information was provided in a report requested by Valor from these agencies.
Negotiation is increasingly recognized as a valuable tool in AGU’s strategy. “We view some of our negotiated agreements as victories,” states Flavio José Roman, Deputy to the AGU. At the AGU, he notes with a touch of humor that the office never loses; it either wins or negotiates.
For the AGU, actively negotiating cases cultivates a positive relationship with the judiciary, particularly when scheduling hearings. “We are unequivocal about our stance. Negotiation is always on the table for us,” says Mr. Roman.
The AGU has noticed that the judiciary is increasingly mindful of the economic consequences of its rulings, a shift backed by legal mandates. According to the Law on the Introduction to the Norms of Brazilian Law (Law No. 13655 of 2018), judges must consider the implications of their decisions, particularly when these are based on broad legal principles.
“This shift required judges to adopt a new perspective. Notably, the current chief justice of the Supreme Court [Justice Luís Roberto Barroso] has appointed an economic advisor specifically to address these concerns,” Mr. Roman adds.
The stipulations of Law No. 13655/2018 have heightened the AGU’s attention to the financial stakes in litigation. Nonetheless, this has drawn criticism, particularly from legal professionals, who argue that these financial estimates are often exaggerated. A notable instance was the “lifetime review” case, a social security matter in which the financial impact projected by the federal government vastly differed from that of taxpayers.
“We’re in the dark about how these numbers are computed,” states Maria Raphaela Matthiesen, a partner at Mannrich e Vasconcelos Advogados. She points out that while these figures are included in the fiscal risks annex of the Budgetary Guidelines Law (LDO) and shared with judges during their rulings, the methodology and data sources remain opaque.
Economist Tiago Sbardelotto from XP Investimentos, who is also a licensed auditor with the National Treasury, clarifies that the projected financial impacts outlined in the LDO are often much more significant than the actual outcomes. According to him, the Federal Revenue Office bases its calculations on the assumption that all eligible taxpayers will pursue legal action, a scenario that rarely materializes.
Ms. Matthiesen points out that the Superior Court of Justice has recently started implementing time limits on its decisions—a process known as modulation. This approach generally indicates a judicial concern about the economic impacts of decisions by attempting to mitigate their retroactive effects.
In her review of cases listed under tax risks, Ms. Matthiesen notes that none of the items adjudicated in the first half of the year favored taxpayers. However, among the tax decisions during this period, she identified one clear victory and one partial win for taxpayers.
The outright victory occurred in a Superior Court of Justice ruling that determined the ICMS sales tax should not be included in the base calculation for the social taxes PIS and Cofins owed by taxpayers under the progressive tax substitution system. There is no available estimate on the financial impact of this case (Special Appeal 1896678 and Special Appeal 1958265).
The federal government considers a “half victory” a complete win in a case regarding the inclusion of income from real estate rentals in the PIS tax base. This applies both to companies primarily engaged in this type of operation and those for which rental is an incidental and subordinate activity.
For the lawyer, if leasing is not integral to a company’s corporate purpose, it should not be taxed. “In their decision, the Supreme Court agreed that the tax applies but restricted its scope to instances where leasing aligns with the company’s corporate objective. Rentals undertaken as sporadic or auxiliary activities are exempt from this tax,” she explained.
These positive outcomes for the federal government in the higher courts align with a strategy by Finance Minister Fernando Haddad, who has prioritized fiscal risks within the judiciary since his tenure began. When identifying cases that could significantly impact public finances, the minister intervenes, often collaborating with the AGU and PGFN to negotiate directly with the justices.
The first half of the year saw significant legal victories. Just before the recess, the Superior Court of Justice ruled on a batch of cases with repetitive effects, establishing legal precedents in favor of the federal government.
Meanwhile, at the Federal Supreme Court, a notable judgment involved the remuneration of Workers’ Severance Fund (FGTS) accounts. Initially, the court ruled in favor of the taxpayers, allowing for a higher rate of remuneration. However, following a motion for reconsideration, this decision was reversed, and it was determined that workers only receive remuneration based on inflation. While the government did not count this outcome as a victory, it exemplifies the negotiation strategies in play (direct action for the declaration of unconstitutionality 5090).
The law firm brokered an agreement with trade union centers and proposed to the Federal Supreme Court that the fund’s resources be adjusted merely for inflation. Mr. Roman emphasized that the objective was to demonstrate to workers and their representatives that increasing the fund’s remuneration could negatively impact public policies intended to benefit lower-income individuals.
“The support of the [trade union] federations was fundamental in persuading not only the justices but also the people,” says the deputy from the AGU. The impact of the ruling remains unestimated.
Judgments in the first half of the year echo the successes of 2023, where the federal government fared well in the courts. For instance, at the Superior Court of Justice, all tax cases from the Fiscal Risks Annex of the LDO were decided favorably, including the upheld taxation of tax benefits after an appeal by taxpayers. In the tax domain alone, favorable judgments in 2023 helped avert losses totaling R$195.6 billion.
Economist Tiago Sbardelotto notes that the government’s dual strategy of making the judiciary aware of the negative impacts on public accounts and negotiating in cases where a federal defeat seemed likely has been effective. “Even in instances where the federal government faced adverse decisions, the effects have been substantially mitigated,” he states.
The agreements enable the government to reduce interest costs and extend payments through 2026 via court-ordered payments, which are excluded from the spending cap and fiscal targets, explains the economist. “We believe that the culmination of both strategies is to mitigate fiscal impacts in the medium term when fiscal regulations tighten. This progress is undeniable. However, it’s also crucial to preemptively address the surge in the judicialization of benefits, a trend that has markedly increased recently,” notes Mr. Sbardelotto.
Priscila Faricelli, a partner at Demarest Advogados, notes that the pandemic has led to an increase in major tax cases being adjudicated via virtual hearings. According to her, the majority of these cases have been resolved in ways that do not favor the taxpayers.
“For at least a decade, the PGFN has refined its approach in higher courts,” she observes. However, she also points out that judges, as political figures, have become increasingly budget-conscious. “The clearest evidence of this focus on budgetary matters is the nature of the modulations, which invariably aim to protect the budget,” she adds.
Brazilian sales up 12% in value and 23.5% in volume, says Amcham
07/16/2024
Abrão Neto — Foto: Rogerio Vieira/Valor
Brazilian exports to the United States reached a record $19.2 billion in the first half of this year. The trade between the countries grew 12% in value (or $2.1 billion) and 23.5% in volume (4 million tonnes), compared to the same period in 2023, according to the Brazil-US Trade Monitor of the American Chamber of Commerce for Brazil (Amcham Brazil).
On the other hand, Brazilian imports from the United States amounted to $19.4 billion, a slight drop compared to the same period last year.
Even with slightly lower imports, there was an increase in eight of the ten products most imported by Brazil from the United States.
The highlights of the period were aircraft (62.4%), ethylene polymers (50.8%), crude oil (48.9%), medicines (32.9%), natural gas (545.9%) and non-electric motors and machinery (20.2%).
The trade between the countries has been performing well, with a 5.1% increase in bilateral trade compared to the same period last year, reaching $38.7 billion in transactions. This growth is more than double the increase in Brazil’s trade with the world in the period (2.5%).
Trade between Brazil and the United States is expected to be more balanced in the yearly results. According to Abrão Neto, CEO of Amcham Brazil, the bilateral trade deficit is expected to be close to zero, unlike that recorded in the last decade. “Trade growth will be driven by Brazilian exports, which will be an important result for the Brazilian economy,” he says.
The American market was the fastest-growing destination for Brazilian exports in terms of value during the year. Nominal growth was $2.1 billion. The increase is 12% compared to the same period last year, and is more than eight times higher than Brazilian sales to other long-standing trading partners such as China (3.9%), the European Union (2.1%) and South America (-24.3%). In total global exports ($7.1 billion), the United States accounted for almost 30% of the total increase recorded in the period.
According to the Trade Monitor, growth can be seen in all sectors, led by the extractive industry (89.2%), followed by agriculture (19.4%) and the manufacturing industry (2.3%).
Of the ten main products exported to the US, eight showed increases, especially crude oil (108.3%), which rose to first place in the export ranking; aircraft (11.9%); and petroleum fuels (202.1%), which rose from 11th to 4th place.
This strong sale of crude oil to the US contributed to a greater share of the extractive industry in total exports, 17.7%, compared to the 10.5% share in the same period of 2023. The agricultural sector rose to 5.3% from 5.0%, driven by the increase in Brazilian sales of unroasted coffee (44.6%).
In the manufacturing sector, Amcham saw a drop of 8 percentage points, from 83.8% to 76.6%. Despite this, the sector is the best performer among the most exported items, accounting for eight of the top ten products.
Ms. Abrão Neto said that the diversity of the US market compared to Brazil’s other trading partners has had an impact on the increase recorded in the period and is reflected in other areas of the country. “This growth has a very positive impact on job creation and revenue generation within the Brazilian market,” he said.
The main points of departure for exports are concentrated in the South and Southeast of the country, with São Paulo accounting for 31.9% of the total, followed by Rio de Janeiro (17.7%), Minas Gerais (10.1%), Espírito Santo (8.1%) and Rio Grande do Sul (4.6%). At the same time, the imports also have São Paulo as the main point of entry, with 31.8% of total imports, followed by Rio de Janeiro (21.8%), Bahia (7.7%), Santa Catarina (5.9%) and Minas Gerais (5.0%).
The most common means of transporting this production is by sea, according to the survey. In the first half of 2024, the sea accounted for 87.7% of export transportation, followed by air, with 11.5%. As for imports, the maritime transport is also the main mode of transportation, with 62.5%, while 36.8% was done by air.
According to Amcham, Brazil is expected to show progress in 2024 compared to last year, especially in exports. “We expect the trade flow to grow in relation to last year, reaching the second-highest trade flow since records began, probably second only to 2022,” said Mr. Abrão Neto.
Rise was driven by increased production and global demand, with significant growth in sales to the USA and China
07/15/2024
Revenue from shipments in the crop year ending in June also set a record, reaching $9.8 billion, an increase of 20.7% — Foto: Divulgação
Brazil’s coffee exports for the 2023/24 crop year (July 2023 to June 2024) reached a record 47.3 million 60-kilogram bags, according to the Brazilian Coffee Exporters Council (Cecafé). This volume is 32.7% higher than the 2022/23 cycle. The previous record was set in the 2020/21 crop year, with 45.6 million bags exported.
Revenue from shipments in the crop year ending in June also set a record, reaching $9.8 billion, an increase of 20.7%.
Cecafé president Márcio Ferreira stated in a note that the larger crop in Brazil allowed the country to expand its share in global trade, “occupying spaces left by reduced supply from other producers, such as Indonesia and Vietnam, mainly with national conilon and robusta.”
According to the organization, the United States was the main destination for Brazilian coffee, purchasing 7.1 million bags, or 2.8% more than in the 2022/23 crop year. Germany and Belgium followed. Brazil also increased coffee sales to China by 186.1%, reaching 1.64 million bags.
Produced in larger volumes in Brazil, arabica coffee remains the most exported type. In the crop year, 35.4 million bags of this variety were shipped, an increase of 16.7%. Meanwhile, exports of canéforas (conilon and robusta) surged to 8.238 million bags. This increase of 461.1% reflected the lower availability of the product in Vietnam and Indonesia, which faced climatic problems.
Mr. Ferreira also noted that investments in research and technology “that improved the quality and productivity” of Brazilian canéforas also enabled the country to expand its share in the global market.
In June alone, the last month of the 2023/24 crop year, Brazil exported 3.5 million bags of coffee, the highest amount recorded for the month in history. Revenue of $851.4 million was also unprecedented for the period, according to Cecafé.
Second stage of offer had R$110bn in orders until last week; low price, inflated orders, Equatorial behind high market interest
07/15/2024
The book-building period for the second phase of the offer for Sabesp ends this Monday — Foto: Victor Moriyama/Bloomberg
With a relatively low share price, the second phase of water utility Sabesp’s privatization has seen strong demand in the financial market. At this stage, the São Paulo state government intends to sell 17% of the company to the market through a dispersed offer. Demand exceeded R$110 billion in orders at the end of last week, according to people familiar with the matter. The amount is inflated as there is an expectation of sharing among interested investors. Real demand is expected to be around R$30 billion, sources say.
Despite strong demand, the price per share is expected to be R$67, or 19.42% below the closing price at the end of Friday’s trading session, at R$83.15. The amount will likely be the same as that offered by Equatorial, in the first phase of the offer—under Sabesp’s privatization model, the proposal for the first phase should be a cap for the second stage, according to people involved in the process.
As a result, the amount to be received by the São Paulo state government in the second phase should be R$7.9 billion. The amount adds to the R$6.9 billion offered by Equatorial, which will become the company’s primary shareholder with 15% of the capital. The total amount raised should be around R$14.8 billion, through the sale of 32% of the shares. The state government, which currently controls the company, will hold 18% of Sabesp’s capital.
The book-building period for the second phase of the offer ends this Monday. The pricing of the shares will only be confirmed next Thursday, and the offer will be settled next Monday.
After that, the antitrust watchdog CADE will have time to assess the operation before Equatorial is officially confirmed as a primary shareholder. A source close to the company sees no potential problem in the antitrust regulator’s analysis but points out that the estimated deadline is up to 60 days. Only then will Sabesp be able to appoint a new board members and executive officers and start a 100-day plan to carry out the first internal changes to the company’s management.
The first phase of privatization, completed on June 28, received only one proposal from a group interested in becoming a primary shareholder. Equatorial, in addition to holding 15% of the business, will have the power to appoint the chair and other strategic positions. The group will not be able to sell its shares until 2029. The 17% offered in the second phase has no such restriction.
According to market sources who spoke under the condition of anonymity, the high demand in the second stage of the process is not only due to inflated orders but also due to a large gap in price compared to the current share trading level. Furthermore, investors welcomed Equatorial as a primary shareholder.
Among those interested in becoming minority shareholders are large foreign and domestic funds with a longer-term investment profile, sources say. Among the groups interested in taking on a relevant stake in the company is Perfin Infra, which planned to participate in the Aegea consortium to become a primary shareholder, had the operator submitted a proposal, according to one source.
People familiar with the process expect share prices to be reduced shortly after the offering, due to a gap between the privatization value and the current trading price. However, in the market, the expectation is that the privatization will generate a significant increase in Sabesp shares’ value in the long run.
In reports by Citi, UBS, Itaú BBA, Bradesco, and XP between May and June, Sabesp’s target price exceeded R$100. The reports have not yet been updated to reflect the recent offer results but the amounts already captured expected advances with privatization, mainly related to the implementation of a new regulatory model, which will allow greater gains and more predictability for shareholders’ financial return.
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