Mercado Pago sheds stealth mode, boosts communication

After expanding product offerings, digital bank will also accelerate lending

04/06/2024

André Chaves — Foto: Rogério Vieira/Valor

André Chaves — Foto: Rogério Vieira/Valor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Valor International

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

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

06/04/2024

Bill Ackman — Foto: Jeenah Moon/Bloomberg

Bill Ackman — Foto: Jeenah Moon/Bloomberg

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

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

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

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

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

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

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

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

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

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

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

*Por Álvaro Campos, Maria Luíza Filgueiras — São Paulo

Source: Valor International

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

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

06/04/2024

Julia Gottlieb — Foto: Divulgação

Julia Gottlieb — Foto: Divulgação

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*Por Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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DIA pays to divest from operations in Brazil

Spanish owners allocate funds to clean balance sheet; group filed for reorganization

06/03/2024

DIA’s local operation has been in court-supervised reorganization since March — Foto: Claudio Belli/Valor

DIA’s local operation has been in court-supervised reorganization since March — Foto: Claudio Belli/Valor

The sale of the supermarket chain DIA’s operations in Brazil to Lyra II Fundo de Investimento em Participações (FIP) accelerated a month ago as the Spanish owners needed to clean the balance sheet and reduce the Brazil risk in its financial statements. Banco Master’s MAM Asset structured the fund but is not involved in the deal. Valor found that a group of former executives of Alvarez & Marsal are leading the fund.

DIA’s local operation has been in court-supervised reorganization since March and is expected to be acquired by the fund for a symbolic amount (€100). In practice, the group paid to operate in Brazil in recent years and divest the country’s chain.

Valor found that, despite the progress of the company’s operational recovery plan, the more financial approach by Chairman Benjamin Babcock gained strength over the last few weeks. Mr. Babcock leads the investment firm LetterOne, with 77% of the group’s shares.

According to this approach, the chain requires a faster solution in Brazil, involving negotiation with foreign banks to refinance the retailer’s debt in Spain.

The completion of the sale hinges on DIA obtaining the banks’ approval of the terms of the agreement, which includes a final capital injection into the local operation. “LetterOne was unwilling to inject capital and needed to reduce leverage. Therefore, divesting of the Brazilian operation became the top priority,” a person familiar with the matter said. Two proposals were at the table, one by Lyra II FIP and another by DIA Brasil managers. The first was the winner.

A statement by the headquarters informs that under the agreement with the fund, DIA will allocate €39 million (R$222 million) to the company in Brazil and will pay €30 million in guaranteed debt (R$171 million) with Santander. It should spend €5 million (R$28.5 million) on transaction expenses, for a total allocation of R$422 million.

As an accounting effect, with no cash disbursement, there are €27 million (R$154 million) in exchange rate adjustments. In total, considering cash and accounting effects, the impact is R$575 million.

Over the last decade, between €500 million and €1 billion have likely been injected into the subsidiary, according to another person, including the period when an accounting fraud was unveiled, in 2019.

The announcement of the deal with the fund, on Friday (31), occurred hours before the company’s reorganization plan was filed in court, with legal debts of R$1.1 billion, as revealed by Valor.

The fund’s investors, through the management, are expected to open negotiations with creditors based on the filed plan, according to two industry creditors’ lawyers interviewed by Valor.

“There is a plan to resume DIA’s operations, that’s what we’ve heard, and we think it’s still in effect. This is the signal we want to see from the new owners,” says one of the lawyers, who criticized the headquarters’ lack of transparency in disclosing information about the fund. Information regarding the Lyra II FIP appears only in a statement to the Spanish market regulatory body.

The fund, structured by MAM Asset, was registered with the Board of Trade on May 17, specifically for the deal. In recent days, there were rumors in the market that Brazilian investor Nelson Tanure could be leading the agreement, given his operations through MAM. Valor found that Mr. Tanure was not involved in the deal.

Santander is the main creditor bank, with two loan facilities (R$85 million and R$90.9 million). Banco do Brasil has loans amounting to R$27.3 million and Daycoval, has R$16.5 million. Most of the debt is with suppliers.

By exiting Brazil, the controlling shareholders of the DIA group will have operations only in Spain (90% of revenue) and Argentina. The decision surprised the market and the group’s leadership in Brazil, which was leading the retailer’s turnaround, and had closed a restructuring project with the headquarters in March.

Led by Sébastien Durchon, the chain has improved its performance—cash consumption decreased and losses were reduced by almost two-thirds, Valor found. Of the total stores, 343 closed between March and April. The group currently has 244 stores (121 owned and 123 franchises) in addition to the distribution center located in Osasco, in São Paulo.

According to the plan filed on Friday (31), which may change after negotiations, creditors that accept to cooperate will not have any discount on their debt but cannot litigate against the company. They also should maintain supply according to the best commercial conditions in effect over the 150 days before the filing of the reorganization plan.

In the first two years after approval, the payment period to cooperating creditors will be at least 30 days or whatever was in effect before the filing (whichever is longer). DIA commits to pay cooperating creditors in 96 monthly installments, following the end of a two-year grace period.

There are also payment conditions for creditors with unsecured debt, labor creditors, and small and micro companies. Under the plan, DIA commits to maintaining its activities and could divest from assets to pay debts amounting to R$1.1 billion.

Considering its facilities, machines, furniture, and utensils, the group’s residual balance is R$88.1 million, according to the feasibility study report attached to the plan. The residual balance of all fixed assets amounts to R$413 million.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Costs grow for Central Bank as Pix expands financial inclusion

Costs reflect increased processing and storage capacity, monetary authority says

06/03/2024

Leandro Vilain — Foto: Leonardo Rodrigues/Valor

Leandro Vilain — Foto: Leonardo Rodrigues/Valor

As the user base expands and new functionalities are incorporated, Pix— the Central Bank’s instant-payment system—represents increasing costs for the monetary authority, in terms of both maintenance and investment. While the instant payment system has significantly boosted financial inclusion and transaction efficiency, the associated expenses for its implementation and operation have grown.

The implementation costs for Pix up to 2021 amounted to R$13.6 million. For 2024, the forecasted costs are R$25.3 million for maintenance and R$43.1 million for investment. These figures are approximations, as maintenance and investment are generally spread across the entire computing infrastructure of the Central Bank. The data were obtained through the Freedom of Information Act.

According to the Central Bank, the rise in costs is due to the need for continuous expansion of the system’s processing and storage capacities, as well as the addition of new features and security improvements.

Despite the increase, these amounts represent a small percentage of the Central Bank’s allocated budget, which was R$3.9 billion in 2023. Of this total, 92.7% was spent on personnel, social charges, and benefits; another 5.6%, or R$222.6 million, went to maintenance; and 1.7%, or R$69.9 million, to investment.

The Central Bank said that it has prioritized the technology budget, “especially necessary for Pix,” at the expense of other projects. Even so, it described the budgetary scenario for 2023 as “quite challenging” and noted that the investment amount for this year depends on a budgetary reorganization currently being negotiated with the government.

The Federal Budget Department declined to comment, stating it only addresses budget credits whose proposals have been formalized and their effects made public.

With the investments made so far, Pix has reached 149.1 million individuals and 14.2 million businesses since its launch in November 2020. The Central Bank estimates that the system has brought 71.5 million users into the financial system by December 2022, the most recent data available.

Leandro Vilain, a partner at Oliver Wyman specializing in financial services, said that Pix has “cannibalized” cash transactions, which he views as “extremely favorable for the low-income population.” He cited examples of service providers who previously only accepted cash and now accept Pix, broadening their potential clientele and opening up new possibilities.

“You have a portion of the population, like self-employed individuals and taxi drivers who used to receive a lot of cash transactions, small self-employed agents, or day laborers. These people have started to receive money directly into their bank accounts, giving banks the necessary information to provide credit if needed,” he said.

Pix does not charge fees for individual users and has increased the volume of transactions in the financial system. In the third quarter of 2020, 10.8 billion transactions were recorded. By the fourth quarter of last year, that number had risen to 30.8 billion.

Before Pix, the easiest options for transfers were TED and DOC, both of which incurred fees. TED has now largely fallen out of daily use, accounting for just 1% of transactions, while Pix handles 43%. DOC was discontinued by banks this year.

The Central Bank has continuously added features to Pix since its launch. Pix Saque (for drawing cash) and Pix Troco (for change), which allow for cash withdrawals at stores and lottery outlets, are already operational. To enhance security, the system includes precautionary blocking for suspected fraud and a “Special Refund Mechanism” to facilitate reimbursements in fraud cases.

Amid these developments, Central Bank President Roberto Campos Neto has publicly discussed the institution’s budgetary challenges, including reduced funding for certain projects.

At an event in late April, Mr. Campos Neto was asked about potential risks to Pix’s operation. He said that there is currently no significant risk but noted that he had allocated many staff to system security, which has hindered the development of new functionalities.

The launch of Pix Automático (for scheduled payments) was postponed from April to October this year. At the time, amid a working-to-rule movement by Central Bank servants, the delay was attributed to the time required for development and organizational issues. The service will function similarly to direct debit, facilitating the payment of recurring bills such as water and internet.

The Central Bank’s centralized system for Pix has faced criticism from the private sector. While banks and payment institutions acknowledge Pix’s success, they see limitations in an operation run by a public entity with a restricted budget.

In last year’s integrated report, in which the Central Bank outlines its operations, the monetary authority highlighted that the biggest challenge was “maintaining the level of results observed in previous years, especially incorporating technological innovations in the Central Bank’s business areas to support the future financial system, such as Pix, Drex [digital currency], and open finance.”

  • Por Gabriel Shinohara — Brasília
  • Source: Valor International
https://valorinternational.globo.com/
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Floods: Reconstruction must consider climate challenges, says Johannpeter

Tragedy highlights need for climate-conscious rebuilding efforts, according to company’s shareholder

06/03/2024

André Bier Gerdau Johannpeter — Foto: Silvia Zamboni/Valor

André Bier Gerdau Johannpeter — Foto: Silvia Zamboni/Valor

Businessman André Bier Gerdau Johannpeter, continuously monitoring the recovery efforts in Rio Grande do Sul—recently devastated by the most significant flood in its history—is deeply involved in the post-disaster scenario in the birthplace of the steel group founded by his great-great-grandfather. From his apartment in Porto Alegre, the former CEO of Gerdau and now vice-chairman of the board watches as dark clouds gather, signaling yet another heavy rainfall. “We are still in the midst of the catastrophe,” he told Valor last week.

While immediate emergency responses and substantial investments are crucial to restore the basic infrastructure, Mr. Johannpeter is also casting an eye towards the future, considering the broader implications of the devastation. He sees an opportunity for Rio Grande do Sul to become a beacon of sustainable reconstruction and a case study in minimizing climate impacts.

“We need to rethink Rio Grande do Sul. Perhaps the state can serve as a case study for how to rebuild in a way that acknowledges and addresses the realities of climate change,” he suggested. With 50% to 60% of its GDP impacted by the disaster, the state’s immediate needs are dire, but Mr. Johannpeter emphasizes that planning for sustainable rebuilding should begin now, recognizing that it will be a prolonged endeavor.

The businessman is championing an efficient and sustainable approach to reconstruction in response to the increasing frequency of extreme weather events. “If we simply rebuild in the same locations and in the same manner, we are setting ourselves up for future catastrophes,” he warns.

Mr. Johannpeter points to successful international models that could inspire Rio Grande do Sul’s rebuilding efforts. For instance, the Netherlands’ “Room for the River” program was initiated after the 1995 floods of the Rhine and Meuse rivers, which displaced over 200,000 people. “This program does not merely attempt to contain water; instead, it involves sophisticated engineering of dykes, elevation of riverbanks, and channel modifications to allow the river more room to flow safely,” he recalls.

Another example is New Orleans in the United States; following the devastation of Hurricane Katrina in 2005, over $14 billion was invested in enhancing its hurricane and flood defenses. The city’s measures included constructing new dyke systems, installing water pumps, and developing an extensive contingency plan to better manage future disasters.

Despite significant efforts and investments, the aftermath of Hurricane Katrina saw New Orleans’ population decline by 20% as 100,000 residents were forced to leave, having no viable options for resettlement. Mr. Johannpeter expresses a concern that Rio Grande do Sul might face a similar fate. “Without a compelling program that offers residents hope and support to rebuild, we risk a mass exodus,” he cautions.

Mr. Johannpeter also highlights innovative solutions like “sponge cities,” a concept applied in China, the United States, Denmark, and Germany. This approach involves adapting urban environments to absorb, cleanse, and repurpose rainwater. While acknowledging the high costs associated with such technologies, he emphasizes their long-term benefits: “We must envision a grand project that’s sustainable over time, rethinking our approach to reconstruction to ensure it is robust and effective.”

Furthermore, Mr. Johannpeter sees an opportunity to raise global awareness about climate change through Rio Grande do Sul’s reconstruction. He points out that while developed nations are progressing toward decarbonization, similar impactful measures can be implemented elsewhere. He envisions two major goals for the state in the wake of its recent devastation: to become a model for effective and sustainable rebuilding and to enhance global engagement with environmental stewardship, thereby contributing to broader efforts to mitigate climate change.

Internally, various proposals and actions are gaining momentum. Mr. Johannpeter, a prominent member of the Rio Grande do Sul State Federation of Industries (FIERGS), highlights the ongoing campaign to boost local product consumption. Dubbed “Buy RS,” this initiative is designed as an emergency measure to bolster the state’s economy in the wake of recent hardships.

FIERGS has presented over 40 distinct requests for federal support to aid in the state’s recovery, which are already yielding tangible results. According to Agência Brasil, a month following the intervention by the federal government’s task force, an emergency allocation of R$62.5 billion has been directed towards Rio Grande do Sul to assist the flood-impacted populace. Additionally, the government has expedited the distribution of benefits and extended the deadline for tax payments.

Mr. Johannpeter, alongside other leading southern businesspersons and executives such as Daniel Randon, Bruno Zaffari, José Galló, and Gabriela Schwan, is actively involved with Transforma RS, an initiative aimed at mobilizing local and international companies. The organization, which already collaborates with public authorities to enhance management practices, now faces the critical challenge of efficiently managing significant financial inflows and coordinating diverse recovery efforts in the aftermath of the disaster.

“We closely examined what was done during the pandemic to reinvigorate companies. However, there is a heightened challenge now: the economy must be stimulated to generate revenue. It is crucial to infuse new capital into businesses, as this catalyzes both the regional and state economies,” he said.

Gerdau, significantly impacted, saw two of its major plants in Charqueadas and Sapucaia halted by the floods. Though the rains did not directly damage the facilities themselves, operations were suspended to ensure the safety of the workforce, many of whom suffered considerable personal losses due to the flooding.

“There was no damage to the property itself, but we halted operations as a precautionary measure,” explained Paulo Boneff, head of organizational development and social responsibility at Gerdau and general manager of Instituto Gerdau. He noted that approximately 180 families of employees either lost their homes or require extensive repairs before they can return. Gerdau is actively working to support these families in making their homes livable again.

In addition to monitoring the well-being of at least 350 families significantly affected by the tragedy, Gerdau faces the challenge of addressing its employees’ mental health. Mr. Boneff highlighted a dedicated company program that maintains daily contact with affected employees, ensuring that no one is required to return to work until they are ready, including from a psychological standpoint.

Furthermore, Gerdau is actively involved in several other initiatives. In collaboration with Gerando Falcões, a non-profit organization focused on social impact, Gerdau has established a fund to aid housing efforts, kick-started with an initial company donation of R$5 million. This fund, open to contributions from other corporations, aims to finance the construction of temporary or permanent residences for families who have lost their homes. Additionally, the steelmaker is contributing to the rebuilding of small bridges in the hilly areas of Rio Grande do Sul, which is critical for the region’s logistics and accessibility.

The controlling family of Gerdau has actively participated in various efforts to aid the reconstruction of the state. In collaboration with Din4mo Lab, a consultancy specializing in social impact businesses, they established the Regenera RS emergency philanthropic fund. Initiated with a substantial contribution of R$30 million from Instituto Helda Gerdau and the steel company itself, the fund aims to amass a total of R$100 million. Managed by Din4mo, the funds will support projects across education, housing, urban solutions, and business development.

“It is a collective endeavor involving both the public and private sectors and drawing support from within and beyond Brazil. Every bit of help counts. The emotional impact is profound, and while the full scope of the challenge is still unfolding, it is clear that it will be substantial,” expressed Mr. Johannpeter.

*Por Stella Fontes, Helena Benfica — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Indonesia’s largest roaster to purchase Brazilian conilon coffee

Kopi Kita considers buying 100,000 coffee bags from Brazil due to robusta shortage in Southeast Asia

05/31/2024

Kopi Kita, the largest coffee roaster in Indonesia, will purchase Brazilian conilon coffee for the first time, introducing the Brazilian variety to the Asian market.

Indonesia, the fourth largest coffee producer, primarily grows robusta and exports to countries like Vietnam. However, due to severe drought starting last year, the country is turning to Brazilian production to meet its needs.

Kopi Kita plans to buy 100,000 bags of coffee from Brazil this year, including both arabica and conilon varieties, Moelyono Soesilo, the company’s director, told Valor. The final decision on the volume will depend on weather developments in Brazil.

“I will wait a few more weeks to finalize the negotiations, observing the progress of Brazil’s harvest. I’ve heard from many producers and traders that the drought in Espírito Santo is affecting the quality of the conilon being harvested, and I don’t want to risk securing lower-quality beans,” Mr. Soesilo explained. He is willing to pay more for Brazilian coffee by delaying the purchase decision.

Kopi Kita is also strengthening its ties with Brazilian traders and exporters to negotiate Brazilian coffee with smaller roasters in Southeast Asia, Mr. Soesilo added. The Indonesian industry is expected to increase Brazilian coffee acquisitions this year due to low domestic stocks. Coffee shipments from Brazil to Southeast Asia are anticipated to gain momentum starting in June.

Kopi Kita began sourcing Brazilian coffee in 2023, initially focusing on arabica beans to blend for the Indonesian market, which predominantly uses robusta. However, the drought worsened between January and March this year, leading to projections of a 6 million bag harvest in Indonesia, matching 2023’s output and insufficient to meet local and Asian demand. Indonesia’s harvest peaked at 12 million bags in 2021.

According to Mr. Soesilo, Brazilian conilon’s flavor and aroma characteristics don’t fully align with Indonesian preferences. Nevertheless, due to the robusta shortage in Southeast Asia, the company had no choice but to turn to Brazilian coffee.

Adverse climate conditions in Asia have been driving Indonesia’s demand for Brazilian coffee since last year. In 2023, Indonesia’s coffee imports from Brazil grew by 19% to 415,900 bags, according to the Brazilian Coffee Exporters Council (CECAFÉ). This increase was driven by Brazilian conilon purchases, which were zero in 2022 but reached 103,300 bags in 2023, surpassing Brazilian arabica imports that year.

The trade between the two countries continues to accelerate in 2024. From January to April, Indonesia increased its purchase of Brazilian coffee by 119.1%, from 23,700 bags in the same period last year to 52,000 bags.

*Por Isadora Camargo — Santos

Source: Valor International

https://valorinternational.globo.com/
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Antitrust authority monitors closer ties between Azul and Gol

Technical team of CADE discusses flight-sharing agreement with airlines

05/31/2024

Azul and Gol recently announced a flight-sharing agreement — Foto: Leo Pinheiro/Valor

Azul and Gol recently announced a flight-sharing agreement — Foto: Leo Pinheiro/Valor

The technical team of the Administrative Council for Economic Defense (CADE) has been in contact with Azul and Gol, seeking information regarding the recently announced flight-sharing agreement, sources say. While the companies are not mandated to submit the agreement to CADE, the antitrust authority can review potential competitive issues, as it has done with similar agreements in the past.

According to a source, before making the announcement, the companies had already approached CADE to present the agreement. Being a “traditional” model without overlapping routes, it is likely that there will be no hurdles from the agency. However, if a merger is proposed, it will require submission to CADE.

Currently, the technical team within CADE’s General Superintendence (SG) is conducting a confidential review to determine if the companies need to formally submit the agreement for analysis. Based on this review, SG may either initiate a formal analysis and request further information from the companies or close the case.

Following SG’s decision, any CADE councilor could request an investigation, which would require agreement from the Tribunal and the technical team.

Within CADE, opinions are divided; some see the agreement as unproblematic due to the lack of overlapping routes, while others believe certain clauses, like the merging of loyalty programs, may require further clarification.

Eric Hadmann Jasper, an expert in economic law and partner at HD Advogados, noted that it is natural for CADE to seek clarifications from the companies given the operation’s significance in a strategic market.

Until mid-2017, such agreements had to be notified to CADE. The policy changed following the analysis of an agreement between Qatar Airways and Latam, where CADE concluded that typical flight-sharing agreements did not require notification.

Mr. Jasper explained that in the Qatar Airways-Latam case, the exemption was granted because the agreement did not involve payment, asset transfers, or changes in corporate structure, and the companies had the freedom to start or stop routes, set prices, and did not exchange sensitive commercial information.

In a recent case involving Latam’s purchase of VoePass (Passaredo) shares, the technical team noted that such agreements can benefit consumers and airlines, particularly when connecting companies operating complementary routes. However, they can also reduce competition, as airlines might lose interest in exploring new or low-demand market niches.

The SG pointed out that CADE’s primary concern in reviewing domestic airline cooperation is the potential for coordinated actions, such as setting flight frequencies and fares together.

CADE councilor Gustavo Augusto emphasized that there is no precedent for absolute exemption of flight-sharing agreements. He stressed the need to assess whether the agreement involves shared risk and suggested that it would be prudent for the companies to notify the operation. “If we determine that the operation should have been notified, the companies could face penalties.”

Gol stated that the sharing agreement is a standard commercial deal within the “normal course of business,” involving only non-overlapping domestic routes, and affirmed their readiness to respond to any inquiries. Azul also expressed willingness to provide any necessary clarifications to CADE.

The National Civil Aviation Agency (ANAC) commented that commercial cooperation agreements do not require its prior analysis and approval. However, as the sector’s regulator, ANAC will monitor the implementation to ensure passenger rights are protected and operations adhere to safety standards.

*Por Beatriz Olivon — Brasília

Source: Valor International

https://valorinternational.globo.com/

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With high interest rates, investors favor bonds, international assets

Lack of consensus at Monetary Policy Committee, fiscal concerns, change in Petrobras increase risk perception

05/31/2024

André Leite — Foto: Divulgação

André Leite — Foto: Divulgação

Investments linked to the Selic policy interest rate and CDI (the interbank deposit rate, used as an investment benchmark in Brazil) remain the main highlights in 2024. A month before the end of the year’s first half, assets regarded as risky, such as the stock market, multimarket and real-estate funds in Brazil had little chance among investors, with the Selic paying comfortable double-digit yields, at 10.5% per year. The depreciation of the real also provided a good return for those investing in the dollar or holding international assets with no currency hedge.

With further interest rate cuts by the U.S. Federal Reserve seen as less likely to occur and the slowdown in the pace of monetary easing in Brazil, the benchmark stock index Ibovespa posted losses of 2.55% in May, until the 29th, and 8.55% in the year. In the first five months of 2024, the index that tracks shares in the real estate segment showed the worst performance (-16.81%), followed by small caps traded on the stock exchange (-13.89%).

The exchange rate was 0.30% up in May and 7.33% in the year.

In fixed income, the IMA-B 5 index, comprised of inflation-indexed bonds adjusted by the Extended Consumer Price Index (IPCA) maturing in up to five years, were 0.94% up in the month and 2.81% in the year. They were still below the 4.39% CDI return since January. Debentures linked to the CDI were showing better performance, with 5.72% in the year, according to the Brazilian Financial and Capital Markets Association (ANBIMA) index.

In the international market, the S&P 500 was 9.8% up, while the Nasdaq rose 10.9% until Thursday (30) when markets in Brazil were closed due to a national holiday.

The United States has been the world’s main capital attractor, via direct and financial investment. At the same time, Brazil has disappointed investors since the government reduced its fiscal surplus target, as proposed in the 2025 budget.

“The market realized what was happening from the second half of April onwards. On the international front, there is no clear horizon for the Fed to cut interest rates, with an impact not only in the Brazilian monetary policy but for emerging markets in general,” said André Leite, chief investment officer at TAG Investimentos. “And we can’t say the government has surprised [the market] with a worse fiscal situation. It was already bad, with little [adjustments] on spending and a very high tax burden.”

Amid concerns about public accounts, Brazilian assets missed the favorable wave seen in some emerging markets in May—and even in developed economies—with a weak performance by the real and Brazilian shares, plus an increase in interest rates. The consequences of the floods in Rio Grande do Sul added uncertainty both on the fiscal side, due to the funds needed to rebuild the state, and on the monetary side, due to expected impacts on inflation.

Mr. Leite points out that Brazil is not a “guy with savings.” He said the country is more like “a guy who owes money and now has a disaster bill to pay, which explains its detachment from the rest of the world.”

The executive says that, in the composition of portfolios, both for individual and institutional investors, the year started with part of the assets allocated in dollars, with no hedge—with direct exposure to the U.S. currency. He sought a return of the exchange rate variation plus 4% in the long term, similar to that of the CDI, but with no relation to Brazilian assets. “In a bad moment, it helps part of the portfolio, reduces volatility, and is paying part of the [performance] bill.”

With artificial intelligence and incentive policies for the construction of microprocessor plants in the U.S., there is a reallocation of capital to the country, both via direct investments and financial assets, through the stock exchange or fixed income. The weak dollar thesis was not confirmed, the executive said. The spread between local and international interest rates, which was once 6 to 8 percentage points, is now close to 4, which is considered insufficient to encourage arbitrage operations.

In the speculative flow towards emerging markets, Mexico has stood out, while the Chilean currency has excelled thanks to the high demand for copper, a raw material with limited supply, Mr. Leite points out. The thesis can be seen in TAG’s portfolio.

The executive said that as rates paid by Tesouro IPCA+, an inflation-indexed National Treasury note (NTN-B) rose, TAG increased its exposure, favoring tax-exempt securities in the conservative portion of the portfolio. The asset manager has taken advantage of opportunities in structured credit, with a good level of guarantees, with interest rates between 3% and 5% above the CDI. The stock market, in turn, lacks the strength to gain traction. With high interest rates, local or international flows with a speculative profile are not expected to come.

At Portofino Multifamily Office, the bias is towards bonds and corporate debt, according to CIO Eduardo Castro. That applies both to Brazil and international assets.

“Interest rates are being kept high [in the U.S.] because activity is strong, which benefits companies’ results,” Mr. Castro points out. With surprises in the top and bottom lines, high-yield companies’ spread (to sovereign rates) is close to the lowest levels in 10 years. However, “the quality of companies, in general, was not affected by the recession, a prevailing narrative 12 months ago.”

According to the executive, the Brazilian stock exchange needs a trigger to adjust prices, no matter how cheap the assets may be. Considering price, macro scenario, and flow, the last two aspects do not allow a reaction. “With the real interest rate of NTN-B above 6%, pension funds are unlikely to increase allocation,” Mr. Castro adds. “For individuals, the same applies, as, in recent years, investors have been hurt by the stock market’s performance.”

In the international market, with interest rates around 5% per year and the U.S. stock market posting good returns, foreign investors are not willing to change geography. Mr. Castro points out that indices in the U.S. are no longer driven by the so-called magnificent seven—Alphabet (owner of Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. According to the executive, there is dispersion to other names outside the tech industry.

“It has really appreciated, it may seem expensive if we compare the valuation with the 10-year history, but there were important changes in the sector, including technology and investment theses. Some cases could demand higher multiples, such as Nvidia,” Mr. Castro said. “Given the differences in risk, allocation, geography, and concentration between the Brazilian and U.S. stock exchanges, we prefer the U.S.”

In the Brazilian market, the preference is for floating-rate bonds as a way to benefit from the double-digit annualized carry, with an additional over the CDI. The executive favors structured credit rather than triple-A, liquid one in large issues.

“The premium for this type of company is relatively low, there is an imbalance among market agents, the originating bank, the borrowing company, and investors, which is the weakest side,” Mr. Castro points out. “Tax-exempt debentures are a good example. Some securities are paying [the yield] of the NTN-B with no additional interest rates, just because of tax exemption. In a normal market, there is a risk of increasing such spread [with the assets’ devaluation].”

However, there is no rush to invest in inflation-indexed government bonds. Although the NTN-B at 6% may be a promising starting point as, in two or three years it will likely outperform the CDI, amid the current concerns about the monetary cycle and inflation, investors would rather postpone taking that risk. “The market is pricing in inflation unanchoring, whether due to discussions about the change in leadership at the Central Bank, the division of votes [in the Monetary Policy Committee], or a slightly worse inflation combined with rising commodities.”

The lack of consensus at the last COPOM meeting, with 5 versus 4 votes for reducing the Selic by 25 basis points and 50 basis points, brought forward the debate on who will replace Roberto Campos Neto as the Central Bank president, said Evandro Buccini, partner and director of credit and multimarket management at Rio Bravo Investimentos. “It has coincided with a turbulent moment also in the U.S. monetary policy, and with the change of command at Petrobras. So, for yet another month, the Brazilian stock market was outperformed by the U.S., with the S&P 500 rising sharply.”

Mr. Buccini points out that, given the negative reactions, the COPOM will seek greater consensus at the next meeting. “It will be interesting to follow the topic and see if it [a consensus] is credible or if it will just convey the idea of a temporary truce.” In any case, he sees a troubled succession as it will be hard to find an independent name appointed by President Lula as it was in the Bolsonaro administration. “There is almost consensus that it will be someone more dovish. This matter will remain around and will only be resolved at the end of the year.”

Rio Bravo’s projection for the Selic was revised to 10% per year from 9.75% by December, with great debate and a lot of noise about fiscal policy expected along the way. The executive mentions that the launch of development bills could indicate a more active Brazilian Development Bank (BNDES) in the coming years, allowing operations below the cost of capital and bringing distortions to private funding.

The firm’s funds have more cash available, including loans and equity. “With 10% [of the CDI], we are happy to carry it and there is no rush to allocate the money.” For individual investors, Mr. Buccini points out that strategies linked to real interest rates may be a good choice. “It could increase further if everything goes wrong and it becomes 7%, but ensuring the IPCA plus 6% in the medium and long terms is very good, especially for investors with access to tax-exempt debentures.”

*Por Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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