New technology promises better experience for viewers
04/05/2024
Juscelino Filho — Foto: Divulgação/Isac Nóbrega/MCom
The minister of Communications, Juscelino Filho, advocated on Wednesday (3) for the offering of credit to encourage the development and implementation of TV 3.0 in Brazil. “We have meetings scheduled with development banks to study this possibility,” the minister said, at an event held at the ministry’s headquarters to discuss the matter.
The minister said credit is necessary as the new technology requires “massive investment” and also because the broadcasting industry has lost revenue due to the rise of social media platforms. He points out that, unlike the conventional broadcasting sector, these platforms are not subjected to regulation and taxation.
“We are aware that the broadcasting industry has been heavily hit with the recent arrival of digital and social media, which took a significant share of the sector’s revenue. Naturally, we seek mechanisms like these,” Mr. Juscelino said.
TV 3.0 promises to provide a better experience for viewers. It will be more interactive, with dynamics similar to those seen in online apps. In addition to conventional live broadcasting, the new open TV will allow access to on-demand content, when integrated with internet access. The advertising market sees opportunities to broadcast ads in new formats.
The new service will feature increased quality in audio and video reception with resolution levels of up to 4K and 8K, making the experience seem “more realistic.”
The government estimates that, by the end of 2024, the new TV 3.0 technological standard should be set, by a decree, to be adopted by Brazil. The country is currently testing different technologies to evaluate which one best suits the Brazilian reality. Among the preferred models are those from Japan, the United States, and South Korea.
The government carried out a similar process in the past when it chose the Japanese standard for digital TV.
Mr. Juscelino estimates the implementation of TV 3.0 to start in 2025. “The entire industrial chain in the sector will adapt to produce the necessary equipment, ranging from transmitters, [signal] converters, new TV sets,” the minister said.
Present at the event, the president of the Brazilian Association of Radio and Television Broadcasters (Abert), Flávio Lara Resende, also defended the adoption of public policies to promote and fund the sector. Another request from broadcasters raised by the entity is the need for more frequency signals to implement TV 3.0 in Brazil.
Mr. Resende pointed out that Brazilian broadcasters initially offered around 80 open channels to the country’s population. Today, according to him, there are only 44 channels. “It is a significant reduction taking place over the years, with almost no offset,” he lamented.
He made a direct appeal to the Ministry of Communications and the Brazilian Telecommunications Agency (ANATEL), which was represented at the event by superintendent Abraão Balbino.
Mr. Resende also spoke of the importance of free-to-air TV as a service that reaches the entire Brazilian population, delivering quality programs.
“Broadcasting plays a key role in social communication in the country, of undeniable public interest, being the only media reaching the entire Brazilian population in a free, open manner. It is an essential service for the maintenance of our democracy,” the president of Abert said.
Spending projection was raised by R$5.6bn but experts see a higher increase
04/04/2024
Felipe Salto — Foto: Ana Paula Paiva/Valor
The federal government’s estimated spending of R$914.2 billion on social security benefits this year is still underestimated, even after a recent increase of R$5.6 billion, projections from experts in public accounts, consulting firms, brokerages, and banks show. The projections range between R$923 billion and R$932.5 billion, indicating a potential gap between R$8.8 billion and R$18.3 billion compared to the government’s figure.
By underestimating spending on social security benefits, the government has minimized the necessity for a more extensive freeze on non-mandatory expenses across other ministries. Furthermore, it has prevented a deterioration in the fiscal result, currently estimated at a deficit of R$9.3 billion for the year, within the primary target range. However, nearing the end of the year, if the discrepancy is substantiated, there will be no alternative but to recognize the actual expenditure figure, given that social security benefits are mandatory expenses.
In February, the allowance known as sickness benefit exceeded 1.4 million beneficiaries, a 33.3% increase compared to the same month of the previous year. At the same time, total spending on this benefit in the last 12 months reached R$34 billion in January, the last available data. This amount represents a 22% increase compared to the same month in 2023.
Tiago Sbardelotto, an economist at XP, said that the major discrepancy in projections is regarding the growth rate of the number of beneficiaries. “We are projecting a growth rate of 2% [of beneficiaries], which is more or less compatible with what we have had in recent years. I would even say it is a conservative rate. The government, on the other hand, is implicitly adopting a rate close to zero because it is counting on management improvements and fraud combat,” said the economist. The bank estimates that social security benefits will consume R$929.9 billion from the federal budget in 2024.
“We do not believe that the government will actually implement [the savings measures], and the data we have verified so far shows that these expenses are in line with our projection and are above what the government was expecting,” he added.
Fábio Serrano, an economist at BTG Pactual, shares a similar perspective. “The key difference compared to our estimate stems from the government’s assumption of saving around R$10 billion, attributed to the implementation of faster procedures for approving temporary incapacity benefits, such as sickness benefits,” he said.
“Given the strong growth in the number of beneficiaries and the slow reduction in the queue of requests, we have adopted more conservative assumptions and have not assumed this saving,” he said, noting that BTG’s projection is for government spending of R$927 billion on social security benefits this year.
Jeferson Bittencourt, an economist at ASA Investments and former secretary of the Treasury, also said that there are signs of an acceleration in the pace of requests for social security benefits. “Studies have shown a high rate of benefit grants, as the government has made efforts to reduce the queue, but it has been reduced only slightly,” he said.
ASA Investments projects spending of R$926 billion for this budget line in 2024. Mr. Bittencourt said that, despite actions to tackle fraud, the government suspended in-person proof of life this year for 4.3 million social security beneficiaries for whom automatic verification was not possible or due to inconsistencies.
“We see the pace of benefit cessation not contributing much to expenditure containment because, on the one hand, the government is conducting a thorough review, seeking to reduce fraud and tackle inefficiencies, but on the other hand, it has decided not to suspend benefits for lack of proof of life,” he said.
This year’s budget was approved with a forecast of government spending of R$908.7 billion on social security benefits. Valor had already shown that the figure was underestimated by up to R$20 billion. In March, when reassessing revenues and expenses, the government increased its projection by R$5.5 billion, reaching R$914.2 billion.
According to Felipe Salto, chief economist at Warren Investimentos, the amount will have to be increased in the next bi-monthly reports evaluating the budget. “The numbers in the bi-monthly report are underestimated, despite the correction made when the government announced the document,” said Mr. Salto.
“The dynamics of Social Security are under considerable pressure and will require a significant freeze of discretionary spending over the next few months. This would still need to be complemented by an equally significant cost cutting, even with the recovery of revenue.” Warren projects R$932.5 billion in social security benefits.
Economists Marcos Mendes and Rogério Nagamine estimate that this budget line will require disbursement of at least R$923 billion this year, considering court rulings. Mr. Nagamine said that there is uncertainty about this projection because the government paid part of the 2024 social security precatórios (IOUs issued by the judiciary branch) at the end of 2023, but emphasized that the approximately R$10 billion in savings that the Ministry of Social Security has been estimating “does not seem likely to happen,” which will require an upward revision of expenses in the next bi-monthly reports.
Mr. Nagamine said that in 2023, the government also adopted the practice of underestimating spending on social security benefits throughout the months, having acknowledged its real impact on the budget only at the end of the year. “In 2023, in the first bi-monthly revision, the initial projection was for a financial expense with benefits of R$825 billion, but the year ended with a financial expense with benefits of about R$835 billion. That is, there was an underestimation of about R$10 billion,” he said.
Contacted for comment, the Ministry of Planning and Budget referred questions to the Ministry of Social Security, which “is the agency responsible for preparing and sending the projection in the process of preparing the bi-monthly report.” The Ministry of Social Security did not respond to Valor’s request for comment.
*Por Jéssica Sant’Ana, Marcelo Osakabe — Brasília, São Paulo
Uncertainties over fiscal issues and rate hikes in the U.S. lead the market to price more risk; the nominal curve has a similar movement
04/04/2024
Luciano Telo — Foto: Rogerio Vieira/Valor
In an environment still harboring uncertainties regarding public accounts and worsening external conditions, in the face of a new hike in long-term interest rates in the United States, the market has once again embedded even higher rates in prices. It is in this scenario that the real long-term interest rate, which discounts the impact of inflation and is one of the variables that best reflects investors’ perception of the future, is already at 6%, the highest it has been since the end of October.
Real market interest rates, extracted from inflation-linked bonds (NTN-Bs) for August 2050, rose from 5.47% at the start of the year to 5.93% on Wednesday.
As a result, this is already reflected in the Treasury’s public bond issues. At last Tuesday’s (2) auction, the Treasury sold 150,000 NTN-Bs maturing in 2060 at a rate of 5.9493%, the highest level of the year.
The movement was similar to that seen in nominal interest rates, which once again visited the 11% mark last week. Part of the rise in rates is related to the external movement: real ten-year interest rates in the U.S. rose from 1.74% at the start of the year to precisely 2% at Tuesday’s close. Although it seems insignificant, the change in the level of American interest rates reinforces the feeling that global rates need to be higher.
Data from the U.S. economy continued to show resilience in the first few months of 2024, which put nominal and real interest rates around the world back on an upward trajectory, noted Luciano Telo, the chief investment officer for Brazil at UBS Global Wealth Management. “In the U.S., activity has remained strong and, in the coming months, inflation should continue to fall, but at decreasing rates. Ten-year Treasuries have been the password for aversion to risky assets all over the world. It’s a force that causes nominal and real interest rates around the world to rise.”
“We have to recognize that Brazil cannot reverse this premium in real interest rates with a domestic story,” emphasized Mr. Telo.
“It was a repricing of both nominal and real interest rates,” agreed Miguel Sano, fixed income manager at SulAmérica Investimentos. “The main difference for the rise in these longer rates is the issue of longer-term uncertainties, such as fiscal uncertainties, and the level of international interest rates. These are factors that will count.”
Mr. Sano also points out that American long rates have been at their highest levels since the 2008 financial crisis. “At that time, a long NTN-B oscillated between 6.3% and 7.4%. We’re in a global environment where interest rates are higher. From the point of view of the global investor, if you’re looking at interest rates in various countries at levels that haven’t been seen for 15 years, you have to wonder whether it’s worth putting money in Brazilian, American, or British interest rates. Naturally, the rate here needs to be higher,” he said.
In addition, domestic uncertainties are also cited by Mr. Sano, noting that the Central Bank estimates a neutral real interest rate in Brazil of 4.5%, while much of the market is already working with higher levels. “This creates a limit to the potential gain from a long NTN-B.”
Despite the exogenous component of the increase in American long interest rates, uncertainties related to meeting the fiscal target also play an essential role in the dynamics of NTN-Bs, according to Carlos Eduardo Eichhorn, the director of asset management at Mapfre Investimentos. “The real interest rate curve has already been opening up [rising] over the year, also because the issue comes and goes. We notice that the more medium and long-term part of the real interest rate, which has risen from 5.5% to levels closer to 6%, is even more sensitive and has been rising more than the pre [nominal interest rate] itself,” he noted.
Agents’ distrust of the domestic fiscal issue eased in the short term after more robust federal tax collection data, but it is still present in the long term.
Mr. Eichhorn believes that much of the fiscal debate has already been incorporated into asset prices over the year, and so a rate close to 6% for medium-term real interest rates, such as those extracted from NTN-Bs for 2035, is already proving more interesting for allocation. “We already have a bit of this position, and we’ll probably increase it to 6%,” he said.
According to the executive, if it becomes clear that the parameters established in the fiscal framework by the government will be respected, there could be a reversal of the perception of risk embedded in prices from the beginning of the year to now. “In fact, there will be a bigger discussion point [about the 2024 fiscal target] between May and June, and that could be decisive for this dynamic. Or, if there is an early and stronger signal from the government authorities that there will be no change to the target, we may also see a relief in the curve,” explained Mr. Eichhorn.
Mr. Telo, from UBS Wealth, also believes that, despite some obstacles in the short term, the premiums embedded in real long-term interest rates in Brazil should guarantee good returns further down the line. “If you buy an NTN-B above 5.5% and carry it for four years, the return is higher than the CDI almost 90% of the time. So we see that there is a good premium.”
According to the executive, global investors are not looking at Brazil at the moment, given that Treasuries are still paying very high interest rates. “And domestic institutional investors have also been shy, and we don’t see individuals wanting to add too much risk at the moment. With the CDI rate high and inflation low, real interest rates on the CDI also remain attractive. The market hasn’t found the participant who is going to make this closing movement [fall] in real interest rates,” explained the executive.
According to Felipe Guerra, partner and investment director at Legacy Capital, in a monetary easing cycle, when nominal interest rates cross the 11% level, medium and long-term NTN-Bs tend to perform well. The professional made the comment based on a study prepared by the manager at a Bradesco BBI event on Tuesday (2).
“We’ve already crossed that mark [of 11% nominal interest], but NTN-Bs haven’t done well so far because there’s strong competition with incentivized bonds. When this competition is over, I think NTN-Bs will close 60 basis points [or 0.6 percentage points] above fixed-rate bonds. So, if you have a portfolio of NTN-Bs there will be a time when you’ll make a lot of money,” noted Mr. Guerra.
In Mr. Sano’s view, there may be a more favorable movement for long NTN-Bs further ahead, but shorter papers may perform better. “The rate is interesting and seems less likely to worsen to 6.2% and more likely to fall to 5.5%, for example. Looking ahead, the symmetry becomes more favorable, but if you don’t have cash constraints, a shorter-term instrument may be more guaranteed. In some portfolios, we prefer the NTN-B for 2028,” he said.
Falling profitability with lower prices and productivity should lead to a smaller planted area in the season
04/03/2024
Falling soybean prices and productivity are reducing the profitability of the crop in the 2023/24 season and should lead to a smaller planted area in the following cycle in Mato Grosso, the largest producing state.
According to the Mato Grosso Institute of Agricultural Economics (IMEA), the total cost of soybean production for the 2024/25 crop will increase by 1.2% compared to the current cycle, reaching R$7,367 per hectare. The expected gross revenue is R$5,517 per hectare, down 6.1%.
“In general, we expect a reduction next season because if the same investment package is maintained, farmers will not be able to monetize the crop,” IMEA Head Cleiton Gauer told reporters during an online event on the state crop. IMEA will release the first planting estimate in May.
Brazil’s soybean and corn production is expected to see the greatest loss in the 2023/24 harvest in the last 25 years amid a drop in grain prices and productivity, according to the Center for Advanced Studies in Applied Economics (CEPEA).
In the 2023/24 harvest, the 18.4% drop in the average price of soybeans and 18.2% in productivity outweighs the positive effect of the 36% reduction in fertilizer prices and 24% in seeds, said Mauro Osaki, a researcher at CEPEA. According to these calculations, farmers face losses with any productivity below 50 bags per hectare and any price below R$100 per bag.
Regarding the 2024/25 harvest, CEPEA calculates that productivity of 55 bags per hectare will be required to cover costs.
According to Mr. Osaki, the outlook for the second corn crop is more positive, but profitability is still insufficient to cover losses from soybeans. “Considering the current price of R$38 per bag and the average productivity of 120 bags per hectare, the profitability is R$3 per hectare,” he said.
Glauber Silveira, the executive director of the Brazilian Corn Growers Association (ABRAMILHO), said that the current corn crop is “less weird” than soybeans because of the rains in March and early April. But he added that prices do not pay production costs and the consequence should also be a reduction in corn planted area in the 2024/25 season.
IMEA estimates for the 2024/25 corn crop in Mato Grosso an increase of 8.1% in the cost of production, to R$6,345 per hectare. Gross revenue is projected at R$3,214, down 8.1%. With the average price of corn at R$30 per bag, the crop will have a negative EBITDA of R$1,456 per hectare in the next cycle—in the current crop, the loss is R$547.05.
For soybeans, with the average bag price at R$94.80 and costs similar to those of the current cycle, the estimate is EBITDA of R$91.08 per hectare, considering the historical average productivity of 58 bags per hectare. In the 2023/24 harvest, the productivity calculated is 52.81 bags per hectare, which generates a negative EBITDA of R$164 per hectare, according to IMEA.
The unit in the country serves more than 30 airlines around the world
04/03/2024
Facing a shortage of turbines in the market and long maintenance queues, the airline industry is grappling with a severe shortage of aircraft. This scenario has prompted GE Aerospace to invest in expanding its capacity in Brazil. GE Celma, located in Rio de Janeiro, is set to be expanded in 2025. “Our focus is now on expanding Três Rios,” H. Lawrence Culp Jr, the company’s global CEO, told Valor.
GE Aerospace will officially be launched to the market today as an independent company, following its separation from the conglomerate GE, which will now operate through three independent entities—GE Vernova (energy) and GE Healthcare (whose separation had already occurred). Mr. Culp, who previously served as president of GE and of GE Aerospace, will continue to lead the aerospace division.
In Brazil, the company has been operational for over 100 years—currently focused in Rio—and employs 3,500 people. The unit provides services to more than 30 airlines worldwide.
The operation reached the milestone of testing and overhauling 500 aero engines in 2023—no public target has been set for after the construction ends. The new facility is expected to be completed in the second quarter of 2025, adding 40,000 square meters of built area.
“We have begun the hiring process and expect to create around 600 jobs. This will enable us to better serve our clients, including Embraer,” said the executive. The partnership with the Brazilian manufacturer, lasting over 25 years, has been reinforced by the recent order of up to 133 E175 jets placed by American Airlines.
The company has an installed base of approximately 44,000 commercial engines and 26,000 military and defense engines worldwide. In 2023, it generated revenues of $32 billion, around 70% of which came from services.
The increase in capacity comes at a crucial time. The newest models (LEAP-1A and 1B engines, used in the Boeing 737 Max and Airbus A320neo) have achieved a reduction of more than 20% in emissions but have ended up requiring more maintenance.
“There is a recognition that challenges exist in the supply chain and not just with the engine manufacturers,” he said. In March, the company announced investments of more than $650 million worldwide.
Digital currencies are also attracting investors, survey shows
04/03/2024
Marcelo Billi — Foto: Divulgação
Most Brazilians are unfamiliar with investments and savings accounts are still the favorite alternative, but corporate bonds and digital currencies are gaining ground, according to a study by the Brazilian Association of Financial and Capital Market Entities (ANBIMA) and pollster Datafolha.
Six thousand Brazilians from different social classes and regions were surveyed about what investments they use. The majority (57%) of respondents say they are unfamiliar with investments or do not use them, compared with 58% in the previous year. The second-largest group (25%) says it uses savings accounts, compared with 26% in the last survey.
The third-largest group (5%) says it invests in certificates of bank deposit (CDBs), structured transaction certificates (COEs), debentures, agricultural credit bills (LCAs) and real estate credit bills (LCIs), compared with 4% in the previous year. These fixed-income securities saw an increase for the second consecutive survey.
The purchase and sale of real estate, investment funds, and digital currencies are tied in fourth place (4%). The share that invests in real estate and funds remained the same, but the population that invests in cryptocurrencies increased compared to the previous year (3%). Crypto assets gained ground in the survey for the second time in a row.
In addition, 3% of Brazilians leave their money at home or “under the mattress” and 2% invest in stocks, private pension plans, or Tesouro Direto (government bonds). Among these products, the only one that grabbed a larger share was Tesouro Direto, which was mentioned by only 1% of the respondents in the previous edition. In addition, 1% of those surveyed invest in coins or gold.
Marcelo Billi, ANBIMA’s head of sustainability, innovation, and education, says that most Brazilians who invest in savings accounts use them as checking accounts or to keep their money safe. He says that what Brazilians understand as savings accounts are often remunerated accounts where the balance earns money in digital banks.
“The word ‘poupança’ [savings] has more meanings than the typical savings account,” he said. “Savings accounts have a pedagogical role in preparing people for the world of investments. I think it will not lose relevance as an organization tool for most Brazilians. People know that other investments are better, but they are getting organized,” he said.
In Mr. Billi’s view, many factors contribute to the spread of investments beyond savings, such as the deepening of the financial market, investors’ search for more profitable investments at times of lower interest rates, and social media influencers, who popularized the conversation about financial investments in those platforms.
Young people are taking the lead in searching for investments beyond traditional savings accounts, he said. “Digital currencies are a phenomenon and the conversation about bitcoin has become very popular on social media. Corporate bonds such as CDBs are usually the number one investment when Brazilians leave savings accounts, “he said. “They are publicized as safer options that also offer better yields. Plus, the idea of lending money to a bank is better understood compared to funds, for example,” he said.
The study also showed that 37% of Brazilians invest in financial products now, compared with 36% the previous year and 31% two years ago. The rest of the population does not save money nor use financial products to save money.
Present in Brazil for more than 20 years, the conglomerate also controls April and has already invested more than $6.5 billion in Brazil
04/02/2024
Praveen Singhavi — Foto: Gabriel Reis/Valor
Brazil is at the center of the strategy of the Asian conglomerate Royal Golden Eagle (RGE), owner of Bracell, a Brazilian producer of dissolving and bleached eucalyptus pulp that has been one of the most prominent investors in the local forestry sector in recent years.
With more than $35 billion in assets and 70,000 employees globally, the Singapore-based group, which also owns April and Asia Symbol, leading pulp and paper companies in Asia, is currently the second-largest producer of market pulp (sold to third parties) in the world, behind Suzano, and has plans to expand further in the country.
In addition to the billion-reais investment to buy and expand the former Lwarcel plant in Lençóis Paulista (state of São Paulo), which began in 2018 with the acquisition, Bracell is investing R$2.5 billion in a mega-factory for tissue paper in the same town, and another R$2.5 billion in a plant for chemicals used in pulp production, also in Lençóis. In 20 years, Bracell’s investments have already exceeded $6.5 billion (more than R$30 billion at the current exchange rate).
“Brazil is the sweet spot of the global pulp industry,” Bracell CEO Praveen Singhavi told Valor in his first interview in the position he has held for about a year. Neither Brazil nor RGE, however, is new to the executive’s career. For almost 16 years, he led another of the group’s operations, April. Before that, between 2006 and 2007, he was the head of Olam International, one of the global names in agricultural commodities trading in Latin America.
Government support for the pulp and paper sector, the existence of a mature ecosystem that contributes to the evolution of the local industry, and the availability of land give Brazil a vital position in the plans of major investors in the sector, including the Asian group, according to Mr. Singhavi. Added to that is the competitiveness of the raw material produced here, which has the lowest costs in the world and is also favored by the climate and soil.
It’s no surprise that the country is now the world’s largest pulp exporter. RGE uses dissolving pulp produced in the interior of São Paulo at mills owned by Sateri and Asia Pacific Rayon (APR), subsidiaries that place it at the top of the global viscose market ranking. Between Camaçari (in the state of Bahia) and Lençóis, Bracell can produce 3 million tonnes of kraft pulp or 2 million tonnes of dissolving pulp per year. To transport its production abroad, it invested R$1 billion in a terminal at the Port of Santos, also in the state of São Paulo.
With the completion of the OL Papéis purchase in 2023, Bracell will now operate two tissue units in the country with a capacity of 50,000 tonnes per year, marketed under the Familiar (single- and double-ply toilet paper) and Absoluto (paper towels) brands. “Brazil is an important tissue market, and we see opportunities for growth,” he commented. It is now installing an additional 240,000 tonnes of capacity at the new Lençóis plant, which will start operating in the second quarter.
Bracell’s upcoming project entails a R$300 million investment over two years aimed at modernizing its Camaçari plants that produce dissolving pulp, used in making viscose, and special dissolving pulp, a higher-quality fiber for medicines, food, cosmetics, and more. The Bahia factory was the group’s entry point into the country when it acquired the former Copener Florestal and Klabin Bacell in 2003. By 2030, the investment is expected to reach R$1 billion.
Some say that Bracell, which today has industrial and forestry operations in Bahia, São Paulo, Pernambuco, and Mato Grosso do Sul, with more than 11,000 employees—almost four times the number it had four years ago—is preparing a forestry base to build a new pulp mill in Mato Grosso do Sul. The company’s management denies such an intention. “Our focus is on having access to timber. Launching the tissue project and marketing are the priorities,” said Mr. Singhavi.
Bracell’s drive has annoyed competitors, not only in the pulp and paper industry but also in other agribusiness segments vying for land, especially in the São Paulo region where its largest operation is located. That has even led to a lawsuit over foreigners purchasing land. The strong demand for land and timber in certain regions, notably the South, Southeast, and Midwest, to supply new pulp projects has resulted in significant appreciation in recent years. “Bracell is a Brazilian company with a foreign investor,” said the executive. “The important thing is to follow the country’s laws, so we are within the land legislation.”
Regarding sustainability, Mr. Singhavi highlighted that past issues, such as the exploitation of native forests, which once troubled April, have been addressed and resolved. The RGE group company is in the process of seeking recertification from the Forest Stewardship Council (FSC), which represents the gold standard for responsible forest management practices. Mr. Singhavi added that the company not only fulfills all necessary criteria but also pursues one of the sector’s most ambitious conservation goals: for every hectare of land planted, an equivalent hectare will be preserved. Currently, they are close to achieving this goal, with the target standing at almost 90%.
In a meeting with the Electricity Regulatory Agency, Mines and Energy Minister Alexandre Silveira says he is considering measures to revoke the power utility’s concession
04/02/2024
Alexandre Silveira — Foto: Valter Campanato/Agência Brasil
The series of problems with the electricity supply in the São Paulo area could jeopardize the continuity of Enel’s concession contract. On Monday, the minister of Mines and Energy, Alexandre Silveira, ordered Brazil’s Electricity Regulatory Agency (ANEEL) to open disciplinary proceedings against the utility. In a meeting with the agency’s board, Mr. Silveira said the company had “crossed the line” and that “all possibilities” of punishment should be considered by the agency.
In an official notice to ANEEL, the minister cited the “repeated episodes” of power outages in Enel’s concession area and said that the dissatisfaction of the population served by the company is “notorious.” Mr. Silveira commented on the decision to initiate the process in an interview with cable news channel GloboNews.
At the meeting with the agency officials, Mr. Silveira reiterated his arguments, pointing out that the plan to renew concessions currently being analyzed by the government could be affected by Enel’s problems. For this reason, he advocated that the company should be sanctioned severely in order to send a message to others, according to an excerpt that Valor had access to.
In addition to the technical problems with the power supply, Mr. Silveira told Enel’s executives that the company had “little dialogue” with governments. “Enel goes beyond all limits in its relationship with the states and the federal government. Given this, we need to be a little more radical,” he said.
For him, the regulator should “consider all the possibilities of punishing the company” and “better evaluate its condition as a concessionaire of energy services in Brazil.” Pointing out that all rights of defense must be granted, Mr. Silveira mentioned a possible action to declare the concession null and void, which means terminating the supply contract.
“Enel has the right to an adversarial hearing, which is natural, but it’s important to note that over R$300 million in fines have been imposed, yet none have been paid. It has consistently failed to meet the required quality of service as outlined by regulations.”
Experts interviewed by Valor believe that it is the ministry’s prerogative to request an investigation, take action, and adopt measures against the company. Still, they believe that the service provided by the company is within the limits set by the agency.
Mr. Silveira informed ANEEL that the case could impact the concession renewal process. He emphasized that any requirement to re-tender the contracts would lead to “chaos.” He said, “If investments regulated for medium and low voltage are already restricted, imagine the reactions if these investment plans were disrupted. It would result in chaos in the Brazilian electricity sector.”
He added that “when distribution contracts were signed 10, 15, 20 years ago, they were very loose, which gave the freedom to provide a quality of service far below what the Brazilian population demands.”
He also urged ANEEL to prioritize the most pressing ongoing cases. Besides Enel, Mr. Silveira mentioned Amazonas Energia, a utility whose concession the agency had already advised to terminate. Although the case is still under evaluation, he noted that President Lula has the final say on the matter.
ANEEL’s board of directors has already rejected a request to transfer control of Amazonas Energia. The distribution company, controlled by the Oliveira Energia group, requested the transfer of control to regularize the situation, as it was no longer able to guarantee the economic and financial sustainability of the concession.
Enel said it was “in full compliance with all contractual and regulatory obligations and is implementing a structured plan that includes investments to strengthen and upgrade the network structure, digitize the system and expand communication channels with customers, as well as mobilizing teams in the field preventively in case of failures.”
The utility said it has made “significant investments to improve the quality of service and face the challenges of the electricity sector considering the impact of climate change.”
The company claims to have invested R$8.36 billion since 2018 when it assumed the concession in São Paulo, averaging R$1.4 billion per year, nearly double the investments made by the previous concessionaire.
*Por Murillo Camarotto, Rafael Bitencourt — Brasília
In an environment of external pressure and maturing NTN-As, the agency will offer the equivalent of $1 billion in currency swaps
04/02/2024
Sérgio Goldenstein — Foto: Leo Pinheiro/Valor
The sentiment that the scenario allowed for a significant appreciation of the domestic exchange rate lost strength. On a day when the dollar rose globally, the Brazilian real was among the currencies that suffered the most, with the exchange rate remaining firmly above R$5, its highest level since October 2023. The pressure on the Brazilian currency was primarily external due to the renewed strength of the U.S. economy. However, domestic factors also played a role, such as the approaching maturity of dollar-linked bonds (NTN-As), which led the Central Bank to announce the first intervention in the foreign exchange market since December 2022.
Shortly after the markets closed, the monetary authority announced that it would hold an extraordinary auction of up to 20,000 currency swap contracts, equivalent to $1 billion. It will be the first foreign exchange swap offering since May 2022. The action also marked the end of a tense day in the markets. The exchange rate ended Monday’s (01) session up 0.87%, trading at R$5.0591 per dollar, the highest level since October, after reaching R$5.0704 at the day’s peak.
The global movement was a determining factor in the pressure on the exchange rate. The process of repricing U.S. interest rates took on new contours after strong statements from two leaders of the Federal Reserve (Fed) last week—director Christopher Waller and chairman Jerome Powell. As the market advances with the start of an interest rate cut cycle in the U.S., the dollar strengthens.
However, the real stood out negatively in Monday’s session. Among Latin American currencies, the Brazilian currency was at the bottom. The dollar rose 0.42% against the Mexican peso, 0.58% against the Chilean peso, and 0.04% against the Colombian peso. Among the world’s most liquid currencies, only the Turkish lira managed to continue rising.
On Monday, the activity index for the U.S. industrial sector startled investors by rising from 47.8 points in February to 50.3 in March, thus reaching a level that indicates expansion for the first time since September 2022. Additionally, the price sub-index rose from 52.5 to 55.8 points, which could indicate a scenario of more intense inflationary pressures in the sector, turning on the yellow light among market participants.
“Until then, these prices had been more controlled. Moreover, the Fed has been placing significant emphasis on inflation data as a condition for its future actions, in this case, a possible interest rate cut,” noted Marcel Yagui, currency manager at BlueLine Asset.
The market, he says, has begun to cast doubt on the start of the interest rate cut in June, which had been considered quite likely. According to the CME Group at Monday’s close, Fed funds futures indicated a 58.4% chance of an interest rate cut in June and a 41.6% probability that the easing cycle wouldn’t begin until later.
“The relevance of this data is undeniable given the recent context of more conservative statements from the Fed. The movement could only be one of rising interest rates and a stronger dollar,” said Mr. Yagui. In this context, BlueLine reduced its long positions (which bet on appreciation) in the real.
Although external factors were decisive for the dynamics of the session, they were not the only ones that influenced the behavior of the exchange rate. Market participants have been pointing out in recent weeks that the maturity of NTN-As could generate some stress in the exchange rate, although they were not betting on extraordinary action by the Central Bank.
“I have the impression that the initial idea of the Central Bank was to let the market absorb this maturity, which is relevant but not huge. However, with the more adverse external environment exerting pressure on the real, they opted to mitigate the potential additional impact on the exchange rate resulting from the maturity of the NTN-As,” said Warren Investimentos’ chief strategist, Sérgio Goldenstein.
The maturity of the papers on April 15 is expected to create a demand for the American currency of around $3.7 billion, which had already heightened the perception among agents that the exchange rate could be more unstable at the beginning of April. From the low to the high of the day in Monday’s session, the dollar fluctuated by more than R$0.06, a level not seen in recent trading sessions.
“These bonds originate from the process of exchanging foreign debt for domestic debt,” explained Mr. Goldenstein, who once headed the Central Bank’s Open Market Department (DEMAB). “It’s undoubtedly an exchange rate pressure because it’s unlikely that the Treasury will renew these bonds,” he explained. “Entities holding these bonds are effectively buying in dollars. Upon the bonds’ maturity, these entities will no longer hold their positions. If they wish to maintain their investment position in dollars, they would need to re-enter the market [to purchase more dollars].”
Some traders even mentioned that the pressure might not be so significant as the bonds could be protected with some kind of hedge. Mr. Goldenstein, however, emphasizes the need to distinguish between the Central Bank, the Treasury, and the private sector, noting that the process could still exert pressure on the exchange rate. “If there is a hedge, someone in the market has to provide it, so it remains within the market,” he said.
In the view of Banco Pine’s chief economist, Cristiano Oliveira, the Central Bank acted appropriately since the maturity of NTN-A introduces distortion to the foreign exchange market, which has already been affected by uncertainties surrounding U.S. monetary policy. “Domestic factors do not suggest a devaluation of the real. The Central Bank should monitor the market closely until maturity and, if necessary, offer more swaps. The real depreciated more than its peers on Monday because of that,” he explained.
The assessment of some financial agents aligns with Mr. Oliveira’s perspective on the domestic fundamentals, suggesting room for an appreciation of the Brazilian currency. This perception was quite relevant at the turn of the year, but successive disappointments with the dynamics of the exchange rate have led to a “cleansing” on the technical side, with a reduction in optimistic positions on the real.
Among foreign investors, the long position (betting on a rise) in the dollar through derivatives such as dollar futures and currency swaps reached an all-time high last Friday, climbing to $68.44 billion. Local investors, meanwhile, continue to hold a short position (betting on a decline) in the dollar against the real, amounting to $13.3 billion.
In a monthly call on Monday (01), Fernando Chibante, currency manager at Occam, stated that the firm continues to bet on the Brazilian real’s appreciation, citing the positive carry trade and stable external accounts as key factors. “Additionally, last month, we saw a significant improvement in technical factors. Even though the real experienced some deterioration throughout March, we attribute much of that to the broader external scenario, particularly the stronger dollar,” he explained.
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