Private investment, fiscal adjustment, inclusion are key to growth

Experts say country needs to devise a healthy business environment to attract capital

04/09/2024

Dario Durigan — Foto: Ana Paula Paiva/Valor

Dario Durigan — Foto: Ana Paula Paiva/Valor

Experts at the Rumos 2024 event, hosted by Valor at the Rosewood Hotel in São Paulo, said that for Brazil to achieve growth and improvement, it must focus on three key pillars: fiscal adjustment, private investment, and the inclusion and sustainability agenda. According to economists, government officials, and private-sector representatives, the country has already made progress, such as approving the tax reform. Still, it needs to create a healthy business environment to attract domestic and foreign private capital.

For example, the uncontrolled increase in public spending is often cited as a cause for concern among investors. During the event, the executive secretary of the Ministry of Finance, Dario Durigan, acknowledged that actions to reduce and improve the quality of public spending were necessary. “Seeking to reduce expenses is important for the economic team,” he said.

The ministry’s number two justified the beginning of the tax adjustment on the revenue side due to “distortions” caused by the granting of benefits, exemptions, and other devices that reduced collection without bringing structural economic gains. “With the spending cap [the rule that limited growth in public spending to the previous year’s inflation, replaced by the tax framework], there was a lock on expenses, but there was no lock on the revenue side,” he said. “The special regimes, presumed credits, [tax] advantages, and loopholes were sometimes reproduced even by municipalities.”

The government “has been recomposing the tax base by attacking the most serious inefficient gaps.” In the short term, Mr. Durigan acknowledged that, alongside adjustments, the government is counting on dividends from state-run companies to aid in the rebalancing of government accounts. “The Finance Ministry’s view is that the [dividend] inflows are relevant from a fiscal point of view, but this should happen with the appropriate dialogue.” According to Mr. Durigan, “[Finance] Minister Fernando Haddad does not deny and I do not deny that it is important to have these revenues.”

In the long term, the secretary believes that fiscal adjustment will be achieved through the tax reform itself. “Fiscal consolidation was set in motion last year and we now see good results at the beginning of 2024. However, it is an agenda that over time will be fulfilled by tax reform, which will bring about the most comprehensive reorganization of our tax system.”

During another panel, Marcos Barbosa Pinto, the secretary of economic reforms at the Ministry of Finance, discussed a series of measures spearheaded by the ministry. These are initiatives to reduce the net interest rate spread (the difference between the funding rate and the banks’ lending rate). The secretary referenced a study conducted by the Central Bank, which indicates that if Brazil had a spread equivalent to the global average of 6% per year, it would experience a 40% increase in credit availability and a 5% rise in GDP.

“In the long term, we have an important goal,” he said. Brazil has a spread of around 20% per year. “We can reduce it,” said the secretary. “Brazil has the conditions to unlock a gigantic credit volume and very large growth.”

Mr. Durigan added that the economic team has been working with a dual agenda on a long-term development vision: fiscal and ecological consolidation. “To achieve growth alongside social development and environmental responsibility, we need two distinct agendas,” he said. The executive secretary said that “these issues complement each other.”

Solutions to increase productivity in Brazil were also issues of debate at Rumos. Mr. Barbosa Pinto said, “Brazil will not be able to grow sustainably without attacking the problem of productivity.”

He viewed this as “long-term and challenging work,” but he said that significant changes could be observed in the short term through measures implemented in the recent past, such as the fiduciary alienation law, which significantly expanded the real estate credit market. Mr. Barbosa Pinto mentioned the approval of the new guarantee framework last year, which is expected to decrease financing costs and speed up the recovery of assets pledged as collateral in contracts.

Economists Silvia Matos, coordinator of the Macro Bulletin at the Brazilian Institute of Economics (FGV Ibre), and Cassiana Fernandez, head of economic research for Latin America and chief economist for Brazil at J.P. Morgan, suggested that the structural reforms could potentially have positive effects on productivity. “Something that surprised us was the positive effects of the labor reform,” said Ms. Matos. “The post-pandemic recovery was different. It came specially with formal employment.”

According to Ms. Fernandez of J.P. Morgan, the bank’s models also point to a potential growth of Brazil closer to 1.5% per year. The economist said she had “great confidence” in the effects that consumer spending tax reform could have on productivity going forward.

Santander’s chief economist and former Treasury secretary Ana Paula Vescovi assessed the need to reduce credit costs in Brazil to accelerate growth. “It is necessary to reduce the cost of finances and make room for the private sector to play its role,” she said.

Ms. Vescovi emphasized the importance of the country being able to devise “a healthy business environment with legal certainty.” The economist said she often talks with international investors “who look at Brazil and see the comparative advantages we have at this time of energy transition.” However, issues such as the governance of state-run companies and the tax reform process itself, which still needs to be regulated by Congress, end up inspiring caution.

*Por Anaïs Fernandes, Marcelo Osakabe, Sérgio Tauhata, Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com

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Companies accelerate debt payments

Firms are taking advantage of cheap debentures to pay off more expensive papers

04/08/2024

Matheus Licarião — Foto: Carol Carquejeiro/Valor

Matheus Licarião — Foto: Carol Carquejeiro/Valor

Amid falling interest rates on debentures, Brazilian companies have been planning offerings aimed at paying off debts and repurchasing previous issues. About 40% of the issues of debentures registered in March aimed to manage liabilities, according to a survey made by Valor based on information sent to the Securities and Exchange Commission of Brazil, known as CVM.

The current scenario is conducive to this type of operation. With lower rates and increased investor interest, companies are looking more at liabilities to find out “what can be improved, lengthened, or swapped for other debt,” said Getúlio Lobo, head of fixed income distribution at XP’s investment bank.

From now on, companies are expected to raise funds through longer-term securities to repurchase shorter-term debts, said Mr. Lobo. They could also negotiate with investors to exchange older securities for new debentures.

Not all companies will be able to exchange older papers for new ones, though. Companies with higher credit risk will hardly be able to do such a move because investors would not accept moving from expensive to cheap papers just to lengthen the company’s debt, said Matheus Licarião, head of debt capital markets at Santander.

“However, for companies with high-quality scores, asset managers will have to put money on the papers, even if the same asset is at a lower price,” he said. “Major asset managers are flush with cash and looking at the market to make new allocations.”

The increase in the maturity of issues seen in recent months contributes to more companies seeking offers for liability management. “We started to see ten-year, seven-year debentures, even in securities that are not incentivized. With the possibility of longer-term financing open for more predictable businesses, companies are expected to accept paying a little more to extend the terms of their debts,” said Felipe Wilberg, head of fixed income and structured products at Itaú BBA.

Of the 72 offerings filed last month, 28 are aimed at refinancing or paying off debts. Tecban, known for the Banco24Horas ATM network, and the MRV construction company launched offerings for that reason.

Of this total, 11 offerings had as a specific objective the early payment of other debentures. Among them are the offerings of the power distributor Equatorial Goiás, the automotive parts maker Iochpe Maxion, and the drugmaker Eurofarma.

The current interest of companies in issues aimed at repurchasing old debentures is also related to the crisis experienced by the corporate debt market in early 2023 after an accounting fraud at Americanas came to light.

As risk perception worsened, bond rates rose mainly during the first half of last year. But the companies’ need for credit has not changed, and many have had to raise funds in the capital market or directly with banks—and pay more for it.

“We always see demand for debt refinancing, but there is a stronger movement this year. Many companies were concerned in 2023 about liquidity and raised funds at a higher cost than usual and with shorter terms. They sought to replenish their cash reserves because they did not know how long the situation would last. Now, they are taking advantage of the overheated market to engage in liability management,” said Enrico Castro, head of debt capital markets at BNP Paribas Brasil.

The debenture market is experiencing a rally amid the prospect of a fall in the Selic policy rate and after several events that boosted demand. The first was the change in the taxation of exclusive funds, which increased the demand for corporate debt securities.

In February, new rules were announced for securities offerings such as real estate and agribusiness receivables certificates (CRI and CRA). Individual investors don’t pay income tax on these securities. The changes boosted the market for incentivized debentures—tax-exempt securities issued by infrastructure companies.

Falling interest rates should not last indefinitely. While this does not change, the list of future offerings continues to grow, especially of incentivized securities. “We see a robust pipeline of incentivized debenture issuances, considering current spreads that have been at the most competitive level for at least five years,” said Mr. Castro.

*Por Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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China surpasses Argentina, supplying 40% of Brazil’s imported cars

Acceleration started in the second half of 2023; country becomes relevant customer for China

04/08/2024

Gabriela Faria — Foto: Gabriel Reis/Valor

Gabriela Faria — Foto: Gabriel Reis/Valor

China accelerated exports of vehicles in the first quarter of the year and led the external supply of cars to Brazil. The Asian country, which is now the world’s largest producer of automobiles, accounted for 39% of passenger vehicles imported by Brazil from January to March 2024, up from 10.3% in the same period last year. Argentina, historically the largest supplier of vehicles to Brazil, saw its share fall to 16% this year from 40.2% in 2023. Mexico ranks third, with a share of 12.1% in the first quarter of 2024, compared with 13.6% in the same period of 2023.

In the full year 2023, Argentina ranked first in car sales to Brazil, with $2.24 billion, up 9.8% from the previous year. In the second half of 2023, China accelerated vehicle sales to Brazil, ending the year in second place with $1.09 billion, compared to $186.7 million in 2022.

From January to March 2024, of the $1.46 billion in Brazilian foreign purchases of automobiles, $569.9 million came from China. The figure is more than five times the $102.9 million for the same period in 2023 and more than half of what Brazil bought in cars from China last year. China’s fast pace also boosted the total import of passenger cars by Brazil, which grew 46.4% year over year in the first quarter.

Argentina shipped $234.6 million to Brazil in the first quarter, down 42% year over year. Mexico exported $176.3 million to Brazil from January to March.

China’s official export figures also indicate that Brazil has gained ground in the country’s car exports. Brazil, which was the nineteenth destination for passenger vehicles shipped by China in the first two months of 2023, ranked fifth in the same period this year, behind Russia, Belgium, the United Kingdom, and Mexico.

Imports from China stand out because they are growing much faster pace than the domestic market, said José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB). According to data from the Secretariat of Foreign Trade (SECEX/MDIC), more than 60% of cars imported from China in the first quarter of the year are fully electric. “The data show a strategy for a new landscape with China working to gain ground in this market,” he said.

Davi Gonçalves, an analyst specializing in the automotive sector at Tendências, a São Paulo-based consultancy, recalled that imports of Chinese electric and hybrid vehicles grew last year, especially in the fourth quarter.

“The flow remained strong despite the introduction of an import tax in January and is likely to remain so in the short term. Among the cyclical factors that favor the category is the increased interest of Brazilian consumers in high-tech, renewable energy cars amid a more favorable environment for products aimed at high-income individuals,” he said.

The competitive prices of Chinese automakers and Brazil’s weak production of these vehicles also play a role, said Mr. Gonçalves.

With the result seen from January to March, vehicles became Brazil’s second most imported item from China and helped to boost total purchases from the Asian country. While the value of Brazilian imports fell 1.8% from January to March compared to the same months in 2023, the arrival of products made in China grew 14% in value, according to SECEX. The growth was driven by a 40.2% increase in volume. There was a 17.6% drop in average import prices.

Gabriela Faria, an economist at Tendências, recalls that the reduction in prices in Chinese imports combines a more general scenario of price reduction after the shocks that put pressure on global inflation with a specific situation in China, which has been experiencing “deflation.” “China expanded its production capacity, but there was no local demand to absorb the supply. Prices fell as a result, including those of the products it exports,” he said.

Several other countries have seen China grab a larger share of their car imports, said Mr. Gonçalves. “Although levels are expected to remain historically high throughout the year, some obstacles limit the pace of expansion,” he said. In addition to the Import Tax, Mr. Gonçalves cited the expected increase in domestic production, which includes the start of operations by Chinese automakers in Brazil between the end of this year and the beginning of next year. Following a decision by the Brazilian government, electric cars started paying 10% of Import Tax in January 2024. The rate is expected to rise gradually until it reaches 35% in July 2026.

China has increased exports of several items and one is cars, which has raised protection policies in several countries, said Livio Ribeiro, a partner at BRCG consultancy and researcher at Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV). For instance, Brazil protected its industry by increasing the Import Tax rate.

“In the specific case of Brazil, one element seems different. The Brazilian car industry is a 60-year-old baby reliant on Brasília for protection. However, the government has an interest in absorbing Chinese companies. So, the government imposed an import tax, but paved the way for these companies to bring part of their production here, which is not an immediate process,” he said.

Brazil’s higher auto imports reflect one of Beijing’s directives to elevate China’s position in value chains, said Mr. Ribeiro.

“China is driving a technological densification of exports worldwide, and vehicles are no exception,” he said.

“China is already at the point of exporting factories as well, following the example of other Asian countries, but much faster.”

Korea’s Hyundai is an example of success in this regard, he said. “I think China wants to do something similar. One difference is that electric cars cater to a niche demand, whereas previous experiences focused on mass production,” he said.

On the other hand, Argentina’s lost ground in Brazil’s car imports shows that one should not treat both countries’ automotive industries separately, said Mr. Ribeiro.

“It’s actually a single industry spread across two countries. With the crisis in Argentina, there is a movement to produce in Brazil rather than there, and this seems more evident in mass production cars with a higher volume of production,” he said.

The slowdown in domestic demand in Argentina is not the only reason, he said. Insecurity about some conditions during the presidential transition, such as labor union negotiations, also played a role.

*Por Marta Watanabe — São Paulo

Source: Valor Inaernational

https://valorinternational.globo.com/
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Moraes orders probe into Elon Musk’s activities

Following provocations by the proprietor of the X platform, the justice has mandated an investigation into Mr. Musk’s involvement with digital militias

04/08/2024

Alexandre de Moraes — Foto: Gustavo Moreno/SCO/STF

Alexandre de Moraes — Foto: Gustavo Moreno/SCO/STF

Justice Alexandre de Moraes from Brazil’s Federal Supreme Court has mandated an investigation into the actions of businessman Elon Musk, the proprietor of the X platform (previously known as Twitter). The decision was issued on Sunday (7) after the billionaire’s public declarations of potentially defying judicial mandates regarding the removal of content and the suspension of user accounts on his social media network.

In addition to targeting Mr. Musk in the ongoing investigation into digital militias, Justice Moraes has explicitly instructed the platform to adhere to all current and future court orders issued by both the Federal Supreme Court and the Superior Electoral Court. Failure to comply will result in a daily penalty of R$100,000 and legal repercussions for the individuals responsible for the company’s operations within Brazil.

Furthermore, the Brazilian Supreme Court Justice has called for Mr. Musk to be investigated for allegations of obstructing justice, as well as organizing and encouraging criminal activities. Justice Moraes highlighted that Mr. Musk’s behavior might amount to a “felonious criminal instrumentalization” of the platform, necessitating his inclusion in the existing probe.

In his ruling, Justice Moraes drew connections between the X platform and the attempted coup events of January 8, 2023. He stated, “It is utterly unacceptable for any social network or private messaging service provider representatives, especially those from the former Twitter, now ‘X,’ to feign ignorance of the criminal misuse perpetrated by so-called digital militias. This misuse encompasses the dissemination, propagation, organization, and expansion of numerous illegal activities on social networks, particularly those that gravely undermine the Democratic Rule of Law and aim to dismantle the Federal Supreme Court, the National Congress, and the Planalto Palace—essentially, the very foundation of the Brazilian Republic.”

Justice Moraes referenced a post-coup attempt meeting held “in an absolutely public and transparent manner” at the Superior Electoral Court with representatives from all major platforms, which focused on “the real peril of this criminal misuse” by social networks and messaging services.

Over the weekend, according to Justice Moraes, Elon Musk “initiated a misinformation campaign” targeting the actions of the Supreme Court and the Superior Electoral Court. This behavior, Mr. Moraes implies, demonstrates the platform’s complicity in attitudes supportive of a coup.

On Saturday (6), Elon Musk launched criticisms at Justice Alexandre de Moraes, who, in his capacity as Chairman of the Superior Electoral Court, played a pivotal role in enforcing stricter regulations on platforms to curb the dissemination of “fake news” during the electoral period.

The day commenced with the billionaire addressing a January statement by Justice Moraes, querying, “Why are you demanding so much censorship in Brazil?” As the day progressed, Mr. Musk escalated his remarks, insinuating that Brazil’s freedom of expression was being compromised.

In a statement on X, Mr. Musk articulated, “We are lifting all restrictions. The judge has applied massive fines, threatened to arrest our employees, and cut off access to X in Brazil. As a result, we will probably lose all revenue in Brazil and have to shut down our office there. But principles matter more than profit.”

On Sunday, he again mentioned Justice Moraes, promising to publish “everything” he demanded and showing how, allegedly, those requests violate Brazilian law. “He should resign or be impeached,” he asserted.

Mr. Musk’s posts garnered applause from users and even legislators on the political right, such as Congressmen Nikolas Ferreira and Eduardo Bolsonaro, the son of former President Jair Bolsonaro.

These developments have thrust the regulation of social networks and the proposition to levy taxes on major tech companies back into the public discourse. Amidst the ongoing tussle between Justice Moraes and Elon Musk, recent reports by the Folha de S.Paulo newspaper and corroborated by O Globo newspaper highlight a government initiative poised to impose taxes on big tech entities.

The Federal Attorney General, Jorge Messias, emphasized the urgency of this conversation, stating, “We cannot continue in a society where billionaires from overseas can dominate social media platforms, positioning themselves in ways that challenge our rule of law.”

Paulo Pimenta, the minister of the Special Secretariat for Social Communication (SECOM), voiced his stance against the remarks made on X. On the platform, he declared his refusal to let “anyone, no matter their wealth or influence, insult” the nation.

Similarly, Congressman Orlando Silva, who serves as the rapporteur for the Fake News Bill aimed at regulating social networks, expressed his concern. He remarked, “We’ve reached a critical juncture. Elon Musk is now openly challenging the authority of the Judiciary Branch.”

Mr. Silva announced his intention to request that Brazil’s speaker of the Lower House, Arthur Lira, expedite the bill’s voting process. This move aims to establish a “liability regime for digital platforms.” “It is a measure to protect Brazil,” he stated.

*Por Isadora Peron — Brasília

Source: Valor Ingternational

https://valorinternational.globo.com/
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Stronger company results create positive outlook for 2024

Survey of 394 non-financial companies shows growth in revenue and profit in last quarter of last year

04/08/2024

Aline Cardoso — Foto: Carol Carquejeiro/Valor

Aline Cardoso — Foto: Carol Carquejeiro/Valor

Brazilian publicly traded companies had a strong performance in the fourth quarter of 2023, with both profit and revenue growth compared to the previous year and the third quarter. This achievement was driven by companies focused on the domestic market and continued cost-cutting efforts, which offset the weakness in commodities. In the view of analysts, this positive trend opens up a perspective for strong performance throughout this year, especially for domestic companies. This optimism is bolstered by declining interest rates and rising consumer spending.

A survey by Valor Data of 394 non-financial companies shows that the net profit of this group of companies reached R$54.1 billion, a 12.6% increase compared to the previous year and 20.4% compared to September. Meanwhile, revenues reached R$913.5 billion between October and December, a 3.4% increase over the same period in 2022 and 4.9% compared to the third quarter. These figures exclude Petrobras and Vale due to their size, to avoid distorting the results, as well as companies that have recently undergone court-supervised reorganization, such as Oi, Light, and Paranapanema, whose numbers significantly vary year-over-year.

Despite the improvement, analysts interviewed by Valor considered the fourth-quarter results “neutral,” meaning there were no major surprises and mostly fell within the market’s expectations for the quarter.

Companies operating in the domestic market had a more positive performance than those exporting commodities, which were affected by falling prices and the fact that the exchange rate remained around R$4.8 per dollar.

“In aggregate, the results were only 4% below what we expected, which we consider neutral performance,” said Aline Cardoso, head of Brazil equity strategy at Santander. “Still, we had a quarter in which company profits grew on average by 3%, compared to a 20% decline in the third quarter.”

“The quarter was slightly worse than we expected, especially in EBITDA and profit, but undeniably, it was a very strong performance in year-over-year comparison,” said Carlos Eduardo Sequeira, head of research at BTG Pactual. He highlighted the performance of companies operating in the domestic sector, supported by better economic performance during the period.

The energy, sanitation, and telecommunications sectors, in general, surpassed expectations. In the energy sector, increased demand for electricity and higher prices, driven by higher temperatures, boosted results during the last three months of the year.

Meanwhile, telecommunications companies, especially Telecom Italia’s TIM and Telefónica’s subsidiary, took advantage of a more “rational” competitive environment—with less aggressive offers—and passed on price increases above inflation to customers. Reductions in investments also resulted in a significant margin increase and robust cash generation.

Overall, what caught analysts’ attention was the improvement in efficiency that domestic companies demonstrated in the fourth quarter, with margin expansion and robust cash generation thanks to initiatives taken in recent years. “In a more challenging environment, companies needed to pursue greater efficiency in profit margins,” said Mr. Sequeira.

According to Bank of America (BofA), which considers 79 companies composing the benchmark stock index Ibovespa, including financial companies, earnings per share fell by 13%. In contrast, EBITDA decreased by 3%, and revenues remained stable on a year-over-year basis. Compared to the third quarter, earnings per share fell by 1% for the year, EBITDA rose by 15%, and sales fell by 6%.

Excluding effects from energy and commodity companies, notably Petrobras and Vale, earnings per share grew by 21% in the fourth quarter, compared to the same period in 2022, with EBITDA also rising by 21%, and revenues of the 79 surveyed companies increasing by 5%. Compared to the third quarter, earnings per share remained stable, while EBITDA increased by 9%, and company sales increased by 6%.

Commodity-related companies had weak results as expected due to falling prices, resulting in reduced profits. According to BTG’s survey, commodity companies experienced a 7.2% decline in revenues and a 22.7% decline in net profit, on a year-over-year basis. According to Santander, results ended up slightly better due to a smaller-than-expected decline in prices.

Both oil and pulp experienced lower prices during the fourth quarter, with Brent crude falling by 7% during the period, averaging $83, while pulp traded in China saw a 29% reduction in prices, to $615 per tonne, due to macroeconomic uncertainties worldwide.

Meanwhile, iron ore maintained high levels, with supply-side issues, but steel mills had low utilization rates, and steel prices remained under pressure.

Overall, expectations for the year seem more optimistic. An analysis by Santander of earnings conference call transcripts during the first quarter shows a significant increase in the use of the word “recovery” and fewer mentions of inflation and default, indicating that companies anticipate a better environment in 2024—which could mean improved profit margins throughout the year.

“We expect that the economic recovery, real wage gains, and lower unemployment should have positive effects on consumer sectors during the first quarter,” said the head of research at BTG. “It won’t be a spectacularly stronger season, but the trend of improvement is expected to continue,” he said. He added that much of the improvement will come from lower interest rates, reducing pressure on financial expenses.

*Por Felipe Laurence, Victor Meneses — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Gasoline price gap reaches 17%

In diesel, the difference is 13%; fuel adjustments remain a challenge for Petrobras’s top management

04/08/2024

Bráulio Borges — Foto: Ana Paula Paiva/Valor

Bráulio Borges — Foto: Ana Paula Paiva/Valor

Amid discussions about Petrobras’s leadership, adjusting fuel prices remains a challenge for the state-owned company’s top management. The recent increase in oil prices has intensified pressure for an adjustment in gasoline and diesel prices to align with international market rates. Average projections from three consultancies and trade associations, as reviewed by Valor, indicate that as of Friday, Petrobras’s refineries were selling gasoline at prices 17% below international parity. For diesel, the disparity was 13%.

If Petrobras fails to adjust fuel prices for longer—in the current scenario of rising oil prices—it may see a decrease in profitability as happened in the past. In previous Workers’ Party (PT) administrations, the company went for long periods without adjusting gasoline and diesel prices, which led to losses and an increase in debt. It took years for the oil giant to fix its finances.

Between 2008 and 2012, the practice of retaining prices also reduced government revenue with taxes on Petrobras’s activities by 31.6%, as Valor reported in 2014. From 2008 to 2013, taxes paid by Petrobras fell from 2.1% of GDP to 1.6%.

On the other hand, if Petrobras increases its product prices in the domestic market, as is recommended in times of high oil prices, political pressure on the company tends to increase.

No government likes it when Petrobras increases fuel prices, as the decision is unpopular and boosts inflation. Something similar happened during the Bolsonaro administration. However, price adjustments are required to keep the company’s financial health when the scenario points to an increase in Brent prices, experts say.

To meet demand, around 30% of the diesel sold in Brazil is imported. Whenever oil prices rise abroad, Petrobras needs to pass on the rise to the domestic market. Last year, diesel supplied by Russia at lower prices helped ease the discussion about fuel adjustments. Russia outperformed the United States, a traditional exporter to Brazil.

In May 2023, Petrobras changed the pricing policy that had been in place since the Temer administration, known as Import Parity Price (IPP), which linked domestic prices to international prices.

Under the current administration, Petrobras introduced a new pricing policy, called “commercial strategy.” The model was poorly received by the market due to its lack of transparency and predictability regarding price adjustments. Petrobras has repeatedly argued that no company in any sector is required to disclose how it decides its prices. That would be a matter of commercial strategy in the face of competition.

The discussion about pricing has lost relevance since oil prices eased in 2023, according to Bráulio Borges, a researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV) and an economist at LCA Consultores. “But that is still a matter of concern as history shows that the practice of keeping domestic prices below international prices for a long period affected the company’s profitability in the past.”

If new shocks arise on the international scene, the issue could return to the spotlight, he points out. Mr. Borges adds that the practice could also lead to a shortage in the domestic market since national production alone is not enough to meet diesel demand.

Two reasons are currently strengthening the adjustment scenario: the price of Brent broke the level of $90 per barrel for the first time in six months, and the exchange rate was traded above R$ 5 last week, leading the Brazilian Central Bank to intervene in the market with auctions. The exchange rate and Brent prices are the main variables for the adjustment.

Considering the market closing on Friday (5), consulting firm StoneX indicates a 12% gap in diesel prices, or R$ 0.42 per liter, and 12.6% in gasoline (R$0.35 per liter). The Brazilian Infrastructure Center (CBIE) estimates an average gap of 25.92% in gasoline prices, or R$0.98 per liter, and 8.22% in diesel prices (R$0.31 per liter). The Brazilian Association of Fuel Importers (ABICOM) estimates an average gap of 12% for gasoline (R$0.48 per liter) and 19% for diesel (R$0.65 per liter).

Petrobras changed gasoline prices for the last time on October 21, reducing them by 4.1% (R$0.12 per liter). Diesel prices haven’t changed since December 27, when the company reduced prices at its refineries by 7.94%.

In 2022, with record-high earnings of R$188 billion, 77% more than in 2021, Petrobras paid approximately R$248 billion in current values to the federal government (R$103 billion in taxes, R$86 billion in royalties and participations, and R$59 billion in dividends). The increase was explained in part by cyclical factors, as the international parity price (IPP) was based on international oil prices and the exchange rate.

At the time, the company attributed the record results to the rise in oil prices due to the onset of the Russia-Ukraine war. Several analysts consider the IPP a more transparent policy, closer to market fluctuations than the current model—which tended to maximize results.

Except for in 2020—the onset of the COVID-19 pandemic—the collection of Tax on Circulation of Goods and Services (ICMS) on fuels, in 2023, was at the lowest level to the total tax revenue in the country, considering the past decade. The tax revenue with fuels corresponded to 16.6% of the ICMS collected, compared to 17.7% in 2022.

The loss of share in 2023 resulted from a reduction in the ICMS rate following legal measures by the government in 2022 amid the electoral race in which then-President Jair Bolsonaro tried to fight inflation pressures. At the time, fuel prices contributed to the increase in the Extended Consumer Price Index (IPCA). The government’s decision reduced the ICMS on electricity, telecommunications, and transportation.

“The measure was a mistake since the government intended to influence prices by limiting the legal rate on gasoline,” said Felipe Salto, an economist at Warren Rena and former Secretary of Finance of São Paulo.

According to Mr. Salto, the measure shows how much fuel is a sensitive item in inflation, weighing on consumers, and also the impact on revenue, given its representation in the states’ ICMS revenue.

“Decisions to intervene in fuel price policy are worrying. We do not know whether it will be done, but it would be bad as it could impact the economy and affect tax revenue,” said Mr. Salto.

“We started to consider our best refining and logistics conditions to practice competitive prices, competing in the market with other players selling fuels in Brazil; and to mitigate external volatility, providing periods of price stability to our customers, as is currently the case,” Petrobras stated.

Carlos Kawall, an economist at Oriz Partners, argues: “The worst thing to do would be to make political use of that and follow the path of populism to hold down fuel prices, not only using the federal government funds but also affecting Petrobras management by providing subsidies for gasoline, which benefit the higher classes and go against decarbonization.”

The central government and federated entities benefit from taxes on Petrobras’s fuels. ICMS is a state tax incorporated into the prices charged at refineries and began to have a fixed value in 2022, when then-President Bolsonaro approved an act eliminating the percentage charge.

According to a person familiar with the matter, the fixed ICMS rate prevents revenue from changing even if the state-owned company changes prices. The tax was previously levied based on a percentage of the fuel liter at refineries, defined by each state. “Now, when fuel prices are high, it may affect consumption, but not tax revenue,” the source points out.

According to this person, who engaged in discussions about the ICMS, the measure is positive, as it makes taxation more predictable. In 2024, the ICMS on gasoline is R$1.37 per liter, and on diesel, at R$1.06 per liter. The federal gasoline tax is made up of federal contribution CIDE and social taxes PIS, PASEP, and Cofins.

*Por Fábio Couto, Kariny Leal, Marta Watanabe, Estevão Taiar — Rio de Janeiro, São Paulo, Brasília

Source: Valor International

https://valorinternational.globo.com/
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Seacrest hires Goldman Sachs to sell oil assets

Junior oils negotiate merger to strengthen themselves in the Brazilian market

04/05/2024

Seacrest’s sale process comes at a time of significant activity in the market — Foto: Seacrest Petróleo/Divulgação

Seacrest’s sale process comes at a time of significant activity in the market — Foto: Seacrest Petróleo/Divulgação

Seacrest is looking for a buyer amid a strong wave of consolidation of independent oil companies in Brazil, Valor found. The company, which went public last year on the Norwegian stock exchange, hired Goldman Sachs as its financial advisor, according to sources who spoke on condition of anonymity.

Other companies in the sector have already been surveyed about potential interest in the independent oil company, a newcomer in the segment.

The company’s sale process comes at a time of significant activity in the market. This week, Enauta proposed a merger with 3R Petroleum—a memorandum of understanding is expected to be signed next week, according to sources.

3R had already received a proposal to combine assets with PetroReconcavo, but the talks did not progress because the two companies could not reach an agreement on the exchange of shares between them, according to people familiar with the matter. Enauta has undergone recent changes in the shareholding base and board, and its movement reflects the agility of its creditors, Bradesco and Jive. Until last year, the independent company was identified as a target for consolidation, not as a protagonist in this process.

In the proposed merger with 3R, Enauta conveyed the message that, if the merger with the competitor materializes, the result could be a company capable of fostering other mergers and acquisitions (M&A) processes in the sector, driving the consolidation movement in an industry led by Petrobras.

A consolidation movement of these smaller companies was already anticipated by the market because the oil and gas industry needs scale. The game changed after Petrobras stopped the process of divesting more mature wells with the election of President Lula. Assets sold in previous administrations gave rise to independent oil companies.

Seacrest emerged from this process after purchasing the Norte Capixaba field from Petrobras. The initial public offering (IPO) made a year ago on the Oslo stock exchange partly aimed at financing this acquisition. The company raised $260 million at the time.

The Oslo-listed company was founded in 2020 by Erik Tiller and Paul Murray, who are co-founders of the Norwegian oil company OKEA, also listed on the Oslo stock exchange. The company’s first foray was the Cricaré field, which comprised 27 onshore oil concessions, in addition to oil production assets, an operation that was completed at the end of 2021.

Seacrest and Goldman Sachs declined to comment.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Government studies credit for TV 3.0

New technology promises better experience for viewers

04/05/2024

Juscelino Filho — Foto: Divulgação/Isac Nóbrega/MCom

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.

*Por Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Government underestimates social security spending by up to R$18bn

Spending projection was raised by R$5.6bn but experts see a higher increase

04/04/2024

Felipe Salto — Foto: Ana Paula Paiva/Valor

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

Source: Valor International

https://valorinternational.globo.com/
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Long real interest rate nears 6%, highest level since October

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

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.

*Por Gabriel Roca, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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