CDB gains more space in bank funding

Term deposits jumped again in 2023 as customers migrated from funds to lower-risk products

12/04/2024

Luiz Masagão — Foto: Divulgação

Luiz Masagão — Foto: Divulgação

The start of the fall in the Selic rate in August last year was not enough to increase investors’ appetite for risk. While investment funds withdrew R$127.9 billion in 2023, bank funding from CDBs rose again, consolidating its position as the largest source of funding for financial institutions. Meanwhile, savings continued to fall and were overtaken by bond issues, such as real estate credit bills (LCI), agribusiness credit bills (LCA), and financial bills (LF).

A Valor survey based on statements from Itaú, Caixa, Banco do Brasil, Santander, and Bradesco shows that the volume of term deposits—CDBs—rose 15.5% last year to R$2.2 trillion. Meanwhile, bills jumped 30% to R$960.6 billion, and savings fell 2.1% to R$929.1 billion. Bond issues made by the big banks abroad have been practically stable in recent years and have a much smaller share, at R$117.1 billion. Each instrument has its advantages and disadvantages. Savings accounts are cheaper than CDBs, but they must be directed towards the real estate sector. Bills, on the other hand, are more expensive than the former but are not subject to compulsory payments.

Ever since the yield on savings accounts was changed in 2012, CDBs have been gaining strength, a movement that has been reinforced since 2018 with the rise of investment platforms, which began distributing third-party securities, including those from medium-sized banks, which offer more attractive yields. During the pandemic, with the payment of emergency aid and the restriction on the movement of people, who were left without so many places to spend, there was initially a jump in bank deposits. Then, with the Selic rate at historic lows, the instrument remained competitive but had to compete for investors’ attention with multimarket funds and other asset classes with a greater chance of returns.

In 2022 and 2023, with the reversal of the scenario and rising interest rates, CDBs began to shine again. This pendulum is starting to swing again now, given that there are already signs of an influx into investment funds. Even so, deposit-taking remains strong and is fueling competition for customers’ pockets.

In addition to the big banks, medium-sized institutions—such as Inter, PagBank, ABC, and Daycoval—benefited from the demand and took the opportunity to diversify their funding. It’s common to see advertisements offering promotional rates or highlighting the yield of the securities. The coverage of the Credit Guarantee Fund (FGC)—a private entity in Brazil that protects depositors and investors in the event of a bank failure, offering R$250,000 coverage per individual—was a factor that gave investors the confidence to put money into financial institutions with which they have little familiarity.

The success of investment platforms and CDBs from medium-sized banks hasn’t affected the availability of funding for the big ones, but there are indications that it may have contributed to an increase in prices. A few years ago, it was common to see the biggest institutions paying returns well below the CDI rate. Today, the discount in relation to the spread is generally small, while medium-sized competitors often offer rates of 115% and even 130% of the CDI.

“In recent years, there has been this structural migration from savings accounts to other instruments, and now, even with the fall in the Selic rate, I don’t think this will be completely reversed,” said Luiz Masagão, Santander’s treasury director. “Some investors went into funds and then back into CDBs; they didn’t like having a more volatile portfolio. It’s a question of the investor’s profile.”

Santander has a slightly different funding mix from its private rivals, more concentrated on wholesale, but in the last two years, it has been trying to increase its share of retail. To this end, the bank strengthened its investment advisory services and reformulated the high-income segment. According to Mr. Masagão, this led to a very positive result in customer fundraising last year.

Eric Altafim, director of corporate products and sales at Itaú, says that with interest rates still high and problems in the corporate credit market in 2023, there has been a migration of funds to CDBs. “This has fattened the banks’ cash flow, providing a good supply of liquidity. But you have to remember that excess liquidity is different from excess capital. And that was in 2023. In recent months, we’ve started to see signs of a certain reversal of this trend of migration to CDBs, and there’s competition for these funds again.”

The executive also recalls that although liquidity increased during the pandemic, banks’ portfolios grew rapidly during those years, with the expansion only moderating in 2023.

At Bradesco, Roberto Paris, executive director in charge of the treasury, says that the development of the financial bills market has been so strong in recent years that today banks don’t need to issue international bonds as much. At the same time, after the 2008 global financial crisis, bank liquidity requirements became much more conservative. “Before 2008, the only protective barrier in times of volatility was compulsory deposits. Now, there are a series of rules and liquidity requirements. So I think we’re in a position to have lower compulsory deposits.”

An increase in deposits doesn’t necessarily mean that banks will have more money to lend and invest. If they take in more funds on one side and don’t see much chance of investing this money in the business, they adjust their funding mix, reducing the issuance of more expensive instruments, for example. In addition, in the case of deposits, the financial institution is obliged to leave compulsory deposits with the Central Bank.

A recent change that could affect the composition of bank funding is the restriction on incentivized securities, namely those that are exempt from income tax for individuals. These securities include Real Estate Credit Bills (LCI), Agribusiness Credit Bills (LCA), Real Estate Receivables Certificates (CRI), Agribusiness Receivables Certificates (CRA), and Real Estate Investment Funds (LIG). With new limitations on what can be used as collateral announced at the beginning of February, issuance of these securities has declined. Additionally, the increase in the minimum holding period to nine months for LCA and 12 months for LCI is expected to alter the buyer profile.

Alongside these changes are the challenges facing savings accounts. Savings accounts saw their third consecutive year of withdrawals in 2023. This scenario affects real estate financing, as savings accounts are the primary funding instrument for this industry. Last year, for the first time, savings accounts lost to the capital market as the leading source of funds for housing loans, with shares of 36% and 38% of the total, respectively.

In February, the CEO of Caixa, Carlos Vieira, said that the 2024 budget had been resolved but warned that if nothing was done about savings, there would be problems in 2025. The bank is the country’s leading mortgage lender. According to the executive, there are some alternatives to be discussed, such as releasing part of the compulsory deposit.

When asked, Caixa said in a statement that since 2021, it has repositioned its funding strategy with a focus on bills, especially LCI, in order to compensate for savings outflows from the point of view of funding for housing. Asked if it is discussing a possible reduction in the compulsory deposit with the Central Bank, the institution replied only that “it has been debating alternatives for expanding funding for real estate credit with all the actors involved.”

Banco do Brasil, meanwhile, said in a statement that its commercial funding has been growing in recent periods, reaching more than R$1 trillion in December. “Banco do Brasil, like the financial system, has been experiencing a gradual reduction in the volume raised through savings, which is natural in the context of the evolution of the funding products available to clients. The bank is constantly assessing the most suitable funding alternatives.”

*Por Álvaro Campos, Mariana Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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New subsidies for wind, solar energy puts sector on alert

With a provisional presidential decree, federal government extends deadline for accessing discounts on use of power grid

04/11/2024

Alexandre Silveira — Foto: Valter Campanato/Agência Brasil

Alexandre Silveira — Foto: Valter Campanato/Agência Brasil

President Lula signed a provisional presidential decree on Tuesday that drew criticism from the power industry. The decree extends the deadline for wind and solar power projects to access subsidies on grid usage by an additional 36 months. It also aims to reduce tariffs using funds from the privatization of Eletrobras. This initiative has put the sector on alert due to concerns about potential increases in tariffs, which are seen as a significant factor contributing to high electricity costs in the country.

At the ceremony at the Planalto Palace, Alexandre Silveira, Brazil’s minister of Mines and Energy, said that the provisional presidential decree will enable over 30 gigawatts of clean and renewable energy in Brazil, with the construction of new wind and solar power generation projects. Overall, the government estimates that the resources will reach R$165 billion in investments and create over 400,000 jobs.

With this measure, the government reopens the deadline for owners of wind and solar plants to access discounts on the use of the power grid. The original deadline had already ended during the Bolsonaro administration but had been extended by him at the time with the signing of the provisional presidential decree 998/20. It triggered an avalanche of requests for new projects with benefits at the Brazilian Electricity Regulatory Agency (ANEEL).

Members of the government itself complained about the weight of the new wave of subsidies on the account that centralizes tariff charges, the Power Development Account (CDE). This is a point that displeases this group of experts and is classified as “absurd” by a source consulted by Valor. The source calculates that the benefit will increase the cost of charges borne by consumers via tariffs by R$4 billion annually. “Those who pay the CDE are the middle class, industry, and commerce, which are not in the free market and necessarily consume power from distribution companies,” they said.

The provisional presidential decree signed Tuesday includes two compensatory mechanisms to alleviate high tariffs in the country. The first provides for the use of funds from the privatization of Eletrobras to prepay loans contracted by distributors during the COVID-19 pandemic and the 2021 hydrological crisis, thus reducing tariffs by 3.5% to 5% nationwide.

“We will pay off loans from the Covid Account and Hydrological Scarcity Account. There will be R$11 billion less in Brazilians’ pockets,” said the minister of Mines and Energy. He added that both financing contracts were signed “irresponsibly” by the previous government and “should never have been passed on to consumers.”

The second mechanism, with a local focus, aims to secure funding for the distribution company of the state of Amapá. This initiative seeks to mitigate the extraordinary tariff revision requested by the local concessionaire last year, which was estimated to be around 44%. Initially planned as a separate measure, it was eventually included in the proposal for benefits to renewable energy generation projects, as previously reported by Valor.

Minister Silveira and Chief of Staff Rui Costa said on Tuesday that the debate with sector members will be deepened to seek a structural solution to the problem of expensive electricity in Brazil. At the Presidential Palace, Mr. Costa said that a meeting will be held this Wednesday to discuss how to “harmonize the world’s cheapest production with the bill that should be one of the cheapest in the world for the poor and the middle class” in the country.

Mr. Silveira also said that a “permanent discussion forum” has already been established with the sector. “Tomorrow [Wednesday], we will have a slightly broader meeting,” he said, referring to the participation of representatives of entities and experts. According to Mr. Silveira, the government has the ongoing challenge of correcting distortions in the electricity sector, which result in higher tariffs. He said that after listening to the sector, a solution will be presented to Mr. Lula.

Following the government event, the National Front of Energy Consumers criticized the proposal, labeling it as “inconsistent and harmful.” They argue that the rules increase the charges within the tariff and anticipate future resources, thereby creating an additional expense that will ultimately burden consumers in the years ahead. The organization highlighted that subsidies currently constitute 16% of the Brazilian electricity bill. “With the new presidential measure, this cost will escalate further and immediately.”

The Brazilian Association of Energy Consumers (Abrace Energia), which represents industrial consumers, calculated that the extension of subsidies for renewable energy will represent a future increase that could reach R$4.5 billion per year in the tariff. “Therefore, it considers it important that these measures be evaluated together with several others that could structurally reduce the price of power,” the statement said.

*Por Rafael Bitencourt, Mariana Assis, Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
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U.S. agriculture secretary says China favors Brazil

Tom Vilsack suggested that this was taking place in retaliation against recent restrictions on foreign ownership of farmland in the country

04/11/2024

Tom Vilsack — Foto: Yuri Gripas/Bloomberg

Tom Vilsack — Foto: Yuri Gripas/Bloomberg

U.S. Agriculture Secretary Tom Vilsack suggested that China could be favoring Brazil’s soybeans and corn partly in retaliation against recent restrictions on foreign ownership of farmland in the country, according to Bloomberg News.

Recently, the Republican-led state of Arkansas forced Syngenta Ag, controlled by Chinese state-owned group ChemChina, to sell 160 acres (64 hectares). The move was made possible with a new law in the state that restricts ownership of local lands by certain foreign groups. The area had been owned by Syngenta since 1988, when it was not controlled by the Chinese.

According to the secretary, the U.S. saw a trade deficit of $6 billion in the first quarter. “Why would that be? Is it just Brazil, or was there a reason why the Chinese ag minister asked me about Syngenta?” Mr. Vilsack told the news agency.

The U.S. secretary said China’s agriculture minister had questioned him about Syngenta in recent conversations, which would have been a “signal.”

With China buying fewer crops from the U.S., Brazil has overtaken America as the world’s top corn shipper after already doing so with soybeans. Mr. Vilsack advocated that the U.S. diversify its exports to countries other than China, but maintain trade relations with the country.

Bloomberg said it reached out to the Chinese embassy in Washington but received no response. China’s commerce and agriculture ministries were also approached by the agency but did not respond.

*Por Globo Rural — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Surge in illegal pesticide seizures sparks industry concerns

Chemical industry estimates that illicit market in Brazil amounts to between $2.9bn and $3.7bn

04/11/2024

Agricultural pesticides originating from Paraguay and Argentina seized by the Federal Revenue of Foz do Iguaçu and by the police of Paraná and Santa Catarina — Foto: Divulgação/Receita Federal

Agricultural pesticides originating from Paraguay and Argentina seized by the Federal Revenue of Foz do Iguaçu and by the police of Paraná and Santa Catarina — Foto: Divulgação/Receita Federal

Just over a year ago, state and federal law enforcement agents uncovered a smugglers’ warehouse in a raid in Americana, 140 kilometers away from São Paulo. Spacious and well-lit with fans on the walls, the property hid 75 tonnes of pesticides that had illegally entered Brazil.

One product stood out as it contained Paraquat, an active ingredient associated with Parkinson’s disease in people who handle it, and banned in Brazil in 2021. Before the ban, the chemical was widely used to dry soybean crops to accelerate grain ripening, allowing for early harvesting.

The seizure, which took place in February 2023, only confirmed what authorities had already been detecting: the advancement of criminal groups in the sale of pesticides in the black market. This explains the increase in the number of seizures of illegal pesticides in the country. Last year, the Federal Police alone seized 575 tonnes, nearly 180% more than in 2022.

The batch of products seized in Americana—packaged in sacks and blue plastic barrels— was valued at the time at R$43 million. Authorities said the cargo would be sold to rural producers in Mato Grosso and São Paulo states.

Federal and state agencies have been making successive seizures of both Paraquat and other illegal pesticides—many of which come from Paraguay, Uruguay, Paraguay, Bolivia, and Argentina, countries with less stringent regulations than Brazil’s regarding agrochemicals. The active ingredients are generally imported from China and India.

The trade of these products is primarily attractive due to the lower prices compared to agrochemicals produced and sold within the standards of the Agrochemicals Act, passed in 2023.

In addition to price, the illicit market also exploits the possibility of selling products in Brazil with concentrations much higher than those considered safe. An example is Emamectin benzoate, an insecticide for pest control. Authorized on an emergency basis in the country with a concentration of 5%, the insecticide is found in Paraguay with concentrations reaching 90%.

Enforcement agents involved in tackling the illegal market said that many retailers and rural producers who acquire clandestine pesticides are aware of what they are doing, either because of the below-market price or because of the Spanish-language packaging. They warn of the health and environmental risks posed by these clandestine products.

The Ministry of Agriculture said it does not have an estimate of the size of the illegal pesticide market. The agrochemical industry estimates that the share of the market served by illicit products ranges from 20% to 25%.

The estimate was based on 2021 data and amounted to between $2.9 billion and $3.7 billion that year.

The numbers are from CropLife Brasil, the entity that brings together pesticide, seed, biotechnology, and biological product companies, including GDM, BASF, Bayer, Sumitomo Chemical, and Syngenta.

“This is a global problem. In Europe, according to OECD data, illegal inputs represent on average 14% of the local market. Brazil suffers greatly because it is a major agricultural producer,” said Nilto Mendes, CropLife Brasil’s manager for combating illegal products and a former federal police officer.

A study released in 2021 by the Institute of Economic and Social Development of Borders (IDESF) also estimated the share of illegal pesticides in the country at 25%.

Illegal pesticides can be those smuggled, adulterated through dilutions and additions of other inputs, counterfeited using products not intended for plantations, and may also be those resulting from thefts.

In the case of smuggling, Paraquat has become a more prominent problem. In 2022, law enforcement agents had already made a major seizure in Santa Catarina. In 2023, again in Americana. Last month, the Federal Revenue Service in Foz do Iguaçu seized 36 tonnes of illegal pesticides. Of this total, about 70% was Paraquat.

When health regulator ANVISA decided to ban the sale and use of this chemical in the country, it cited the risk (although, according to the agency, still under discussion in other countries) of Parkinson’s disease and the potential for the substance to cause mutations that could be passed on to future generations or even cause cancer. In 2020, the agency issued a note saying that the risk was for those who handled the product. Those who consume food, however, are not susceptible to exposure to the substance.

For the industry, the entry of criminals—smugglers, counterfeiters, money launderers— into the pesticide market represents unfair competition, tax evasion, a threat to the reputation of legal products, and risks to health and the environment.

For regulatory agencies, the clandestine pesticide chain raises several alarms.

“Considering that illegal products have not undergone the official registration procedure of the federal government, it is conceivable that residues in the food of those who use these products may generate residues above what Brazilian legislation predicts,” said the Ministry of Agriculture.

ANVISA stressed, “Irregular pesticides do not offer safety guarantees for the worker and the environment, nor do they have the efficiency and quality required for these products. Without these minimum requirements, irregular products represent a high risk of damage and threat to the health of the worker and people who consume the food in which irregular products were used.”

Brazil’s environmental protection agency IBAMA, which participated in the Americana raid, said that illegal products originating from smuggling do not undergo evaluations of efficacy, agronomic feasibility, environmental impacts, and human health, and that “therefore, their environmental impacts are uncertain and may cause severe adverse effects on non-target organisms of these substances, negatively interfering with environmental balance.”

The Ministry of Agriculture said that it has been acting against the illegal market and that in 2023 it carried out 35 operations with seizures of pesticides, fertilizers, seeds, and other products.

In addition to increased inspections, another significant measure was implemented. Last year, the new Agrochemicals Act strengthened penalties for illegal businesses involving these products, with sentences now ranging from three to nine years in prison.

But there are still two obstacles. One is to raise awareness among producers about the origin of agrochemicals. Another obstacle lies on the other side of the borders, said economist Luciano Barros, president of IDESF, “It is necessary to improve the regulatory environment in neighboring countries and seek an alignment of agrochemicals regulations among Mercosur countries.”

The Brazilian Confederation of Agriculture (CNA) did not respond to a request for comment.

*Por Marcos de Moura e Souza — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Almaviva buys 51% of Brazilian Magna Sistemas

Italian group reports that 75% of revenues are generated by digitalization business; in Brazil, AI has reduced the number of employees

04/11/2024

Marco Tripi — Foto: Rogerio Vieira/Valor

Marco Tripi — Foto: Rogerio Vieira/Valor

Almaviva, an Italian group that operates with digitalization and relationship management services between companies and their customers, acquired 51% of Magna Sistemas, a Brazilian software and technology services firm, for R$340 million. With the acquisition, Almaviva seeks to expand its digital transformation business with a focus on public services in Brazil.

The acquisition of the remainder of Magna’s capital, which is now called Almaviva Solutions, is in the Rome-based group’s plans over the next five years, which would raise the purchase price to R$800 million, Almaviva CEO Marco Tripi told Valor. “We spent about two years evaluating technology companies in Brazil, and the company’s management team led us to the decision [to close the deal]. We need high-ranking managers,” said Mr. Tripi, who came to São Paulo to formalize the transaction.

The purchase of Magna does not end the Italian group’s acquisition plans in Brazil, said Mr. Tripi without elaborating. The company, which operates in 11 countries, also seeks to increase the share of revenue generated outside Italy to 50% in 2026 from 30% in 2023, the executive said.

In Brazil, Almaviva has been diversifying its contact center and billing businesses, with more attention to the financial and services industries and less to telemarketing.

The focus on digital channels and the use of artificial intelligence, reducing human interactions, has led to a significant reduction in the number of contact center employees in Brazil.

In 2023 alone, the subsidiary reduced the number of employees in Brazil to 33,500 from 40,500. In Colombia, the base for contact center and billing services in Spanish-speaking countries, the headcount decreased to 36,000 last year from 42,000.

“We will eliminate ‘commodity’ jobs. It’s challenging, but the company must evolve, and technological advancement may lead to a reduction in the number of employees,” said Mr. Tripi.

On the side of technological evolution, according to the executive, the company’s 15-year commitment to artificial intelligence has been bearing fruit. Last year, Almawave, a business focused on AI projects, reported net revenue of €57.5 million, up 20% from 2022. In the same period, net income of €9.29 million almost doubled, an increase of 92.7%.

In 2023, 75% of Almaviva’s global revenue came from digitization projects, particularly in sectors like sanitation and public transport. Call centers accounted for 25% of the result. Revenue totaled €1.2 billion in 2023, up 20% year over year. Net income of €86.7 million represented a 15.5% increase during the period.

In Brazil, the proportion is reversed. Most of the revenue comes from customer management services and billing. But the plan is for other technology services, especially for public sector companies, to account for the bulk of revenues in the coming years.

In 2023, Almaviva reported net revenue of R$1.61 billion in Brazil, up 8.8% from 2022. Net income was R$152.5 million, up 18.5% year over year.

The acquisition of Magna was finalized by Brita S.A. The Brazilian company is 90% owned by Almaviva and 10% by the Italian company Simest, which supports overseas businesses. Simest is controlled by the Italian development bank Cassa Depositi e Prestiti (CDP).

The remaining 49% stake in Magna Sistemas, which was renamed Almaviva Solutions, remains with the founding partners. Adriano Dias, founding partner and chief executive of Magna, will continue to be in charge of Almaviva Solutions. Its 1,200 employees are expected to be integrated into AlmaViva’s Brazilian subsidiary by August.

Magna Sistemas’s clients include the Information Technology Division of the Civil Police Intelligence Department (DIPOL) of São Paulo and the São Paulo State Transportation Agency (ARTESP).

*Por Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Stronger inflation in 2025 on analysts’ radar

IPCA at 5% in 2025 worries some economists amid effects of employment in the services sector

04/10/2024

Alexandre Bassoli — Foto: Silvia Zamboni/Valor

Alexandre Bassoli — Foto: Silvia Zamboni/Valor

Although the market’s median expectation for inflation in 2025 has been around 3.5% for months, some economists expect inflation to accelerate from this year to the next, especially due to the dynamics of service prices.

“My biggest concern is the tight job market,” said Alexandre Bassoli, chief economist at Apex Capital. He sees inflation ending 2024 at 4.2% and going to 5% in 2025.

“The monetary easing cycle started amid peculiar conditions, with economic growth that surprisingly accelerated and an unemployment rate that has fallen persistently to its lowest levels since 2015. Economic slack seems to be low,” he added.

According to the economist, it is already possible to see the tight job market translating into higher wages, which puts pressure on inflation in services, especially in more labor-intensive segments.

“Looking ahead, I don’t see this degree of tightness decreasing; on the contrary. The economy seems to be starting the year stronger than we had thought and I think we will see the effects of interest rates adjustment for a while,” said Mr. Bassoli.

Étore Sanchez, chief economist at Ativa Investimentos, highlights the dispersion of projections for the 2025 inflation. The median estimate in the Focus survey is 3.53%, but it ranges between 3% and 5.1%. Ativa expects an Extended Consumer Price Index (IPCA) of 3.8% in 2024, accelerating to 4.2% in 2025.

Next year’s inflation should be pressured by services, according to Mr. Sanchez. “We are experiencing an easing in the monetary policy despite the resilience of services inflation. Therefore, it is not expected to fall, especially because we don’t see the job market weakening,” he explains.

Mr. Sanchez also expects some offset coming from regulated prices, such as urban transportation. “Some prices haven’t been adjusted as 2024 is a municipal election year. That will only postpone inflation a little. Next year, it will come back,” he said.

Mr. Sanchez also expects more fluctuation in food prices in 2025. “It is a short-term cycle. In one year, farmers receive higher pay, which encourages an increase in productivity and planted area. The following year, it falls. Then, it rises again. It is natural to see volatility from year to year,” he said.

Therefore, according to Mr. Sanchez, only the prices of industrial goods could bring positive news for inflation in 2025. “Industry is linked to the international market, where we expect to see inflationary relief. The industry has largely reflected the import of disinflation, which I expect to continue next year, but it may not be strong enough to slow down inflation in 2025 as a whole,” Mr. Sanchez adds.

Gustavo Arruda, head of Latin America research at BNP Paribas, expresses uncertainty about a favorable contribution from industrial goods. “We buy into the idea that there is disinflation of industrial goods stemming from the global slowdown, from China, and from some lagged effects after the pandemic shock. It aided last year and still aids this year, but for 2025, it appears that this effect will be diminishing,” he said.

In addition to the pressure on services in the 2025 IPCA, Mr. Arruda points out the perspective of a still expansionary fiscal policy fueling demand, while monetary policy should move towards neutral territory. “I don’t think it will be expansionary, but it won’t be contractionary either, or it may be less restrictive.”

BNP Paribas projects inflation of 3.5% per year in 2024 and 4% in 2025. If the Central Bank fails to reduce interest rates to 9% per year, as BNP Paribas projects, or a little below that level, at the end of the cycle of cuts, by stopping it sooner than expected, the bank’s estimate for the 2025 IPCA will have to be revised downwards, said Mr. Arruda.

Mr. Sanchez highlights that Ativa’s projections for the Central Bank’s stance “differ slightly” from what the investment firm believes monetary policy should be at present. Ativa anticipates that the key rate Selic will remain steady at 10% until at least March 2025, at which point the Central Bank would begin considering 2026. He added that the Central Bank aims for inflation matching expectations “but has not been very successful in this endeavor.”

Projections for the 2025 inflation are crucial not only because the year is already present in the “relevant horizon” that guides the Monetary Policy Committee’s actions, but also because the reading that there is little room for reducing inflation expectations ahead impacts monetary correction and price dynamics, Itaú Unibanco points out in a report.

The bank estimates that a shock of 0.50 percentage points in inflation projections for one quarter leads to an increase of 0.36 percentage points in inflation in the following six quarters.

“Given the dynamics and balance of risks in the current scenario, which, among other factors, involves a more challenging international scenario and resilient economic activity and domestic job market, we see little room for reducing inflation expectations ahead,” economists Julia Gottlieb, Natalia Cotarelli, and Julia Passabom wrote in the report.

According to part of the economists who are wary about the 2025 inflation, one risk is the Central Bank being led to raise interest rates again next year. That possibility also faces uncertainties given the prospect of a change in its team. By the end of 2024, the federal government is expected to appoint a new president and two directors for the Central Bank.

“We see an increase in the Selic rate in the second half of 2025 as the most likely scenario given the inflationary situation. The Central Bank will probably be led to increase interest rates in a context of narrow economic slack and pressure on services inflation,” said Mr. Bassoli of Apex. He projects the Selic at 9.25% at the end of this year and 10.5% in December 2025.

Uncertainties regarding the Central Bank’s new composition affect inflation expectations for 2025. However, Mr. Arruda of BNP Paribas does not believe the change will necessarily mean the monetary authority will be dovish to the point of avoiding rising interest rates again, if necessary. “Each Central Bank is different. I think it may become more dovish than in the past, but that does not necessarily imply that we are moving towards an extreme situation,” he said.

*Por Anaïs Fernandes, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Retailers pass on tax increases to consumers

ICMS increases and cuts in subsidies catch sellers by surprise

04/10/2024

Felipe Tavares — Foto: Divulgação

Felipe Tavares — Foto: Divulgação

A combination of adverse legal measures affecting retail chains has begun to impact consumers’ wallets, leading to price pressures in the market.

Unexpected changes in tax regulations by the government and the Supreme Federal Court (STF) approved at the end of 2023, along with the sales tax ICMS increase in 11 states in January, have led companies to pass on part or all of these costs to customers—and this trend also extends into 2024.

The federal government and the states need funds to offset revenue losses from 2023 and reduce the deficit in public accounts, passing on part of this bill to companies—which transfer some of it to consumers to preserve their margins.

According to a survey by CNC, the National Confederation of Commerce and Tourism, consumers already perceive the current moment as unfavorable for the purchase of durable goods, such as TVs and refrigerators, due to higher prices and expensive credit. March showed the lowest confidence level in this sector since October.

Two central changes in this discussion, both complex in legal terms and approved at the last minute in 2023, were the new interpretation of the payment of Difal (differential ICMS tax rate) and a change in the rules for tax incentives granted by states for investments.

This becomes a headache, especially for retailers, who are more exposed to these measures. The Difal change, specifically, started impacting online retailers last year.

According to Felipe Tavares, chief economist at CNC, “the issue lies in the fact that the retail sector is directly impacted. If retailers bear the brunt of these changes, it ultimately affects the end consumer in equal measure,” particularly if businesses cannot absorb the increased tax costs.

“I often say that when a company’s taxes increase, it’s the customer who pays,” said Carla Hamada, coordinator of the tax committee of ABAAS, the association of self-service wholesalers.

As for the subsidies, the Ministry of Finance projects an extra R$35 billion to be added to the federal government’s revenue in 2024. As for Difal, the total bill for the retailers ranged from R$9.5 billion to R$10 billion in 2022, the year marked by a legal dispute over outstanding amounts. These dues have already been settled with the states.

The increase in the ICMS rate transfers another R$9.2 billion annually to the coffers of 11 states. The change in the rate is effective from January to April, depending on the region of the country.

Companies such as Magazine Luiza, Casas Bahia, Arezzo, Mateus, and Assaí told analysts in recent conference calls they have already felt or passed on to consumers the effects of one of these three changes in recent months (ICMS increase, Difal revision, or investment limitation).

The change in law also impacted retailers. The government offers a subsidy by reducing or exempting companies from paying taxes as a counterpart to investments, such as the opening or expansion of factories, distribution centers, or machinery purchases.

Until last year, companies deducted these incentives from income tax payments, improving net profit. But the new law sanctioned by President Lula on December 29 excludes benefits linked to operating expenses, focusing on incentives that effectively promote productive investments.

It is a way to reduce distortions, which ultimately boosts the federal government’s cash reserves but affects the results of the groups.

In a report in December, XP analysts projected the need for up to a 3% price increase for retailers covered by the bank, on average, to offset an 8% to 15% decrease in net profit due to the new law. This would happen when considering a 50% to 100% decrease in the tax benefit.

As for Difal, it is used to split the ICMS collection between the state where the company is located and the state where the product is consumed.

Example: A product is sold from a state with a 15% ICMS to another with 18%. The credit related to the three-percentage-points difference is divided between the states. This practice is more common in online retail operations.

The question in the courts was whether companies should bear the Difal from April 2022 or after 2023, as companies argued before the Federal Supreme Court. In late November, the Supreme Court, in a surprising turn of votes, decided it would apply after 2022, catching the sector off guard.

Marcelo Roncaglia, a partner specializing in tax law at the Pinheiro Neto Advogados law firm, said that before the Supreme ruling, smaller retailers, facing significant legal uncertainty, complied with and paid the tax. In contrast, larger retailers sought injunctions and deposited the amount in a court-held account. However, with the final decision, all retailers are now obligated to pay the tax for 2022.

“The sad part is that the poorer population ends up being penalized because consumption taxes have a greater share in the budget of these classes than among the richer ones,” he said.

Some large companies had not provisioned the sum, requiring a write-down after the Supreme Court decision. Retailers Renner and Magazine Luiza are in this group. Price increases gained momentum after the second half of 2023.

In a highly competitive retail environment, these price hikes end up losing steam. Brazil is a country of fragmented commerce and high competition, which helps accommodate price increases. However, constant crises (such as from 2015 to 2016 and after 2020) weaken businesses across the board and the groups’ abilities to absorb increases. And this is the case at the moment.

“These changes without any foresight create tax confusion in a chaos already established by the legal madness that companies face in the country. This only generates uncertainty and higher costs,” said Mr. Tavares of CNC.

At Magazine Luiza, with the increase in taxes, especially with Difal, an additional R$3 billion was added to the company’s costs in 2023. About R$1.2 billion of that was Difal. “If we divide it by quarter, it’s R$300 million that we hadn’t collected in 2022, which we started collecting in 2023. So, there was a very significant increase in prices to defend our profitability,” CEO Frederico Trajano told analysts in March.

It took three quarters to pass everything on, with a total pass-on sum of about R$1 billion in 2023. There was no effect on the chain from the subsidies.

At retailer Casas Bahia, the company accounted for the effect of Difal for 2022 in the results and passed on the full amount to prices.

According to Mr. Tavares of CNC, it may not be possible to identify this pressure in inflation indicators now. This is because these effects spread within durable and semi-durable categories, with a smaller weight in the index.

In the chains, there has been an increase in home appliance prices in five of the last six months, considering Brazil’s official inflation index IPCA, and in four of the last six months in clothing categories. Both segments were affected by Difal.

Subsidies, on the other hand, impact the wholesale food sector, which has made robust investments in the last three years.

In January, Genial Investimentos mentioned in a report the effects on Assaí, a cash-and-carry chain. It stated that investment subsidies had reduced tax and social contribution payments by R$248 million in 2022, a benefit that will no longer be in place.

For financial publishing company Empiricus, the end of this effect can be offset by price increases in 2024, albeit less than those of its competitors.

In the fashion sector, Arezzo&Co’s chief financial officer, Rafael Sachete, said at an event last week that chains in general felt the new Difal rule and the impact of the change in how subsidies are taxed at the same time.

In Arezzo’s case, with the changes in the rules, the group held back acquisitions and streamlined its structure to improve margins. In 2024, this approach continues, aiming “not to pass on too much to price increases.”

He said that there was a price increase to cover part of the Difal impact. The company plans to avoid major hikes in order to remain competitive—and gain efficiency in expenses by selling more.

“These gains from the expenditures, however, are not permanent. So, the gain has to come in two ways, through increased revenue or by starting to raise prices,” he said. “The focus for 2024 is still to increase revenue, but we may have a limit on that at some point.”

There are still other measures taken that have already reached the balance sheets this year, such as the increase in ICMS rates by the states.

According to consultancy LCA Consultores, IPCA is expected to be impacted by 0.10 points with the tax increase, rising from 4.1% to 4.2% for the year.

A study by Pernambuco’s trade federation Fecomércio indicates that food, beverages, clothing, and footwear will be the most affected by the increase—ICMS will rise between 17% and 22%, depending on the state. In pharmacies, prices increased automatically after January, according to ABRAFARMA, the entity that represents the stores, because stocks are lean.

Looking a little further ahead, other surprises may appear and make this bill more expensive for consumers.

There is an ongoing debate in the states to increase the ICMS rate on Brazilians’ international purchases, for shipments up to $50 made on foreign online marketplaces and apps. The tax could increase to 25% from 17% on the sale, according to initial discussions.

At present, it is the consumer who assumes the responsibility of paying the ICMS on products purchased from online marketplaces such as AliExpress, Amazon, and Shopee, directly through methods like card payments, instant-payment system PIX, or payment slips.

This 17% rate has been enforced since August by companies participating in the Remessa Conforme program (which establishes a set of rules for the advanced customs clearance of products in exchange for an exemption from import taxes for shipments up to $50), limited to international websites, after being previously exempt. Now, less than a year since its implementation, discussions about a potential increase are anticipated to take place in state assemblies this semester.

ICMS increases are a way for states to try to replenish their budgets, which have been affected since the pandemic.

Casas Bahia, Magazine Luiza, and Arezzo/Soma did not comment beyond what is already public. Assaí said it maintains strict expense control, citing the balance from October to December, and constantly seeks opportunities for efficiency improvements. It added that the ICMS increase is passed on directly to the consumer because the industry already includes the tax change in sales to retailers.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Moraes rejects request to exempt X from judicial measures in Brazil

Office of the Chief Prosecutor of Brazil says that company representatives should be heard in the investigation

04/10/2024

Alexandre de Moraes — Foto: Rosinei Coutinho/SCO/STF

Alexandre de Moraes — Foto: Rosinei Coutinho/SCO/STF

Justice Alexandre de Moraes of the Federal Supreme Court denied a request from representatives of platform X in Brazil (formerly Twitter), stating that they should be held accountable for the actions of the company, which is based in the United States, including any criminal liabilities.

On Sunday, the justice ordered the opening of an inquiry to investigate Elon Musk, the platform’s owner, following his threats to defy court orders mandating the blocking of profiles on the social network. The justice also implicated the billionaire in the investigation of digital militias.

In a statement to the court, the federal attorney general, Paulo Gonet, argued that the legal representatives of the platform in Brazil should be included in the investigations. The Federal Police have yet to schedule the testimonies. According to the Office of the Chief Prosecutor, the hearings are necessary to ascertain whether the company has unblocked any profiles suspended by court order and to identify who was responsible for such actions.

In a request submitted to the Federal Supreme Court, company X Brasil claimed it had no involvement in the “management, operation, and administration” of the platform, asserting that its activities were confined to the “commercialization, monetization, and promotion” of the former Twitter in the country. The statement clarified that any new court orders concerning the platform should be directed to the company abroad, not to its national representatives.

In his decision, Justice Moraes stated that the company was attempting to shirk responsibility concerning the orders issued by the Supreme Court. “X Brazil is seeking to exempt itself from responsibility regarding the compliance with orders issued by Brazil’s highest court of justice, under the pretense that the decision-making power lies with the international corporations that established the platform,” he remarked.

He further noted that the claim “displays a certain cynicism” and “verges on bad faith litigation.” “The activities of X Brasil, as delineated in the Articles of Association, disclose its clear civil and criminal liability in connection with the platform ‘X.’ Consequently, any obstruction of justice or noncompliance with a court order will fall upon the directors of the said company,” he added.

The justice also highlighted that the request presented to the Court is noteworthy because the company’s argument emerges “after years during which the company has complied with judicial directives and participated in numerous meetings, both at the Supreme Court and at the Superior Electoral Court, concerning the misuse of social media in the electoral process.”

Justice Moraes also contended that the company “is seeking a de facto jurisdictional immunity clause,” for which there is no basis in the national legal framework. “On the contrary, the inclusion of one of the so-called international operators in its corporate structure indicates an exploitation of legal identity, as it could opt not to adhere to the orders of Brazilian courts without facing any repercussions, shielded by its representative in Brazil.”

On Saturday, Mr. Musk took to social media to launch direct attacks against Justice Moraes. As the chairman of the Superior Electoral Court, the justice had played a key role in intensifying regulations on platforms to curb the dissemination of “fake news” during the election period.

The billionaire started the day by responding to a January post from the justice, questioning “why so much censorship.” In the afternoon, the businessman continued to post messages suggesting that freedom of speech was under threat in Brazil.

Mr. Musk’s remarks elicited criticism from authorities. On Tuesday, Justice Cármen Lúcia, vice-chairwoman of the Superior Electoral Court, supported Justice Moraes’ position, stating that all natural and legal persons are bound by the country’s legal system and must adhere to judicial rulings.

“Regardless of their origin, race, gender, creed, or economic status, all individuals and entities are subject to the laws of the country and must obey judicial decisions,” she stated.

She also mentioned that “judicial decisions can be appealed against, criticized, or questioned, but they must not be disregarded.”

The justice, who is set to preside over the Superior Electoral Court during this year’s municipal elections, further emphasized that “judges in Brazil are there to ensure the authority of the ruling and its enforcement.”

“Without an independent judiciary to enforce its rulings, there’s no assurance of the rule of law. Without the safeguard of the Democratic Rule of Law, the security of democracy is compromised. Without democracy, there is no freedom, and without freedom, there is no dignity,” she declared.

Lula

President Lula seized the opportunity during the launch of a program aimed at reducing deforestation in the Amazon to address “billionaires” seeking habitable conditions beyond Earth. This statement came amidst the ongoing criticisms by businessman Elon Musk, owner of the platform X, directed at Supreme Court Justice Alexandre de Moraes.

While President Lula did not directly mention Mr. Musk, he suggested that billionaires could better utilize their wealth by preserving forests and enhancing people’s lives.

“Some billionaires are attempting to build rockets for travel, aren’t they? They must realize the importance of living on our planet and dedicate a significant portion of their wealth to preserving the environment and enhancing the quality of life for people,” President Lula remarked during the Planalto Palace event for the Union with Municipalities for Reducing Deforestation program.

Although the president refrained from naming the entrepreneur explicitly, his reference was unmistakable. Mr. Musk, who owns the X platform, is also recognized for his ventures into the space industry, investing substantial sums in rocket launches, which is precisely the activity President Lula highlighted in his speech on Tuesday.

*Por Isadora Peron — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Petrobras considers billion-real agreement with federal government

Decision could end dispute involving actions worth R$55.2bn and help government reduce primary deficit to zero

04/09/2024

Agreement could put an end to a dispute involving actions totaling R$55.234 billion — Foto: Roberto Pagot/Agência Petrobras

Agreement could put an end to a dispute involving actions totaling R$55.234 billion — Foto: Roberto Pagot/Agência Petrobras

State-owned oil company Petrobras is studying the possibility of entering into a tax settlement to be proposed by the federal government regarding charter agreements for oil rigs, Valor learned from two sources familiar with the matter.

The agreement could put an end to a dispute involving actions totaling R$55.234 billion and, at the same time, help the government to reduce its primary deficit to zero this year.

The draft notice was released for public consultation on Friday (5) by the Attorney General’s Office of the National Treasury (PGFN) and the Federal Revenue Service. It will receive inputs until next Friday (12). The notice is expected to be published by the government by the end of the month when the companies would be able to join the agreement.

The subject was one of the topics discussed at a meeting at the Planalto Palace last week, attended by Chief of Staff Rui Costa and ministers Fernando Haddad (Finance), and Alexandre Silveira (Mines and Energy). They also discussed the issue around Petrobras’s extraordinary dividends.

According to a government source, the state-owned company is likely to join the tax settlement, as it has been losing proceedings on the subject at the Administrative Council of Tax Appeals (CARF).

The company’s executive board is weighing the pros and cons of entering into the agreement, which could end actions worth R$55.234 billion if all litigation is included in the deal. If the agreement is accepted, the oil giant will receive a discount on the debt amount.

However, in its financial statements, Petrobras describes processes related to charter agreements as a “possible loss,” claiming that there are manifestations in favor of the company’s understanding in higher courts.

“The company ratifies the classification [of withholding income tax, IRRF] of the loss as possible as there are manifestations in favor of the company’s understanding in superior courts and will seek to ensure its rights,” says an excerpt of the 2023 fourth quarter’s financial statements.

“The other processes involving [federal tax] CIDE and [social taxes] PIS and Cofins are in different administrative and judicial stages and are described as possible losses as there is a legal provision in line with the company’s understanding,” Petrobras added in its financial report.

The notice placed for public consultation allows the tax settlement—a type of agreement to end administrative or judicial dispute—on the levy or not of IRRF, CIDE, PIS, and Cofins on remittances abroad, arising from the bipartition of the legal transaction in a charter agreement regarding vessels or oil rigs.

It is the so-called settlement of major tax theses, which is being carried out by the Federal Revenue and the PGFN to end disputes and secure revenue for the federal government. That is because, if there is no agreement, even if the federal government wins the dispute at the CARF, companies can appeal in processes that drag on for years.

According to the notice draft, companies that enter into the charter agreement will be allowed to choose from two payment options. The first option offers a 60% discount on the total debt amount. The remainder must be settled with a down payment of at least 30% and the balance in up to six monthly installments.

The second option offers a 35% discount on the total debt amount. The remainder must be paid with a down payment of at least 10% and the balance in up to 24 monthly installments. The draft also says the tax settlement may include the use of tax loss credits and negative tax base on the Social Contribution over Net Profit (CSLL), up to a cap of 10% of the remaining balance after the initial discount has been applied.

The tax settlement is one of the economic team’s major bets to increase tax revenue and get closer to the target of reduce primary deficit to zero in public accounts this year.

In the latest federal budget revenue and expenditure assessment report, the government estimated R$36.6 billion for these initiatives, which involve other notices and individual transactions, in addition to the issue of the charter agreement. Petrobras did not respond to a request for comment.

*Por Jéssica Sant’Ana — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Uncertainty over U.S. rates stalls reopening of Brazilian IPO market

After more than two years without initial public offerings, the chance for companies to debut on the stock exchange may come only at the end of the year

04/09/2024

Roderick Greenlees — Foto: Gabriel Reis/Valor

Roderick Greenlees — Foto: Gabriel Reis/Valor

The delay by the U.S. Federal Reserve in implementing monetary easing, along with the resulting market volatility caused by this uncertainty, has postponed the reopening of Brazil’s initial public offering market after more than two years of dormancy. While initially anticipated for the period between April and June, forecasts now suggest that the IPO window will likely open in the second half of the year. However, some projections extend this timeline to between September and December, with most operations potentially being launched in February 2025.

Roderick Greenlees, the global head of Itaú BBA’s investment bank, currently maintains his estimate of three to five primary issues this year. If follow-on offerings are considered—when listed companies make new offerings—the total reaches 25 to 35 operations, with a volume ranging between R$35 billion and R$50 billion. Mr. Greenlees states that if the initial cut in U.S. interest rates does not occur in June, he will revise the forecasts.

“There is a huge pent-up demand from both issuers and investors. We have good companies wanting to tap the market,” said Mr. Greenlees. Among the candidates for going public are Inspirali, a medical school business within the Ânima educational group, construction companies Pacaembu and Tegra, and Cimed, the country’s third-largest pharmaceutical company by volume. Cimed has already indicated that its offering may be delayed until 2025. The market is also anticipating the arrival of sanitation company Aegea and cement maker Votorantim Cimentos, among others.

Marcelo Millen, head of Citi’s equity division in Latin America, states that the bank has been in discussions with “a number of companies” preparing to go public this year. He declined to disclose the sectors, but mentioned that the companies share common characteristics: they are “large, valued at least R$5 billion, with a strong track record of execution, and resilience in delivering results.” Additionally, he said that they intend to launch an offering of at least R$2 billion to ensure liquidity in the secondary market. “We are optimistic about interest rate cuts in the United States,” he said.

The executive mentioned that the U.S. market has been facing challenges but is now exhibiting a gradual rebound. In March, there was euphoria surrounding the IPO of Reddit, a social media and news-sharing platform, which closed at the top of its price range and subsequently rose almost 50% on its first day of trading. It is expected to be a kind of pioneer, but since 2024 is an election year, he said, the U.S. market will have fewer windows for offerings.

According to Mr. Greenlees, therefore, it is a matter of time to launch the first offering in Brazil since 2021. He mentions that many companies have maintained up-to-date public records, giving them an advantage as they can initiate the offering process within three weeks. Those who do not have the process ready need three to six months, depending on the stage of the company.

“So the timeline begins to compress. I initially anticipated one or two offerings in the second quarter, but I no longer consider that possibility. The risk of there being no offerings is low now,” said Mr. Greenlees. Victor Rosa, head of Scotiabank Brazil’s investment bank, explains that the stock market is highly sensitive to predictability. Therefore, if any factor disrupts expectations, it could potentially postpone the market opening until the end of the year or even into 2025.

Rodrigo Guedes, lead partner of equity capital markets at KPMG Brazil, remarks that the company has secured four new mandates, signed at the end of January. He sees potential investment opportunities in infrastructure and logistics, sanitation, financial services (fintechs), non-electronic retail, industry, and agriculture.

The offerings managed by consultancy Grant Thornton exhibit a similar profile, encompassing companies in sectors such as biotechnology and civil construction. Five companies have nearly finalized their processes and are now awaiting the opening of the window. Additionally, Octavio Zampirollo, an audit partner at the company, mentioned that four new candidates arrived at the beginning of the year. At G5 Partners, partner Levindo Santos stated that two mandates were signed in February, stemming from dormant conversations initiated two years ago. These discussions were reactivated due to the improved market conditions.

Mr. Greenlees mentioned, “We have interesting operations that will enter the market with first-quarter numbers, made even more favorable due to falling interest rates.” These sectors are also known for having less risk and greater liquidity, which is appealing to foreign investors, said Mr. Rosa. According to Mr. Guedes, since 2020, there has been a reversal in foreign participation in offerings, which previously ranged from 60% to 70%. Domestic investors have now assumed greater prominence.

He expects the reopening of the market to occur “closer to December,” as setting the price of the offering in September would require the company to be ready within a month and a half. “With the complex international economic and geopolitical situation, I don’t know if we have many ready. If the windows for IPOs are missed this year, the next opportunity will be in February 2025.”

Mr. Millen of Citi says he already sees investors willing to consider IPO opportunities. He stressed that the market is “fully functional for follow-on offerings.” Mr. Guedes of KPMG noted that the profile of secondary offerings this year will also begin to change, with an increase in operations aimed at investment objectives, whereas last year they were primarily focused on reducing indebtedness.

There were only five offerings until March. One was Energisa, which raised R$2.5 billion. The proceeds will be used, in addition to reducing leverage, for investments in concessions and potential mergers and acquisitions. “In the coming months, we will continue to see transactions aimed at capitalizing companies, as well as those for new projects and investments,” said Mr. Greenlees.

*Por Liane Thedim — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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