Brazilian giant is investing R$19.3bn in the largest single production unit of this raw material in the world
12/15/2022
Suzano’s eucalyptus forest in Mucuri, Bahia — Foto: Divulgação
More than 40 non-governmental organizations (NGOs) from different regions of the world have requested the International Finance Corporation (IFC), the financing arm of the World Bank for private-sector investments, to veto a $900 million loan to Suzano for the construction of a eucalyptus pulp mill in Mato Grosso do Sul.
The Brazilian company, the world’s largest producer of market pulp, is investing R$19.3 billion in a new production unit in Ribas do Rio Pardo with a capacity of 2.55 million tonnes per year, the largest single production line of this raw material in the world.
In the letter seen by Valor, entities such as Rainforest Action Network (RAN), Forests & Finance Coalition, and World Rainforest Movement (WRM) claim that the funding is not aligned with the purposes of the IFC.
According to them, the institution’s expectation that funded projects generate economy-wide effects and have positive environmental effects go against at least three impacts considered for the project: environmental, competitiveness enhancement, and fossil fuel-free technology.
As for the environmental effect, the organizations claim that the expansion of areas cultivated with eucalyptus, the raw material for Suzano’s pulp production, is leading to the “decline of species richness and reducing the remaining areas of Cerrado,” one of the country’s main biomes, which is at risk of extinction.
In addition, the organizations say, Brazil’s pulp and paper industry is “highly subsidized” and the construction of a new unit of Projeto Cerrado’s size would result in increased greenhouse gases – Suzano claims that the unit will be the most sustainable in the industry worldwide.
“We also note that there has been no real consultation with the affected communities, nor is there any expectation that preemptive consultation will take place. This is a clear failure,” the entities say. For them, Suzano’s new project will “further expel local communities from their lands.”
The IFC will decide this Thursday about financing Projeto Cerrado, which already has funds from export credit agencies. Sought, Suzano has not yet positioned itself on the issue.
In a note, Suzano said Projeto Cerrado is expected to generate 10,000 jobs at the peak of construction and thousands of indirect jobs, in addition to being in line with other “socio-environmental characteristics intrinsic to the company’s operations,” including proper use of soil and water, commitment to protecting and enhancing biodiversity through the implementation of landscape-scale corridors, zero deforestation, and close relationships with local communities.
“The construction of the new unit, as well as the company’s entire business model, is therefore aligned with the Commitments to Renew Life, a broad set of long-term goals that reflect the company’s motivation to positively impact society and the environment,” Suzano said in the note.
Deal for sale was closed between Mubadala and company’s creditor banks
12/14/2022
The sugar-and-ethanol company Atvos was valued at R$1.6 billion in the agreement closed between Abu Dhabi sovereign wealth fund Mubadala and the creditor banks of the company for its sale, sources say. The transaction, settled in defiance of the current controlling shareholder, the U.S.-based fund Lone Star, is equivalent to a multiple close to that of sales of mills in financial distress – of just over R$40 per tonne of installed cane capacity, or R$68 per tonne of processed cane.
The deal does not involve cash payment, but a debt restructuring and a commitment from Mubadala to contribute R$500 million as equity. Mubadala will in practice have a stake of 31.5% in Atvos, while the banks will hold 60%. Under the agreement, the banks, which have warrants equivalent to 90% of Atvos, will cede the bonds to Mubadala, and, in return, new bonds will be issued with the fund.
There would also be the entry of the Agroenergia FIP Multiestratégia fund, of partners Ricardo Knoepfelmacher and Giovanni Forace, from RK Partners – former advisor to Odebrecht in the case. With this, Lone Star and Novonor (former Odebrecht) would share the remaining stake.
Atvos has been valued at very different amounts. When the company was still a subsidiary that Odebrecht wanted to sell, before seeking protection from creditors, the group sustained that the business was worth between R$6 billion and R$13 billion.
When the company was already under judicial reorganization, Lone Star, one of the most aggressive creditors in the negotiations, agreed to pay $5 million to take over the company from the Natixis bank, which held the right to exercise control as collateral on behalf of Odebrecht’s creditor banks.
Lone Star is expected to question the deal in court. The fund is expected to argue that it is investing in Atvos and that there would be no need for contributions. In this harvest, crushing reached 22.3 million tonnes, compared to 27 million tonnes three years ago, but capex increased from R$400 million in 2020/21 to R$1.1 billion this crop. A good part of this increase was used to double the sugarcane planting area to 90,000 hectares by the end of this harvest. The cash generated jumped to R$1.2 billion in the current harvest from R$200 million in 2020/21.
The U.S.-based fund expected the company to be worth four times what was negotiated with Mubadala, with a multiple close to $40 per milled tonne, or almost R$5 billion in total.
The Arab fund understands that there is still a high debt, of R$7 billion, and a need, for the next three years, of R$1.5 billion more in capex than what is currently used to reduce the age of the cane fields and expand the planting area, which would raise the value of the company (including debts) to almost R$10 billion.
In a note, Lone Star said the Mubadala deal “ignores the significant operational and financial turnaround,” and that it was closed “without a competitive process and without consultation with management team,” nor was there “due process or due diligence.” Mubadala declined to comment.
Monetary Policy Commitee reviews all the channels through which fiscal policy can harm the scenario of inflation convergence to the target
12/14/2022
Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo
The Central Bank’s Monetary Policy Committee (Copom) is adopting a wait-and-see approach until it gets to know in greater detail the fiscal policy of the Lula administration. But it warned that an expansion driven by increased public spending could have the opposite effect to the one intended, slowing down the economy instead of stimulating it.
In the minutes of its last meeting, released Tuesday, the Copom reviews all the channels through which fiscal policy can block inflation from meeting the targets.
It can be because of aggregate demand, the rise in asset prices such as the dollar, the heightened economic uncertainty, the deterioration of inflation expectations, the increase in the neutral rate of interest or the loss of power of monetary policy if loans offered by state-owned banks gain ground.
However, the committee stopped short of giving a more concrete response to fiscal uncertainty – in other words, indicating an eventual postponement of the cycle of interest rate cuts or even a potential new hike in the key interest rate Selic.
Apparently, this environment of fiscal uncertainty had not worsened the Copom’s inflation projections. They rose only slightly, to 3.3% in mid-2024 from 3.2%, and remain compatible with the target on this horizon, which the Central Bank is currently aiming at.
In fact, despite all the fiscal uncertainty, the foreign exchange rate prior to the Copom meeting was flat at R$5.25 compared to the previous meeting, in October. Inflation expectations for 2024, until last week’s meeting, had not moved. The minutes say policymakers are a little concerned about the rise in the average inflation expectation, but what actually enters the inflation projection models is the median.
In theory, the Central Bank’s inflation projection can be influenced in case of revision of its estimate for the neutral rate of interest, which rose for the last time in June, to 4% from 3.5%, in real terms. But the minutes do not say whether there has been any revision. We may have more details on the subject on Thursday when the Inflation Report will be released.
Since the inflation projections have not changed, the fiscal policy could require an action from the Copom only from the balance of risks to inflation. But the way the Central Bank describes its balance of risks, there was no change. In other words, the balance between factors that can make inflation fall below expectations and those that can make it stay above has been maintained.
It seems there was no change because the Central Bank is adopting a cautious strategy in judging the fiscal policy of the future Lula administration.
“The current scenario, particularly uncertain on the fiscal side, requires serenity when evaluating risks,” the minutes say, repeating a phrase that already appeared in last week’s Copom statement.
Even so, the committee decided to send some messages to the future administration. The minutes reveal that the Copom did several exercises to check how fiscal policy can hinder the work of bringing inflation to the target. The idea implicit in these calculations is that, if it gets in the way, interest rates are likely to be higher, either because cuts will be delayed or further hikes in the key interest rate.
“The final effect, whether on inflation or on activity, will depend on both the combination and the magnitude of fiscal and parafiscal policies,” the Copom’s minutes say.
A relevant point mentioned by the policymakers is that the eventual fiscal and parafiscal stimulus planned by the future federal administration could have an opposite effect than expected, causing contraction instead of accelerating the economy.
The minutes cite two reasons for this. First, if the fiscal policy affects confidence in the sustainability of public debt. Another reason is linked to the degree of economic slack. With reduced slack, a significant fiscal expansion will hit inflation “and override the intended impacts on economic activity.”
This last point is sensitive, even to heterodox economists who support Modern Monetary Theory (MMT), which admits that there are limits to fiscal expansion when the economy is operating near full capacity.
But the controversy is not settled. The new administration has been claiming that, with the Transition PEC (proposal to amend the Constitution), it will keep spending stable in relation to GDP. But it has not shown any more detailed calculations supporting this thesis. The Central Bank makes more elaborate calculations about the fiscal stimulus, considering the structural primary balance.
What was missing was for the Central Bank to present its simulations to the public – that is, how much each fiscal dose affects inflation and activity. If the idea is to increase transparency, some detail may be included in the Inflation Report.
Otherwise, these simulations tend to remain under reserve for eight years, until the technical presentation made to the Copom is released.
Fund plans to invest $500m to $1bn in next three years in data infrastructure opportunities
12/14/2022
After the sale of the data center company Odata to the American Aligned, Pátria Investimentos fund, which held about 90% of the company’s capital, now seeks to expand its technology portfolio, with a focus on infrastructure for 5G networks.
“In three years, we will invest $500 million to $1 billion in data infrastructure opportunities,” said Felipe Pinto, partner at Pátria, in an interview with Valor.
Among the 42 companies in Pátria’s current portfolio, 19 of which are infrastructure companies and 23 are private equity, Winity — created in 2020 to provide infrastructure to wireless networks — is currently the fund’s only technology company.
The idea, according to Mr. Pinto, is to expand Winity’s operations beyond the Brazilian market and seek new investments in Latin America, with an eye on the expansion of 5G networks in countries like Colombia, Peru, and the Central American region.
Winner of the national lot of the 700 MHz band in the frequency auction for 5G offering in the country last year, Winity is awaiting approval from the antitrust regulator Cade on a network sharing agreement signed with Telefonica (Vivo) in August. “We are confident that we will go through the approval processes normally,” said Mr. Pinto.
The fund says it is interested in investing in data infrastructure companies to meet corporate demand for 5G networks. “We look at the potential infrastructure that can serve companies in the agricultural, mining – including mining complexes in Chile –, healthcare, and industrial plants among others,” Mr. Pinto said.
In addition to investing directly in technology companies, for two years Pátria has been digitalizing companies from other segments in its private equity investment portfolio.
According to Ricardo Barbosa, Pátria Investimentos’ Digital Transformation and Value Creation Private Equity Portfolio Leader, the goal is to increase EBITDA and raise the forward enterprise value-to-EBITDA multiple of these companies, in addition to generating business through digital transformation.
One of the examples cited by the fund is the agricultural resale platform Lavoro, which is preparing to carry out an IPO on Nasdaq. As Valor’s business website Pipeline reported in September, Lavoro will go public through a merger with TPB Acquisition Corporation, a special purpose acquisition company (SPAC) sponsored by investment firm The Production Board. In the deal, the Brazilian company was valued at $1.2 billion.
Today, 23 companies in Pátria’s private equity portfolio are in digitalization projects led by Mr. Barbosa’s sector, including database migrations to the cloud and production chain robotization.
In October last year, the fund also identified a space to invest in information security by announcing the purchase of cybersecurity companies Neosecure and Proteus for the markets of Argentina, Brazil, Chile, and Colombia. At the time, the fund committed to injecting $250 million into the sector.
The manager informed on Tuesday that the sale of Odata to Aligned and of the concessionaire Entrevias, announced at the beginning of the month to the French company Vinci, is expected to generate a gain of approximately $1.4 billion for the shareholders of Pátria Infraestrutura III fund. In the case of Entrevias, Pátria is selling a 55% stake and the fund will continue with the remaining 45%.
Data center company intends to accelerate expansion in Latin America, expects to quintuple revenues in five years
12/14/2022
Andrew Schaap — Foto: Divulgação
The U.S.-based data-center infrastructure company Aligned announced on Tuesday the acquisition of 100% of the capital of the Brazilian company Odata, which has data center operations in Brazil and other Latin American countries.
The deal was signed over the weekend by Pátria Investimentos fund, which holds about 90% of Aligned’s capital, and by the U.S.-based data-center company CyrusOne, which held about 10% of Odata.
The value of the deal and its terms were not revealed. Sources say the deal is valued at more than R$10 billion and represents 26 times Odata’s EBITDA.
The deal depends on approval by the Administrative Council for Economic Defense (CADE) in Brazil, as well as the regulatory bodies in the United States, Chile, Colombia, and Mexico, where the companies have operations.
According to Ricardo Alário Arantes, Odata’s CEO, the acquisition does not change the company’s data center expansion schedule — today there are eight in four countries — or the team of 350 employees in Latin America. “We will accelerate the conquest of new clients and business opportunities,” said the executive.
The purchase of Odata makes it possible for Aligned, which has 16 data centers in the United States, to bring clients to Latin America. “Exporting clients is exactly what we want to do,” Andrew Schaap, CEO of Aligned Data Centers, told Valor.
Mr. Schaap says his schedule of trips with Mr. Arantes to visit current and potential clients will be intense in the coming weeks, focusing on the 2,000 largest companies in Fortune magazine’s global index.
With the support of Macquarie Asset Management fund, Aligned intends to accelerate investments in Odata’s expansion. According to Mr. Schaap, the plan is to invest more than R$5.3 billion ($1 billion) in the Latin American operation in the next 10 years. The company also expects to quintuple revenues in five years.
Felipe Pinto, a partner at Pátria Investimentos, said that the exit is part of a natural cycle. “We launched Odata as a startup and, for us, it is a typical cycle that has been completed,” he said.
In April, Valor reported that Pátria was already in advanced conversations with international M&A boutiques and foreign investment banks to define who could buy Odata. At the time, the company was valued at $1 billion.
In addition to Odata, Pátria has already divested companies such as Highline do Brasil, a telecommunications tower company, sold in December 2019 to the U.S.-based investment group Digital Bridge (former Digital Colony), and Vogel Telecom, of fiber optic connectivity for companies, sold to the Algar Telecom group for R$600 million in May 2021.
According to Mr. Pinto, Pátria continues to invest in technology, as well as in energy, logistics, and sustainable companies. One company in the current portfolio is Winity, which was created in 2020 to provide infrastructure for wireless networks.
Odata, which was created in 2015, does not disclose its revenues, but they come mostly from long-term contracts with large cloud computing service providers, as well as clients in the financial, telecommunications, and education industries.
Odata currently has six data centers in operation — three in Brazil, one in Chile, one in Colombia, and one in Mexico. The company has three other centers under construction in Brazil and Chile with delivery scheduled for the first half of 2023, as well as in Mexico, for the first half of 2024.
At the end of last year, the company raised $30 million from the International Finance Corporation (IFC), the World Bank’s branch aimed at the private sector, to finance the expansion of its data center structure in Latin America, including Brazil.
In August, Odata received a new loan from IFC, of $35 million, to invest in the expansion of data centers in Latin America.
Mr. Arantes says Odata continues to work with the IFC and expects Aligned to bring in new funding partners for expansion.
In addition to supporting the expansion of leading U.S. data center providers Aligned and Netrality Data Centers, Macquarie Asset Management manages investments in AirTrunk, a data center operator with facilities in Australia, Singapore, Japan, and Hong Kong. In September, it announced the acquisition of a minority stake in British data center company Virtus, which operates in the Greater London area and is owned by Singapore’s ST Telemedia.
Macquarie Asset Management, a division of the Australian group of investments Macquarie, managed more than $2.8 trillion in assets by the end of September, up 8% year-over-year, according to the company’s most recent financial statement.
Provisional measure paves the way for partnerships between INB and private-sector companies for ore production
12/14/2022
With the approval by the Senate of the provisional measure 1,133/2022, which allows private-sector investment in nuclear ore extraction in Brazil, the sector sees the possibility of new companies joining an activity previously exclusive to Indústrias Nucleares do Brasil (INB).
Companies in the industry believe that the measure will make the activity more dynamic and provide greater legal security not only for the electric sector but also for other fields, such as health and environment.
Brazil has the sixth-largest uranium reserve on the planet and is one of the few countries in the world to master enrichment technology for peaceful purposes, but it manages to mine only 40% of what is needed for Angra 1 (640 MW). The remainder comes mainly from Kazakhstan and Uzbekistan through the Russian state-owned company Rosatom, which operates in these countries.
The Brazilian Association for the Development of Nuclear Activities (Abdan) understands that this is an opportunity for more intense uranium exploration and to make the country self-sufficient and the chance for new companies to land in Brazil since, without a guaranteed regulation, it would be difficult for the private sector to invest in the industry.
Celso Cunha — Foto: Luciana Whitaker/Valor
Abdan’s head Celso Cunha told Valor that the arrival of private-sector companies in the extraction of nuclear ores does not mean a breach of the federal government’s monopoly, but changes in the law that give more clarity to possible companies and investors.
He recalls that a public-private partnership (PPP) already exists. The Santa Quitéria consortium is a partnership between INB and Galvani – a company that produces phosphate fertilizers – for the implementation of a joint mining project. The objective is to exploit uranium and phosphate found in an associated form in the Itataia ore deposits in Santa Quitéria, Ceará. The current law determines that less than 50% must be uranium, but now the provisional measure does not establish quotas and uranium exploration can increase.
“But only INB can sell and use uranium. It is not the state’s job to dig a hole. Extracting uranium from great depth requires technical knowledge we don’t have in Brazil. The solution is to make public-private partnerships, bring Brazilian and foreign companies together and take it to INB,” he said.
Today the pillar of expansion of the Brazilian electricity sector is wind and solar sources. These sources are intermittent because they depend on the wind and the sunlight. This instability creates a challenge for Brazil’s national grid operator ONS, which organizes the mix of sources to meet the demand in real-time, which also varies. According to Mr. Cunha, nuclear generation is important because it is commanded by people, not the sun, wind, or rain.
“To produce for Angra 1, 2, and 3 we need the Santa Quitéria mine, in Ceará. Then we will be able to supply the market. We won’t need to import uranium,” he said.
A target of worldwide controversy for almost 70 years, when U.S. President Eisenhower proposed, in a speech to the United Nations, the atomic program for peace, nuclear energy is now back on the international agenda, going from villain to climate hero. Amid the urgency of combating global warming and the ever-shortening window for action, atomic energy already fits the definition of green energy. On the other hand, Russia’s war against Ukraine may make uranium imports more expensive, as European nations seek to reduce their dependence on Russian gas.
Brazil is not out of this context. The National Energy Plan-2050 signaled eight to 10 new nuclear plants, and the Ten-Year Energy Expansion Plan (PDE) 2031 foresees another 1 GW in the Southeast region. The works of Angra 3 have resumed and besides guaranteeing the fuel, the executive says that Brazil needs to define the energy tariff to approve the financing if it wants to maintain the plant’s completion schedule until 2027.
The financing is divided into a R$4 billion tranche that is already underway and R$17 billion BNDES is expected to raise in the international market. Eletronuclear will hold the auctions.
There is talk of a fourth nuclear plant in the Southeast region in the next 10 years. If the plant gets off the drawing board, the forecast is that it will have 1 gigawatt of installed capacity. There is no decision on where the site will be, but chances are it will be in the region of Angra dos Reis, Rio de Janeiro.
Abdan is advising the new administration’s energy transition committee, besides being ahead of important agendas for the next year, involving new plants in Angra and small modular reactors. According to him, the priorities for the government’s 100 first days in office range from unlocking funds to make research feasible, to providing legal security for the mining and commercialization of nuclear ores and their by-products, in addition to the challenge of speeding up the operation of the National Nuclear Safety Authority, which currently does not have a president.
Uncertainty about the future of the state-run oil company and recovery in China explain the distance
12/13/2022
In mid-October, when Petrobras shares peaked, the state-owned company was the most valuable company on the Brazilian stock exchange, R$116 billion ahead of second-place Vale. By early November, after the second round of presidential elections, the gap had narrowed to R$85 billion. Within two weeks, on the 11th, Vale had moved ahead. Today, one month later, the mining company has already put R$77 billion ahead.
The swap of positions, which seems to have come to last, was the result of the combination of uncertainty about the future of the state-run oil giant with the return to power of the Workers’ Party (PT) and the expectation of a recovery in China, the main market for Vale, with the easing of restrictions because of Covid-19. Iron ore has been up 9% in the month.
Investors’ distrust of the election winners, which was great before, has only increased with the news over the last few weeks, following the movements of the huge transition team. Monday, the day of the graduation of the elected, two pieces of information did the damage: Aloizio Mercadante would be considered to be the CEO, and the state-owned companies law would have its days numbered.
At 4:00 pm, Petrobras preferred shares fell 4.17% to R$23.68, accumulating an 11% drop in the month and 30% since October’s record high of R$33.72 — equivalent to R$187 billion less in market capitalization. Meanwhile, oil was up 2.48%.
It has been such a good period for the oil companies that the stocks remain in the black for the year, up 42%, while Ibovespa went into the red today. Among peers, however, Petrobras has also fallen behind. Prio, considered by analysts as an option for the state-owned company to invest in the sector, rose 63% in the year. The American Exxon advanced 71%.
Ministry of Agriculture received a technical questionnaire to check the feasibility of starting a partnership
12/13/2022
Bean harvest is just under 3 million tonnes per season — Foto: Claudio Belli/Valor
The Brazilian private sector has insisted for years, and now China is showing the first signs of interest in importing beans and pulses (lentils, chickpeas, and peas) from the country. Last month, the Ministry of Agriculture received a request for answers to a technical questionnaire sent by the Chinese to check the feasibility of starting shipments.
Although the document is not an official manifesto, producers and industries in Brazil are celebrating, since the opening may represent good opportunities. In China, the per capita consumption of beans is only 1.7 kilos per year, but the average has grown 400% annually.
“This is a work that has been going on for years, involving the Ministry of Agriculture, Foreign Affairs Ministry, and the interested segments. In the specific case of mung beans [also known as moyashi and used to produce edible sprouts], it was very celebrated in Brazil,” Ariana Guedes, international advisor to the State Secretariat of Economic Development (Sedec) in Asia, told Valor.
The beginning of this process is also related to the loss of area destined for the planting of beans, especially for crops such as soybeans, as has also happened in Brazil, added the advisor. Given this trend, exporting to China may represent even more than compensation.
According to the most recent data from the U.S. Department of Agriculture, in the 2019/20 harvest, China produced 4 million tonnes of beans, lentils, chickpeas, and peas, down 10% from 2018/19. In Brazil, the bean harvest is just under 3 million tonnes per season, with gross production value estimated by the government at R$15 billion this year.
It is worth remembering that Brazil makes occasional imports of black beans from China, especially when there are difficulties in Argentina, which supplies 90% of the 100,000 tonnes imported by the country annually.
Although the Chinese do not consume beans as much as Brazilians, the demand for processing has been growing in the country, for use in human food and animal feed. According to Ibrafe, between 2018 and 2021 there was a 172.3% increase in Chinese imports of mung beans, 819.7% in purchases of pinto beans, 503.7% in red beans, 2.8% in peas, and 79.7% in chickpeas.
According to Mr. Araújo, Canada currently supplies 93% of pulses imported by China, while the United States keeps the rest. The world market for beans and pulses is worth $26 billion annually, according to the Brazilian Institute of the Bean (Ibrafe), and it is natural that China’s greater appetite, considering its population of 1.4 billion, will transform the landscape.
In addition, Larissa Wachholz, former special advisor to former Minister Tereza Cristina (Agriculture) for issues related to China and partner at Vallya Agro, stressed that the growth of China’s middle to lower-middle class, today with about 800 million people, has broadened the debate on food security and health.
“There is a trend that those people who have moved to urban areas and achieved a better income be more concerned about food diversification and nutritional issues. Pulses fall into that category, which is a great opportunity for Brazil,” he said.
Despite the euphoria of the Brazilian private sector, Fábio Coelho Correa de Araújo, Brazilian agricultural attaché in China, reinforced, in an interview with Valor, that the Chinese questionnaire does not mean official interest in buying Brazilian products. At least for now. “The opening of the market for plant products is done through risk analysis of the product, and this can take months or years.”
This does not discourage optimists, though. And Marcelo Lüders, president of Ibrafe, is one of them. “With the problems of the war in Ukraine, the Chinese needed to expand their peanut suppliers and authorized Brazilian purchases in a few months. The same can happen with pulses,” he said.
It was Mr. Lüders who forwarded the questionnaire received from the Chinese to Embrapa (Brazilian Agricultural Research Corporation Rice and Beans) and IAC (Agronomic Institute of Campinas). But both are waiting for an official request from the Ministry of Agriculture to contribute with the technical aspects.
System integrator competes with Ericsson and Nokia; in Brazil, Telefónica’s Vivo is a client
12/13/2022
U.S.-based company Mavenir is taking advantage of the deployment of the 5G wireless technology in Brazil by phone carriers to expand its presence in the country. A provider of network software in the cloud, with end-to-end operations, Mavenir is a systems integrator that competes with large suppliers such as Ericsson and Nokia. In Brazil, it has already won Telefónica’s Vivo as a client. Now, it is negotiating with other large carriers and regional providers, according to Antonio Correa, senior regional vice president for Southern Europe, the Caribbean, and Latin America.
Mavenir has been a Vivo supplier for seven years for messaging systems and three years for cybersecurity. To serve the phone carrier in this last project, it has established a commercial partnership with NEC, said Mr. Correa.
Vivo declined to comment. NEC said that the alliance was designed for the integration of a “proof of concept” of open RAN (open network, with different suppliers) for Vivo in Pernambuco. Mavenir wanted the Japanese multinational to lead the equipment implementation process. The result was considered very positive, according to NEC, and served at the time as a successful case of network architecture for the two companies worldwide.
Mavenir serves more than 250 communication service providers in 120 countries and employs 5,000 people around the world. The company expects to post a global revenue of $750 million this year. In Brazil, the operation is still small.
The company, which is focused on applications for 5G technology, made a capital increase of $155 million in October. The company has raised $250 million in strategic capital since July. The funds will be used to finance products that drive the company’s growth.
With the capital increase, Siris, a private-equity firm focused on technology, which was the first investor, remained the largest shareholder. In the last four years, Koch Strategic Platforms, a subsidiary of Koch Industries, and microprocessor manufacturers Intel and Nvidia have joined as minority shareholders.
On Mavenir’s website, CEO Pardeep Kohli said that it took seven years for the company to reach its current level and that he has spent the last three years building a team to design and build radios for network communication. In the case of Brazil, Mr. Correa said that there is interest in assembling these open RAN radios, but this will first depend on the business “getting off the ground.”
Anderson André — Foto: Divulgação
“We have global assembly partners, including in Brazil, to start [producing] as soon as we have contracts,” said Mavenir’s vice president for Brazil, Anderson André. The primary production process will be the model used.
Mr. Correa said that he started to focus on Latin America in the last three years, mainly interested in increasing the company’s presence in Brazil, due to the potential 5G market and integrating its geographical service area, which became its territory almost three years ago. The executive said that besides negotiating with providers and phone carriers, he has also talked to integrators already established in Brazil with the aim of expanding the service arm and accelerating opportunities in the local market.
For now, the investments in Brazil are with personnel. The company has an office in São Paulo and a team in Rio de Janeiro.
Anderson André said that an ecosystem of integrators is being built that will “sew” the pieces to supply customers. The executive is confident in the wide range of possibilities that are opening up with 5G to serve the corporate market that operates in wholesale and retail.
Market participants are already working with real rate of 5%
12/13/2022
As discussions about public spending move forward with the Transition PEC (proposal to amend the Constitution), the worsening perception of fiscal risk and the possibility of increased subsidized loans via state-owned banks have put pressure on the neutral rate of interest, the one that neither speeds nor slows economic growth. The international landscape is not helpful either, with tighter monetary conditions in the major economies, which props up the feeling that the local interest rate will remain at higher levels in the future.
The lower levels of neutral rates of interest have been left behind. Before the pandemic, the Central Bank and the market worked in their scenarios with a neutral rate of interest of around 3% in real terms. In June, the monetary authority started to adopt in its scenarios a neutral real rate of 4%, but in the last few weeks the market has been working with even higher numbers –some institutions have already put in their scenarios a neutral rate of interest of 5%.
In the Banco Original’s calculations, which consider the difference between the key interest rate Selic and the IPCA (Brazil’s official inflation index) estimated by the Focus (Central Bank’s weekly survey with economists) for a three-year period ahead, the neutral rate of interest implicit in the expectations of market economists is 4.9% in real terms. The environment with a higher neutral rate makes it clear that, in the market’s view, even if the Selic does not rise above the current level of 13.75% per year, it will not fall as much as was expected months ago. This is linked to recent scenarios of market participants who have raised projections for the Selic in 2023 and 2024.
Fernando Genta — Foto: Silvia Zamboni/Valor
This is the case of XP Asset Management, whose central scenario includes a neutral real interest rate of 5%, with an upward bias, said chief economist Fernando Genta. For him, the signs of neutral rate of interest hike are “unequivocal” and Brazil is likely to transition to a new macroeconomic balance of higher public spending, higher interest rates, faster inflation, and some increase in the tax burden.
“With the prospect of higher public spending, the Focus survey is likely to show upward revisions in the Selic projections, with no downward revisions in inflation expectations. This combination of more interest and inflation expected, for an extended period, is interpreted by the model as an increase in neutral rates of interest,” said Mr. Genta, who was assistant secretary of the Ministry of Economy between 2017 and 2018.
The most recent discussions about possible changes to the Long-Term Rate (TLP) also interfere with the sense of a higher neutral rate of interest. Rumors that former Minister Aloizio Mercadante may take over the Brazilian Development Bank (BNDES) in the next administration gained steam Monday and impacted long-term interest rates substantially. The interbank deposit (DI) rate for January 2027 rose to 13.05% from 12.865%; while the DI for January 2029 climbed to 13.1% from 12.9%.
Last week, Mr. Mercadante criticized what he considers an excessive transfer of profit from the BNDES to the National Treasury, advocated the bank’s role as a booster of industry and guarantor of long-term loans and, internally, also discussed ways to rebuild the bank’s funding system and change the TLP. The presidential transition team’s view is that, besides being excessively high, the TLP is inflexible and, thus, inefficient.
In Mr. Genta’s view, the recent discussion about changes in the TLP moves in the direction of a higher neutral rate of interest, since, in case of reversal and return to the previous scenario, the power of monetary policy would be weakened. “As you increase the percentage of credit not impacted by monetary policy, you need a higher interest rate to achieve the same impact on inflation. It may sound semantic, but I think this is more a reduction in the power of monetary policy per se rather than a rise in the neutral rate of interest. But both things go together,” he said.
Banks such as Credit Suisse and Citi are also working in their scenarios with a neutral real interest rate of 5%. Santander embeds in its scenarios a neutral rate of interest of 4%, but stressed that this variable shows some tendency to the upside.
“Our calculations, which are based on the real yield curve and smooth market moves, the neutral rate of interest is actually moving towards 5%. We are not incorporating this into our scenario yet; we are waiting for fiscal decisions and signals about economic policy,” said Mauricio Oreng, Santander’s head of economic research. While uncertainty is high, he said, “in fact, there is a preliminary indication that the neutral rate of interest may be going to 5%.”
“All else constant, a higher neutral rate of interest also means that the neutral primary result gets higher,” said Mr. Oreng, as he points to the fiscal challenges ahead. “And we are also seeing a scenario where international interest is higher. For a few years ahead we will be working with a higher interest rate abroad. The environment with Fed funds at 5% is quite different from what we expected before.”
When evaluating the recent history of the neutral rate of interest, Mr. Oreng recalled that, after Congress passed the pension reform and TLP was put in place, the risk premiums of Brazilian assets fell to “very low” levels, which led the market to project a neutral rate of interest of 3%. “However, the evolution of the post-pension reform scenario, with new discussions of the fiscal framework and spending above the cap, led to a higher neutral rate of interest scenario. If we excluded the pension reform, our interest rate would be at an even higher level.”
The baseline scenario of Apex Capital’s chief economist Alexandre Bassoli includes the neutral rate of interest at 5% in real terms. “The trend has been upward since the pandemic. The estimates of the Central Bank itself, which used to be 3%, went to 4%. There is a global component because clearly there is a trend of a significant increase in interest rates in the world, but there is also a local component, which is the issue of the risk premium, which is related mainly to fiscal uncertainty.”
Mr. Bassoli points out that the spending cap brought predictability to public spending and increased the confidence of economic agents. “It is unclear what kind of regime may come to be adopted, but if the adoption of the cap contributed to reduce the neutral rate of interest, the extinction of the cap increases the rate.”
Original’s chief economist Marco Antonio Caruso observed the same. “If you have a federal administration willing to reduce public savings, there is, in theory, less availability of funds, and this helps you to have a higher neutral rate. Brazil has a high debt – almost 20% above its emerging peers – and the signaling of an increase in this debt causes risk premiums to rise. This also brings a higher neutral rate of interest,” said Mr. Caruso.
Since the neutral interest rate is an unobservable variable, according to Mr. Caruso, the evidence of a higher neutral rate of interest may show up in the economy through slower disinflationary processes and higher nominal rates for longer periods.
Mr. Caruso also draws attention to the recent discussion on the resumption of the Long-Term Interest Rate (TJLP). “BNDES used to offer subsidized loans to large companies, in relevant volumes. You end up making a large part of the economy’s credit unresponsive to monetary policy. If this scenario comes back, it would also require a structurally higher interest rate over time,” the economist said.
Cautious messages about the resumption of subsidized interest rates have even been sent by Central Bank authorities, especially by the monetary authority’s president, Roberto Campos Neto, in recent events. But despite the discussion being on the rise among market players in recent months, Mr. Caruso does not believe there will be any sharp change in the neutral rate of interest in the Central Bank’s next communications.
“The Central Bank is a ‘taker’ of fiscal information and cannot assume things that are not yet materialized. And it would be strange. Nature does not make jumps. It is difficult for the Central Bank to indicate that it has a high conviction that an unobservable variable went to 5% from 4% overnight. I think it would be a longer and more discussed process,” he said.
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