Oil production surge expected to boost royalties by 20% in 2024

National Petroleum Agency projects R$90.3bn revenue amid rising production, market conditions

05/20/2024

Vilma Pinto — Foto: Wenderson Araujo/Valor

Vilma Pinto — Foto: Wenderson Araujo/Valor

This year’s oil production increase in Brazil is projected to generate R$90.3 billion in royalties, marking a 20.4% rise compared to the R$75 billion collected last year, according to the National Petroleum Agency (ANP). The early months of 2024 confirm the agency’s forecast of higher production for the year. The ANP anticipates higher government revenue from these participations in the coming years.

From January to March, the latest available data, Brazil’s average oil production was 3.441 million barrels per day, a 6.96% increase year-on-year. The average natural gas production between January and March was 148.8 million cubic meters per day, 4.26% higher than the same period last year, according to the ANP.

Revenues generated from increased production bolster public coffers at a favorable time, with rising barrel prices, and provide relief to the federal government, oil-producing states, and municipalities amid discussions on fiscal balance.

Experts consulted by Valor say the federal government can freely use the money from royalties and special participations (an additional royalty paid to the government on large-volume fields), except for the portion allocated to the social fund. Fields under the production-sharing regime allocate 22% of royalties to the Social Fund. For states and municipalities, there are restrictions. Federal law prohibits using royalties and special participations to pay active public employees and settle debts, with exceptions for public school teachers’ salaries and debts to the federal government.

Vilma Pinto, director of the Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog, notes that it is inappropriate to use royalties to increase current expenditures, as this type of revenue is “sensitive to the cycle.” “Using it to expand recurring expenses can create future fiscal imbalances. This applies to both the federal government and states and municipalities,” she said.

Between January and April, Brent crude was priced at an average of $82.95 per barrel, 0.95% higher than the average for the same period last year, which was $82.16, according to Valor Data. In May, Brent continued to rise, closing on Friday with a weekly gain of 1.41%, at $83.98. The price of the barrel and exchange rates are key in calculating government participation in the oil sector.

On Thursday, the ANP reported that it allocated R$8.3 billion to the federal government, states, and municipalities related to the payment of special participation corresponding to January through March this year.

ANP data also indicate that federation entities will see increased revenue from royalties and special participations in the coming years. The ANP’s projections suggest that revenue from these government participations is expected to reach R$404.1 billion between 2024 and 2027, 12% above the R$360.9 billion that filled the coffers of the federal government, states, and municipalities between 2019 and 2023.

The projection assumes an oil price slightly below $80 per barrel. There is no forecast yet on when the data that underpins the survey, conducted in 2023, will be updated.

Symone Araújo, a director at ANP, said that historically, government participation hit a record high in 2022 due to rising oil prices and increasing production. There was a decline in revenue in 2023 compared to 2022 due to falling oil prices after the peak: “Government participation in the coming years is likely to increase due to the expected rise in oil and gas production, with new production units coming online, positively impacting public revenue,” she told Valor.

Economist Gabriel Barros Leal, former director of the IFI, said that royalties and special participations give the federal government more flexibility in their use compared to taxes and contributions, as they do not have a specific destination, except for the part allocated to the Social Fund. “This additional revenue could help pay down debt and improve the primary balance. It could also help if the government wants to finance expenditures,” said Mr. Barros Leal, who warns that the risk is that government-financed expenditures are generally mandatory and have low returns. “The government spends more than it collects and spends poorly, taking money from society and transferring it incompetently,” he said. The best use of the money, he added, would be to reduce the public debt, which he deems as “high and expensive.”

Economist and public finance expert Raul Velloso added that higher royalties and special participation revenue this year, if confirmed, offer an opportunity to reduce consolidated public sector debt. Ms. Araújo, with ANP, said the agency is not responsible for evaluating the use of revenue by entities benefiting from government participation: “This responsibility lies with the state and municipal audit courts. The agency only calculates and transfers the funds, leaving it to the entity managers to decide on resource use, without ANP interference.”

Royalties are financial compensation paid by oil and natural gas producers to the federal government, states, the Federal District, and municipalities benefiting from the exploitation of these activities. Royalties are calculated based on a rate applied to the producing field (ranging from 5% to 15%), the field’s monthly production, and the reference price of oil or natural gas. The ANP supervises the funds.

The legislation stipulates that 40% of royalties are allocated to the federal government, 22.5% to producing states, and 30% to producing municipalities. The remaining 7.5% is distributed among all states and municipalities in the federation. Within the federal government, the funds are divided between the Navy and the Ministry of Science and Technology. “Royalties are a simple and direct form of taxation,” said Décio Hamilton Barbosa in the book “Tributação do Petróleo no Brasil e Outras Jurisdições” (“Petroleum Taxation in Brazil and Other Jurisdictions”).

Special participations, on the other hand, are extraordinary financial compensations paid by oil companies for oil and natural gas fields with large production volumes. Compensation is made quarterly, and the destination of funds depends on the type of field.

The federal government also benefits from oil reserves even before production begins. In area auctions, the Brazilian State receives funds from companies winning the bids. Under the concession regime, companies winning blocks pay a signature bonus, based on the prior perception of resource generation. Under the production-sharing regime, adopted for part of the pre-salt fields, area winners allocate a portion of production, called profit oil, to the federal government through the state-run Pré-Sal Petróleo (PPSA), which later sells it on the market in its auctions.

Eduardo Pontes, a partner at consultancy Infis Consultoria, said that 69% of the revenue obtained from oil sales in the country is allocated to the federal government in the form of taxes, royalties, and special participations. “And in the pre-salt, the federal government gets 70%, 80% of the profit oil, which is a form of special participation, both from Petrobras and other companies,” said Mr. Pontes.

Petrobras is the main contributor to public revenue, being the largest oil company in the country, with oil and gas production around 3 million barrels of oil equivalent per day. The company injected R$420.5 billion into public coffers in royalties, special participations, and other categories (such as signature bonuses) between 2016 and 2023.

In a statement, Petrobras said, “In 2023, we collected R$61.4 billion in government participations (royalties and special participations), whose amounts are distributed by the ANP to the National Treasury, states, and municipalities, based on criteria defined by law. Additionally, our contribution in the form of taxes collected to the federal government in 2023 was R$87.4 billion.”

In adverse geopolitical scenarios, the state-run company tends to benefit from increased revenue from oil sales and potential increases in the prices of oil products in the domestic market, as well as possible hikes in the dollar exchange rate. However, there are negative effects of rising oil and product prices on inflation, which tends to make both Petrobras, a state-run company, and the government delay price increases when necessary. On the other hand, the higher the Brent price, the more viable exploration and production activities become. Petrobras has been seeking to explore new areas to replenish its portfolio in regions such as the Equatorial Margin and the Sergipe-Alagoas and Pelotas basins, concerned about the decline of its fields.

With the current reserves maintained, without exploring new frontiers, studies indicate that production is expected to continue to increase until it declines around 2030. “The trend is for government participation to follow production, with increases in the coming years and declines from 2030, 2031, if new reserves are not incorporated,” said Ms. Araújo, with the ANP.

The current pace is of reserve growth, which is likely to translate into increased production. According to ANP, total proven oil reserves (which have a reasonable certainty of commercial extraction) increased by 6.98% in 2023 compared to 2022. Natural gas reserves increased by 27.12% last year compared to the previous year.

Por Fábio Couto, Rafael Rosas — Rio de Janeiro

Source: Valor International

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

Aid to Rio Grande do Sul could have an impact of 1% of GDP

Consultancy estimates that measures announced by the federal government for the state total R$12bn, but amount could grow

20/05/2024

Arroio do Meio, in the Taquari Valley, will need to rebuild as the river waters recede; floods claimed 157 lives and 88 people are still missing — Foto: Gustavo Mansur/Palácio Piratini

Arroio do Meio, in the Taquari Valley, will need to rebuild as the river waters recede; floods claimed 157 lives and 88 people are still missing — Foto: Gustavo Mansur/Palácio Piratini

The impact of measures to aid Rio Grande do Sul on the central government’s primary accounts should be between 0.6% and 1% of the Gross Domestic Product, which would mean a spending of up to R$117.8 billion considering a proactive administration. These are the projections of a study carried out by BRCG consultancy and reviewed by Valor.

According to the consultancy, being a proactive administration means acting more to aid than in previous emergency events, such as the landslides due to heavy rains in the mountainous region of Rio de Janeiro in 2011. The study says that, if the federal government follows the pattern seen in other disasters, primary spending will be around R$70 billion, equivalent to 0.6% of GDP.

In the context of more conservative government action, spending would be R$48.4 billion or 0.4% of GDP. On the other hand, with a more active government, it could reach R$117.8 billion, equivalent to 1% of GDP.

“Even a scenario of moderate government action would have a relevant impact. Therefore, the estimated spending, in any scenario, is significantly higher than the amount announced by the government, of R$12 billion,” economists Matheus Ribeiro and Lívio Ribeiro wrote in the report.

“For now, the government is being cautious or timid, and that’s not that bad,” they say.

However, the economists point out that primary spending will comply with the rules set in the fiscal framework, “which will accelerate the increase in public debt.”

“Whatever [spending] has a primary impact will have an impact on the debt, whether or not it falls outside the framework. There is the primary [spending] considering the [fiscal] framework, and the difference between revenue and primary spending which, ultimately, is what increases debt,” Mr. Ribeiro told Valor.

In the study, the economists disregard the impacts from the revenue perspective, whether related to delays in tax collection or changes in the tax base.

Measures with no effect on primary spending, such as the use of the Workers’ Severance Fund (FGTS), multilateral loan facilities, or suspension of the Rio Grande do Sul state debt payment to the federal government, were also excluded from the study.

BRCG points out that the extent of the tragedy remains to be known and will only be determined when the water recedes. “However, it is clear that this is the biggest natural catastrophe in Brazilian history; its humanitarian, economic, and social cost will be very high,” the report says.

On Sunday (19), the Rio Grande do Sul government reported that the floods that started at the end of April killed 157 people, and 88 are still missing. More than 20% of the Rio Grande do Sul population (2.34 million people) was affected by the storms and 582,000 people were displaced from their homes—77,000 are in shelters.

The forecast is for more heavy rain in Rio Grande do Sul from Tuesday (21).

The measures announced by the government in recent weeks total around R$62 billion, according to the consultancy—R$12 billion are of primary impact. The numbers, however, are expected to increase, according to the economists’ projections.

Their estimates were based on similar events, such as the one in the mountainous region of Rio de Janeiro, the dam burst in Brumadinho, Minas Gerais, in 2019, and Hurricane Katrina, in the U.S., in 2005.

“Hurricane Katrina is the extreme climate event most close in proportion to what we will likely see in Rio Grande do Sul. The area receiving aid from the U.S. government was approximately 11% larger than the area affected in southern Brazil, although the population impacted is about 60% larger,” the economists wrote in the report.

“The comparison may get closer, depending on the number of municipalities in Rio Grande do Sul declaring a state of emergency.”

Estimated spending in infrastructure and environmental recovery in the consultancy’s report is based on information on the area affected by previous disasters, as well as the impact on material capital and the environment.

The damage caused by Katrina was estimated at 1% of the U.S. GDP in 2005, according to the National Oceanic and Atmospheric Administration, equivalent to 6.1% of Brazilian GDP that year, BRCG compares.

“In 2005, the U.S. government approved spending about 0.8% of GDP, or 4.9% of Brazilian GDP currency-converted, aimed at recovery following the hurricane. In the first 16 months after the catastrophe, spending was around 0.3% of U.S. GDP or 1.8% of Brazilian GDP,” the economists point out.

Landslides due to rains in the mountains of Rio de Janeiro, in turn, caused damages of R$7.9 billion, at current prices, in addition to related losses amounting to R$1.9 billion.

In the Brumadinho disaster, caused by a Samarco dam burst, Vale—one of the owners of the company—reached an agreement in 2021 with the Minas Gerais government at 0.4% of that year’s GDP (or R$37.7 billion) for repair and compensation.

As these are events of a different nature and magnitude, economists rely on hypotheses to estimate the numbers related to the disaster in Rio Grande do Sul.

In the case of infrastructure and housing spending, 40% of the works are expected to occur in the first year after the floods, with 50% backed by the federal government.

To measure environmental recovery spending, they consider non-compensatory payments incurred by Vale in Brumadinho. It is assumed that spending per square kilometer would be the same in Rio Grande do Sul, with a variation of around 25%.

The BRCG estimates for health and sanitation spending are based on amounts allocated by different levels of the federation during the COVID-19 pandemic.

Although the two situations are different, the economists argue that the pandemic was “an extreme and recent event in which public authorities were called upon to act and faced a prolonged state of emergency.” For now, the consultancy’s study considers the federal government’s health spending and projects that per capita spending in the affected municipalities could grow 40% to 60%.

Amounts involved in policies aimed at credit, job protection, and income transfer are based on the draft of similar policies adopted in the previous events analyzed.

For estimating credit, for example, the study considers per capita spending with credit fund quotas and payroll financing in the first year of the pandemic.

Regarding measures to maintain employment rates, BRCG consultancy works with a scenario of replication, until the end of 2024, of the Employment and Income Maintenance Benefit (BEm) program by the federal government. The program was created to maintain employment during the pandemic by reducing working hours and salaries.

Estimates for social spending consider the reconstruction aid (a R$5,100 voucher via the Brazilian instant payment pix), with the possibility of adopting a type of emergency aid of R$600 or minimum wage for people affected by the disaster.

“The package announced by the government should be reviewed and extended over the coming weeks and months. Furthermore, most of the measures will likely last well beyond the end of 2024,” the report points out. Even the Fiscal Recovery Regime of Rio Grande do Sul, which has already been made more flexible, with postponement of payments to the federal government, could undergo further renegotiations in the coming months.

*Por Marsílea Gombata, Rafael Vazquez — São Paulo

Source: Valor International

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

Rio Grande do Sul government considers relocating entire cities

Increasing frequency of extreme weather events demands new engineering solutions, experts say

05/17/2024

Marcia Musskopf and Sandra Barzotto, who own two stores in Roca Sales, Rio Grande do Sul — Foto: Arquivo pessoal

Marcia Musskopf and Sandra Barzotto, who own two stores in Roca Sales, Rio Grande do Sul — Foto: Arquivo pessoal

It remains unclear when reconstruction efforts will begin in Rio Grande do Sul. However, engineers, urban planners, and the state government agree on one thing: simply rebuilding houses, schools, streets, bridges, and water treatment plants as they existed before this year’s historic floods will not suffice.

Given the new reality of more frequent extreme weather events, the unanimous view is that many cities in Rio Grande do Sul will need to take on new forms.

Among the ideas being suggested are transforming neighborhoods into parks, building houses on stilts, and constructing new barriers and dikes in urban areas. In extreme cases, where cities have been almost entirely submerged, a drastic measure is being considered as a possible solution.

“We face a series of challenges, and we cannot rule out the possibility of having to relocate entire cities from where they currently are, or even rebuild them in other locations,” Vice-Governor Gabriel Souza told Valor.

“This has happened in some places around the world and even in Brazil. Of course, it requires dignified living conditions, public resources, and compensation. But where it is unfeasible to keep people living, it is better to provide them with another place.”

The number of cities affected by the historic floods has reached 452, and 77,000 people are living in shelters. The heavy rains began to hit the state on April 29.

The state government has yet to detail how and where to rebuild the affected structures. However, experts have outlined some priorities.

One of them is critical infrastructure. Roads and water supply systems should be designed to be quickly repairable, said Professor Vanderley John from the University of São Paulo’s engineering school. In the case of water, it would be better to place some facilities in more distant and higher locations, out of the reach of floods, even if this is less cost-efficient. But it would be more efficient in terms of risk, he said.

The same could apply to electrical substations and sewage treatment plants.

There is currently no precise assessment of the damage. However, the government reports that more than 700 schools, hospitals, military barracks, fire stations, police stations, roads, bridges, viaducts, sewage treatment plants, water treatment plants, and power substations have been affected. Half of Rio Grande do Sul’s infrastructure has been destroyed or impacted, said the vice-governor.

William Mog, an architect and urban planner and a member of the Prosecution Service of Rio Grande do Sul, does not believe in a single, large solution but rather in several strategies to address likely future floods.

One of the most important, according to Mr. Mog, is relocating populations from neighborhoods in flood-prone plains and those living on hillsides. “In these cases, it would not be enough to relocate and leave these areas vacant. One option to be considered would be the construction of linear parks in these areas,” he said.

A second change would come in the form of land use in a strip of land behind these parks. “In this second strip, some developments could be allowed but with restrictions, such as requiring buildings to be elevated on stilts so that the ground floor is left open and with permeable soil to act as a sponge.”

Projects involving mass relocations—whether entire cities or neighborhoods—tend to be complex, controversial, and costly.

However, the risk of new losses and more deaths seems to be pushing some residents of cities in Rio Grande do Sul to seek exactly that: to leave their homes permanently.

“In September last year, during the first flood, we said, ‘This happens once in a lifetime; it won’t happen again,’” recalls Sandra Panis Barzotto, 51, a businesswoman in the city of Roca Sales, a town of 10,400 inhabitants in the Taquari Valley, one of the regions heavily affected by the floods. In September, the waters invaded everything, reaching a height of 2 meters. In November, there was another flood, though less destructive. “We told people it wouldn’t happen again. But then came this May flood, and now people in the city are saying they will leave, they will look for another town. There are people who no longer have a house. And we no longer dare to encourage them to stay; we can’t say it won’t happen again.”

Ms. Barzotto and her sister, Márcia Regina Musskopf, 56, are business owners in Roca Sales, with stores selling clothes and shoes. The losses they suffered from last year’s two floods may have reached R$800,000, and this year’s losses are about R$300,000. With streets impassable due to mud, part of Roca Sales’ commerce remains closed.

The sisters repeat the questions many residents have been asking: What can be done? Deepen the riverbed, build barriers? “It will be expensive and laborious, but if nothing is done and another flood like this comes, no one will want to stay in the city,” said Ms. Barzotto.

After the September 2023 floods in the Taquari Valley, the government decreed that rebuilding homes in areas that had been engulfed by the flood would not be allowed.

River dredging, drainage systems such as retention basins, raising bridges, and building and rebuilding dikes to protect urban areas from future floods are other measures being mentioned by the state government and experts as options that should be on the state’s agenda when reconstruction begins.

However, opinions on barriers are divided. Some believe these structures could increase the speed of water in downstream cities.

“The fact is that we cannot do things the same way. All calculations were based on the rainfall of the last hundred years, but all of this is outdated,” said Nilson Sarti, vice president of Environment and Sustainability at the Brazilian Chamber of Construction Industry (CBIC).

A few days ago, Governor Eduardo Leite presented a preliminary estimate of reconstruction costs: R$19 billion. But shortly thereafter, a bridge collapsed, raising the total.

“The estimated cost is only for rebuilding. We are not including the construction of anything new in that amount. Just reconstruction,” said Mr. Souza.

“It seems that the United States needed $50 billion to rebuild the area affected by Katrina [the hurricane that devastated parts of the southern country in 2005]. I cannot give an exact number, but it will certainly be much more than R$20 billion, which means that the state will not be able to make all this reconstruction effort on its own.”

*Por Marcos de Moura e Souza — São Paulo

Source: Valor International

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

Floods decimate bees, threaten Rio Grande do Sul’s honey dominance

State accounts for 15% of honey production in Brazil

05/17/2024

Recent weeks’ heavy rains have covered or fully destroyed many beehives in the state — Foto: Sérgio Ranalli

Recent weeks’ heavy rains have covered or fully destroyed many beehives in the state — Foto: Sérgio Ranalli

The recent floods in Rio Grande do Sul are expected to confirm a situation that has been threatening small farmers, who dominate the activity in the region: the state will likely lose its position as Brazil’s largest honey producer. The recent weeks’ heavy rains have covered or fully destroyed many beehives in the state, which had already been dealing with the consequences of the floods of September last year.

The 2023 floods compromised the spring flowering, which is now hindering the recovery of the remaining swarms. “Around 10% of bee colonies were lost in this flood, which destroyed 35,000 to 50,000 beehives,” estimates Patric Luderitz, vice-president of the Beekeeping and Meliponiculture Federation of Rio Grande do Sul (FARGS) and coordinator of the State Beekeeping and Meliponiculture Sector Chamber. “The sector is in a catastrophic situation.”

The numbers are preliminary but tend to rise as the damage assessment advances, Mr. Luderitz says. The Brazilian honey production amounts to R$1 billion.

According to the most recent data by the Brazilian Institute of Geography and Statistics (IBGE), Rio Grande do Sul produced 9,000 tonnes of honey in 2022, or 15% of national production. Of the approximately 100,000 beekeeping farms in Brazil, 37,000 are located in Rio Grande do Sul.

With the high rates of bee mortality and hive destruction, beekeeping in the state will take at least two years to recover, Mr. Luderitz estimates. “It all will depend on the weather and the funds we will have available. One thing is to get R$300,000. R$3 million is a whole different thing,” he points out.

In Cachoeira do Sul, beekeeper Ede Nelson Beck estimates he has lost at least 500 of his 1,700 beehives on the banks of the Jacuí River. Each of his beehives had some 30 kilograms of honey.

Most farmers build apiaries in floodplains as biodiversity tends to be richer in these areas, which improves production. “We have been keeping bees in these areas for years and have never seen losses like we are experiencing now,” Mr. Beck said.

With the floods, he expects the segment to struggle to resume operations in the municipality. Much of Cachoeira do Sul’s agriculture is located in the highlands, meaning the food supply for insects in the floodplains is limited.

“The solution will be to install apiaries in hilly grasslands, which will likely reduce production. We will lose these [floodplain] blooms. This is the city’s new reality,” he lamented. “There will hardly be a corner left for beekeepers to produce honey.”

President of the Rio Grande do Sul Beekeepers Association (AGA) Abenor Furtado points out that the heavy rains in recent weeks worsened the problems the segment had been facing since last year’s floods. “We were counting on the fall season flowering but then came this rain,” he said.

Without enough food, bees in Rio Grande do Sul will become extremely weak to face the winter, which could further increase losses in the state. Mr. Furtado hopes the next flowerings, beginning in August, may help recover swarms.

Until then, the bees will have to be fed artificially—and the state’s honey production will be negligible. “We are already considering that we will have no production this year,” he said.

*Por Cleyton Vilarino, Globo Rural — São Paulo

Source: Valor International

https://valorinternational.globo.com/

/by

Private equity funds have worst start to year since 2020

New investments fell by 8%, while company exits plummeted by 80% year-on-year from January to the first week of May

05/17/2024

Priscila Rodrigues — Foto: Gabriel Reis/Valor

Priscila Rodrigues — Foto: Gabriel Reis/Valor

Private equity funds, which buy equity stakes in companies, are experiencing one of the most challenging periods in recent years. The scenario is caused by volatility and the fact that the IPO market has been stuck for almost three years, narrowing the door to exit investments. Economic uncertainties have also made new investments more complex. Even so, the report is of more movement in the sector, something that should be reflected in the figures ahead.

In the year to the first week of May, asset sales by managers operating in Brazil totaled $105 million, and investments—disbursements to acquire stakes in companies—totaled $997 million. According to Dealogic data collected at Valor’s request, this is the worst start to the year, on both counts, since 2020, when the outbreak of the pandemic closed the markets.

The drop was significant compared to 2023 when the beginning of the year was marked by the revelation of the accounting fraud at the retailer Americanas, which abruptly closed both the variable and fixed income markets in an unprecedented way. In terms of new investments, there was an 8% drop year-on-year. In exits, the decline was even more intense, at around 80%, on the same basis of comparison.

The difficult start to 2024 comes after two equally weak years for the activity of these funds around the world. Higher interest rates damaged the financing of acquisitions and narrowed the exit door for investments via the capital markets. However, with many funds still capitalized and cash on hand, the pressure for disbursements to return to shareholders is growing.

Among the investments made in 2024, the American company Advent remained active and bought the cosmetics company Skala for undisclosed sums. It also invested R$1 billion, alongside Canada’s CPPIB, in the Inspira basic education network. Atmos, Warburg Pincus, and Mission invested in the Salta group. Among the assets currently looking for a buyer are, for example, Odontocompany, by LCatterton, and Gran Coffee, by Pátria, both of which already have financial advisors in place. Among the divestments made, Pátria sold shares in Hidrovias do Brasil to Ultrapar in the meantime.

According to data from the Brazilian Private Equity and Venture Capital Association (ABVCAP), the association that brings together private equity funds operating in Brazil and uses a broader base than Dealogic, investments in the first quarter reached R$5 billion, compared to R$9 billion in the fourth quarter and R$5.8 billion in the same period in 2023.

Priscila Rodrigues, president of ABVCAP, points out that the sector’s aim is to “put money to work” and that she has seen funds with cash in hand looking for opportunities. Those who start investing earlier, she points out, will be able to get more attractive prices. “What hinders divestments is what benefits allocation,” said Ms. Rodrigues, who is also one of the main partners of private equity manager Crescera.

Piero Minardi, from Warburg Pincus, predicts a slightly better 2024 for funds, given the degree of uncertainty in the economy. However, he believes that the funds already have mature investments in their portfolios and that divestments will, therefore, occur even though the IPO window remains closed. “If the funds carry these investments for another year, the internal rate of return begins to dilute,” he said.

Although the figures for the beginning of the year show less activity in the period, Ricardo Madrona, a partner at Madrona Fialho, says private equity funds are more active on the trading desks and will start investing. “Since March, April, these funds have been more active to start allocating,” he said. However, the closing of these transactions, which began to be worked on in recent months, will only appear in the figures later on.

Mr. Madrona says, for example, that of the 15 M&A (mergers and acquisitions) mandates on his desk, six are from funds. He says another four private equity mandates are currently being negotiated.

UBS BB director Anderson Brito says that the bank’s pipeline of private equity transactions is quite significant at the moment, including “buy side” operations—where they are on the buying end. “We’re seeing a sustainable movement, and the funds have significant ‘dry powder’ [cash to invest],” says the executive. He points out that, despite the more challenging scenario, the funds are managing to raise funds. “We see this in a positive light, and in an uncertain environment, it’s one of the best times to bet on this asset class,” he points out. “In addition, with the capital market closed, there is less competition,” he recalled.

Mr. Brito also states, on the other hand, that negotiations are taking longer to complete, and for this reason, the movement is not yet reflected in this year’s transaction figures.

Pedro Muzzi, director of Goldman Sachs in Brazil, says that M&A talks are more active at the moment and that private equity funds will have a prominent position in this recovery. “Private equity is part of this ecosystem and will be present at both entry and exit,” he said.

At igc Partners, which advised cosmetics company Skala on its sale to Advent, private equity funds are still among the contenders for the assets, but with a more significant presence of foreigners, while the locals are more distant, according to Daniel Milanez, a partner at igc. “The foreign funds have no problem with dry powder,” he comments. According to Mr. Milanez, as of next year, with the improvement in economic conditions, local funds will once again occupy a larger space on the buying side.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

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

Chinese e-commerce giant Temu set to enter Brazilian market

Amid pressure from local industry and retailers, Temu applies for tax-exemption certification

05/16/2024

As the industry and retailers increase pressure to bring the issue of ending import tax exemptions for foreign websites to the forefront in the Lower House, a new global player is poised to enter the Brazilian market. Sources say that Temu, part of the Chinese mega-group Pinduoduo and a direct competitor to Alibaba, has submitted a certification request to the Federal Revenue Service for the Remessa Conforme program— which establishes a set of rules for the advanced customs clearance of products in exchange for an exemption from import taxes for shipments up to $50.

The certification was submitted through Elementary Innovation Pte, a subsidiary of Pinduoduo (PDD) based in Singapore. The carrier expected to operate with Temu, according to Brazil’s Revenue Service records, will be J&T Express Brazil, although negotiations with other logistics operators are ongoing.

If approved, the company will be allowed to send deliveries under $50 to the country without paying the 60% import tax. Only the 17% sales tax ICMS tax will be mandatory for local buyers. To comply, it will have to follow rules such as the prior submission of purchase and consumer data.

Temu declined to comment. The company’s application was submitted in March and could take several months to process—on average, recent requests have taken between 60 to 120 days for approval, but there is no official deadline for the review.

To expedite the project’s implementation, Temu representatives have been contacting Brazilian technology companies to establish agreements that will accelerate the integration of systems in China and with its local platform to be created.

Before making a final decision, the company sought a clearer definition of the Remessa Conforme program to verify its progress and the actual requirements for compliance. Currently operating in about 50 countries, Temu has emphasized the need to expand operations in emerging markets.

Market speculation suggests that Temu is well-positioned to disrupt established foreign platforms that already have a loyal customer base in Brazil and to innovate with advanced language capabilities.

Santander published a report suggesting that traditional sector companies, such as Mercado Libre, Shopee, and Magazine Luiza, could feel a greater impact from Temu’s entry.

Temu extensively utilizes game-like approaches and layouts, offering games that allow users to earn more discounts and support frequent customer check-ins to gather data on profiles and habits.

Given the perception that Temu will invest heavily to gain market share, competition for sales is expected to intensify in Brazil. This comes at a time when national and Asian companies have been adopting more rational and conservative strategies to protect returns.

Globally, Temu is known for selling a wide range of products at low prices (“shop like a billionaire” is the campaign slogan) and has faced criticism from governments in Europe and the U.S. over alleged imports of counterfeit products and the use of labor under poor conditions, allegations it denies.

A hybrid of Shopee and Shein, Temu was created in 2022 by Pinduoduo, a company with a market capitalization of $192 billion on Nasdaq. Among Chinese digital groups, Pinduoduo is almost on par with leader Alibaba ($193.5 billion in market cap).

While the Temu app can already be downloaded in Brazil, purchases are not yet possible—there have been over 3 million app reviews so far.

Temu’s likely entry comes at a time when local stores and industries are pushing for the return of import tariffs. On Tuesday, industry associations, commerce groups, and union leaders published a manifesto in the media criticizing the lack of tax equality between foreign online marketplaces and national companies.

Also on Tuesday, they held a press conference to increase pressure on the issue. They advocated for the approval of a report by Congressman Átila Lira that ends the import tax exemption for shipments up to $50. The issue is part of the Green Mobility and Innovation (Mover) program bill, but the Workers’ Party opposes it.

“What is the logic of granting a tax waiver to those who do not generate any jobs in Brazil?” questioned Sérgio Zimerman, CEO of Petz. “Just one individual sender shipped 16 million parcels to Brazil. This is mockery. We have been ridiculed by the platforms,” he said.

Businessman Flávio Rocha, from Riachuelo, stated that a piece sold in the chain’s stores “contains an absurd 45% tax, but enters through the borders, when applicable, with a 17% state tax,” he said.

The meeting was organized by the Parliamentary Front for Entrepreneurship (FPE), which has been pressuring the government to end the exemption since last year.

Initially, the Lula administration adopted the measure but backed down amid negative social media backlash and a drop in popularity. The Federal Revenue Service created Remessa Conforme in 2023 to organize the flow and study taxation, with support from the Ministry of Finance, but the exemption has been maintained so far.

In response, business leaders mobilized in Congress alongside Lower House Speaker Arthur Lira to approve the end of the exemption within a bill by the legislator and rapporteur Átila Lira. However, the Workers’ Party and the presidential office opposed the approval, creating an impasse last week, and the bill did not advance.

“Congress works under pressure, popular pressure, and sector pressure,” said the congressman. “We know that part of the government supports this matter, but part does not and does not want to address it. We need a fair text.” The rapporteur said he is open to negotiation but awaits a proposal from the government leader in the Lower House, Congressman José Guimarães.

*Por Rafael Rosas — Rio de Janeiro

Source: Valor International

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

Magda Chambriard to champion government agendas at Petrobras

Newly appointed CEO committed to investments in refineries, gas, and fertilizers

05/16/2024

Magda Chambriard — Foto: Ana Paula Paiva/Valor

Magda Chambriard — Foto: Ana Paula Paiva/Valor

Appointed as the new CEO of Petrobras, Magda Chambriard had at least two key meetings this week, according to government sources, before starting her term at the lead of the state-owned company in alignment with her two direct bosses in the federal government. On Tuesday (14), before Jean Paul Prates’ dismissal was announced, she met with President Lula. On Wednesday (15), the conversation was with Minister of Mines and Energy Alexandre Silveira.

The distancing of Mr. Prates from the president and the minister is cited as one of the factors that contributed to the ousting of the executive from the helm of the country’s largest state-owned company. Other reasons that caused clashes with the government leadership were addressed in the conversations to avoid new friction after the change in command.

In the meeting, President Lula highlighted which of the company’s projects he would like to see thriving, such as increasing investments in refineries, gas, and fertilizers, the resumption of the naval industry, and exploration studies in the new Equatorial Margin offshore frontier.

This was their second meeting recently. The first one took place about a month ago, as Valor found. The president met Ms. Chambriard when she was a managing director at the National Petroleum Agency (ANP), during the Rousseff administration. The name of the new CEO, who engaged in the current administration’s transition team, was endorsed by former President Dilma Rousseff, as well as president of the Brazilian Development Bank (BNDES) Aloizio Mercadante, Chief of Staff Rui Costa, government leader in the Senate Jaques Wagner, and former Petrobras CEO José Sergio Gabrielli.

Mr. Lula usually listens to Messrs. Costa and Wagner about Petrobras, given their political background in the Camaçari petrochemical complex, in Bahia, in the 1980s.

Among the reasons behind President Lula’s dissatisfaction with Mr. Prates, in addition to the payment of dividends, is Petrobras’s 2024-2028 investment plan. The then CEO prioritized energy transition projects, with $5.2 billion for wind and solar energy.

According to sources at the Planalto Palace, President Lula was especially bothered by the amount of funds allocated to offshore wind farms, with three of the 10 plants expected to be installed in Rio Grande do Norte, Mr. Prates’s electoral stronghold—he was a senator between 2019 and 2023, before taking over Petrobras.

One of President Lula’s requests to Ms. Chambriard was the resumption of halted works in refineries, projects that were dear to the president in his previous terms, especially the Abreu e Lima works, in Ipojuca (Pernambuco).

In January of this year, Mr. Lula visited Pernambuco to announce the resumption of construction works in the refinery. The Abreu e Lima works were the targets of the anti-corruption task force Car Wash, which President Lula criticized in his speech in January, saying that “some judges and prosecutors in this country, subordinate to the United States Department of Justice, never accepted that Brazil had a company like Petrobras.”

Regarding the resumption of the shipping industry, Messrs. Lula and Mercadante are in alignment so that BNDES and Petrobras could work together. About three weeks ago, Mr. Mercadante acknowledged past mistakes in this area but added that investments from the development bank for the shipping industry are expected to increase to R$5 billion this year, with resources coming from the Merchant Marine Fund, which is 75% managed by the bank.

The meeting with Mr. Silveira, the first after Ms. Chambriard was formally appointed, served to review strategic points of the oil giant’s investment plan.

Optimistic about the appointment of the new CEO, the minister reinforced the need to accelerate priority actions to boost economic growth. Topics such as the expansion of refining, fertilizer, and petrochemical plants, as well as the Brazilian naval industry, were discussed at the two-hour meeting.

*Por Rafael Bitencourt, Andrea Jubé — Brasília

Source: Valor International

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

U.S. elections, Fed influence Lula administration’s economic choices

Entrepreneurs, government officials, and sector experts review business opportunities between Brazil and the U.S.

05/16/2024

Gabriel Galípolo, the Brazilian Central Bank’s Monetary Policy Director, alongside former Fed members James Bullard and Kevin Warsh — Foto: Vanessa Carvalho/Valor

Gabriel Galípolo, the Brazilian Central Bank’s Monetary Policy Director, alongside former Fed members James Bullard and Kevin Warsh — Foto: Vanessa Carvalho/Valor

Two significant events in the United States later this year—the potential start of the Federal Reserve’s interest rate cut cycle and the U.S. presidential elections—will shape the economic policy options of the Lula administration in the coming months. This topic was a key focus at the Summit Valor Econômico Brazil-USA held on Wednesday (16). The event, which took place at The Plaza Hotel in New York, gathered Brazilian and American businesspeople, government officials, and sector experts to discuss the challenges and main business opportunities between the two countries. It also marked the start of a series of activities celebrating Valor’s 25th anniversary, set to conclude in May next year. One goal of these events is to intensify international debates and deepen understanding of Brazilian realities and business prospects.

Frederic Kachar, the general director of Editora Globo and the Globo Radio System, commented, “We are an economy with one of the five largest trade balances in the world and a monetary policy committed to fighting inflation. However, we still face issues with the exchange rate. We have a clean energy mix, which truly sets us apart from the rest of the world, yet we are not a priority for investment, even by the United States.” He noted that the Brazilian economy has many attributes and differentials that should be more appreciated both domestically and internationally. The event’s eight panels explored ways these could be leveraged for sustainable growth.

On the fiscal side, the need to control spending was emphasized, as stated by Dario Durigan, the executive secretary of the Ministry of Finance. He noted that, alongside initiatives already underway since last year to restore revenues, further efforts to contain spending are necessary. However, Secretary Durigan cautioned that this must be balanced to avoid exacerbating political polarization in the country.

In terms of monetary policy, Gabriel Galípolo, the Central Bank’s monetary policy director, indicated a move towards greater cohesion and a more conservative strategy in response to the worsening inflationary scenario following a contentious vote in the Monetary Policy Committee (COPOM) that stirred market unease.

Additionally, the government faces challenges in mobilizing resources for emergency relief and rebuilding infrastructure in Rio Grande do Sul, which was severely damaged by heavy rains—an extreme weather event expected to become more frequent. This concern was echoed by many participants at the event, who emphasized the necessity of aid for the state.

“The need for aid in rebuilding, considering this new reality, is crucial,” stated Ilan Goldfajn, president of the Inter-American Development Bank (IDB), which is collaborating with the government on a R$5.5 billion rescue package for the state. “Countries must adapt and prepare to face what is coming.”

The anticipated start of the Federal Reserve’s monetary easing process continues to be delayed, contributing to rising international interest rates due to the increased need for the U.S. Treasury to finance its public deficit. This situation constrains the availability of capital for emerging economies. Kevin Warsh, a former Fed member and potential future head of the institution, stated that if Donald Trump wins the presidential elections again, “I don’t think there will be an interest rate cut until December, and I think that’s the right decision. I don’t see how the Federal Reserve could make cuts before that.”

The upcoming U.S. elections are expected to exacerbate political polarization, which could have similar effects globally and might lead to heightened protectionist measures within a divided geopolitical landscape. “Isolationism is present in both parties,” remarked Scott Jennings, a Republican Party strategist. “There is a multi-party isolationist movement.”

The ongoing political polarization further complicates achieving consensus on addressing the U.S. public deficit, which is increasingly necessary given the rise in public debt since the 2008 financial crisis and the likelihood of the Fed maintaining higher interest rates for a prolonged period. Mr. Warsh criticized the fiscal expansion under the Biden administration and the Fed’s initial misjudgment of inflation as temporary, stating, “The bigger the inflation problem, the more regressive the tax on the poor in the United States and around the world. The United States has an obligation to have responsible fiscal and monetary policies.”

Following a divided vote last week, Gabriel Galípolo, speaking publicly at the Summit Valor Econômico Brazil-USA for the first time since the vote, aimed to demonstrate a unified approach to monetary policy that might entail less easing than previously anticipated. He referenced a statement by Central Bank President Roberto Campos, emphasizing the importance of not debating but instead pursuing the target. “Discussing the pursuit of the target is a forbidden discussion for a Central Bank director. You don’t discuss the target. The target is pursued.”

Mr. Galípolo elaborated on last week’s COPOM meeting debate, which focused on whether to proceed with a signaled 50-basis-point cut in interest rates. New directors like himself argued for adhering to the signaled cuts to establish credibility with the market. “It’s up to the Central Bank’s directors to set interest rates at a sufficiently restrictive level for as long as it takes to meet the target,” he stated. He also mentioned considering a 20-bp drop and supported the majority’s technical argument for this decision.

The Summit Valor Econômico Brazil-USA, held with master sponsorship from Gulf and JBS and additional sponsorship from Gerdau, JHSF, Cedae, Copel, and Aegea, was supported by multiple government entities and featured Latam and Delta Airlines as the official carriers. The event was organized by Valor Econômico.

*Por Alex Ribeiro — New York

Source: Valor International

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

U.S. prepared to partner with Brazil in energy transition, says American ambassador

Green energy and energy transition areas are ripe for cooperation between the two nations, said U.S. Ambassador to Brazil Elizabeth Frawley Bagley

05/15/2024

Elizabeth Frawley Bagley — Foto: Vanessa Carvalho/Valor

Elizabeth Frawley Bagley — Foto: Vanessa Carvalho/Valor

The U.S. ambassador to Brazil, Elizabeth Frawley Bagley, stated today (15) at the Summit Valor Econômico Brazil-USA that the United States is ready to invest and cooperate with Brazil in partnerships related to the energy transition and green energy, areas she said have great potential to increase trade relations between the two nations.

Participating in a panel on the 200th anniversary of the bilateral relationship between Brazil and the United States at the Summit Valor Econômico Brazil-USA, Ambassador Elizabeth Frawley Bagley highlighted the promising prospects of the green economy. “Brazil’s focus on the energy transition to clean energy is an area in which the U.S. is ready to invest and which offers excellent opportunities to further solidify the partnership between the two countries,” she said. The event, held today (15) in New York, gathers Brazilian and American businesspeople, government officials, and experts from various sectors to discuss the challenges and main business opportunities between the two nations.

Ambassador Bagley, whose diplomatic experience includes serving as a senior advisor to Secretaries of State John Kerry, Hillary Clinton, Madeleine Albright, and as a special representative to the United Nations General Assembly, praised the efforts of both countries to create jobs and increase prosperity for their people.

She highlighted the partnership announced last year by Presidents Biden and Lula, aimed at combating precarious work and promoting the creation of decent jobs. This initiative, formalized during the UN General Assembly, involves collaboration with trade union partners from both countries and the International Labour Organization (ILO).

The U.S. Ambassador also expressed solidarity with the people of Rio Grande do Sul, mentioning that the United States is sending donations and supplies in partnership with the Army and the Foreign Affairs Ministry to mobilize resources for the affected regions. “We are with you. Ten of our people have lost everything, and we share not only the pain of this tragedy but also the solidarity,” she said.

Private sector creating jobs

Ambassador Bagley pointed out that American exports to Brazil support almost 150,000 jobs in the U.S., underscoring the significant role of the private sector in both countries in generating job opportunities for their citizens. She also mentioned that the United States is proud to be by far the largest foreign direct investor in Brazil, with a total of $191.6 billion invested in 2021.

The primary U.S. imports to Brazil include industrial and energy-related products such as refined fuels, natural gas, fertilizers, aircraft, and medical instruments, according to the U.S. embassy. Conversely, Brazil’s main exports to the U.S. are crude oil, aircraft, iron and steel, coffee, and cellulose.

Ambassador Bagley addressed an audience of Brazilian and American businesspeople, government officials, and experts from various sectors on Wednesday (15) at The Plaza Hotel in New York. The event is part of a comprehensive program celebrating the 25th anniversary of Valor, which will conclude in May next year.

Celebrating 200 years of bilateral relations

Regarding the bicentennial of relations between Brazil and the U.S., celebrated this year, Ambassador Bagley noted that hundreds of events are planned, including exchange programs, art exhibitions, concerts broadcast via YouTube, and the first NFL game in Latin America. “The bicentennial is an opportunity for an even better future, highlighting the importance that our bilateral relationship has had for the economy and our peoples.”

She also emphasized the historical support of the U.S. in significant moments for Brazil, such as being the first country to recognize Brazil’s independence in 1824, even before Portugal. “We recognized Brazil’s independence before Portugal, and we’re proud of that,” she remarked.

The ambassador stressed that the economic partnership forms one of the relationship’s foundations between the two countries.

“As the largest democracies in the Western Hemisphere, the partnership between Brazil and the U.S. is rooted in a shared commitment to sustainable economic growth and prosperity,” she said.

In an interview with Valor editor-in-chief Maria Fernanda Delmas following her panel discussion, Ambassador Bagley highlighted the importance and potential for growth in sports diplomacy activities, including investment partnerships in sports courts and training for Brazilian athletes by NBA professionals. “We will also collaborate in soccer between the women’s soccer teams of the two countries,” she added. “A lot is going on.”

Regarding the Brazil-U.S. CEO Forum, a group formed in 2007 that brings together up to 12 U.S. CEOs and 12 Brazilian CEOs to develop joint recommendations for both governments on how to increase bilateral trade, Ambassador Bagley praised the role of the American Chamber of Commerce (AmCham) in bringing companies together. “We talk about the green economy and green energy; we’ve been working with Embrapa [Brazilian Agricultural Research Enterprise] for several years. Everyone was very impressed with the Brazilians, their commitment to entrepreneurship, and their technical knowledge.”

On potential investments in the transition to a green energy economy, the U.S. Ambassador mentioned that several proposals on green hydrogen and infrastructure will be presented at the G20 Leaders’ Summit in November 2024 in Rio de Janeiro, attended by leaders of the 19 member countries, plus the African Union and the European Union. “We have a lot of cooperation and coordination [going on] and a lot to discuss.”

*Por Ligia Guimarães — São Paulo

Source: Valor International

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

Brazil sees second-largest dollar outflow ever

Movement helps explain shift in expectations for the real’s performance

05/14/2024

Fabio Landi — Foto: Leo Pinheiro/Valor

Fabio Landi — Foto: Leo Pinheiro/Valor

Investor hopes for a stronger Brazilian real at the turn of the year quickly dissipated. The robustness of Brazil’s trade balance bolstered renewed expectations for the real’s appreciation, similar to last year, when the commercial flow was solid. However, a significant outflow of dollars through the financial account dashed these expectations.

In the first four months of the year, Brazil saw the second worst financial flow since the official records began in 1982—a net outflow of $20.8 billion—second only to 2020, which helps to explain the change in expectations for the real’s performance.

“The contracted exchange rate at the start of this year is much worse than in the same period last year, and the main culprit is the financial flow,” said Ronie Germiniani, head of Itaú BBA’s exchange desk. “The trade balance, on the other hand, is in line with what we saw in 2023, with even better numbers, as expected.”

While the financial flow was negative by $20.8 billion in the first four months, the trade balance showed the opposite movement: it recorded the second-largest dollar inflow since official records began between January and April, totaling $27.6 billion.

The mismatch between the commercial and financial flows frustrated many Brazilian investors. Focusing mainly on the influx of dollars from exports, some managers began to bet on the real’s appreciation, anticipating some easing of U.S. monetary policy. For example, Verde Asset bet on the real against the dollar in November last year, citing a “structural improvement” in the trade balance.

Like Verde, other local asset managers started to view the commercial flow as a key factor for the real’s appreciation. From May 2023 to the end of January this year, local institutional investors’ bets on the Brazilian currency’s appreciation through the derivatives market increased to $17.5 billion from around $4.7 billion, according to data from B3.

Fabio Landi, a partner at Adam Capital, recalls that at the turn of the year, “the entire market” calculated the trade balance with the rise in exports and began to work with the expectation of the real’s appreciation. “The short position in dollars and long in real became consensus, partly due to the perception that the U.S. Federal Reserve would reduce interest rates, leading to a weaker dollar against all currencies; Brazil still had a positive carry, and the balance of payments was strong, meaning all factors pointed towards a real appreciation.”

The local market correctly anticipated a strong trade balance, which would translate eventually into a robust commercial flow. However, the surprise on the financial account was much more negative than agents had expected.

Adam Capital started the year with long positions in the real but began to switch to short positions (betting on depreciation) by the end of February. “We never believed in a weak U.S. economy. Despite [Fed Chair Jerome] Powell’s political will to cut rates, we didn’t think the data would be sufficient to warrant a rate cut. This scenario was delayed, and the market realized we were in a high U.S. interest rate environment with a strong dollar. Consequently, the idiosyncratic factors of each country became secondary,” said Mr. Landi.

Mr. Germiniani of Itaú also emphasized the importance of the Fed’s decisions for the global market, noting their significant impact on the Brazilian stock exchange’s performance. “While it’s challenging to pinpoint the exact reason for the entire outflow through the financial account, one easily traceable factor is the foreign exit from the stock market,” said Mr. Germiniani. “We’ve seen between $6.5 billion and $7 billion in foreign capital outflows from the stock market this year, which is very significant, accounting for about a third of the total outflow.”

However, the Fed isn’t the only reason for this outflow. Mr. Germiniani said that with the prospect of a more conservative U.S. monetary policy and a market with lower liquidity, foreign investors become more selective and sensitive to local uncertainties. “Doubts about fiscal policy, Petrobras, and even the COPOM [the Brazilian Central Bank’s Monetary Policy Committee] scare money away from the stock market,” he said, noting that the return of this capital is also more uncertain. “When making choices, foreign investors opt not to buy assets from places where there are constant disturbances.”

While a third of the capital outflow via the financial account can be explained by disinvestment in the stock market, the explanation for the remaining two-thirds is more elusive. Luís Afonso Lima, head of analysis at Mapfre Investimentos, looks to the balance of payments for answers, “even though the numbers don’t always align.”

“There’s been a significant increase in dividend payments by foreign and Brazilian companies to overseas,” Mr. Lima said. This scenario is “curious” because although the Brazilian economy is doing well, it isn’t robust enough to generate such high profits and lead to such substantial remittances. “The explanation likely lies in the fact that much of this capital is sent by mineral extraction companies, mainly Vale and Petrobras, benefiting from commodity prices.”

Additionally, a third factor in the capital outflow through the financial account involves spending on services. “When you look in detail at the balance of payments, you notice many expenses related to transportation because conflicts in the Middle East increase freight costs; there are also higher insurance costs and services for telecommunications and computing,” said Mr. Lima. “It’s hard to say how relevant each factor is for the financial account outflow, but U.S. interest rates certainly explain a large part.”

Mr. Lima also suggests that the contracted exchange rate scenario will likely worsen before improving. “Perhaps by mid-year, as U.S. disinflation shows consistent signs, we might have more predictability regarding rate cuts in the U.S. In this case, I can see chances of improved flows to emerging markets,” he said.

For Mr. Germiniani, the mere signal of rate cuts in the U.S. isn’t enough to guarantee a reversal of the capital outflow seen earlier this year. “We can’t be overly optimistic about the stock market and the flow because the U.S. narrative remains very strong. They have high, very restrictive interest rates, and their economy is booming. Just look at the S&P 500 chart,” he said. “Even though rate cuts would benefit emerging markets, I don’t believe the recovery will be strong.”

Similarly, Mr. Landi, with Adam Capital, said, “We’re not yet at a point where we don’t have a strong dollar.” The firm continues to hold small positions in the dollar against the real. Mr. Landi said that the timing for the Fed to start cutting rates remains uncertain, and in Adam’s view, the U.S. central bank may continue to delay the start of a monetary easing cycle.

*Por Arthur Cagliari, Victor Rezende — São Paulo

Source: Valor International

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