Lithium, cobalt, and niobium are essential for many modern technologies — and the country has plenty of them
09/20/2022
Niobium: Brasília believes that country has essential stocks of strategic commodities and can supply companies of different origins — Foto: Reprodução
The United States has signaled to Brazil its interest in having preferential access to the Brazilian production of critical minerals amid growing rivalry with China, as it seeks to reduce dependence on strategic commodities.
Valor has learned that in meetings held in Washington in August, Brazilian representatives replied that the United States is welcome — including to make a difference in investments in this sector — but Brazil does not intend to grant privilege to partners.
The view in Brasília is that the country has essential stocks and can accommodate the presence of companies of different origins. While the U.S. talk about having preference, Brazilians reply that the government seeks to improve the business environment and equal competition conditions.
This message was given by diplomats and also by the Minister of Mines and Energy, Adolfo Sachsida, last month in Washington, sources say.
Critical minerals such as rare earth elements, lithium, cobalt, and niobium are essential for many modern technologies and for national and economic security. They are found in products from computers to home appliances. And they are key inputs in clean energy technologies such as batteries, electric vehicles, wind turbines, and solar panels.
A study by the European Union (EU) points to Brazil as the world’s largest producer of niobium — 92% of all. The product is used for high-technology applications (capacitors and supercomputers, among others). In addition, the country produces 13% of the world’s bauxite for aluminum production; 8% of natural graphite, used for batteries and material for steel production; and 9% of the world’s tantalum, which is used for superalloys and compensators for electronic devices, for example.
During the Trump administration, the U.S. defined a list of 35 ores considered critical to economic and national security. This year, the Biden administration took action to increase U.S. production.
A White House statement notes that as the world moves into a clean energy economy, global demand for those critical minerals is expected to skyrocket between 400% and 600% in the coming decades. For minerals such as lithium and graphite used in electric vehicle batteries, demand will increase even more — by about 4,000%.
The U.S. is increasingly dependent on foreign sources for many of the processed versions of those minerals, according to the White House. Globally, China controls most of the processing and refining market.
Last week, the European Union announced that it will make a Critical Raw Materials Act to build up “strategic reserves” and gain autonomy. European Commission President Ursula von der Leyen pointed out that lithium and rare earths “will soon be even more important than oil and gas.”
The only problem, Ms. Von der Leyen said, is that “one country dominates the processing” — that is, China. “We have to avoid falling into the same dependency as with oil and gas,” she said, adding that the EU seeks new partners to help strengthen the European economy and promote “our values.”
In the same meetings in Washington, Brazilian representatives insisted that the U.S. remove barriers to the entry of steel from the country into the U.S. market. The response was that, for the time being, this will not happen, especially in view of the U.S. legislative elections in November.
The Brazilian diplomacy replied that, at the same time, the U.S. imported from China and, before, from Russia. For these sources, the U.S. needs to have a clearer vision of what it wants in relation to Brazil and Latin America.
The trio of phone carriers claims from Oi the payment of R$1.73 billion dueto disagreements found in the contract for the purchase of the asset — Foto: Edilson Dantas/Agência O Globo
Telefônica Brasil, owner of Vivo, TIM S/A and Claro Participações Monday began a dispute with Oi in relation to the closing price adjusted by the purchase of Oi’s mobile business. The trio of phone carriers claims from Oi the payment of R$1.73 billion due to disagreements found in the contract for the purchase of the asset. Oi reported that it has opened a period of 30 days to try to seek an amicable solution to the situation.
Sources familiar with the situation say they believe the case will not be resolved easily and is likely to end up in private arbitration. The sale of the asset was signed in 2020 and closed in a judicial sale in April this year for R$16.5 billion.
The discrepancies have now been identified by the auditing company KPMG, hired by Telefônica, TIM and Claro. In addition, the trio asks for compensation of R$353.27 million.
The total contract adjustment claimed by the telecom companies is R$3.18 billion. Of this total, R$1.44 billion had been retained by the three carriers as a guarantee when the deal was closed. The difference of R$1.73 billion is what they are now asking from Oi.
Every transaction of this type, with ample time between the deal and the closing, has clauses to prove that what was signed is what is being delivered, says another source that follows the case.
Valor found that documents submitted by Oi on the fulfillment of commitments were considered inefficient and confusing, and it is not possible to distinguish what is capital investment in the mobile service from landline phone investment, for example.
Valor has also learned that the result of KPMG’s verification would indicate to the telcos that Oi seems to have “thrown in the towel a little bit,” which would mean that, in a way, it had given up on reaching the goals, because it would have invested less than it had committed, and it didn’t meet the goals of net adds — the difference between incoming and outgoing customers —, it didn’t reach the working capital, it lost market, and it wouldn’t have made the investments assumed.
On the other hand, this price adjustment notification reveals a “move” by Telefônica, TIM and Claro, according to a person who works with the companies. This is because the three phone carriers had offered R$15 billion for Oi Móvel in 2020. As a competitor appeared, Highline, the companies, which did not want to lose the asset, were “forced” to raise to R$16.5 billion, in a binding offer that ended up successful via judicial sale in April this year. But this substantial increase “was never quite accepted by the three companies,” which considered themselves to be the only bidders, the source said. Thus, they expected to “come up with any kind of an excuse” at the right time to reduce the amount offered.
After Oi presents the documentation on the fulfillment of the goals, another period of 30 days for negotiation between the parties will be established. On Monday, in a notice of material fact, Oi rejected KPMG’s analysis, which “presents procedural and technical errors, with mistakes in methodology, criteria, assumptions, and approach,” according to the phone carrier.
After the negotiation deadline, if there is still no agreement on the value of the asset, a single independent auditor will be hired within five days. This auditor will have to do the accounting for the companies within 30 days. In this case, it will probably not be KPMG, which has already been “compromised” by doing the first survey on Oi for the telcos. The decision of the contracted auditor will be binding on all parties involved without the possibility of appealing.
In the last case, if with this single audit the three telcos and Oi do not reach a consensus, the arbitration will be necessary. There are no details yet, but it should be a private arbitration, with an audit company, since the National Telecommunications Agency (Anatel) and the antitrust regulator CADE have nothing to do with this phase of the process, as they told Valor.
“The obligations assumed by the companies, and which are monitored by CADE, are the main ones reviewed in the Agreement on Control of Concentrations (ACC). The private issues between the companies are not part of the scope,” explained the antitrust agency.
Speaking about its legal competence, involving the regulatory features of the operation, Anatel said that “the subject [values eventually due after adjustment] is restricted to the agreement signed by Oi, Claro, TIM and Vivo, applying, in this case, the specific contractual provisions, object of a free agreement between the parties.”
For a source familiar with the documentation process, KPMG asks Oi for a high level of detail, such as, for example, all the invoices (there would be tens of thousands) linked to an investment. In addition, since the deal was closed, there would not have been any sign of questioning to Oi about the data presented to the telecom companies.
Oi, TIM, Claro and KPMG declined to comment. The four telcoms released Monday a statement to the market on the subject.
Container expansion and grain terminal are on the radar
09/19/2022
Fabio Siccherino — Foto: Marcelo Justo/Valor
DP World is studying to expand operations in Brazil. The growth route is still under analysis, but there are some paths being studied, according to Fabio Siccherino, the company’s CEO for Brazil.
One possibility under evaluation is to expand the container terminal in Santos. The idea would be to increase capacity to 1.6 million TEUs (20-foot equivalent units of containers) from the current 1.2 million TEUs, and eventually, at a later stage, to up to 2 million TEUs. “It is a project under discussion. There should be a definition by the end of the year,” he said. If the expansion goes ahead, the construction work will take 18 months.
According to the executive, the company has been monitoring demand growth projections and capacity expansion projects of other terminals at the port to determine the right time to make the investment. “Our understanding is that this is the right time [to start the expansion]. We only cannot fail to meet this demand and allow it to go to another port. We believe that this is a good time to invest,” he said.
DP World, a Dubai-based global giant in the port sector, operates a Private Use Terminal (TUP) in Santos since 2013, where it handles containers and, more recently, pulp. This new operation, in partnership with Suzano, is the result of a business diversification strategy that may be extended to other types of cargo.
Another possibility for the company’s growth is to get a grain terminal off the drawing board in the same port. In November 2020, the company signed a letter of understanding with Rumo to study the implementation of the project in Santos. However, the agreement did not go ahead.
Now, the company is trying to resume the initiative with other partners, such as producers and grain traders. “We are sounding out the market and working on that again. Agribusiness is growing in Brazil, there is a lack of installed capacity at the Port of Santos to meet this demand, and we have an asset well positioned for this,” Mr. Siccherino said.
A third development route for the company, which is already underway, is door-to-door logistics. This is a global strategy of DP World, which sees the business as the main growth driver in the future.
“It is a business transformation process, in which the group is no longer just an operator but a major logistics player. Here in Brazil, we created the company from scratch, and we are growing organically,” he said.
Today, this branch still has a small weight in the Brazilian operation. “When we started to prioritize the business, the pandemic and all the logistical problems came up. Now we are signing agreements with shipping companies to guarantee space on the ships, so there should be growth.”
In 2021, DP World Santos posted net revenue of R$551.5 million, an increase of 35% compared to the previous year. However, the terminal still faced a R$178.5 million loss, compared to a R$389 million loss in 2020.
The company’s problem is financial since it has a large dollar debt. Last year, net debt totaled R$2.95 billion, up 6.7% year-over-year. In 2017, when the group bought Odebrecht’s stake in the business (then called Embraport), a debt restructuring was carried out. However, the difficult situation persists.
The executive expects that the 2022 results will show a greater advance and that the company is able to turn around.
The group’s long-term vision for Brazil remains positive, according to Mr. Siccherino. There is interest in expanding operations beyond the Port of Santos.
“Brazil has many opportunities, even though it has its problems, some issues of legal insecurity that persist, it is a giant market. I am asked by the group to find opportunities to grow more in the country. Some are being analyzed; whenever a bidding process is announced, we look into it. Not only containers, for example, but also grains. We haven’t seen any opportunity yet, but it is on the group’s radar.”
One project that DP World will certainly study is the privatization of the Santos Port Authority (SPA), the state-owned company that runs the port. “We have been looking into it. The company has made [similar] experiences outside Brazil. But the positioning will depend on the final model and the conditions of the bidding, which are still pending,” he said.
The Brazilian Development Bank (BNDES) has started studies to enable forest concessions based on the sale of carbon credits. The state-owned bank already operates in environmental projects, with the bidding of parks for tourism and forests focused on sustainable management. The idea now, however, is to expand the ways of generating revenue from preservation, said Pedro Bruno Souza, head of social infrastructure partnerships and environmental services.
To make this model viable, it will be necessary to structure a regulatory and legal framework for the contracts since today there are restrictions – legislation forbids the sale of carbon credits in forest concessions, for example.
The initial stage is expected to be concluded by December so that specific initiatives can be structured starting in 2023. The bank’s initial estimate is to carry out three pilot projects with about 1.6 million hectares, which have not yet been defined yet.
“Brazil’s potential for this market is huge, but first it must guarantee legal security for the model,” Mr. Souza said.
He highlighted that carbon credits are only one potential source of revenue. “It is possible to generate credits for the conservation of a drainage basin, for the preservation of endemic species in the region. All of this has value. And there is a growing number of companies willing to pay for it. The question is how to price a guarantee of preservation.”
In parallel to these studies, the BNDES has moved forward with new forest concession projects based on sustainable management, that is, the extraction of timber and non-timber forest products in a controlled manner – something that is already a reality in Brazil.
The bank plans to launch later this year the public notice for Block 1 of national forests, with three assets in the South region. The project is under analysis by the Federal Court of Accounts (TCU), but the auction would only be feasible in 2023.
There are still two other lots of Amazon forests being structured by the bank, but in a less advanced stage. The projects are being carried out in partnership with the Ministry of Environment, and federal regulation is up to the Brazilian Forestry Service.
The idea of concessions is that concessionaires make investments to support inspections – which remain the responsibility of public authorities – with the construction of infrastructure and purchase of equipment, including guard posts and monitoring equipment.
In addition, the concessions must allocate resources and support the communities that live in the areas. “There is no point in telling illegal loggers they can’t do that anymore. You have to create a way for this person to migrate to preservation activity. So technical assistance for agroforests, to teach that planting certain products will yield more, is one obligation.”
None of the projects under analysis by the BNDES includes indigenous territories.
The forest concessions model, authorized by law in 2006, has been well regarded as a way to stimulate preservation, said Leonardo Sobral, with the forest chains and restoration team at Imaflora, a non-profit organization.
“It is proven that the model serves as a barrier to deforestation. If an area has no use, the chance of it being invaded is greater. From the moment the concession is established, there is a series of actions that prevent the problem from increasing,” he said. In his view, concessions could have advanced more in the past few years. “This agenda must be strengthened.”
In relation to the carbon credit model, Mr. Sobral believes that it can be an interesting way to expand the viability of the concessions if done well. He highlights, however, that it is necessary to guarantee a good execution of the project, with an adequate mapping of the traditional communities in the area and an adequate calculation of the benefits generated.
“In an area that is under deforestation pressure, additionality is relevant. But if it is a region with difficult access, which is not under pressure, there is no additionality,” he said. He is referring to cases in which the project would not have any positive impact from the preservation standpoint. “This regulation will have to be discussed.”
Owner of brand Phebo expects to gross R$1bn this year
09/19/2022
Christopher Freeman and Sissi Freeman — Foto: Leo Pinheiro/Valor
One of the oldest companies in Brazil, Granado has optimistic plans for the coming years after getting through the pandemic without any problems. The Rio de Janeiro-based personal care brand plans to double production by 2030, open new company-owned stores, and consolidate its recent presence abroad.
With revenues estimated at R$1 billion in 2022, the company controlled by Christopher Freeman grew 23% from January to August year-on-year. The revenue in these eight months, R$590 million, was even higher than the R$350 million obtained between January and August 2019, before the pandemic.
Created in 1870 by Portuguese citizen José Antônio Coxito Granado as a kind of pharmacy, the company was bought by Mr. Freeman in 1994. Ten years later, in 2004, the English businessman acquired the Phebo brand from Procter & Gamble. Today, Phebo’s traditional glycerine soaps represent the group’s main business. Together with Phebo, Granado commercializes around 800 products.
Besides the soaps, other items are consolidated in the market, such as the antiseptic powder (whose registry was approved by doctor Oswaldo Cruz in 1903), and the liquid soap for children, which has 40% of the segment’s sales. More recently, the company has bet on new niches, such as perfumes and household items, and has launched a pet line.
“The moment is very positive. Brazil is a huge market because Brazilians take more baths than the world average and it is still a bar soap country, unlike Europe. In fragrances I also always saw a niche, although the competition with foreigners has grown,” says Mr. Freeman.
About 70% of Granado’s revenue comes from wholesale sales, where the beauty and personal care sector is led by global brands such as Palmolive, Dove, Nivea and Lux, according to Kantar data for 2021. The remainder corresponds to sales in own stores – in Brazil and abroad – and via website. The configuration allowed the company to go through the pandemic without major mishaps. In 2020, Granado expected to grow 15% and to gross R$670 million, and grossed R$617 million even with the social isolation measures.
“Retail is a small part of our revenue. In this sense, we benefited in the pandemic because we didn’t lose sales share in supermarkets and pharmacies, which didn’t have to close,” says Sissi Freeman, Granado’s head of sales and marketing.
She acknowledges that, despite growing, sales through the website were not able to fully absorb the losses in the stores during the pandemic. Today the site’s sales are comparable to those of four physical stores. The most popular items are room diffusers, gift kits, and perfumes.
“We have never sold so much perfume online before. Generally, people want to smell the scent. But in the last three months, Époque Tropical represented 28% of sales on the site,” says Ms. Freeman.
Launched at the end of 2021, the perfume sold out a few times after going viral on social networks. A TikTok user compared Époque Tropical to a fragrance from the London brand Joe Malone. Ms. Freeman assures, laughing, that the marketing was spontaneous.
Right hand of her father, Sissi Freeman is responsible for Granado’s repositioning, expanding the portfolio without losing sight of the brand’s values. Since the inauguration of the first concept-store, in 2006, in downtown Rio de Janeiro, the entrepreneurs have gradually increased the pace and will end 2022 with 90 unities in the country, five of them dedicated to brand Phebo.
A new store in Lisbon, planned for the end of October, is not included. The Portuguese branch will be added to the other three units in Europe, all in Paris, where the international distribution center is installed. The company is also present in department stores in France, England and is preparing to arrive in Belgium. The international sales are still shy, representing around 1%, but the growth perspective already influences the perfumes development, main bet on the external market.
As most of the raw material is imported, production suffered with lockdowns in China and the war in Ukraine, which raised freight prices. For the first time, product prices were increased twice in the year: 10% in January and 5% in July. “A lot of what we buy is paid in dollar. We believe so much in the international strategy because we see the importance of having revenue in foreign currency,” explains Ms. Freeman.
Despite the difficulties, father and daughter say that the profit margin is at 15% and project it over 20% for 2023. Contributing to the optimism is the payment of a debt generated by the construction of the factory in Japeri, State of Rio de Janeiro, opened in 2015. The investment estimated between R$400 million and R$1 billion, eroded the company’s profit, destined for the payment of creditors. The balance, according to Christopher Freeman, was “strengthened” with the purchase of 35% of the shares by Puig, a Spanish company that owns brands such as Carolina Herrera and Paco Rabanne, in 2016.
Group intends to buy minority stakes in regional businesses and form a holding company
19/09/2022
The asset management group Fortune One, especially focused on private equity, has been analyzing the purchase of minority stakes in retail construction businesses to create a holding company in the segment. The goal is to close partnerships with regional retailers, keeping the controlling shareholders in management, and become a consolidator business in that sector, the company says.
The plans began to gain strength last year, after the strong acceleration in sales in the first year of the pandemic, in 2020, in an environment of high dispersion of those businesses across the country, which favors consolidation projects.
Studies carried out by the fund (led by Waldir Abreu, current head and former superintendent of Anamaco, the sector’s national association) show that 66% of the stores in Brazil have up to four employees. Only 14% have more than 100 employees and two thirds are in the first generation, that is, the management is not young.
Valor has learned that there were two initial contacts with chains, and at least seven businesses were identified internally by investors with a profile to be approached to seek an agreement. This group includes the networks Cassol (Santa Catarina), Todimo (Mato Grosso), Amoedo (Rio de Janeiro), Chatuba (Rio de Janeiro), Balaroti (Paraná), ABC da Construção (Minas Gerais) and Carajás (Alagoas). The last two have already been probed by the fund, Valor found out. ABC has not manifested itself and Carajás denies the contact.
Fortune One does not comment on possible agreements but confirms that the initial phase of mapping and market studies has already been completed.
“There has been an advance in the operating model of the networks in this sector in recent years. There is an understanding that, to achieve consistent growth, it is necessary to join forces and create a national scale. There is also maturity and openness to negotiate”, says CEO Marcos Costa.
According to him, there is currently R$300 million available in an investment fund registered at B3 for business capitalization. Those resources are expected to reach R$1 billion by the end of 2022, and R$5 billion by the end of 2023. “The intention is not to seek business in isolation, closing one or another deal separately, but a larger partnership with regional businesses.”
Mr. Costa affirms that, in case this project moves forward, the fund would exit the investment by means of an IPO of the business created or would negotiate with a buyer group.
According to an investment advisor who has been in contact in the past with regional store chains, there may be an interest in selling minority stakes because the chains felt an increase in leverage with the recent rise in interest rates. He points out, however, that there is still some resistance among controlling shareholders, and it is not a simple model to be implemented. However, a cash offer, which generates liquidity for partners who want to leave the business, weighs favorably.
“The problem is that it is difficult to set up this holding model with different companies because, even if they keep their regional management, there are disagreements about national strategies, and not always a merger that maintains the autonomy of the chains generates such strong synergies,” he says, recalling unsuccessful attempts to create holding companies in pharmacy and electronic retail.
In Brazil, the movements of the last decade involve the entry of Chilean Sodimac in the country, with the purchase of Dicico in 2013, and the acquisition of Tumeler by Telhanorte in 2017. This year, until July, the sector’s sales fell 8.3%, after a high of 4.4% in 2021, according to the statistics agency IBGE.
In the evaluation of Mr. Abreu — head of the fund and one of the executives in charge of this project — there were advances in the chains in terms of systems and management from ten years ago, which facilitates integrations, and there are stores that have already reached their ceiling of regional expansion, which ends up leading to the search for new agreements. In parallel, Mr. Abreu observes that another possible path is the formation of real estate funds with assets from the chains that associate. The stores would be sold to them. who would rent them to the retailers.
At this moment, Anamaco Bank — a digital bank created in partnership with Anamaco and opened this year — is in operation. The bank started to offer credit through investment funds (FIDCs) to the networks associated with the entity, which licensed the use of the brand to the institution. It was a first step towards approaching this market.
Fortune One, the Brazilian manager of partners Sadao Isuyama and Mr. Costa, bought Ícone Investimentos in 2020 to accelerate the structuring of local funds. The company also has a branch in the United Kingdom for international business.
Survey carried out by Valor shows that only one out of four market participants expect a 25-basis-point hike in key interest rate Selic on Wednesday
09/19/2022
Despite Central Bank directors’ hawkish tone in recent weeks and the evidence that monetary tightening in developed economies will gain steam, most investors believe that the monetary tightening cycle in Brazil has come to an end. Even so, the recent de-anchoring of inflation projections for 2024 and the high levels of inflation cores still make one out of four market participants expect a 25-basis-point hike in the Selic, Brazil’s key interest rate, on Wednesday.
According to a survey conducted by Valor with 109 financial firms, 82 of them expect the Central Bank to keep interest rates unchanged at 13.75% in this week’s policy meeting. The other 27 still expect a residual 25-basis-point hike, to 14% per year, at the end of the cycle.
The data reinforced the hypothesis that after Wednesday’s meeting, interest rates will remain unchanged by the end of the year. The Central Bank’s Monetary Policy Committee (Copom) will meet two more times in this period. Only two of the 108 firms see new adjustments in the October and December.
The view that the tightening cycle in the country could be very close to the end was quite consolidated after the Copom’s last decision, when the policymakers said that they would evaluate “the need for a residual adjustment, of lower magnitude, in its next meeting.” However, some people in the market believe that recent remarks by Central Bank President Roberto Campos Neto and monetary policy director Bruno Serra brought back the possibility of an extension of the cycle on Wednesday.
“My impression was, initially, that the tough tone was designed to only ease early pricing of cuts. But then came Bruno Serra’s speech, saying that it was necessary to be cautious with the eventual end of the cycle. These were clear signs that there is a 25 bp hike on the table, and the probability is not irrelevant. Before that, in my view, the end of the cycle was given. But the 0.001% chance became 20% or 25% chance of happening,” said Juliano Ferreira, the chief economist of BGC Liquidez.
Yet, he said that the Central Bank will only deliver the last 25 bp hike if it believes this would be the clearest message to the market that it will take longer to start its easing cycle. “I don’t think it would be the right instrument. It is possible to stop in a hawkish way,” he said.
Leonardo Costa, an economist at ASA Investments, recalled that it will be important to monitor Central Bank’s new inflation projections, which are likely to show a slowdown in 2022 and 2023 after the government eased the tax burden on regulated prices and a higher projection for 2024. In the last Copom meeting, the monetary authority projected the IPCA (Brazil’s official inflation index) in 2024 at 2.7%, below the 3% target for that year. This projection is expected to be revised to around the target, the economist said.
“Our perception, since the last Copom meeting, is that there was a deflationary movement, and there is a perception of a little lower inflation. On the other hand, expectations for 2024 are still concerning. This should give subsidies for the Central Bank to interrupt the cycle at 13.75%, even if it maintains a hawkish tone of vigilance and indicates the maintenance of interest rates for a long period of time,” Mr. Costa said.
The view is similar to that of Júlia Gottlieb, an economist with Itaú Unibanco. According to her, since the last Copom meeting, the inflation dynamics have been benign, and the Central Bank’s inflation projections for 2022 are likely to slow down to 6.1% from 6.8%, reducing the risk of inertial inflation in the following year.
“With this, it does not need to make a residual hike along the lines of what was addressed in the last statement. In relation to signaling, it may indicate that it will make a stop, but that the broad economic situation prescribes a still substantially contractionary policy, and that the Copom should remain vigilant,” she said.
According to the survey carried out by Valor, the median of the 106 projections for the IPCA in 2022 was 6.1%, while the average point of the estimates (105) for the IPCA in 2023 reached 5.1%. As for 2024, the median of the 91 projections collected was 3.5%, the same level as that seen in the survey conducted before the last Copom meeting, in August.
Eduardo Yuki — Foto: Ana Paula Paiva/Valor
Safra’s senior economist Eduardo Yuki also expects the Central Bank to keep rates unchanged at Wednesday’s meeting, but sees the need for a tough tone from the authority.
“The statement may reiterate the Central Bank’s vigilance of inflation expectations, signaling a very firm stance. It may also indicate the need to maintain the Selic rate at a contractionary level for a sufficiently prolonged period, aiming to anchor inflation expectations for 2024. Thus, we expect an austere statement,” he said.
Even the part of the market that evaluates that the continuity of the monetary tightening cycle is the best strategy for the Central Bank acknowledges that an eventual increase of 25 bp in the Selic rate would not make a big difference from the economic standpoint, but that it would send an important message.
Gustavo Arruda, head of Latam research at BNP Paribas, believes that it is still early to declare victory over inflation and, in a scenario of mounting uncertainties, both here and abroad, a conservative tone from the Central Bank would be the most appropriate.
“If it stops [raising interest rates], will it be a mistake? I have the impression that it would not. Most of the cycle has already gone, and we are discussing the details. But I like to look more at the balance of risks and I think that if it stops, it will take more risks. If there is a possibility of the Central Bank needing to raise interest rates again after announcing the pause, it is better to continue with small hikes, since the cost would be lower,” he said. Mr. Arruda expects a 25 bp hike in the September meeting, and that the Selic rate will end the year at 14.25% — a projection that may be revised depending on the Copom’s statement on Wednesday.
José Pena, the chief economist of Porto Investimentos, said that recent remarks by Central Bank President Roberto Campos Neto and monetary policy director Bruno Serra were more directed at combating market expectations of early cuts in interest rates, rather than signaling an intention to extend the monetary tightening cycle.
The economist, whose baseline scenario includes cuts only in the middle of the second half of next year, said that the activity data released by the statistics agency IBGE last week unveiled positive signs that the Central Bank may find conditions to cut interest rates a little sooner than expected.
“Retailers faced a widespread drop, but credit-sensitive sectors, such as durable goods, suffered more. These are signs that the monetary tightening is starting to show its effects,” he said. According to Mr. Pena, the services sector, which, unlike retail, surprised positively, is less dependent on credit and more dependent on income, which was recently boosted by government handouts and the labor market.
“We may have, at the turn of the year, a scenario of lower domestic activity, with clearer effects of monetary policy on the activity and with the added benefit of the Central Banks abroad tightening more and reducing imported inflation,” the economist of Porto Investimentos said, estimating that, if the described scenario is confirmed, the cycle of cuts may begin at the turn of the first to the second half of the year.
According to the survey carried out by Valor, the median of the participants’ projections for the Selic rate at the end of 2023 is 11%, the same level as the previous survey.
Regarding the more intense monetary tightening cycle in developed markets, the economists consulted by Valor do not believe that, for now, an additional interest rate hike in the United States, in relation to what is currently priced in the market, has the potential to change the Brazilian Central Bank’s flight plans.
“Today, the market is pricing a final rate between 4.25% and 4.5% [in the U.S.]. Even if it is a little higher, I don’t believe that this would derail the real and force the [Brazilian] Central Bank to raise interest rates again”, the economist from Porto Investimentos said.
Fiscal risk from legal disputes grows 66% since March, led by pensions case
09/19/2022
The Federal Supreme Court hold important, costly cases — Foto: DorivanMarinho/SCO/STF
The fiscal risk calculated by the federal government for lawsuits filed against it has reached its most critical point in the last two years: R$2.6 trillion of impact to the taxpayer, according to the report to which Valor had access, updated in August. In comparison to the previous estimate, closed in March, there’s a 66% increase.
This figure refers to lawsuits whose chances of defeat in court have worsened in the last few months or have entered the government’s radar of concerns. Three cases are responsible for the increase. The main one is the so-called “lifetime review” — a revision of the social security retirement pensions to include years worked before 1994, which can increase the monthly amount received. The Federal Supreme Court (STF) has already formed a majority in favor of the pensioners and retirees but has not yet made the result of the judgment official.
Between March and August, the National Institute of Social Security (INSS) increased the estimated fiscal impact of the decision by more than 934%, to R$480 billion from R$46.4 billion, making this lawsuit the biggest focus of alert for the technicians who closely monitor the litigations.
According to these sources, the INSS started to consider the risk of the STF proclaiming a more generic thesis, that mentions not only retired people, but all the other insured people, such as those who receive death pension or sickness benefits. In respect for the accounting principle of prudence, the federal government always projects the worst-case scenario.
The other two cases were not alarming until then, but are now, adding to the total fiscal risk. One involves the incidence of social taxes PIS and Cofins on imports, with an impact of R$325 billion. The other discusses whether the granting of tax incentives interferes with the sales tax ICMS quota passed on to the municipalities. Defeat could cost the federal government around R$279 billion.
The STF has already recognized the general repercussion of both cases, which may go for trial by a panel of justices at any time. The rapporteurs, Justices Nunes Marques and Gilmar Mendes, respectively, may even do so directly in the virtual plenary session, whose agenda is not managed exclusively by the Court’s new chief justice Rosa Weber.
Even with a lower impact (R$151 billion), the government’s attention is also drawn to the appeal against the decision of the Superior Court of Justice (STJ) which admitted the special retirement of security guards who work with or without firearms, as long as they can prove the harmfulness of their activity. The case is also advanced in the Supreme Court.
Most of the R$ 2.6 trillion involves cases classified as “possible” risk of judicial defeat. There are also those of “probable” risk, whose unfavorable outcome to the federal government is even closer to happening, according to technical estimates. This portion is calculated at R$278.2 billion.
The number will be sent to Congress by October 10, for a fine-tuning of the 2023 budget before the congressional vote. Among the cases of “probable” risk is the discussion about the supplementation of the Fund for Maintenance and Development of Elementary Education (Fundeb), with a R$29.4 billion impact.
Another lawsuit to be included in the update of the so-called “Fiscal Risks Annex” of the budget is the one that discusses whether or not charities in the health, education, and social assistance segments have immunity from social security contributions. The federal government’s defeat could cost R$22.5 billion to the taxpayer.
Prior to last month, the highest total fiscal risk in two years had been recorded in August 2020 — R$2.3 trillion. In the meantime, the estimate has never fallen below R$1.8 trillion.
Sources in the economic team say that, although worrisome, the amount referring to the judicial demands will not necessarily be converted into court-ordered debts for next year. First, it is necessary to wait if the conviction will actually take place. In some cases, a change in the vote of just one Supreme Court justice would be enough to reverse the situation.
Moreover, even if the federal government is defeated, the execution of the sentence is not carried out exclusively by means of court-ordered payments — it can happen, for example, through an agreement for the compensation of debts. In other cases, an unfavorable judicial decision may only mean less revenue than expected.
A survey by the Economy Ministry shows that spending on judicial claims has been rising gradually. From 2014 to 2021, the share of sentences in total primary expenditure will jump to 3.4% from 1.8%. Sources points as reason the increases in litigation and the greater speed of Justice, with tools such as the virtual plenary.
The budget law foresees a total of R$73.99 billion in court-ordered debts for next year, of which R$22.31 billion in debts from previous years. If we consider the small value requests (RPV), which total R$26 billion, the expenses with judicial demands would exceed R$100 billion.
For public accounts specialist Leonardo Ribeiro, economic advisor to the Senate, the government needs to promote mechanisms to meet accounts to prevent these fiscal risks from becoming budget expenses. “One solution is the securitization of public sector assets and liabilities using market instruments. This offsetting of debts would be an element to restructure the federal government’s debts, mitigating fiscal risks arising from judicial decisions,” he explained.
Daniel Couri, head of the Independent Fiscal Institution (IFI), said that the judicial disputes certainly increase the fiscal risk of the federal government. “It is important to have clarity about these numbers and it seems to me that the federal government is moving in that direction. But dealing with such a risk is a problem when you have a high and expensive debt for the standards of emerging countries,” he said.
The Federal Attorney General’s Office (AGU) said that its role is to “evaluate and classify the fiscal risks of lawsuits filed against the federal government, independent agencies, or public foundations based on legal criteria.” It also stated that “the risk classification is subject to change as each case evolves within the Judiciary”. The AGU also said that in 2021 the court decisions favorable to the federal government avoided the disbursement of R$418 billion, “allowing these amounts to be directed to sectors such as health, security, and education.”
Economy Ministry’s projections foresee 2.5% GDP expansion and drop in inflation next year
19/09/2022
Economy Ministry’s building in Brasília — Foto: Marcelo Casal Jr/ABr
Macroeconomic projections unveiled on Thursday by the Economy Ministry maintained an apparently optimistic tone, foreseeing relatively strong GDP growth and falling inflation at the same time.
The scenario outlined by the Secretariat of Economic Policy (SPE) includes GDP growth of 2.5% in 2023 and a slowdown in inflation to 4.5%, compared with 6.3% this year. In addition, it expects the downward trend to continue thereafter, to get “close” to the target in the following years.
In the document, the ministry does not detail what could lead to this drop in inflation. Financial market analysts also predict a decline in inflation, but without convergence to the target before 2025. To have disinflation, however, they count on a 0.5% GDP drop in 2023.
In the interview that presented the projections, SPE’s team defended the thesis that Brazil’s potential GDP is higher. In other words, they say it is possible for the economy to grow faster without pressuring inflation.
This would be the result of several factors: higher capital expenditure and imports of capital goods; more formal jobs, which are more productive; and stronger growth in technological services.
The bulletin does not say directly what the potential GDP estimated by the SPE is, nor does it present more elaborate calculations about how it might have grown due to these factors. But everything indicates that it would be a number close to 2.5%, because this is the expected long-term growth, until 2026.
It is a slightly more optimistic percentage than the market consensus; the Focus bulletin projects a 2% rise in the long term. But it is high if compared to growth rates seen in the last decades.
A point that draws attention to the Treasury’s projection is the expected growth of 2.5% next year, close to the potential GDP, while inflation is seen as slowing down.
Inflation can lose steam for a number of reasons – such as a positive external shock or an improvement in economic agents’ expectations about price indices – but the only secure way for the Central Bank to tame inflation is by slowing down activity to create economic slack.
The document does not detail whether, in the ministry’s view, there is an economic slack now – a hypothesis that the market considers increasingly unlikely given the high core inflation more closely linked to the economic cycle.
The Economy Ministry’s projections do not have much importance for the policy of fighting inflation, since the Central Bank is a great specialist on the subject and operates according to its own models. But it is an important input for outlining the fiscal scenario. If one of the two – inflation or real GDP growth – is overestimated, it means that the nominal GDP used in the calculation of revenues may also be inflated.
Government of Narenda Modi said country had to mitigate rising prices of grain in domestic market
16/09/2022
Brazil and other countries questioned Thursday India’s decision to restrict or ban exports of the product. Several partners showed concern about food security after the announcement. India is the world’s largest rice exporter.
New Delhi announced last week a ban on exports of broken rice, a second-rate product used for animal feed. As it is a cheaper alternative, several countries, especially from Africa, buy it for human consumption. India also restricted exports of several types of the product, including white and brown rice, but excluded basmati rice from the measure.
India says it was forced to restrict exports to mitigate domestic price hikes driven by falling production – which reached the lowest level in recent times. India sells rice to more than 150 countries. Last year, the nation exported 21.5 million tonnes of grain, a volume that is greater than the sum of shipments of the other four largest exporters – Thailand, Vietnam, Pakistan, and the United States.
At a regular meeting of the World Trade Organization Committee on Agriculture, several countries responded to India’s move. The U.S. and the European Union asked for an explanation and questioned why, so far, the Indian government has not even informed the WTO about the measure.
Brazil also mentioned the Indian restrictions and called on countries to go in the other direction by adopting measures that ease trade and give up trade-distorting policies. “This is essential to ensure growth, development, environmental protection, and food security around the world,” said a Brazilian representative.
Senegal, a major rice importer, made the toughest intervention. According to the country’s government, India’s decision threatens Senegal’s food security and also that of other countries, which have relied on trade with the Indians. It seems clear that several importers of broken rice will have no way to cover the 20% rise in costs.
The Indian representative said he didn’t understand why some countries complain when India gives subsidies for production and also complain when the country doesn’t export. The argument irritated some delegations.
The problem, as certain negotiators note, is that India distorts trade with huge subsidies, creates expectations in the market, then distorts it again by not delivering to several countries. China, the largest buyer of Indian broken rice, has kept quiet in the WTO discussion.
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