Uncertainty over interest rates jeopardizes further reductions in banking spreads

Gap between borrowing and lending rates hit 18.85 percentage points in May, marking the narrowest margin since July 2022

15/07/2024

Alessandra Ribeiro — Foto: Leonardo Rodrigues/Valor

Alessandra Ribeiro — Foto: Leonardo Rodrigues/Valor

The banking spread in Brazil, the premium that financial institutions add to loans, has dipped to its lowest point in nearly two years. Yet, the fluctuating interest rate landscape casts shadows over the sustainability of this trend.

In May, the average banking spread, which gauges the disparity between the rates financial institutions charge on loans and the rates at which they acquire funds, was recorded at 18.85 percentage points. This is a significant drop of 3.13 points from May of the previous year, marking the commencement of the decline and representing the lowest figure since July 2022. The Central Bank reports that this reduction occurred both among legal entities, where spreads decreased by 1.21 points to 8.4, and individuals, where they dropped 4.45 points to 23.86.

This shift is largely attributed to changes in the composition of credit issued post-pandemic, with a tilt towards safer, lower-interest loans. “Since the end of 2022, banks have become slightly more selective,” noted Rafael Schiozer, a finance professor at Fundação Getulio Vargas.

A shift in credit allocation priorities is evident, with a pronounced focus on options like cash credit cards and financing for durable goods or vehicles. Central Bank data reveals a 41.3% increase in vehicle purchase credit this year alone.

Alessandra Ribeiro, director of macroeconomics and sector analysis at Tendências Consultoria, attributes the significant reduction in the individual banking spread partly to a decrease in default rates, which dropped from 4.2% in May last year to 3.7% in the same month of 2024.

She points to improved labor market conditions and the Desenrola Program (the government’s debt renegotiation program), which facilitated debt renegotiation, as crucial contributors to this trend. “The decline in defaults, combined with a robust job market, lowers the perceived risk,” Ms. Ribeiro noted. “This, in turn, enables banks to mitigate the risk priced into their rates, fostering a reduction in the spread.”

Another factor contributing to the reduced spreads was the series of cuts in the Selic, Brazil’s benchmark interest rate, by the Central Bank’s Monetary Policy Committee (COPOM). From August 2023 to May, the benchmark interest rate decreased to 10.5% from 13.75%, measured annually. However, the uncertain future trajectory of the Selic, influenced by an unpredictable external environment, fiscal instability, and President Lula’s criticisms of the Central Bank, casts doubt on the continued narrowing of the spread.

The reduction cycle paused in June, and according to the latest Focus survey, market projections hold that the basic interest rate will stay at the current level of 10.5% through year-end. Earlier in the year, projections anticipated the Selic would close at 9%.

“The future of the spread hinges somewhat on the stabilization of long-term rates,” said Mr. Schiozer. “If investors believe that President Lula’s actions have minimal impact on monetary policy and that fiscal policy will remain stable, long-term rates are likely to decrease, encouraging banks to embrace more risk. Conversely, if the situation worsens or remains unresolved, banks may become more cautious.”

Rubens Sardenberg, director of economics, prudential regulation, and risks at the Brazilian Federation of Banks (Febraban), said that the medium-term trajectory of the banking spread “heavily depends on how the macroeconomic scenario unfolds.”

Conversely, Bruno Lavieri, chief economist at consultancy 4intelligence, argues that keeping the Selic rate stable at its current level through the year’s end “wouldn’t impede” the narrowing of the spread. He suggested that the spread “seems more influenced by banks’ risk aversion rather than the broader economic cycle.”

“The outlook is for the spread to continue its downward trend, though at a gradual pace, given that defaults, particularly among individuals, have also been decreasing slowly,” Mr. Lavieri added.

In addition to cyclical shifts, structural measures aimed at reducing the banking spread have been intensified since the administration of former President Michel Temer. These efforts include updates to the positive credit register, the launch of open finance, and the establishment of a new legal framework for guarantees. “We’re not stationary; we are making progress, but it’s a long-term journey,” noted Mr. Sardenberg of Febraban.

The current economic team under President Lula views the spread in Brazil as being driven primarily by two factors: default rates and the profit margins of financial institutions. The Ministry of Finance estimates that reducing the impact of these two factors on the spread by half would equate to a permanent 5-percentage-point reduction in the Selic rate.

Furthermore, to enhance overall credit access for legal entities, the economic team is promoting two legislative measures. The first (14,905/24), ratified by President Lula in late June, standardizes the regulations for lending outside the traditional banking system. The second (2,925/23), aimed at safeguarding capital market investors from accounting fraud, is currently pending in Brazil’s Lower House, the Chamber of Deputies. Analysts anticipate that these measures will enable companies to secure more affordable credit from the capital market despite the persistently high banking spread.

A third, broader factor that the Ministry of Finance considers a potential reducer of the banking spread for companies is the tax reform on consumption. The Ministry asserts that the new regulations will permit borrowers to reclaim taxes incorporated into transactions, effectively lowering the margin.

Ms. Ribeiro, from Tendências Consultoria, expresses skepticism about the reform’s direct influence on reducing the spread but acknowledges a possible indirect impact. According to her, enhancing the tax system could boost productivity and competitiveness, which in turn would affect growth potential and employment. This improvement could lower risk perception, ultimately impacting the spread. “We see more potential through this indirect route,” she noted.

*Por Estevão Taiar, Gabriel Shinohara — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Brazil prepares to regulate hydrogen

National Petroleum Agency’s Director-General Rodolfo Saboia says regulator needs mandate; lack of resources could be an issue

12/07/2024

Rodolfo Saboia — Foto: Leo Pinheiro/Valor

Rodolfo Saboia — Foto: Leo Pinheiro/Valor

Brazil’s Petroleum Agency (ANP) is gearing up to regulate the hydrogen market, but according to the agency’s director-general, Rodolfo Saboia, a lack of resources could hinder this effort. Mr. Saboia mentioned Tuesday that the agency is “like a player waiting to enter the field” regarding hydrogen. He added that while the ANP is preparing to engage in the market, it still needs the official mandate.

“The ANP is observing the developments in hydrogen regulation and its integration into Brazil’s energy mix,” Mr. Saboia said at an event hosted by the Federation of Industries of the State of Rio de Janeiro (FIRJAN) on Tuesday. “It is expected that the ANP will be tasked with regulating hydrogen, but we are currently in the position of a player waiting to enter the field and unable to act yet.”

Mr. Saboia, whose term ends on December 22, noted that ANP staff are independently preparing and qualifying themselves to become hydrogen specialists. “The agency needs to await the legal mandate to allocate resources, which are currently scarce, for personnel training,” he said.

ANP staff have emphasized in recent months that the agency is facing a resource shortage. Mr. Saboia stated that it is difficult to specify which operations are delayed due to the situation, but he acknowledged a backlog of demands. “There is an opinion from the TCU [a public spending watchdog], for example, stating that the lack of personnel impacts the regulation of the new gas market. We haven’t had a public exam since 2015, and the budget has been declining for over 10 years,” he said.

Industry experts attending the FIRJAN event agreed on the need to advance hydrogen market regulation. Paulo Emílio Valadão de Miranda, president of the Brazilian Hydrogen Association (ABH2) and a professor at the Federal University of Rio de Janeiro (UFRJ), emphasized the importance of strengthening Brazil’s domestic market to position the country as a future hydrogen exporter. “Brazil has the potential to develop a significant internal market for the energy use of hydrogen, which will help decarbonize societal activities,” he said.

A bill regulating so-called green hydrogen, which has low carbon emissions, was approved by the Senate on July 3 and, due to modifications, will return to the Lower House for further consideration. The Senate included provisions for hydrogen production from hydropower, ethanol, biogas, and biomethane. The original text only allowed for solar and wind generation.

*Por Kariny Leal — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/

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Americanas scandal spurs scrutiny on executive bonus recovery

The accounting scandal at retail chain Americanas has intensified discussions around “clawback” policies for recouping bonuses and benefits previously awarded to executives. This practice is becoming increasingly common both in Brazil and the United States, particularly among Brazilian companies with ADRs listed on the American market, such as Ambev and Vale, which already implement such rules.

07/12/2024

Americanas said that it is awaiting the conclusion of ongoing investigations to reclaim any bonuses that improperly awarded — Foto: Domingos Peixoto/Agência Globo

Americanas said that it is awaiting the conclusion of ongoing investigations to reclaim any bonuses that improperly awarded — Foto: Domingos Peixoto/Agência Globo

Antonio Tavares Paes Júnior, a partner at Costa Tavares Paes Advogados with a master’s degree in corporate law from Columbia University, reports a surge in inquiries about clawback clauses. “The Americanas case has shed light on a topic that was previously obscure and rarely discussed outside confidential settings,” he said.

Reflecting the growing adoption of these clawback clauses, Mr. Paes Júnior noted an expansion in the range of scenarios they cover. He pointed to a recent contract he drafted, stipulating that an executive must return bonuses if they breach a non-compete agreement.

In May, B3, the Brazilian stock exchange, initiated a public consultation to discuss whether companies at its highest governance level should be mandated to implement clawback rules. These provisions typically allow a company to recoup compensation in cases of contractual breaches or managerial misconduct.

In the United States, the Securities and Exchange Commission (SEC) required companies listed on major stock exchanges like the New York Stock Exchange or Nasdaq to institute a clawback policy by December 1, 2023. This mandate also affects Brazilian companies with American Depositary Receipts (ADRs) traded in the U.S.

For instance, Ambev has a clawback policy that mandates the return of any compensation improperly received over the three completed fiscal years if the company’s financial statements are restated. In accounting terms, a fiscal year refers to a 12-month period used by corporations to compute their financial outcomes.

In its documentation, the beverage giant Ambev revealed that its clawback policy was implemented on December 1 of the previous year, aligning with the New York Stock Exchange requirements. When queried via email about whether the financial scandal at Americanas influenced the formulation of its clauses, Ambev responded that it was merely adhering to U.S. capital market regulations.

Similarly, Vale, also listed on the New York Stock Exchange, had established clawback clauses prior to the SEC’s mandate requiring such policies. The mining giant, however, chose not to comment on the issue.

Although Brazil lacks a specific law mandating clawback policies for bonus payments, numerous companies have pursued legal action to recoup payments made to executives implicated in fraud or corruption.

Americanas, currently without a clawback policy, has said that it is awaiting the conclusion of ongoing investigations to hold those involved in the alleged embezzlement accountable and to reclaim any bonuses that may have been improperly awarded. Similarly, shipbuilder Sete Brasil, which has been under court-supervised reorganization since 2016, has adopted this approach.

Engulfed in the wave of corruption scandals unveiled by Operation Car Wash, which uncovered corruption schemes in Brazil, Sete Brasil is seeking the return of bonuses from three former executives who received these payments during their tenure, as reported by Valor.

The lawsuits against these executives are confidential, but a source familiar with their developments confirmed that both have been ordered to repay millions of dollars to Sete Brasil. One of these cases is currently pending appeal before Brazil’s Superior Court of Justice.

The third executive involved with Sete Brasil consented to repay the court-mandated sum in installments.

“Having a ‘clawback’ policy simplifies the process of reclaiming funds [that were received improperly],” said Marcelo Lamego Carpenter, a partner at Sergio Bermudes Advogados, which represents Sete Brasil. “In Sete Brasil’s situation, had the executives been under such a policy, it might have precluded the numerous defenses [they presented in court].”

Moreover, a 2010 resolution from Brazil’s Central Bank mandates that unpaid portions of variable compensation for directors of financial institutions “must be proportionally returned” in cases of significant profit declines. “This is not a clawback per se,” clarifies Érika Seddon, a labor law partner at Mattos Filho.

An expert who asked to remain anonymous believes the Americanas scandal will likely encourage the adoption of clawback policies, though it’s largely driven by the existing obligations from the SEC.

On the regulatory front, a recent directive from the Brazilian Securities and Exchange Commission (CVM) requires companies with a clawback policy to disclose it on the agency’s website, according to Henrique Ferreira Antunes, a partner in the capital markets practice at Mattos Filho. “The concept of clawback as a cornerstone of good governance has been around, but it was truly catalyzed in 2022 by the SEC’s mandates, affecting both American and Brazilian companies listed abroad,” Mr. Antunes further explained.

*Por Rodrigo Carro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Ministry of Finance, Senate discuss safeguards for consumer tax reform rate cap

Negotiations underway to establish measures for limiting standard VAT rate to 26.5%

07/12/2024

Rodrigo Pacheco — Foto: Jefferson Rudy/Agência Senado

Rodrigo Pacheco — Foto: Jefferson Rudy/Agência Senado

Members of the Ministry of Finance and the Senate are already negotiating ways to ensure the effectiveness of the provision included in the consumer tax reform regulations to limit the standard rate to 26.5%. Under discussion is the creation of a program that establishes a hierarchy of measures that can be adopted to reduce the tax rate if it exceeds the maximum limit. Valor has learned the idea is to include this detail in the text of the bill as it goes through the Senate.

Supplementary Bill (PLP) 68, the main proposal for regulating consumer tax reform, was passed on Wednesday night in the Lower House. The lawmakers included in the bill text a measure to limit the standard rate to 26.5%, the sum of the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS).

The initiative came in the face of an increase in exceptions, intending to prevent them from raising the standard rate of the new Value Added Tax (VAT). However, parliamentarians, members of the government, and experts pondered that it was not clear enough how this measure would work in practice.

As a result, people close to the economic team have already contacted senators to establish a program that sets out responsibilities and a timetable for action. The first mechanism would be a command for the government to reduce the number of exceptions to general taxation. This would be followed by other measures such as linearly cutting exceptionalities and raising taxes on income to compensate for the consumption tax. Or a combination of these measures. The details are still being worked out.

In an initial survey, the idea was presented to the Senate leadership, whose president is Senator Rodrigo Pacheco. According to sources, the idea was well received. Negotiators have argued that the tax rate cap needs to be backed up by a set of measures that allow it to be complied with. It’s a logic similar to that of the fiscal framework, in which the fiscal target is supported by a “ladder” of restrictions on spending in the event of non-compliance.

In the suggestion put forward by the government, exceeding the 26.5% limit could itself be a trigger to set off the reviews of the tax reform’s exceptionalities, which will otherwise be carried out every five years.

This way, the measures to ensure the VAT rate does not exceed the stipulated level would be triggered automatically. The version approved in the Lower House only stipulates that, in the event of the cap being exceeded, the government will send a supplementary bill to revise the list of exceptions. However, it does not impose any kind of penalty if the bill is not approved, which makes it possible for the rule not to be complied with in practice.

This mechanism was not initially on the radar of the government and Congress, but it was a political solution to include proteins in the tax-exempt basic food basket. The exemption of meat had been facing resistance because, in theory, it would cause an increase of 0.53 percentage points in the standard rate, estimated at 26.5% without considering this exception.

The increase would happen because the reform is based on maintaining current tax collection. Therefore, reducing taxes on products such as animal protein, cheese and medicines, as the Lower House has done, would increase the standard rate charged on other products.

According to coalition parliamentarians who defended the inclusion of proteins in the basic food basket, the contradiction between increasing the list of exceptions and capping the tax rate could be mitigated by efficiency gains in the fight against tax evasion, delinquency, and litigation in tax collection. This gain could occur, said a source in the technical area, but it will depend on how the collection of IBS and CBS is structured.

The government’s ambition is to have a system that is at the cutting edge of technology, like the banking services in Brazil today. This would make tax collection more efficient and the country’s consumption tax system the most modern in the world.

These changes will be discussed at the same time as the Finance Ministry is working on the next stage: income tax. The issue has been studied by the technical area since last year, but the proposal will begin to be formatted in August. The plan is to send it to Congress at the end of this year, after the elections, in order to discuss it in the first half of 2025.

As soon as he was officially confirmed as the rapporteur for the regulation project, Senator Eduardo Braga told journalists that he would maintain the objective of guaranteeing the neutrality of the tax burden in this case. He was also the rapporteur for the constitutional amendment proposal that established the tax reform.

The bill is expected to pass through the Constitution and Justice Committee (CCJ) before going to the floor vote. As the supplementary bill is expected to be altered by Mr. Braga and receive possible amendments from other senators, the tendency is for the proposal to still go back to the Lower House this year.

The government intends to finish the approval of this part of the consumer tax reform regulations by December. At the same time, the Lower House is still debating the project for the management committee of the new IBS.

*Por Fernando Exman, Julia Lindner, Caetano Tonet, Lu Aiko Otta — Brasília

Source:Valor International

https://valorinternational.globo.com/
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Bill favors states indebted to federal government

Senate President Pacheco’s proposal alters indexation, freezes payments, and sets debt at R$700bn to be repaid over a span of 30 years

10/07/2024

Rodrigo Pacheco — Foto: Geraldo Magela/Agência Senado

Rodrigo Pacheco — Foto: Geraldo Magela/Agência Senado

Brazilian Senate President Rodrigo Pacheco introduced on Tuesday (9) a supplementary bill proposing new guidelines for state debt repayment to the federal government. This legislative change, initiated by the Senate leader, proposes that the total principal of around R$700 billion be fixed and repaid over a span of 30 years. The largest portions of this debt are attributed to the states of Minas Gerais, São Paulo, Rio de Janeiro, and Rio Grande do Sul.

Under the new bill, states would have the option to negotiate the transfer of assets to reduce their federal debts. The interest adjustment index could shift from the current rate of IPCA plus 4% to just the IPCA (Brazil’s benchmark inflation index). Moreover, states could receive a reduction of up to two percentage points on the interest rate by transferring assets amounting to over 20% of the total debt value.

If the transferred asset value falls between 10% and 20% of the total debt, states can secure a deduction of one percentage point. Additionally, the bill includes provisions for further reductions: one percentage point if the equivalent funds are invested within the state in education, infrastructure, or public safety, and another percentage point is allocated to the National Equalization Fund, which benefits all entities, including those without debts.

Originally, the Ministry of Finance had proposed that reductions in debt interest be contingent upon increasing enrollments in technical secondary education. However, Senator Pacheco’s bill stipulates that investments must be flexible but are conditional upon states achieving annual performance goals related to technical secondary education. Should a state fail to meet these benchmarks, 60% of the funds must mandatorily be directed towards developing vocational education.

Sources from the Ministry of Finance have expressed reservations about the Senate’s proposal, describing it as “far from ideal” and markedly different from the original plan proposed by the ministry. Preliminary internal evaluations suggest that the proposal could harm the federal budget by disrupting financial flows and may not even benefit states like Minas Gerais and Rio de Janeiro, which are actively seeking to renegotiate their debts.

When asked about the bill, Finance Minister Fernando Haddad acknowledged that he had not yet reviewed the text but emphasized the importance of ensuring it does not adversely affect federal accounts.

“We are aiming for zero impact on the federal government’s primary accounts. It’s crucial to maintain this stance, as any deviation could lead to significant issues with the national accounts, and we cannot afford errors in this area,” the minister told reporters.

Senate President Pacheco appointed Senator Davi Alcolumbre, the head of the Constitution and Justice Commission (CCJ) and a close ally, as the rapporteur. Mr. Pacheco aims for the proposal to be voted on by July 18th, just before the informal recess of the Brazilian Congress begins.

Despite the urgency, the Senate president has called for “collaboration” from his colleagues, acknowledging the lack of a unified stance among the Ministry of Finance and governors.

“We have a sustainable program, a project that has been thoroughly developed in collaboration with the Ministry of Finance and the governors. Clearly, not all points have been settled with the Ministry of Finance or the governors. Now is the moment for everyone to come to the table and work out what can be improved,” he stated.

According to government insiders, Senator Pacheco might be broadening benefits for states as a strategic move to counteract criticism from Minas Gerais Governor Romeu Zema, as both are locked in a political rivalry.

Senator Pacheco noted that if the indebted states join the Program for the Full Payment of State Debts (ProPag) and reduce the interest rate to 4%, their combined debts would decrease from R$700 billion to R$672 billion. Despite the federal government foregoing R$28 billion annually under this plan, Mr. Pacheco argues that the arrangement is ultimately beneficial for both parties.

“The federal government’s aim is to collect, and the state’s aim is to pay, yet the debt gap widens. We are offering a way to balance this out. This is more than a financial transaction—it’s about strengthening the federal relationship. It involves investing in the states, allowing the federal budget to effectively collect the principal,” he contended.

The proposed bill includes an option for states to transfer “net and certain credits” with the private sector to the federal government. For instance, this could allow the Minas Gerais government to apply what remains of Vale’s compensation payments for the Brumadinho dam disaster towards reducing its debt burden. Federal government officials, however, are cautious about this clause, expressing concerns about the inclusion of potentially unrecoverable debts.

As the bill was being drafted, governors and lawmakers pushed to incorporate options for negotiating discounts on both interest and principal amounts of the state debts. Senator Pacheco pointed out that such discounts would contravene the Fiscal Responsibility Law (LRF).

Efforts by governors to utilize funds from the States Compensation Fund, established during tax reform, to alleviate debt were also proposed but ultimately rejected.

Felipe Salto, former secretary of Finance and Planning for São Paulo and now chief economist at Warren Investimentos, expresses deep concerns about the Senate’s proposal. “In practice, real interest rates could effectively drop to zero. This poses a significant obstacle to achieving fiscal balance, as it could diminish vital financial revenue streams while simultaneously encouraging increased spending due to the created fiscal space,” he explained.

“As if that were not enough, they are still creating an equalization fund, for which a percentage point from the reduced interest for states that participate will be directed into this fund, which will then be distributed among all states. Essentially, this is throwing money out the window,” he remarked.

Marcelo Fonseca, chief economist at Reag Investimentos, acknowledges the potential benefits of the federal government acting as a “lender of last resort” due to its greater borrowing capacity compared to the states. However, he notes that, upon “initial review,” Senator Pacheco’s proposal appears “fraught with issues,”—some of which are recurrent—notably, the lack of “substantial conditions that allow adjustments and reforms,” which are crucial for states to improve their fiscal health.

Source: Valor International

https://valorinternational.globo.com/
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Vale’s 15-candidate shortlist for CEO excludes government nominees

Mining company to cut list to three by July’s end, with CEO appointment expected in August

07/10/2024

Vale’s board wants to turn the page and is looking for an executive who can lead the company’s growth process — Foto: Leo Pinheiro/Valor

Vale’s board wants to turn the page and is looking for an executive who can lead the company’s growth process — Foto: Leo Pinheiro/Valor

An initial shortlist of 15 potential candidates for Vale’s CEO position was made public Tuesday amidst the mining company’s troubled succession process, which has been dragging on since 2023. The names—most of them revealed by O Globo Columnist Lauro Jardim—include executives from major Brazilian companies, including Embraer, Gerdau, Klabin, and Engie. Only two are from the mining sector, two are foreigners, and only one is a woman, engineer Ana Zambelli, who has a long history in the oil and gas sector.

Valor found that this first selection, prepared by Russell Reynolds consultancy, has displeased Previ, the pension fund of Banco do Brasil’s employees, as it lacks a name closer to the government.

In the selection process, the head-hunting consultancy indicates some executives who are regarded as top priorities for the position and suggests candidates who are willing to participate in a second stage of the process. The idea is that three names would be selected by the end of the month and the selection would be completed by the end of August, according to people familiar with the matter. Valor did not have access to the scores each of these top candidates received.

Some of the company’s shareholders interviewed by Valor expressed dissatisfaction with the list prepared by the consultancy.

Names such as Cristiano Teixeira (Klabin), Gustavo Werneck (Gerdau), and Francisco Gomes Neto (Embraer) were well received by shareholders given their successful track record in their respective companies. Other names, such as Pedro Parente (EB Capital) and Antonio Maciel Neto (CAOA), are said not to represent the invigorating “new blood” that the company wants to bring in to grow again, according to sources. When contacted, none of the executives on the list returned the calls. The foreign executives cited, Pablo Di Si (Volkswagen) and Antonio Filosa (Jeep), would face resistance from shareholders. Mr. Filosa said he has not been contacted.

The selection carried out by the head-hunting consultancy focused on names linked to the industrial sector, according to one candidate who spoke with Valor. The list does not include executives linked to the financial market.

Some shareholders argue that Vale’s succession process should be accelerated to end the crisis opened by the expected change in command. However, the difficulty in finding an executive who could start immediately is highlighted as the main hindrance in the process.

Executives included in the list who spoke on condition of anonymity confirmed that immediate availability may be a problem but it could be negotiated. Some cite problems related to the environmental disasters caused by Vale’s dam bursts in Mariana (2015) and Brumadinho (2019), in Minas Gerais, although the company represents an important challenge in a seasoned executive’s career.

Behind the scenes, Previ, a key shareholder since Vale’s 1997 privatization, has been seen as the Brazilian president’s point of contact for the CEO succession process from the start of the Lula administration. This process has been marked by several government attempts to intervene in the company.

Sources close to Previ denied that there is any type of pressure to change or add names to the first list of candidates provided by Russel Reynolds. Valor found that the list was submitted on Monday (8) to the people and compensation committee, coordinated by Previ’s CEO João Fukunaga, who holds one of the pension fund’s two seats on Vale’s board of directors. Previ’s other board member is the company’s chairman, Daniel Stieler. The board met on Tuesday (9) and the list was discussed. Messrs. Fukunaga and Stieler did not immediately respond to Valor’s request for comments.

Some names close to the government that have been mentioned as possible candidates include Paulo Caffarelli, former Banco do Brasil CEO, and, more recently, Bruno Dantas, president of the Federal Court of Accounts (TCU). The first name cited was former Minister of Finance Guido Mantega, but this potential nomination wasn’t well received by the market. The discussions about the mining company’s succession divided the board. Other names mentioned during the succession process included Vale’s former CEO Murilo Ferreira, who was ahead of the mining company during the Rousseff administration, and Aldemir Bendine. Their names were not on Russell Reynolds’s initial list. Mr. Dantas did not immediately respond to Valor’s request for comments.

Vale’s CEO succession process has a defined governance protocol, and the company has announced a timeline for Eduardo Bartolomeo, the current CEO, to be replaced by December. However, the negative impact of this prolonged process on the company has prompted shareholders and managers to work towards expediting the CEO transition. Officially, these expedited dates are not part of the company’s publicly disclosed timeline.

Russell Reynolds’s first list will be narrowed down to reduce the number of candidates to three names. According to sources, there is an agreement under which the final list should include an internal candidate, who could be Chief Financial Officer Gustavo Pimenta. Then, there would be two other candidates to be appointed and the name of the new CEO would emerge from this list of three.

Valor found that in the first list, the consultancy made a selection by including candidates according to technical criteria. However, the final decision on whoever would move on to the next stage of selection will be up to Vale’s board of directors, currently comprised of 11 members, after two independent directors resigned. José Luciano Penido resigned in March when a letter signed by him criticizing the succession process became public. He made a recanting statement a month later and an internal investigation by Vale indicated that the succession process complied with governance. Last week, Canadian board member Vera Marie Inkster also resigned.

The board was reduced to six independent members, which is below the rules set by the company’s bylaws. Vale should call an Extraordinary General Meeting (AGE), on a date yet to be set, to reconstitute the board.

In a note released on Tuesday (9) night, the mining company informed that Russell Reynolds continues to provide the company with advisory services to select the new CEO. “The actions by Vale’s board of directors continue to be carried out as per communication to the market on May 1, 2024. Vale’s CEO succession process is carried out in compliance with the company’s bylaws and corporate policies, as well as the board of directors’ internal regulations and current legislation.” The company adds that Vale’s board of directors has not reached any conclusion to date regarding the list of candidates and reaffirms that it will keep the market posted on any relevant developments regarding the selection of the new CEO.

Vale’s management is pursuing an executive with a profile capable of taking the company back to growth after the problems that followed dam collapses in recent years. The company faces environmental licensing problems, especially in Pará, where its main reserves are located, in Carajás. According to sources close to the company, there is a mix of competencies to be observed in choosing the new CEO. That includes, for example, a required international experience in previous positions held by the executive. Another point pursued is that the executive has good communication skills and a focus on institutional relationships with stakeholders.

*Por Mônica Scaramuzzo, Francisco Góes, Stella Fontes, Kariny Leal — São Paulo, Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Auto parts industry calls for stricter regulation on imported items

Union says some imported assemblies with tariff benefits include parts available in Brazil

07/08/2024

Claudio Sahad — Foto: Silvia Zamboni/Valor

Claudio Sahad — Foto: Silvia Zamboni/Valor

The automakers’ attempts to bring forward the imposition of the maximum import tax rate on electric and hybrid cars gained support this week. Representatives of the auto parts industry raised their concerns with Vice President Geraldo Alckmin. The auto parts sector is advocating for the creation of mechanisms to prevent items from entering the country under the so-called “Ex-tarifário” regime—a temporary reduction of the import tax on certain goods when there is no equivalent domestic production.

However, according to the president of the National Union of the Components Industry (Sindipeças), Claudio Sahad, when an import involves an assembly of parts, there is currently no way to verify if all the items in that assembly could not be sourced domestically. Sindipeças has offered the government support for this type of action.

According to Mr. Sahad, the number of items in the sector on the list of benefited products increased to 3,000 in 2021 from 100 in 2010 and is now at 8,500. The sector also advocates for deadlines for products to be included in the regime. “Only by setting deadlines will we be able to stimulate development and production in the country,” he said.

Mr. Sahad also mentioned that the sector hopes that, over time, Chinese brands that have announced plans to produce in Brazil, such as BYD and GWM, will adopt local sourcing. Initially, the vehicles will be assembled with kits of parts brought from China. “We can attract battery manufacturers, especially for the hybrids that will be produced in Brazil.”

On Wednesday afternoon, Mr. Alckmin included the ministry’s team in the meeting with Sindipeças. In addition to complaints about parts, the organization, which represents over 500 companies, requested not only the advancement of the import tax increase on hybrid and electric cars but also the consideration of further increasing the rate for these vehicles. “We are in a new global context; Europe has increased the import tax on electric cars by 48%,” he said.

A gradual increase in the import tax for these vehicles has been in effect since January. This month, the rate for fully electric cars rose to 18% and for hybrids to 20%.

The escalation continues until July 2026, when the tax will reach 35% for all vehicles coming from countries with which Brazil does not have a free trade agreement, regardless of the type of energy used.

On Thursday, it was the automakers’ representatives’ turn to revisit the issue. The defense of mechanisms to curb the influx of Chinese vehicles was the main topic of the traditional monthly press conference held by the National Association of Vehicle Manufacturers (ANFAVEA).

In an attempt to show internal unity, the association invited Ciro Possobom, CEO of Volkswagen do Brasil, to also share his opinion.

“If you want to sell cars here, come play here,” said Mr. Possobom, positioned in front of a soccer field image projected on the meeting room screen at ANFAVEA. According to him, the sector estimates that 450,000 vehicles will be imported in 2024. “That’s a lot,” he said.

The executive argued that the domestic industry should receive incentives to produce locally what is currently imported. He also said that imports increase as exports decline. In the first half of the year, external vehicle sales totaled 165,300 units, a 28.3% drop compared to the first half of 2023.

“We must be very careful with what’s happening,” Mr. Possobom said. “The market is growing, but production remains the same.” From January to June, 1.14 million vehicles were licensed, a 14.6% increase compared to the same period in 2023. In June alone, sales growth reached 13.1% compared to the same period, with 214,300 units sold. The daily sales average of 10,700 units returned to pre-pandemic levels.

On the other hand, accumulated production in the first half—1.12 million vehicles—showed a small increase of 0.5% compared to the same period in 2023. However, in June, the pace of assembly lines accelerated, with an 11.6% increase and 211,000 vehicles produced.

ANFAVEA President Márcio de Lima Leite described the import result as “unrestrained,” with 197,600 units imported in the first half. According to Mr. Leite, 78% of these imports came from China. In one year, the market share of Chinese brands in Brazil increased to 26% from 7%.

The executives also pointed out the loss of competitiveness in Latin America, where, according to them, Asian vehicles enter without paying taxes in several countries. According to Mr. Possobom, half of the vehicles imported by Brazil’s Latin American neighbors come from Asia.

Mr. Leite then showed a map illustrating the decline in Brazil’s share of vehicle sales in neighboring countries. In one year, Brazil’s share fell to 5.3% from 8.9% in Mexico and to 17% from 22.6% in Colombia.

“We risk this impact causing factory closures in the second half,” said ANFAVEA’s president.

On the commercial vehicle side, support came from Iveco CEO Marcio Querichelli. According to him, two-thirds of the trucks sold in markets like Chile, Peru, Colombia, and Ecuador are of Asian origin.

ANFAVEA used the meeting to revise projections. The association predicts higher-than-expected internal market expansion. In January, it forecasted 6.1% growth in 2024, totaling 2.45 million units. The new projection indicates 2.56 million, a 10.9% increase. Executives attributed the increased demand to lower interest rates.

On the other hand, the decline in exports will reduce production. In January, ANFAVEA expected a 6.2% production increase this year, totaling 2.47 million. The new projection indicates 2.44 million, a 4.9% increase.

The most drastic revision was in exports. The association initially expected a slight growth of 0.7%. Now, it forecasts a 20.8% drop in shipped volumes, totaling 320,000 units.

*Por Marli Olmos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Petrobras plans to take back fertilizer units leased to Unigel

Petrochemical company failed to pay $1bn natural gas supply contract, started arbitration against oil giant

07/08/2024

Unigel reactivated operations at the Sergipe and Bahia plants in 2021 with an investment of R$500m — Foto: Divulgação

Unigel reactivated operations at the Sergipe and Bahia plants in 2021 with an investment of R$500m — Foto: Divulgação

Petrobras plans to take over nitrogen fertilizer plants in Laranjeiras (Sergipe) and Camaçari (Bahia) leased to Unigel in 2020, Valor learned. The move aligns with the state-owned company’s strategy of resuming production of these inputs in Brazil after shutting down operations in units regarded as unprofitable. However, the strategy comes up against interests and contracts signed with the petrochemical company, which invested at least R$500 million to reactivate these plants.

Unigel, which is under financial restructuring, started arbitration against Petrobras seeking to review the terms of a contract for natural gas supply, a raw material in fertilizer plants. The 10-year agreement follows the take-or-pay model (which provides for a minimum payment regardless of consumption) and is valued at $1 billion.

Gas supply was halted in the middle of last year as part of an understanding between the two companies, while the parties tried to reach an agreement regarding a new price increase, which made the production of fertilizers economically unfeasible. Urea prices fell sharply in the international market since the end of 2022, but prices for the gas sold in Brazil remained higher than those in other parts of the world.

Unigel decided to open the arbitration proceeding following unsuccessful negotiations and when an alternative tolling contract (industrialization to order) proposed by the state-owned company was questioned by the public spending watchdog TCU. The proceeding was initiated in 2024 at the International Chamber of Commerce (ICC).

According to people familiar with the conversations, Unigel has failed to comply with the terms of the contract, which provides for annual payments of $100 million, since last year, when it halted operations at the Laranjeiras and Camaçari factories. However, the company refuses to give up the business and is seeking compensation for the termination of the tolling agreement by Petrobras.

“The [take or pay] contract may be reviewed whenever it offers too great a benefit to one party and too great a loss to the other,” one source says. Unigel argues that Petrobras is exercising “abuse of economic power” by holding a monopoly on natural gas in the country.

The oil giant, in turn, continues to implement its plan to retake fertilizer production. On Friday (5), 214 workers were rehired at Araucária Nitrogenados, a plant in Paraná that is being reactivated. The unit, included in Petrobras’s divestment plan in 2019, accounted for 30% of the Brazilian ammonia and urea market supply. Brazil relies on imports of nitrogen fertilizers.

At the end of December, Unigel obtained a preliminary injunction from the Rio de Janeiro courts preventing Petrobras from executing penalties, including retaking the plants for non-performing the contract for gas supply. On Wednesday (10), the Rio de Janeiro Court of Justice (TJ-RJ) will decide on an appeal filed by Petrobras. According to sources close to Unigel, the arbitration court will reassess the injunction, but the expectation is that the current situation will not change until a final decision is made.

Also at the end of December, Unigel and Petrobras signed the controversial tolling agreement, and the termination was announced by the state-owned company at the end of June. According to the company, the contract’s effectiveness conditions were not met within the set deadline (June 27, 2024) and, therefore, its validity was terminated before taking effect.

“The company reaffirms that the contracting party continues to analyze a final, profitable, and viable solution for the supply of fertilizers to the Brazilian market. As it has been informed to the market, Petrobras plans to reorganize its operations in the fertilizer segment within the scope of its 2024-2028 Strategic Plan,” the company states.

In an order at the end of January, Justice Benjamin Zymler, rapporteur at the TCU, gave Petrobras 15 days to provide clarification on the tolling contract and highlighted the possibility of voiding the agreement. The agreement, valid for 240 days and expected to pay R$759.2 million to Unigel for providing industrialization, storage, shipping, and after-sales services for urea, ammonia, and automotive liquid reducing agent (ARLA-32, used to reduce diesel vehicle emissions), has never come into force.

The TCU’s experts found signs of wrongdoing and potential losses of R$487.1 million to Petrobras in the event the agreement was executed. According to the order, the TCU’s experts also saw a potential loss of R$1.23 billion if the state-owned company took back plants leased to Unigel. If the oil giant did not take back the plants, losses could be R$542.8 million.

In a note to the market released on Tuesday (2), Unigel said the termination of the tolling agreement does not significantly change the company’s projections included in the reorganization plan, which covers R$4.14 billion in debts. The plan has been approved by most of its creditors. In addition to renegotiating financial debts, Unigel has divested some assets—it has just received $100 million for its operation in Mexico—and the Slezynger family has agreed to give up a 50% stake in the business to creditors sticking to the plan.

Unigel declined to comment on the matter and said the arbitration is confidential. Petrobras did not respond to Valor’s request for comment.

*Por Stella Fontes — São Paulo

https://valorinternational.globo.com/
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Weakened real, Brent pressure Petrobras to raise fuel prices

Company’s new CEO and CFO reiterated last week that they see no reason to change pricing policy

07/08/2024

For the Brazilian Association of Fuel Importers (ABICOM), Petrobras’s lag could increase if oil prices remain high — Foto: Hermes de Paula/Agência O Globo

For the Brazilian Association of Fuel Importers (ABICOM), Petrobras’s lag could increase if oil prices remain high — Foto: Hermes de Paula/Agência O Globo

Despite the recent appreciation of the real and a relief in Brent oil prices on Friday, Petrobras’s fuel prices in the domestic market remain disconnected from import parity, according to analysts consulted by Valor. The state-run company has not changed gasoline and diesel prices since the end of 2023.

According to StoneX calculations, Petrobras’s gasoline is 19.8% (or R$0.56 per liter) below the import parity price (PPI), and diesel is 10.5% (or R$0.37 per liter) below. “Considering strictly the lag, it is quite reasonable to expect a price increase by the company,” said Thiago Vetter, an analyst at the consultancy.

“Energy prices are rising in July. Diesel and gasoline contracts on the Nymex [New York Commodities Exchange] have increased by 7.1% and 5.5%, respectively. This, combined with an exchange rate that has been continuously rising in June and July, significantly impacts the import parity prices of fuels,” said Mr. Vetter.

Last Friday, the exchange rate in the spot market closed down by 0.46%, at R$ 5.46 per dollar. After much volatility, the exchange rate accumulated a 2.27% drop last week. However, from the beginning of June until Friday, the exchange rate accumulated a 4.87% increase. Brent oil fell by 1.01% on Friday to $86.54. But since the beginning of June, it has accumulated a 5.67% increase. The exchange rate and oil prices are the factors that most influence fuel price formation.

For the Brazilian Association of Fuel Importers (ABICOM), Petrobras’s lag could increase if oil prices remain high. “Petrobras’s prices have been frozen in 2024, with no hikes, despite the high volatility in prices and exchange rate,” said Sergio Araújo, president of ABICOM. According to the association’s calculations, Petrobras’s gasoline is 18% below PPI, or R$0.61 per liter, and diesel is 15%, or R$0.62.

On July 1, Petrobras announced a 3.2% increase in aviation kerosene (QAV), or R$0.12 per liter. For Mr. Araújo, this would indicate that gasoline and diesel also need increases. The state-run company usually announces QAV changes on the first day of each month. According to the Brazilian Infrastructure Center (CBIE), Petrobras’s gasoline has a lag of 26.05%, or R$0.995 per liter, compared to the international reference. According to CBIE calculations, diesel has a lag of 11.90% or R$0.475 per liter. According to Itaú BBA, Petrobras’s gasoline is 18% below PPI, and diesel is 17%.

Petrobras reported it adopted a commercial strategy in May 2023 that incorporates the best production and logistics conditions for setting sales prices of gasoline and diesel to distributors. “This allows us to practice competitive prices compared to other supply alternatives and mitigate international market volatility, providing periods of price stability for our customers. We do this in balance with national and international markets and operate our assets safely, optimally, and profitably. This practice is especially important in times of high volatility, like now. Thus, the company continues to observe market fundamentals and, for competitive reasons, cannot reveal its decisions,” the company said.

Por Kariny Leal — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Spending savings now could lead to higher prices later, economists say

Families have been sustaining activity, but analysts see a risk in depleting financial reserves

08/07/2024

Bruno Martins — Foto: Leo Pinheiro/Valor

Bruno Martins — Foto: Leo Pinheiro/Valor

While the strength of Brazilian household consumption in 2024 has surprised even the most optimistic analysts, economists are trying to understand what is driving this phenomenon—whether it is income growth due to a tight labor market or the result of families dipping into their savings. The source of this trend is important because it has implications for future inflation and, consequently, for monetary policy, at a time when the Central Bank sees no room to continue cutting interest rates.

The median expectation of market agents for household consumption growth in 2024 has increased by almost one percentage point since the beginning of the year, to 2.8% in the latest Focus survey by the Central Bank from 1.9% in January. The monetary authority itself now has an estimate higher than this median.

In the second-quarter Inflation Report (IR), released at the end of June, the Central Bank updated its projection for household consumption growth this year to 3.5% from 2.3%, noting that it now expects consumption to rise more than in 2023, when it advanced 3.1%, “despite the slowdown in the expansion of social benefits,” the Central Bank stated in the report.

“Households have high savings rates and financial asset stocks, room for increased spending, and a very heated labor market with rising wages,” said Bruno Martins, an economist at BTG Pactual. “It’s a challenging outlook for the Central Bank,” he added, projecting a 4% increase in household consumption in this year’s GDP.

According to Mr. Martins, BTG’s indicators do not show that families have been depleting their savings this year. “The savings rate indicator continued to rise. It reached the highest level since official records began, excluding the period of fiscal expansion during COVID-19,” he said.

Excluding the pandemic period, which makes evaluation more difficult, Mr. Martins noted that BTG’s household savings rate indicator peaked at 9.4% in 2017 in the four-quarter moving average; in March this year, it hit 9.6%.

“Despite the 1.5% growth in household consumption in the first quarter GDP, the real wage bill and disposable income growth were even higher. I think this growth in household consumption is entirely explained by income growth,” he said.

Fernando Montero, chief economist at Tullet Prebon, said that household consumption rose 4.4% in the first quarter of this year compared to the same period in 2023, surpassing GDP, which grew by 2.46%. As a result, he said, household consumption climbed to 64.9% in 2024 from 63.2% of GDP in the first three months of 2023. During this same period, gross savings in the economy dropped by 1.3 percentage points, to 16.2% in 2024 from 17.5% of GDP in the first quarter of 2023.

Contrary to what might be inferred, Mr. Montero said that families have never consumed so little and/or saved as much of their disposable income as they have at the beginning of this year. In 2024, household consumption as a percentage of Gross Disposable National Income (GDNI), calculated by the Central Bank, in the first quarter was the lowest since official records began, in 2003, Mr. Montero noted. The GDNI includes salaries, social security benefits, social program transfers, and other sources such as rents and financial investments.

In the first quarter of 2024, household consumption represented just over 90% of their gross disposable income, according to Tullet Prebon. In the same period in 2023, this percentage was close to 93%, and in 2022, it was 95%. At the peak of the series, it exceeded 96% in 2008, and at the lowest point until 2024, it was just above 91% in 2009.

“The explanation lies in the record income of families coming from transfers and net public sector spending, which is the real “dissaver” in the system,” wrote Mr. Montero in a report.

Armando Castelar, an associate researcher at the Brazilian Institute of Economics (FGV/IBRE), agrees that the government is a “classic dissaver.” But he also said that the fact that household gross disposable income fell between the first quarter of 2024 and the last quarter of 2023 suggests that the increase in consumption in GDP during this period may have occurred at the expense of a decline in household savings, following an improvement in credit conditions.

Household gross disposable income totaled R$682.1 billion in the quarterly moving average until December 2023, in constant values, adjusted for inflation and seasonally adjusted, Mr. Castelar said. In March this year, this value was R$680.16 billion. “If income does not increase, people can withdraw money from savings or borrow money to continue consuming. Looking at the macro level, it’s the sum of things. The credit helps explain dissaving. Obviously, the flip side is a deterioration in household balance sheets,” said Mr. Castelar.

Mr. Montero noted that household gross income fell by 0.28% in the first quarter of 2024 compared to the fourth quarter of 2023, but after surging by 3.93% at the end of last year, as the payment of court-ordered debts needed to be accounted for by the end of December to avoid contaminating the primary result of 2024.

Mr. Martins, with BTG, noted that another indicator from the bank, which measures the stock of financial assets in household balance sheets, also remains at a high level, which, according to him, “supports the idea that there has been no dissaving, but rather a very strong growth in the wage bill.”

The growth in savings now poses a greater risk for future inflation, Mr. Martins warns. “If, at some point, this savings rate starts to decline, meaning that dissaving does occur, there could be even greater demand pressure, which could affect inflation indicators.”

Mr. Montero, with Tullet Prebon, said he initially thought that household income in the quarter up to May—data yet to be released by the Central Bank—could decline as the government’s early payment of court-ordered debts in February exited the account.

However, strong data from the Brazilian statistics agency IBGE for the labor market and government spending during the period bring doubts to this perspective. The real usual earnings mass in the quarter up to May advanced 9% in the last year, while the federal government’s primary expenditure accumulated a real increase of 13% this year, Mr. Montero said. “These are strong values, based on high levels, adding up to large chunks of GDP and occurring in parallel.”

Yihao Lin, an economist at Genial Investimentos, said stronger household consumption compared with 2024 first-quarter GDP growth and the contraction of the economy’s savings rate compared with the same period in 2023 indicate household dissaving. However, he argued that this was not the main factor for consumption growth. “It’s an additional factor, but we must remember that there were court-ordered debt payments, fiscal policies like the minimum wage increase, and a larger investment budget,” he said.

Although the interest rate outlook is not as favorable as once thought, Mr. Castelar said that the trend is still towards greater credit availability for families, which also tends to support consumption throughout the year. “The whole idea of monetary policy with the high Selic interest rate is to put a brake on this, but the dynamic should still be greatly influenced by consumption,” he said.

Genial’s Mr. Lin said that not all of the strong wage gains and labor market growth translate into activity. “When we look at credit and household debt data, which have improved or at least remained stable, we suspect that part of these gains is being directed towards debt repayment. This combination of a labor market with income gains for families, who in turn are managing to control their debts, is still quite favorable for consumption, even though the interest rate is high,” he added.

*Por Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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