Stress in domestic market continues, pressures Brazilian real

Currency has been losing ground against the dollar, in its deepest plunge since January 2022; short-term interest rates soar with worsening exchange rate

07/02/2024

Otavio Oliveira da Silva — Foto: Carol Carquejeiro/Valor

Otavio Oliveira da Silva — Foto: Carol Carquejeiro/Valor

The perception that risks to the government accounts’ track have not diminished, coupled with an international scenario of high pressure on emerging markets due to rising yields of U.S. Treasuries, led to continued stress on local assets on Monday. In this context, the foreign exchange rate rose significantly, closing at R$5.65 per dollar, the highest level since January 2022. The depreciation of the Brazilian currency has pushed the market to price in a 125-basis-point hike in the Selic policy rate this year.

Recent days have seen a continuous deterioration in assets. Amid concerns over the government’s economic policy and the sense that politicians lack urgency in addressing fiscal issues, risk premiums on assets have been increasing rapidly.

Finance Minister Fernando Haddad attributed the weakening of the real to “communication noise” and said the government needs to better communicate the results achieved in the economy. Asked if it was time for the Central Bank to intervene in the exchange rate, he said that it is a matter for the monetary authority, “and they know when and how to do it.”

After the foreign exchange rate ended the first half of the year with an appreciation of more than 15%, there was an expectation that Friday’s stress was linked to the end of the semester, due to position adjustments and the formation of the end-of-month Ptax (an exchange rate calculated during the day by the Central Bank of Brazil). Monday’s session challenged that view.

According to Otávio Oliveira da Silva, treasury manager at Daycoval, the question to be answered is where the real crash will end. “Now we will be testing levels. If this speculative scenario testing continues, the Central Bank might eventually step in to calm the market. It’s hard to pinpoint when this will happen, though.”

In his view, the market struggles to find a feasible level that aligns with expectations. “For now, there is caution, and caution in a local uncertainty environment often translates into buying dollars.”

The pressure from the exchange rate spread to the futures interest rate market. Thus, the initial part of the yield curve, more sensitive to monetary policy prospects, faced strong upward pressure.

By the end of the day, the rate on the Interbank Deposit (DI) contract for January 2025 rose to 10.835% from 10.735% in the previous adjustment, while the rate for January 2026 DI increased to 11.77% from 11.55%.

In this context of accelerated depreciation of local assets, the market is now working with a Selic rate above 11.75% per year by the end of 2024—which would mean the Central Bank raising the Selic rate by 125 basis points by December. In the COPOM digital options market, agents increased their bets on an interest rate hike at the July meeting. On Monday, the probability of a 25-basis-points increase rose to 10% from 3%. The probability of a 50-basis-point rise jumped to 15% from 8%, and the likelihood of maintaining the rate fell to 71% from 85%.

“It was a day to stop and revisit the Central Bank’s recent communications. This is not our baseline scenario yet, but the questions need to be asked. We still have almost 20 working days until the next COPOM meeting, which is almost long-term in Brazil, but if the meeting were tomorrow, I believe the Central Bank would have to open up to the possibility of raising interest rates. Initially, I think the authority would communicate that the risk balance has become asymmetrical, which would be the first step towards a rate hike,” said Daniel Cunha, chief strategist at BGC Liquidez.

In his view, July 22, when the National Treasury announces the May-June Evaluation Report, will be crucial to understand the government’s commitment to the spending track and the fiscal framework. “The expectation is that there will be a spending freeze of around R$20 billion. It remains to be seen whether the political reality will allow this to happen, but there is growing pressure for this. This market discomfort is likely to persist until there is some trend reversal in the fiscal component,” said Mr. Cunha.

Decoupled from other local assets, the Ibovespa, Brazil’s benchmark stock index, closed the day higher, primarily supported by exporting companies that benefit from the weakened real. However, the local currency also exerted negative pressure as it affected the yield curve and, consequently, interest rate-sensitive companies. By the end of the day, the index rose by 0.65% to 124,718 points.

According to BTG Pactual analysts, the deterioration of local assets can be attributed to what they believe is a crisis of fiscal and monetary confidence. “The unanimous COPOM decision may have restored some confidence, but a full recovery is likely only after the new Central Bank president is appointed. On the fiscal side, we expect the government to announce a spending freeze in July, but structural changes are only expected after the municipal elections.”

Given the pressure from the weakened real, operators have been debating whether the Central Bank should intervene in the exchange market to ease the buying pressure on the U.S. dollar.

Mr. Cunha, from BGC Liquidez, believes that this discussion is secondary at the moment. “Using foreign exchange intervention as an economic policy tool is something we have moved past. It could happen in the event of transactional market dysfunction, and no one maps this better than the Central Bank’s exchange desk. The COPOM members themselves have denied this possibility. This is not the central problem facing local assets.”

B3 data once again showed an increase in the level of foreign bets against the real. The long position in the dollar is close to $82 billion, although some end-of-month adjustments may correct this value. On the other hand, local investors increased their short position in the dollar to $7.5 billion, which may also be adjusted due to the turn of the month.

*Por Arthur Cagliari, Gabriel Roca, Matheus Prado, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Clear rules more important than tax hikes, Nissan says

CEO for Latin America argues that competing with Chinese rivals doesn’t depend on tax timing

06/28/2024

Guy Rodríguez — Foto: Gabriel Reis/Valor

Guy Rodríguez — Foto: Gabriel Reis/Valor

Automotive industry leaders have recently mobilized to urge the government to reconsider the gradual increase in import taxes for electric cars and instead implement the maximum rate of 35% all at once. However, Guy Rodríguez, CEO of Nissan Latin America, believes that competing with Chinese rivals is independent of the timing or method of tax hikes. “We are not concerned about whether the tax rates will be advanced or delayed; what matters is having clear and fair rules,” he said.

Mr. Rodríguez stated that Nissan will stick to its investment schedule, totaling R$2.8 billion from 2023 to 2025, reinforced at the end of 2023. “We won’t change anything. Even if 10 more competitors arrive, new manufacturers setting up factories are welcome. We need to be smarter,” he emphasized during a visit to the company’s office in São Paulo on Thursday (27).

Mr. Rodríguez, an Argentine executive managing Nissan’s Latin American operations in Mexico, noted that the Mexican market is open with numerous importing competitors. “Yet Nissan, which produces locally, has been the market leader for 16 years with a 17.5% share,” he highlighted.

He also mentioned that the Japanese brand already competes with Chinese manufacturers in China, where it also makes cars. “Of the 3.4 million vehicles produced globally by Nissan in 2023, 800,000 were in China,” he said.

The Brazilian Association of Importing and Manufacturing Automotive Companies (ABEIFA) criticized the request for an immediate increase in the import tax for hybrid and electric vehicles to 35%. The association called for predictability in automotive industry policies, particularly out of respect for consumers who have the right to choose advanced technologies.

At the end of 2023, the government decided to resume the import tax on fully electric cars, suspended since 2016, and increase the tax on hybrids. The increase was planned to be gradual over two years, starting in January with 12% for hybrids and 10% for electrics. In July, it will rise to 25% and 18%, respectively.

Further increases are scheduled for July 2025 and July 2026, at which point all imported cars from countries without free trade agreements with Brazil will be subject to the maximum rate of 35%.

“Any additional measures would break rules and contracts. The Brazilian government has repeatedly stated in international forums that Brazil has stable and predictable regulations,” said Ricardo Bastos, president of the Brazilian Electric Vehicle Association (ABVE).

The initial tax increase was not sufficient to curb the influx of Chinese products. These brands have strengthened their inventories and continuously launched new models, attracting consumers with advanced technology.

The aggressive competition from Chinese brands, particularly in electric vehicles, does not concern Nissan, which prefers to maintain its cautious and steady approach. If the strategy was not successful, said Gonzalo Ibarzábal, CEO of Nissan Brazil, “the brand’s sales would not have increased by 35.2% last year, almost three times the growth of the national market for cars and light commercial vehicles.”

Nissan’s new investment cycle will expand its portfolio. The Resende factory, in the Rio de Janeiro state, will produce two new models. The first, a new generation of the small SUV Kicks, will be launched in 2025. Its successor will be larger, according to Mr. Rodríguez. Later, a new sports utility vehicle will be produced, although Mr. Rodríguez did not disclose details. A new turbo engine is also planned.

The third stage of product renewal will involve producing a new pickup at the Argentine factory. According to Mr. Rodríguez, 80% of the work to prepare the Resende plant for the new lines is already complete, and the employees have been trained.

With new products, Nissan aims to double its market share in Brazil, compared to 2023, reaching 6% in 2026. “We will be bigger,” said Mr. Rodríguez, undeterred by the threat of new competitors.

Additionally, the new vehicles will expand Nissan’s export market. Mr. Rodríguez expects to sell the new SUVs in 20 Latin American countries. Exporting, he said, is a way to achieve “stability against currency fluctuations.”

Nissan’s management did not provide any hints about when it plans to start producing electrified cars in Brazil, a decision already signaled by the company. There is an expectation that models with the e-Power technology, already a reality in Mexico, will eventually be produced in Brazil.

The e-Power technology features both a combustion engine and an electric motor. Unlike conventional hybrids, the combustion engine is not used for traction but exclusively to “fuel” the electric motor, meaning the car runs solely on the electric system. “We will announce [the electrification] at the right time when everything is aligned internally,” Mr. Rodríguez said.

Nissan’s Latin American leadership seems to have reached a more comfortable position following global changes in the alliance between the Japanese company and Renault and Mitsubishi.

At the end of 2023, the companies involved in the 1999 alliance announced the separation of their purchasing departments. “Each now buys its parts,” Mr. Rodríguez said, noting that this does not mean the alliance has ended.

The decision grants each alliance member more independence. “We are an economic group,” Mr. Rodríguez said.

When announcing the change, the group highlighted that markets are becoming increasingly regional and that the idea is to leverage each company’s strengths, technical funds, and experience.

The alliance will no longer be led by a single executive, as it was during the time of Carlos Ghosn, the Brazilian who conceived the union of these companies and became their leader.

Ghosn was arrested in Japan in November 2018, accused of misusing company assets for personal gain. The following year, while under house arrest, he fled, hiding in a large musical instrument case, and sought refuge in Lebanon, where he lives to this day.

*Por Marli Olmos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Lula rejects link between Brazilian real weakening, interview

President calls those who blamed him for the currency’s weakening “morons”

28/06/2024

President Lula — Foto: Ricardo Stuckert/PR

President Lula — Foto: Ricardo Stuckert/PR

President Lula expressed irritation on Thursday over analyses regarding the devaluation of the Brazilian currency, the real, against the dollar. During a meeting of the Economic and Social Development Council, Mr. Lula called those who blamed him for the rise of the U.S. currency “morons.” In his assessment, the exchange rate had already risen 15 minutes before his interview with a news portal, a factor that contributed to this spike.

“See what happened yesterday [Wednesday]. When I finished the interview [with the news website UOL], some commentators’ headlines were that the exchange rate rose because of Lula’s interview. And the morons did not realize that the exchange rate had risen 15 minutes before I gave the interview. Fifteen minutes before,” the president emphasized before an audience of businesspeople, union leaders, and representatives of social movements in Brasília.

On Wednesday’s session, the exchange rate had already opened under pressure due to the general strengthening of the U.S. currency abroad. However, it was during Mr. Lula’s interview with UOL that the rate accelerated its rise and surpassed R$5.50 per dollar for the first time since January 2022, as contextualized by Valor.

In that interview, Mr. Lula questioned the possibility of the government effectively seeking a balance for the government accounts. This is because, in the conversation, he said that the problem “is not having to cut [expenses], it is knowing if it is really necessary to cut or if it is necessary to increase revenue.” The statement was poorly received by financial market agents, one of the factors behind the real weakening.

After the damage, the president tried to repair his opinion about the trend of increasing government spending. According to Mr. Lula, he learned from his mother, Dona Lindu, that one should only incur debt if it is to improve one’s assets. On the other hand, the president said at the same event that Brazil’s public debt is a “small change” compared to the debt of other countries, like the U.S. and Japan.

“I did not learn economics at the university. I learned it from Dona Lindu. I can only spend what I have. If I am going to incur a debt, it has to be a debt that will improve my assets,” he said. “How are we going to make businesspeople invest if the market does not react? I am not talking about the Faria Lima [the avenue in São Paulo where many Brazilian banks have offices]; I am talking about the real market. If the market does not have purchasing power, where does this go?” he said.

Hours later, during an interview with Itatiaia radio station in Minas Gerais, the president returned to the topic of the U.S. currency and attributed the exchange rate’s behavior to people who want to “live off financial speculation.” Regarding the state of government accounts, however, the president acknowledged that there is indeed room for cuts in the budget but reaffirmed that he will not take money from social programs.

With the economic policy under scrutiny, the meeting turned into an act of support for Finance Minister Fernando Haddad, who was also present at the event. Leaders of the National Confederation of Industry (CNI), Brazilian Federation of Banks (FEBRABAN), and unions praised the head of the economic team and highlighted the positive numbers of the Brazilian economy.

Mr. Haddad reviewed his management, reinforced the commitment to balancing government accounts, and tried to project a positive image of the economy, saying that the country will grow more than 2.5% per year and reduce inequality under this government. He also said that “expectations indicate” the lowest average annual inflation rate “in a government cycle in the entire history of the Real Plan (a set of measures implemented in Brazil in 1994 to stabilize the country’s economy),” below 4% per year, and the “expectation of having the highest level of public and private investment of the decade.” “We are experiencing the greatest growth in family income and the largest reduction in poverty in the last 10 years,” the minister said.

Finally, the finance minister sought to downplay speculations about disagreements he supposedly had with the president. On this, he said he had never been overruled.

“We have had a fiscal problem in Brazil for 10 years. It started in 2015 and has not ended until today. You, President [Lula], decided to face this issue [fiscal imbalance] and never overruled the Ministry of Finance in the pursuit of balancing the accounts,” Mr. Haddad said.

On Thursday, Mr. Lula also reiterated that he is in no hurry to appoint Roberto Campos Neto’s successor at the Central Bank — the current president’s term ends in December. Following recent criticisms, the president said Mr. Campos Neto “took a wrong path.” Then, without mentioning names, the president said he would appoint someone to the Central Bank with a “commitment to Brazil and the people.” “It cannot be someone who makes mistakes,” pondered the president.

On this topic, Mr. Lula was asked if he would consider appointing the Central Bank’s director of Monetary Policy, Gabriel Galípolo, to head the monetary authority. In response, he praised Mr. Galípolo but said he had not discussed succession with him. “Galípolo is a golden boy, highly competent, with unparalleled honesty,” he said.

Nevertheless, he defended that the next Central Bank president must explain when raising or lowering interest rates. “We will have a serious Central Bank president who will not mess around. When he says he has to raise interest rates, he must explain why he will raise them,” he added.

*Por Renan Truffi, Raphael Di Cunto, Gabriela Pereira — Brasília

Source: Valor Iternational

https://valorinternational.globo.com/

/by

Brazil’s Federal Police details billion-dollar fraud scheme at Americanas

Operation in Rio targets former executives for alleged fictitious accounting within the retail chain

06/28/2024

Financial figures were reportedly manipulated when Americanas failed to meet the targets anticipated by bank analysts — Foto: Domingos Peixoto/Agência O Globo

Financial figures were reportedly manipulated when Americanas failed to meet the targets anticipated by bank analysts — Foto: Domingos Peixoto/Agência O Globo

Information compiled by the Federal Public Prosecutor’s Office and the Federal Police, which underpinned Thursday’s (27) operation against 14 former executives of Americanas, reveals intricate details about the fictitious accounting scheme devised within the company.

The documents related to the search and seizure executed during the operation describe a “closing kit” containing the company’s actual financial figures. These were reportedly manipulated when the company failed to meet the targets anticipated by bank analysts. This alteration was purportedly done to avoid disappointing the market and key stakeholders, including Carlos Alberto Sicupira.

The scheme unraveled from what was known as the “zero version” or “V0,” which reflected the actual quarterly financial status of the company. However, the “V0” increasingly diverged from both the company’s initial projections and market expectations.

To align the actual figures with the projections, executives began suggesting adjustments, thus replacing reality with fabricated data. The fraud traces back to 2007, as per the executives’ plea agreement with the Federal Public Prosecution Service (MPF); however, the company has stated that the exact commencement of the scheme is unclear.

In the newly initiated “Operation Disclosure,” agents from Brazil’s Federal Police, an agency similar to the FBI, visited the residences of 14 former directors implicated in accounting fraud totaling R$25.3 billion. The 10th Federal Criminal Court in Rio de Janeiro issued two preventive detention orders and 15 search and seizure warrants. The operation, involving 80 Federal Police agents from Rio, was a collaborative effort between the Federal Police, the MPF, and the Securities and Exchange Commission of Brazil (CVM).

Pre-trial detentions have been requested for former CEO Miguel Gutierrez and former director Anna Saicali (former CEO of B2W, the group’s former digital company), both of whom have eluded authorities and are now considered fugitives. Mr. Gutierrez relocated to Madrid last year, and Ms. Saicali traveled to Portugal earlier this month but has since left the country, according to sources.

The International Cooperation Center has placed both names on Interpol’s Red List. Mr. Gutierrez stated in a release that he has not had access to the records of the precautionary measures and “never participated in any fraud.” Attempts to contact Ms. Saicali for comment were unsuccessful as of the close of this edition.

The investigation encompasses alleged crimes, including market manipulation, insider trading, criminal association, and money laundering. Convictions could carry penalties of up to 26 years in prison. The scheme purportedly aimed to artificially enhance the company’s financial results, thereby generating unwarranted bonuses for the directors involved.

Originally, it was estimated that about 30 individuals were implicated in the fraudulent scheme, as reported by Americanas in 2023 when signs of fraud first surfaced. However, investigations now suggest that the number peaked between 50 and 60 participants, some of whom may have been unwittingly involved, according to findings by Valor.

The ongoing investigation targets crimes allegedly committed by the company’s former board of directors, which operated under a five-tier hierarchical structure, each level having distinct responsibilities to ensure the scheme’s operation. The core group consisted of 14 executives.

All individuals identified across these hierarchical levels were subjects of the recent operation. According to the Federal Public Prosecutor’s Office (MPF), Mr. Gutierrez was positioned at the apex of this “criminal association” and labeled “the main architect of the fraud.” Anna Saicali, former CEO of B2W Digital and the Ame platform, was a second-tier leader. Below her were José Timotheo de Barros, former CEO of the physical stores, and Marcio Cruz, former CEO of the digital branch.

The majority of those under investigation occupied the fourth tier of the hierarchy, possessing limited decision-making authority and requiring approval to perpetuate the fraudulent activities. According to the MPF, this tier included individuals like Carlos Padilha, Fábio Abrate, Anna Sotero, Fabien Picavet, Jean Lessa, João Guerra, Luiz Saraiva, Maria Christina Nascimento, Murilo Correa, Raoni Lapagesse, and Marcelo Nunes, who later became one of the whistleblowers of the scheme. The fifth and final tier included Flávia Carneiro, who has also cooperated with the investigation.

The allegations primarily involve the recording of non-existent advertising budgets and the costs of undisclosed financial operations in the company’s financial statements. Additionally, regular expenses were improperly recorded as investments, and there were fictitious increases in sales figures.

Por Adriana Mattos, Camila Zarur — São Paulo and Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
/by

Brazil slips in emerging market stock offerings

Lack of IPOs and minimal activity sees Brazil fall from 3rd to 7th in rankings dominated by India and China

06/24/2024

Hans Lin — Foto: Carol Carquejeiro/Valor

Hans Lin — Foto: Carol Carquejeiro/Valor

The sluggish activity in the Brazilian equities market has caused Brazil to drop positions in the ranking of emerging countries. According to data from Dealogic, Brazilian companies have raised only $2.1 billion from stock offerings this year, including block trades.

This total places Brazil in seventh position among non-mature economies, with India leading at $21.5 billion, followed by China with $19.7 billion. The figures account for the year to date up to the 14th, with Brazil’s share of the total emerging market offerings standing at 0.8%.

In 2023, a notably weak year for the industry, Brazil was ranked third among emerging countries, managing to raise $9.5 billion from January to December. China was the leader that year. In 2022, Brazil held the fourth position, trailing China, India, and South Korea, based on Dealogic’s global data collection on capital market activities.

According to B3, the financial volume of issuances this year has halved compared to the same period last year, focusing solely on the Brazilian market.

Furthermore, Brazil is nearing a milestone of three years without a new company debut on the local stock market—a scenario unprecedented in at least the last three decades. Market sentiment increasingly suggests that initial public offerings (IPOs) may not resume until 2025.

Market sources consulted by Valor indicate that the volatility of the Brazilian market and the uncertain outlook for the country’s fiscal health have heightened risk aversion. This cautious stance has not only deterred new IPOs but also affected additional stock offerings from already listed companies, known as “follow-on” offerings. Notably, there have been no such transactions in the country for about two months.

At the beginning of last year, the market for follow-on offerings shut down for two months following the Americanas scandal but reopened in the second quarter as companies in need of capital began to reengage with investors. Currently, however, heightened risk aversion has prompted companies to shore up their finances through private capital increases instead.

Industry insiders point out that another deterrent to new market activities is the disappointing performance of stocks from companies that conducted follow-on offerings earlier this year, resulting in losses for investors.

The only significant offering anticipated this year is the privatization of Sabesp, which is expected to generate upwards of R$15 billion. This transaction is likely to attract a strategic investor to purchase a substantial share block, designed meticulously to mitigate market volatility. Investment bankers note that if market conditions improve in the latter half of the year, activity could pick up. However, the focus on this multibillion-dollar deal has dominated market efforts and sidelined other potential offerings, which may have to delay their plans.

Despite the deteriorating local situation, Roderick Greenlees, the global head of investment banking at Itaú BBA, points out that the main hurdle to reviving stock offerings in Brazil remains the U.S. interest rate environment. The U.S. Federal Reserve has delayed initiating monetary easing as the American economy shows continued signs of robust activity.

Mr. Greenlees reveals that the bank was poised to execute 10 follow-on offerings, but heightened market volatility and declining stock prices prompted issuers to postpone these deals, awaiting more favorable conditions. “This significant uncertainty has resulted in a waiting game,” he remarks, noting that ongoing redemptions from investment funds are also stifling transaction flows. “There’s no new money entering the market.”

The Itaú BBA executive acknowledges that internal issues have exacerbated Brazil’s competitive stance relative to other emerging markets. Nonetheless, he suggests that only a minor shift, specifically the onset of a decrease in U.S. interest rates, is needed to revive local market offerings. “If the government demonstrates its commitment to fiscal stability, market offerings could rebound very swiftly,” he asserts.

Hans Lin, the co-head of Bank of America’s investment bank in Brazil, notes that in the current climate of market volatility, block sales of shares have become increasingly popular as a strategy to mitigate risk aversion. “We’re observing a more active block market,” he comments. He recalls a recent transaction where the bank facilitated a block sale for the private equity fund Carlyle, which sold its remaining stake in Rede D’Or in an operation valued at R$2.2 billion.

Mr. Lin emphasizes that the market in the United States remains robust, with asset values on the rise. “Investors are concentrated on the American market where they are profiting; there’s no need for them to seek additional risks,” he explains. According to Mr. Lin, the emerging markets that are successfully attracting foreign capital and standing out include India and Mexico.

Victor Rosa, the head of Scotiabank’s investment bank, describes Brazil’s financial market activity as being “hostage” to American interest rates, with investors showing little enthusiasm for the local stock market. This lack of new developments keeps the country in a state of limbo, nearing three years without an IPO. In contrast, Mexico is experiencing a surge in local company offerings driven by the “nearshoring” trend, which aims to bring production closer to consumer markets. According to Mr. Rosa, this will make for a very active year.

Mr. Rosa points out that the real interest rate in Brazil has not been conducive, prompting a shift from fixed to variable income investments, thereby constraining the influx of new capital. On a positive note, he highlights that the few offerings that do occur are from companies seeking capital for investment rather than merely adjusting their balance sheets, marking a shift from last year’s primary fundraising motive.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Brazilian fintechs bet on expanding to Mexico

Mexican market experiences a boom, attracts Brazilian firms’ investments

06/24/2024

Nubank’s Cristina Junqueira — Foto: Carol Carquejeiro/Valor

Nubank’s Cristina Junqueira — Foto: Carol Carquejeiro/Valor

Brazilian fintechs—and even traditional banks—are betting on expanding operations to Mexico. Latin America’s second-largest economy is an obvious destination given its market size, but there are other factors behind the bet.

Mexico has benefited from the U.S. strategy of nearshoring (relocating production chains closer to consumer markets); the country’s financial sector’s regulatory agenda is gaining strength; and it has a largely unbanked population, which translates into a huge growth potential. At the same time, the use of cash remains very strong, for cultural reasons—which can be a hindrance, but also opens up opportunities.

Brazilian digital bank Nubank, which filed for a banking license in Mexico last year, has highlighted the country among its priorities for 2024. Argentina-based Mercado Pago—with its largest operation in Brazil—applied for a banking license in May and cited the Mexican market as an important front for growth. Among Brazilian traditional banks, Bradesco already had a card operation in the country and decided to expand it in 2022, with the acquisition of a Mexican finance company, which was approved in February this year.

According to a study carried out by innovation firm Finnovista in partnership with Visa, at the end of 2023, 773 local fintechs were operating in Mexico, compared to 394 in 2019. The report also indicates that there are another 217 foreign fintechs, most of which are from the U.S., Chile, Colombia, and Argentina. The most representative segments of activity among local financial startups are loans, payments and remittances of funds, and technology for financial institutions. Around 60% of fintechs in Mexico have products and services aimed at the business-to-business (B2B) market.

Another survey, carried out by Bank of America based on data from Sensor Tower, revealed that Mexico has approximately 19 million active neobank users, representing some 15% of the population. The level is similar to what Brazil had in 2018. The percentage in Brazil rose to around 80% in 2021 and has stabilized since then.

Although the Brazilian and Mexican scenarios share some similarities, BofA analysts point out that there are also relevant differences. In Mexico, the adoption of fintechs is growing at a slower pace and there is a higher level of concentration compared to the Brazilian market. According to these data, Mercado Pago and Nubank combined represent around 60% of users. Next are PayPal, Spin, and Hey Banco.

Mexico represents an “almost perfect opportunity” for Brazilian fintechs and banks that seek to take operations abroad, said Daniela Dutra, leader of banking solutions at Capgemini. The country boasts characteristics such as relative economic stability, low banking access, and more recent opening of the financial system, which also means little global competition. At the same time, the level of credit compared to GDP is almost half that seen in Brazil.

Despite the opportunities Mexico brings to foreign companies, there are also challenges, including understanding consumer behavior. “The level of financial education is low and, due to the poor access to banking services, many people have no credit history, which makes credit granting more difficult. There is also poor information regarding fraud,” Ms. Dutra points out.

In an interview with Valor, Cristina Junqueira, co-founder and head of growth at Nubank, points out that Mexico has a GDP per capita approximately 30% higher than that of Brazil and a low rate of financial inclusion, which the bank sees as a transformation potential. Nubank has invested more than $1.4 billion in Mexico and boasts a 7 million customer base. “Mexico is our top priority for this year. We aim to continue expanding our customer base and significantly contribute to financial inclusion in Mexico.”

She points out that some 82% of the Latin American population still uses cash as the top payment method, a huge difference from the Brazilian market, highly digitized with the instant-payment system Pix. On the other hand, smartphone adoption in the region is expected to grow to 93% in 2030, from 79% in 2022. “Despite its particularities, connectivity opens up a huge potential. And that’s where innovations such as instant-payment systems and open banking emerge, with the potential to shift the financial scenario in Mexico.”

In an interview with Valor this month, Mercado Pago senior vice-president André Chaves argued that the firm has a solid starting point in Mexico given its experience in e-commerce. As the level of banking access is low, being able to see consumer behavior beyond banking is a differentiator, he explained. Mr. Chaves added that banks’ biggest competitor in Mexico is cash, so there is room for the expansion of many rivals. “There is large ‘open water’ [to explore]; therefore I think the two [banks] can grow at very accelerated rates without bothering each other. That said, I want to be the one with the most growth,” he said about Nubank.

Daniel Berman, head of sales at Capgemini Brazil, said the Mexican financial segment was slower to adopt innovation and fintechs struggle more to access funds than in Brazil. According to Finnovista data, the second main challenge reported by Mexican neobanks is accessing funds. The first challenge is scaling and internationalizing operations.

The regulatory framework for fintechs in Mexico, implemented in 2018, is seen as an important step for the segment, although there are points requiring attention, according to Brunno Morette, a partner in corporate law and acquisitions at Cascione Advogados law firm. “There are still few allowed activities and a lack of specific regulations,” he pointed out. However, the Central Bank of Mexico (Banxico) and the National Banking and Securities Commission (CNBV) are following the subject closely and innovations are expected ahead.

Mr. Morette also notes that, given the size of Brazil, it is natural that companies focus first on the domestic market before seeking expansion. However, in the case of neobanks, the logic is different. “For fintechs, internationalization is easier and faster. And they will usually look first at neighboring or regional countries.”

Payments and banking platform Dock is among the Brazilian companies eying the Mexican market. In 2021, the company acquired Mexico-based Cacao, focused on card processing solutions. Providing financial services for companies, Dock is present in 11 countries in Latin America and has around 40 clients in Mexico, which represents 10% of the total. “We always had the vision that this is a market with many opportunities. We have been following the regulatory steps since its early movements,” said Anderson Olivares, Dock’s general manager for Latin America, based in Mexico.

Mr. Olivares says there is synergy between the company’s operations in Brazil and Mexico and a lot can be replicated. He points out that the big difference is the regulatory moment of each of the countries. In Brazil, one of the ways in which Dock operates is by sharing its banking license with other companies, the so-called banking-as-a-service (BaaS) model. In Mexico, this format is not yet recognized by regulatory bodies and, therefore, each client needs to have a license. On the other hand, fintechs can share its relationship with card brands to issue credit cards. “The central bank’s agenda is also advancing to increase competition in Mexico,” he adds.

While the Mexican market is new for fintechs, the scenario is different for conventional banks. The market is dominated by foreign players, such as Citi, BBVA, Santander, and HSBC. Still, the favorable moment has boosted the interest of some participants. Bradesco has had a credit card operation in the country since 2010, and two years ago it announced the acquisition of a popular financial institution (SOFIPO), which is similar to a license for operating a finance company in Brazil. At the time, it had some 3 million customers and said its goal was to double this base and increase its portfolio by fourfold in five years.

Alexandre Monteiro, the head of Bradescard Mexico, said the bank expected a faster approval for the deal but had to develop new systems, instead of scaling what it found at the SOFIPO. “The goals we mentioned at the time were based on digital accounts. We continue aiming to grow a lot. We are developing new platforms to compete with the main players and want to offer a world-class customer journey.” He says the current base has 3.2 million credit cards and the credit portfolio grew 15% in the last 12 months, well above inflation, of 4.5%.

He says the Mexican banking system today is similar to what Brazil had five to 10 years ago but expects this difference to shrink. “Mexico started a few laps behind [Brazil] but that gap tends to reduce over time. There is an ongoing cultural change, young people are opening digital accounts as they don’t want to have to go to a [physical] branch,” he said. The executive is based in Guadalajara, where Bradescard is headquartered.

Carolina Fera, vice president of financial services at the local fintech Clip, a card acquirer, is also attentive to the ongoing transformation of the Mexican banking system. Ms. Fera, who is Brazilian, was hired by Clip to help expand the offer, which includes accounts for small businesses. “General Atlantic was increasing investments in Mexico and looked for executives in Brazil, which is the most advanced market in Latin America. That’s how I came to Mexico. I think Brazilian advances have influenced regulation in the entire region,” she said.

However, she points out that Mexican instant systems CoDi (Cobro Digital, for payments), launched in 2019, and DiMo (Dinero Móvil, for transfers), launched in 2023, could be improved to accelerate its adoption, as happened with Pix in Brazil. “Nearly 70% of transactions in the Mexican market are still in cash. These systems aren’t as user-friendly as Pix, as they allow only one type of key to be registered.” She points out that facilitating use with the help of technology is important but the local reality also needs to be observed. “Wanting a fully digital model could be a risk. You can’t go straight from zero to 100%. Human relationships and in-person service are still very important here [in Mexico].”

*Por Por Mariana Ribeiro, Álvaro Campos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Cost of Selic interest rate for companies reaches R$78bn

Amount is more than double Vale’s investment per year; businesspeople criticize Central Bank

06/21/2024

Ricardo Nunes — Foto: Leo Pinheiro/Valor

Ricardo Nunes — Foto: Leo Pinheiro/Valor

Maintaining the Selic policy interest rate at 10.5% per year for as long as necessary to reduce inflation, as indicated by the Central Bank on Wednesday (19), would cost companies billions of reais and could affect long-term investments when businesses are slowly resuming industrial and commercial activities.

Although businesspeople understand the reasons for the end of the rate-cutting cycle, as they see inflationary control as key and have openly criticized the Lula administration’s fiscal laxity, keeping the rate at this level brings a financial cost to companies of over R$78 billion per year, according to estimates made by Paramis Capital for Valor.

The total stock of corporate debt linked to the CDI (the interbank deposit rate, used as an investment benchmark in Brazil) is currently at R$743.2 billion and, with a 10.5% per year Selic, the impact on companies reaches R$78 billion per year. The amount is equivalent to more than double the investments planned by Vale in 2024 and 70% of the average to be allocated annually by Petrobras from 2024 to 2028.

If the policy interest rate could end the year at 9%, as the market had estimated less than six months ago—before concerns about inflation increased and the government eased its discourse on austerity in public accounts—, the cost to companies would be R$66.9 billion, or R$11.1 billion lower than the current impact.

With the Selic at 9.5%, the interest rate burden would be R$70.6 billion annually, R$7.4 billion lower than the current impact. Brazil has the world’s second-highest real interest rate, only behind Russia. That hinders funding and postpones projects by companies carrying debt linked to the CDI—most of them.

For Ricardo Nunes, the head of credit investments and wealth at Paramis, Selic above 10% could delay projects and slow down companies’ growth. Trade associations and businesspeople have echoed the concerns, criticizing the end of the Selic cutting cycle and uncertainties in the fiscal and political fields. “We think the Selic will be held at 10.5% until year-end, and we do not rule out a possible increase. There is political noise and, if the government adopts a more populist tone, this could further increase the political and fiscal risk,” Mr. Nunes said.

Leonardo Silva, competitiveness coordinator at ABIMAQ, an association representing the machinery industry, said there is an understanding of the motivations behind the Central Bank’s decision. “The Central Bank is doing its job. We are not questioning that. There is an inflationary risk and the fiscal issue cannot be ignored. However, depending on the dose, the medicine could turn into poison.”

The fact that companies’ debt has increased throughout the year weighs heavily on them, as the Selic rate affects the total debt stock. The stock of corporate debt increased from R$610 billion in April to R$743 billion now, according to Paramis, as a direct effect of debenture issuing.

These debt transactions accelerated this year due to a window of smaller net interest rate spread until May, with a firm guarantee from the banks structuring the issues. Paramis’s survey does not consider the effect of reducing the spread on debt.

Additionally, there has been a dearth of initial public offerings (IPOs) for three years, and a reduction in follow-on deals. Owners of leveraged businesses led part of the offerings that came off the drawing board. As a result, there was a reduction in access to funds, which also led to an increase in the issuance of private loans over the past two years.

Debenture offerings reached R$160.6 billion from January to May, a record for the period, with an increase of 204% over 2023.

For Daniel Lombardi, a managing partner at G5 Partners, a firm offering advisory on wealth management, M&A, and private debt restructuring, the Selic at 10.5% for the next few months, could keep private issuances strong until year-end.

There should also be an increase in divestment deals by companies to raise cash, and sale-and-leaseback transactions. That has increased since 2023 among retailers, which are highly affected by increasing interest rates.

Mr. Lombardi points out that companies and banks must be transparent when negotiating a new debt restructuring due to the perspective of a higher cost of capital for longer.

“Leveraged businesses support little hassle, and many companies have received shareholder money at this time of high interest rates. So, the faster it is settled, the better,” he said.

In this environment of greater uncertainty, industrial and retail leaders have raised their tone. CNC and CNI, trade and industry confederations, ABIMAQ (machinery), and IDV (retail) focused on the harmful effects of a contractionary monetary policy—the CNI even cited an “inadequate and excessively conservative” decision.

In a report released this week, Santander sees a negative impact from maintaining the Selic rate unchanged on retailers such as Casas Bahia, Magazine Luiza, and Pague Menos. On the opposite side, the bank sees a possible positive impact on Renner, Vulcabras, Vivara, and Natura, with little or no leverage.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Health sector faces structural changes amid rising costs

Regulatory, demographic, economic shifts trigger transformations in a market worth over R$300bn

06/21/2024

Fernando Torelly — Foto: Silvia Zamboni/Valor

Fernando Torelly — Foto: Silvia Zamboni/Valor

Since the pandemic, the health sector has undergone significant changes involving regulatory, demographic, and economic-financial issues, leading to structural transformations in a more than R$300 billion market. These changes are directly related to the soaring cost of healthcare, which reached R$239 billion last year considering only medical expenses paid via health plans.

From 2019 to 2023, the accumulated average adjustment of corporate health plans, which represent 70% of the sector, reached 68.72%—more than double the official inflation index for the period. The cost of healthcare is rising faster than the client’s ability to pay, putting the sustainability of this market at risk.

In this context, two noticeable changes are occurring in the sector: the depreciation of health plans, with a reduced offer of services such as reimbursements, services networks, and coverage scope; and a new wave of consolidation, now involving large groups.

With escalating costs and difficulties in passing prices on to consumers, hospital groups and health plan operators, historically on opposite sides, are now merging assets. In this market, when a hospital’s revenue rises, the health plan loses because it has a higher bill to pay. Ultimately, the patient may receive inadequate medical care and face steep price increases.

“Previously, there was a lot of fat in the sector, and costs were passed on to the client, but that’s no longer possible. Operators are now pressuring large hospital groups as well, which didn’t happen before,” said Vinicius Figueiredo, an analyst at Itaú BBA.

Dasa and Amil have merged their hospitals, and Rede D’Or and Bradesco Seguros have created a hospital company. The insurer also has partnerships with Mater Dei and Albert Einstein, BP, and Fleury, and is a shareholder of Grupo Santa in Brasília. Porto Saúde and Unimed Nacional have joined forces with Oncoclínicas to build specialized cancer hospitals. Medical cooperatives are also merging. “Now, we will see operations involving large groups, followed by smaller deals,” said Osías Brito of BR Finance.

“This movement was triggered by Rede D’Or’s acquisition of SulAmérica in 2022. At the time, there were questions about the sector’s future, and Rede D’Or provided an answer by creating a hospital company with Bradesco,” said Fernando Kunzel, co-founder of JGP Financial Advisory, the advisory arm of investment manager JGP. Also in 2022, Hapvida and NotreDame Intermédica announced a merger to create a vertically integrated operator with a national presence and potential to capture the clientele of insurers. This phenomenon has been occurring for about a year.

“Companies’ health plan expenses average 14%, potentially reaching 20%, of payroll. Maintaining an adjustment at the current level could lead to companies canceling the benefit. There is a risk that only those who need and use the health plan the most will remain in the system. However, without risk dilution, the cost will be even higher,” said Luis Fernando Joaquim, a partner at Deloitte.

The increase in healthcare prices is a global phenomenon due to an aging population, the emergence of new treatments and drugs, and long COVID cases. In Brazil, legislative changes have further intensified the rise.

“There was a failure to understand the impacts of COVID on the sector. Immediately after, in 2021 and 2022, regulatory changes allowed the inclusion of mandatory medical procedures by health plans, unlimited therapy sessions for autism spectrum disorder (ASD), and a national minimum wage for nursing. Additionally, several mergers and acquisitions were completed. In short, there were many movements in a short period, and the sector is still in the adjustment phase,” said Flávia Pareto Conrado, partner and founder of Setter Investimentos, a consultancy and adviser.

“The impacts of therapies for ASD patients are being measured now. It’s complicated to price a product with an unlimited number of therapies,” said actuary Luiz Feitoza, a partner at the consultancy Arquitetos da Saúde.

Those who have not closed a partnership agreement are forming commercial alliances. HCor, for example, conditioned the start of new unit construction on pre-approval from health plans to guarantee revenue. “The future lies in large clusters. Today, it’s necessary to form partnerships or strategic acquisitions,” said Fernando Torelly, CEO of HCor, noting that with the crisis, operators are avoiding licensing more hospitals.

Antonio Britto, president of Anahp, a hospital association, believes vertically integrated units, networks, and independent hospitals with strong reputations can coexist. Mr. Britto said that despite the improvement in operators’ results in the last quarter of 2023 and the first three months of 2024, pressure on hospitals remains.

Abramge, the health plan association, said that the recovery is partial and that more than a third of operators still report negative results.

*Por Beth Koike — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

After government measures, steel companies revise projections

Estimates for steel imports shift to a 7% decrease from a 20% increase

06/20/2024

Jefferson De Paula — Foto: Nilani Goettems/Valor

Jefferson De Paula — Foto: Nilani Goettems/Valor

The federal government’s decision to establish quotas for the import of 11 types of steel products, with a 25% tariff on surplus volume, is expected to bring moderate improvements to the Brazilian steel industry in the second half of the year, according to the Brazil Steel Institute (Aço Brasil).

Although imports had risen through May, driven by a global oversupply and unfair competition practices by some producing countries, the trade association expects that the measures implemented this month will reduce imports by 1.5 million tonnes this year.

“It’s not the best [agreement], nor the one we initially wanted. But we believe it’s an agreement that, if it works, will significantly improve the situation of the steel industry in Brazil,” said Jefferson De Paula, chairman of Aço Brasil and CEO of ArcelorMittal Brasil.

From January to May, steel product imports rose by 26.4% to 2.3 million tonnes, while domestic production saw a slight increase of 0.6%, reaching 13.6 million tonnes. Last year, total imports reached 5 million tonnes, mostly from China, 50% higher than in 2022, while domestic production shrank by 6%.

Marco Polo de Mello Lopes, managing director of Aço Brasil, noted that the 30% increase in the average imports of steel products between 2020 and 2022 used to define the quotas was not exactly what the Brazilian industry had sought. “The quota is generous, beyond what we thought was necessary to regulate the market, because of this 30% delta,” he said.

Industry representatives will meet with the government next week to discuss the results of the measure so far and any necessary adjustments. The industry has already detected, for example, an increase in rebar imports, which are not included in the initial list of products subject to quotas.

Nevertheless, there will be gains, and steel companies have revised their forecasts for 2024 upward. They now project a 0.7% increase in steel production, reaching 32.2 million tonnes, compared to the previous estimate of a 3% decline. For imports, the projection, which at the end of 2023 was for a 20% increase, has shifted to a 7% decrease, totaling 4.7 million tonnes. Domestic sales are expected to grow by 2.5% to 20 million tonnes, against an initial forecast of a 6% decline.

According to Mr. De Paula, steel consumption did not see significant growth in the first months of the year but could end 2024 with an accumulated increase of 1% to 3%. This outlook considers the strong performance of the construction sector, with more projects in the My Home My Life housing program and a resurgence of real estate launches, as well as a more active automotive market for both light and heavy vehicles.

With the impact of the measures on the domestic market, the sector is expected to gradually reduce idle capacity and maintain the planned R$100 billion investment package for the next five years. Asked about steel price increases in the domestic market, which have already started to be announced, the association’s leadership pointed to market economics.

“It wasn’t said that there would be no price increases. One thing was the claim by consumer sectors that the industry wanted to raise prices. Price speculation is not on the radar, but in a market economy, companies will have to make adjustments,” said Mr. Lopes.

As proof that Brazilian mills follow the international market, Aço Brasil noted a 12.7% drop in domestic hot coil prices from January 2023 to mid-June this year, in line with prices in other countries.

“In these 10 months [of talks with the government], there was a lot of discussion about price. But the price is set by the market, and it was agreed that our prices would be market-based,” said Mr. De Paula.

Faced with the surge in imports since the end of 2022, the industry had sought some form of trade defense from the government. In February this year, Aço Brasil requested the adoption of a quota-tariff system for 18 types—Mercosur Common Nomenclature (MCN)—of steel products and succeeded for nine of them. Two MCNs for tubes were also approved.

Now, said Mr. Lopes, the industry and the government are monitoring 27 other MCNs to prevent imports of similar products, not on the quota list, from circumventing the rules.

*Por Stella Fontes — Araxá

Source: Valor International

https://valorinternational.globo.com/
/by

CBMM advances in niobium batteries, equips new Volkswagen bus

Key advantage of niobium oxide use is ultra-fast charging

06/20/2024

Collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries — Foto: Divulgação

Collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries — Foto: Divulgação

One of the major challenges in the electrification of urban mobility is reducing vehicle recharge times. In many cases, batteries require hours to recharge, and for buses and trucks, this means long downtime periods, increasing costs, and larger fleets.

This challenge brought CBMM, a niobium products manufacturer controlled by the Moreira Salles family, together with Volkswagen Caminhões e Ônibus. The collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries. The prototype was unveiled on Wednesday at CBMM’s industrial and mining complex in Araxá, Minas Gerais.

While the bus has no set date for mass production, the battery, developed by CBMM in collaboration with Japan’s Toshiba Corporation and Sojitz Corporation, is expected to hit the market in larger volumes by the second half of 2025.

The primary advantage of using niobium oxide in batteries is ultra-fast charging—up to 10 minutes for light vehicles and up to 15 minutes for heavy vehicles, without the risk of overheating or explosion. During the prototype’s presentation, a real-time demonstration showed the e-Bus being recharged in 8 minutes and 37 seconds.

Rapid charging with niobium technology does not compromise battery life. “The evolution of these materials ensures competitiveness and quality for the batteries,” said CBMM CEO Ricardo Lima.

Since 2014, CBMM has been developing materials to enhance battery performance. In mid-2018, the company signed a research contract with Toshiba, which led to the technology used in Volkswagen’s electric bus.

The companies aim to use these buses for urban routes, given their estimated 60-kilometer range, which covers over 90% of routes in large Brazilian cities. The e-Bus prototype, built on an 18-tonne chassis, has four battery packs, each with a usable capacity of up to 30 kWh (kilowatt-hours). The bus charges via the front roof, connecting wirelessly to a 300-kW pantograph fixed to the ground and connected to the electrical grid.

According to Volkswagen Caminhões e Ônibus CEO Roberto Cortes, it typically takes about four years for a new electric vehicle to reach the market. He noted that the development of the E-Delivery electric truck began in 2017 and it was launched in 2021.

To date, CBMM has invested around R$450 million in niobium oxide production capacity, in addition to the R$80 million the battery program receives annually. Currently, the company has 41 battery projects under development, including applications for heavy vehicles, mining transport, and robots.

CBMM expects the battery sector to account for 25% to 30% of its revenue by 2030. Currently, approximately 80% of its revenue comes from steel products, as niobium addition enhances steel strength. The company does not plan to produce the niobium-lithium batteries themselves. Instead, the Minas Gerais government is in discussions with Toshiba, which currently manufactures the cells in Japan, to attract potential investment to Brazil.

The CBMM-Toshiba partnership has included pilot cell manufacturing plants in Japan and active material production in Araxá, along with a dedicated battery materials laboratory at the Minas Gerais factory.

Following the installation of the pilot niobium oxide plant, CBMM has built a factory with a capacity of 3,000 tonnes per year, which will begin operations in August. This volume is expected to meet demand for the first three years.

The reporter’s travel costs were covered by CBMM.

¨Por Stella Fontes — Araxá

Source: Valor International

https://valorinternational.globo.com/
/by