Investment grade requires change in spending structure, Fitch says

Todd Martinez, co-head of sovereign ratings for Latin America, sees fiscal uncertainty for Brazil in the medium term

02/06/2025

Fitch Ratings deems it unlikely that Brazil will regain its investment-grade status during the current government. Restoring the “good payer” status entails more than just meeting the targets of the current fiscal framework, according to Todd Martinez, co-head of sovereign ratings for Latin America. “It’s not just about having a balanced primary result in a few years, but rather a significant surplus. The current framework demands spending constraints, not cuts,” he told Valor.

The agency upgraded Brazil’s rating to “BB” with a stable outlook in 2023 and reaffirmed this assessment last year. Another review is expected before July.

Mr. Martinez noted that the positive surprises in GDP growth have not benefited Brazil’s fiscal situation as expected. He also emphasized the need to determine whether this stronger growth is a result of government spending or if recent reforms have genuinely made Brazil’s economy more dynamic.

The executive also remarked that U.S. President Donald Trump’s policies and the Federal Reserve’s actions could impact Brazil but the primary risks for the country are domestic. For Mexico, however, a widespread tariff war could be devastating, necessitating close scrutiny of President Claudia Sheinbaum’s microeconomic policies.

Valor: Fitch reaffirmed Brazil’s “BB” rating last year with a stable outlook, citing fiscal issues as a major constraint. Since then, the government has met the 2024 target and approved an adjustment package. How do you assess the situation now?

Todd Martinez: Last year’s fiscal result shows the government not only met the minimum required but exceeded expectations. There was a 0.1% GDP deficit, or 0.4% if we account for spending on Rio Grande do Sul. A year ago, markets didn’t expect the government to meet its 2024 target, and projections for 2025 have improved rather than worsened. The challenge is that, despite being on track to meet targets, the government has not gained market credibility. Last year’s target achievement was largely due to temporary rather than structural measures. The disappointing effect of the 2023 tax measures, which could have provided a structural revenue boost, also played a role. The positive fiscal surprise in 2024 stemmed from extraordinary revenues and the government’s decision to bring forward court-ordered payments of federal debts to 2023. Without these, there wasn’t a significant improvement. We remain concerned about the fiscal situation, as does the local market, due to considerable uncertainty. The government may have reached a fatigue point with Congress after tax reform approval. [Congress] doesn’t seem inclined to approve additional measures to increase structural tax burdens, while significant spending cuts are challenging due to a rigid budget.

Valor: How committed is the government to fiscal consolidation?

Mr. Martinez: We recognize the government’s commitment to fiscal targets. However, the challenge is that the fiscal framework and targets may not be enough to improve market confidence and ease pressure on the Central Bank to maintain high interest rates. The government has room to continue meeting its targets, but unfortunately, this may involve more improvisation, such as advancing dividends or freezing the budget. While these measures help, they are not structural solutions. Therefore, uncertainties about medium-term projections will persist.

Valor: The economy has grown more than expected. Could this help improve fiscal dynamics?

Mr. Martinez: The pace of economic growth is probably the best news for Brazil and was already partially reflected in our 2023 rating upgrade. Many economies surpassed expectations post-pandemic, but Brazil continues to positively surprise years later. However, it is still unclear whether 3% growth is the new normal or simply the result of a fiscal stimulus that will not be sustainable in the medium term. There are strong arguments that recent reforms and the recent tax reform could foster greater investment appetite, boost productivity, and thus support higher growth levels. But only if this strong growth continues without fiscal stimulus will we be convinced that this is the new normal. If the economy is growing more, why isn’t that enough for a higher rating? In many countries, stronger growth would improve fiscal conditions, but that has not been the case in Brazil. Higher growth has helped boost revenue, but much of the government’s spending is mandatory and tied to revenue increases. While economic growth aids revenue, it doesn’t equally improve the fiscal situation. There’s political pressure to spend more, so any positive revenue surprises often lead to higher spending. Additionally, strong growth has required the central bank to keep interest rates high, significantly increasing government interest expenses.

Valor: Do you see a scenario of fiscal dominance?

Mr. Martinez: Today’s Central Bank is very different from a decade ago, which was one of the reasons why we upgraded Brazil’s rating in 2023. The Central Bank has gained substantial credibility and formal autonomy, making it one of the most prudent and proactive globally. However, there are limits to what it can do. Given concerns over fiscal risks, raising interest rates may not be as effective as it would be otherwise. That doesn’t mean Brazil is in an extreme fiscal dominance scenario where rate hikes trigger fears over fiscal sustainability, prompting capital flight and making interest rate increases inflationary rather than deflationary. We still believe that rate hikes, on balance, help anchor confidence.

Valor: How does the relationship between the Executive and Legislative branches affect Brazil’s rating?

Mr. Martinez: One reason we upgraded the rating in 2023 is that, despite challenges and political tensions, we saw dramatic improvements compared to a decade ago. Challenges remain, but what’s positively surprising is that despite sometimes tense relations, Brazil manages to pass certain measures and has enacted significant reforms. That isn’t the reality in other Latin American countries. The fragmented Congress requires many negotiations to pass legislation, often leading to delays and dilution, yet Brazil ultimately approves measures. In the fiscal realm, the challenging relationship with Congress complicates the government’s fiscal consolidation agenda, primarily consisting of increasing revenue. Promoting spending cuts is difficult.

Valor: Do you believe Brazil can regain investment-grade status during the current administration?

Mr. Martinez: It’s difficult to foresee the positive fiscal shock needed to regain investment-grade status in the current government’s final two years. Improving public finances and market confidence would require more than budget freezes and minor measures, which are typically temporary. Significant improvement in revenue and changes in the structure of mandatory spending rules to reduce medium-term spending pressure would be necessary. This would require constitutional changes and a supermajority in Congress, which are unlikely decisions before an election. However, after the election, regaining investment-grade status is not unattainable. It would require more than just meeting the fiscal framework—a significant surplus, not just a balanced primary result, would be necessary. The current framework demands spending constraints, not cuts, and depends on revenue improvements that we do not expect to materialize.

Valor: How might U.S. President Donald Trump’s policies and their consequences for the Federal Reserve affect Brazil?

Mr. Martinez: We’re closely monitoring the U.S. now, as they pose a significant risk to the global economy, especially Latin America. Potential risk channels include tariffs, interest rates, immigration, and relations with China. Many of these aren’t as relevant to Brazil as they are to Mexico, for instance. Fed is the most relevant. Trump’s policies are inflationary, as higher tariffs can pressure U.S. prices, alongside fiscal expansion. Additionally, a larger fiscal deficit means a greater supply of Treasuries later on, which pressures the long end of the U.S. yield curve. All of that matters for Brazil. Nonetheless, local monetary policy depends more on domestic factors and confidence in fiscal developments.

Valor: Mexico is more vulnerable to the U.S. scenario. What should we expect from the Sheinbaum administration?

Mr. Martinez: Comparing Mexico with Brazil is interesting because they share similar strengths and weaknesses. Mexico’s debt is lower but its fiscal situation has deteriorated recently. However, like Brazil, external finances are a source of strength. Mexico’s central bank is also strong and credible. The difference is that despite having a left-wing government, they seem to have internalized that being too fiscally expansive could have market confidence repercussions. The major concern is with microeconomic policies. We saw the previous government make changes in the energy sector and intervene in airport construction, affecting economic dynamics. The question is whether President Claudia Sheinbaum will adopt a more pragmatic stance, allowing the country to leverage nearshoring. Recently, we saw judicial reform approval, and the country will now elect judges, a source of uncertainty for the business community. Overall, our main concern is the relationship with the U.S. The baseline scenario is that Mexico could remain a strong U.S. ally. The most likely outcome is sector-specific rather than universal tariffs. If that’s the case, it could negatively impact growth in the coming years, affecting the fiscal situation and the government’s ability to reduce its deficit. It would be a very negative scenario that could affect Mexico’s investment-grade status. As Brazil’s example shows, losing investment-grade status isn’t difficult if many things go wrong simultaneously, and regaining it is challenging.

Valor: What is your view on Argentina?

Mr. Martinez: We became more optimistic about Argentina towards the end of 2024. We raised Argentina’s rating from “CC” to “CCC,” which is still very low but reflects our view that the country is unlikely to restructure its debt. That is a risk, although not the most likely one. The government embarked on an aggressive fiscal adjustment and devalued the currency, and it wasn’t clear if these measures were sustainable. However, they managed to maintain the adjustment without a significant drop in popularity, so Milei’s political position remains strong. The exchange rate policy is concerning. The two anchors of the economic program are fiscal surplus and currency crawling peg [gradual adjustments], as inflation is so high that within a year, Argentina went from a cheap to an expensive country. It’s a risk since whenever Argentina has relied on currency appreciation as a political anchor, it hasn’t ended well. We don’t see the current policy leading to a reserve accumulation, which Argentina needs to stabilize the economy and repay its debts. Nonetheless, the government has done an excellent job of boosting confidence. Therefore, we believe Argentina can get through the year without major changes to its exchange rate policy and reach elections. However, it’s unclear how sustainable it is in the medium term.

*By Álvaro Campos  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Embraer secures its largest executive jet sale

Shares traded the highest volume on B3 stock exchange, surpassing Itaú, Vale

02/06/2025

Embraer announced to the market on Wednesday (5) that it has signed an agreement with Flexjet—a U.S.-based company focused on leasing and sharing private aircraft—to sell 182 executive jets, along with 30 options. The deal is valued at $7 billion.

The agreement was well-received by the market, causing the Brazilian plane maker shares to soar by 15.51% at the close, reaching R$66.37 and marking the highest increase on the benchmark stock index Ibovespa.

Reflecting the news, the financial volume traded in Embraer shares was the largest on the trading floor, totaling R$1.377 billion, surpassing stock market giants Itaú (with R$1.246 billion), Vale (R$1 billion), and Petrobras (R$621 million), according to data from Valor Pro, Valor’s real-time information service.

According to Embraer, the agreement includes a fleet comprising the Praetor 600, Praetor 500, and Phenom 300E models, plus a services and support package. This is the largest order by Flexjet in its 30-year history and also the largest firm order for the Brazilian manufacturer’s executive jets.

“We are very happy with Flexjet’s renewed commitment to Embraer through this comprehensive purchase agreement, which further strengthens our over 20-year strategic partnership,” said Michael Amalfitano, president and CEO of Embraer Executive Jets, in a statement.

The partnership between Embraer and Flexjet began in 2003 when Flight Options, which became part of the Flexjet group in 2015, was the first shared ownership company to introduce the Brazilian Legacy Executive jet into its fleet.

The deal marks another strong bet from a major group in the Brazilian company. In March 2024, Embraer once again surprised the market by announcing an order of 133 E175 jets (including firm orders and purchase rights) by American Airlines. That agreement also exceeded $7 billion, considering the list price.

American Airlines, one of the largest airlines in the world, has become an important name in the global market betting on Embraer’s aircraft. On the commercial side, the Brazilian company has benefited from a post-pandemic trend of airlines seeking smaller planes, which are easier to fill.

The Embraer E1 has been successful in the United States, given access to the regional market. A union agreement limits the weight of jets in regional operation to 39 tonnes, which is why the E2, as it is a larger model, does not occupy that space.

Embraer ended 2024 with 73 aircraft delivered by its commercial division, a 14% increase year-over-year. In the executive segment, deliveries totaled 130, a 13% increase on the same basis.

The company still has an opportunity to grow its commercial division, which has been operating below the 100 annual deliveries mark for several years due to a weak supply chain. The company has indicated to the market that by 2026, depending on its suppliers’ capabilities, it expects to return to that level.

Despite the challenges, the Brazilian manufacturer has fared better compared to giants Boeing and Airbus, which operate larger aircraft and whose technology has posed complex challenges, particularly with more frequent engine maintenance on newer models.

Due to these maintenances, the industry has struggled with a shortage of engines, causing aircraft to be grounded worldwide. Embraer, by operating smaller jets with less drag (the more drag, the higher the fuel consumption, and the more force the engine must exert), requires maintenance at a greater interval.

In a report, the Itaú BBA team said Embraer’s announcement confirms that its executive aviation unit is among the company’s main growth drivers this year. According to analysts Daniel Gasparete, Gabriel Rezende, and Pedro Tineo, the order validates the Brazilian company’s strong operational moment, practically doubling its order book. The bank calculates that the order will sustain the company’s EBITDA growth by at least 10% per year until 2028, creating the potential for an upside in stock return estimates.

The Citi team noted that the announcement means a significant bet in the company regarding the quality of its products and the safety of its operations. Analysts Stephen Trent, Filipe Nielsen, and André Mazini wrote that even if the order has some discount due to its large volume, it considerably expands Embraer’s order book.

The XP team wrote that the deal confirms long-term delivery prospects following the current capacity expansion. Analysts Lucas Laghi, Fernanda Urbano, and Guilherme Nippes added that the addition of $7 billion to the order book ensures revenue visibility for the next five years.

“While we maintain our estimates unchanged, we believe that this order not only ensures longer revenue visibility but also reduces the delivery growth risk in the coming years,” XP pointed out.

  • By Cristian Favaro, Bruna Furlani e Felipe Laurence — São Paulo
  • Source: Valor International
  • https://valorinternational.globo.com/
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States increasingly resort to sales tax hikes

Governors raise general tax rate in an effort to recover revenue losses

02/03/2025

The movement to increase the general rate of the sales tax ICMS, Brazil’s main consumption tax, is not yet over. The average tax rate, which was 17.61% in 2022, is set to rise to 19.24% by 2025. This calculation includes all 26 states and the Federal District (Brasília), along with ICMS hikes approved in 2024 that will take effect by April this year in the states of Rio Grande do Norte, Piauí, and Maranhão. The trend of increasing rates began in 2022, and since then, at least 18 states and the Federal District have raised the ICMS rate at least once.

The highest standard ICMS rate, which was 18% in 2022, will increase to 23% starting February 23 of this year when the law raising the tax in Maranhão takes effect. With a five percentage point increase applied gradually since 2022, Maranhão’s ICMS has risen the most during this period, followed by Piauí’s tax, which will be 22.5% from April this year, up from 18% in 2022. States such as Amapá, Espírito Santo, Minas Gerais, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul, Santa Catarina, and São Paulo have not increased the standard ICMS rate since 2022.

In some cases, there have been attempts to raise the tax. For instance, the government of Rio Grande do Sul tried to pass a law in 2023 to ensure a higher rate in 2024 but withdrew the proposal. In the face of strong political opposition, Governor Eduardo Leite pulled back the proposal submitted to the Legislative Assembly of Rio Grande do Sul. The current modal ICMS rate for the state is 17%.

Due to the principle of annual anteriority, legislation to raise the ICMS rate must be approved in the preceding year. States also need a 90-day prior notice.

Carlos Eduardo Xavier, Secretary of Finance of Rio Grande do Norte, recalls that the state government attempted to raise the modal ICMS rate to 20% in 2023, to take effect in 2024. “The government faced a defeat in the Legislative Assembly. Last year, we managed to better organize our base and approved the 20% rate definitively.”

In 2022, the Rio Grande do Norte government increased the rate from 18% to 20%, effective for the following year, but the measure was temporary and only lasted until the end of 2023. Therefore, the modal ICMS returned to 18% last year. Among the “imperative issues” for reinstating the 20% rate, Mr. Xavier cites the need to restore revenue following the income losses since 2022.

In a statement, the Maranhão Department of Finance also said the restoration of lost revenue in 2022, when the federal government under Jair Bolsonaro imposed restrictions that reduced ICMS rates in key sectors such as electricity, fuels, and telecommunications for state revenue.

Until 2022, in most states, these activities paid ICMS above the standard or modal rate, which refers to the general rate set by states for the tax. The restrictions were introduced through Supplementary Laws 192 and 194, both in 2022. Rodrigo Spada, President of the National Association of State Tax Auditors (FEBRAFITE), said that these laws were based on precedents from the Supreme Court, which had already identified electricity and telecommunications as essential activities, exempting them from paying a higher-than-modal ICMS rate. He also said that fuels were included in the laws as well at a time when efforts were being made to combat inflation. At that time, gasoline and diesel prices followed the sharp rise in oil prices in 2022, shortly after Russia invaded Ukraine in the early months of that year.

This set of measures, Mr. Spada said, also resulted in a change in ICMS collection on fuels, shifting to the “ad rem” model, with a specific value per liter—for gasoline and diesel—and per kilogram for cooking gas, rather than applying the rate to prices.

According to the Maranhão Department of Finance, the restrictions on ICMS rates resulted in a monthly revenue reduction of approximately R$200 million. Despite cuts in costs and departmental budgets, a note from the state’s Finance Department said it was necessary to adjust ICMS rates to partially offset revenue deficits. The tax, which was 18% in 2022, rose to 20% during 2023, advanced to 22% in 2024, and will increase by another percentage point to 23% in February. “With the rate adjustment and improvements in the tax system, Maranhão’s revenue, when adjusted for inflation, will surpass the levels reached in 2022, allowing the state to make investments in infrastructure and finance public policies and social programs,” said the Maranhão Department of Finance.

Renata dos Santos, the Secretary of Finance for Alagoas, said that the state experienced “strong” revenue in 2023 and 2024 due to economic dynamism and law enforcement. In 2023, she recalls, a special tax installment program also boosted income. This performance, she said, contributed to the state not proceeding with rate increases. The Alagoas government raised the modal ICMS rate during 2023 from 17% to 19%, based on a 2022 law. Since then, there has been no increase in the modal rate. “There’s also a limit to taxing. When you tax too much, you end up increasing evasion,” she said. “Currently, there are no plans to raise the rate, but that depends on how ICMS revenue behaves this year. There are uncertainties about economic activity.”

Ms. Santos noted that the state, in addition to the 19% modal ICMS, has an additional 1% for the Poverty Eradication Fund (FECOEP). In Alagoas, she said, this additional charge has a broader base than in most states. For this reason, according to Ms. Santos, the state’s effective ICMS rate can be considered as 20%.

Helena Sayuri Roveri, a tax consultancy manager at Becomex, said that the additional FECOEP charge is levied by many states, but has a broader base in three of them: besides Alagoas with 1%, Rio de Janeiro with 2%, and Sergipe with 1%.

There are also other specific situations, Ms. Roveri noted. In Santa Catarina, she said, the general rate is 17%. However, internal operations in the state are taxed at 12% when conducted between taxpayers for goods intended for resale or manufacturing. This, she said, is a strategy to compete with the interstate ICMS rate of 12% and encourage companies to keep suppliers within the state.

According to the Secretary of Finance of Alagoas, even without an ICMS rate increase, the second half of the current term also comes with caution. A plan is being developed, she said, not only to boost revenue but also to cut expenses. “We’re studying contract revisions but without making blind cuts.” The idea, she said, is to analyze expenses “point by point,” evaluating travel and event costs, for example. “Expenses always need trimming,” she said. The aim is to ensure resources so that the government can fulfill investment promises made during the campaign.

According to Ms. Santos, ICMS revenue in Alagoas increased by 16% nominally in 2024, well above the 4.83% inflation rate measured by the IPCA. For 2025, she uses conservative projections and anticipates stability in real terms for federal transfers from the State Participation Fund (FPE). She projects a real increase of about 2% for ICMS revenue.

With the highest ICMS revenue in the country, São Paulo maintained the standard tax rate of 18%. Samuel Kinoshita, the São Paulo Secretary of Finance, said the government’s choice was to pursue other measures. He mentions the “Direção Certa” program, which includes cost containment, incentives for tax compliance, and a review of ICMS benefits. The state’s tax revenue grew by 8.2% in real terms in 2024 compared to the previous year, while there was an 8% decline in 2023.

*By Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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EDP puts two solar plants in São Paulo up for sale

Negotiations are in early stages, with assets valued at R$1.6bn to R$1.8bn

02/03/2025

Portuguese energy group EDP has put two major solar farms in São Paulo State up for sale, according to sources consulted by Valor. Negotiations are still in the early stages, and the assets are valued by the market at between R$1.6 billion and R$1.8 billion, based on their enterprise value—which includes both equity and net debt. BTG Pactual is advising on the transaction.

The assets on the market include the 252-megawatt Pereira Barreto Solar Complex, located in the municipality of the same name, and the 254.6 MW Novo Oriente Solar Complex, in Ilha Solteira.

EDP’s divestment strategy extends beyond solar power. The company is also negotiating the sale of the Santo Antônio do Jari (392.95 MW) and Cachoeira Caldeirão (219 MW) hydroelectric plants in Amapá, as previously reported by Valor. Bradesco BBI has been hired as a financial advisor for that transaction, which could generate around R$3 billion, according to market sources. Talks on these hydro assets are already at an advanced stage and could be finalized in the coming weeks.

When contacted, EDP declined to comment on the asset sales. BTG Pactual also did not provide a statement.

Market analysts caution that the sale of EDP’s solar assets could face hurdles in 2025. The growing use of curtailment—restrictions on wind and solar generation imposed by Brazil’s National Electric System Operator (ONS)—is increasing risk perceptions around renewable energy investments.

These regulatory constraints have already affected the market value of energy companies and made it more difficult for them to secure financing, according to banks and financial institutions.

The Pereira Barreto project received a R$750 million investment, while Novo Oriente was financed with R$805 million from the Brazilian Development Bank (BNDES), allocated to six special purpose entities under EDP. Given that these are standalone assets, potential buyers are likely to be either strategic investors or financial players with existing energy platforms.

Pereira Barreto was inaugurated in 2021 by EDP Renováveis, the renewable energy arm of the Portuguese group. Novo Oriente, in contrast, was developed through a 50/50 partnership between EDP Brasil and EDP Renováveis.

Mergers and acquisitions in Brazil’s solar energy sector surged 76% in 2024 compared to the previous year, according to consulting firm Greener. Despite tighter profit margins, the expectation is that M&A activity in the energy sector will remain strong in 2025.

In late December, João Marques da Cruz, EDP’s president for South America, stated that the company does not plan to invest in new power generation projects in the coming years, citing weak demand and low electricity prices. Instead, EDP will focus its investments in Brazil on electricity distribution and transmission, with planned spending of up to R$12 billion in these areas through 2030.

EDP has consistently communicated to investors that it follows an asset rotation strategy, selling projects to finance new investments. The company’s financial leverage, measured by net financial debt to EBITDA over the 12 months through September 30, 2024 (the latest available data), stood at 2.12 times, according to Valor Data.

EDP has already executed several major asset sales in Brazil. In late 2021, British fund Victory Hills and Paraty Energia acquired the Mascarenhas power plant from EDP for R$1.23 billion. In 2023, the company sold transmission lines to private equity firm Actis in a R$2.7 billion deal. Additionally, EDP agreed to sell an 80% stake in its coal-fired Pecém plant in Ceará to a group of Brazilian investors led by Mercurio Asset.

If the company successfully completes its latest divestments, the proceeds could help finance its transmission investments. In March 2024, EDP secured three lots in a transmission auction held by Brazil’s electricity regulator, ANEEL. The projects require an estimated R$3 billion in capital expenditures to build nearly 1,400 kilometers of transmission lines and two substations across four states.

*By Robson Rodrigues  e Fernanda Guimarães  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Big banks profits to improve in Q4; outlook for 2025 concerns

Macroeconomic outlook for 2025 signals slowdown in loans and rising default rates

02/03/2025

The earnings season for Brazil’s major banks in the fourth quarter of 2024 is expected to reflect what analysts are calling “the last rays of sunset.” In other words, the numbers from October to December are likely to be positive, with rising profits and loan portfolios, while default rates remain stable. However, the forecasts presented by financial institutions and what their top executives say about 2025 in earnings calls are more important than the results themselves. With the Selic policy interest rate remaining high, credit is expected to lose momentum in 2025, and concerns over the country’s fiscal outlook loom large.

Together, Itaú Unibanco, Bradesco, Banco do Brasil, and Santander are expected to report combined profits of R$29.363 billion in the fourth quarter, up 1% from the previous quarter and 22.7% higher than the same period in 2023, according to the average projections of ten financial firms surveyed by Valor. For the year 2024, total profit is projected at R$112.4 billion, an increase of 16%.

In a report titled The Last Rays of Sunset, Itaú BBA noted that despite strong fourth-quarter results, a key factor will be the banks’ outlook for the year ahead. According to analysts, the combined profit of the four largest banks is still expected to rise around 10% in 2025 but growth will likely be concentrated in the first half of the year, making full-year guidance a challenge.

“Providing guidance is a tough task given the increasingly volatile and deteriorating scenario. Worsening macroeconomic indicators, such as interest rates and inflation, are raising barriers to credit, which tends to curb demand for new loans. We expect these concerns to be reflected in executives’ statements and guidance, with a forecast of moderate loan portfolio growth (below 10%) and stable financial margins,” Itaú BBA stated.

Bradesco BBI also highlighted that investor focus will be on 2025 guidance and pointed to the adoption of the new IFRS 9 accounting standard, which could impact banks’ bad debt provision levels. “Notably, we believe banks will factor in a more challenging macroeconomic scenario for 2025, which may result in slower loan portfolio growth. Additionally, as banks deal with the expected impact of IFRS 9, some may face higher provisioning requirements in 2025.”

Bank of America projects that the major banks’ loan portfolios will grow by 9% this year but net interest income should expand at a faster pace, driven by client margins—supported by higher interest rates—though partially offset by lower market margins. “We also expect asset quality to deteriorate and risk costs to increase. Finally, we believe fee revenue will rise in line with operational expense growth,” BofA analysts stated in a report.

Bernardo Guttmann, head of financial sector analysis at XP, pointed out that a snapshot of credit data published by the Central Bank for December does not indicate any slowdown in lending. However, he noted that recent conversations with bank executives suggest a more cautious stance. “It has become clear that banks’ sentiment regarding the economy is aligning more with that of financial markets, which have a more pessimistic outlook,” he said.

Mr. Guttmann added that no specific sector stands out as the most likely to increase default rates, except for agribusiness, where court-supervised reorganization cases are expected to peak between February and March.

XP also noted that IFRS 9 will lead to a raft of reclassifications beyond provisioning adjustments. Items previously recorded as fee income—such as real estate appraisal fees for mortgage applications—will now be accounted for as part of financial margins. Conversely, some expenses that were previously recorded as administrative costs, such as debt collection fees, will now be entered into bad debt provisions. Additionally, commissions paid to correspondent banking networks, which were previously paid upfront, will now be amortized over the contract term. “This will alter some balance sheet line items and complicate comparisons with previous periods,” said analyst Matheus Guimarães.

Another factor that could impact fourth-quarter results, particularly for some mid-sized banks, is payroll-deductible loans for Social Security (INSS) beneficiaries. Banks such as Banco do Brasil, Itaú, Santander, Pan, BMG, Mercantil, and Banrisul suspended these loans through correspondent banking networks late last year due to high operational costs relative to the 1.66% monthly interest rate cap.

In January, the National Social Security Council (CNPS) raised the cap to 1.80%, a level banks argue is still insufficient. The Brazilian Association of Banks (ABBC) has taken the matter to the Federal Supreme Court (STF), questioning whether the CNPS and the National Institute of Social Security (INSS), which are linked to the Ministry of Social Security, have the authority to set interest rate caps.

Analysts project that Itaú will post a record quarterly profit of R$10.831 billion. The bank is also expected to announce an extraordinary dividend payout of nearly R$20 billion.

According to analysts at Genial, Itaú’s highlights for the period should include loan portfolio expansion—continuing the pace of previous quarters and closing with 12.5% growth, at the top of its guidance range—higher financial margins, albeit at a slower rate than loan growth, and controlled provisioning expenses, reflecting stable asset quality and default rates. “It is the leader of the pack, with a return on equity (ROE) of 23% in 2025,” Genial analysts said.

Banco do Brasil is the only major bank expected to report a slight quarterly profit decline (-0.2%). Citi analysts believe its financial margin should remain resilient but do not foresee a turnaround in the agribusiness segment’s difficulties. “We expect loan portfolio growth of 11% in 2024, with persistent provisioning pressures slightly offset by strong treasury results. Agribusiness loan defaults should remain high compared to historical levels, although client margins should continue to rise steadily.”

Bradesco is expected to continue its turnaround trajectory, with profit surging 84.5% from the fourth quarter of 2023 when higher provisions and a leadership transition impacted the bank’s earnings (Marcelo Noronha replaced Octavio de Lazari Jr. as CEO). According to Santander analysts, client margins should improve and asset quality should remain stable, while market margins could be a downside risk. They estimate this line will total R$312 million in the fourth quarter “due to high volatility in the yield curve and a lack of hedging instruments to mitigate this impact.” Given the Selic outlook for 2025, some analysts are already forecasting a zero result for Bradesco’s market margin this year.

Santander is expected to report a R$3.702 billion profit, with financial margins growing in line with loan portfolio expansion and fee revenue standing out amid the bank’s efforts to engage customers and boost cross-selling. “Meanwhile, we expect operating expenses to grow at a similar pace to the third quarter but below inflation on an annual basis. We also anticipate the effective tax rate will continue rising to 16%, though likely still below sustainable levels,” Goldman Sachs stated.

Nubank, which is not included in Valor’s aggregate results, is expected to report a profit of approximately $565 million (around R$3.2 billion based on Friday’s exchange rate). Analysts believe the bank may be affected by currency fluctuations, and fourth-quarter figures will be a key indicator of the fintech’s risk appetite amid a tougher macroeconomic scenario. “We see 2025 as a challenging year for Nubank. Unsecured loans in Brazil may slow if credit conditions worsen due to inflation and higher interest rates, along with rising default rates. Although Nubank is gaining market share in secured lending, we believe returns on these products remain unattractive,” Citi analysts stated.

*By Álvaro Campos  — São Paulo

Source: Valor International

https://valorinternational.globo.com/b
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With a deficit of R$11bn, government meets 2024 fiscal target

Increase of 8.9% in revenue aids performance; secretary highlights challenges for 2025

01/31/2025

The Brazilian federal government met its primary budget target for last year, thanks to both increased revenue collection and reduced expenditures. However, National Treasury Secretary Rogério Ceron emphasized the necessity for the federal government to improve the primary balance by 2025. He also noted that recent changes in both external and domestic scenarios might “require more effort on our part” to balance public finances.

The central government ended last year with a primary deficit of R$44 billion, equivalent to 0.36% of GDP, according to the National Treasury Secretariat (STN). Excluding expenditures not considered in the target calculation, such as spending to combat the effects of floods in Rio Grande do Sul, the deficit was R$11 billion, or 0.09% of GDP. The target for 2024 was a zero deficit, with a tolerance range of 0.25 percentage points of GDP, either above or below, or approximately R$28.8 billion.

Earlier this month, Finance Minister Fernando Haddad stated that the central government would meet the target, forecasting a deficit of about 0.1% of GDP. This Friday (31), the consolidated public sector results calculated by the Central Bank, covering the federal government, states, municipalities, and non-financial state-owned enterprises, except Petrobras and Eletrobras, will be released.

The Central Bank figures are also expected to confirm that the nominal deficit remains at a concerning level, around 8% of GDP, ranking among the highest globally. Unlike the primary result, this figure includes interest payments on public debt and is closely monitored by analysts as it determines the country’s debt dynamics. For this year, the nominal deficit is expected to range between 8.5% and 9% of GDP.

According to Thursday’s Treasury data, the 2024 outcome was influenced by a real growth of 8.9% in net revenue. This increase was driven by both tax collections managed by the Revenue Service, which rose by 12.5%, and non-managed collections, which grew by 3.6%. In the latter case, revenues from participations and dividends, particularly those from the National Bank for Economic and Social Development (BNDES), which paid R$18.7 billion more than the previous year, played a significant role.

On the expenditure side, there was a 0.7% decline, mainly due to a R$39.8 billion reduction in spending on judicial rulings and writs of payment. However, mandatory expenses such as the Continuous Cash Benefit (BPC) and flow control continued to rise, with increases of R$14.7 billion and R$16.4 billion, respectively.

In a press conference detailing the figures, Mr. Ceron highlighted that the 2024 primary result was the second-best of the last decade, stating that “it is undeniable that the [fiscal] recovery process has been intense” over the past two years.

“The first year of the fiscal framework was extremely satisfactory,” he remarked, referring to 2024.

However, he acknowledged that “we need to improve” compared to last year, indicating that a reduction from the 0.36% deficit recorded in 2024 would signify improvement. The target for this year also aims for a zero deficit, with a tolerance of 0.25 percentage points.

Mr. Ceron also mentioned that given recent changes in the economic landscape, it might be necessary to reopen “the debate” on new measures to adjust public accounts. On the international front, he cited the Federal Reserve’s decision to “pause monetary easing.” On Wednesday (29), the Fed maintained the federal funds rate at a range of 4.25% to 4.5% annually.

The Treasury Secretary also identified Brazil’s interest rate as a source of fiscal pressure. Since mid-December, the Central Bank has raised the Selic rate by 200 basis points to 13.25% per year and signaled another one-point increase for the March meeting. According to Mr. Ceron, these changes suggest that “fiscal challenges may be intensified.”

Mr. Ceron also addressed President Luiz Inácio Lula da Silva’s statement that he would only implement new fiscal measures if necessary. According to the secretary, this was a “positive signal” confirming that the government will do what is required to achieve fiscal balance, while also reflecting “a legitimate concern [of the president] to preserve public policies” for the most vulnerable population.

The secretary dismissed the possibility of the Brazilian economy being in a fiscal dominance scenario, which occurs when public debt is so high that interest rate hikes could have the opposite effect on inflation, further pressuring price trajectories.

Nonetheless, Mr. Ceron stated, “we need to collaborate” to limit the Selic rate hike cycle. “The sooner we can provide correct signals, the shorter the cycle will be,” he added.

*By Estevão Taiar, Guilherme Pimenta e Ruan Amorim — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Rising prices erode early consumption gains as sales volume weakens

In January, the gap between sales growth in value and volume widens; diesel price hike still ahead

01/31/2025

Inflation is forcing Brazilians to further revise their shopping baskets, already impacting the pace of sales volume growth in stores in 2025, according to an exclusive NielsenIQ (NIQ) report obtained by Valor.

The expansion rate of units sold in January, compared to the same period in 2024, dropped to 2.4% from 11.2% over roughly 20 days, from the first to the third week of the month.

Another exclusive study by Scanntech shows that over the past six months, half of the volume growth seen in early 2024 has been erased. This means inflation has already forced Brazilians to give back part of the gains achieved just months earlier.

Amid weakening consumption, the Northeast states—where the government’s key voter base is concentrated—are the only region among those analyzed where supermarket and hypermarket sales are declining simultaneously. Only cash-and-carry stores posted growth in the third week of January compared to the previous year, according to NIQ.

For the past two weeks, this trend has been raising concerns in the government, which is seeking short-term measures to slow price increases. The negative impact of inflation on President Lula’s popularity, as highlighted by a Quaest poll on Monday (27), is a key concern. On Tuesday, Mr. Lula publicly addressed rising prices.

The surveys have yet to account for the impact of Petrobras’s recent diesel price hike, which is expected to drive up food transportation costs in a country where distribution relies heavily on highways, further pushing prices upward.

According to NIQ’s weekly tracking, based on sales data from partner retail chains, the total units sold slowed at a faster pace than revenue growth in the first three weeks of January—a typical sign of accelerating shelf inflation.

In the first week of the month, revenue was up 20.4%, while unit sales increased 11.2% year-over-year. By the second week ending January 12, volume growth slowed to 9.9%, while revenue expanded by 16.4%.

Over the following seven days, until January 19, the trend shifted further: revenue rose 9.4%, but the number of units sold increased by only 2.4%—just a quarter of the previous week’s pace and far below the nearly 20% growth seen at the start of January.

For the CEO of a wholesale retailer, this modest 2% growth represents the “new normal” for sales volume in an environment of repeated price hikes.

“What we saw at the beginning of January, with double-digit growth, was an anomaly. There was a strong replenishment purchase because the year started in the middle of the week, which typically boosts restocking sales,” he said. “I think we’ll see more of this 2%-2.5% growth throughout the year, and that’s weak.”

This slowdown occurred just before President Lula warned his ministers in a January 21 meeting that workers were feeling the pinch of rising prices and urged swift action.

“We’ve seen supermarkets trying to plan purchases further in advance with suppliers to keep inventory levels as low as possible [to reduce fixed costs]. This has been happening since October. There’s also been a push for greater brand variety to balance price increases,” said Marcio Milan, vice president of ABRAS, the retail food association.

Mr. Milan estimates that prices in stores rose about 1% in January alone. The association is in ongoing negotiations with the government to find ways to curb accelerating prices, though there is skepticism within the sector about the effectiveness of such measures.

Gabriel Fagundes, director of industry insights at NIQ, said while the first two weeks of January were positive, the subsequent slowdown was driven by price hikes linked to the rising dollar. Many raw materials and agricultural commodities are priced in the U.S. currency.

New price lists began arriving in stores between December and January. “The data shows a widening gap between value growth and units sold, which is driven by price increases,” Mr. Fagundes noted.

Price gap

Between November and December—the holiday shopping and Black Friday period—average revenue in retail, wholesale, and pharmacies grew 6.3%, while unit volume increased just 1.2% year-over-year, according to Valor’s calculations based on monthly data.

Thus, as Mr. Fagundes pointed out, there was a roughly 5-percentage-point gap between the figures, reflecting inflation and shifts in product mix. This gap has widened further in 2025.

By January 19, the accumulated gap had reached 7.5 percentage points—sales in value terms grew 15.5%, while unit volume increased only 8%. “We need to see how much wider this gap will get. If it keeps growing, it could signal additional price hikes ahead. February brings increased demand for beverages and personal care items [due to Carnival], which are also sensitive to dollar fluctuations,” Mr. Fagundes said.

The wholesale CEO noted a positive development: the recent drop in the dollar’s exchange rate, which he believes could ease pressure for further price hikes in the industry.

Mr. Fagundes emphasized that more data is needed to determine volume trends for early 2025 but confirmed that price increases are becoming more widespread. He noted that the latest hikes are compounding existing inflationary pressures from late 2023.

Economists had previously warned that household budgets were being squeezed by persistently high price levels in 2024. Now, additional increases on top of those levels are evident, depending on the product category.

NIQ’s survey covers the so-called modern retail segment, which includes supermarkets, hypermarkets, cash-and-carry stores, and pharmacies—accounting for 80% of national consumption. It does not include smaller independent retailers, which make up the remaining 20% and typically do not influence broader market trends.

Consumer behaviour

The food retail and pharmacy sectors generate R$1.6 trillion annually, representing just over 60% of the country’s total restricted retail sales.

This inflationary acceleration is partly due to agricultural crop failures, climate issues, and new waves of price hikes across various product categories, including dollar-linked raw materials.

Between late October and early January, the exchange rate per U.S. dollar rose 7.3%. Since then, it has fallen 5.6%. The exchange rate surpassed R$6.20 on January 2, following a loss of government credibility after announcing insufficient fiscal adjustment measures to restore public finance order.

Since November, retailers and food, hygiene, beauty, and cleaning product manufacturers have been negotiating price adjustments of 5% to 10%, depending on the category, as previously reported by Valor.

According to Scanntech’s internal data analysis, currency-sensitive supermarket items accounted for 76% of total food retail price increases in the fourth quarter of 2024.

Another key finding is how consumers are responding at points of sale.

The Northeast states were the only region among the seven analyzed by NIQ in January where supermarket and hypermarket sales declined simultaneously. Hypermarket sales fell 16% from January 13-19 compared to the previous year.

Only cash-and-carry stores grew during this period in the region (9.2%), offering prices 5%-10% lower than other retailers.

Scanntech Brasil’s data, based on transactions from 45,000 partner stores, indicates that Brazil has reversed recent consumption gains. In the fourth quarter, sales volume fell 0.7%, following a 1.2% decline in the third quarter. This contrasts with the first and second quarters, when volume grew 3% and 1%, respectively.

This outlook echoes past downturns, though not as severe as in 2015-2016 during the Dilma Rousseff administration, when industries and retailers lost years of growth due to declining sales and revenue.

Priscila Ariani, marketing director at Scanntech Brasil, estimates that, in the fourth quarter of 2024, Brazilians saw a 5.7% decline in purchasing power, driven by a 9.3% increase in average food retail prices, while average income rose by just 3.1% for the year. “With price pressures persisting into January, purchasing power is expected to take an even greater hit,” she said.

“Shrinkflation”

Ms. Ariani highlighted another trend: consumers shopped more frequently in 2024 but bought less per trip to hunt for deals.

Calculations show that from January to December 2024, food retail sales in value terms increased by 5.2% compared to 2023, driven primarily by a 4.7% rise in prices over the year. The remaining 0.5% of growth came from a higher sales volume.

In other words, over 90% of the revenue expansion resulted from price adjustments on store shelves. As for units sold, the modest 0.5% increase was supported by a 2.3% rise in in-store traffic, which contributed to the overall index.

She also pointed to “shrinkflation,” where manufacturers reduce package sizes while maintaining prices, embedding an often unnoticed inflationary effect that impacts consumers’ wallets.

In 2024, the average product package size shrank by 0.9% compared to 2023, while consumers increasingly opted for smaller, lower-weight products to cut costs.

“This 0.9% reduction may seem minor, but in a market that moves tonnes of goods annually and generates nearly R$1.4 trillion in food sales, it is far from insignificant,” Ms. Ariani explained.

A leading wholesale club in São Paulo reports that packaging downsizing has already led to a 3% decline in the volume sold in 2024.

“If you factor in the reduction in product quantities per package and subtract it from the overall volume increase for the year, the total tonnage sold in Brazil is actually lower than reported,” a source said.

According to the Scanntech Brasil’s study, around 83% of grocery product categories saw packaging sizes shrink by late 2024, leading to a 4.5% drop in volume sold.

Ms. Ariani highlighted that this trend impacts business predictability and planning, affecting investment decisions throughout the year—an issue also flagged in analyst reports. Since the pandemic, rising interest rates and inflation-driven cost pressures have led some retail chains to scale back expansion plans and new store openings.

This article was translated from Valor Econômico using an artificial intellig

*By Adriana Mattos  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Fines for deforestation in the Amazon are rarely paid, survey shows

Number of convictions increases, but challenges in effectively punishing crises persist, survey finds

01/31/2025

A study recently released by the Amazon Institute of Man and Environment (Imazon) reveals that only 5% of convictions for illegal deforestation in the Amazon result in compensation payments. Furthermore, the processes have not guaranteed that the fines collected are used for the restoration of the biome.

Upon reviewing 3,551 public interest civil actions (ACPs) filed by Federal Prosecution Service (MPF) between 2017 and 2020 due to illegal deforestation in the Amazon, Imazon found that the number of convictions has increased, but effectively punishing environmental crimes remains challenging.

According to the research, out of 640 judgments upheld after appeals and 55 consent decrees (TACs) established, which determined compensation of R$252 million, only 37, or 5%, had their compensation paid.

Imazon reported that the debts paid amount to R$652,300, covering three judgments and 34 agreements. Considering cases in the payment phase, with bank account freezes of the defendants or installment payments, the percentage increases to only 8%.

The study further indicates a tendency among judges to reduce the amounts requested by the Federal Prosecution Service. In cases where initial and final values were available, there was a 34% reduction in compensations for material damages—averaging from R$11,304 to R$7,515 per hectare deforested—and a 59% reduction for collective moral damages—from R$5,616 to R$2,280 per hectare deforested.

“Making criminals pay for illegal deforestation in the Amazon and repairing the damage is one of the main challenges for environmental justice,” Imazon lamented in a statement.

On the other hand, the institute considers it a positive finding that convictions have increased since 2017, following the launch of the Amazon Protect Program, a project by the MPF to combat illegal deforestation in the region. Nevertheless, the data still show that convictions are a minority among all such cases.

By December 2023, out of 3,500 actions, approximately 2,000, or 57% of the total, had received a judgment, with 695 cases resulting in some form of accountability. These included 640 cases judged to be procedurally valid and 55 consent decrees, which are commitments by those responsible for illegal deforestation to undertake remedial actions.

This analysis indicated an increase in accountability, as another Imazon survey found that, of the 3,500 cases analyzed, only 650 (18%) had judgments by October 2020, with 51 being procedurally valid.

“That is, the convictions accounted for 1% of total actions and 8% of the judgments. Most decisions holding deforesters accountable [449 cases] occurred after October 2020, especially in 2023, when there were 241 valid judgments,” the Imazon report explained, emphasizing that both the Federal Regional Court of the 1st Region (TRF1) and the Superior Court of Justice (STJ) have been more favorable to the accountability requests of the MPF.

“It is positive to see the increase in procedurally valid cases for holding deforesters accountable and that the courts have upheld a favorable understanding of convictions in these cases that use evidence obtained remotely, such as satellite images and database use. The challenge now is to achieve effective payment of compensations and the recovery of deforested areas,” said Imazon researcher Brenda Brito.

However, the study also shows that 66% of the judgments were unfavorable to the preservation of the biome even after appeals. By December 2023, 860, or 42% of the cases, had been dismissed—indicating the courts determined there was no evidence for action. Additionally, 268 actions, or 13%, were deemed unfounded—meaning all MPF requests were denied. Furthermore, 137 (7% of the total) were declined by the state judiciary. Another 68 actions, representing 3% of the total, were annulled, meaning they became invalidated decisions awaiting new judgments.

According to Imazon, the predominance of case dismissals occurred mainly until 2020 and was due to actions with uncertain defendants. In these cases, the MPF filed actions due to illegal deforestation even when the defendant could not be identified, enabling the courts to enjoin the area from any economic use, which can combat land grabbing. However, in October 2020, the STJ adopted a favorable stance on continuing actions against uncertain defendants, leading to an increase in procedurally valid cases of this type after appeal judgments.

*By Rafael Vazquez  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Ambipar raises $400m in green bonds amid softer investor demand

Proceeds will be used for debt refinancing, sustainability projects, and general corporate purposes

01/30/2025

ESG company Ambipar raised $400 million through a debt issuance in international markets, with demand for its green-labeled bonds exceeding twice the issued volume, reaching $850 million. The waste management company priced the eight-year bonds at 10.87%, slightly below the initial guidance of 11%, according to sources familiar with the transaction.

This is Ambipar’s second bond issuance in international markets. In January 2024, the company raised $750 million, surpassing its initial $500 million target amid strong investor demand. That issuance had a seven-year maturity and was priced at 9.87%, below the initial guidance of 10%.

Ambipar drew less demand compared to other Brazilian companies that recently entered the market. Usiminas and JBS, both frequent issuers, saw investor interest surpass their bond offerings by more than four times.

An investment banker, speaking on condition of anonymity, said Ambipar’s issuance faced challenges compared to other January offerings, attributing this to the company’s credit profile and lower market recognition rather than a shift in investor appetite.

Another person familiar with the matter noted that Ambipar operates in a niche sector with no direct international peers, making it harder for investors to assess its credit profile. However, the company still managed to extend the bond maturity and attract large investors focused on sustainable assets.

Market strategy

Ambipar initially marketed the bonds with a target issuance between $400 million and $500 million (a benchmark-sized offering). The company plans to use the proceeds to repay debt maturing in 2031, refinance other obligations, and fund general corporate purposes. An equivalent amount will also be allocated to sustainability projects.

In a statement, Chief Financial Officer João Arruda said the bond issuance would help Ambipar roll over short-term debt.

“We are very pleased with the outcome of the transaction. The issuance attracted high-quality investors who believe in Ambipar’s future and support our environmental agenda,” he said.

“The bond market offers an eight-year maturity, which is not available in the local market. As a prudent measure, we will use this issuance to refinance Ambipar’s debt due between 2025 and 2028, as well as part of the green notes maturing in 2031. This gives us a solid timeframe to execute our growth, profitability, and efficiency plans, increasing our cash generation and improving our credit profile over time,” Mr. Arruda added.

Fitch Ratings assigned the issuance a BB- rating, citing Ambipar’s strong position in the environmental services sector, growth potential, and geographically diversified revenue streams. However, analysts noted that the company’s high leverage and significant cash flow consumption for interest payments constrained its rating.

Ambipar joins JBS, Bradesco, and Usiminas, which also raised funds in the international bond market in January. JBS issued $1.75 billion, Bradesco secured $750 million, and Usiminas raised $500 million.

Investment banks had anticipated a stronger bond issuance season, but rising volatility in both domestic and international markets led some companies to postpone fundraising plans. The current issuance window is expected to remain open until the second week of February, when companies begin releasing fourth-quarter 2024 earnings results.

Ambipar’s issuance was jointly led by Bank of America, Bradesco BBI, and UBS BB, with settlement scheduled for February 5.

*By Rita Azevedo, Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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