Brazil and Paraguay reach agreement on Itaipu tariffs

A 15.4% increase applies for the three-year period between 2024 and 2026; Paraguay defended higher price

05/08/2024

Alexandre Silveira — Foto: Cristiano Mariz/Agência O Globo

Alexandre Silveira — Foto: Cristiano Mariz/Agência O Globo

The governments of Brazil and Paraguay signed Tuesday in Asunción an agreement promising to resolve disputes over the Itaipu Binational Hydroelectric Power Plant, including a mechanism to maintain the Brazilian energy tariff. As reported by Valor, the energy tariff at the plant will increase by 15.4%, from the current $16.71/kW to $19.28/kW.

Despite this increase, which Paraguay requested, there will be no impact on the price of electricity in Brazil. The Brazilian half of the plant will contribute $900 million to offset the increase, amounting to about $300 million a year, which will be deducted from the investment plan. This new price will be valid for the three years from 2024 to 2026.

Brokered personally by Minister of Mines and Energy Alexandre Silveira, the agreement only partially meets Paraguay’s initial request for a tariff of just over $22/kW. Brazil has also included “structural compensations” in the deal. One such compensation is setting a deadline of December 31, 2024, for concluding negotiations on the so-called “Annex C” of the Itaipu agreement, which outlines the financial and structural terms for the construction and operation of the plant. Post-2026, the tariff is expected to drop to between $10/kW and $12/kW, excluding non-operational costs.

By finalizing the tariff agreement and progressing to the negotiation of Annex C, the Brazilian government hopes to end the recurring annual tensions with Paraguay over tariff settings. This situation mirrors a decade-long dispute between the governments of Paraguay and Argentina over the economic terms of Yacyretá, another binational power plant.

Starting in 2027, only the operational costs of the hydroelectric plant will be considered in calculating Itaipu’s energy tariffs, a change anticipated since last year when the final installment of the loan for the plant’s construction was paid off, 50 years after the signing of the international treaty. “The agreement puts an end to the complicated negotiations that occur every time a tariff change is discussed,” a participant in the negotiations told Valor.

Additionally, Brazil is advancing the sale of energy from other Paraguayan plants like Yacyretá (3,200 MW) and Acaraí (200 MW). These operations are expected to increase competition in the Brazilian energy market, potentially lowering energy prices for consumers. Brazil plans to use power purchase mechanisms similar to those already employed with Argentina and Uruguay.

Following this agreement, Brazil will no longer be obligated to buy surplus energy produced on the Paraguayan side at a fixed rate, which has historically driven up costs. Once this obligation ends, Brazil can continue to purchase the unused energy from Paraguay but at market prices, potentially leading to cost savings.

Brazil and Paraguay each have rights to half of the energy generated at Itaipu, which has an installed capacity of 14,000 MW. From this production, the plant supplies only 8.7% of Brazilian energy demand but meets a significant 86.4% of Paraguayan consumption.

The Brazilian government’s initial stance was to keep the price unchanged; however, Paraguay’s reliance on the plant’s revenue for economic stability pushed the negotiations forward. The resolution to this stalemate involved utilizing the $300 million annual surplus injected by Brazil to offset the tariff adjustment. This decision reflects the government’s strategy to invest in maintaining moderate tariff levels.

In Paraguay and Brazil, funds from Itaipu have been diverted to finance infrastructure projects unrelated to energy generation, such as highways, bridges, and airports, particularly in Paraná. This redirection of funds has drawn criticism from experts who argue that, rather than lowering energy costs for consumers, the high cost of energy has been maintained to fund these other projects.

With the new agreement, the Brazilian government expects to deliver electricity from Itaipu to consumers at a rate of R$205 per megawatt-hour (MWh), which is below the current average contract price of R$300/MWh charged by distributors.

*Por Murillo Camarotto, Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Decoupling social security faces resistance, analysts warn

Economists support Minister Tebet’s plans to separate social security from health and education spending floors

05/07/2024

Carlos Kawall — Foto: Silvia Zamboni/Valor

Carlos Kawall — Foto: Silvia Zamboni/Valor

Decoupling the increase in the minimum wage from social security and welfare benefits, as well as unlinking the spending floors for health and education from revenues, are considered priority measures to ensure the sustainability of public debt. While these measures are deemed essential to prevent the economy from being overwhelmed by revenue demands, their political feasibility remains uncertain.

In a recent interview with Valor, Brazil’s minister of Planning and Financial Budgeting Simone Tebet expressed her support for separating Social Security from the minimum wage, which is currently adjusted in real terms. Last week, Finance Minister Fernando Haddad highlighted an article on the social network X (formerly Twitter), written by economist Bráulio Borges, which advocates for detaching the social security floor from the minimum wage as a strategy to reduce federal expenditures. This article was published by FGV Ibre’s Fiscal Policy Observatory.

Carlos Kawall, founding partner of Oriz Partners, believes that Minister Tebet’s comments indicate that mere spending reviews are insufficient for fiscal consolidation, suggesting that deeper spending cuts are necessary. He noted, “We have created overly flexible rules that accommodate increased spending in a manner incompatible with economic growth and public debt sustainability. We cannot generate the necessary revenue to support this spending without stifling the economy.”

Social security expenses currently represent more than 40% of the government’s total revenue and are its most significant expenditure, according to Silvio Campos Neto, economist and partner at Tendências. He referenced a study from the Ministry of Finance indicating that for every R$1 increase in the minimum wage, there is a nearly R$400 million rise in spending on social security and benefits, such as the Continuous Cash Benefit (BPC)—a welfare program for the elderly or disabled who lack sufficient income—and the salary allowance, which annually provides additional financial relief to low-income workers. “Considering the forecasted real adjustments from 2023 to 2026, we’re looking at an accumulated increase of around R$150 billion, driven by the policy of raising the minimum wage and linking it to benefits,” he explained.

In the article endorsed by Minister Haddad, Mr. Borges contends that a key strategy to curb social security spending would be to detach the pension floor and other welfare benefits, like the BPC, from the national minimum wage, recommending that pensions be adjusted for inflation. Mr. Borges also suggests that criteria such as the minimum retirement age and minimum contribution time should not be static but should automatically adjust according to changes in life expectancy as calculated by the IBGE.

Mr. Kawall believes adjusting pensions and welfare benefits for inflation could be a viable middle ground in the debate on decoupling from the minimum wage, allowing greater flexibility in spending and making any real adjustments discretionary. He also emphasizes the need for parametric reforms in pension grants, noting, “This would be a relatively simpler reform, as the fundamental change of linking it to age was already enacted in 2019.”

Mr. Kawall acknowledges that while the recalibration of retirement ages and contribution times is necessary over time, its effects will not be felt for 10 to 15 years. “In the short term, the real increase in the minimum wage expands the base of the pyramid, which will become unsustainable over time. There won’t be time for the structural changes of recalibration to take effect. In the short term, breaking the link with the minimum wage is more critical,” he explains.

Mr. Kawall also highlights an important aspect of Ms. Tebet’s statements regarding the minimum spending thresholds for health and education. These thresholds lead to a dynamic of real growth in spending in these sectors, which conflicts with fiscal sustainability in the medium and long term. The connection between federal revenues and health and education spending stems from the so-called Transition Amendment (EC 126/2022)— a constitutional amendment in Brazil that was enacted to adjust fiscal and budgetary rules. By repealing the spending ceiling and other expense correction mechanisms, it reinstated previous rules that link health spending to the growth of net current revenue (RCL) and education spending to net tax revenue.

“In education, the minister initiated an innovative discussion about including Fundeb in the education spending,” Mr. Kawall noted. Fundeb is a funding mechanism designed to support public education in Brazil. He also notes that the constitutional minimums for health and education impose constraints not only on the federal government but also on states and municipalities.

Felipe Salto, chief economist at Warren Investimentos, expresses concern that Minister Tebet does not appear interested in making significant changes to health spending. “She doesn’t seem inclined to alter anything. And there’s an issue with the constitutional floor for health [spending], which is already compressing discretionary spending,” he pointed out. “Health spending is high and inefficient. It is not assessed, and there is constant pressure for more spending without proper assessment.”

Coupling social security benefits to the minimum wage or tying health and education spending floors to revenue metrics has placed significant strain on the budget, according to Fábio Serrano, an economist at BTG Pactual. However, he notes, “The issue is very politically sensitive, even though it makes sense from an economic perspective.” He believes there is insufficient political support for these changes.

Mr. Campos Neto, from Tendências, shares a similar viewpoint, noting the political challenges such proposals face. “Even though the proposal today comes from within the government, from Planning, and likely has the support of the Ministry of Finance, the political opposition it faces will be substantial,” he stated.

*Por Marta Watanabe, Marsílea Gombata, Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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WEG to produce wind turbines in the United States

Company’s decision aims to take advantage of the U.S. green package, which guarantees investments in the climate agenda

05/07/2024

João Gualberto — Foto: Rogerio Vieira/Valor

João Gualberto — Foto: Rogerio Vieira/Valor

WEG has announced it will produce wind turbines for onshore generation to serve the American market at its motor and high-voltage generator factory in Minneapolis.

João Paulo Gualberto da Silva, managing director at WEG Energia, says that the decision approved by the board took into account the benefits offered by the Inflation Reduction Act (IRA), Joe Biden’s green package that guarantees investments in the climate agenda aimed at attracting resources for clean energy.

“The IRA provides for around $370 billion in incentives for the energy transition over 10 years and credits for those who manufacture components locally, such as the hub [the part where the blades fit] and the nacelle [the structure that houses the wind turbine’s components], with a federal income tax rebate,” said Mr. Gualberto.

The executive says that the companies do not receive any incentives to manufacture the equipment, but customers who buy from companies that manufacture nacelles and hubs in the United States receive an additional $2.5 for every megawatt-hour produced.

“So we’re going to produce the nacelle and hub in Minneapolis, but we don’t yet have suppliers for the blades and towers,” he said. “We’re going to start developing the supply chain this month.”

The idea is to offer a 7 MW model, the largest ever produced in the Americas and developed in partnership with Petrobras. WEG’s intention is to remove the dependency of Brazil’s wind energy business, which has experienced several bumps in the road over the last 12 years, and to develop a more stable market that is growing by an average of 14 GW per year. The company also manufactures in India. The company’s plan is to obtain around 1 GW of market share, following its strategic plan to install around 3 GW worldwide.

Exploring new geographies is one of the manufacturer’s strategies, since the Brazilian market is currently stagnating and is experiencing a process of deindustrialization of the supply chain. For this reason, the company opted for a temporary shutdown of its wind turbine line in Jaraguá do Sul (state of Santa Catarina).

The situation is different around the world. The global wind industry grew by 50% in 2023 and reached 117 GW in new capacity, according to data from the Global Wind Energy Council (GWEC).

The plant in Minneapolis has the modular capacity and operational flexibility to handle the new product. According to WEG, the plant will be able to start supplying the first equipment from 2026. In the meantime, the company is starting to develop its local supply chain.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Floods cut off southern Brazil state, kill at least 90

Rio Grande do Sul state counts 132 people missing after heavy rains that hit 385 of the 497 municipalities since last week

05/07/2024

Floods impacted Porto Alegre, the capital city of Rio Grande do Sul — Foto: Gustavo Mansur/Palácio Piratini

Floods impacted Porto Alegre, the capital city of Rio Grande do Sul — Foto: Gustavo Mansur/Palácio Piratini

The government of Rio Grande do Sul confirmed that the heavy rains that hit the state over the last week killed at least 90 people. The death toll could rise even further in the coming days, as 132 people are missing and 361 injured. There are also four deaths under investigation.

This is among the worst disasters in more than 30 years in Brazil considering deaths from intense rain. According to the Digital Atlas of Disasters in Brazil, produced by the Ministry of Regional Development with data from 1991 to 2022, the disaster in Rio Grande do Sul was only surpassed by the storms of May 2022 that killed 117 people in Greater Recife (Pernambuco).

The Civil Defense of Rio Grande do Sul informed that 48,147 people lost their homes and have been relocated to shelters provided by the public authorities, and 155,741 have been displaced. Of the total of 497 municipalities in the state, 388 were affected by the heavy rains in the region. The rains that devastated cities in Rio Grande do Sul reached Santa Catarina and Paraná, causing another three deaths.

The extreme weather also damaged agriculture in the state. A survey by the National Confederation of Municipalities (CNM) shows that agriculture is the sector of the economy most affected by the disaster, with financial damages amounting to R$506.8 million, according to data collected until Monday (6) afternoon.

According to the CNM, there are so far R$967.2 million in total losses in Rio Grande do Sul also considering other economic segments and the public sector. However, the number could be much higher. The amount includes just 25 municipalities that reported to the CNM.

According to J.P. Morgan, although the “shocking floods” in Rio Grande do Sul bring a huge humanitarian toll, the impact on the Brazilian GDP “tends to be modest.” “More impacting could be the political and medium-term effect on fiscal accounts, depending on how the government and the Parliament decide to deal with the region’s needs,” said economist Vinicius Moreira and chief economist Cassiana Fernandez.

They point out that Rio Grande do Sul currently accounts for some 8.6% of the Extended Consumer Price Index (IPCA) and 6.5% of Brazil’s GDP in 2021 (the latest official data available).

Rio Grande do Sul also faces a strong impact on infrastructure due to the flooding. According to a report released on Monday (6) evening by the State Logistics and Transport Department, 26% of customers served by water utility Corsan remain without water supply, which means a total of 750,000 customers.

RGE Sul, a power distribution company that caters to 381 cities, including Novo Hamburgo, Canoas, and Santa Maria, has 270,000 points without energy, representing 8.8% of customers. CEEE Equatorial did not provide an update on the numbers but, according to the report released on Monday morning, 9.5% of customers had no power.

As for telecommunications, Telecom Italia’s TIM said 38 cities have no voice and internet services. Telefónica’s Vivo reported that 28 municipalities in its operations base are without service, and América Móvil’s Claro, 19 municipalities.

The report also informs that 789 schools in 216 municipalities have been affected—either due to damages, or because they are serving as shelters, or have experienced access problems, among other reasons. In total, 273,000 students have been impacted.

Return to classes has occurred gradually, but in the capital Porto Alegre there is still no date for resumption.

In the capital of Rio Grande do Sul, residents of two neighborhoods in the central area had to leave their homes and were advised to seek shelter in the face of imminent new floods after the water pumping system was shut down on Monday (6).

According to city hall, the local electricity provider halted the power supply to one of the pump houses for safety reasons. The system broke on Friday (3), causing all the water that had been dredged to flood the downtown area again.

(With news agencies)

Source: Valor International

https://valorinternational.globo.com/
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Selective tax revenue capped at R$50bn per year

The tax is being created to have the same revenue as the old IPI

05/03/2024

Bernard Appy — Foto: Cristiano Mariz/Agência O Globo

Bernard Appy — Foto: Cristiano Mariz/Agência O Globo

The revenue from the Selective Tax (IS), which will be created with the consumption tax reform, will not exceed R$50 billion per year, according to estimates made by the Ministry of Finance. The tax is being designed to have the same collection as the current Tax on Industrialized Products (IPI), Bernard Appy, Brazil’s special secretary for tax reform, told Valor.

According to the secretary, the federal government collected around R$60 billion last year from the Tax on Industrialized Products. Under the new tax regime, the aim is to maintain the same revenue at most. He explained that around R$10 billion will be collected from the tax that will be levied on products that compete with those produced in the Manaus Free Trade Zone, a tax that was maintained by the reform to keep the region’s competitive edge. The rest (up to R$50 billion) will be collected from the Selective Tax.

Mr. Appy stressed that the Selective Tax will not be used by the federal government to collect more tax, which is a concern that has been raised by experts. “It’s not in [the federal government’s] interest to collect more with the Selective Tax than it does with the IPI. The Selective Tax has no tax collection objective. It is regulatory and will be used for regulatory purposes,” said the secretary. “The way it is today, it will raise less than R$50 billion,” he added.

He said that if the federal government wanted to collect more from the Selective Tax, it would have to share the revenue with states and municipalities, which would be a self-inflicted setback. “For us, it’s not in our interest for it [the Selective System] to raise more than R$50 billion because if it raises more than R$50 billion, we’d have to reduce the CBS [federal VAT] rate proportionally, and we’d have to send 60% of the revenue to the states and municipalities. In other words, for every real we collect from the Selective Tax over R$50 billion, we lose R$0.60 in net revenue for the federal government, so we’re not going to do that. We don’t usually shoot ourselves in the foot,” he explained.

The secretary also said that the decision to leave the definition of Selective Tax rates to ordinary law was so that his department would have more time to look into issues that are changing, such as taxation on alcoholic beverages, cigarettes, and polluting vehicles. The Selective Tax will apply to these three items, as well as to boats and aircraft, soft drinks, and mineral goods (iron, oil, and natural gas).

Mr. Appy thinks it is unlikely that the bill with the rates will be sent to Congress this year because it is not the priority now, and there is time to discuss it later since the tax will start to be levied as of 2027. “It is not something that requires a mega system to be implemented, so there would be time to do it.”

However, Mr. Appy said that if there is a political decision by the government or a desire by Congress, there would be no impediment to sending the bill this year.

The Selective Tax will be created to replace the Tax on Industrialized Products and will tax goods and services that are harmful to health or the environment. According to the supplementary bill, the tax will be levied only once, and credits may not be used for it.

*Por Jéssica Sant’Ana, Lu Aiko Otta — Brasília

Source: Valor International

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Pension system has less than two contributors per beneficiary

Study projects that, if current conditions are maintained, there will be more beneficiaries than contributors as of 2051

05/03/2024

Leonardo Rolim — Foto: Edu Andrade/Ascom/ME

Leonardo Rolim — Foto: Edu Andrade/Ascom/ME

Brazil has fewer than two contributors for each Social Security beneficiary, a ratio expected to deteriorate in the coming decades. By 2051, there will be more insured individuals than those contributing to the pension system, according to a study published this week by the Institute for Applied Economic Research (IPEA).

The estimate considers all pension schemes—for public servants, military personnel, and private-sector workers—as well as the so-called BPC (Continuous Cash Benefit, a pension for poor elders and disabled people). Still, it does not consider other benefits such as maternity aid and the former sickness benefit, now called temporary incapacity aid.

The study shows that the ratio of contributors to beneficiaries fell to 1.97 in 2022, the most recent data available, from 2.26 in 2012. Projections indicate that this ratio would drop to 0.99 by 2051 and 0.86 by 2060, the last projected year. In other words, if conditions remain unchanged, there will be more beneficiaries than contributors to Social Security from 2051 onwards.

In absolute numbers, it is estimated that the total number of beneficiaries from retirement, survivor’s pensions, and BPC would grow from 31.4 million in 2022 to 61.2 million in 2051, and would reach 66.4 million by 2060, more than doubling over nearly four decades. Meanwhile, the projected number of Social Security contributors would decrease from 61.8 million (2022) to 60.6 million in 2051 and 57.2 million in 2060. That is, the total number of contributors is expected to decline over time, while the number of insured more than doubles.

Researchers Rogério Nagamine and Graziela Ansiliero, authors of the study, note that the worsening ratio of contributors to beneficiaries is due to the natural maturation of the pension systems and the rapid and intense aging of the population. Another factor contributing to the deterioration of this indicator is the increase in the number of non-contributors, due to informal employment, unemployment, and inactivity.

More than half of the population (55.5%) of working age (men from 20 to 64 years old and women from 20 to 61 years old) were not contributing to Social Security in 2022, according to the researchers. In absolute terms, out of a total of 129.5 million people of working age, only 58.9 million were contributors (45.5% of the total) and 70.7 million were non-contributors (55.5% of the total).

“With these demographic trends, it is expected that in the coming decades, the increase in the total number of beneficiaries will not only continue at a pace superior to that of the total number of contributors but could also lead to a situation of stagnation or even contraction of the latter group given the expected decrease in the population of working age,” the researchers wrote.

The study was based on data from the Continuous National Household Sample Survey (PNAD), population projections made by the Brazilian statistics agency IBGE in 2018 (complete data from the 2022 Demographic Census is still unavailable), and administrative records from pension systems. “The trend of worsening in the ratio between contributors and beneficiaries is the main diagnosis and is expected to persist even with a new population projection, the results of which could further worsen the indicator,” the researchers said.

Social Security experts agree that the ratio of contributors to beneficiaries has been declining over the years due to the aging of the Brazilian population and lower fertility rates. If measures are not adopted, the situation could deteriorate further in the view of experts consulted by Valor, especially with the increase in the number of temporary workers with fixed contracts or from online platforms, what has been termed as gig workers.

In the study, Mr. Nagamine and Ms. Ansiliero also calculate an estimate of the rate needed to fully fund Social Security, considering the contributions made by workers and employers. This rate would be 32.2% in 2022 and would reach 73.6% by 2060.

Luís Eduardo Afonso, a specialist in Social Security and associate professor at the School of Economics and Administration at the University of São Paulo (FEA/USP), said that the ratio between beneficiaries and contributors is what makes the rate needed to fund Social Security estimated at over 70% by 2060. In his assessment, one solution to avoid this would be to increase the minimum age and institute an automatic hike mechanism for this age as life expectancy increases. “There are no silver bullets,” he said.

Mr. Afonso also recommends that the government adopt measures to encourage formalization to increase the number of contributors, with an evaluation of the results of these policies, unlike what happens today with the Individual Microentrepreneur (MEI)—a program for certain professionals who work alone and wish to have their business taxpayer’s number, which grants them some rights, such as social security.

Former Social Security Secretary Leonardo Rolim advocates the implementation of a capitalization regime for private sector workers, to ensure the system’s sustainability in the long term. “The most sustainable systems in the world have a capitalization layer,” he said, recalling that the original 2019 Social Security reform proposal included this provision but the measure was eventually removed from the bill.

To increase the fertility rate, Mr. Rolim proposes that the government promote a policy in the labor market that provides greater protection for women, such as extending maternity pay for longer and offering a larger pension benefit for women with more than one child. He said that it is unlikely that women will return to having six or seven children, but measures like these could contribute to improving the indicator.

All the projections made by the study serve as a warning of the need for measures to ensure the long-term adequate financing of social security. “Currently, the political debate seems to be focused on short-term agendas, with no concern for financing in the medium and long terms,” the researchers wrote.

*Por Jéssica Sant’Ana, Edna Simão — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Floods kill 31 in Brazil’s southern state

Hydropower dam collapses; 74 people are missing in the Rio Grande do Sul state’s worst disaster ever

05/03/2024

A bridge in Santa Maria was destroyed by floodwaters; heavy rains in the Rio Grande do Sul state this week forced 10,242 to leave their homes and 4,645 to be relocated to shelters — Foto: Mauricio Tonetto/Secom

A bridge in Santa Maria was destroyed by floodwaters; heavy rains in the Rio Grande do Sul state this week forced 10,242 to leave their homes and 4,645 to be relocated to shelters — Foto: Mauricio Tonetto/Secom

Heavy rains in Rio Grande do Sul have killed at least 31 people and left 74 missing, in what is already considered the worst disaster in the state’s history. On Thursday (2), Governor Eduardo Leite confirmed the collapse of a dam linked to the 14 de Julho hydropower plant, on the Antas and Taquari rivers. Another 36 people were injured in the 154 municipalities hit by the extreme weather. In total, 71,300 people were affected by the storms, which forced 10,242 to leave their homes and 4,645 to be relocated to shelters.

The hydropower dam is located in one of the areas most affected by the heavy rains that hit the state in recent days, between the municipalities of Cotiporã and Bento Gonçalves. It was built to generate electricity to supply the region. The governor of Rio Grande do Sul admitted that there is a relevant risk of other structures collapsing due to the force of the water, especially in the metropolitan region of Serra Gaúcha. The state government decreed a state of emergency.

“There will be many deaths, unfortunately, and 204 municipalities are at greater hydrological risk. This is already and will be the worst disaster in the state’s history. The numbers are preliminary and incorrect given what is happening right now. There is a risk of dams bursting in the Serra Gaúcha region,” he said.

Given the scenario of crisis, the governor said the priority is to rescue stranded people. “There are patients who need hemodialysis and are in stranded municipalities. We have to bring drinking water to these populations. There are pregnant women that need to be relocated and corpses that need to be taken for burial,” Mr. Leite added.

The government also drew attention to weather forecasts related to the Guaíba River, which has risen above the alert level in the Porto Alegre area. “We estimate that the Guaíba River could reach 5 meters in height, a level greater than that recorded in the last biggest flood, in 1941.”

The governor held a press conference to address the heavy rains alongside President Lula, who visited the state on Thursday (2) and flew over affected areas. “A good meeting does better than a thousand phone calls for this alignment,” the governor said, thanking the president.

President Lula visited the city of Santa Maria with a delegation of ministers and secretaries. The municipality is one of the most affected by the storms and is located almost 300 kilometers from the capital Porto Alegre. On the site, President Lula promised that the federal government would spare no effort to assist the state.

“I made a point of bringing ministers here because I want each of them to pledge, not only before me but also before the press, of what we are committing to do in Santa Maria to mitigate the suffering that this extreme event is causing to the state”, the president added. However, the federal government has not yet detailed the funds to be transferred to the state of Rio Grande do Sul and its municipalities.

As a result of the president’s visit, Chief of Staff Rui Costa created a “situation room” to monitor events in the state. According to him, the room will hold daily meetings to receive demands from state authorities, including on Saturdays and Sundays.

“I ask that everyone remain on duty to provide an immediate response [to the state]. For example, in the healthcare area, it is crucial that we organize to contact municipal health secretaries because, most likely, these flooded cities will lose their stock of medicines and the health situation tends to aggravate,” Mr. Costa said.

The minister of the Secretariat of Social Communication (SECOM), Paulo Pimenta, defended that a new delegation return to Rio Grande do Sul in the coming days. “Maybe we will have to think about visiting the state again next week. There is no road to get anywhere, there are 141 points of closure,” said the minister, who is a licensed member of the Parliament for the Workers’ Party (PT) of Rio Grande do Sul. “We can’t get grocery supplies, fuel supplies. In healthcare, [the situation] is very serious as ambulances have no access. The situation is expected to aggravate in the next few hours,” he said.

Environment Minister Marina Silva, who is a member of the presidential delegation that traveled to Rio Grande do Sul, defended a fiscal exceptionalism similar to that adopted during the COVID-19 pandemic to allow the administrations to have funds available to invest in infrastructure.

“We will have to adopt exceptionalism so that, throughout the year, we can carry out interventions, including relocating people, making changes to the city’s master plan, or changing the entire infrastructure bidding process. Otherwise, we will keep building bridges that will collapse,” said the minister, according to Agência Brasil.

Citing data from the National Center for Monitoring and Alerts of Natural Hazards (CEMADEN), the minister emphasized that 1,038 municipalities in Brazil are at risk of extreme weather events, such as excessive rain or severe droughts, and this number should rise to more than 1,900 cities due to worsening climate change, also according to Agência Brasil.

(With Agência Brasil)

*Por Renan Truffi, Mariana Assis — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Debt-burdened companies reengage in negotiations with crisis managers

With restricted credit at the beginning of 2023, groups raised R$30bn from investment funds

05/02/2024

Daniel Wainstein — Foto: Gabriel Reis/Valor

Daniel Wainstein — Foto: Gabriel Reis/Valor

Companies that resorted to loans at higher rates during the credit crisis, especially from asset managers focused on stressed assets, known as “special sits,” are back at the table to refinance their debts. A survey by Seneca Evercore shows that these companies raised around R$30 billion in the first half of 2023—60% of the funds went to publicly-traded companies and another 40% to private companies.

With the credit tap turned off at the beginning of 2023 due to the Americanas accounting fraud, companies had to take on short-term debt to gain momentum at that time. “The problem is that most of these debts have started to fall due now, and new renegotiations are taking place,” said Daniel Wainstein, partner and CEO of Seneca, who has brokered for several clients in this situation.

Some of these companies have started taking out expensive credit again, but not at the same rate as in the first half of last year. Mr. Wainstein said that in the whole of 2023, the companies raised around R$40 billion in total with special sit managers. “The volume was higher in the first half of the year because the credit crisis was at its peak. The scenario began to change in August last year, with a certain return to normality.”

For the executive, the search for expensive credit this semester should be lower since the scenario for financing on the market is currently different compared to the same period last year. “If I had to make an estimate, I’d say that the volume of financing should end the semester at between R$15 billion and R$20 billion,” he said.

Companies such as the women’s fashion retailer Marisa, the textile industry Coteminas, the petrochemical company Unigel, the health group Elfa, and Pátria are among those that have had to resort to specialized funds to ensure they have enough resources to get through 2023. The Bodytech gym chain had part of its debentures bought by the Latache restructuring fund.

With the credit crunch, many retail companies had difficulties and turned to specialized funds for working capital. Marisa began a restructuring process, sold assets, and financed itself with the BTG Pactual bank’s restructuring company at the beginning of the year, according to sources familiar with the business.

Elfa, controlled by the Pátria fund, turned to Daniel Goldberg’s Lumina for an injection of R$620 million—part of which was converted into shares to give the company a boost. Sources linked to the company said that the healthcare company is refinancing its debts, but there are no significant maturities for this year. According to sources, the company should be the target of consolidation—Viveo was pointed out as a potential buyer, but there are no negotiations underway at the moment.

In the case of Bodytech, the company also had to restructure its debts due to the pandemic. Luiz Urquiza, one of the group’s partners, says the banks decided to sell part of the debentures they held—and Itaú’s share was traded to Latache last year. According to Mr. Urquiza, the company repurchased these debentures from Latache in March 2024, a decision made by the partners. The chain began to extend its debentures at the beginning of last year. The bonds total R$ 170 million, of which R$70 million are held by the controlling shareholders—in addition to Mr. Urquiza, businessman Alexandre Acioly is also a partner in the company. The bank debts total R$190 million. “In our case, our debate is not about survival. We are not at risk of out-of-court reorganization.”

In a prolonged negotiation process with creditors, Unigel’s controlling shareholders continue to roll over debt with special sits—and other suppliers—and are still seeking new capital for the group’s working capital, according to sources familiar with the matter. The petrochemical company, which signed an out-of-court reorganization agreement for debts of R$3.9 billion, has until May 20 to approve the plan, but negotiations with creditors remain challenging.

Also burdened with heavy debts, Coteminas is still negotiating with Farallon—the restructuring manager has invested in the company and is in discussions to negotiate debentures convertible into shares. Sources indicate that the textile company is seeking new resources with other managers specializing in stressed assets.

“Companies that turn to funds or investors focused on stressed assets are in a situation that won’t be resolved quickly,” noted Douglas Bassi, a partner at the restructuring firm Virtus. Mr. Bassi does not share Seneca Evercore’s optimism that the improved scenario could reduce the search for cheaper credit this year. “We’re not seeing much activity in the capital markets. I see a lot of agribusiness companies looking to restructure, and some of them are already in a more difficult phase,” he explained.

For Mr. Bassi, many companies are resorting to judicial recovery. “The macroeconomic scenario over the last year has not improved to the point where these companies are recovering.” Sérgio Machado, founding partner of ARC Capital, points out that for banks, high regulatory capital commitments make it nearly impossible to take on or keep credit assets on the balance sheet whose repayment scenario is based on conversion into equity. This capital ends up being provided by funds specializing in illiquid assets or bridging capital. According to Mr. Machado, given the high cost of capital in Brazil, successful restructuring processes involve monetizing assets, both operational and not, to generate liquidity for working capital and reduce liabilities.

Marisa, Unigel, and Elfa declined to comment on the matter. Coteminas did not respond to requests for an interview.

*Por Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Government reduces fiscal risk in courts

The 2025 Budget Guidelines Act indicates a budget of R$3.60tn, down from R$3.76tn at the end of 2022

05/02/2024

Jorge Messias — Foto: Divulgação/Daniel Estevão/AscomAGU

Jorge Messias — Foto: Divulgação/Daniel Estevão/AscomAGU

In its first year, the Lula administration has set a downward track for the federal government’s fiscal risks within the justice system, which had been on the rise and are a primary concern for the government starting in 2027, the year when all “precatórios”—IOUs issued by the judiciary branch—amounts will revert to primary expenses.

Data from the fiscal risk chapter of the 2025 Budget Guidelines Act indicate that the federal government’s exposure to judicial risks stands at R$3.601 trillion, down 4.2% from R$3.758 trillion at the end of 2022. This is the first drop since the transition from 2019 to 2020, after which the risk track record had increased.

The current amount does not yet account for the federal government’s gains from the lifetime pension revision thesis, ruled by the Supreme Court this year, as the figures were finalized considering outcomes until the end of 2023. Therefore, an additional R$480 billion remains to be deducted from the fiscal statistics.

“We have decided to set this track on a downward path, and my perspective is to deliver, during the president’s first term, this curve pointing downwards,” Jorge Messias, the federal attorney general, told Valor. “We cannot talk about a sustainable public debt track record without addressing the growing debt that will pressure the federal government’s budget, which is the court-ordered debts.”

Ms. Messias emphasized that the Federal Attorney General’s Office’s (AGU) strategy prioritizes reaching settlements when full wins in cases are unattainable. “Sometimes, it’s cheaper to acknowledge the rights still in the administrative phase than to move the decision to the courts. There have been administrations that chose to swap the budget for IOUs,” he said.

Moreover, according to Mr. Messias, in addition to seeking victories in court, there are “less obvious” strategies, such as settlements. “I joke that here at the AGU, I never lose. Either I win or I make a deal,” he said.

Despite the improvement in numbers, experts claim there are still risks in the scenario, as primary expenses for IOUs are on an upward track. Until 2027, the Lula administration received a waiver from the Supreme Court in the case that declared unconstitutional the establishment of a cap for IOUs in 2021, during Paulo Guedes’ tenure at the Ministry of Economy. Thus, it was permitted for the Lula administration to pay some of the court-ordered debts outside the fiscal rules until 2026.

A significant portion of the value that became a remote risk stems from favorable tax rulings for the federal government. This risk has been a priority for Finance Minister Fernando Haddad since the beginning of the year, with direct involvement in cases. He has even met with ministers on more significant issues, such as the Workers’ Severance Fund (FGTS) inflation adjustment trial, still pending review with an estimated impact of R$295 billion, and the lawsuit involving changes in the calculation base for the Business Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on sales tax ICMS subsidies.

Lawsuits against the federal government are classified into three risk levels: probable, possible, and remote. Probable risk includes issues with a financial impact of R$1 billion or more that have had unfavorable rulings from the Supreme Court and Superior Court of Justice. Possible risk covers lawsuits already in the higher courts but not yet definitively judged—that is, when there has been some unfavorable decision by a collegiate body, but an appeal is still possible. Other lawsuits are considered remote risk and are not included in the fiscal risk schedules.

Possible risk actions decreased to R$2.586 trillion in 2023 from R$2.741 trillion in 2022, a drop of 5.7%. Probable risk actions slightly fell to R$1.015 trillion from R$1.016 trillion, a reduction of 0.1%.

The federal government’s risk classification considers the case phase—whether it is in a trial court or higher courts, for example, following the guidance of an AGU ordinance. This is different from the criterion used by companies in their risk analyses and provisions in financial statements, which consider the likelihood of winning or losing.

The classified lawsuits involve cases that could result in direct government expenses, the IOUs, as well as cases that will impact future projected revenue. This occurs, for example, when the government can no longer collect a certain tax or when there will be compensation.

One of the reductions in impact estimates last year occurred due to the Supreme Court ruling that recognized the incidence of social taxes PIS and Cofins on financial revenues. The risk estimated at R$115.2 billion was reclassified to remote. The merits were judged in 2023.

Three multi-billion cases awaiting decision from the Superior Court of Justice were also reclassified to remote after rulings in which the federal government won. The main one concerned the sales tax ICMS subsidies, with an estimated impact of R$47 billion. The decision upheld tax benefits related to the state tax in the calculation base of the Business Income Tax and Social Contribution on Net Income.

Also removed from the fiscal risk schedule were disputes about the crediting of social taxes PIS and Cofins in the resale of products taxed at a zero rate, estimated at R$31 billion, and the recognition that sales tax ICMS comprises the base of the Business Income Tax and Social Contribution on Net Income in presumed profit, with an estimated impact of R$2.4 billion.

One of the main topics that reduced the impact of non-tax lawsuits was the trial on the Pension Reform (as per Constitutional Amendment 103, of 2019) at the Supreme Court. The analysis has not yet concluded—may be finished next week—, but some votes have already led the federal government to estimate a reduction in impact to R$497.9 billion, compared to R$621 billion projected at the end of 2022.

The conclusion of another trial eliminated a risk of impact in this case, involving the calculation of the pension by family quota and per dependent. Another reason for the reduction was a change in the calculation methodology made by the Ministry of Social Security.

For federal public autarchies and foundations, the risk fell by R$2.5 billion. This happened due to the ruling on compensatory interest for expropriation for agrarian reform purposes, which limited it to 6% instead of 12%. The decision became final in 2023.

“The improvement in the fiscal risk estimates of the Budget Guidelines Act reveals that the government is succeeding in acting alongside the courts to uphold theses in favor of the Treasury and the Constitution,” said Felipe Salto, chief economist at Warren Investments. “Regarding the IOUs, it is necessary to develop better systems for identifying the conditioning factors of these expenses. The IOUs do not arise spontaneously.”

In 2023, the federal government created a fiscal risk committee involving the Federal Attorney General’s Office and the Ministries of Finance and Planning to monitor these fiscal risks. On average, the Attorney General receives 90,000 notifications per day. The expectation, in the coming years, is to act strategically, including the possibility of proposing legislative changes if necessary to keep judicial fiscal risks more controlled or, at least, more predictable.

  • Por Guilherme Pimenta, Beatriz Olivon — Brasília
  • Source: Valor International
  • https://valorinternational.globo.com/
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Moody’s raises outlook for Brazil’s rating

Change comes just over two weeks after Brazil reduced the fiscal target for 2025

05/02/2024

Dario Durigan — Foto: Marcelo Camargo/Agência Brasil

Dario Durigan — Foto: Marcelo Camargo/Agência Brasil

Moody’s raised on Wednesday (1) Brazil’s Ba2 credit rating outlook to positive, from stable, indicating an improved chance of upgrading the country’s rating in the future. The agency cited positive GDP growth prospects and continued, albeit gradual, progress toward fiscal consolidation. The change comes just over two weeks after the country reduced the fiscal target for 2025 and 2026, which caused market stress and losses for domestic assets.

Last year, the other two main rating agencies—S&P and Fitch—upgraded the country’s rating. However, in the three agencies’ reading, Brazil remains below the best-rated countries, those with an investment grade. Despite the improved outlook, Moody’s cited negative aspects of the Brazilian economy, such as a high public indebtedness.

In the assessment released on Wednesday (1), Moody’s affirmed that GDP growth prospects are “more robust than in the pre-pandemic years, supported by the implementation of structural reforms over multiple administrations, as well as the presence of institutional guardrails that reduce uncertainty around future policy direction.”

The agency expects real GDP growth of around 2% in 2024 and 2025, on average. Over the medium term, the expectation is well above the annual average rate of a 0.5% contraction seen from 2015 to 2019.

“In the next few years, Moody’s anticipates growth will be broad-based extending to both the industry and the services sectors with domestic demand propelled by a strong labor market and higher real wages,” the agency wrote, also citing the government’s energy transition agenda.

The report also highlighted improvements in the monetary policy framework, strengthening of the Central Bank’s independence, improvements in the governance of state-owned companies, and measures to boost the business environment.

“The upcoming overhaul of the tax regime, while taking effect over a long period, also marks a notable structural reform,” the report says.

As for the fiscal scenario, the agency says the framework introduced last year is expected to result in gradual consolidation of public accounts. “Moody’s expects Brazil’s primary and overall fiscal deficits will narrow in 2024-2025 supported by revenue measures,” the agency said, projecting stabilization of government debt in a few years unless there is some type of shock in the economy. However, Moody’s points out that risks to fiscal consolidation efforts remain due to the government’s reliance on fiscal revenue growth and restricted ability to cut spending.

The maintenance of the Ba2 rating reflects “still relatively weak fiscal strength, given Brazil’s spending rigidity, high debt burden, and weak debt affordability.” The rating also takes into account Brazil’s sovereign credit strengths, which include a large and diversified economy, moderately strong institutions and governance, and a solid external position.

Among the factors that could lead to an upgrade in the rating, Moody’s cited an improvement in the primary result and fiscal deficits, which would enhance fiscal policy credibility, as well as continued solid GDP growth. Negative risks would be a weakening of the commitment to fiscal consolidation and, as a consequence, negative credit pressure. “Persistently low GDP growth would represent a credit-negative development that would adversely affect Brazil’s credit profile,” the report says.

Although the review of Brazil’s rating outlook by Moody’s is considered positive by the market, agents pointed out that the timing was unexpected, especially given the signals that the government has been sending in the fiscal area.

For Carlos Kawall, former Treasury Secretary and a partner at Oriz Partners, the government’s attempts to weaken the fiscal framework and structural reforms of recent years go in the opposite direction of the points cited by Moody’s.

“In recent months, the government has been taking steps towards weakening the framework, questioning the Central Bank’s autonomy and privatizations, and seeking to change the labor reform, while the improvement in the outlook is linked to these reforms,” he argues. “The intentions expressed to go backward in these reforms are in the opposite direction to the improvement in the outlook,” he points out.

Mr. Kawall argues that the government should not consider the outlook change as an endorsement of recent measures. “That would be an opportunistic reading. The change in the outlook is positive but it was made looking back, seeing reforms that ensure greater potential growth,” he said.

Alberto Ramos, head of Latin America economics research at Goldman Sachs, sees the new bias in the current rating as positive. “However, the timing was unexpected, following the market stress around the change in the trajectory of the government’s primary results,” he said. “Fiscal concerns have grown, not diminished. And a lot remains to be defined regarding reforms, including tax overhaul.”

In the opinion of Marcelo Fonseca, chief economist at Reag Investimentos, the change was “inappropriate” as it did not consider, for example, the shift in fiscal target announced last month. “It seems like we are talking about two different countries,” he said.

According to him, “the shift to a more flexible fiscal regime, as was the approved framework, does not place the country on a level of stability.” Furthermore, “fiscal targets are also very difficult to achieve.”

“Even from a political point of view, the government has struggled to defend its agendas in the Parliament, which will impact the primary result,” he said.

According to Mr. Fonseca, the change is not expected to have major impacts on asset prices. Combined with the fact that it does not change Brazil’s “speculative” grade, “investors know what the real risks of investing in Brazil are.”

The improvement in Brazil’s rating outlook was welcomed by the government. To Valor, Dario Durigan, executive secretary of the Ministry of Finance, said the review reinforces that the federal government’s economic agenda is “on the right track.” As examples of the strengths of the Brazilian economy, he mentioned “growing GDP, falling unemployment, increasing household income, strong external accounts, low inflation, and recovering fiscal [situation].” Mr. Durigan also emphasized the implementation of “important reforms” to increase the “productivity of the economy in the medium and long terms,” including tax overhaul.

Another source from the government’s economic team adopted a similar speech but acknowledged that the warnings made by Moody’s reinforce “the importance of not slacking off and remaining firm” in pursuing the balance of public accounts. For this source, the game “is not over”, and society “needs to continue supporting our agenda for the sake of the country.”

Government officials also used their social media accounts to comment on the change and highlight the roles of the Legislative and Judiciary branches. Finance Minister Fernando Haddad said the review “has to do with the joint work of the three branches of government, which placed the country’s interests above surmountable differences.” Minister of Planning and Budget Simone Tebet said there is a joining of “efforts by the government, Parliament, and the Judiciary to overcome budgetary challenges and boost our economy.” President Lula said Brazil “is once again respected worldwide” and “has credibility.”

*Por Augusto Decker, Estevão Taiar, Caetano Tonet, Gabriela Pereira — São Paulo and Brasília

Source: Valor International

https://valorinternational.globo.com/
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