7 Business Sectors that Brazil’s Lula Could Boost, Or Put the Brakes On

The new Workers’ Party (PT) administration will face the challenge of avoiding a recession, and stimuli to sectors such as oil, renewable energy and civil construction should favor companies in the country

Plans to privatize the Port of Santos, the country's main port in terms of cargo movement, will be abandoned by Lula's government
January 09, 2023 | 02:19 PM

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Bloomberg Línea — With a new year and a new government in Brazil, the country can expect to get down to business again. The country’s corporate scene is expecting the start of a new cycle in 2023, and amid expectations of changes to the regulatory framework, with less fiscal discipline of the public sector, along with a risk of tax hikes and greater monitoring by the authorities and changes to the expansion plans of state-owned companies.

Strategic sectors, such as oil, energy, mining, civil construction, agribusiness, infrastructure and finance, should be the most scrutinized in Lula’s government, according to analysts consulted by Bloomberg Línea.

Starting in February, with the renewal of the National Congress with the inauguration of new congress members, lobby groups are likely to be mobilized to influence the legislative agenda, and which is expected to be dominated by discussions such as tax reform.

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“The 170-billion-reais ($32.3 billion) per year fiscal expansion package to increase social spending, which President Luiz Inácio Lula da Silva managed to persuade Congress to approve, turned out to be larger than expected, with potential repercussions for debt sustainability,” according to BTG Pactual’s (BPAC11) team of strategists in a report on their expectations for the month of January.

“To avoid a further deterioration in country risk and a worse growth/inflation combination, the new government may have to create compensatory measures (tax increases?) to finance more spending,” they added.

The local macroeconomic scenario, characterized by high interest rates and still worrisome inflation, should also evolve in line with the trends dictated by the wider world, especially the economic pace of the world’s largest economies (USA, China and Europe), while weakened by monetary tightening to contain prices and the ongoing war between Russia and Ukraine.

The predominantly political profile of the new cabinet in Brasilia has generated mistrust in the market, however.

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“The choices of the new government’s economic team raised fears of a return to the state interventionism that was the hallmark of the last years of its previous mandates (2003-10). Brazil needs a reformulation of the fiscal rules and a tax reform to ensure long-term growth and fiscal solvency,” according to a report by consulting firm hEDGEpoint Global Markets, specializing in commodities, agricultural and energy markets.

This is what analysts expect for seven business areas of the Brazilian economy:

1. Sell-off of refineries

Businesses at risk: the sale of Petrobras (PETR3, PETR4) refineries in Paraná (Repar), Rio Grande do Sul (Refap) and Pernambuco (Rnest). The new government must negotiate with the antitrust agency to revise an agreement signed in 2019 with the Administrative Council for Economic Defense (CADE) and back out of the commitment to privatize eight refining plants and their respective logistics infrastructure.

Business on the radar: Petrobras should seek more opportunities in energy transition projects in three areas (hydrogen, offshore wind and carbon capture). Investments are expected in projects to decarbonize the company’s operations, such as platform electrification, gas recovery systems, energy efficiency and emissions reduction in refineries.

“We see good reasons for Petrobras to position itself in sectors linked to energy with a lower carbon footprint,” says Banco do Brasil analyst Daniel Cobucci, recalling two recent billion-dollar transactions in this segment: the purchase of Archaea Energy, a biogas producer, by British Petroleum; and the announcement of the acquisition of a share of Casa dos Ventos by the French company TotalEnergies.

2. New mining areas

Business at risk: exploration licenses for granite, quartzite and marble, granted during the Bolsonaro government, should be reviewed. Mining projects in gold and tin mines in the Amazon may also be suspended. Galvani Fertilizantes and Brazil’s nuclear power operator INB may find it difficult to get the Santa Quitéria project off the ground, which seeks to exploit uranium in the state of Ceará.

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Lula’s Environment Minister Marina Silva defends the views of environmentalists worried about the risks of contamination of the population by nuclear power, however.

Business on the radar: the supervision and monitoring of tailings dams should become more rigorous, after the environmental disaster of the Vale (VALE3) dam in Brumadinho (in Minas Gerais state) in 2019. Companies will demand more works to reduce risks and care for the environment. Vale expects to have no dam in a critical state of safety (emergency level 3) by 2025.

3. Santos port concession

Business at risk: the plan to privatize the port of Santos, the largest in the country, is likely to be shelved. The new governor of the state of São Paulo, Tarcísio de Freitas, has indicated a willingness to insist on his project being pursued by negotiating with President Lula, but the market considers that, at most, the federal government would support the concession of some areas of the port to dock companies.

Knowing the port sector, the former governor of São Paulo, Márcio França, from the Brazilian Socialist Party (PSB), was sworn-in on January 2 as Lula’s Minister of Ports and Airports.

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Business on the radar: the new government plans to resume the Growth Acceleration Program (PAC), launched by Lula during his previous administration in 2007. The focus will now be on the completion of ongoing or stalled infrastructure projects, attracting partnerships with the private sector. Road works, focused on transport logistics, should boost partnerships between the new administration and contractors.

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Transport Minister Renan Filho said on January 3 that the improvement of the highway network will require around 100 billion reais ($19 billion) in investments, and that new rail projects can be implemented through public-private partnerships.

4. New Eletrobras

Businesses at risk: the privatization of Eletrobras, in 2022, should not be contested, since it would increase the perception of legal insecurity, but rules such as the obligation to contract energy from thermal plants and PCHs (small hydroelectric plants) may be questioned, according to analysts. The expected privatization of the Companhia Paranaense de Energia for 2023 may be shelved.

Business on the radar: incentives for the construction of smaller hydroelectric plants, and solar, wind and biomass plants are expected, as the new government has stated its intention to develop renewable energy sources. The country’s development bank BNDES should strengthen its credit lines, such as RenovaBio, for energy efficiency programs in the productive sector, according to the analysts consulted.

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5. Real estate market

Business at risk: high interest rates (13.75% per year) are still holding back the increase in real estate financing in the country. The market rules out the beginning of a Selic rate cut before the second half of 2023. This means that construction companies in financial difficulties will have to shelve launches, without generating cash. In September 2022, developer Rossi Residencial (RSID3) went into receivership.

Business on the radar: developers that serve the middle-low income public, such as MRV (MRVE3), one of the largest in the country, and Tenda (TEND3), may benefit from measures to combat the housing deficit promised by the new government, such as the resumption of the Minha Casa, Minha Vida program (My House, My Life). The program should gain new modalities such as urbanized lots, social rentals, and tax incentives to induce the construction or rehabilitation of idle buildings in urban centers, according to analysts.

“There is a sign on the part of the new government of a resumption of the Minha Casa Minha Vida program. If on the one hand the high interest rates for housing credit represent a more challenging scenario for the middle-income market, on the other hand there is a prospect of a resumption of the HIS [Social Interest Housing] market, which can mitigate the retraction of the segment,” says Ana Maria Castelo, coordinator of construction projects at the Brazilian Institute of Economics (FGV Ibre) of the Getulio Vargas Foundation, regarding signs of improvement in the sector’s confidence, such as the index of expected housing demand.

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6. Public banks’ credit

Business at risk: in 2022, high default rates led the main Brazilian banks to increase provisions for toxic debts, putting pressure on their profitability. The financial sector is forecasting a slowdown in the pace of credit concessions, with greater rigor in risk analysis by the banks. The increase in spreads on loans should compensate for a capital market lacking dynamism.

Business on the radar: public banks, such as Banco do Brasil (BBAS3), Caixa Econômica Federal and BNDES, should gain more importance in the financing space with the new government’s plans to avoid a recession and foster mainly small and medium-sized companies through subsidized rates. These financial institutions may increase staff via public tenders and open new branches.

According to Agnaldo Bastos, a lawyer specialized in public tenders, around 120 calls for tenders are expected, and “the new Lula government tends to focus more on the public machine and invest more in the opening of federal public bidding processes.”

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7. Agribusiness exports

Business at risk: agricultural and cattle-raising activities linked to deforestation, forest fires and environmental degradation should be subject to greater inspection by federal authorities, as promised by the new government. Control over the list of authorized pesticides may also be reinforced, as well as actions to protect the territories of Indigenous peoples, especially in the Amazon.

Business on the radar: incentives for the development of rural production cooperatives and to families and sustainable agriculture are part of the new government’s program. The Bank of Brazil should be activated to reinforce disbursements to finance the Plano Safra (Crop Plan), aimed at raising crop yields, as well as to expand business in the agro production chain, simplifying processes, especially small and medium-sized producers and cattle farmers.