Last months were marked by consistent deceleration of price hikes
10/01/2023
Inflation has surprised once again to the upside at the end of 2022, raising the full result for the year. The benchmark inflation index IPCA rose by 0.62% in December, above the 0.61% ceiling of the projections gathered by Valor Data — the median was 0.45%. Thus, last year closed with an inflation of 5.8%, against a market expectation of 5.6%.
According to economists’ evaluation, inflation is still high, although it represents a significant slowdown considering the 10.1% reported in 2021 and the peak of 12.13% reached in the 12 months until April. Despite that, for the second year in a row, the Central Bank will need to write a letter to the finance minister justifying why the IPCA missed the target, which was 3.5% in 2022, with a tolerance of up to 5%.
The last months of last year saw a deceleration in 12 months, but the IPCA remained at double-digit levels between September 2021 (10.25%) and July 2022 (10.07%). The projection for last year’s inflation was much higher than what was actually observed, had it not been for the government’s intervention at the time. Amid the electoral race, then-President Jair Bolsonaro cut taxes on important items.
Considering deflations in fuel (-23.9%, after a 49.02% high in 2021), electricity (-19.01%), and internet services (-12.09%), this “hand of the government” reduced inflation by 2.16 percentage points, said Luis Otávio de Souza Leal, chief economist at Banco Alfa.
Gasoline alone fell 25.78% in 2022, after a high of 47.49% in 2021, exerting the greatest individual impact (-1.7 percentage points) on holding down the IPCA for 2022. Besides the effect of the lower ICMS, there was also the influence of falling fuel prices at refineries, set by Petrobras throughout the year.
“Excluding the gasoline and electricity sub-items from the inflation calculation, the IPCA would have been 9.56%,” said André Filipe Guedes, an analyst at the statistics agency IBGE.
Administered prices (those regulated by contract or public agency) saw a deflation of 3.83% in 2022 after rising almost 17% in 2021, according to MCM Consultores. Free prices, on the other hand, had accelerated to 9.39% from 7.7%.
Among the main influences for the IPCA’s rise are items related to automobiles — be it taxes, services, or the vehicle itself. The automotive industry was one of those that most felt the effects of the disorganization of the production chain brought about by the pandemic, with more expensive inputs and a lack of raw materials. As the prices of taxes and services follow the variation in car prices, they are also affected.
The behavior of industrial goods, however, ended up affecting the average of the measures that try to soften the effect of more volatile items and are closely monitored by the Central Bank, which went to 0.66% in December from 0.33% in November.
*By Anaïs Fernandes, Lucianne Carneiro — São Paulo, Rio de Janeiro
Peculiarities of the sanitation sector, however, will require a negotiation with the municipalities
01/09/2023
Natália Resende — Foto: Silvia Costanti / Valor.
The São Paulo state government will study the privatization of water and waste management state-run company Sabesp in the same way as was done for Eletrobras — considering the peculiarities of the sanitation sector, though — which will require a negotiation with the municipalities served by the company. According to Natália Resende, who took over the recently created “super-secretariat” of Environment, Infrastructure and Logistics of the State, the initial step will be taken in the first 100 days of the administration, carrying out the contracts for the studies. In the process, other privatization models may also be evaluated, she says.
“We are going to detail each of the scenarios. Of course we already have a feeling, a smell, so when we talk about the Eletrobras privatization model it’s because we really see there [an interesting format]. But we will certainly study the proposals that emerge”, he says.
In an interview with Valor, Ms. Resende also talked about other plans ahead of the secretariat, which brought together the Transport and Logistics and Infrastructure and Environment Secretariats.
Among the projects under analysis is the privatization of the Metropolitan Company of Water and Energy (Emae), which is expected to have a call for a bid this year; the plan for reducing the effects of pollution of rivers, which may be connected to the privatization of Sabesp and Emae; the concession for coastal ferries, in a PPP format; and the possible resumption of a state project to get the Santos-Guarujá dry link off the drawing board, in case the federal government does not move ahead with the tunnel, included in the privatization of the Port of Santos.
Federal Attorney General’s Office (AGU), Ms. Resende served as a legal advisor to the Ministry of Infrastructure under the current governor of São Paulo, Tarcísio de Freitas (Republicans) — and, according to her, helped in the structuring of “a hundred infrastructure auctions”.
Read below the main excerpts of the interview:
“We are going to study the privatization of Sabesp, which includes privatization. If this is the best option, we will move towards it,” says the secretary. According to her, the goal is to anticipate the universalization of the water and sewage services in the State and improve the services provided to the final user.
In the 375 cities served by Sabesp, water supply is universal (98%), but water losses still represent 16% of the total produced. The sewage collection coverage is 92%, and the treatment, is 78%, according to data from 2021.
Ms. Resende says the idea is to study a combination of the Eletrobras privatization model (done by selling the state-owned company’s shares on the Stock Exchange) with the peculiarities of the basic sanitation sector. In the process of selling the power company’s control, there was a dilution of the federal government’s shareholding, through a capital increase.
In the case of the water and sewage sector, the main difference is that the competence of the service lies with the municipality. This means that it will be necessary to renegotiate contracts with the municipalities if Sabesp wants to make changes — for example, to extend terms or add investments. “We need to talk to the municipalities. This we will do. There are several contracts with different deadlines, and we want to bring forward universalization. To do this, we need more investment,” he says.
When asked about the possibility of the State keeping a “golden share” (a special share with veto power), she says that the topic will also be studied.
Also asked about other forms of privatization, such as direct sale, block concession, or capitalization, she said that different models would be analyzed, but highlighted that it is necessary to have focus. “Several proposals will arise in the process. What you cannot do is lose focus.”
There is still no timeline for the privatization process. This will be defined in the studies, which will be contracted in the first 100 days of the administration.
Regarding the discussion in the federal government about changes in the sanitation law, Ms. Resende says that the idea was poorly received. “When I looked [at the Provisional Measure that proposed changes to the National Water Agency], it caused me a lot of concern. Then they said that it was a mistake. It’s okay, mistakes happen, but the sanitation agenda is a high priority, it has to be given a lot of attention.”
The secretary says that it will still be necessary to wait for the federal proposals to ponder the possible impacts on the State’s plans. “On our side, we will do our best to protect and do what we think is right.”
Foreign banks show signs of concern with directions pointed by new government
01/09/2023
After the noises emitted by the new government provoked days of high tension among local market players, foreign banks have now started to send messages of greater caution with the directions indicated by the Lula administration, worsening their projections for the trajectory of Brazilian assets.
Besides increasing the uncertainties about the performance of the local market, the move seems to give strength to the thesis that foreign players take a little more time to react to domestic political news.
For Morgan Stanley, the context of fiscal worsening and uncertainties about the framework that will discipline public spending in the coming years was translated into a worsening of the prospects for Brazilian assets. The American bank even cited in a recent report “echoes of the fiscal deterioration experienced in 2015 and 2016” in local markets.
“We reaffirm that, from the exchange rate point of view, the attractive spread [i.e., high-interest rates] will not be sufficient to avoid more significant depreciations if external accounts and the fiscal outlook continue to deteriorate,” stated the report. The bank’s strategy team reaffirms a pessimistic view of the real. “We believe that the BRL [real] should underperform emerging market peers due to the risks of political uncertainty and we have opened a short position against the South African rand.”
As for interest rates, the institution considers a process of falling rates unlikely, preferring to adopt a trend which gains from rising local rates. “We remain very focused on inflation expectations for 2024 and 2025, as further de-anchoring may lead markets to price a resumption of the high cycle in 2023 — which is not the base scenario, for now,” they assess.
The higher interest rates for longer are expected to undermine the story of apparently attractive valuation for local stocks. “If we are correct in our assessment, the next few years should not be good for domestic stocks,” said the Morgan Stanley analysts, who maintained a “neutral” recommendation for local stocks.
In the first week of the new administration, Commerzbank sent its clients a note asking, “what does Lula represent for the real?” In response, the German bank said “probably nothing positive.” According to Antje Praefcke, Commerzbank’s senior foreign exchange analyst, Brazil’s fiscal scenario and the sustainability of public debt has been a stumbling block for investors for some time. Now the situation is likely to get worse, as the government plans adjustments to the spending cap to facilitate the increase in social spending it promised during its election campaign.
“Lula will have to manage to improve it [the debt], either with the help of spending cuts or revenue increases. No easy task in times of high inflation and deep political division. The prospect of higher spending will probably make investors even more skeptical and may drive them away completely.”
For the analyst, two questions will be decisive for the Brazilian currency over 2023. The first is whether Mr. Lula will manage to control the fiscal situation or whether it will deteriorate with adjustment to the spending cap. The second is how the Central Bank will react to the evolution of the budget and whether the monetary authority will continue to be an anchor for the stability of the real. “It is likely that times will get tough for the real. If investors question Mr. Lula’s budget policy and the Central Bank’s monetary policy, the currency is likely to depreciate rapidly, with the biggest risk probably being fiscal policy.”
Wells Fargo: fiscal fears materializing — Foto: Scott Eells/Bloomberg
Another foreign institution to raise concerns about the new government’s early directions was Wells Fargo. “With Lula now officially sworn in, the fiscal fears that have pre-emptively shaken investors are beginning to materialize and further affecting market participants’ confidence,” the institution said in a report.
Wells Fargo calls attention to the fiscal expansion already approved in the Transition PEC, while there is the prospect of using state-owned banks to leverage economic activity. “We believe that this new direction of fiscal policy will end up being inflationary, and we now believe that the CB will delay monetary policy easing until the third quarter of 2023,” said the bank report.
Thus, Wells Fargo recognizes that its projection made at the beginning of the year, that the dollar would end the first quarter trading in the R$5.30 range, runs the risk of not materializing. “Should future policy decisions indicate further erosion of fiscal responsibility, we will adjust our USD/BRL outlook to reflect likely pending capital outflows that would put depreciation pressure on the currency,” he said.
For Eirini Tsekeridou, Julius Baer’s fixed income analyst, the announced extension of the tax exemption on fuel prices not only affects tax collection but was also a “rug-pulling of Minister [Fernando] Haddad,” who was against the measure, weakening his credibility and also the country’s commitment to fiscal responsibility.
“There is still no clarity regarding Brazil’s fiscal structure, including the replacement of the spending cap, so until we have more visibility on Lula’s strategy, the real will likely remain volatile and affected by news flow,” Ms. Tsekeridou told Valor.
The Oxford Economics consultancy was another institution that revised its scenario for the country. As pointed out by Regis Chatellier, director and emerging markets strategist, Brazil’s fiscal outlook has deteriorated following the recent increase in the spending cap and Mr. Lula’s post-election speech. “In this context, inflation should remain relatively high and the CB’s interest rate cuts will be much slower than anticipated. We believe risk premiums will remain high, with strong investor positioning also limiting the appreciation of Brazilian bonds,” he said.
Mr. Chatellier says that premiums on Brazilian bonds are relatively high, which ends up being a buffer for risks. “However, we believe that risk premiums embedded in LTNs and NTN-Fs will remain elevated given the deteriorating fiscal outlook and slower normalization of monetary policy,” he added. “We cut our recommendation for exposure to local Brazilian bonds to ‘neutral’ from the above market average.”
*By Arthur Cagliari, Gabriel Roca, Matheus Prado — São Paulo
If unsuccessful with bloc, negotiation can be individual
01/09/2023
China says it is ready to negotiate a free trade agreement with Mercosur or separately with any partner of the bloc. It is an issue of impact that is unlikely to be left out of the visit that President Luiz Inácio Lula da Silva (Workers’ Party, PT) plans to make to China in the near future.
During the 20th Congress of the Chinese Communist Party in October, a report presented by President Xi Jinping highlighted China’s strategy to seek “greater integration in the global industrial chain and supply chain and (continue) to promote the liberalization and facilitation of trade and investment.”
To this end, the country will continue to negotiate “high-standard free trade agreements” with its trading partners. “In short, China’s opening door to the world will be opening wider and wider. This will certainly create more opportunities for its own development and for the rest of the world.”
Li Chenggang — Foto: Denis Balibouse/Reuters
In late November, during the examination of Brazil’s trade policy at the World Trade Organization (WTO), Chinese Ambassador Li Chenggang noted that Brazil has concluded several free trade agreements and renewed or started new negotiations, and gave Beijing’s message: “China believes it is crucial to improve Brazil’s regional integration and export diversification. In this regard, China encourages Brazil to play an active role in expanding Mercosur’s network of regional trade agreements with key trading partners.” He also recalled that China is Brazil’s largest trading partner since 2009, the largest market for Brazilian exports, a major source of imports for Brazil and contributes heavily in Brazil’s trade surplus.
Asked by Valor to elaborate on the ambassador’s speech, the Chinese Ministry of Commerce (Mofcom) replied clearly: “This means that China is willing to negotiate a free trade agreement (FTA) with Mercosur as a whole or an FTA with any Mercosur member.”
Beijing has already concluded 22 free trade agreements, for example with Chile and Peru in South America, besides ten under negotiation and eight “under consideration”, such as with Colombia. It has also made a feasibility study of an agreement with Uruguay, which in practice would cause the dismantling of Mercosur as a customs union. Diplomatically, for Beijing it would be better to negotiate with Mercosur as a whole. But it confirms plan B to negotiate separately.
The Bolsonaro administration has never hidden its skepticism and little sympathy for Mercosur. The Lula administration, on the other hand, has signaled the importance of the bloc not only economically, but politically and strategically. The reaction to Beijing’s plan will certainly be different.
The discussion becomes less defensive regarding China. The diplomat and economist Tatiana Rosito prepared a document along these lines on “Bases for a long-term strategy for Brazil towards China,” at the request of the Brazil China Business Council (CEBC), in 2020. Ms. Rosito is now the new secretary for International Economic Affairs at the Ministry of Finance.
In the document she notes that, due to the expected impacts, there is a way to go for Brazil (and the Mercosur partners) in the negotiations of international agreements before dealing with free trade with China, “but this theme should not be taboo and should be increasingly considered through an approach that can lead Brazil and the different sectors of the Brazilian economy to dwell on the gains and losses of increased trade with China.”
Ms. Rosito cites a 2019 study by the Applied Economics Research Institute (IPEA), “Impact assessment of a Brazil-China Free Trade Agreement on the Brazilian Economy,” which points to “unequivocally positive results for the Brazilian economy, with gains in GDP, investment, exports, and imports. The trade balance would be slightly worse, but there would be a significant reduction in the aggregate price level and an increase in the degree of openness of the economy.”
“The fact that opening up to China would promote large export gains even in ‘unexpected’ sectors is a highly relevant result,” the study says, noting that production and employment losses in some sectors require debate on the issue.
The study uses a general equilibrium model that causes skepticism. It is not because of tariffs that Brazil does not export other products, outside the list of commodities, to China, but because it does not have the competitiveness, scale or efficiency to serve the gigantic Chinese market.
“I don’t know of any segment [in Brazil] that, first, has enough production, and second, that has the appetite to take the risk of increasing business in a market that size. China is not a market for selling surpluses, distributors have no interest in small volumes,” says Marcos Caramuru, former Brazilian ambassador to China (2016-2018), partner at consultancy Kemu and a leading China expert.
When Mr. Lula raises in Beijing the recurrent complaint of lack of diversification of Brazilian sales to the Chinese market, the answer will certainly be to discuss agreements.
For Renato da Fonseca, Industrial Development superintendent at the National Confederation of Industry (CNI), it is not necessary to start with a free trade agreement. He suggests a trade facilitation agreement as a kick-off.
Brazil’s next harvest is expected to be “normal” compared to the last two, which were seriously affected by the weather, experts say
01/05/2023
Brazil is in the off-season of a smaller production cycle, and the next one is not expected to be a “super-crop” — Foto: Silvia Zamboni/Valor
With divergent estimates, the real size of Brazil’s 2022 coffee harvest is still unknown. And, even as this is taken into account, coffee prices may face surprises in the first half of the year.
This is because Brazil is in the off-season (January to June) of a smaller production cycle, and the next one is not expected to be a “super-crop,” as international market agents believed.
In the importers’ view, the trees would be rested from bad weather, and the cycle could surprise to the upside. However, nature is responding differently. The 2023 harvest will be good, sources say, but smaller than 2020 — a record year that yielded 63 million bags, and that had been propping up buyers’ expectations.
Analysts are cautious about projections for prices, but some see them going up. “We are in the off-season of a crop that was much smaller,” said Eduardo Carvalhaes, from Escritório Carvalhaes. There is no exact dimension of the shortfall or the stocks in the country.
The Brazilian production of coffee (Arabica and Robusta) harvested in 2022 is projected with a large gap. While the National Supply Company (Conab) indicates 51 million bags, the U.S. Department of Agriculture (USDA) foresees 62 million bags.
For Fernando Maximiliano, an analyst at StoneX, it will be necessary to observe the pace of Brazilian exports in the coming months, a factor that will show the availability of grains and the appetite of the foreign market. This can still affect prices, he said.
The international and domestic prices are on a downward path in the last few months, after an intense price rise that gained strength after the frosts in July 2021. But despite the recent drops, the 2022 annual average in New York, of $2.1283 per pound, exceeds by 25% the average level of 2021, according to Valor Data.
Gil Barabach, an analyst at Safras & Mercados, said that there is usually a mismatch between the foreign and domestic markets during Brazil’s off-season. He sees room for recovery of domestic prices, but the weak demand abroad has curbed increases.
Attention now turns to the first figures for the 2023 harvest, which are expected to be released soon. StoneX, for example, is in the middle of an analysis in the field and will unveil a projection in mid-February.
Sources consulted by Valor from the main producing regions in Minas Gerais say that the next harvest will be, at least, “normal,” if compared to the last two seriously affected by the weather. The harvest is still under development. January to May is the time of grain expansion, a phase that still depends on the weather.
The agronomist Adriano de Rezende, technical coordinator of the Minasul cooperative, the second largest exporting center after Cooxupé cooperative, explains that 95% of the coffee fruit is formed by carbohydrates acquired through photosynthesis.
For the process to run smoothly, rain, adequate temperature, and sunshine will be necessary until May, the harvest time. Only 5% of the carbohydrate arises with the help of fertilizer. According to him, until now, fruit setting (transformation of the flower into fruit) has been a little impaired in the south of Minas Gerais by low temperatures and poorly distributed rainfall.
But both in the Minasul region and in Patrocínio, in the Cerrado region of Minas Gerais, considered stars in the global production of Arabica coffee, the 2023 harvest is expected to exceed the production of 2021 and 2022, and will be below that of 2020.
According to Simão Lima, head of the Cooperative of Coffee Growers of the Cerrado (Expocaccer), productivity is estimated at 32 bags per hectare this harvest, compared to 27 bags per hectare in 2022. Mr. Lima estimated that the region may supply nearly 6.5 million bags, but made it clear that it is still early to determine figures.
The rainfall is favorable in the Cerrado, and an atypical second blooming has occurred in December in some places. With this, there will be coffee beans at different stages of maturity at harvest time, but this is not an alarming factor, he said.
After investing heavily in energy sector, China’s next target may be electrified railroads, says Luiz Augusto de Castro Neves, a former ambassador in China
01/05/2023
Divulgação — Foto: Luiz Augusto de Castro Neves
Brazil’s relations with China, its largest trading partner, could gain new steam if the Lula administration puts in place measures to cut red tape and ease exports. Chinese investments in Brazil could also increase once the regulatory environment here becomes clearer.
This is the view of Luiz Augusto de Castro Neves, a former Brazilian ambassador in Beijing, who for years has maintained a constant dialogue with businesspeople and executives from both countries and knows the mutual demands well.
After having lived four years in China, Mr. Neves presides the Brazil-China Business Council (CEBC), an entity that brings together large Brazilian groups like Bradesco, Itaú Unibanco, Banco do Brasil, BRF, JBS, Klabin, Suzano, Petrobras, and Vale. Among the members with Chinese capital are 99, CPFL Energia, and Bank of Communications.
In an interview to Valor, Mr. Neves says that after the Chinese have invested heavily in the power industry in Brazil, their next target may be electrified railroads to improve the transportation of Brazilian commodities to the ports.
He also sees a growing interest from China for more products from Brazil, beyond the few products that today dominate exports to China – soybeans, iron ore, meat, oil, and sugar. But this expansion and diversification require internal changes. “As long as we are in a position to supply these products competitively in the international market,” he said.
The former ambassador also says that the return of a leftist government, headed by Mr. Lula — who is, in theory, more aligned with Beijing than the right-wing Mr. Bolsonaro — is unlikely to bring, by itself, more fluidity to trade and investment. “Historically, the Chinese have always separated their foreign policy from ideological aspects.”
Read the main excerpts from the interview below:
Valor:What should the Brazilian government do to stimulate an increase in Brazilian exports to China and a greater diversification of these exports?
Luiz Augusto de Castro Neves: There are many obstacles, and one is the tax issue. Companies pay taxes to export. Another issue: there is often a bureaucratic entanglement for companies to export that makes Brazilian exports less competitive. In other words, it contributes to making Brazilian exports more expensive. The Brazilian government could facilitate exports, which is not easy. Export licenses and several required bureaucratic steps make our exports more expensive. This affects Brazilian exports in general, including to China, which is our main customer.
Valor:Regarding Chinese investments in Brazil, what obstacles could be removed by the government?
Mr. Neves: The regulatory environment in Brazil often hinders foreign investments here. A few years ago, a Chinese ambassador told me that all he needed was to better understand the regulatory environment in Brazil, what they could do, and what they couldn’t do in terms of investments. My answer was: “Listen, whoever finds out first tells the other.” And there is an interesting aspect of Chinese investments in Brazil. That is, the Chinese have a strong interest in Brazil becoming a great exporting and competitive nation because they are our clients. Chinese investments in Brazil exceed $70 billion, which is equivalent to less than two years of Brazilian exports to China.
Remember that the Chinese interest in Brazil has to do with the fact that a country with more than 1 billion inhabitants is very concerned about ensuring supplements to feed its population. And Brazil is one of the few countries in the world that can meet a large part of this Chinese demand for food. In this sense, investment in infrastructure helps Brazil to become more competitive in the world market. This is positive for Brazil as an exporter, but it is also positive for China, as an importer that wants more competitive prices.
Valor:Still about Chinese investments in Brazil, what new areas could be on their radar?
Mr. Neves: They have already invested in the power generation industry. The Belo Monte hydroelectric plant, for instance. They have invested in power transmission and more recently in distribution, with the acquisition of CPFL, Brazil’s largest power distribution company. In my view, they are going to invest in electrified railroads to transport, for example, soybeans by rail and not by truck, as happens today, when a substantial part of the harvest is lost in transportation.
Valor:Has this possible Chinese investment in electrified railroads in Brazil already been discussed with you directly?
Mr. Neves: I lived in China for four years and have been president of the Brazil-China Business Council for several years. Nobody told me what the Chinese goal is, but the Chinese goal is to invest in infrastructure to ensure a better transportation of goods for export.
Valor:Unlike other partners of China, Brazil has not joined the Belt and Road Initiative, launched a few years ago by President Xi Jinping, to enable investments in infrastructure to facilitate the flow of products to the Chinese market. Would Brazil’s joining this project help commercial relations?
Mr. Neves: It could help, but the economic trade and investment relationship between Brazil and China are so dynamic that we can ask if it is worthwhile for Brazil to join this Chinese project. There is great dynamism in the relations between the two countries: the Chinese are our biggest exporters and importers. And there is also a dynamism of Chinese investments, which would grow and be much more dynamic if the regulatory environment in Brazil was clearer and more predictable.
Valor:Does the fact that Brazil will be governed again by President Lula, a leftist leader, tend to have any impact on trade and investment relations with China?
Mr. Neves: No, I do not believe so. Throughout the four years of the Bolsonaro administration, trade between Brazil and China has remained dynamic. Historically, the Chinese have always separated their foreign policy from ideological aspects.
Valor:Is there any big issue to be solved today between the two countries from a trade standpoint?
Mr. Neves: All countries which have intense commercial and financial relations also have aspects subject to controversy. Brazil complains about certain phytosanitary barriers for exporting food to China, and the Chinese complain, for example, about the Brazilian regulatory environment and the doubts generated regarding whether they can invest in this or that sector.
Valor:Are there conditions in the Chinese economy for more Brazilian products to have more significant sales?
Mr. Neves: Yes, there are. When President Xi Jinping announced changes in China’s economic policy, the goals are still the same. The means vary a little. He said the model that allowed China to grow for 40 years at double-digit levels has in a way run out. Among other reasons, it depends a lot on the level of economic activity of the rest of the world economy. And today it is turning more to China’s internal consumption, among other reasons because China’s economic growth was spectacular, but it generated a great inequality. President Xi Jinping was already talking about this in 2007 when I was living there. He already said that China’s model was not sustainable in the long term and that at some point a more inward-looking model would be needed. This means that the Chinese people will consume more and save less. Although not at spectacular rates, the country will continue to grow, and this creates a demand in China for Brazilian products, as long as we are in a position to supply these products competitively in the international market.
Senator Prates, picked by President Lula to run state-owned oil company, said prices will be aligned with international market
01/05/2023
Jean Paul Prates — Foto: Edilson Rodrigues/Agência Senado
Senator Jean Paul Prates, picked by President Luiz Inácio Lula da Silva to head Petrobras, said Wednesday that the promised change in the fuel price policy will not include a direct intervention in the market.
Mr. Prates also made it clear that the calculation for price rises will continue in line with what is practiced internationally – but will no longer follow the so-called import parity price, a policy put in place in 2016, during the Temer administration, in which the variation of Brazilian fuel prices occurs according to the prices of oil and oil products in the main markets. “It will not unlink from the international price, it will unlink from the import parity, without imposing a tariff, with no direct intervention in the market, just using the competitive advantage,” he said.
Mr. Prates’s statements brought some relief to local assets in the trading session and allowed Brazil’s benchmark stock index Ibovespa to rise for the first time in 2023 driven by the appreciation of Petrobras shares. The stocks ended the day up 1.67% (common shares) and 3.18% (preferred shares).
He also guaranteed that the measures will be taken in a predictable way. “Saying that the IPP will end doesn’t mean the price will be disassociated from international swings. Only that we will use the fact that it is produced domestically in favor of the Brazilian economy. We will discuss it with all interested parties,” he said.
Mr. Prates spoke to reporters after the inauguration ceremony of Vice President Geraldo Alckmin as Minister of Development, Industry, Commerce, and Services (MDIC). Among other measures under study, Petrobras’s future CEO advocated that a stabilization account for fuel prices must be followed by other measures such as an “ad rem” rate – in currency, instead of percentage – and the return of the federal tax Cide “to recover the collection of the states.”
He also said that the measure is implemented quickly, comparing its absence to being in a car without wearing a seatbelt. “I think it is important to have [the stabilization account soon]. You’re always at risk. You’re riding without a seatbelt,” he said. “I think having a cushion like that, and then suddenly using Cide again, getting some of the revenue back for the states somehow, using a flat, ad rem tariff. Putting currency instead of percentage, because when the price goes up, the tax does not go up in the same proportion. But at least the price is not inflated from the inside,” he said. “If you use ad rem, single-phase tariff, single rate, and the states are comfortable, it’s good, it works. The problem is that cutting taxes from the states abruptly was an emergency solution,” he added.
President Jair Bolsonaro eliminated the collection of federal taxes (Cide and social taxes PIS and Cofins) on fuels last year, amid the rise caused by the war in Ukraine. He also sponsored a bill that transformed fuels into essential products, limiting the collection of the sale tax ICMS to the minimum rate of each state, between 17% and 18%.
The measure reduced prices, but also affected revenue collection by state governments. “No structural solution was put in place. The solution was to take money from states,” he said. “It’s not a smart solution. It is even a somewhat punitive palliative. You are not fighting volatility. If another country goes to war with an oil-producing country, you won’t have anywhere else to cut. There was not a solution.”
Mr. Prates reiterated that the price policy will not “revoke the market,” but will take into account “the actions of the National Petroleum Agency, the ministry, and the market practice.”
The senator also said that the pricing policy is the country’s, not the oil company’s. “Petrobras follows the context. The instance of Petrobras’s decision concerns Petrobras’s customers. And the national context instance concerns the Ministry of Finance and the Ministry of Mines and Energy,” he said.
Conab will play key role in purchase of food and formation of regulatory stocks, says Minister Paulo Teixeira
01/04/2023
Paulo Teixeira — Foto: Marcelo Camargo/Agência Brasil
The Minister of Agrarian Development and Family Agriculture, Paulo Teixeira, reinforced on Tuesday, during his inauguration ceremony, that he is facing the challenge of eradicating hunger in Brazil and providing more dignified living conditions for the people who live in rural areas.
The ceremony was attended by Vice President Geraldo Alckmin and several other high-ranking officials, in a clear sign of the importance that the ministry will have in the new administration.
“No country can consider itself civilized with such a substantial portion of its population threatened by hunger. Without food, there is no democracy,” said Mr. Teixeira in his speech.
The minister said that the National Supply Company (Conab) will remain within the ministry’s structure, despite the suggestion of Agriculture Minister Carlos Fávaro to implement shared management in the state-owned company.
“Conab will play an important role in the purchase of food and the formation of regulatory stocks,” he said, adding that “all the Conab programs aimed at corporate agriculture will be maintained, but the company must remain in this ministry.”
About the stocks, however, Mr. Teixeira acknowledged that it will be necessary to seek funds in the budget to finance the storage. “We will talk to Finance and Agriculture [ministries] about the formation of regulatory stocks, so there will be no increase in the price of food or lack of food in the off-season,” he said.
With the high prices of meat in the last few years — and after President Luiz Inácio Lula da Silva’s campaign promise that people will eat picanha, a cut barely similar to sirloin cap, again — Mr. Teixeira does not know if he will be able to create stocks of these products. “We will see the economic conditions for this. But there will certainly be grain stocks,” he said.
The ceremony also attracted rural social movements, which delivered food baskets from agrarian reform producers to the new minister and performed music and poetry.
The Conab auditorium, in Brasília, was packed with deputies, senators, and former ministers. The president of the Workers’ Party, Gleisi Hoffmann, and the justice of the Superior Court of Justice (STJ), Benedito Gonçalves, also attended.
Mr. Teixeira believes that there has been a setback in policies aimed at family farming and rural, water, and forest peoples since 2016, after the impeachment of former President Dilma Rousseff.
“The reversal process started in 2016 led to Brazil’s return to the hunger map. We have a huge territory that has not been used rationally in recent years due to the lack of public policies,” said the minister.
Even without a direct connection to agriculture, the new minister cited historical agendas of family farming social movements — such as agrarian reform, which had new settlement processes paralyzed during the Bolsonaro administration.
“Today, we restart this challenge to eradicate hunger and give more dignified living conditions to Brazilians who live in rural areas. We want to rescue the role of the Brazilian State, which through this and other ministries must promote access to land,” he said.
“We have thousands of families living in camps, on the sides of roads, in very poor conditions, in a country fully capable of offering land and housing to their sons and daughters,” he added.
According to the minister, access to land is the initial step to other rights, such as mobility, electricity, internet, and quality water. He also deems it necessary to show the impact of family agriculture on the preservation of the environment.
In this sense, Mr. Teixeira said he intends to implement an agrarian reform program with the resumption of expropriations and land distribution in Brazil. He also said that he will maintain the process of giving official deeds for existing settlements.
The minister guaranteed that, in this process, there will be legal security and that the property right will be respected. The minister criticized the interruption of land distribution actions in the last administration and wants to resume expropriations that have already been judged in court. Mr. Teixeira still does not have a survey of the size of the area suitable for expropriation.
The minister also said he intends to expand technical assistance and rural extension actions in agrarian reform settlements and for family producers.
Source is only behind hydro power one decade after first projects
01/04/2023
Strong state policy of incentives for renewable sources also drives growth — Foto: Uwee Westphal/Pixabay
Solar power became the second-largest source in Brazil’s generation mix, only behind hydroelectric plants, from a virtually non-existent installed capacity a decade ago. The source has just topped wind power and hit 23.9 gigawatts, considering large plants and small photovoltaic systems of self-generation on roofs, facades, and small plots of land.
The amount accounts for 11.2% of the country’s power generation mix. Since 2012, investments have totaled R$120.8 billion, according to the Brazilian Solar Energy Association (Absolar). Technological improvement, market evolution in Brazil, cost reduction, and good insolation quality have created ideal conditions for the source to grow.
A strong state policy of incentives for renewable sources also drives growth, according to the Economics of Energy Innovation and System Transition (EEIST) project.
Absolar’s head Rodrigo Sauaia told Valor that Brazil is among the 10 largest markets in the world in this segment and is still gaining ground. “The first solar power contract with the federal government was signed in 2014. Only in 2017 Brazil hit one gigawatt. The first auction of the wind power industry, on the other hand, was held a decade earlier,” said the executive.
Last year was unique in this trajectory: the sector overcame the challenges of exchange rate oscillation, high freight rates, the collapse of China’s supply chains, congestion in ports, inflation caused by high global demand, and the pandemic. Even so, Brazil added 9 GW of power. In the last 150 days alone, the rate of growth has been more than 1 GW per month.
With this, the power generated from photovoltaic panels has been the fastest-growing segment in the electrical sector by associating the growing search for clean and renewable power with the appeal of low cost.
Yet, the solar source is expected to keep growing strongly. Bloomberg projects that the solar source will be the most important in the power generation mix by 2050, surpassing hydroelectric plants, which total 110 GW in operation, according to the Brazilian Electricity Regulatory Agency (Aneel).
“This path can be traced in a more or less agile manner, according to public policies developed and the use of these technologies in government programs,” said Mr. Sauaia.
It is worth pointing out that the solar source is significant in Brazil’s power generation mix because of distributed generation, a type of energy production generated mainly with solar panels near consumers with a limit of up to 5 MW.
Guilherme Chrispim, head of the Brazilian Association of Distributed Generation (ABGD), recalled that in this historical context, wind power took longer to reach the same level. Furthermore, the growth of solar was key for the social, economic, and environmental development of Brazil, at a time when the consumer became more empowered, including with the option to generate their own energy.
“Distributed generation for small consumers made solar power the second-largest source in Brazil’s generation mix,” he said. “This shows democratization in this source. Plus, there is no lack of sunny areas in Brazil.”
Not surprisingly, distributed generation is the model that added the most power in the system – 7.7 GW, compared to 4.6 GW in 2021 – and is expected to be the source that will inject the most capacity in the system.
Absolar forecasts that the source will add more 10 gigawatts of capacity in the electrical system this year, raising the total to 34 GW. Of this amount, 21.6 GW will come from small and medium-sized systems installed by consumers in homes, small businesses, rural properties, and public buildings.
The sector’s path is still long. Technological development is a challenge since a good part of the solar panels installed in residences has low efficiency. The crystalline silicon cells had 13% efficiency 10 years ago, compared with up to 26% now. As technology advances, costs are falling.
“As of 2020, solar power is the generation source with the best cost-benefit ratio in places where more than 60% of the world’s population lives. Cheaper than coal-fired, wind-fired, and hydro sources,” said Mr. Sauaia when referring to large power plants. According to the International Energy Agency’s forecast, the source is expected to surpass power production from coal by 2027.
Smaller solar systems have also seen their costs reduced. A study by consultancy Greener with companies in the sector found that, in Brazil, a residential photovoltaic system that cost an average of R$35,000 in 2016 can currently be purchased for R$19,500.
Even with the substantial drop in equipment prices, it is still expensive for low-income households. Camila Ramos, director and founder of the consultancy Clean Energy Latin America (Cela), stressed that even with the high interest rates in Brazil, the demand for financing solar panels has increased because of the growing rise in electricity bills in recent years.
According to the executive, the segment’s financing lines have increased in the last year. The sector calls for more access to credit in social programs to bring this technology to the whole society in a more democratic way.
The source’s growth is not restricted to Brazil. The whole world has been advancing at a record pace, not only because countries are driving the expansion of renewable power, but also to achieve their climate and energy security goals. China, for example, has more than 306 GW. The United States is at more than 123 GW, according to 2021 data. Compared to some countries, Brazil is still taking its first steps.
The appointment of top executives from Caixa Econômica Federal and Banco do Brasil (BB) working forces to lead these state-owned banks are the latest signs that President Luiz Inácio Lula da Silva intends to use both banks to support the increase of credit, according to market specialists. The market share of private-sector lenders, which has grown in recent years to equal that of the state-owned peers, is expected to give way again to this group that dominated the ranking of the National Financial System (SFN) until 2015.
For investors who own shares in the sector, this is bad news, as it potentially reduces the distribution of dividends from BB, the only state-owned bank with listed shares, and represents competition for other banks in some segments.
“Overall, both BB and Caixa have a relevant part of the portfolio of individuals. I would expect an expansion of credit lines, either through new concessions or debt renegotiation,” said Larissa Quaresma, a financial sector analyst at Empiricus Research. “It is one way to extend the use of state-owned banks as a mechanism for economic policy.”
Both Tarciana Medeiros, appointed as CEO of BB, and Rita Serrano, Caixa’s new CEO, came from the lenders’ ranks. Ms. Medeiros worked at the middle management level and was catapulted to the highest post in the federal bank, and “will need a quick learning curve to handle the position in the statutory board,” said Ms. Quaresma.
As for Ms. Serrano, the employees’ representative on Caixa’s board of directors, Ms. Quaresma says that “she maybe will give in to the pressure for increasing social spending and real salary adjustments.”
Ms. Quaresma evaluates that, in an environment of high interest rates, there will be pressure for the banks to reduce rates. “It is unclear how state-owned banks will manage their finances given the increase in the cost of funding tied to the [Brazil’s key interest rate] Selic.”
The eventual use of BB and Caixa to stimulate credit, contrary to monetary policy, may provoke the migration of riskier borrower profiles from private-sector to state-owned banks, said Ricardo Almeida, the founding partner of the asset management company Tower Three. The executive, who is former CEO of Bradesco Asset, says he does not believe that credit expansion via state-owned banks will occur at the same levels seen in the Rousseff administration when BB, Caixa, and the Brazilian Development Bank (BNDES) adopted anti-cyclical growth policies. “If the amount is the same, it will help a lot with the default rates in private-sector banks. The [population’s] indebtedness is high, I have more concern about Caixa than BB in that sense.”
Turbocharging credit has already proven to be “a bad incentive” because state-owned banks are not good capital allocators, said Otávio Vieira, a managing partner of Nest Investimentos. For him, there is a risk of setbacks, of the expansionist policy depleting the institutions’ financial situation. “The government attempt to stimulate with cheap credit, with subsidies, can be bad and destroy value.”
Fernando Siqueira, head of research at Guide Investimentos, saw the nominations as more political, as the executives were not at the summit or held similar positions elsewhere. “It is worth monitoring now what the policy adopted will look like.” According to him, the market does not see great risks in the “Desenrola” program, of credit for indebted households, one of the priorities of Finance Minister Fernando Haddad. But it is necessary to observe how it will be done and if the government will adopt an expansionist credit policy, as it was during the Roussef administration.
What is emerging, however, is a more competitive scenario for the financial sector, especially in the free credit, in lines such as overdraft, credit cards, and car financing, says Ms. Quaresma, from Empiricus. In real estate credit, there are already subsidies, and this is a field dominated by Caixa. BB, in turn, stands out in agribusiness. For the analyst, private-sector banks tend to seek profitability by making lines that are out of the focus of the state-owned ones more expensive.
Empiricus had a buy recommendation for BB shares during most of the year, but after Mr. Lula’s election, suggested the sale of the stocks. “Whoever bought, definitely has to worry because now the BB’s focus is different, it no longer has that profitability, efficiency, and cash generation agenda. Profit becomes a secondary objective,” said Ms. Quaresma.
She does not expect impacts on the distribution of dividends in the next two or three quarters, which will reflect the results of 2022, but in one year this tends to appear in the accounts.
One stock manager says he held BB in his portfolio for much of the year because the results had been very good, the best in the industry. “I wouldn’t have much of a problem buying again, but I’m waiting to see the first days of government.”
Leonardo Morales, partner and director of SVN Gestão, reduced to zero the positions he held in BB and Petrobras some time ago because of the political risk. For him, the big challenge for the bank is to keep the return on equity (ROE) around 20%.
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