Real long-term interest remains at 6%, with no signs of declining

NTN-B rate climbs to a 14-month peak amid fiscal deterioration and external pressures

06/10/2024

Fabricio Taschetto — Foto: Rogerio Vieira/Valor

Fabricio Taschetto — Foto: Rogerio Vieira/Valor

Real long-term interest rates have settled at around 6% for the past two months, reaching a 14-month high with no indication of decline. This uptick aligns with a global context of rising interest rates, notably in the United States, and is compounded by a deteriorating perception of risk and growing uncertainties surrounding government accounts.

The fiscal measures adopted by the government have not helped alleviate these rates. Recent taxation changes affecting exclusive or restricted closed-end funds have prompted investors to shift their capital towards tax-exempt securities, thus increasing demand for long-term NTN-Bs (B-Series National Treasury Notes, Brazilian government bonds indexed to the national inflation rate), which are generally less influenced by monetary policy cycles.

Notably, the real interest rates indicated by long-term NTN-Bs starkly contrast with those during the last cycle of the Selic rate (Brazil’s benchmark interest rate) cuts. In 2020, rates for bonds maturing in 2045 fluctuated between 3.5% and 4.5%. Now, those same securities are yielding rates above 6%. This significant shift reflects both the deteriorating state of government accounts over the past four years and the tightening of monetary policy in the United States.

In recent weeks, Brazil’s financial markets have shown increasing independence from U.S. trends. The gap between Brazilian and American real interest rates has widened significantly, suggesting that the market is demanding a higher premium to hold Brazilian bonds.

“Rates are undoubtedly high. From a fiscal standpoint, it appears unsustainable,” observes Michael Kusunoki, the head of fixed income and multimarkets at BNP Paribas Asset Management. He emphasizes that Brazil is at a pivotal moment. “We are facing challenges with the credibility of its fiscal and monetary policies. There is a perception of leniency in both areas, which undermines confidence and necessitates higher risk premiums from the market,” he adds.

Despite a recent easing of U.S. interest rates, this relief has not extended to the Brazilian market. Mr. Kusunoki points out, “The external environment offered some support, but the domestic factors failed to contribute positively. If the international situation were worse, the local scenario could be even more dire.” As of Friday, the rate for the NTN-B bond maturing in May 2045 was recorded at 6.3%.

Real long-term rates are expected to remain elevated for the foreseeable future, influenced by fundamental economic factors, fiscal deterioration, and persistent uncertainties. Renan Rego, chief investment officer at G5 Partners, notes that complexities such as changes in the Central Bank’s leadership and increased government spending contribute to the heightened levels of NTN-B rates. “The market is naturally adjusting, and this adjustment is compounded by technical issues related to investment flows,” he explains.

Mr. Rego observes that NTN-Bs have recently encountered increased competition, leading to reduced demand for these Treasury bonds. Consequently, interest rates on these securities have risen as the market adjusts to make them more appealing to investors.

“The taxation of come-cotas [mandatory withholding of income tax on investments] has significantly impacted closed-end funds, which traditionally held allocations in non-exempt assets like NTN-Bs,” Mr. Rego continues. “As taxation takes effect, investors face a tax burden on accumulated earnings, prompting them to shift their investment strategies towards managed portfolios with exempt securities. This shift has resulted in decreased allocations to NTN-Bs.”

The shift in investment strategies has thinned the pool of buyers for NTN-Bs, particularly at a time when the multimarket sector is experiencing volatility. “Multimarkets have traditionally purchased NTN-Bs when they perceived the pricing to be favorable. However, significant redemptions within the multimarket sector have notably decreased the demand for this asset, contributing to persistently higher rates.”

This perspective is echoed by Fabricio Taschetto, chief investment officer at Ace Capital, who attributes the sustained high levels of real long-term interest rates primarily to technical flow factors. “The government’s decision last year to alter the tax regime for exclusive funds disrupted the decades-long-standing equilibrium in the market for funds and bank bills. The imposition of taxes on the accumulated earnings of closed funds has freed up capital, prompting a shift towards tax-exempt alternatives. This has resulted in a significant migration of investments,” he observes.

Mr. Taschetto also notes that, as NTN-Bs underperform, funds linked to the IMA-B—an index of inflation-linked government bonds—are similarly struggling, leading to a cascade of redemptions affecting these funds as well. “Effectively, there are fewer financiers for public debt. The competition facing NTN-Bs has intensified alongside the surge in demand for exempt commodities, complicating the government’s efforts to finance its debt through these securities as capital flows into exempt investments. This results in a significant fiscal shortfall,” he explains.

Furthermore, Mr. Taschetto points out a unique challenge for NTN-Bs. “When managers of funds holding incentivized bonds receive contributions, they typically purchase IPCA-linked incentivized bonds and must hedge these positions. Generally, this hedge involves selling NTN-Bs short. Thus, capital exits funds that were allocated to NTN-Bs, necessitating their sale and is redirected to other funds where managers are again compelled to sell NTN-Bs. It results in a compounded negative impact on these securities.”

Ace Capital maintains a position in long NTN-Bs, albeit reduced. “Once we grasped the dynamics at play, our appetite for NTN-Bs diminished sharply, leading us to halve our holdings. Given the enduring nature of these technical factors, we plan to maintain our current positions until the market stabilizes. While NTN-Bs priced near 6.2% represent significant value, we do not foresee any immediate catalysts that would dramatically alter their status,” Mr. Taschetto adds.

Miguel Sano, a fixed-income manager at SulAmérica Investimentos, shares a similar pessimistic outlook on long-term real interest rates. “The premiums are steep on the long end, yet we see no catalyst for improvement. For instance, this week saw a significant drop in the yields of 10-year U.S. Treasuries, but neither the local market nor other emerging markets mirrored this movement.”

Mr. Sano explains that real rates have struggled to maintain a downward trend due to liquidity constraints, similar to those affecting other assets. “Purchasing requires available capital. Multimarket funds have experienced significant redemptions over the past eighteen months. Likewise, IMA-B funds and foundations have shown little interest. The market is missing a catalyst… We have long considered equities undervalued, yet there’s been no movement,” he states.

Additionally, Mr. Sano highlights that the attractiveness of NTN-Bs may be dampened by shifts in the neutral interest rate. “If the neutral interest rate is indeed higher, the potential for gains on these bonds diminishes,” he notes.

Mr. Sano also contemplates the likelihood of even higher interest rates. “Back in 2007, when Treasuries were around 4.7%, long-term NTN-Bs were trading at about 7%. We can’t discount the possibility of reaching those levels again if the economic outlook deteriorates,” he explains.

Lucas Queiroz, a fixed income strategist at Itaú BBA, notes a recent trend towards risk reduction in Brazil. “There’s been a notable correlation between interest rates and the exchange rate lately, indicative of classic risk aversion. This trend became particularly evident in April and May, as investors started unwinding their positions,” he observes.

Mr. Queiroz believes that the current interest rates incorporate considerable risk. “The Focus [bulletin] suggests that the market anticipates a real neutral rate of around 5%. If you hold an indexed bond over five years, you’d expect a return of five percent over the Consumer Price Index (IPCA+5%). Currently, NTN-Bs are offering about 6.2%. There’s a premium in play here, which is central to our optimistic outlook for a potential reduction in rates,” he concludes.

Por Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Challenges ahead for drawing investors to São Paulo’s train projects

Engineering risks, fiscal constraints, and future sector auctions pose hurdles for public-private partnerships

06/06/2024

Rafael Benini — Foto: Ana Paula Paiva/Valor

Rafael Benini — Foto: Ana Paula Paiva/Valor

The package of metro and urban train concessions in São Paulo is generating interest in the market, but analysts consulted by Valor see significant challenges in moving these projects forward. The obstacles to attracting investors include high engineering risks, fiscal limitations for offering guarantees in public-private partnerships (PPPs), and competition from other infrastructure auctions scheduled in the coming years.

The São Paulo state government auctioned the first PPP of the package in February this year, the Intercity Train (TIC) between the capital city and Campinas. The auction attracted only one bidder—the consortium formed by Comporte and China’s CRRC. The contract was signed last Tuesday.

The government’s package includes at least 13 other projects under study, with a potential investment of R$130 billion. The most advanced initiative is the PPP for lines 11-Coral, 12-Safira, and 13-Jade, expected to have its tender launched in September and the auction held in the fourth quarter. The projected investment is R$10 billion.

Three more PPPs may be launched in 2025, according to the government’s schedule. One is the TIC Oeste, a new 100-kilometer line connecting São Paulo to Sorocaba in 60 minutes, with a projected investment of R$10 billion. The second project includes the existing Line 10-Turquesa and the new Line 14-Ônix, with an estimated investment of R$18 billion.

There is also a PPP to build Lines 19-Celeste and 20-Rosa of the metro. Studies are still evaluating the feasibility of this mega-project, which is expected to require R$45 billion. To achieve this, the government is considering forming a lot with existing lines—Lines 1-Azul, 2-Verde, 3-Vermelha, and 15-Prata are being studied.

Analysts anticipate new investors will emerge, but the market remains challenging. “Rail mobility is a complex sector, especially with new lines. Contracts require high investment and face geological, expropriation, and interference risks,” said Bruno Aurélio, a partner at Demarest.

Given that mobility contracts are generally PPPs requiring public investment, fiscal issues and the structuring of payment guarantees also need attention, noted Guilherme Quintella, president of EDLP (Estação da Luz Participações), which conducted studies for various intercity train projects for the São Paulo government in 2012. “There must be fiscal security. This is the biggest challenge. The projects depend on this funding to advance.”

Additionally, the long-term nature of the package introduces continuity risk, said David Wong, a director at A&M (Alvarez & Marsal). “The plans and timelines make sense. The challenge is attracting investors and ensuring that government changes don’t negatively impact projects, which is common in infrastructure,” he said. He also noted the need for multimodal integration with other mobility structures for route feasibility.

Today, a concern for both the government and the market is to broaden the range of investors in the sector, which is less developed than others like highways. “There are few specialized groups with experience to ensure the business plan is delivered,” said José Virgílio Lopes Enei, who heads the infrastructure area at Machado Meyer law firm.

Despite the challenges, analysts believe that the São Paulo government’s package is attracting new interest in the sector. “A single project struggles to attract new entrants because participating in an auction requires investing tens of millions of reais. But with a program, there’s more incentive for investors since losing one bid means there are other opportunities,” said Mr. Enei.

Currently, besides the groups already operating in the sector—mainly CCR, Acciona, and the Comporte-CRRC consortium—analysts suggest that foreign groups, investment funds, and even highway operators already active in Brazil could enter the market.

Rafael Benini, São Paulo’s secretary of partnerships and investments, said the state government has seen market interest in the projects. “People are conducting technical visits and accessing the data room to review information,” he said.

A significant change expected to increase competition is a tax incentive for subcontracting. This allows the winning group to subcontract another company for line operations, construction, and rolling stock supply. Currently, subcontracting is possible but suffers from double taxation, which the government plans to offset in the short term. “With the tax reform, this will be resolved in the future. For now, we will reimburse the company for the double taxation until 2028,” Mr. Benini said.

Renato Kloss, a partner at VAK Advogados law firm, emphasized the importance of diversifying the profile of interested parties to increase competition. “It’s essential to consider that the bidder need not be the operator. The winner can contract later. Changing this opens opportunities for other interested parties, such as investment funds,” he said.

*Por Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil grapples with inadequate strategy against animal trafficking

Study identifies 24 risks related to fraud, corruption, and laundering that facilitate wildlife trafficking in Brazil

06/06/2024

A notable case involved an American collector who illegally acquired a leucistic boa constrictor—a rare genetic variant characterized by white skin and black eyes—from a zoo in Niterói — Foto: Divulgação

A notable case involved an American collector who illegally acquired a leucistic boa constrictor—a rare genetic variant characterized by white skin and black eyes—from a zoo in Niterói — Foto: Divulgação

Brazil lacks a cohesive strategy to combat wildlife trafficking, a crime that remains both organized and widespread within the nation. Although it is a rampant, organized crime, there are no official national statistics. Global estimates suggest the illegal wildlife market could be valued between $7 billion and $23 billion, as indicated by a 2018 study conducted by Interpol and various organizations.

In Brazil, wildlife trafficking occurs both domestically and internationally. A notable case involved an American collector who illegally acquired a leucistic boa constrictor—a rare genetic variant characterized by white skin and black eyes—from a zoo in Niterói. This particular snake can fetch between $350,000 and $1 million. The trafficker bred the snake and sold its offspring online for up to $60,000 each to buyers in the United States, Canada, and Italy.

This case and others are detailed in a report titled “A Lavanderia de Fauna Silvestre: como riscos de fraude, corrupção e lavagem viabilizam o tráfico de vida silvestre” (“The Wildlife Laundromat: How Risks of Fraud, Corruption, and Laundering Enable Wildlife Trafficking”) released Wednesday. The report was prepared by Transparência Internacional-Brasil, part of a global movement active in over 100 countries, with technical assistance from Freeland Brasil—an international organization combating organized crime in wildlife trade—and supported by the U.S. State Department’s Bureau of International Narcotics and Law Enforcement Affairs. The study underscores the significant role of corruption in facilitating wildlife trafficking.

The executive summary provides a detailed 135-page analysis of Brazil’s legal and institutional framework for combating wildlife trafficking, highlighting the susceptibility to fraud and corruption within the nation’s wildlife management systems and the international trade in species. Researchers scrutinized the inefficiencies in inspection, investigation, and enforcement practices carried out by environmental and police agencies, pinpointing prevalent corruption risks.

The report identifies 24 specific risks of fraud, corruption, and laundering that enable wildlife trafficking in Brazil. One notable risk involves the practice of reusing microchips from legally owned animals to falsely tag wildlife captured illicitly, thereby “laundering” their illegal origins.

Birds emerge as the most trafficked group in Brazil, representing approximately 80% of all animals seized by authorities. The exact runner-up is unclear, but reptiles and mammals also suffer significantly from illegal trade. The report references a study indicating that 23% of bird species in Brazil are impacted by trafficking.

“Irregular capture occurs throughout Brazil,” states Dário Cardoso, an analyst with Transparência Internacional-Brasil’s socio-environmental integrity program. There is substantial evidence indicating that animals are primarily captured in the North, Northeast, and Central-West regions and then traded within the Southeast, South, and Northeast. Data on transnational trafficking remains scant.

“We urgently need measures to prevent and combat the corruption that facilitates wildlife trafficking,” said Renato Morgado, program manager at Transparência Internacional-Brasil.

The report lays out recommendations across five key areas. One crucial area calls for action to eliminate fraud in wildlife management control systems, ensuring that animals captured illegally cannot be laundered into legality. Among these recommendations, the study highlights the importance of integrating automatic alerts into digital control systems.

Another critical area involves anti-money laundering measures. “Due to their high value, animals become assets within the economic framework. There is not only the laundering of money from trafficking but also the ‘laundering’ of illegally captured fauna,” explains Mr. Morgado. “Thus, it is essential to enhance Brazil’s anti-money laundering tools to detect these maneuvers in wildlife trafficking,” he adds. This enhancement could include setting up specific financial system alerts for wildlife trafficking activities.

“It is far from a random crime; it is a calculated and well-organized operation,” notes Mr. Cardoso, a specialist in criminal sciences. “A major issue is that environmental agencies do not have adequate data on seizures and fines. There is a severe lack of transparency,” he continues. “Without this information, we cannot fully grasp the extent of the problem or develop more effective counter-strategies.”

The report documents 18 cases and operations aimed at combating trafficking involving front zoos, veterinarians, inspectors, and cargo companies. It also details how birds are trafficked internationally, including the smuggling of eggs to foreign markets.

*Por Daniela Chiaretti — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Auren acquires Esfera to boost energy trade

Goal is to grow in retail, serving medium and large clients

06/06/2024

Auren, a power utility created from the reorganization of assets of the Votorantim group and Canada-based fund CPP Investments, announced the acquisition of Esfera, which operates in electricity management. With the deal, the company expects to boost the sale of electricity in the retail segment and trade with medium and large-sized clients. The amount involved in the deal was not disclosed.

Behind the deal is the recent free energy market opening for medium and high voltage following Ordinance 50/2022, published by the Ministry of Mines and Energy at the end of 2022. Auren’s Chief Financial and Investor Relations Officer Mario Bertoncini told Valor that in the scenario of mass opening of the free energy market, the company had to seek a better understanding of its new client.

“In recent years, we have created an ecosystem of companies, which involved telemetry with the acquisition of Way2. Then we invested in artificial intelligence and algorithms, by acquiring Aquarela. [We increased] the knowledge of individual consumers with the company Flora and, more recently, [entered into] a partnership with Vivo telecom to advance in the retail segment. The acquisition of Esfera means adding one more company to our portfolio,” Mr. Bertoncini said.

Auren is the largest energy trader in Brazil and now should stand out in new segments where it didn’t have a relevant presence. Esfera manages around 6% of the power consumed in Brazil. It serves 570 business groups and manages approximately 1,600 contracts on the free energy market. It also has 142 generating units in its portfolio and posted revenues of R$324 million in 2023.

The executive said the investment was made with company funds and represents Auren’s second deal in less than a month. On May 15, the company announced the acquisition of AES Brasil’s assets, which increased the company’s leverage from 1.8 times to 4.9 times.

“The deal has no material impact on the company’s debt as Esfera brings results. It operates at a low leverage level. What it adds in terms of results, EBITDA, and margins compensates for any leverage with the acquisition,” he added.

Although Auren has acquired 100% control, the company’s management will continue as an independent business, with separate teams and offices. The agreement also provides that the former partners will continue to lead the company. Esfera CEO Braz Justi said that in 2021, the company started to seek retail clients but it hasn’t seen a relevant volume until 2024.

Among the reasons for selling the company, Mr. Justi highlights the possibility of integrating Esfera into a large platform. Furthermore, Auren can invest in computer systems to explore a fast-growing market. “These pillars were the main reasons influencing our decision. We gave up control of the company to join a larger platform,” the executive said.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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SPIC to invest R$780m in new wind farm

New complex in Rio Grande do Norte announced amid slowdown in projects, oversupply caused by subsidies, and generation cuts

06/05/2024

Adriana Waltrick — Foto: Ana Paula Paiva/Valor

Adriana Waltrick — Foto: Ana Paula Paiva/Valor

Amidst a standstill in the Brazilian wind energy sector due to a crisis that hampers new projects from getting off the ground, SPIC Brasil, a subsidiary of China’s State Power Investment Corporation (SPIC), has taken the lead by announcing an investment of R$780 million for constructing a new complex with a total installed capacity of 105.4 megawatts in the Touros region of Rio Grande do Norte.

The project will feature 17 wind turbines, each with a capacity of 6.2 MW. SPIC Brasil’s CEO, Adriana Waltrick, told Valor that the project still requires environmental permits for the transmission line and resolution of land issues, as the network will cross 115 properties. However, the project will proceed under pressure from the Chinese government, the controlling shareholder, with construction beginning in the coming days to ensure the complex is operational by 2026. The public tender to select the equipment manufacturer is in its final phase.

Despite the sector’s challenging moment, Ms. Waltrick highlights that valuable energy assets and regulatory stability, combined with China’s financial and technological capacity, have created ideal conditions for SPIC in the power industry.

“Yes, the wind sector is experiencing a reduction in projects, there’s an energy oversupply in the market, and generation cuts for all players, but we are in Brazil with a long-term view. The initial hurdles do not discourage us regarding Brazil’s growth potential, and we will continue investing,” she said.

The financing for the project is still being negotiated, with the company planning to use 60% third-party capital and 40% internal funds. The energy will be sold through the company’s trading arm in the free market, where consumers can choose their supplier and set contracts by source, term, or price. Investors typically decide on new investments when they have long-term contracts to minimize risks.

SPIC is taking a different approach, aiming to secure buyers, known as offtakers, despite Brazil’s current energy oversupply. “It was a bold decision since the entire sector is retrenched. The Chinese investor pressed us about the contracts, but we will succeed,” Ms. Waltrick said. “SPIC grows by at least 20 GW annually. We aim to bring at least 10% of that to Brazil.”

The wind sector crisis has led to deindustrialization in the country. WEG and Siemens Gamesa have temporarily halted their wind turbine production lines, GE has exited Brazil, and Nordex has reduced production. Conversely, China’s Goldwind is setting up its production line in Camaçari, Bahia.

It’s too early to determine if the construction of a new complex signals a turning point. The sector has urged the government for an industrial policy to address the disruption in supply chains. A report by the Global Wind Energy Council (GWEC) concluded that without Western support for the renewables industry, China would dominate production.

Minas and Energy Minister Alexandre Silveira stated that he is closely monitoring the national wind industry and adopting concrete measures to maintain investments, such as transmission auctions and the provisional presidential decree sent in April to boost renewable energies.

Nivalde de Castro, a professor at the Federal University of Rio de Janeiro (UFRJ) and coordinator of the Electric Sector Study Group (Gesel), attributes the situation to an economic phenomenon where unnecessary subsidies for the wind and solar sectors have created an imbalance between supply and demand.

“For the wind industry’s situation, the solution is to export. In the medium term, the hydrogen sector will generate demand, opening up new investment opportunities. Another route is to attract demand alternatives with major consumers, like big tech companies, which could come to Brazil because they are energy-intensive and the cheap, renewable energy is attractive to them,” Mr. Castro said.

Since entering Brazil in 2017, SPIC has grown nearly 60-fold, from 58 MW of installed capacity to 3.4 GW currently. The Chinese government-controlled company began with the purchase of Pacific Hydro; months later, it acquired the São Simão plant for R$7.18 billion; in 2020, it bought stakes in the GNA I and GNA II thermal power projects, as well as participation in the future GNA III and GNA IV expansion projects. In 2024, it completed a R$2 billion cycle with a solar complex totaling 738 MWp.

SPIC is also investing in hydrogen projects and offshore wind farms at the ports of Açu and Pecém, although the lack of regulation prevents a more decisive move.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Q1 GDP outperforms, surges by 0.8%, but future remains uncertain

Financial tightening and impacts of Rio Grande do Sul’s floods pose significant uncertainties for the year’s outlook

06/05/2024

Domestic absorption, which includes household consumption, investments, and government spending, rose by 1.6% in the first quarter — Foto: Maria Isabel Oliveira/Agência O Globo

Domestic absorption, which includes household consumption, investments, and government spending, rose by 1.6% in the first quarter — Foto: Maria Isabel Oliveira/Agência O Globo

Brazil’s GDP showcased robust growth in the first quarter of 2024, rebounding from a stagnant second half in 2023. The boost was propelled by a mix of one-time factors, including significant court-ordered debt payments and more enduring elements that bolstered household consumption and services. Investments saw a considerable recovery, and agricultural outputs exceeded expectations. However, the outlook for the upcoming quarter appears less promising.

While the resilience of the labor market and elevated household disposable income might persist through 2024, other elements introduce greater uncertainty. Worsening financial conditions amid a less favorable interest rate forecast and the ongoing repercussions from the catastrophic floods in Rio Grande do Sul contribute to a murky economic forecast. Economists are divided over the net impact of the state’s destruction and its subsequent reconstruction on the national GDP.

Brazil’s GDP experienced a 0.8% increase in the first quarter of 2024 compared to the fourth quarter of 2023, according to seasonally adjusted data. This growth slightly surpassed the median forecast of 0.7% projected by Valor from consultations with 73 financial institutions.

Economic activity in Brazil has rebounded from the stagnant second half of 2023. The Brazilian Institute of Geography and Statistics (IBGE) revised the GDP variation for the fourth quarter of last year from zero to a decline of 0.1%, following a modest rise of 0.1% in the preceding quarter.

According to Goldman Sachs, compared to the first quarter of 2023, GDP in 2024 expanded by 2.5%, surpassing the median forecast of 2.2%. In real terms, the economy is now 7.8% larger than its pre-pandemic level.

Economists suggest that the “carryover” left by the first quarter’s GDP implies a baseline growth of 1% for the year.

Following the recent IBGE release, some financial institutions have revised their 2024 GDP forecasts for Brazil upward, even considering the potential impact of the floods in the South. For instance, Goldman Sachs adjusted its growth projection from 1.9% to 2.1%, and Barclays increased theirs from 1.9% to 2.2%. “This adjustment reflects a stronger start to the year, offset by the ongoing uncertainty surrounding events in the South,” commented Roberto Secemski, Barclays’ chief economist for Brazil, in his report.

“We had impacts from the floods, which could affect not only agriculture but also industry and services, particularly from the supply side. However, the positive surprises in the first quarter’s GDP support our previous projection of 2.2% growth,” said Laiz Carvalho, economist for Brazil at BNP Paribas, in a commentary.

Domestic absorption, which includes household consumption, investments, and government spending, rose by 1.6% in the first quarter of 2024, compared to the fourth quarter of 2023, fueled by robust household consumption and investments. In contrast, Goldman Sachs noted that in the fourth quarter of 2023, this increase was just 0.1%.

Conversely, the net contribution of the external sector to GDP in the first quarter of this year was negative by one percentage point (pp), as imports surged significantly more than exports—6.5% compared to just 0.2% in the last quarter of 2023. Additionally, changes in inventories contributed 0.2 pp to GDP growth, according to XP.

As household consumption rose “well above GDP,” the savings rate dropped from 17.5% in the first quarter of 2023 to 16.2% in 2024, notes Rebeca Palis, IBGE’s national accounts coordinator. This marked the lowest rate for the first quarter since 2020, when it stood at 14.3%. According to a report by Genial Investimentos, the behavior of the savings rate at the start of 2024 suggests “that part of the solid year-over-year performance of household consumption was due to domestic dissaving.

The investment rate remained nearly constant in the first quarters of 2024 and 2023, at 16.9%, down slightly from 17.1%. Ms. Palis clarifies that this consistency was due to parallel growth in investment and GDP. The rate of 16.9% in 2024 was also the lowest for the first quarter since 2020, when it was 16.2%. However, some economists highlight progress compared to the fourth quarter of 2023, when the rate dipped to 16.1%.

According to Banco ABC Brasil, these investment and savings rates align with a potential GDP growth of between 1.5% and 2%. Despite this, the country appears to be expanding above these figures, which could pose challenges in terms of inflation.

Gross Fixed Capital Formation (GFCF), which quantifies investment in machinery, equipment, construction, and innovation, remains 15.1% below its peak in the second quarter of 2013—over ten years ago and prior to the 2015-2016 recession. This metric is part of the national accounts’ historical data, initiated in 1996.

Ms. Palis highlighted that GDP, services, household consumption, and government consumption have reached their highest levels since records began. Agriculture nearly matches its record high from the first quarter of 2023, yet the industrial sector still lags, currently 7.2% below its peak in the third quarter of 2013.

On the supply side, the industrial sector was the only one to register a decline when comparing the first quarter of 2024 with the final quarter of 2023, dropping by 0.1%. However, economists highlight a positive shift in the manufacturing segment, which, after two consecutive quarters of stagnation, rose by 0.7% at the beginning of the year.

“When you look at the first quarter of 2024 compared to the fourth quarter of 2023, the three industrial sectors that are declining are the same ones that experienced significant growth last year,” notes Ms. Palis, describing the general trend in the industrial sector at the start of 2024 as “slightly downward.”

The industrial sector encompasses manufacturing and extractive industries, along with construction and the production and distribution of energy and gas. The extractive industry saw a halt to seven consecutive quarters of growth, with a 0.4% decrease from January to March 2024. However, compared to the same period in 2023, this sector still shows a nearly 6% increase.

Some economists expressed disappointment with the construction sector, which declined by 0.5%. The energy and gas segment also experienced a decrease, falling by 1.6% compared to the fourth quarter of 2023. Ms. Palis attributes this to a high base of comparison since 2023 was a positive year following water-related challenges in 2022. Compared to the first quarter of the previous year, the industry involved in the production and distribution of electricity, gas, and water saw an increase of 4.6%. “A significant portion of this growth was driven by residential energy consumption. The beginning of the year was notably hot,” explains Ms. Palis.

The agricultural sector was expected to grow in the first quarter of 2024 relative to the final quarter of 2023 due in part to a weak basis for comparison—the sector contracted by 13.1% over the last three quarters of the previous year, notes Barclays. Yet, the sector exceeded expectations with an 11.3% increase, surpassing the median projection of 8.8%.

Despite concerns about adverse weather conditions for 2024 due to El Niño, even before considering the impact of the floods in Rio Grande do Sul, the first quarter’s GDP was predominantly influenced by soybean and corn harvests. These crops are more significant than those typical of the fourth quarter, such as oranges and wheat, explains Ms. Palis.

Despite the record harvest backdrop from the first quarter of 2023, agriculture experienced a 3% decrease this year, which still outperformed the anticipated 4.5% decline. “Production was slightly lower than last year, but still robust,” notes Ms. Rafaela Vitória, chief economist at Banco Inter.

However, the most notable performance among the supply components came from the services sector. It expanded by 1.4% in the first quarter of 2024 compared to the last quarter of 2023, surpassing the median estimate of 0.5%. This growth marked the best quarter-on-quarter performance for services since the fourth quarter of 2020, when the sector rebounded by 3.1% from the initial pandemic impacts.

Within the services sector, significant increases were seen in trade (3%), information and communication services (2.1%), and other activities (1.6%), many of which catered to family-related services.

Ms. Palis from IBGE points out that trade was spurred by the retail segment, which is closely tied to household consumption and was a standout in demand aspects. Information services benefited from growth in the internet and systems development segment, which is linked to investments, another prominent demand component within GDP.

“We haven’t seen the reliance on agriculture that characterized 2023, indicating a shift towards greater dependence on the external sector. When trade and services are driving growth, it signifies robust economic activity, suggesting an uptick in activity,” explains Mr. Gabriel Mota, head of variable income at Manchester Investimentos.

Lower interest rate pressures also played a role in boosting the services sector in the first quarter of the year, according to Mr. Claudio Considera, national accounts coordinator at Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV Ibre) and head of the institute’s GDP Monitor. He particularly emphasizes the surge in the tourism sector, noting increases in sub-sectors like accommodation and food services, as well as transportation.

On the demand side, household consumption increased by 1.5% in the first quarter of 2024 compared to the previous quarter, surpassing the median expectation of 1.1% and reversing a 0.3% decline in the fourth quarter of 2023. This marked the most substantial growth since the 2% rise in the second quarter of 2022.

Economists attribute this robust performance to several factors: a strong labor market, rising wages, a real increase in the minimum wage, income transfer and anticipation policies, the payment of court-ordered debts, and more robust credit provisions. These elements collectively boosted families’ disposable income, thereby stimulating consumption during this period.

Mr. Secemski from Barclays highlights that the boost from the real increase in the minimum wage, effective from February, had a “ripple effect,” particularly significant given that almost two-thirds of public pensions are tied to the minimum wage.

“We believe that [household consumption] will underpin [GDP] growth throughout the year,” notes Ms. Carvalho from BNP Paribas.

Government consumption remained stable, following increases in every quarter of 2023 compared to the preceding three months. “This figure doesn’t include income transfer programs but rather reflects government spending on health, education, and security. It represents the final consumption of society,” explains Ms. Palis.

For many economists, the standout from the first quarter GDP announcement was the performance of GFCF, which surged by 4.1% compared to the fourth quarter of 2023, following a modest increase of 0.5% in that quarter. This 4.1% growth in GFCF marked the strongest quarter-on-quarter gain since the 6.4% rise in the first quarter of 2021.

Bradesco views the first quarter GDP figures as “positive news” and suggests “the economy’s trend growth might be slightly above consensus expectations,” according to a report led by Fernando Honorato at Bradesco.

Ms. Palis from IBGE notes that investments were bolstered by an increase in capital goods imports and strong performance in sectors like software development. “Software has seen significant growth again. It surged during the pandemic and then stabilized, but now this segment is even increasing in significance,” she explains.

“The decreasing trend in interest rates is beneficial; the appreciation of Brazil’s real aids the import of capital goods, as much of this equipment is sourced from abroad, and production declines are also lessening,” adds Ms. Palis. However, she cautions that the production of capital goods is still in negative territory when compared year-on-year.

Julia Gottlieb, an economist at Itaú Unibanco, acknowledges the growth in GFCF during the first quarter but notes that it remains insufficient to boost the country’s growth potential. “We expect it to increase over the next few quarters, yet it’s still at a low level,” she comments.

Genial Investimentos attributes the early 2024 rebound in GFCF to a more optimistic view at the beginning of the year regarding the extension of the monetary easing cycle, alongside a lower comparison base due to last year’s cumulative declines. “However, this recovery should be viewed with caution due to worsening conditions, particularly the rise in political and economic uncertainties in recent months,” the brokerage advises in a report.

In a briefing to clients, William Jackson, the chief economist for emerging markets at Capital Economics, indicates that Brazil’s strong economic performance in the first quarter may be fleeting, cautioning that it “does not herald the start of a robust recovery. We are skeptical that the growth observed in the first quarter can be maintained. Leading indicators suggest a weaker second quarter ahead,” he notes, pointing to a decline in the industrial PMI and the FGV consumer confidence indicator.

In the near term, economists anticipate a softer GDP performance for the second quarter, largely due to the pronounced effects of the floods in Rio Grande do Sul. According to estimates from ABC Brasil, the disaster is expected to reduce the anticipated growth for the quarter by between 0.4 and 0.5 percentage points—the bank forecasts a GDP increase of 0.4% for the period compared to the previous three months. Meanwhile, Santander and Genial Investimentos are projecting a mere 0.1% growth, and Rafaela Vitória from Banco Inter does not discount the possibility of a contraction in the second quarter.

The impressive GDP growth in the first quarter might have led G5 Partners to elevate its annual economic growth forecast from 2.1% to 2.5%. However, due to potential impacts from the Rio Grande do Sul disaster, Chief Economist Luis Otávio Leal opted to retain the existing projection.

“Our estimate would likely have been even higher if not for the uncertainties in Rio Grande do Sul,” notes Roberto Secemski of Barclays in a report.

Rebeca Palis from IBGE cautions that current market projections about the tragedy’s impact are still speculative at this stage. She emphasizes the importance of awaiting the IBGE’s monthly economic activity surveys, covering industries, agriculture, and commerce for May and June, to determine if the effects are widespread across sectors or more isolated.

*Por Alessandra Saraiva, Anaïs Fernandes, Ívina Garcia, Lucianne Carneiro, Marsílea Gombata, Marta Watanabe, Rafael Rosas, Rafael Vazquez — Rio de Janeiro, São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Rapporteur removes tax on international purchases from bill

Rodrigo Cunha’s decision creates rifts among senators and draws criticism from Lower House Speaker Arthur Lira

06/05/2024

Senator Rodrigo Cunha — Foto: Waldemir Barreto/Agência Senado

Senator Rodrigo Cunha — Foto: Waldemir Barreto/Agência Senado

In a move that caught the government by surprise, Senator Rodrigo Cunha, the rapporteur of the bill establishing the Green Mobility and Innovation Program (Mover), removed the 20% tax on international purchases up to $50 on Tuesday, deeming it “irrelevant” to the bill’s nature. The change led to disagreements among government-aligned senators and drew criticism from Lower House Speaker Arthur Lira. The deliberation was postponed to this Wednesday.

Despite Senate President Rodrigo Pacheco expressing support for the tax, he chose Mr. Cunha, who presents himself as independent, as the rapporteur. The other candidate for the role was government leader Senator Jaques Wagner.

Additionally, while government senators learned about the changes made by Mr. Cunha through the press shortly before the scheduled vote, Mr. Pacheco had been informed in advance during discussions in recent days.

Following the announcement by Mr. Cunha, Mr. Wagner attempted to contact him by phone but was unsuccessful. Later, on the Senate floor, Mr. Cunha spoke with the government leader and denied that he was “avoiding” anyone.

“The Brazilian people were surprised when the Lower House included an irrelevant subject to the Mover program, taxing international purchases at 20%. This will be removed from the text as it is a legislative ploy,” Mr. Cunha announced in a press conference early in the afternoon. “In reality, it is a bill to stimulate and encourage the modernization of the country’s vehicles, which has nothing to do with taxing companies,” he added. Mr. Cunha argued that the taxation of international purchases could be addressed separately in another bill, passing through thematic committees first.

After Mr. Cunha’s statement, Mr. Pacheco defended the rapporteur’s autonomy in crafting his report but also said that taxing international purchases is appropriate. “Establishing a uniform tax between what comes from abroad and what is produced here aligns with our goal of developing the national industry,” he said.

Leaders of some parties were willing to support a separate vote to reinstate the tax. However, the government leader in the Senate feared that a nominal vote, where each position is recorded, could be risky. Mr. Wagner then requested a postponement of the bill’s analysis.

“There is a lot of communication noise, and I think voting on this matter now would cause much confusion. I prefer to work until tomorrow [Wednesday] to develop a procedure for voting on this matter. If we vote today, it will return to the House, delaying the decision,” said Mr. Wagner.

The government leader has sought an agreement to approve the bill as it stands, avoiding a return to the Lower House, but with a commitment from President Lula to veto certain points. The provisional presidential decree that created Mover lapsed last Friday, and the sector now depends on the bill’s approval.

Besides the government, retail, and industry sources said the plan was for a symbolic vote (by agreement) in the Senate on Tuesday to pass the bill with the tax. The sector also learned of the rapporteur’s decision when the report was presented.

Mr. Cunha did not only exclude the tax on international purchases. The rapporteur removed all riders from the bill. Among them was the provision establishing a local content policy for oil and natural gas exploration and production activities.

On the other hand, the government supported the removal of this provision as it had faced criticism from Vice President Geraldo Alckmin.

Amid the discomfort caused by Mr. Cunha’s report, Mr. Lira said he was informed by Mr. Pacheco that the parties are organizing to restore the initially agreed-upon text. “There must be a unified direction regarding established agreements,” Mr. Lira told journalists. “I believe the government will correct this and vote on the agreed-upon text,” he added.

He refrained from attributing Mr. Cunha’s changes, with whom he was once allied but is currently estranged, to possible government coordination failures. He also mentioned contacting Finance Minister Fernando Haddad to discuss the matter, who assured him that no agreement had been made to remove the tax.

*Por Julia Lindner, Caetano Tonet, Marcelo Ribeiro, Jéssica Sant’Anna, Adriana Mattos — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Mercado Pago sheds stealth mode, boosts communication

After expanding product offerings, digital bank will also accelerate lending

04/06/2024

André Chaves — Foto: Rogério Vieira/Valor

André Chaves — Foto: Rogério Vieira/Valor

Mercado Pago has spent the past few years expanding its product offerings to complete its transition from a payments company to a digital bank. Now, the company believes it is time to “come out of hiding,” said André Chaves, the platform’s new senior vice president.

“We’ve stayed under the radar in recent years, but now it’s time to make some noise. We started ramping up our communication from last year’s Black Friday onwards, participated in Salvador’s Carnival, and have interesting plans for the second half of the year,” Mr. Chaves said in his first interview since taking over his new role within Mercado Libre in March. Having joined the company in 2020, Mr. Chaves previously handled investor relations for the group.

The diagnosis that the bank is entering a new phase is based primarily on two points, according to Mr. Chaves: the product range is structured, and the environment for credit is becoming more favorable. Mercado Pago officially positioned itself as a digital bank in 2022, during a time when new credit concessions were more restricted. Since the second half of last year, however, the bank has been accelerating lending.

Mercado Pago does not disclose breakdown data for Brazil, but the country is the most significant within its total balance. At the end of the first quarter, the loan portfolio totaled $4.448 billion, a 46% increase over the same period in 2023. This growth was driven by credit cards, with a portfolio of $1.538 billion, up 132% year-on-year.

“The main product people demand from a financial institution is credit. It’s no use attracting customers only to disappoint them later. Now, we’re more optimistic about credit, and it makes sense to invest more in communication,” Mr. Chaves said. According to him, Mercado Pago decided to ramp up its credit offerings before its competitors because it is confident in its ability to “separate the wheat from the chaff.” “We have a unique data platform. If you buy on the online marketplace, we collect over 2,000 variables from that transaction. Based on this, we realized we could create a unique credit business.”

The idea, he added, is to continue issuing cards at a strong pace throughout 2024 and expand the overall portfolio.

Mercado Pago’s delinquency rate was 17.9% at the end of March, down from 18.7% in the previous quarter and 28.2% in the same period last year. However, the short-term delinquency indicator has been rising, reaching 9.3%, up from 8.2% in the fourth quarter and 7.8% in the first quarter of 2023.

Mr. Chaves attributed the quarterly increase in delinquencies to the seasonality of the start of the year and said the figures were within expectations. Regarding the trend for the year, he noted that as the credit market improves, the institution will naturally start lending to riskier groups. “With that comes greater monetization. Delinquency can’t be looked at in isolation.”

Without providing details, Mr. Chaves also mentioned that the institution is preparing a “broader package of benefits” for its credit card, to be used both within and outside the ecosystem. “It won’t be a typical points program,” he said.

Currently, the bank’s focus is not on the number of clients but on engagement, according to Mr. Chaves. Besides credit, another key factor for deepening customer relationships is the investment area. In March, Mercado Pago announced that it would offer a 105% CDI (Brazil’s interbank benchmark rate) return for users depositing or receiving at least R$1,000 per month in the bank. The institution, which went against market trends with this announcement, maintains that the measure is structural and sustainable.

“It’s not a promotional thing. A large part of the financial industry relies on user money to balance the books. We’re creating a business model that doesn’t depend on that. It’s an important differentiator,” Mr. Chaves said. “We are not ready to unveil our numbers yet, but the results of this measure have been above expectations.”

In the investment sector, Mercado Pago offers certificates of bank deposit (CDBs), three funds in partnership with Nikos—recently launched by the founders of Órama—and cryptocurrency trading. The plan is to soon launch LCIs (Real Estate Credit Bills) and LCAs (Agricultural Credit Bills), also through partnerships. With this, the institution believes it completes an appropriate offering for its client niche. The goal, according to Mr. Chaves, is to keep the offering simple. There is also an insurance area, provided through partners.

Currently, about 40% of Mercado Libre’s revenue comes from Mercado Pago. Specifically looking at the digital bank, Brazil represents more than half of the total revenue. In the first quarter, the bank generated $1.008 billion in revenue in Brazil, out of a total of $1.837 billion. After Brazil, the most significant markets are Argentina and Mexico.

In May, the institution applied for a banking license in Mexico. Due to the high rate of unbanked individuals and cash usage, the country is seen as an important growth avenue. Mexico has also been highlighted by Nubank as a priority market. Mr. Chaves said that the main competitor there is cash, suggesting there is ample room for growth for both institutions. “There’s so much open sea that I think both can grow at very accelerated rates without stepping on each other’s toes. That said, I obviously want to be the one that grows the most,” he added. According to him, the starting point in Mexico is solid due to the company’s e-commerce experience. “We can see the person far beyond the banking transaction.”

In terms of payments, where Mercado Pago began, the bank emphasized that it is increasingly able to diversify its base. Traditionally focused on micro-entrepreneurs, the company said it has been climbing the pyramid in the offline world, while in e-commerce it can serve large retailers.

Asked about the potential impacts of Cielo’s decision to delist its card acquirer, Mr. Chaves noted only that the option to offer an integrated payment and other services solution has proven to be a trend in the industry.

Regarding the possible effects of the situation on results in Rio Grande do Sul, devasted by floods, Mr. Chaves said the exposure to the state is similar to the region’s representation in GDP and, therefore, any impact would be small. “The priority is to support customers and employees.”

*Por Mariana Ribeiro, Fernando Torres, Talita Moreira — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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BTG buys stake in Pershing Square; Brazilian appointed to board

Bank is among investors who bought 10% of Bill Ackman’s firm, which, ahead of an IPO, is welcoming outside partners for the first time

06/04/2024

Bill Ackman — Foto: Jeenah Moon/Bloomberg

Bill Ackman — Foto: Jeenah Moon/Bloomberg

Brazilian investment bank BTG Pactual is part of a consortium that acquired a 10% stake in Bill Ackman’s Pershing Square management company, according to a document released by the firm. Other investors in the group include Arch Capital, Consulta Limited, Iconiq Investment Management, Menora Mivtachim Holdings, several family offices, and additional investors.

“We are delighted to invite a group of world-class, long-term partners as investors in our business, which has been entirely owned by Pershing Square employees since our inception more than 20 years ago,” said Mr. Ackman in a statement. While individual stakes of the investors were not specified, the total 10% share was purchased for $1.05 billion.

Mr. Ackman stated the funds will be used to “help accelerate our growth in assets under management” across Pershing Square’s existing and new investment strategies. He reaffirmed the company’s commitment to “generating high, long-term returns for our investors.”

Last week’s announcement of the sale of a 10% stake in Pershing Square hinted at preparations for a possible initial public offering (IPO) next year.

While the latest statement from the management company did not confirm these IPO plans, it detailed significant organizational changes, including the appointment of Ben Hakim as the director of Pershing Square Capital Management (PSCM). This restructuring is designed to ensure that Bill Ackman retains voting power, safeguarding it against potential shareholder dilution. Mr. Ackman, a high-profile activist investor renowned for his strategic positions against companies like Herbalife and bond insurer MBIA, has a robust presence in both the boardroom and on social media.

The restructuring also establishes a new board of directors. It will comprise five independent members—Kerry Murphy Healey, Orion Hindawi, Nicholas Lamotte, Christine Todd, and Brazilian native Marco Kheirallah—alongside members linked to Mr. Ackman’s management team: Ryan Israel, Nick Botta, and Halit Coussin.

Mr. Kheirallah, Daniel Goldberg’s partner at Lumina Capital and former BTG Pactual executive, joins representatives from the newly invested management companies as the first outside partners in the firm’s history. Previously, Pershing Square relied solely on executive partners since its founding.

This collaboration marks a significant valuation of Pershing Square at just under $10 billion, aligning it with major industry players like TPG and CVC Capital in terms of market value, although its revenue scales are somewhat more modest, according to Financial Times.

For context, Pershing’s main fund, which manages $15 billion, generated $155 million in management fees and $312 million in performance fees last year. In comparison, TPG, which went public two years ago with a valuation of around $10 billion, reported over $600 million in management fees in the year preceding its IPO.

Pershing Square is poised to list shares in the U.S. next year.

The sale of the stake in Pershing Square was coordinated by Bank of America, Citigroup, Evolve, Jefferies, and UBS. BTG declined to comment.

*Por Álvaro Campos, Maria Luíza Filgueiras — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Robust jobs market exerts broad pressure on inflation

Itaú analysis reveals that low unemployment impacts more than just labor-intensive sectors

06/04/2024

Julia Gottlieb — Foto: Divulgação

Julia Gottlieb — Foto: Divulgação

Brazil’s robust jobs market has driven consumer prices measured by IPCA, affecting the entire basket of goods and services, not just the labor-intensive ones. This finding comes from a study by Itaú Unibanco, indicating that wages will continue to influence prices in the coming quarters.

Analysts typically observe the behavior of the services sector to gauge how the labor market and wages impact inflation. They particularly focus on two core measures established by the Central Bank: labor-intensive services (including activities like medical and dental services, beauty services, and domestic workers) and services sensitive to idle capacity.

However, these measures account for only 7% and 10% of the IPCA basket, respectively, representing only 17% and 28% within the services category. IPCA, the Portuguese acronym for Extended Consumer Price Index, is Brazil’s official inflation index.

“The issue with these metrics is that, since they are defined by exclusion, you end up looking at a group with a small weight within the IPCA,” said Julia Gottlieb, an economist at Itaú Unibanco. “We aimed to understand, more broadly, all the pressures coming from the labor market.”

To achieve this, Itaú developed a labor intensity indicator for every 377 items in the IPCA, using data from the statistics agency IBGE. This indicator considers companies’ wages and social contributions spending, the product’s weight within its sector, and production costs. The IPCA was then reweighted based on each product’s labor intensity.

As expected, this exercise increases the weight of services within the new indicator—to 53.4% from 35.5%. Personal expenses (20.8% from 10.1%), and education (14.9% from 5.9%) stand out among the categories with the most significant increases. Conversely, food and beverages (11.6% from 21%), lodging (10.1% from 15.4%), and gasoline (0.4% from 5%) see the most notable declines.

The reweighted index indicates that labor-intensive products are experiencing more intense price adjustments than the overall IPCA. While the IPCA recorded a 3.7% rise in the 12 months ending in April, the reweighted index increased by 5% over the same period.

Ms. Gottlieb said that the alternative index has been above the IPCA since the second half of 2022, coinciding with the unemployment rate dropping below 9%. This is the level Itaú considers the equilibrium unemployment rate, beyond which the labor market starts exerting upward pressure on inflation.

As measured by the Continuous National Household Sample Survey (Pnad Contínua), the unemployment rate fell to 7.5% in the three months ending in April, down from 7.9% in the previous three months. This result was below the median analyst expectation of 7.7%. Meanwhile, the average real income grew by 0.8% in the quarter ending in April and 4.7% compared to the same period in 2023.

The influence of the labor market on inflation dynamics is a recurring subject in speeches by Central Bank officials.

The minutes from the latest Monetary Policy Committee (COPOM) meeting show that officials discussed the issue but did not reach a consensus on the extent to which wage increases—stemming not only from productivity gains but also the improved bargaining power of workers in a stronger job market—are affecting prices.

“We tried to dissect each labor component in each service category to see if there is a correlation between wages and inflation. There does seem to be some pressure, but it’s very embryonic and not something we can clearly demonstrate,” said Central Bank President Roberto Campos Neto at an event organized by Grupo Lide on the 27th.

Looking ahead, Itaú expects the labor market to continue pressuring prices. Running a model based on the reweighted index and projections for inflation inertia and unemployment rate shows that the indicator remains above the services IPCA in the coming quarters, ending the year with a 12-month increase of 6.03%.

“We don’t expect the unemployment rate to rise significantly—it should remain below 9% this year—so the indicator will also stay pressured,” Ms. Gottlieb said. “It’s also worth noting that it hasn’t worsened. Marginally, it even shows some slight moderation, partly helped by the behavior of inertia. However, we assess that this exercise further supports the Central Bank’s cautious stance on monetary policy.”

*Por Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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