Class associations accuse U.S.-based aircraft company of threatening national sovereignty
11/23/2022
Boeing’s offensive to recruit engineers from the elite of Brazil’s aerospace and defense industry has ended up in court. Two trade associations have filed a lawsuit to try and stop the U.S.-based plane maker from hiring “highly-skilled engineers” that are currently working in strategic companies of the country’s Defense Industrial Base (BID).
In one year, Boeing has taken more than 200 engineers from other companies to its center, in the most acute movement of brain drain that this industry has ever experienced, according to estimates by representatives of the Brazilian Association of Defense and Security Materials Industries (Abimde) and the Aerospace Industries Association of Brazil (Aiab).
In the suit filed Tuesday in the 3rd Federal Court of São José dos Campos, the trade groups warn that the U.S.-based company’s move puts the survival of companies in the sector at risk and threatens national sovereignty. The goal of the suit is to stop the “systematic hiring that leaves a trail of predatory actions in the companies of the BID, until alternatives are discussed that can guarantee the preservation of national sovereignty.”
With the move, the intention is also to bring the American company to the center of the debate, as well as the Ministry of Defense and the Federal Attorney General’s Office (AGU). “These are hundreds of engineers, but the core of the issue is not quantitative. It is qualitative. That is the difference with other brain drain processes,” said Aiab head Julio Shidara.
“Aiab defends free competition and the free market. But such principles are not absolute. They must be subject to constitutional imperatives such as national sovereignty,” he added.
So far, 10 of the most important companies in the defense sector have had engineers “co-opted” by Boeing, and some have lost about 70% of their staff in specific areas essential to the business, according to the associations.
In Embraer’s case, the situation would be more worrisome given the access that Boeing had to “proprietary information” during the negotiation period for the purchase of the Brazilian manufacturer’s commercial aircraft, which did not move forward. Embraer and Boeing have taken the conflict to arbitration and there is no outcome yet.
In the associations’ view, Boeing’s move unbalances the market and represents a threat because the companies that make up the BID “aim to constantly update the Navy, Air Force, and Army technologies.” “The companies that are being harassed are the ones that provide technology that maintains the defense capability of the Armed Forces,” they said.
Overall figures were not disappointing, but slowdown and interest rates are a concern
11/23/2022
Emy Shayo Cherman — Foto: Ana Paula Paiva/Valor
Brazilian public companies reported good results in the third quarter, supported by the country’s better-than-expected economic activity in the period. However, the persistence of inflation and uncertainty about the interest rates are raising the risk of deceleration in the following months.
According to an analysis carried out by Valor Data with 408 public non-financial companies, excluding the effects of Petrobras and Vale to avoid distorting the sample, net profit fell by 31% year-over-year and increased 15% over the second quarter. Revenues advanced 15% in one year, to R$931.2 billion, and grew 5% over June.
Production costs, although lower when compared to the second quarter – with the reflection of the invasion of Ukraine by Russia – are still at high levels. The 21% increase was greater than the advance in revenue and ate into profits.
“Overall, our perception of the results was positive, better than expected,” said Emy Shayo Cherman, Latin America and Brazil equity strategist at J.P. Morgan. She said the market had low expectations, but GDP growth projected for the third quarter, compared with initial estimates of contraction, helped results to overcome projections.
The main positive highlights were the oil and gas and pulp and paper sectors. “Petrobras reported revenues above the consensus, even with Brent prices below the previous quarter,” said Victor Penna, manager of the market analysis team at BB Investimentos. For him, the sector will be strong in the fourth quarter, since demand and supply remain tight, which would be enough to hold oil prices up.
The market now monitors the controversy surrounding the payment of dividends by Petrobras. In the earnings conference call, the chief financial and investor relations officer, Rodrigo Araújo Alves, said the company’s cash is close to the optimal point of $8 billion and that debt is “stable, controlled” around $65 billion.
Most sectors posted mixed results in the third quarter, said XP’s strategist Jennie Li. “We didn’t see any where all companies had positive or negative results, it depended a lot on the circumstances they were in.”
Construction companies reported results above the expected by the market, while the greater devaluation of iron ore and steel, driven by China, pressured the results of Vale and steelmakers.
Ms. Shayo, with J.P. Morgan, noted that the improved activity of the Brazilian economy impacted mainly services, with disappointing consumer spending figures, as shown by the results of retailers. “Expectations were unrealistic and there was an overestimation by the market.” She recalled that discretionary consumption was especially impacted by the corrosion of the population’s income.
The higher interest rates, still with virtually no effect on the overall sample, have done considerable damage to the balance sheets of consumer companies, as evidenced by the comments of executives and the alarming numbers on the bottom line – the rise in interest rates increases the cost of debt, which is higher because companies have capitalized in recent years.
But that’s not all. The deleterious effect of interest rates also appears in sales. The high default rate has hurt the results of retailers such as Americanas, Magazine Luiza, and Via. The chief financial and investor relations officer of Magazine Luiza, Roberto Bellissimo, said in the earnings conference call that the company is issuing fewer cards as a way to face this situation.
The worsening of the financial result of Americanas, which was negative by R$612.3 million, more than doubled compared to the negative result of the third quarter 2021. The company links the bad figures to the high interest rates in the period, which led to the net loss of R$211.5 million, and to the 19.6% drop in sales of electronics, because they are products of higher average ticket that depend on credit.
In the case of Grupo Pão de Açúcar (GPA), many stores managed to partially pass on inflation to prices, but in regions where competition is fiercer, especially with the Extra brand in the suburbs of São Paulo and Rio de Janeiro, this is harder to do, CEO Marcelo Pimentel told analysts in the earnings conference call. The investments related to the quality of fruits and vegetables had an initial impact, but the group could not pass on direct inflation to these prices.
“If fiscal and political uncertainties remain in place, the Central Bank may have to raise interest rates again, which will put further pressure on companies’ bottom lines,” said Ms. Li. She notes that large publicly traded companies still have ways to protect margins by being more resilient, which reduces liquidity risks.
“This increase [in financial costs] is problematic for the company when it is not capitalized and is burning cash,” said Victor Natal, Itaú BBA’s strategist for individual clients. He points out that it is natural for companies’ financial expenses to increase and that they are used to this amid Brazil’s history of high interest rates. “I believe we have already been through the worst in relation to this,” he said.
For the fourth quarter, the banks believe there will be a slowdown, even with the period being the best for consumer companies, which usually rely on Black Friday and the holiday season. “Sales are likely to increase compared to the third quarter, but they will still be weak year-over-year,” said Mr. Natal, with Itaú BBA.
In the view of Mr. Penna, with BB Investimentos, the atypical fourth quarter, with the FIFA World Cup, is likely to boost consumption figures, especially of beverages. “Ambev may benefit in the ‘away-from-home’ segment, with increased consumption in bars and restaurants,” he said. “The purchasing power of consumers is a point to keep an eye on.”
Banks and fintechs see in the sector opening room to enhance cross-selling and financial services
11/23/2022
The opening of the food and meal card segment, which will take place as of May 2023, is expected to bring more opportunities for banks and other financial institutions to strengthen their operations in the benefits sector. With an estimated volume of R$150 billion after this regulatory change, the segment itself is already interesting, but for banks, it also represents a way to increase their relationship with companies, including small ones, and to enhance cross-selling.
Bradesco and Banco do Brasil operate in this niche through Alelo, which is part of EloPar, and now Elo will also start operating in the open arrangement. Santander created Ben in 2019 and Itaú bought a stake in Ticket the same year.
As with credit cards, the world of benefit cards will be divided between open and closed arrangements. In the closed arrangement, which is the traditional model for this market, issuing, accreditation, and the card’s flag are all done by the same company. The values, in turn, can be used in the accredited network. Today, this market is dominated by Alelo, Sodexo, and Ticket, which hold a slice of almost 80%. The rest is spread over almost 180 local and regional companies.
The bulk of the market is in food and meal benefits, which can be offered to the workers with or without tax benefits for the employers through the Worker’s Food Program (PAT). There are, however, several other types of benefits that can be offered, such as culture vouchers, pharmacy, and fuel, among others.
In the open arrangement, issuing, accreditation, and flagging are done by different institutions. More recently, benefits startups have started to operate through this “flagged” model, which expands the acceptance network. As of May, the open arrangement will be able to offer companies the same tax benefit as the closed one under PAT.
Márcio Alencar, Alelo’s head of digital strategy, marketing and business says that today the company has a 30% share in PAT, or R$40 billion, and another R$6 billion in its ecosystem in other benefits, which already operates in an open arrangement model. He believes that, with the regulatory changes, this 85%/15% ratio between closed and open arrangements tends to seek a balance in the medium to long term.
“It’s not because the open arrangement in PAT starts in May that there will be mass migration. It will be gradual. We have long-term relationships with the Human Resources departments of companies, for our more than 1 million stores we already offer several other financial services, and the end customer is already very well served here. He is not going to simply change overnight.”
In any case, Alelo is already testing a flexible benefits model in partnership with Elo expected to be launched in early 2023. Pedro Cardoso, head of new business at Elo, says that since decree 10,854, issued in November 2021, which established an 18 month timeframe for the entry into force of the open arrangement in PAT, the company had been studying entering this segment. “We have one of the largest payment arrangements in Brazil, with more than 8 million accredited establishments, and 45 million cards issued. So, we started studying how to use this network to structure a benefits product.”
Since in the open arrangement Elo is the flag and Alelo is the issuer, they will be together and will not compete directly with each other, although an eventual expansion of this partnership could end up cannibalizing Alelo’s closed arrangement market. “There is no conflict, there is room for collaboration. It will be up to the company to contract what is best for its employee, the closed or the open arrangement,” said Mr. Alencar.
Ignacio Estivariz — Foto: Divulgação
Mercado Pago entered into the benefits market around three months ago. According to Ignacio Estivariz, the company’s senior officer of digital banking, the company realized it could modernize this segment just as it did with the digital account. In partnership with Visa, the same plastic is used for the debit and benefits function. In the app, there are sub-accounts, since the meal benefit, for example, can only be used in restaurants. “For the company, it makes it easier to manage all benefits in one card, and the client still has all the benefits of the free of charge Mercado Pago account,” explained the executive.
Mr. Estivariz points out that Mercado Pago currently has 35 million users in Brazil and that, in theory, this is the potential market for the benefits product. He states that the fintech will get the interchange fee from the card, but that this is not the main reason for offering the benefit. “We are always looking at where technology can bring a differentiator, where the current experience is not very good. Now we are in this process of talking to HRs, bringing in the companies. Not to mention the benefits of financial inclusion, since the benefits card is often the first step on that path,” he said.
Mr. Estivariz mentions a company in Manaus (Amazonas) in which employees still received their meal cards in paper vouchers which were accepted at a single restaurant. Now, with the agreement with Mercado Pago, everything was digitalized. Marco Garcia, the owner of the packaging company Rubberon, reveals that many of his employees had access to a debit or credit card for the first time through Mercado Pago. The positive reaction of the company’s employees has spread throughout the region to a point where other entrepreneurs have sought Mr. Garcia out for more details about the product and directions on how to implement it in their businesses.
Ticket, a brand of Edenred Brazil, has a broad portfolio of benefits. Besides food and meal cards, it offers solutions for transportation, culture, incentives and rewards, salary anticipation, health, well-being, education, and remote work. In late 2021, the brand launched Ticket Vantagens, which offers a series of benefits to users, such as a online marketplace with selected products, discount club with cashbacks, and access to a corporate education platform.
“The constant increments in the portfolio are part of the brand’s strategy of investing in relationship and digitalization. The solutions reinforce the brand’s digital transformation, respecting labor legislation and union agreements,” said the company to Valor.
In 2019, Itaú acquired an 11% minority stake in Ticket, which remains independent, with Edenred as its parent and manager. According to the company, the partnership enabled the bank to expand its portfolio of HR solutions offered to its corporate clients. “At the same time, the new distribution channel strengthens Ticket’s existing sales organization and arrives to support the brand’s constant growth in the Brazilian market.”
The entry of the open arrangement model in PAT will be important for newcomers in the market to be able to access the HRs of large companies as well. This is because the program’s tax benefit applies to companies that calculate their taxes based on the so-called real profit. “With the opening of the market, larger companies may start considering new providers,” said Karen Fletcher, leader of the legal department of Caju, a startup founded in 2020 that concentrates benefits on a credit card with the Visa flag. Today, 13,000 companies with about 400,000 users use the Caju card.
Other changes that may increase competition in the sector are the prohibition of the bonus given to HRs of the hiring companies by the issuers of food cards, which ends up increasing the rate that these issuers charge restaurants and supermarkets, and the post-payment (deadline for HRs to pay the value of the contracted benefit), said Ms. Fletcher. “For the new entrants, it was very difficult to compete with companies that could afford offereioffer both the payment term and aggressive discounts.”
The changes in the rules for food and meal cards were made by decree at the end of 2021, and by a provisional measure approved this year. The discussions were not simple. There was much debate, for example, about the freedom for the user to change the management of his or her benefit card. This portability may even need to be postponed since there is resistance and sources from the sector comment that the operationalization is not simple and there are still regulatory doubts about how it will be done.
For portability to work, government regulations will be needed to define, for example, which body will manage this registry, whether Central Bank, Ministry of Economy, or Ministry of Labor. The Brazilian Association of Worker’s Benefit Companies (ABBT) has been active in talks with the government, as has Zetta, an association founded by Mercado Pago and Nubank, which also represents other fintechs. The transition to Lula administration, however, has somewhat delayed the talks.
With the arrival of the open arrangement, it is still likely that there will be a consolidation in the market and local companies will end up being bought out or even shut down if they cannot adapt to the new features, which require investments in technology. An obstacle is that the market leaders already have a very large market share, and, among these smaller companies, many do not have the governance standards required by the large groups, which makes an eventual M&A operation more complex.
When contacted, BB and Bradesco preferred to speak only through Alelo. Itaú, Sodexo, and Santander declined to comment.
Ilan Goldfajn was supported by the United States, Canada, and Mercosur
11/22/2022
Ilan Goldfajn — Foto: Ana Paula Paiva/Valor
With the decisive support of the United States, Canada and the entire Mercosur, former Brazil’s Central Bank President Ilan Goldfajn was elected Sunday president of the Inter-American Development Bank (IDB). Mr. Goldfajn, the first Brazilian in the position, will take office for a five-year term on December 19th.
The victory was considered “overwhelming” by the Brazilian government, which celebrated the conquest. The IDB’s election system considers the votes of countries according to their participation in the institution’s capital. Mr. Goldfajn obtained the support of 17 countries, which correspond to more than 80% of the voting power.
“Taking over the presidency of the IDB is an honor and a great opportunity for me, as a Brazilian, after 63 years that JK [Juscelino Kubitschek] had this dream,” Mr. Goldfajn told Valor.
In his first speech after being elected president, Mr. Goldfajn pledged to lead the institution “in all its diversity.” “I will be the president of the high-income, middle-income, and low-income countries. I will be the president of the regional members and also of the non-regional members. I will be the president of the countries of South America, Central America, North America, and the Caribbean countries,” he said in a video posted on Twitter by the IDB’s executive director for Brazil and Suriname, Martha Seillier.
The result shows that the noise caused by former Finance Minister Guido Mantega, who sent letters to a number of countries asking for postponement of the election, has been contained. The maneuver left some countries confused about the Brazilian candidacy.
“This is a candidacy of the Brazilian state, which will govern on behalf of and for the benefit of the entire region,” Foreign Trade Secretary Lucas Ferraz, who coordinated Mr. Goldfajn’s campaign and was responsible for negotiations with the organization’s member countries, told Valor.
Mr. Ferraz pointed out, on the other hand, that this is a “legacy” of president Jair Bolsonaro (Liberal Party, PL) and the Minister of Economy, Paulo Guedes. It was also one of the rare victories of Brazilian diplomacy under the Bolsonaro administration, in which the promises of gains in the rapprochement with Mr. Trump did not materialize, for example.
Despite resistance from some wings of the new administration, Mr. Goldfajn defends causes that are common to President-elect Luiz Inácio Lula da Silva and the Biden administration, who has been advocating a more present role in issues such as climate change.
In a statement, the Ministry of Economy said that Mr. Goldfajn’s election is a result of the campaign led by the ministry. Moreover, it stressed that it is a recognition of the platform presented by Brazil: physical and digital infrastructure; fight against poverty, inequality and food insecurity; and climate change and biodiversity.
To Márcio Olímpio Fernandes, political analyst at Ohmresearch, Mr. Goldfajn’s election means an attempt at stabilization for the IDB after a tense period of the Claver-Carone administration, whose appointment by Mr. Trump broke the tradition of the institution always being chaired by a Latin American.
According to Pedro Silva Barros, economist at Ipea and head of the institute’s mission to Venezuela under the Lula and Rousseff administrations, the expectation in the new administration is that Mr. Goldfajn “will not repeat Claver-Carone’s mistake, which was to make a Trumpist management without [former President Donald] Trump” in power.
“What the new government of Brazil expects is for Mr. Goldfajn to do a Latin American management, not a pro-Bolsonaro management without Bolsonaro,” he said. “There will be in the coming period a resumption of Latin Americanism led by Brazil and Mr. Lula. The IDB can and should support that agenda.”
Brazilian company signed an exclusivity agreement with Japan’s NH Foods
11/22/2022
NH Foods had paid nearly $135 million for BPU five years ago — Foto: Divulgação
Minerva Foods is close to buying another facility abroad. The Brazilian company signed an exclusivity agreement with Japan’s NH Foods to discuss the acquisition of Breeders & Packers Uruguay (BPU), an Uruguayan slaughterhouse with the capacity to process nearly 1,000 animals per day.
Sources say Minerva is in the due diligence stage. The deal is expected to be defined by December 15, when the exclusivity period ends.
Sources say the amounts were not defined yet, but Minerva is expected to disburse $35 million to $45 million. Rabobank is advising Minerva.
NH Foods decided to sell the Uruguayan operation amid the down cycle of the cattle-raising business in the neighboring country. NH Foods had paid nearly $135 million for BPU five years ago.
If it buys the facility, Minerva will expand its processing capacity in the country by 40%. The company currently has three units in Uruguay, with a combined capacity of 2,500 heads of cattle a day. In Uruguay, Marfrig, another Brazilian company, is the leading meat producer.
Minerva’s decision to take over BPU is based on the bet on a turnaround of the cattle-raising market in Uruguay with a larger offer of cattle in the next years. In a recent conference call with analysts, the company cited better perspectives for Uruguay.
The deal with NH Foods in Uruguay may start a global partnership and involve NH’s operations in Australia. Nippon Ham owns the third-largest beef facility in the country.
Minerva is valued at R$8.1 billion on the stock exchange.
If privatized as announced, the state-run company will become a corporation with dispersed ownership
11/22/2022
Copel is seen by the market as a solid company with good governance — Foto: Reprodução Facebook Copel
The decision of the government of Paraná to privatize Copel by trading shares held by the state in the financial market puts the company in a club that is no longer small: that of companies without a defined controlling shareholder, which may give investment capacity to the state-owned company, besides guaranteeing dividends to the state of Paraná, which remains a relevant shareholder.
The story sounds familiar, and it is. The model is the same recently used by the federal government to privatize Eletrobras. Considered by the market as a solid company with good governance, Copel can become a strong “competitor” to Eletrobras in the electric sector, by adopting a model that was also used by Vibra Energia (formerly BR Distribuidora), Vale, and Embraer, among others.
In addition, privatization can guarantee installed capacity for the company. A rule established a few years ago required Copel to give away the shareholder control of the Foz do Areia hydroelectric plant, the company’s largest, with an installed capacity of 1.6 gigawatts.
The plant’s concession contract expires in September next year. After this date, power plants and state-owned concessionaires can renew the grants for 30 years, as long as they privatize most of the operations. In this case, Copel would have to offer to the private sector at least 51% of Foz do Areia’s operations, becoming a minority shareholder.
Without the restraints of the rule made for state-owned energy companies, Foz do Areia would continue in the hands of the company, which aims to be 100% renewable. Recently, Governor Carlos Massa Ratinho Jr. stated that Copel will study to get rid of a coal-fired operation (Figueira, of 30 MW).
The company is also studying to get rid of the 469-MW natural gas-fired Araucária thermal plant in order to invest in wind and solar plants — which is one of Eletrobras’s plans to advance in power generation.
In a note, the government reinforced that the state of Paraná will remain the largest shareholder (with at least 15%) and will also have a special golden share, with veto power, which aims to ensure investments in Copel Distribution, today the main arm of the company.
Sources consulted by Valor indicate that the government will have no difficulty in approving the proposal, since the current governor Ratinho Júnior was reelected in the first round with almost 70% of the votes and has a majority in the Legislative Assembly.
The privatization would also strengthen Paraná state’s cash flow, which, like all other states, was affected by the drop in revenue caused by the reduction of the sales tax ICMS rate levied on fuels after the product was classified as an essential item. This reduction was one of the measures adopted by the federal government to reduce the impact of high fuel prices on inflation.
Mr. Ratinho Jr. signaled last month that he could relinquish control of Copel. Without the strong opposition of the people of Paraná, with less cash and investment plans, the government put the company up for sale, waiting for the funds from the stock offer and future dividends. Today alone, with the announcement of the privatization, the company appreciated about 20% on the stock exchange.
*By Robson Rodrigues, Fábio Couto — São Paulo, Rio de Janeiro
Ultra’s company has already entered distributed generation
11/22/2022
Tabajara Bertelli — Foto: Claudio Belli/Valor
A few weeks after the acquisition of startup Stella and getting into distributed solar power generation, Ultragaz — the liquefied petroleum gas (LPG) distributor of Ultra group — made a new strategic move to consolidate itself as an energy company with a diversified portfolio. For R$165 million, the company purchased Neogás, a leader in compressed natural gas (CNG) distribution in the country, with an eye on the energy transition and the potential of the biomethane market.
Founded 22 years ago, Neogás was the pioneer in CNG distribution in Brazil and operates six compression bases installed in São Paulo, Rio de Janeiro, Paraná, and Rio Grande do Sul with an estimated production capacity of 100 million cubic meters per year, the same volume produced in 2021.
The distributor also has a fleet of 149 trucks, a customer portfolio complementary to that of Ultragaz, with large industrial consumers mainly far from the coast, and supplies 50 gas stations, in addition to providing logistics services to natural gas distributors.
“The main point [with the acquisition] is to unlock the biomethane market, which has a huge potential in the country,” Tabajara Bertelli Costa, CEO of Ultragaz, told Valor. Today, according to the executive, the domestic production of gas corresponds to only 3% of the potential.
As with the acquisition of the distributed generation startup, the strategy with Neogás is to take advantage of the strength of the Ultragaz brand and its broad commercial bases — over 58,000 companies and 11 million families served throughout Brazil — to offer new products and services to customers.
The expansion of access to natural gas and biomethane is expected to especially benefit industries that are more distant from pipelines and distribution networks. At the same time, by connecting biomethane producers — who are in landfills or near sugar and ethanol mills — and end customers, Ultragaz’s expectation is to accelerate the development of this sector.
“Distributed generation already exists and may be very relevant in the coming years. Now, the vision is to develop the biomethane production chain”, said Mr. Bertelli. Ultragaz’s plan, according to the executive, is not to become a producer of gas, although there may be some incursion of this nature to learn more about the technologies or to promote the value chain.
The intention, stressed the executive, is not to be a large producer of biomethane. It is necessary to know the technologies and better understand the market, eventually encouraging the production to ensure that the product reaches the market with a proper price. The focus, however, remains on the last mile. “The idea is to do the same thing that was done with LPG,” he said.
Although today the Neogás operation is concentrated in the South and Southeast, the ambition is to expand the supply to other Brazilian regions. Ultragaz has advanced conversations with customers that may result in the installation of compression stations, which by business logic should be close to the market, in new locations and, consequently, in new biomethane production centers. “Ultragaz brings logistical expertise,” said the executive.
While Stella is likely to remain as a subsidiary of Ultragaz, the plan for Neogás is to incorporate it in the future. From the beginning, the commercial area will be already integrated, according to the executive. The closing of the operation still depends on certain conditions, including approval by the antitrust watchdog Cade.
According to Mr. Bertelli, there is growing demand from customers for different types of energy, particularly those that meet the sustainability commitments made by companies. Another factor that will probably drive the market and the energy transition itself is the concern with supply security.
Ultragaz is still unable to measure the additional revenues from its latest acquisition. However, the company’s CEO says, there are several opportunities to be seized. “There is a lot happening in renewable energy, but we are looking at where we have a differentiated operation. The vision is to accelerate the energy transition process, and this way we are potentially building a new Ultragaz,” he added.
The Ultra group’s company had already been studying a renewable LPG, obtained from raw materials such as ethanol, biodiesel and chemical residues. The main challenge, according to Mr. Bertelli, is to reach a commercially competitive product. LPG of fossil origin can be transported in a canister. Through a partnership, the first BioGLP flame in the country was produced in 2021. The next step will be to check the commercial viability.
Difference between Brazilian and U.S. real interest rates increases again after elections
11/22/2022
Thiago Mendez — Foto: Leo Pinheiro/Valor
One barometer of the size of the premium demanded by the market is the spread between Brazil’s long-term real interest rate and the U.S. benchmark real rate. Real interest is the indicator that usually represents the true gain from an investment, since it discounts inflation.
The relative resilience of Brazilian assets to the risk aversion in global markets had been reducing the risk premium of local assets throughout the year until very recently. This trend has begun to reverse. Since early November, investors have started to demand a higher risk premium for domestic assets amid heightened uncertainty regarding the sustainability of the public debt in the long term.
In March, at the peak of the discussions about this year’s budget and with the start of the monetary tightening cycle in the United States, the difference between the rate of NTN-Bs (Brazil’s National Treasury notes) maturing in May 2055 and the 10-year U.S. real interest rate was close to 7 percentage points. Since then, the spread has fallen to 4.07 points on November 3, but is now approaching 5 points again.
“We had a very tight election in Brazil, with discussion about what the country’s fiscal framework will be. There is a vague speech of the future administration about combining fiscal and social responsibility, but there is great uncertainty about what will be done and how. In this context, the Brazilian assets had little risk premium,” said Thiago Mendez, head of fixed-income strategies at Bahia Asset Management. Taking the interest rate market as an example, he recalled that the curve priced Brazil against the world in 2023, and the country was expected to be among the first ones to cut interest rates.
“A little while ago, the market priced a cycle of almost 4 percentage points of Selic drop, which would indicate a rate below 10% [per year], even as the United States and Europe will still raise interest rates next year,” said Mr. Mendez. He points out that the agents got excited with the possibility of an orthodox person to take over the Ministry of Finance, but said that, in face of the signaling of a large volume of spending wanted by the elected administration for next year, the real increase in spending is “very big.”
“The risk premium situation of Brazilian assets, which was low, has completely reversed. Abroad, we saw the pricing of interest rate hikes in the United States decrease. The market started to bet on interest rate cuts there, while in Brazil we saw the opposite. Any priced drop is out of the yield curve,” he said. “At this moment, the market considers more likely that the Central Bank will raise interest rates again in the short term.” In this sense, the firm chose to have few positions in Brazilian assets at the moment.
According to the manager, the strong upward movement of interest rates in the last few days has led Brazilian fixed-income alternatives to once again present a “relevant” premium, which reflects the uncertainty with debt sustainability. “We are navigating an environment of great uncertainty in the short term. Volatility will continue to be high, especially in interest rates. The more expenses, the harder it will be for the Central Bank to start reducing interest rates. Given the premiums, if the world helps and Brazil has a credible fiscal framework, assets may once again have room to behave well, but it is still too early for this. In addition, the new administration has not given any concrete signs that it will move along these lines,” he said.
Since the market jitters seen on November 10, the performance of local assets has been very much tied to Brasília and to information about the Transition PEC – a proposal to amend the Constitution aimed at excluding Brazil’s main social program from the spending cap – and about who will lead the Ministry of Finance in the next administration. The disclosure of an alternative PEC, which provides for R$70 billion in expenses above the cap rather than R$198 billion, gave support to the markets on Monday and helped to reduce the risk premium of Brazilian assets. Yet, the high uncertainty prevails and still generates a demand from investors for a premium.
If the Transition PEC is passed with nearly R$200 billion excluded from the cap, as indicated by the first draft forwarded by the transition team to Congress last week, the primary deficit of 2023 could reach a “dangerous” level for the behavior of country risk measured by five-year CDS contracts, said Marco Antonio Caruso, the chief economist of Banco Original.
The bank compared Brazil’s primary result as a proportion of the GDP with the difference between Brazil’s five-year CDS and the average of other emerging countries from 2007 to 2019. Original excluded two exceptional periods: Luiz Inácio Lula da Silva’s first term in office (2003 to 2006), when the CDS remained high due to market fears about his fiscal policy, but in fact surpluses were produced; and the pandemic, when government spending rose to around 10% of GDP, but the market was “tolerant” because it understood that it was an emergency situation.
“Apart from these two periods, we saw that the higher the surplus, the higher the premium of our CDS against the other emerging economies, and the opposite is also true,” said Mr. Caruso. For him, this was already expected, given that the CDS acts as “insurance” against a debtor – in this case, the federal government. “It reflects, in some way, the possibility of a worsening or improvement in the public accounts,” he said.
According to Original’s calculations, the “magic number” that would trigger an excessive worsening of Brazil’s risk measured by the five-year CDS is close to 1% of GDP. “That is, deficits higher than 1% of GDP, looking at Brazilian history, end up triggering a much worse CDS,” said Mr. Caruso.
Original’s estimate for the primary result in 2023 was close to zero. However, if the Transition PEC is approved with an amount close to R$200 billion, this deficit could be around 1.5% of GDP, he said.
The primary surplus that does not make the Brazilian debt explosive is estimated at 2% of GDP, according to the economist. “If the government starts with a deficit much larger than 1%, it is so far away from the 2% [surplus] that it starts to be politically very difficult. If the government started with a smaller deficit and had a signal that this 2% would be reached, maybe the market would settle down,” said Mr. Caruso. The duration of the waiver (permission to spend above the cap), whether it will be permanent or not, and its size “matter a lot” to the market, the economist said.
Not by chance, as noted by Ian Lima, fixed-income manager at Porto Investimentos, the discussion around the Transition PEC without the participation of the economic group that makes up the transition team generated bad mood among market participants. “The market interprets the PEC as a political proposal, not an economic one. The Ministry of Finance and the Ministry of Planning, which will have to comply with what was determined, did not participate in the discussion about what the budget will be. The pilot is not present and the market tends not to like this kind of behavior,” said Mr. Lima.
When referring to the interest rate market specifically, Mr. Lima notes that the market has interpreted the Central Bank’s next move as an interest rate cut, but points out that since it is not possible to see a sustainable growth scenario or debt stabilization, to the extent that it is still difficult to say what the fiscal policy will be, caution with bets on interest rate cuts predominates.
“From the market jitters of the 10th to now, we understand that this is not the time to simply reduce the positions to zero. We left a mix a little shorter, because the whole curve widened and we are, therefore, with shorter positions,” said the manager from Porto Investimentos.
When looking at the long end of the real yield curve, however, Mr. Lima opts for a more careful tone. “It has a premium. A real interest rate above 6.3% doesn’t seem to make sense in historical terms, but we have a discussion about fiscal imbalance and nothing concrete yet about debt sustainability,” he said.
The head of finance at a large local bank says that among Brazilian assets, implied inflation and long-term interest rates are the assets that are currently trading at a positive premium, while the stock market and the real are still trading at a negative premium. “This means that local stocks and the currency are relatively expensive compared to rates and implied inflation, especially,” this source said on condition of anonymity.
“While the tax discussion has been very bad, nothing concrete has been decided yet, but most of the bad news has been fully incorporated into the inflation market,” the executive said. According to Warren Renaissance data, on Monday the “implied” inflation priced by NTN-B maturing May 2025 was at 7.06%.
“Without the proper fiscal support, not even a politically independent Central Bank can control inflation,” analysts at A.C. Pastore & Associados wrote in a report to clients. For them, only with primary surpluses that allow compliance with the government’s budget constraint will it be possible to preserve macroeconomic stability.
Senator Tasso Jereissati will file a proposal to amend the Constitution suggesting a way to ensure monthly payments for cash-transfer program
22/11/2022
Tasso Jereissati — Foto: André Coelho/Valor
Senator Tasso Jereissati will file a proposal to amend the Constitution (PEC) suggesting an alternative way to ensure monthly payments of R$600 for the cash-transfer program Bolsa Família (current Auxílio Brasil) in 2023. Mr. Jereissati’s idea is to increase the budget limit foreseen for next year by R$80 billion, an amount that would definitively expand the basis for calculating the spending cap the following years.
This is the second proposal that has emerged in recent days as an alternative to the blueprint prepared by the Worker’s Party’s (PT) transition team, providing R$198 billion in expenses outside the spending cap next year. The first was unveiled last Saturday by another PSDB senator, Alessandro Vieira, of Sergipe, and proposes to exclude R$70 billion from the spending cap for extra spending in 2023.
The emergence of yet another proposal reinforces the expectation that the transition team will have to negotiate. In the view of public accounts experts and some members of Congress, R$198 billion is an exaggerated amount to leave outside the cap, just as they criticize the idea of removing Bolsa Família from the spending limit for good.
Mr. Jereissati argues that with more R$80 billion the new administration can both adjust the value of Bolsa Família and expand spending in important areas such as health, education, science, technology and culture, including a real increase in the minimum wage. This bill is criticized, however, by Workers’ Party senators. They say that R$80 billion would be enough just to guarantee the value of the Bolsa Família at R$600 and an additional payment of R$150 per child up to six years old.
According to former Finance Minister Nelson Barbosa, a member of the presidential transition team, the new administration is able to expand the 2023 budget by up to R$136 billion, even outside the spending cap, without generating fiscal expansion.
The debate about fiscal expansion is not directly related to the spending cap, which is being discussed in the Transition proposal to amend the constitution, the so-called Transition PEC.
According to Mr. Barbosa, the federal administration’s primary expenses are expected to end this year at nearly 19% of GDP, while the 2023 budget bill foresees primary expenses at 17.6% of GDP. The R$136 billion, in this case, would correspond to a difference of nearly 1.4 percentage points of GDP.
Given these numbers, he considered insufficient the R$70 billion of additional spending to be provided by the alternative PEC filed by Senator Alessandro Vieira.
Mr. Barbosa made these statements at the Centro Cultural Banco do Brasil (CCBB), where Mr. Lula’s transition team is working.
At the same place, the vice-president of the Worker’s Party and reelected federal deputy José Guimarães said that the expenses included in the Transition PEC represent an attempt to define spending “as low as possible.” In other words, he suggested that a lower amount than the one proposed by the elected government would not be enough to meet social demands.
Another member of the transition team, Senator Randolfe Rodrigues said that the blueprint of the PEC may be presented this Tuesday. According to the senator, the blueprint is expected to provide the exclusion of the cash-transfer program from the spending cap for four years. The deadline was defended by Mr. Guimarães and by the Workers’ Party’s head, Gleisi Hoffmann.
Mr. Rodrigues also said that the counterparts to ensure fiscal balance may come in the same text of the PEC or the medium term.
A member of the regional development technical group, the senator said he received the data with an “alarming scenario” from the current administration. Last year, R$700 million was spent on Civil Defense actions, he said. For 2023, only R$120 million were set aside.
There was also a distortion, in the senator’s opinion, in the allocation of funds. “In 2018, 19% of regional development funds were allocated from parliamentary amendments, in 2022 this represents 64%,” he said, criticizing the system of rapporteur amendments, also called the secret budget.
Mr. Guimarães also said that the inclusion of the rapporteur’s amendments in the PEC “was never” discussed with the Chamber of Deputies Speaker Arthur Lira.
“This issue was never part of our talks,” he told reporters after being asked if this possibility, raised by Deputy Ricardo Barros, could help the PEC to move forward in Congress.
According to Federal Deputy Guimarães, “there is a great spirit of goodwill to approve the PEC.” “Everything has to be negotiated, nobody can impose it,” he said. He also said that from now until next Wednesday, the PEC negotiation will be “unlocked.”
While the political group discusses the PEC that will enable the payment of R$600 for Bolsa Família, the economic team analyzes several proposals for the new fiscal rule. Mr. Barbosa said that the transition team will present a recommendation on the topic in mid-December.
In the former minister’s opinion, the suggestions presented so far converge on the importance of establishing a sustainable debt trajectory as a relevant concept.
He also stated that there is a “reasonable consensus” in the transition team regarding the importance of a tax proposal that implements a value-added tax. According to him, Congress seems to have converged towards the adoption of the dual VAT, that is, a federal tax and another state tax. That is how it is described in PEC 110 report.
“This is a theme to be matured and approved in 2023 to be in effect as of 2024,” he added.
The same calendar applies to Income Tax reform, which, in his opinion, is not mature. Thus, he believes that there will be plenty of time to seek an agreement on the collection of income tax on dividend distributions.
Wealth and asset management firms see more interest in foreign assets after election
11/21/2022
Roberto Lee — Foto: Silvia Costanti / Valor
The market jitters caused by doubts about what Brazil’s fiscal policy will look like as of 2023 left everything cheaper, from stocks to long-term fixed-income bonds to the local currency. But instead of taking advantage of low prices, some investors are moving part of their funds abroad, especially after the runoff vote held on October 30. A novelty is that investors have sought U.S. Treasuries, which are widely seen as safe havens, despite the fat premium offered by similar assets in Brazil.
Avenue, a U.S.-based asset management company, saw the number of account openings grew three times above pre-election averages, while remittance volumes more than doubled, reaching on some days more than five times the average of previous quarters, said Roberto Lee, the platform’s founding partner. He declined to reveal the numbers because of the sale of the business to Itaú, which was agreed earlier this year and still depends on the approval of regulators.
Mr. Lee expected this move to end five or six days after the election, but it is still in place. “It is a phenomenon that doesn’t happen only in Brazil. Investors usually wait for the results [of an election or other event] to decide whether to send 20% or 40% [of their portfolios].”
In his view, this is not a capital flight, but Brazilians figuring out that it is worthwhile having part of the portfolio in hard currency.
What draws attention, however, is the destination of this money – short-term Treasury bonds, the more traditional U.S. fixed-income alternative and an asset almost as liquid as cash, which is now remunerating at a level not seen in the past. “That shows that it’s an alternative for capital protection, safety reserve,” said Mr. Lee. “It makes perfect sense, because it’s a broader market that has the safest securities.”
In this type of remittance, the amounts are larger than those destined for the stock market, he added.
In the last two weeks, after the runoff vote confirmed that Luiz Inácio Lula da Silva will be Brazil’s president again from 2023 on, the interest in sending part of the portfolio abroad gained steam, said Thiago de Castro, a partner and CEO of the wealth management company Tag Investimentos. “Investors think that in this new term he [the president-elect] won’t follow the basics of what was the first Lula administration. They see an angrier Lula focused on social policies, as he has always been, but without the fiscal responsibility seen in the past. They expect him to rule like the first term of [former President] Dilma [Rousseff],” who was picked by Mr. Lula to succeed him 12 years ago.
The view of the firm was already that regardless of who wins, the solution to go over the constitutionally established spending cap would be to tax structures that affect the top of the pyramid, from private family funds to inheritances and dividends. “Regardless of the taxation, because there will be taxes abroad as well, people are more interested in having funds in hard currency abroad,” said Mr. Castro. Investors now keep 20% of their portfolios abroad. Mr. Castro believes that this share will increase.
With about R$11 billion under management, Mr. Castro says that at least 20 clients who had no exposure to international assets started a conversation about that. “It was very reactive,” he said, despite expecting two difficult years for developed economies amid interest rate hikes and the economic slowdown expected in the United States, Europe, and China.
But unlike in Brazil, where investors compare their investments with the interbank deposit rate (CDI) on a monthly basis, Mr. Castro perceives an increase in the remittance of funds with the objective of preserving capital. “They look at how the S&P500 has behaved over the last 20 years. They are prepared to seek returns in more developed markets leaving behind eventual premiums that fixed income gives us in Brazil every cycle like the one we are experiencing.”
B.Side, two movements could be seen, said Antonio Costa, CEO of the wealth team: the expansion of the share abroad by families that had already invested in international markets and a greater interest by those who have not yet taken this step. “After the election, many clients approached us to ask what to do in this regard,” he said. “I think it’s natural when you change the status quo and there are no definitions about the government plan, what the Transition PEC [proposal to amend the Constitution] will look like, and who will be in the economic team.” The executive does not consider, however, such movement as capital flight. The Transition PEC is being proposed by Mr. Lula’s team to finance Brazil’s main social programs.
Mr. Costa’s clients are families with at least R$10 million in assets. According to him, this type of client already has interests abroad, use currency hedging, and holds stocks and other assets. As there are also significant risks out there, with geopolitical tensions, tightened financial conditions in developed countries, and the fear of recession, his clients prefer U.S. Treasuries as well. “Despite the overperformance of the S&P500 in recent days, volatility can still hurt a bit,” said Mr. Costa.
Wealth management firms Alloc and Portofino have also identified increased investor interest in international alternatives.
Two weeks ago, Guide was telling its investors to set up some hedges because the market opened up this opportunity in the first trading sessions after the election. One way to do that was to allocate in IVVB11, the S&P500 ETF traded on B3, said Fernando Siqueira, head of research at Guide. It is a way to capture the appreciation of the U.S. stock market and the depreciation of the real without having to send money abroad.
With the recent devaluation of Brazilian assets, the suggestion has already been revised, because prices in the local market have become attractive again, but some investors prefer to hold the bond that replicates the U.S. stock market index. “As much as our vision is that with Lula’s election the chance is that he will repeat what he did between 2003 and 2010 [in his two previous terms], many people doubt and prefer to stay out [of the stock market],” he said.
This move has not accelerated particularly after the election, according to Mr. Siqueira, but those who were disappointed by the defeat of President Jair Bolsonaro have been inclined to do that.
As for the local stock market, the specialist says he already sees good companies trading at a discount, including WEG, Vale, and Gerdau, and some others more linked to the domestic economy, such as Arezzo, Multiplan, and Totvs.
“There are good-quality companies with high margins, which are good cash generators, are not in debt, and fell 10% to 15%. They are buying opportunities,” said Mr. Siqueira. “Others will suffer a lot to pay [their obligations] because of higher interest rates.”
For those who prefer to bet on the Ibovespa ETF, the specialist said the current level – Brazil’s benchmark stock index is just below 110,000 points – is a good entry point, but that in this case investors must lengthen their investment horizon. “There will be volatility because you don’t know what the new administration is going to do. It could test the limits of the market again.”
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