Chambriard was inaugurated as CEO of Brazil’s state-owned oil company and member of the board of directors this Friday
24/05/2024
Magda Chambriard — Foto: Tânia Rêgo/Agência Brasil
Petrobras announced this Friday (24) that its board of directors has approved the appointment of Magda Chambriard as a board member and has elected her as the new CEO of the company.
Ms. Chambriard assumed both positions this Friday and joined the board immediately, without the need to convene a shareholders’ meeting, the state-owned company said.
The new CEO of Petrobras is an engineer who has built her career within the company. She served as the director-general of the National Agency of Petroleum, Natural Gas and Biofuels (ANP) from 2012 to 2016.
The executive takes over the position vacated by Jean Paul Prates, who was dismissed by President Lula on May 14 after a series of disagreements regarding the management of the company.
Proposal backed by Lower House speaker is being discussed under new policy for automotive industry
05/23/2024
Presidente Lula — Foto: Brenno Carvalho/Agência O Globo
President Lula said on Wednesday (22) he would veto the end of the import tax exemption on international purchases of up to $50 if it is approved within the Green Mobility and Innovation Bill, known as Mover, Congressman José Guimarães, leader of the government in the Lower House, told Valor. Lower House Speaker Arthur Lira insists on passing the legislation and has postponed the vote. A new attempt to vote on the matter should take place on Thursday (23).
In recent weeks, the inclusion of the topic in the Mover Bill divided the groups in the Parliament and led the vote to being postponed on multiple occasions. Members of President Lula’s Workers’ Party (PT), understand that the end of the tax exemption could generate reactions in the party’s electoral base and hurt the Lula administration if approved. The Liberal Party, former President Jair Bolsonaro’s party, is also against it and proposed the approval of an amendment that would exempt from tax all domestic sales of up to $50. The proposal is considered a “fiscal time bomb” by government supporters and even oppositionists.
In a text message sent on the WhatsApp group of government leaders in the Lower House, Mr. Guimarães said that President Lula is in favor of the approval of the Mover Bill—the country’s new policy for the automotive sector—but is against eliminating tax exemption on international purchases up to $50. Mr. Guimarães confirmed his statement to Valor: “He [President Lula] will veto it [if it is approved].”
Mr. Lira insists on taxation and has received support from prominent Brazilian businesspeople in recent weeks. Fábio Faccio, the CEO of Renner, was in Brasília to meet with Mr. Lira and other Lower House members and present some reasons to support the taxation. “We are not asking for commercial barriers. We’re asking for fair competition. If we also had tax exemption, our products would be sold at half the price and with better quality,” he argued.
In previous weeks, executives from retailers Petz, Leroy Merlin, Riachuelo, and Mercado Libre also engaged in this effort to raise awareness among legislators and the government. “These e-commerce platforms claim that they are helping those with less purchasing power, but they are actually taking away these people’s jobs and the money for social policies by not paying taxes,” Mr. Faccio said.
Valor found that retailers linked to IDV, the main retail association in the country, are hoping that, despite a possible veto by Mr. Lula, it will be possible to bring the import tax back through a debate with the president.
“We have to move step by step, dealing first with the approval of the bill in the Lower House. Then, if the Executive branch resists, we can prove that the tax exemption is harmful to companies and jobs,” said a person familiar with the matter. “One battle at a time.”
President Lula’s opposition to the idea of returning the import tax is not new to retail and industry members and the possibility of a presidential veto did not surprise those who were in Brasília on Wednesday (22) following the matter. The companies had been increasing pressure on Congress and seeking support from the government.
This week, the CEOs of retailers such as Renner, Petz, Marisa, and Caedu sent video and text messages to Lower House members asking for support to eliminate the tax exemption, Valor found.
International marketplaces claim that the exemption for purchases of up to $50 is a global practice that has allowed low-income people to have access to the same benefits as richer people who make purchases on international trips and has generated thousands of jobs in the logistics sector in Brazil.
Furthermore, they argue that the impact on the domestic retail and industry is not as big as the companies say. “The share of international e-commerce platforms would not reach more than 0.5% of national retail,” trade associations Proteste, Free Market Institute, and the Brazilian Association of Transportation Companies wrote in an open letter.
If the exemption is eliminated, the taxation would be a 60% import tax on the products, in addition to the 17% Tax on Circulation of Goods and Services (ICMS) under the Federal Revenue’s Remessa Conforme program. International companies claim that would create a global tax of 90%, making the cross-border market unfeasible.
As an alternative, the Mover Bill rapporteur, Congressman Átila Lira, suggested changing the text to set an import tax of 25% or creating a schedule for levying the tax. However, the idea received no support from the Lula administration. “I’m hoping that it will be voted on Thursday [23] as I don’t want to harm the bill,” the rapporteur said. He pointed out that the government has requested the postponement fearing that an amendment by Congresswoman Adriana Ventura suggesting the extension of tax exemption to the domestic industry could be approved by the House floor.
To legislators, Finance Minister Fernando Haddad advocated for a “joint solution” involving the three branches of government to determine how the taxation of imports below $50 would be carried out.
“The retail and industry segments’ concerns are legitimate but we need to have an understanding between the three branches of government on this issue,” he said at a public hearing in a committee by the Lower House.
Mr. Haddad praised governors Tarcísio de Freitas (São Paulo) and Romeu Zema (Minas Gerais) for the agreement reached in the National Council of Finance Policy (Confaz) to levy ICMS on these imports.
At the end of the hearing, Mr. Haddad told reporters he does see the topic being decided under the Mover Bill.
*Por Marcelo Ribeiro, Raphael Di Cunto, Gabriela Pereira, Estevão Taiar, Adriana Mattos — Brasília and São Paulo
The Lula administration has revised its primary deficit forecast for 2024 upwards, as revealed in the latest figures from the Ministry of Planning and Budget. The deficit projection has increased from R$9.3 billion to R$14.5 billion due to an escalation in primary expenditures, which do not include interest expenses, according to the bimonthly revenue and expenditure evaluation report.
Despite this year’s primary result target being set at zero, the new fiscal framework permits the government a deficit margin of up to R$28.8 billion, approximately 0.25% of the Gross Domestic Product (GDP). This provides the government with considerable fiscal flexibility to achieve its target by year-end.
The first four months of this year saw a significant rise in federal revenues, allowing the government to authorize additional credit of R$15.8 billion. This increase in the spending ceiling will enable the government to release R$2.9 billion that was previously restricted in March and to address new obligatory expenditures, details of which are pending. Despite these adjustments, a budgetary shortfall of R$2.5 billion remains under the new credit framework.
However, this fiscal room does not equate to surplus funds, cautioned Federal Budget Secretary Paulo Bijos. “We must stay vigilant [regarding spending],” he emphasized. Dario Durigan, the executive secretary of the Ministry of Finance, reassured that the additional credit would not compromise the government’s commitment to meeting the zero-deficit target for the year. “The activation of the framework is harmless in terms of our projections,” Mr. Durigan stated.
Despite the deteriorated primary deficit forecast, the deputy head of the Ministry of Finance expressed satisfaction with the financial outcomes of the early months of the year. “The foundation of the national fiscal policy is being reconstructed,” he stated. “What we are witnessing in the first four months aligns with our projections and the objectives we set forth in 2023,” he further explained, noting that the primary revenue projection had increased by R$16 billion.
This revision in revenue estimates includes a heightened projection for dividend receipts, spurred by the government’s strategy to count on distributing 50% of Petrobras’s retained profits from 2023.
At Petrobras’s shareholder meeting at the end of April, the decision was made to distribute 50% of these extraordinary dividends, which amounted to R$21.9 billion. Of this, the federal government received R$6.4 billion, while the remaining half was retained in the company’s remuneration reserve account.
Treasury Secretary Rogério Ceron commented that the oil company’s announcement in April is considered sufficient assurance by the economic team that the second installment of dividends will be distributed within the year. He refuted any suggestions that the government had exerted pressure to secure these funds, which are crucial to achieving a zero-deficit target.
“There’s no element of pressure involved; we’ve proceeded with caution,” emphasized Secretary Ceron. He noted that any changes in the economic landscape would be reflected in subsequent bimonthly budget evaluation reports.
This year, the government’s projection for dividends and shareholdings increased significantly, from R$43.7 billion to R$57.9 billion. This rise includes almost R$13 billion in extraordinary dividends from Petrobras, R$400 million from the Brazilian Development Bank (BNDES), and additional funds from other state-owned enterprises.
On the expenditure front, projected spending has increased by R$24.4 billion, bringing the total to R$2.209 trillion. This includes a R$20.1 billion rise in mandatory expenditures and an additional R$4.3 billion in discretionary spending, which covers investments and operational costs of the public sector. Fortunately, this increase in spending has been offset by an additional R$15.8 billion in credit, which has expanded the spending limit within the framework of the new fiscal rules for this year. As a result, there was no need to impose any budgetary restrictions.
The bimonthly report also detailed a consolidated assessment of the primary financial impact of government interventions addressing the public calamity in Rio Grande do Sul. To date, these measures have resulted in a primary financial impact of R$12.9 billion. Notably, this figure is exempt from the calculations of both the primary result target and the constraints set by the new fiscal framework.
Included in these calculations is an overlooked impact of R$1.1 billion stemming from the Reconstruction Aid—a grant of R$5,100 allocated to families affected by the calamity. Executive Secretary Gustavo Guimarães of the Ministry of Planning and Budget assured that federal support to Rio Grande do Sul would “be provided without restraint” but with a “diligent regard for public finances,” which are “crucial for the economic growth of both Brazil and Rio Grande do Sul in particular.”
Secretary Guimarães further clarified that while federal aid does not factor into the calculations of primary and fiscal framework limits, the ministry is committed to full transparency regarding these expenditures, ensuring they are publicized and open to public scrutiny.
The antitrust watchdog allows Petrobras to negotiate new pipelines and sets new conditions for the state-owned enterprise
05/23/2024
With the antitrust watchdog’s latest decision, Petrobras will retain ownership of some refineries it was initially required to divest, including Repar, in the state of Paraná — Foto: Divulgação
Petrobras has successfully renegotiated the terms of its 2019 agreements with the Administrative Council for Economic Defense (CADE), the antitrust regulator. The agreements were initially established to suspend investigations into Petrobras’s dominance in the refining and gas markets. With the new arrangement, approved by CADE’s tribunal on Wednesday, Petrobras is no longer obligated to divest five of its refineries and the Transportadora Brasileira Gasoduto Bolívia-Brasil (TBG).
Under the revised terms, Petrobras faces new responsibilities. Notably, CADE will oversee the methodology used to set oil prices at refineries for the next three years and renewable energy pricing for an additional three years. In the gas sector, although Petrobras will maintain its investment in TBG, it will relinquish operational control, as the pipeline operator is to appoint independent members to its board of directors.
Should Petrobras fail to comply with these stipulations, CADE retains the authority to reopen investigations. Any findings of misconduct could result in penalties for Petrobras, including fines and mandatory changes to its business practices. Existing inquiries into allegations of price discrimination will be on hold throughout this monitoring period.
This agreement, the result of months of negotiations with CADE, coincides with a leadership transition at the state-owned company. Magda Chambriard, recently endorsed by the company’s eligibility committee, is set to assume the presidency with a directive to augment Petrobras’s refining operations.
The initiative to revisit these agreements began under the leadership of Jean Paul Prates in 2023. The company communicated to its board that the mandated divestments conflicted with its strategic objectives, a plan originally put into place during the Bolsonaro administration.
Following the new agreement, Petrobras has proceeded with the sale of three refineries: Six (Pará), Reman (Maranhão), and Rlam (Bahia). However, with CADE’s latest decision, the company will retain ownership of the other refineries it was initially required to divest: Repar (Paraná), Refap (Rio Grande do Sul), Rnest (Pernambuco), Regap (Minas Gerais), and Lubnor (Ceará).
As part of the commitments negotiated with CADE, Petrobras will also make public its general commercial policies for oil deliveries to ensure non-discriminatory practices. It will offer a specific type of contract, known as a Frame agreement, to any independent refinery on Brazilian soil concerning oil supply. Additionally, Petrobras is required to provide easy access to confidential data to facilitate ongoing monitoring by the antitrust watchdog.
During the session, CADE’s president, Alexandre Cordeiro, emphasized that the proposed consent decree for refining will not only bolster the transparency of Petrobras’s operations but also enhance CADE’s ability to access complex information, thus improving oversight.
He also noted that the proposal includes a robust monitoring mechanism that enables CADE to promptly verify Petrobras’s compliance with competition rules and respond swiftly to any discriminatory practices. Other board members echoed the significance of this structure, which aligns with the technical opinion provided by CADE’s General Superintendence.
Board member Camila Cabral Pires Alves emphasized the critical nature of monitoring the commitments outlined in the consent decree to ensure the effectiveness of the negotiated remedies. Meanwhile, board member Gustavo Augusto clarified that the consent decree aimed to foster the entry of new economic players into the refining market, rather than privatizing the refineries. “We are focused on maintaining the goals and making a technical correction in how these goals will be achieved,” he noted, adding that repurchasing assets that had been divested would not be appropriate.
Board member Diogo Thomson reported that the gas consent decree had been largely fulfilled, and the adjustment made—removing political control over TBG—was enabled by subsequent legislation. This change allows the state-owned company to continue its investments in vital infrastructure and further opens up the market.
In a notice to the market, Petrobras noted that the appendix to the refining consent decree emerged from “extensive debate” with CADE. The company explained that it was unable to sell the remaining refineries, necessitating a revision of its strategic plan.
Petrobras detailed that the frame agreement model sets foundational terms for negotiating oil volumes on a cargo-by-cargo basis. It specifies that the obligation to buy and sell will only be established if both parties reach an agreement on pricing, ensuring alignment with the prevailing market conditions at the time each deal is finalized.
Regarding natural gas, the company noted that the New Gas Act, enacted after the 2019 agreement, provides an exemption from de-verticalization for companies that were already vertically integrated. This exemption is contingent upon these companies adhering to independence and autonomy requirements, which are to be regulated by the National Petroleum Agency (ANP). Consequently, specific obligations have been negotiated to ensure the operational independence of TBG.
However, lawyer Thiago Silva, a partner at Vieira Rezende Advogados, argues that under the New Gas Act, de-verticalization remains a legal imperative that must be addressed eventually. There is a two-year window for the ANP to publish the relevant resolution on this matter. “The exemption does not permit permanent vertical integration but rather provides a timeframe for compliance, which has not yet commenced,” he explained. Mr. Silva also pointed out that distributors currently face scrutiny over plans that appear similar to transportation projects and are under pressure to regularize their operations.
*Por Beatriz Olivon, Fábio Couto — Brasília and Rio de Janeiro
Borrowings now feature larger volumes and extended terms, becoming increasingly central to corporate management strategies, while tax-exempt bonds are increasingly drawing individual investors
05/22/2024
Pierre Jadoul — Foto: Gabriel Reis/Valor
In Brazil’s relatively subdued stock market, corporate debt instruments like debentures and receivables certificates are carving out more substantial roles within investor portfolios and have become crucial elements of corporate financing strategies. This sector’s expansion and increased sophistication are clearly reflected in the secondary market activity, where these securities are traded before their maturity.
For instance, in terms of transaction volume, the secondary market concluded last year with 2.255 million operations involving all forms of corporate debt securities, marking an increase of more than sixfold over the past five years, according to data provided by B3, the Brazilian stock exchange, for Valor. This surge included a 70% growth in just one year, notably during a period characterized by globally high interest rates that generally deter investors from this asset class.
Financially, the trading volume of private bonds in 2023 reached R$839.7 billion, quadrupling over five years. In the first four months of 2024 alone, transactions have already amounted to R$277.95 billion.
The number of issuers has nearly doubled in the past five years, with a total of 626 in 2023. Regarding the value of assets traded, there was a significant jump from R$4.4 billion in 2019 to R$14.5 billion last year. In just the initial four months of this year, the figure has already hit R$5 billion, signaling solid potential for growth throughout the year.
Fabio Zenaro, B3’s director of over-the-counter products, commodities, and new business, notes that the fixed-income market has seen rapid evolution in recent years across all industry metrics. “Until recently, we were processing around 3,000 trades a day, and now, we’ve reached 20,000,” he said.
Mr. Zenaro recalls that more companies are now turning to the local market for financing, drawn by longer terms and a market capable of handling large operations, thereby enhancing the sector’s significance even further.
Despite technological advancements, corporate debt trading is predominantly conducted over the counter with broker mediation. Mr. Zenaro points out that only 1% of fixed-income trading currently occurs on electronic platforms, a stark contrast to international norms, where this could exceed 30% in the future.
On a typical day, investors contact brokers by telephone to locate assets and finalize transactions. Whereas the market previously saw fewer trades, compelling investors, including fund managers, to hold onto their assets until maturity, it now allows for much more active and flexible management.
At Legacy, for instance, securities are typically held in the portfolio for about six months, according to Leonardo Ono, the firm’s corporate debt manager. “It’s like the chicken and the egg scenario. I’m not sure if the liquidity came from the longer maturities of the assets or if the longer maturities brought about the liquidity,” he muses. With increased liquidity, the number of investors grew, but so did market volatility. “Many investors complain about the volatility, but that’s just a byproduct of increased liquidity.”
Mr. Ono also highlights that individual investors have played a significant role in bolstering the secondary market in Brazil. “The current high interest rate environment is likely to sustain the trend of individuals entering the corporate debt market,” he observes, noting that income tax-exempt bonds have made this market particularly attractive to investors, leading them to prefer corporate debt over public bonds. “Today, every investor maintains a portion of their portfolio in corporate debt,” he adds. The market could see further expansion with the entry of foreign investors and pension funds.
On the other hand, Pierre Jadoul, corporate debt manager at ARX Investimentos, points out that despite its growth, the Brazilian market remains highly concentrated in the banks, contrasting with more developed countries where capital market participation is more pronounced. “The migration of credit from banks to capital markets is a natural progression,” he asserts.
Mr. Jadoul reflects on a recent revelation within the Brazilian market: the realization that fixed income can be volatile, a fact underscored by mark-to-market practices, and that securities are susceptible to defaults, as seen in the recent cases involving Americanas and Light. He points out that mark-to-market practices have introduced more efficiency, allowing assets to be bought and sold at fair prices.
At ANBIMA, Brazil’s association of securities firms, the scope of private securities monitored has seen substantial growth year over year. Over the past five years, for instance, the assets tracked have tripled, now totaling around 900.
Vivian Lee, chief credit strategist at Ibiúna Investimentos, observes that improved transparency in pricing has played a crucial role in drawing investors, thereby boosting market liquidity. “Five years ago, the secondary market had fewer significant players,” Ms. Lee remarks. She notes that, following the pandemic, bank treasuries and multimarket funds have become more active participants.
With individual investors increasingly entering the market, regulatory oversight has intensified to prevent any misuse of the spread level, according to Mr. Zenaro from B3. He adds that BSM, the self-regulatory body of the stock exchange, plays a critical role in this oversight, ensuring that assets are not sold at prices that significantly deviate from market norms, thereby enhancing the transparency of corporate debt trading.
More dismayed than optimistic tone marked conversations between companies, banks, and funds at a series of events in New York
05/22/2024
Flavio Souza — Foto: Silvia Costanti/Valor
Foreign investors are putting Brazil on hold for now. In addition to local and global macroeconomic issues, the country has its own homework to do to avoid losing this capital flow for a long time—or the money will be reallocated to emerging markets like India and Mexico. This was the overall tone, more dismayed than optimistic, of the conversations between companies, banks, and global institutional investors throughout the last week, during an extensive Brazilian agenda in New York.
“The companies are wrapping up the first-quarter earnings cycle with results in line with expectations, but on the investor side, we notice a wait-and-see attitude due to issues related to Brazil or issues beyond Brazil. Naturally, the interest rate environment in the United States is significant, as well as the recent revisions regarding the behavior of interest rates in the Brazilian market,” summarizes Flavio Souza, CEO of Itaú BBA.
The bank brought together 150 businesspeople and 500 investors for four days of debates. According to the BBA’s leader, there was a change in tone compared to last year, when there was a challenging scenario with a new government and credit events, but with a perspective of good opportunities ahead. Now, investors looking for liquid assets have shown more nervous behavior, without reallocating the capital they are withdrawing from local assets.
“There is still a lot of noise in Brazil on the fiscal side,” said Sergio Fischer, CEO of LOG, a logistics company controlled by the Menin family, after rounds of talks with foreigners. In April, the federal government included a revision of the fiscal target for 2025 in the Budget Guidelines Act, projecting a result lower than initially discussed.
For Fabio Barbosa, CEO of Natura, the transition at the Central Bank also contributes to the tension among foreign investors. Roberto Campos Neto will leave the presidency of the monetary authority at the turn of the year and, in the last meeting of the Monetary Policy Committee (COPOM), the board showed a split between directors appointed by the Lula administration and those remaining from the Bolsonaro administration, raising doubts about inflation tolerance in the next cycle.
“What disappoints me the most is seeing that Brazil is not on the map, not in the focus of investors. There is a lot of concern about the uncertainties we have, such as the fiscal issue, greater or lesser interference in the economy, what will be the trend of interest rates, and the flexibility of the Central Bank,” said Mr. Barbosa.
In his view, these issues add to the fact that Brazil is poorly positioned globally. “As interest rates in the United States are very high, the risk appetite has decreased, and Brazil today represents a risk. This disappoints me because we are better than the image that appears, better in environmental issues, economic growth. The country will grow around 2.5%, has inflation under control, institutions functioning reasonably, but that is not the perception we convey,” he said. “We convey the perception of uncertainty that some of these positive points may not be there in the future. And that makes us miss investment opportunities.”
It was precisely during the meetings promoted by Brazilian companies in the U.S. market that President Lula decided to finally replace the CEO of Petrobras, appointing Magda Chambriard, an executive with a more “expansionist” profile. The subject inevitably invaded the closed-door meetings. “Petrobras is Brazil’s largest company by market capitalization, so it is natural that it is always a focus of monitoring and attention. When there is a change in the command, and this was news all day, it becomes the subject of questions and inquiries by investors trying to understand the scenario,” said Mr. Souza from Itaú BBA. “It’s part of a broader context related to the perception of the level of government influence in the companies it participates in, the economy in general, and how this relates to fiscal, economic policy, and from the perspective of returns.”
According to him, for equity investors, this context influences more immediate behavior. However, some investors see an entry point in Brazilian stocks, as price-to-earnings multiples are below the historical average.
At Itaú, updated monetary projections now indicate the Selic policy rate closing the year at 10.25% per year. The bank still expects a window for initial public offerings in the fourth quarter but mainly counts on secondary offerings for stock market activity.
“Mexico is clearly much more active, and India is super strong as well. The country cannot stay out of the flow for too long; it has to more actively return to being a desirable place, capable of attracting foreign investors,” said Cristiano Guimarães, head of corporate and investment banking at Itaú BBA. “It is necessary to create some momentum, a perception that the market will move forward and unlock,” adds the institution’s CEO.
Mr. Souza emphasizes that strategic investors will continue to look at sectors such as energy, agriculture, and pulp and paper. The bank advised the sale of AES’s local subsidiary but does not see a trend in this case. “Infrastructure continues to attract investors; it is the market where project finance effectively works, with long-term capital for project development,” said Mr. Guimarães.
Sustainability and climate finance are also definitely on the bank’s, investors’, and companies’ long-term agenda—especially after the catastrophe in Rio Grande do Sul, which highlighted the urgency of the issue and the need to include this risk in business and public management models.
“There is more than objective evidence of climate change and its implications beyond the humanitarian issue, which is always the most relevant, but also in business. In our operation, we see this so clearly that the entire climate finance agenda of the Itaú Unibanco group, which has always been on the broader sustainability agenda, is now part of Itaú BBA’s activities because we understand that it has ceased to be a corporate citizenship agenda and has become a business agenda,” said Itaú BBA’s CEO.
One of the bank’s initiatives was a financing commitment of up to R$400 billion for sectors with a positive impact on ESG criteria by 2025. “We have already exceeded 90% and will reach the goal 18 months ahead of our ambition, so it will be updated.”
Unlike first quarter, April’s result was not boosted by single-investor funds
05/22/2024
Claudemir Malaquias — Foto: Diogo Zacarias/MF
Boosted by revenues related to consumption and the labor market, federal tax collection in April reached R$228.9 billion, a real increase of 8.26% year over year, according to data released by the Federal Revenue Service on Tuesday. This marks the fourth month of the year with revenue growth exceeding 5%, even after adjusting for inflation.
In the January-April period, total revenue reached R$886.6 billion, a real increase of 8.33% compared year over year. These results set new records in the Federal Revenue Service’s since official records began, in 1995, making them the highest values in 30 years. Without adjusting for inflation, revenue rose by 12.25% in April and 12.85% for the year.
April’s results are primarily attributed to a surge in revenue from social taxes PIS/Cofins, which totaled R$44.3 billion, an increase of 23.38%. This growth was driven by the reinstatement of fuel taxes and reduced use of tax credits from court decisions.
Another factor boosting PIS/Cofins revenue was the enactment of Law 14.592/23, which stipulated that sales tax ICMS must be excluded from the calculation base for tax credits on acquisitions.
Social security contributions were notable from an economic activity perspective, totaling R$52.8 billion in April, up 6.15%. This was due to a 5.11% increase in the wage bill compared to the previous year.
In a report to investors, economists with Warren Investimentos said that April was the first month of 2024 without revenue from the taxation of single-investor funds stocks. Despite this, revenue growth surpassed that of March (7.2%) and January (6.7%), only trailing the February increase (12.3%).
The January-April result is explained by the same factors as in April, including changes in legislation that positively impacted government revenues and more robust economic activity.
Additionally, the accumulated annual result benefited from R$11.44 billion in Income Tax from the stock of single-investor funds, an atypical revenue source that ended in March. A further positive contribution came from a 46.05% reduction in tax compensations from court decisions.
According to Federal Revenue data, companies used R$16.9 billion in tax credits from court decisions to offset their owed taxes from January to April this year, compared to R$31.3 billion in 2023. The fewer tax credits companies use, the more the Treasury collects.
Until last year, there was no limit on the use of judicial credits to offset owed taxes. This year, a limit has been implemented. It is expected that this new limit will result in an additional R$24 billion in revenue for 2024. This figure may be revised when the report on the evaluation of revenue and expenses in the Budget is released this week.
In a report to investors, Fábio Serrano, an economist at BTG Pactual, said that the data up to April indicates stronger-than-expected revenue, but is still insufficient to meet the primary surplus target, even considering the margin that allows for a deficit of up to R$28.8 billion this year.
Mr. Serrano said that the data for May and June will be crucial as they will show the impact of taxation on capital gains from offshore assets and the effects of the floods in Rio Grande do Sul, as well as the mandatory withholding of income tax on single-investor funds.
“In 2023, 5% of federal revenue originated from Rio Grande do Sul, equivalent to R$109 billion. For now, we estimate a primary impact of R$35 billion on the public sector due to the floods,” Mr. Serrano said.
Asked about the impact of the calamity in Rio Grande do Sul on federal revenue, Claudemir Malaquias, head of the Center for Tax and Customs Studies at the Federal Revenue Service, said it is currently difficult to have an economic estimate.
“Of course, we need to monitor the assessment of real losses, because we only have projections so far. While the waters are still high, it is difficult to have an economic estimate,” Mr. Malaquias said. “We will continue to monitor the situation and, when we have the information, we can release detailed data,” he added.
He also noted that the deferral of taxes announced so far does not have a fiscal impact, as the collection has only been postponed and will still be carried out within the current year.
Ilan Goldfajn defends shaping multilateral banks for emergencies
05/21/2024
Ilan Goldfajn — Foto: Ana Paula Paiva/Valor
At the height of the disaster in Rio Grande do Sul, Ilan Goldfajn, the Inter-American Development Bank (IDB) president, visited Brazil and announced an aid package that could reach R$5.5 billion.
In his view, the disaster reinforced the assurance that extreme weather events have become increasingly frequent. Therefore, in addition to the emergency action, it is necessary to shape multilateral banks to act in climate emergencies. Floods in Rio Grande do Sul or the major drought that hit Argentina and Uruguay last year are examples of how the entire region has been affected by climate events.
The contingency structure includes three fronts: granting loan facilities, pausing loan payments in the face of moderate climate emergencies, and creating “catastrophe bonds,” which involve debt waiver in extreme events.
On another front, he says reconstruction work must increase resilience to climate events.
Another topic that brought Mr. Goldfajn to the country is the IDB support for the Brazilian presidency of the G20, the subject of a meeting with Finance Minister Fernando Haddad.
Coincidentally, the IDB currently leads a group of ten multilateral credit banks. An overhaul of these institutions’ performance is among the themes promoted by Brazil. In April, this group of banks announced measures to act as a system. Among its goals is increasing funding by $300 billion to $400 billion over the next decade.
The IDB wants to increase credit supply by $150 billion. One initiative in this area includes a request to the International Monetary Fund (IMF) so that countries’ reserves in the institution may be used by multilateral banks.
Initiatives by the Brazilian presidency at the G20 will also include the launch of a global pact against hunger and poverty. On this topic, according to Mr. Goldfajn, the IDB has a database gathering successful experiences in the area, such as the Brazilian cash-transfer program Bolsa Família. The database also describes programs that were not as successful, knowledge that can be made available to the world, he said.
Read below the main excerpts from the interview with Valor:
Valor:You were in Brazil at the height of the disaster in Rio Grande do Sul. What did this disaster reveal?
Ilan Goldfajn: It shows us that addressing the climate issue is a key priority. A development bank cannot ignore these impacts, which have many social consequences, including people being displaced, returning to poverty, losing income, and losing their properties. Many people lost their lives. Dramatic moments arise from extreme [climate] events, which, unfortunately, are becoming increasingly frequent.
Valor:Do you see that happening in the region?
Mr. Goldfajn: Let me tell you a story. As I joined the bank, my feeling was that the climate impact could be seen in the Caribbean and Central America, with hurricanes and the islands being devastated. However, I wasn’t so sure that would spread across the entire region. Since I joined, we have seen the worst drought ever in Uruguay and Argentina. There was a lack of water in Montevideo, which had never occurred before. Argentina lost $15 billion, although it didn’t have huge dollar reserves. There have been major fires in Chile and a hurricane that devastated Acapulco, Mexico. These events will be recurring and will pose high tolls. Development banks have to prepare to help the region deal with that.
Valor:How?
Mr. Goldfajn: There are two ways of doing so. One is in the medium term. Reducing emissions, using renewable energy, and working on our program Amazonia Forever. However, we also have to emphasize adaptation and physical and financial resilience.
Valor:The Brazilian government is in talks with multilateral organizations to seek a structural solution to climate emergencies. How does that coincide with the IDB’s agenda?
Mr. Goldfajn: We need to think about creating a contingency system that should be developed in advance to be prepared once the event occurs. Dividing the risk into three fronts. In major catastrophes, we offer debt waiver. In the intermediate events, we extend loan maturity. We have loan facilities that can be extended for two years. In minor events, we can offer loan facilities. We can act according to the extent of the catastrophe.
Valor:Waiving the debt?
Mr. Goldfajn: We can work together with the state or federal government to issue catastrophe bonds. In other words, in the event of a catastrophe, we settle the debt.
Valor:How about material losses?
Mr. Goldfajn: We will work on reconstruction in a resilient way. Putting in place an infrastructure that can better resist flooding or hurricanes.
Valor:Could such instruments be used in Rio Grande do Sul or are they still being developed?
Mr. Goldfajn: We have to think structurally. What happened in Rio Grande do Sul could have an impact elsewhere. We need to organize for the future. Regarding Rio Grande do Sul, we will work according to two models.
Valor:What would they be?
Mr. Goldfajn: We will allocate R$1.5 billion to things that are already in place, including loans to small and medium-sized companies, project relocation, humanitarian aid, and hiring staff to organize reconstruction. In addition, there will be another R$4 billion as a boost to the future of reconstruction in Rio Grande do Sul in a resilient way.
Valor:You have declared your intention to increase available funds to countries by $150 billion over the next decade. How do you plan to get these funds?
Mr. Goldfajn: The IDB recently approved three major changes. One is the capitalization of IDB Invest through a new model, totaling $3.5 billion. It doubles the funds by IDB Invest, our private-sector arm, designed to help companies.
Valor:Does it include Rio Grande do Sul?
Mr. Goldfajn: We have just had a meeting with the BRDE [Far South Regional Development Bank ] about how we can help them. IDB Invest was among the topics we discussed. Part of the R$1.5 billion I mentioned includes loan facilities via BRDE. In addition, IDB Invest can help the BRDE. With greater liquidity and guarantees, it can increase leverage. Brazil is the IDB and IDB Invest’s largest client. This capitalization is great news for the world and even better news for the region and Brazil.
Valor:What is the second change?
Mr. Goldfajn: An approval of $400 million for IDB Lab, which donates to startups. It is very important for Brazil.
Valor:What about the third change?
Mr. Goldfajn: The approval of our new strategy for the future. These are relevant reforms, which increase our work’s scale. That includes financial innovation, increasing leverage, and using our own funds in the best way. These are instruments to improve our balance sheet, such as the SDR [Special Drawing Rights, the IMF’s “currency”]. There are also ways to increase the impact of our work, including selectivity, effectiveness, and development.
Valor:In Brazil, you met with Finance Minister Fernando Haddad. What did you talk about?
Mr. Goldfajn: Rio Grande do Sul, environmental aid, and solidarity, were the main topics of my visit. Another subject was our role in the [Brazilian] G20 presidency. We are making a huge effort to support Brazil in the presidency. That includes a few implications. On the financial side, the Brazilian presidency intends to create a framework of reforms in multilateral banks. It wants to create a guidance. We are helping as we are a multilateral bank with experience in what is useful, and what is needed. We tap into our leadership of multilateral banks, which includes ten institutions, to agree on a joint reform plan. This is one side.
Valor:What’s the other?
Mr. Goldfajn: Brazil introduced a relevant topic on the agenda, which is the fight against hunger and poverty. And the country will launch the global alliance against hunger and poverty, a banner at the G20. At the IDB, we have been carrying out social programs to combat hunger and poverty for years. There are successful experiences, like Bolsa Família and a program in Mexico, but there are also those that don’t work. We have a database setting apart programs that have or haven’t worked in Latin America. And we are making it available for the G20 presidency. We also addressed a very important program increasing climate funding by offering currency hedging.
Valor:Does this hedging prepare Brazil to receive more investments?
Mr. Goldfajn: I think some areas are more prepared to receive investment, while others need improvement. Brazil and Latin America need to get ready to receive more investments. That is related to planning, but also to regulation, which includes defining the rules of the game and the appropriate business environment. A lot has been discussed in Latin America about public security and organized crime. And I’m not just talking about Brazil. I’m talking about the entire region. We have a major public security program in place in Ecuador.
Valor:Are Brazil’s macroeconomic weaknesses a hindrance to investments?
Mr. Goldfajn: Whenever I talk to investors, they say stability is a key factor for them. Economic stability, stability of rules, and stability in security. They seek our help dealing with the risk of excessive exchange rate depreciation, expropriation of concessions, or a rule change midway that completely changes the tax structure, for example.
Valor:How do you see Brazil’s macroeconomic situation?
Mr. Goldfajn: Brazil has stability. It has challenges, but it has macroeconomic stability. Thanks to the size of its reserves and because there is a Central Bank, a Ministry of Finance, and a Ministry of Planning and Financial Budgeting doing their jobs. Looking from the outside, we can see the forest: we see challenges, but we also see all that has been achieved in recent years.
Valor:Valor promoted an event about the Interest for Education program, and Secretary of Treasury Rogério Ceron said the IDB will work on it. What other innovations is the IDB promoting in Brazil?
Mr. Goldfajn: Everything is changing. We can’t go on with the same solutions we had before. We have to innovate. For decades, I faced the issue of exchange rate fluctuations and I know that can be a problem. However, for the first time, we are innovating and, if everything works well, we will increase investment in climate.
Valor:How?
Mr. Goldfajn: By offering a currency hedging that makes investors feel more comfortable. We have been leaders in swap operations, with the debt-for-nature deal, Ecuador’s big project. In Barbados, there was a debt-for-water swap, following a lack of water [in the country]. And we have debt-for-health projects in some countries. Under the Interest for Education program, we are offering our expertise. But everything is preliminary and yet to be defined.
Borrowings now feature larger volumes and extended terms, becoming increasingly central to corporate management strategies, while tax-exempt bonds are increasingly drawing individual investors
05/21/2024
Pierre Jadoul — Foto: Gabriel Reis/Valor
In Brazil’s relatively subdued stock market, corporate debt instruments like debentures and receivables certificates are carving out more substantial roles within investor portfolios and have become crucial elements of corporate financing strategies. This sector’s expansion and increased sophistication are clearly reflected in the secondary market activity, where these securities are traded before their maturity.
For instance, in terms of transaction volume, the secondary market concluded last year with 2.255 million operations involving all forms of corporate debt securities, marking an increase of more than sixfold over the past five years, according to data provided by B3, the Brazilian stock exchange, for Valor. This surge included a 70% growth in just one year, notably during a period characterized by globally high interest rates that generally deter investors from this asset class.
Financially, the trading volume of private bonds in 2023 reached R$839.7 billion, quadrupling over five years. In the first four months of 2024 alone, transactions have already amounted to R$277.95 billion.
The number of issuers has nearly doubled in the past five years, with a total of 626 in 2023. Regarding the value of assets traded, there was a significant jump from R$4.4 billion in 2019 to R$14.5 billion last year. In just the initial four months of this year, the figure has already hit R$5 billion, signaling solid potential for growth throughout the year.
Fabio Zenaro, B3’s director of over-the-counter products, commodities, and new business, notes that the fixed-income market has seen rapid evolution in recent years across all industry metrics. “Until recently, we were processing around 3,000 trades a day, and now, we’ve reached 20,000,” he said.
Mr. Zenaro recalls that more companies are now turning to the local market for financing, drawn by longer terms and a market capable of handling large operations, thereby enhancing the sector’s significance even further.
Despite technological advancements, corporate debt trading is predominantly conducted over the counter with broker mediation. Mr. Zenaro points out that only 1% of fixed-income trading currently occurs on electronic platforms, a stark contrast to international norms, where this could exceed 30% in the future.
On a typical day, investors contact brokers by telephone to locate assets and finalize transactions. Whereas the market previously saw fewer trades, compelling investors, including fund managers, to hold onto their assets until maturity, it now allows for much more active and flexible management.
At Legacy, for instance, securities are typically held in the portfolio for about six months, according to Leonardo Ono, the firm’s corporate debt manager. “It’s like the chicken and the egg scenario. I’m not sure if the liquidity came from the longer maturities of the assets or if the longer maturities brought about the liquidity,” he muses. With increased liquidity, the number of investors grew, but so did market volatility. “Many investors complain about the volatility, but that’s just a byproduct of increased liquidity.”
Mr. Ono also highlights that individual investors have played a significant role in bolstering the secondary market in Brazil. “The current high interest rate environment is likely to sustain the trend of individuals entering the corporate debt market,” he observes, noting that income tax-exempt bonds have made this market particularly attractive to investors, leading them to prefer corporate debt over public bonds. “Today, every investor maintains a portion of their portfolio in corporate debt,” he adds. The market could see further expansion with the entry of foreign investors and pension funds.
On the other hand, Pierre Jadoul, corporate debt manager at ARX Investimentos, points out that despite its growth, the Brazilian market remains highly concentrated in the banks, contrasting with more developed countries where capital market participation is more pronounced. “The migration of credit from banks to capital markets is a natural progression,” he asserts.
Mr. Jadoul reflects on a recent revelation within the Brazilian market: the realization that fixed income can be volatile, a fact underscored by mark-to-market practices, and that securities are susceptible to defaults, as seen in the recent cases involving Americanas and Light. He points out that mark-to-market practices have introduced more efficiency, allowing assets to be bought and sold at fair prices.
At ANBIMA, Brazil’s association of securities firms, the scope of private securities monitored has seen substantial growth year over year. Over the past five years, for instance, the assets tracked have tripled, now totaling around 900.
Vivian Lee, chief credit strategist at Ibiúna Investimentos, observes that improved transparency in pricing has played a crucial role in drawing investors, thereby boosting market liquidity. “Five years ago, the secondary market had fewer significant players,” Ms. Lee remarks. She notes that, following the pandemic, bank treasuries and multimarket funds have become more active participants.
With individual investors increasingly entering the market, regulatory oversight has intensified to prevent any misuse of the spread level, according to Mr. Zenaro from B3. He adds that BSM, the self-regulatory body of the stock exchange, plays a critical role in this oversight, ensuring that assets are not sold at prices that significantly deviate from market norms, thereby enhancing the transparency of corporate debt trading.
Expectations for GDP, inflation worsen due to floods in Rio Grande do Sul, Brazil’s fiscal situation, U.S. interest rates
05/21/2024
Sérgio Vale — Foto: Claudio Belli/Valor
A series of negative news and emerging risks have formed a mix that has worsened economic agents’ expectations for the economy in 2024 and 2025. The latest sign of this process is the market’s median projection for 2024 GDP growth, which fell for the first time in almost a year this week.
Analysts say the scenario pressures the Central Bank to adopt a more cautious stance on interest rate cuts. However, some also see these movements as somewhat exaggerated.
According to the Central Bank’s Focus survey, the market’s median projection for 2024 economic growth dropped to 2.05% from 2.09%. This is the first decline in the projection for this year since June 16 of last year, when it fell to 1.20% from 1.27%.
Meanwhile, the median for Brazil’s official inflation index IPCA rose to 3.80% from 3.76%. For 2025, inflation expectations increased to 3.74% from 3.66%. The median projection for the Selic policy rate rose to 10% by the end of 2024 from 9.75%.
“This worsening of expectations is not new. It started with the changing outlook for U.S. interest rate cuts and growing concerns about Brazil’s fiscal scenario. But it was accelerated by the rift within the Central Bank’s board at the last Monetary Policy Committee (COPOM) meeting and now by the tragedy in Rio Grande do Sul,” said Sérgio Vale, chief economist at consultancy MB Associados. “This last factor directly impacts growth prospects for 2024 and also inflation, as analysts are already incorporating short-term shocks in food prices. These events have halted the previously improving projections for economic activity.”
The scenario is almost a “perfect storm”—but, according to him, “one created by the government, which bears significant responsibility for the poorly calibrated fiscal outcome since the fiscal framework, exemplified by the change in the primary target for 2025,” he said. “This spills over into problems like the one in Rio Grande do Sul, where the situation demands a level of aid that public finances are not prepared to provide.”
“There is indeed an environment of deteriorating expectations, which became more evident with the Focus survey. It was the third consecutive week of an increase in the IPCA median for next year, which is the Central Bank’s main focus,” said Silvio Campos Neto, a senior economist and partner at Tendências Consultoria.
He also highlighted the split within the Central Bank’s board regarding the pace of interest rate cuts, which has crystallized doubts that have existed since the end of last year about how the monetary authority will act with the change in leadership. “It is more than natural for the market to be uncertain due to high political signals and pressures towards a more interventionist approach, as seen in the Petrobras leadership change episode or attempts to boost economic activity using state-run companies in a context of low economic slack.”
Fabio Romão, a senior economist at LCA Consultores, calculates that the recent worsening of projections for 2024 and 2025 inflation in the Focus survey is concentrated on free prices within the IPCA. While the 2024 projection rose to 3.72% from 3.67%, the 2025 projection increased to 3.68% from 3.57%.
“We believe this increase in expectations for 2024 and 2025 is related to currency depreciation and uncertainties in the pricing of certain food items—following climatic events in the South,” he said. The consultancy raised its estimate for food-at-home inflation in 2024 to 4.5% from 3.9% but kept the 2025 estimate at 4.9%.
For 2025, Mr. Romão expects a moderate acceleration in regulated prices after the municipal elections. Another source of pressure could be the resumed rise in industrial goods prices, which have been contained since 2023, he added.
Silvia Matos, coordinator of the Macro survey at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), said that the current expectation scenario calls into question the quality of future economic growth.
“When the fiscal policy is more expansionary, the economy ends up with much higher real interest rates to keep inflation lower. This signals a higher risk premium, and the cost of rolling over public debt also rises. It’s the worst of both worlds—high disinflation costs in terms of activity,” she said.
Given this scenario, economists believe the monetary authority will need to be more stringent in its message about combating inflation, which may include rethinking the final stretch of the interest rate cut cycle. However, they also note that uncertainties surrounding the Central Bank’s leadership change hamper this process.
“Today, there is a fear that the Central Bank will lower its guard on reducing interest rates. If this concern grows, medium- and long-term interest curves will rise significantly. This increases debt costs and affects economic activity because the cost for companies to invest will be higher,” said Mr. Campos Neto, with Tendências.
Despite predominantly negative news, some urge caution in analyzing the worsening expectations scenario. One reason is that, although uncertainties have increased, current economic indicators still allow for some optimism.
“I believe some concerns are natural at this stage of the cycle, in which growth comes more from demand, particularly from a labor market that continues to surprise and raises questions about future inflation behavior,” said Cristiano Oliveira, chief economist at Banco Pine. “But at the same time, I see some exaggeration. There seems to be a contradiction in increasing expectations for both the Selic rate and the IPCA in the medium term. Even working with a higher real interest rate than the Central Bank, as we do, it is only logical to assume that only one side [inflation or interest rates] will be correct, not both.”
For Mr. Oliveira, the floods in Rio Grande do Sul will have a greater impact on activity than on inflation. The unanchoring attributed to food prices may disappear, as it is temporary and other prices remain controlled. However, the damage to activity will be more significant, he said. “Much is expected from the fiscal stimulus, but I have my doubts. We must consider that even the government’s aid of R$5,100 [per affected family] is small to recover entire lives and businesses that have been closed.” The market reacts to uncertainties and is right to demand a higher premium for it, but it is not necessarily correct about what will happen, he added.
*Por Marcelo Osakabe, Marsílea Gombata — São Paulo
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