Brazil’s Capital Markets Becoming Strong Competitors to Bank Loans
Brazilian capital market instruments are competing strongly with bank loans for financing local companies due to their low benchmark rate.
Talking about the falling level of bank loans, the banking analyst at Fitch Ratings, Claudio Gallina said, “The weak economy prompts less demand for loans from banks, but another important fact that we’re seeing in Brazil is the expansion of capital market activity… With the Selic base rate at historic low levels, companies are opting to issue bonds and equities, instead of tapping loans directly from banks.”
The Selic rate is 6.5% and is expected to be cut in coming quarters due to slowdown in inflation and poor economic growth. Commercial banks give business loans at double-digit rates, yet funds can be raised in the capital market at rates nearer to the Selic.
As lending weakens, Brazilian banks may rely more on investment banking and earn revenue from coordinating bonds and share issues.
Brazil Plans to Freeze 1.4 Billion Reais More in the 2019 Budget
On Monday July 22nd the Brazilian government announced an extra 1.443 billion reais ($386 million) freeze on spending as the weak economy crushes revenue and threatens budget forecasts and government fiscal laws.
The freeze, announced by the Economy Minister, is slightly lower than President Jair Bolsonaro’s estimate of 2.5 billion reais because the government will cover the difference with money from a reserve fund.
Weak revenues, expected to be 6 billion reais lower than previously forecast, have forced government to freeze 34 billion reais worth of expenditure so far and slashed its 2019 economic growth forecast from 1.6% to 0.8%.
Due to the falling revenue, the government plans to post a main budget deficit (before interest payments) of 139 billion reais in the current fiscal year. It is also going to limit public spending growth and not issue debt to cover current expenditure.
Petrobras Sells 35% of its Service Station Chain for US$2.5 Billion
Petrobras sold 35% of its service station chain, BR Distribuidora, for US$2.5 million on Wednesday July 24th. This is in line with Congress’ approval on Jun 26th of regulations that aim to end state-controlled Petrobras’s monopoly in the gas industry and open the natural gas market.
Petrobras monopolized gas production and distribution. Now other companies can access to gas pipelines, gas processing units and LNG regasification terminals.
By transforming the gas industry, the government hopes to increase gas production, diversify sources of gas, revitalize the economy, reduce energy costs, expand investment in gas-fired thermoelectric generation and to monetize rich gas connected with crude in giant pre-salt reserves.
Petrobras now owns only 37% of privately-owned BR Distribuidora. Banks involved in the privatization deal are JP Morgan, Merrill Lynch, XP, Citi, Itaú, Credit Suisse and Santander.
Reform is Needed in Brazil’s Energy Sector
Reforms are needed in Brazil’s broader energy sector to diversify the nation’s energy mix, in addition to current natural gas reforms.
Brazil relies heavily on hydroelectric power (about 75% of the nation’s electricity) which tends to be affected by dam levels. Solar and wind power are beginning to grow, meaning that the nation has to rely on expensive thermal generation when dam levels are low. This has led to very high electricity costs.
The minister of Mines and Energy, Bento Albuquerque, is considering the potential of nuclear energy and supports the idea of opening up uranium reserves to the private sector. He has also mentioned new coal plants to continue using coal for generation up to 2027. He even likes the idea of small-scale hydroelectric plants.
However, there have been few ideas on how to accelerate investment in renewable energy or how to implement major reforms.
Brazil Postponed New Road Freight Price Rules to Wednesday to Prevent Strikes
The Brazilian transport regulatory agency, ANTT, postponed to Wednesday the new road freight pricing rules that it was expected to announce on Monday 22nd July.
The postponement came amid fears of a repeat of the May 2018 10-day strike that crippled the economy and left many communities without food and other goods. Government is hoping to meet with the truckers on Wednesday and agree on a new table of road freight values before any announcement.
Movement of goods in Brazil is mostly done by road. Any strike right now would affect transportation of the mid-year grain crop being harvested. The former President Michel Temer created a law that authorizes the government to set minimum truck freight prices.
The trucker unions in Sao Paulo and Minas Gerais agreed to wait for the results of Wednesday’s meeting with the government.