Projections for GDP growth in the year remain at the median of 0.7%, but a wave of revisions has already begun

01/03/2022


Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

While it is making its way in Congress, the so-called Proposal to Amend the Constitution (PEC) for the Transition and the expectations surrounding President-elect Luiz Inácio Lula da Silva’s government team has triggered a sharp worsening of the fiscal outlook this year-end.

Economists started to forecast higher inflation and abandoned the prospect of a reduction in the key interest rate in mid-2023 — the baseline scenario now is that interest rates will only be lowered at the end of the year or even later. Although the projections for the GDP next year have undergone few revisions so far, analysts are still debating the effects on the economy of the promised spending expansion of the new administration.

The median of the estimates of 114 financial institutions and consulting firms consulted by Valor for the GDP in 2023 is still at 0.7%, the same level as the last survey, at the end of November. In this period, at least 20 institutions lowered their projections, reflecting greater concern with the fiscal issue and the prospect that the Selic rate will take longer to fall again.

Another 22 revised their estimates upward. In this case, there was a contribution from the update of the GDP calculation for 2020 and 2021 by the Brazilian Institute of Geography and Statistics (IBGE). The updated values implied a carry over — that is, assuming a zero annual variation rate — for the 2022 and 2023 projections. The median of the projections for growth this year went to 3.0% from 2.8%.

At Claritas, the projection for 2023 was recently lowered to 0.6% from 1.0%. “We could see that Brazil would already experience a cyclical slowdown in growth because of two vectors: the lagged effect of monetary policy, which is possible to see in the figures for credit concession and default, and also because of the global scenario, with [the prospect of] recession in the United States, Europe, and the United Kingdom next year,” says Claritas’ chief economist, Marcela Rocha. “Brazil is a closed economy, but that generates lower export growth in an environment of tighter financial conditions.”

Against this picture, argues Ms. Rocha, there was only the prospect of a record agricultural harvest — with a growth of 14.6% according to projections by the National Supply Company (Conab), or 9.6%, according to the statistics agency IBGE — as well as some recovery in China, which is abandoning the zero Covid policy. But the scenario has ended up getting worse since the elections.

“The size of the Transition PEC spooked, and the market took away the Selic cuts that were planned for next year. Besides hitting the financial conditions, this has also generated an economic cost, which is the worsening of expectations and the increase in uncertainty,” he says. Claritas, however, still sees room for cuts in the key interest rate as of the third quarter.

The new government’s promise to boost public investments in the first year is seen with some skepticism. “It is necessary to see if there is enough time to spend next year. To make investment viable takes time, you need a plan,” says Ms. Rocha. “In any case, I believe that the balance would still be negative. Given the deceleration already contracted so far, this impulse given by the government may be more than offset by the increase in uncertainty.”

According to Cosmo Donato, an economist at LCA Consultores, 2023 will not have any major sector-boosting activity, but farming and cattle raising can make a positive contribution. “Growth drivers, such as industry and services, will lose strength next year. Our vision remains positive for the agriculture and cattle-raising sector, which fell by 0.6% this year and may grow by 3.1% next year,” he says, based on the prospection of harvest indicators and economic activity in China, one of the main destinations of Brazilian agricultural exports.

“But there is the distrust around the fiscal issue, which may imply a cycle of high Selic for a longer time, which weighs on the activity as well. It will be a very challenging year, without much positive news and having to be careful not to get more negative,” he continues.

“There is a lot of uncertainty in 2023. What will happen with this fiscal package is not trivial,” he says. “Next year we will still have high-interest rates holding back credit, construction that helped this year losing steam, and more indebted families,” says Armando Castelar, coordinator of the applied economics area at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV).

The expectation is for less momentum from domestic demand and a less likely interest rate reduction scenario: “2023 will be more difficult than 2022. In part, because we are working close to the capacity limit. And the Central Bank is raising interest rates to slow the economy and control inflation. The complicating factor is expansionary fiscal policy,” says Castelar. “On one hand, you step on the accelerator. On the other, on the brakes. And one thing will get in the way of the other.”

“As the Monetary Policy Committee (Copom) has reinforced, when you have a very dynamic economy, fiscal pressures spill over into inflation, and monetary policy needs to respond to that,” says chief economist Cecília Machado. “In the short term, there may be some mismatch between the effects of these policies, so that the fiscal policy can give some more support to the economy. However, I believe that the monetary one will balance this game.”

Despite this, Ms. Machado sees upside risk to the projection, should the prospects for the agricultural harvest come true. “Agriculture is the big driver, but it also has spillover effects for other sectors, such as equipment and services. Incorporating this, it is possible to reach 1.6% [of growth next year],” she says.

(Contributed to this story Anaïs Fernandes and Marta Watanabe)

*By Marcelo Osakabe, Marsílea Gombata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
Role of Brazilian Development Bank under new administration is warning sign

01/03/2023


Vivian Lee, socia da Ibiuna Investimentos. — Foto: Carol Carquejeiro/Valor

Vivian Lee, socia da Ibiuna Investimentos. — Foto: Carol Carquejeiro/Valor

The corporate debt market is likely to start 2023 in a cautious tone after one more year of growth. Doubts about the role of the Brazilian Development Bank (BNDES) and the uncertainties common at the beginning of a new federal administration make it more difficult to predict how the coming months will be.

The arrival of new capital market rules, such as mark to market in securities trading, also clouds the horizon, as does redemptions from some funds that invest in debt.

“We must observe how the market will evolve over the weeks,” said Felipe Wilberg, head of fixed income and structured products at Itaú BBA. “Today, it is more uncertain than usual.”

Funding from funds that invest in debt began to slow down in October. In November, the situation worsened, according to Vivian Lee, a managing partner at the asset management company Ibiuna. “It was the first month with net redemptions of the funds we follow,” she said. Ibiuna monitors monthly the flow of funds with net assets over R$100 million that buy more than 20% of debt. The data is important because the inflow and outflow of funds influence the pricing of securities in the market.

It is unclear whether this is a one-off movement driven by the increase in year-end spending or whether it will persist. “We will monitor to see if it will become a trend starting in 2023,” said Ms. Lee. The market, in general, is likely to adopt a wait-and-see approach. “It doesn’t necessarily mean that asset managers will stop buying debt, but maybe they will stop buying while they watch what’s coming down the road.”

Until November, companies raised R$235 billion through bonds, data from Anbima, the association of securities firms, show. The market expects that the volume for the year will exceed the R$250 billion seen in 2021. The growth was driven by the migration of funds to fixed-income alternatives from equity – a move triggered in 2021, when the Central Bank started to raise Brazil’s key interest rate Selic.

The closing of the foreign market for raising debt also helped improve the local market. Brazilian companies halted the issuance of bonds in the foreign market in early 2022 because of the strong instability caused by the increase in interest rates in the United States, which made it difficult to set prices. Thus, large exporters like Petrobras opted for raising funds in the Brazilian market.

“The local market has partly supplied what cannot be raised abroad due to the lack of access to the bond market,” said Gilberto Nakayasu, head of corporate debt at Bradesco BBI. “Next year, if there is an increase in rates or a lower appetite from investors, companies will likely return to bonds.”

Mr. Nakayasu foresees for the coming months an increase in the premium charged by investors to take part in new offerings in the local market, considering the record volume of issues in 2022. “Whether we like it or not, unlike the foreign market, the number of investors available to buy securities is smaller and very concentrated. As a result, we expect some pressure on the rates charged on loans.”

Throughout the year, spreads did not vary much considering JGP’s main index, created to track the evolution of this market. “The spreads started the year at CDI [interbank short-term rate] + 1.8% and will end the year at CDI + 1.85%,” said Alexandre Muller, with JGP. “Even with a large volume of issuance, fundraising was great. Now, with funding slowing down in some assets, the offers are also decreasing. The market managed to balance itself out.”

Looking ahead to 2023, Mr. Muller says he is not yet convinced that issuance volumes will be higher. “Before that, we need to evaluate how the companies’ investment plans will be and if they will eventually fall because of high interest rates and political and economic uncertainties,” he said. The estimates also depend, according to him, on how individual investors will react to the new rules of the market. “Possibly there will be a contraction in this investor base.”

As of January, banks and asset managers must present to investors the prices of securities at the value at which they are traded in the secondary market or at the probable negotiation value. Until now, the most common thing is for investors to visualize their positions with yields on the issue rate curve or on the acquisition rate curve, ignoring variations in the market’s mood.

The growth of the local debt market next year still depends on the reduction of political and fiscal uncertainties, according to Pierre Jadoul, corporate debt manager at ARX Investimentos. “I don’t believe that this year will be bad, but it depends on how the new administration behaves. If it calms the market and gives positive signals from the fiscal standpoint, it will manage to take a lot of the pressure off future flows and bring a better environment for companies to invest.”

If the BNDES acts like when under President Dilma Rousseff, the number of issues is likely to fall, said Mr. Jadoul. “From the signals of [Aloizio] Mercadante [nominated to lead the development bank under President Luiz Inácio Lula da Silva], this doesn’t seem to be the path, but we’ll have to wait and see.”

*By Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
In December alone, country’s trade balance totaled $4.8bn

01/03/2023


Brazil’s trade balance was positive at $62.3 billion in 2022, up 1.5% year-over-year — Foto: Pixabay

Brazil’s trade balance was positive at $62.3 billion in 2022, up 1.5% year-over-year — Foto: Pixabay

Brazil’s trade balance in December meant a surplus of $4.779 billion. The number was released Tuesday by the Foreign Trade Secretariat (Secex) of the Ministry of Development, Industry and Trade (MDIC). The value is 24.5% higher than in the same period of the previous year, calculated by the daily average criteria.

With this, the balance was positive at $62.3 billion in 2022, up 1.5% year-over-year, and also the highest since records began.

Exports totaled $26.6 billion in December, up 14%. Imports reached $21.8 billion, up 12%.

In 2022, imports totaled $272.7 billion, up 24.3% and the highest since records began. Exports, meanwhile, totaled $335 billion, up 19.3% and also a record. In turn, the total trade (sum of exports and imports) reached $607.7 billion, up 21.5% and also a record.

The better-than-expected positive balance of trade in 2022 “is explained by higher growth in exports and lower growth in imports compared to the estimated,” Secex said in a note.

In its most recent projection, Secex had calculated a $55.4 billion surplus, the result of $330.3 billion in exports and $274.9 billion in imports. In this case, the total trade would be $605.2 billion.

“The higher-than-expected total trade figure is explained by the higher growth of exports compared to the estimated one,” said Secex.

As for exports, the sector with the highest growth last year was agriculture, “mainly due to higher prices.”

In addition, “growth in value was seen to Brazil’s main trading partners in 2022,” such as China, the European Union, the United States, and Argentina.

Last year, agricultural exports grew 36.11% year-over-year, while the extractive industry saw an increase of 4.64%, and the manufacturing industry posted an increase of 26.18%.

Sales to China rose by 1.46%, while those to Asia increased by 7.54%. Exports to North America grew 19.86%, those to South America climbed 29.03%, and exports to Europe rose 31.39% year-over-year.

As for imports, there was an increase of 6.31% in agricultural purchases, an increase of 69.8% in the extractive industry, and a 22.89% advance in the manufacturing industry.

Regarding imports, the price was also “a determining factor for the increase in value” in 2022. In addition, “an increase in the value imported is noted in all categories” last year, formed by capital goods, intermediate goods, consumer goods, and fuels.

Finally, the “main suppliers of goods to Brazil” in 2022 were China, the European Union, the United States, and Argentina.

*By Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
Weaker activity, high interest rates, and distrust in fiscal situation are main threats in 2023, says Cemec-Fipe

01/03/2023


Carlos Antonio Rocca — Foto: Silvia Zamboni/Valor

Carlos Antonio Rocca — Foto: Silvia Zamboni/Valor

The good performance of investments in the last two years was driven by factors that are losing steam or under threat. After reaching 19.6% of GDP in the third quarter of this year, the highest level since 2014, the investment rate faces a more difficult perspective amid a scenario of anemic growth, high interest rates, and distrust about the fiscal policy.

This is the situation currently described by most analysts. After two years of strong growth — the expansion of the GDP reached 5% in 2021 and is expected to close at 3% this year —, a firm deceleration is now expected. The median of the Central Bank’s Focus survey points to an advance of 0.75% next year. In the survey published Friday by Valor, the median among 114 institutions was 0.7%.

At the same time, the economy will enter 2023 with a key interest rate of 13.75% per year and also high long-term interest rates — the ones that matter for investment decisions. At the close of the last trading session of 2022, the NTN-B (National Treasury note) maturing in 2035 was at 6.03%, compared with 5.27% at the end of 2021 and 3.21% in 2020.

Investment decisions look at the future outlook but are also based in part on current conditions. One way to look at this is to observe the behavior of the return on invested capital (ROIC) and the weighted average cost of capital (WACC) of a selection of 450 publicly traded companies. The calculations made by the Center for Capital Market Studies (Cemec-Fipe) show that investment attractiveness — the difference between ROIC and WACC — peaked in the first quarter of last year, but the cost of capital prevailed again in the third quarter.

“Besides this, this period had some interesting advances that helped drive investments, such as the new law on regulatory agencies, the approval of the basic sanitation framework, the gas law, and a better institutional environment,” said Carlos Antonio Rocca, coordinator of Cemec-Fipe.

It is worth noting, says the economist, that the numbers are compiled using data from listed companies which, in theory, are more efficient than the average of the Brazilian market. In other words, the cost-benefit ratio of investing for the average Brazilian company is worse.

Taking a closer look, it is also possible to observe that the two main sectors that have led the recent improvement in investment — civil construction and the agribusiness truck and machinery industry — do not necessarily have prospects as favorable as those that have been present until now.

The perspective of the Civil Construction Union of the State of São Paulo (Sinduscom-SP) is that the segment’s growth will fall from 7% in 2022 to only 2.4% in 2023. The second sector, on the other hand, has a more encouraging outlook. The most current estimate from the National Supply Company (Conab) is for a record harvest in 2023, reaching 312.2 million tonnes, or 15% more than the one obtained this year. On the other hand, it is widely expected that the boom in commodity prices has ended and that this picture will be stable or show a slight decrease next year.

Gilberto Borça, a researcher at the Brazilian Economy Institute (Ibre FGV), points out the cyclical character of both “drivers” of investment. “The commodities sector is linked to this cycle of rising prices, which is a less noble type of investment. Civil construction, on the other hand, is also recovering from a sharp drop between 2015 and 2016, when the sector was virtually decimated by the Car Wash scandal,” he said.

Mr. Borça lists other reasons to reduce enthusiasm for the recent investment boom. The first is the well-known accounting effect of the internalization of the oil platforms in the national accounts, which inflated gross fixed capital formation (GFCF) by about 1 percentage point in 2020 and 2021 — the effects of which are expected to diminish as of 2022.

The second reason is the fact that the prices of investment products and inputs have grown faster than the prices of the economy as a whole in the recent period. In situations like these, GFCF as a proportion of GDP can grow even if there is no real growth, he says.

Considering the variation of the investment rate to the GDP at current prices, the economist notes that this investment deflator accounted for 42.8% of the investment growth in 2021 or 2.1 percentage points of the 4.9% GFCF growth in 2021 compared to the previous year. Still, real growth would have been 2.5 percentage points — the highest since 2010.

Looking ahead, the Lula administration is promising a resumption of public investments, whose levels today are not even sufficient to cover the depreciation of capital, recalled the FGV-Ibre researcher.

“Public investment ends up generating systemic gains in the economy and channeling private-sector investment,” said Mr. Borça. “I believe that the appointment of Gabriel Galípolo [to the Executive Secretariat of the Ministry of Finance], a specialist in public-private partnerships, can help this model get off the ground and attract the private sector, given the fiscal limitations.”

According to Cláudio Frischtak, managing partner of consulting firm Inter.B, public investment in infrastructure, including that of state-owned companies, currently accounts for nearly 0.6% of GDP. “Therefore, it is not very relevant from the standpoint of aggregate investment, but it can generate a ‘crowd-in’ effect [when it induces other agents to invest]. I see the two as complementary,” he said.

The question, he ponders, is that the direction the new administration intends to give to the fiscal issue may scare investors away. “What is currently being proposed in Congress already creates a negative effect that can last for months and maybe years. We are going to have a huge disincentive because of the increase in the cost of capital,” said Mr. Frischtak.

In the short term, Mr. Frischtak is skeptical about the new administration’s promise to increase public investment next year. “There is no project, execution capacity, or governance for a construction boom. If everything goes right, it could grow nearly 0.1 percentage point of the GDP next year 2023, around R$10 billion, maybe 0.2 points. It doesn’t make sense to talk about a shock of R$40 billion,” he said.

By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
After one month in hospital, he lost a battle against a colon cancer

12/30/2022


Pelé — Foto: Eraldo Peres/AP

Pelé — Foto: Eraldo Peres/AP

The former soccer player Pelé died this Thursday, at 82 years old. The greatest soccer world idol was admitted to Albert Einstein Hospital, in São Paulo, on November 29, and his health condition worsened in recent days.

According to the hospital’s medical bulletin, “the death of Edson Arantes do Nascimento, Pelé, on December 29, 2022, at 15h27, [happened] as a result of multiple organ failure, resulting from the progression of colon cancer associated with his previous clinical condition.

Pelé became a worldwide phenomenon long before globalization and the internet. Legendary ¬— and true — is the story that in 1969 opponents reached an agreement and interrupted the civil war in the Belgian Congo (now the Democratic Republic of Congo) to watch Santos — his team for all his career in Brazil — play. The only condition for the truce was that Pelé would play in the two cities in dispute, Brazzaville and Kinshasa. Santos had scheduled only one friendly match. In the name of peace, they played two.

Born Edson Arantes do Nascimento, in the Minas Gerais town of Três Corações in 1940, Pelé began his history with the ball when his parents moved to the countryside of São Paulo in 1946. His father, João Ramos do Nascimento, also a soccer player, signed a contract with Bauru Atlético Clube (BAC). In the dusty streets and dirt fields of Bauru, Dico, Pelé’s first nickname, tried out his first kicks.

A few steps, dribbles, and goals later, already converted into Pelé, he started playing for BAC’s youth team. He won the Bauru league twice (1954 and 1955). In 1956, the former Brazilian midfielder Waldemar de Britto saw Pelé play and convinced his father to take him to a big club.

At the age of 15, Pelé arrived alone at Santos, on the coast of São Paulo state. He won over the board of directors and signed his first contract. He would be a starter at Santos in 1957.

In the State Championship and Santos, Pelé emerged to the world. He won 26 important titles in 18 years at Santos, including two South American championships and the former Club World Cup (1962 and 1963). The complete collection, including summer tournaments, exceeds 40 trophies. His performance in the 1957 São Paulo Championship led him to be called for the Brazilian national team.

At the age of 16 years and eight months, he was, at the time, the youngest athlete to defend the main national team. In the 1958 World Cup, won by Brazil, he scored six goals, including one in the qualifying tournament against Wales (1-0), three in the semifinal against France (5-2), and two in the final, against Sweden, the host, a performance that earned him the title of “King”, awarded by the French press and fans.

In the 1962 World Cup, he was injured in the second match and left the task of victory to Amarildo and Garrincha. He reached his peak in the 1970 World Cup, in Mexico, when he led Brazil to win the third title. At the height of his fame and international recognition, he decided to leave the national team in 1972.

He was the first player to score a thousand goals in his career. He was also the most-awarded athlete in world soccer, with more than 60 career titles and 20 individual titles and honors. In 1981, he was elected the Athlete of the 20th Century by the French sports newspaper L’Equipe. In 2014 he received from Fifa in an honorary manner the Golden Ball, an award for the best player in the world.

After retiring from soccer, he acted in films and was a singer and songwriter. He married twice and had eight children.

In recent years, he has undergone two surgeries for hip replacements and corrective surgery on his spine. He also had kidney problems. A knee strike in the back permanently damaged one of his kidneys in 1974. The organ was removed. This led to health problems that culminated in repeated hospitalizations, the most serious in late 2018 in Paris.

In 2021, amid the Covid pandemic, he was diagnosed with cancer. The tumor started in his bowls, which were partially removed, but also reached his liver and lung.

*By Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
Projections for GDP growth in the year remain at the median of 0.7%, but a wave of revisions has already begun

12/30/2022


Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

While it is making its way in Congress, the so-called Proposal to Amend the Constitution (PEC) for the Transition and the expectations surrounding President-elect Luiz Inácio Lula da Silva’s government team has triggered a sharp worsening of the fiscal outlook this year-end.

Economists started to forecast higher inflation and abandoned the prospect of a reduction in the key interest rate in mid-2023 — the baseline scenario now is that interest rates will only be lowered at the end of the year or even later. Although the projections for the GDP next year have undergone few revisions so far, analysts are still debating the effects on the economy of the promised spending expansion of the new administration.

The median of the estimates of 114 financial institutions and consulting firms consulted by Valor for the GDP in 2023 is still at 0.7%, the same level as the last survey, at the end of November. In this period, at least 20 institutions lowered their projections, reflecting greater concern with the fiscal issue and the prospect that the Selic rate will take longer to fall again.

Another 22 revised their estimates upward. In this case, there was a contribution from the update of the GDP calculation for 2020 and 2021 by the Brazilian Institute of Geography and Statistics (IBGE). The updated values implied a carry over — that is, assuming a zero annual variation rate — for the 2022 and 2023 projections. The median of the projections for growth this year went to 3.0% from 2.8%.

At Claritas, the projection for 2023 was recently lowered to 0.6% from 1.0%. “We could see that Brazil would already experience a cyclical slowdown in growth because of two vectors: the lagged effect of monetary policy, which is possible to see in the figures for credit concession and default, and also because of the global scenario, with [the prospect of] recession in the United States, Europe, and the United Kingdom next year,” says Claritas’ chief economist, Marcela Rocha. “Brazil is a closed economy, but that generates lower export growth in an environment of tighter financial conditions.”

Against this picture, argues Ms. Rocha, there was only the prospect of a record agricultural harvest — with a growth of 14.6% according to projections by the National Supply Company (Conab), or 9.6%, according to the statistics agency IBGE — as well as some recovery in China, which is abandoning the zero Covid policy. But the scenario has ended up getting worse since the elections.

“The size of the Transition PEC spooked, and the market took away the Selic cuts that were planned for next year. Besides hitting the financial conditions, this has also generated an economic cost, which is the worsening of expectations and the increase in uncertainty,” he says. Claritas, however, still sees room for cuts in the key interest rate as of the third quarter.

The new government’s promise to boost public investments in the first year is seen with some skepticism. “It is necessary to see if there is enough time to spend next year. To make investment viable takes time, you need a plan,” says Ms. Rocha. “In any case, I believe that the balance would still be negative. Given the deceleration already contracted so far, this impulse given by the government may be more than offset by the increase in uncertainty.”

According to Cosmo Donato, an economist at LCA Consultores, 2023 will not have any major sector-boosting activity, but farming and cattle raising can make a positive contribution. “Growth drivers, such as industry and services, will lose strength next year. Our vision remains positive for the agriculture and cattle-raising sector, which fell by 0.6% this year and may grow by 3.1% next year,” he says, based on the prospection of harvest indicators and economic activity in China, one of the main destinations of Brazilian agricultural exports.

“But there is the distrust around the fiscal issue, which may imply a cycle of high Selic for a longer time, which weighs on the activity as well. It will be a very challenging year, without much positive news and having to be careful not to get more negative,” he continues.

“There is a lot of uncertainty in 2023. What will happen with this fiscal package is not trivial,” he says. “Next year we will still have high-interest rates holding back credit, construction that helped this year losing steam, and more indebted families,” says Armando Castelar, coordinator of the applied economics area at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV).

The expectation is for less momentum from domestic demand and a less likely interest rate reduction scenario: “2023 will be more difficult than 2022. In part, because we are working close to the capacity limit. And the Central Bank is raising interest rates to slow the economy and control inflation. The complicating factor is expansionary fiscal policy,” says Castelar. “On one hand, you step on the accelerator. On the other, on the brakes. And one thing will get in the way of the other.”

“As the Monetary Policy Committee (Copom) has reinforced, when you have a very dynamic economy, fiscal pressures spill over into inflation, and monetary policy needs to respond to that,” says chief economist Cecília Machado. “In the short term, there may be some mismatch between the effects of these policies, so that the fiscal policy can give some more support to the economy. However, I believe that the monetary one will balance this game.”

Despite this, Ms. Machado sees upside risk to the projection, should the prospects for the agricultural harvest come true. “Agriculture is the big driver, but it also has spillover effects for other sectors, such as equipment and services. Incorporating this, it is possible to reach 1.6% [of growth next year],” she says.

(Contributed to this story Anaïs Fernandes and Marta Watanabe)

*By Marcelo Osakabe, Marsílea Gombata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
Agreement to suspend relief on fuels is the cause, even with higher prices at pumps

12/29/2022


The end of the fuels relief is expected to immediately cause a slight improvement in the competitiveness of hydrous ethanol and in the remuneration of the mills. However, mills are still likely to continue preferring to produce sugar in the next harvest (2023/24) and may only increase ethanol production because of the larger amount of cane expected for the next cycle.

The social taxes PIS/Cofins and federal tax Cide rates that were levied on fuels in May will return to the same levels in January. However, the future minister of Finance, Fernando Haddad, left the door open for a reevaluation of the tax policy during the beginning of his tenure. For now, gasoline sold at service stations will again be taxed at R$0.6869 per liter, while hydrous ethanol will be charged R$0.2418 per liter.

In January, the liter of gasoline (which has a 27% mix with anhydrous ethanol) is likely to increase by almost R$1 liter at the pumps, while hydrous ethanol may rise by R$0.69 a liter, according to calculations by consultants FG/A. These hikes are still expected to keep gasoline economically more advantageous for flex-fuel car drivers, since the correlation between the two fuels should continue well above 70% (the level at which the two are equally competitive), going to 75.5% from 76.7%.

Whatever ultimate solution the administration of Luiz Inácio Lula da Silva decides to take regarding fuel taxation, there is now a constitutional provision, passed by Congress in July, which imposes that the rates on biofuels must be proportionally lower than on fossil fuels.

As the mills in the Central South are in the off-season, the changes in prices do not immediately impact the supply since the cane crushing will only be resumed in April. If taxes are kept at the same rates throughout the year, the tendency is for ethanol to regain competitiveness with gasoline throughout the harvest, since cane crushing will also be greater and will guarantee raw material for an increase in production, according to João Rissi, a partner at FG/A.

The consultancy estimates that the supply of hydrous ethanol available for the domestic fuel market will grow by 17.4% next season, to 14.5 billion liters. In a recent release, consulting firm StoneX projected an 11.4% increase in production, to 19.6 billion liters.

The increase in ethanol production is expected to happen even in a scenario where sugarcane mills tend to maximize the production of sugar. The consultants’ perspective is that the commodity will continue to offer a more favorable remuneration than ethanol, even in a scenario of increased biofuel prices with the end of tax waivers. “The tightness in the physical sugar market is expected to ensure sustained prices,” says Mr. Rissi.

Even if tax normalization is maintained for the next harvest, sugar is likely to guarantee a 10% higher remuneration than ethanol, according to FG/A’s estimates. Sugar is currently offering a 28% premium over ethanol, according to calculations by financial company BTG. In the average of this harvest, the sugar premium should be around 15%, according to FG/A.

According to the consulting firm, the average price of hydrous ethanol for mills may reach an average of R$2.98 a liter (net of taxes) in the next harvest, given the new tax scenario — in the current harvest, the average price of hydrous ethanol received by mills in São Paulo until last week was R$2.91 per liter, according to the Cepea/Esalq indicator.

However, a major ethanol trader said on condition of anonymity that Petrobras’ new pricing policy could alter these prospects and have “the same effect as a zero tax.”

*By Camila Souza Ramos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
End of relief is expected to return almost R$55bn to federal government next year

12/29/2022


Raul Velloso — Foto: Leonardo Rodrigues/Valor

Raul Velloso — Foto: Leonardo Rodrigues/Valor

The end of federal taxes relief on fuel as of January leaves the central government deficit (National Treasury, Social Security, and the Central Bank) in 2023 closer to 1% than to 1.5% of GDP, economists point out but does not change the worrisome trajectory of the debt and the need to review spending.

The future Finance minister of Luiz Inácio Lula da Silva, Fernando Haddad, asked the current minister, Paulo Guedes, to let the social taxes PIS/Cofins and federal tax Cide relief on gasoline, ethanol, and diesel, as ordered by president Jair Bolsonaro in the election race, expire on December 31.

“Bolsonaro made a political decision that goes against economic logic,” says Raul Velloso, a public finance specialist. The fiscal effort to keep fuel prices artificially low, he says, is incompatible with the need to balance the Budget, even without a spending cap, of which Mr. Velloso is critical.

The end of the relief is expected to return almost R$55 billion to the federal government next year, economists estimate. “There is no way at this point to give up a high value like this unless the elected government gives up its social welfare policy,” says Mr. Velloso.

Many companies already include these additional revenues in their projections. Terra Investimentos expects a R$90 billion deficit for the central government in 2023. The calculation considers, on the expenditure side, an increase in expenses with the Proposal of Amendment to the Constitution (PEC) of Transition and other fiscal expansion initiatives. On the revenue side, it considers R$53 billion from the relief of federal taxes on fuel, in addition to about R$30 billion from other tax reductions that, in Terra’s view, may happen, for example, in taxes on industrialized products and imports.

Still, the expected deficit is large, says Homero Guizzo, economist at Terra, estimating that the gross debt may rise to 82.3% in 2023 from 76.5% of GDP in 2022. “Certainly, the numbers are ugly, just not as ugly as the gloomiest estimates.”

XP Investimentos also expected a R$106.9 billion (1% of GDP) deficit for the central government in 2023, with the end of relief of taxes. Without it, the deficit would go to R$161 billion (1.5% of GDP).

For the consolidated public sector (central government, states, municipalities, and state-owned companies), Ryo Asset’s deficit projection of 1.5% of GDP did not fully account for the fuel tax reductions. Now, it may be close to 1% of GDP. The BRCG consultancy foresees a deficit in the consolidated public sector of around 0.5% of GDP in 2023, already incorporating not only the return of federal taxes but also a third of the equivalent ICMS taxation, says Livio Ribeiro, partner at BRCG and associate researcher at the Brazilian Institute of Economics (FGV Ibre).

*By Anaïs Fernandes, Rodrigo Carro — São Paulo, Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/