Central Bank raises key interest rate by 50bp, to 13.75%

Committee hinted possibility of new hike in September

08/04/2022


Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

The Central Bank’s Monetary Policy Committee (Copom) raised the Selic policy interest rate by 50 basis points on Wednesday, to 13.75% per year, and hinted that it will evaluate the need for a “residual adjustment, of lower magnitude,” in its next meeting, to be held on September 20 and 21. Another novelty was the 12-month projection for inflation until the beginning of 2024, presented because of the impacts of elections on prices.

“The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting,” it said in a statement released after the unanimous decision. The Copom stated, however, that it “it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” Another highlight is that “the uncertainty of the current scenario, both domestic and foreign ones”, coupled with “the advanced stage of the current monetary policy cycle, and its cumulative impacts yet to be observed, require additional caution in its actions.”

According to the Copom, it was noted that inflation projections for the years of 2022 and 2023 “were heavily impacted by temporary tax measures across calendar years.”

“Therefore, the Committee decided at this moment to emphasize the projections for 12-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothens out the primary effects from tax changes, but incorporates their second-round effects on the relevant inflation projections for monetary policy decisions.”

The Copom stated that the decision to raise the Selic rate by 50 basis points, taken unanimously, reflects “the uncertainty around its scenarios for prospective inflation, an even higher-than-usual variance in the balance of risks and is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon,” which includes 2023 and, to a lesser extent, 2024. The last time the rate was at its current level was in December 2016 and early January 2017.

“The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory,” said the Central Bank in the statement.

The monetary authority also pointed out that the external environment remains “adverse and volatile,” citing “marked downward revisions on prospective global growth in an environment of inflationary pressures.”

“The process of normalization of monetary policy in advanced economies has accelerated, affecting the prospective scenario and increasing the volatility of assets,” says the statement.

Regarding the Brazilian economic activity, the Copom wrote that the set of indicators released since the last meeting “continues to suggest that the economy grew throughout the second quarter, with the labor market recovery stronger than expected by the committee.”

“Consumer inflation remains high in volatile components and items associated with core inflation,” it stated. And concluded: “The various measures of underlying inflation are above the range compatible with meeting the inflation target.”

Copom’s inflation projections in the baseline scenario stand at 6.8% for 2022, 4.6% for 2023 and 2.7% for 2024, according to the Central Bank. For regulated prices, inflation projections are -1.3% for 2022, 8.4% for 2023 and 3.6% for 2024.

“The projections based on the reference scenario incorporate the tax measures recently approved,” highlighted the Copom in the statement. “For the six-quarter-ahead horizon, which mitigates the calendar-year impact but incorporates the second-round effects of the tax measures that occur in 2022 and the first quarter of 2023, the 12-month inflation projection stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.”

*By Estevão Taiar, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/

Bets on appreciation of bank, commodity stocks lose steam

The strategy of betting on the appreciation of bank stocks and commodity-related companies – which yielded substantial returns in the first quarter – is slowly losing steam. As foreigners decrease the volume of their purchases in Brazil in April, local investors report a more uncertain scenario and fewer alternatives for the continuity of the Ibovespa rally, since the macroeconomic fundamentals of the country do not bring much comfort to the allocation in domestic issues.

Higher uncertainties are also reflected in the larger cash position of local funds. According to a survey conducted by Bank of America (BofA) with Latin American asset managers, cash levels remained at 7.7% in April, the highest since records began, in 2018, and well above the survey’s historical average of 4.4%.

The lower confidence of financial agents stems, among other reasons, from the question mark about the growth of the global economy. With the indication of the U.S Federal Reserve that it is expected to speed up tapering, fears have also grown that further monetary tightening could lead the U.S. economy into a recessionary period. At the same time, China’s tough policies to contain the Covid-19 pandemic could also weaken demand in the world’s second-largest economy.

In this sense, the notion that global growth would remain healthy despite the normalization of monetary policy in the United States started to be, if not entirely questioned, at least considered by many global agents. Thus, after a substantial appreciation of the most liquid stocks on the Brazilian stock exchange – both in local currency and in dollars – the foreign flow has shown signs of stabilizing in April.

This month, shares of the mining and steel industries, as well as banks, went south, in contrast to the first three months of the year. Vale ON falls 15,98%, CSN ON drops 15,41% and Usiminas PNA loses 15,03 %. Bradesco PN, Itaú PN and Santander units have declined 5,12%, 6,97% and 6,21%, respectively.

The problem, analysts told Valor, is that the rotation to other sectors of the Brazilian stock market has not convinced financial agents either.

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

“My opinion is that holding commodity [stocks] is no longer a novelty as it was a few months ago, and the whole market ended up doing it. However, I don’t feel as comfortable migrating to more technology-related stocks or to assets that are more exposed to the domestic scenario. I would still stay from neutral to slightly overweight on commodities,” said Ricardo Peretti, an equity strategist at Santander Corretora.

The view is similar to that of XP’s chief strategist Fernando Ferreira. According to him, the firm still tends, at the moment, to be upbeat with stocks linked to commodities in relation to assets more dependent on the local economy, since the macroeconomic fundamentals are still bad, with weak activity and high inflation. But the conviction about commodities of early 2022 no longer seems to be the same.

“We think it is too early to rotate into growth assets, as the macro environment is still not good and commodity companies continue to generate a lot of cash, with strong dividend yields. The asset prices also remain historically low, which, in theory, is a good entry point indicator, but it can also suggest that the shares may face a correction soon,” he said.

In addition, the strategist said he is concerned about a potential change in the behavior of foreign investors, who “propped up” the local stock market in the first quarter by buying, precisely, stocks linked to commodities and the financial sector, but put negative pressure on the index in April.

“The slowdown in the flow draws attention, and a possible reversal of this movement would be a major concern for the [stock index] Ibovespa, precisely because the local institutional investors are still dealing with redemptions. If international investors start selling their positions in Brazil, who will be the marginal buyer? I don’t think the factors that brought these investors here have changed, but we can see additional pressure,” he said.

Jorge Oliveira, an equities manager at BlueLine Asset Management, also ponders that the local market may be experiencing a turning point, assuming that foreign investments, focused mainly on commodities and the financial industry, have no longer shown the same strength as before.

“With Petrobras stocks slowly gaining ground and China’s slowdown affecting metal commodities, the narrative that had Brazil as a destination for international investors has been put to the test. Valuations are cheap, but the Chinese government is still propping up the economy there. In case the stimulus expected by the market does not come, there may still be a downward revision of companies’ profits, making them not seem so cheap anymore,” he said.

Along these lines, between February and March this year, the asset manager considerably reduced its positions in stocks in its Blue Alpha B hedge fund, privileging exchange and interest rate products.

There are, on the other hand, those who still feel more comfortable with commodity-linked assets. Victor Nehmi, manager of Sparta’s commodities fund, points out that when commodity prices move uniformly, it is a sign that macroeconomic imbalances are occurring.

“We see no signs that prices have peaked and that they will start to fall from here on out. There is no prospect of an increase in the supply of the main commodities and this gives us conviction that prices are likely to remain high at least until next year,” he said.

According to him, the high prices of commodities are likely to still be reflected in the corporate results of companies over the next 12 months. Mr. Nehmi’s only caveat that the recent appreciation of the real reduces exporters’ margins.

Lucas Brunetti, a commodities analyst at Garde Asset, also sees the worsening of the industry as unlikely. He is upbeat about the fact that China has seen such a flagrant slowdown in the economy, since this is expected to stimulate more forceful government action.

“The Chinese government was restricting credit, now it is expanding it. Also, with the lockdown, services naturally fall. And if the third sector is not advancing, the state apparatus, which seeks to deliver a GDP growth close to the 5.5% estimated for 2022, will need to invest in infrastructure,” he said.

Source: Valor International

https://valorinternational.globo.com

Post-pandemic green recovery may attract foreign investments

Green Recovery', recuperação económica é verde - Iberdrola

A post-pandemic green recovery can bring to emerging countries much more than a return to economic activity, but to attract companies and promoting sustainable development, especially in Brazil.

This was one of the conclusions of a study by the Global Wind Energy Council (GWEC). On the other hand, the agency also warns that the country risks losing hundreds of thousands of green jobs, billions of dollars and billions of tonnes of saved emissions if it chooses another path.

In an interview with Valor, the GWEC’s CEO Ben Backwell and the executive president of the Brazilian Wind Energy Association (Abeeólica), Elbia Gannoum, emphasize that a political commitment is needed to mobilize private investment.

In total, Brazil could add an additional $8 billion of gross value added (GVA) to national economies in the recovery scenario. “This is an activity in which most of the investments come from the private sector. In addition, the industry is a huge job creator,” says Mr. Backwell.

In GWEC’s calculations, Brazil could see 575,000 green jobs over the lifetime of the wind farms if it opted for a green recovery rather than a business-as-usual approach.

Ms. Gannoum adds that more companies could land in Brazil because of the attractiveness of the business. Today, there are only six wind turbine manufacturers and two wind blade companies, but this number could grow more.

She recalls that, unlike what happened in developed countries that made billion-dollar recovery plans, in the case of developing countries, government does not have the capacity for the recovery.

“The renewable energy sector has a strong attraction for private investment and Brazil, in this scenario, should look at the situation as an opportunity. We have an abundance of renewable resources, so the energy transition is a great business opportunity for companies.”

From 2022 to 2026, the report calculates a 40% reduction in carbon emissions, helping the country accelerate progress in meeting its Paris Climate Agreement targets.

The report focuses on five countries – Brazil, India, Mexico, the Philippines and South Africa – each of which face specific challenges due to Covid-19 but which have significant untapped wind energy resources that can unlock rapid economic growth under green recovery measures.

“Unlike Mexico, where the government has practically stopped investments in the wind sector, Brazil has better conditions to develop the wind industry”, compares Mr. Backwell.

The executive says that this energy source grows significantly in the world, but it should be between three and four times bigger to reach the decarbonization goals. “We should be installing around 400 GW a year, but we are installing just under 100 GW.”

Source: Valor International

https://valorinternational.globo.com

Analysis: Oil companies target pre-salt despite energy transition

As dez maiores empresas por produção de petróleo - O PETRÓLEO - Notícias de  Petróleo e Gás, Energia e Offshore

The transfer of rights surplus volume bidding of Sepia and Atapu fields became the third-largest ever in Brazil’s oil and gas industry, considering fixed payments. The bidding raised R$11.1 billion, only behind the first round of surpluses, which raised R$69.9 billion in 2019, and the 2013 Libra sharing auction, which raised R$15 billion. The result shows that even in the face of increasing efforts by oil companies to decarbonize their businesses, oil reserves in the Brazilian pre-salt layer still draw the gaze of multinationals navigating energy transition.

TotalEnergies and Shell, two of the oil companies that have been betting the most on diversifying their businesses, doubled down on the Brazilian pre-salt and will disburse R$2.9 billion and R$1 billion, respectively, in fixed concession payments for the auctioned assets.

The French company took a 28% stake in the Sépia consortium and 22.5% in Atapu, while Shell took a 25% stake in Atapu.

In a note, the Brazilian Petroleum Institute (IBP), a trade group of the local industry, said that Friday’s round represented the “last opportunity to tap the large volumes already discovered in the pre-salt layer.”

Sépia and Atapu represent, for the buyers, an opportunity to immediately tap fields in production stage, diversifying their respective sources of cash generation. Shell and TotalEnergies are among the best positioned multinationals in the Brazilian pre-salt.

The interest in the assets, at a time when companies are gearing up for energy transition, can be explained, curiously enough, by the environmental issue itself – and by the low cost of extraction of the projects. Although investing in more oil reserves may seem counterintuitive, given the increasing efforts of companies to invest in clean energy, the pre-salt holds an important characteristic for these companies: low emissions volumes, due to the high productivity of the wells – which reduces the carbon emissions per barrel.

Faced with the potential drop in global demand for oil in the coming decades and smaller consumer market in the future, oil companies calculate that only the most competitive projects – both in costs and emissions – will prevail in the long run.

The pre-salt oil is, for example, the flagship of Petrobras’s strategy for energy transition. The Brazilian state-owned company, more timid than its global peers in business diversification plans, wants to position itself as the producer with the lowest carbon barrel in the global market in the long term.

For Giovani Loss, a partner at law firm Mattos Filho Advogados, the auction shows that the carbon footprint of pre-salt fields is lower than that of other assets, given the high productivity of the region, and the oil produced in the region is likely to remain competitive as a result. “Mainly the majors and the European oil companies have reduced investments in new asset acquisitions and increased acquisitions and investments in renewable sources, but they still need to keep up with the demand for oil during this energy transition period,” he said.

He recalls that auctions that large auctions are rare in the global industry.

Pressured by shareholders and society to unveil more ambitious decarbonization plans, the European oil companies justify their investments in the pre-salt layer as a way to produce less polluting oil.

Patrick Pouyanné, CEO at TotalEnergies, justified his company’s acquisition in a note, saying Sépia and Atapu are “unique opportunities to access giant low-cost and low emissions oil reserves.” “These assets benefit from world-leading well productivities to keep costs well below $20/boe. They also leverage technological innovations to limit greenhouse gas emissions to well below 20kg/boe. Growing our presence in Brazil will enable us to accelerate the restructuring of our oil portfolio towards low-cost and low emissions hydrocarbon resources that will contribute to transform TotalEnergies to a sustainable multi-energy company,” he said.

In all, Friday’s auction attracted five oil companies: Petrobras was the protagonist of the round, by exercising the right of first refusal to operate the two areas. The state-owned company will disburse R$4.2 billion in fixed payments for the two assets. TotalEnergies was the highlight among the foreign companies by joining the winning consortium for the two areas. The French company will pay R$2.9 billion. Shell will pay R$1 billion, while Petronas and Qatar Petroleum will pay R$1.49 billion each.

With the revision of the bidding parameters, the government was successful in selling the assets, after the failed attempt to auction the surpluses of Sépia and Atapu in 2019. At the time, companies saw many risks in the rules, the main one being the need to negotiate with Petrobras, after the contracts were signed, the amount of compensation for the investments made in the assets. Since then, the government has revised some rules. The main novelty is that, after negotiations between Petrobras and Pré-Sal Petróleo SA (PPSA), the value of the financial compensation to be paid to the Brazilian oil company was calculated prior to the auction. The fixed concession payment was also reduced by 70% compared to 2019.

In the view of the Minister of Mines and Energy, Bento Albuquerque, the adjustments of the parameters contributed to the auction’s success.

The Sépia and Atapu auctions mark, however, a change of cycle in the Brazilian oil and gas industry. This is expected to be the last big pre-salt oil round.

The government’s idea is to end the conventional auctions. The National Energy Policy Council (CNPE) took a first step towards the end of conventional auctions by announcing the inclusion of 11 exploration blocks located in the pre-salt in the “permanent offer” – an on-demand bidding mechanism in which National Petroleum Agency (ANP) offers the market a menu of assets that are permanently available to oil companies to express interest at any time. Six of these assets are said to be offered in the 7th and 8th rounds in the coming years, and five are blocks that were offered unsuccessfully in past bids.

Source: Valor international

https://valorinternational.globo.com/

Brazil starts exporting dairy products to China

The 2020 Dairy 100: changes at the top | 2020-08-18 | Dairy Foods

Brazil is opening the doors of the Chinese market to dairy products. Earlier this month, China received the first cargo ever. Two years after the consolidation of the opening of the market, with the qualification of the Brazilian plants for exportation, Central Cooperativa Gaúcha Ltda (CCGL) sent on the 5th a small volume of powdered milk by air, from the airport of Guarulhos, in São Paulo, to Shanghai.

Emblematic, the deal is with one of the largest dairy products consuming markets in the planet, whose imports are booming. “We believe very much in this market for the future,” CCGL CEO Caio Vianna told Valor. The company registered revenues of R$1.4 billion in 2020.

First Brazilian group to seek qualification to export to China, CCGL will use this sale to try to expand business in the country, where it already has a registered trademark. The import was carried out by a partner company of the cooperative, which will now do the work of a commercial correspondent to advertise and sell the cooperative’s products. Two more containers of powdered milk have already been negotiated and should be shipped soon.

The exported cargo included powdered whole milk, skimmed milk powder, and zero lactose milk powder – an item that requires the application of a lot of technology and may be of interest to the Chinese public, says the CEO. “The objective of the first export is to have the product in China so that we can work commercially. We have opened a channel with the largest consumer market in the world,” said Mr. Vianna, who did not reveal the value of the negotiation.

Brazilian dairy products began to be qualified to export to China in 2019, but the certification had been agreed with the Asian country since 2007. Currently, 33 companies have the approval to trade with the Chinese.

To make the sale possible, CCGL had to adapt to the bureaucracies and sanitary requirements of Beijing, which required patience and investments in management, registration, monitoring, and traceability. The cooperative has 3,500 supplying producers and an installed processing capacity of 3.2 million liters per day at the Cruz Alta plant, in the southern state of Rio Grande do Sul.

About 60% of the volume of 1.7 million liters of milk received daily by the central from 30 affiliated cooperatives come from properties certified by the program “Leite Mais Saudável” and are tuberculosis and brucellosis free. The products sent to China come from those producers. Sanitary requirements were also overcome to prove the absence of contaminants in the Brazilian products common in dairy products from other countries.

“We have to be able to trace the product from the farm, with the producer’s name, and all the processing within the plant. We had to explicitly and individually identify the products in the export documents. It is laborious and complicated,” said Mr. Vianna.

The goal is to make the production known and reliable in order to eliminate some requirements in the next shipments. “In large volumes it will be very complicated; these are adjustments that will have to be made as the process evolves.

CCGL has already exported to Algeria and other African countries. Foreign sales are an option to correct market distortions, said Mr. Vianna, given the seasonality of production and domestic prices. “It is good to export because the domestic market is locked, some exports are necessary to take the pressure off stocks,” he pointed out.

According to Mr. Vianna, the agreed prices for the cargo destined for China were similar to those of the domestic market. “It is a first step for other companies to adapt and look for commercial partners. Let’s hope that the market and the exchange rate allow us to have a positive balance.”

The Brazilian Association of Dairy Products (Viva Lácteos) still does not have an estimate of the potential exports to China but says that other companies are prospecting business. The goal is to achieve a performance similar to that achieved in Russia, whose market was opened in 2014. Today, four containers are sent per month to the Russians, with high added value products. “We are slowly conquering the taste of foreign consumers,” says the head of the organization, Gustavo Beduschi.

Source: Valor international

https://valorinternational.globo.com/

The Senate President Turns Down Fake News Bill and Imposes Another Defeat on Bolsonaro

The Senate and National Congress president, Rodrigo Pacheco, decided to return to the government the provisional measure issued by President Jair Bolsonaro that limits the removal of content published on social networks. This is yet another defeat for the Chief Executive.

Signed by Bolsonaro on the eve of the coup-based acts of the September 7 holiday, the measure altered the Marco Civil da Internet to prevent networks from deciding on the exclusion of accounts or profiles solely based on their own usage policies.

The text was a nod to the president’s base. Publications by Bolsonaro and his supporters were deleted from social networks during the Covid pandemic for misinformation about the disease.

Source: Folha International

https://www1.folha.uol.com.br/internacional/en/

Brazil tests 5G technology in private, restricted networks

Companies in Brazil are starting to use technology 5G in private networks, despite geopolitical disputes between the United States and China. They are exclusive connections, with restricted reach, that can be operated regardless of the licenses that will be auctioned mid-2021. An agreement between the Brazilian Industrial Development Agency (ABDI) and the National Telecommunications Agency (Anatel) will allow tests with the new 5G applications in a factory owned by electrical machinery and equipment maker WEG. The company will function as a laboratory in which the 5G private network will be tested alongside a conventional operator network. The results will be used to fin-tune the regulatory framework of private networks. Germany and the United Kingdom are also deploying the technology through private networks.

Source: Valor International

https://www.valor.com.br/international/briefs

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Vai Car raises R$380m to expand rental outsourcing

With a business model based on outsourcing car rentals to the fleets of other chains, mainly for ride-sharing drivers, Vai Car has borrowed R$380 million with bonds to finance its expansion. The startup aims to have 25,000 passenger vehicles in the next 18 months available through its app-based environment. The company doesn’t disclose its current fleet, but Valor has learned it’s bigger than 10,000 vehicles. It currently operates in São Paulo and will use the funds to reach other cities. The private bond placement was coordinated by XP Investimentos and included BTG Pactual’s hoostLab. Bank BMG and Bossa Nova Investimentos aided the transaction and also invested in the startup.

Source: Valor Econômico

http://www.valor.com.br/international

Brazil set to cut rates again despite FX sell-off

Brazil’s central bank is likely to cut interest rates once again to a new record low on Wednesday despite a currency sell-off as an underwhelming economic recovery keeps a lid on inflation.

The bank’s monetary policy committee, known as Copom, is widely expected to cut the benchmark Selic interest rate by 25 basis points to 6.25 percent at the end of a two-day meeting, according to a Reuters poll of economists.

The decision is expected to be announced at 6 p.m. local time (2100 GMT) on Wednesday.

The near-consensus highlights how stubbornly low inflation has repeatedly frustrated the bank’s plans to halt rate cuts since signaling its intention to do so in February. Inflation is below the bottom end of this year’s target range of 4.5 percent, plus or minus 1.5 percentage points.

With economic indicators spanning everything from retail sales and industrial output to the services sector underwhelming in recent months, it is likely to take a long time before inflation accelerates back to the central bank’s target range.

The weak economy is also expected to limit pass-through from a weak currency, dampening the effect of higher import prices. Concerns over a widening U.S. fiscal deficit and accelerating inflation have bumped up U.S. bond yields, sending emerging markets into a tailspin.

Analysts widely expect that to be the last in the deepest easing cycle in decades, which brought the Selic down from a nine-year high of 14.25 percent in 2015.

“The post-meeting communiqué language will be key for market movements,” Nomura economists João Pedro Ribeiro and Mario Castro wrote in a report. “We continue to expect the Selic rate to remain unchanged throughout the year.”
Source: Reuters

Brazil Central Bank President Warns On Cryptocurrencies Ahead Of G20

While Bank of England Governor and Financial Stability Board chair Mark Carney may not see cryptocurrencies as an immediate threat to the global financial system, the head of Brazil’s central bank still sees plenty of reason for concern.

In remarks to Folha de Sao Paulo, a Brazilian newspaper, ahead of the 2018 G20 Summit in Buenos Aires, Ilan Goldfajn articulated that that cryptocurrencies still lack the stability needed to be a safe and legitimate exchange of value.

Rather, Goldfajn noted that he prefers to think of them as “crypto-assets” rather than “cryptocurrencies.”

 I don’t refer to them as money because money has to have stability in its value and be able to facilitate payments,” he explained. “I see them more as an asset, and a risk, because they don’t have the support of a central bank.

The topic of cryptocurrencies is on the docket for several summit meetings this week, presumably where regulatory aspects will be discussed. Goldfajn explained that the goal will be to “look at what each country is doing and what are the benefits, because all of us are in favor of the technologies.”

He also reiterated warnings of the potential use of cryptocurrencies for financing illicit activities. While the extent to which bitcoin and other large-cap cryptocurrencies are being used in this manner at a global scale appears, he explained that the risk, however small that may be, of that occurring in Brazil’s borders is too large to tolerate.

 “We cannot show complacency in regards to tax evasion and money laundering,” he emphasized. “If this new channel were to be used for these purposes, we must act how we act in response to other illicit movements.”
Source: Forbes