🧋 Drinking Brazil’s milkshake?

Good morning! Today, we talk about the mines and energy minister’s new push for oil ventures in the Equatorial Margin. The Cerrado has taken over as Brazil’s new deforestation hotspot. And markets’ inflation expectations are worsening.

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A new push for Amazon offshore oil drilling

In an iconic final scene from Paul Thomas Anderson’s 2007 film “There Will Be Blood,” prospector Daniel Plainview, played by Daniel Day-Lewis, reveals to a dumbfounded pastor who owns a once oil-rich piece of land that he has been draining his oil for years. 

• “Here, if you have a milkshake, and I have a milkshake, and I have a straw. There it is, it’s a straw, you see? Watch it. Now, my straw reaches across the room and starts to drink your milkshake. I drink your milkshake. I drink it up!” 

For Brazilian Mines and Energy Minister Alexandre Silveira, that is exactly what neighboring country Guyana is doing to Brazil’s potentially massive Equatorial Margin oil reserves. “Our brothers from Guyana are sucking on Brazil’s riches through a straw, they are drilling on the border,” he said. 

• “It is the right of the Brazilian people to know their wealth,” Mr. Silveira added.

Context. For those in the industry, the Equatorial Margin is regarded as one of the world’s most exciting new oil frontiers. Consultancy firm Rystad Energy estimates the reserves’ potential at 5 billion barrels of oil equivalent, but puts environmental concerns at the top of its risk matrix.

• The Equatorial Margin is an offshore area encompassing the coasts of Brazil’s North and Northeast regions. 

• Oil exploitation in an area close to the Amazon River mouth is environmentalists’ biggest concern. It is a very active region, with currents and sediments coming from the river mouth; a spill there could cause international chaos, affecting the coasts of multiple countries in the region.

• Last year, Brazilian environmental protection agency Ibama denied a permit for drilling a well in the Equatorial Margin, and multiple sectors within the government have pushed back.

 Why it matters. The Lula administration’s biggest contradiction lies in its energy policies. While showcasing green commitments and promises to end Amazon deforestation by 2030 and make Brazil’s energy matrix carbon neutral, the administration remains bullish on oil.

Case in point. Brazilian officials, notably Mr. Silveira, have defended the idea that Brazil should drill as much oil as possible now in order to fund its energy transition. For climate advocates, such a strategy makes absolutely no sense.

Rhetoric. By saying that Guyana may be drilling “Brazil’s” oil, Mr. Silveira is trying to swing public opinion to his side by tapping into national pride and the fear that the country might be losing out.

Massive reserves. Equatorial Margin oil reserves are expected to be massive, considering the findings in analogous areas in Africa and Guyana. The latter has become the world’s fastest-growing economy thanks to its newfound oil and gas wealth; the local government is investing part of the riches in mining, tourism, agriculture, and other sectors. President Mohamed Irfaan Ali wants to reduce the country’s dependence on hydrocarbons.

Cerrado consolidated as Brazil’s new deforestation hotspot

The Matopiba region, Brazil’s new agricultural frontier, has become the country’s top deforestation hotspot — a new study by monitoring platform MapBiomas finds.

Context. Matopiba is a portmanteau used to describe a region that straddles the states of Maranhão, Tocantins, Piauí, and Bahia. According to Embrapa, Brazil’s agricultural research company, Matopiba has already grown to become the country’s fourth-most important grain-producing region.

 Why it matters. Last year was the first time in MapBiomas’ yearly reports that the Cerrado savanna (where most of the Matopiba is) surpassed the Amazon rainforest as the biome with the biggest deforested area in a year. 

• That is no trivial finding, especially considering that the Cerrado is just half the size of the Brazilian Amazon.

By the numbers. According to MapBiomas, almost 52 hectares of Amazon land were deforested per hour in 2023. In the Cerrado, the destruction went up to 126.7 hectares per hour.

Trend. Agribusiness, Brazil’s economic engine, is the country’s main driver of deforestation — whether the land is cleared for pasture or crops. The sector has yet to address how indirect suppliers often fail to comply with environmental regulations.

• A recent study by the Amazon Environmental Research Institute (Ipam) and MapBiomas warns that deforestation for agricultural purposes is taking a massive toll on river systems in the Matopiba region.

What they are saying. Conservation rules for farmers are more permissive in the Cerrado than in the Amazon. In the rainforest, landowners must conserve 80 percent of their property, but that requirement drops to 25 to 35 percent in the Cerrado. 

• The federal government claims that local administrations have been lax in issuing land use permits. “It is much easier to deforest legally in the Cerrado,” Deputy Environment Minister João Paulo Capobianco said last year. “We have to double-check that the permits comply with legal requirements.”

Inflation expectations up and in the way of interest rate cuts

Speculation surrounding Finance Minister Fernando Haddad’s appearance last week before the House Finance and Taxation Committee contributed to higher inflation projections in Brazil, Central Bank Chairman Roberto Campos Neto told businesspeople on Monday.

Context. Mr. Haddad referred to Brazil’s current 3 percent inflation target as “unimaginable” and “extremely demanding” — while also calling for reforms to Brazil’s fiscal structure, as large chunks of federal revenue are constitutionally earmarked for spending on specific things, which reduces any government discretion over the budget.

 Why it matters. While some analysts read Mr. Haddad’s statements as self-praise — in the sense that the country’s economic policy is in better shape than analysts expected, thereby contributing to the disinflationary process — others understood the speech as a sign that the government wants to change the target from 2025 onwards. 

• Mr. Campos Neto’s assessment of the Central Bank’s analysis models indicates that the latter narrative is gaining strength. 

Red flags? Mr. Haddad’s speech in the House would not do this alone, other recent measures have also disturbed market expectations. One is the split decision of the Central Bank’s Monetary Policy Committee, which led to a slimmer rate cut than previously expected (by 0.25 percentage points to 10.5 percent).

• All five board members appointed by far-right former President Jair Bolsonaro voted for the smaller rate cut, while all four members named by the current Luiz Inácio Lula da Silva administration wanted to continue the pace of cuts of half a percentage point.

• Although well explained in the bank’s minutes, the decision reinforced the idea that a less conservative and less market-friendly Central Bank may emerge next year, when Lula picks the new head of the monetary authority.

• The proximity of Mr. Haddad’s statements to Thursday’s meeting of the National Monetary Council (which sets Brazil’s inflation target), and the fact that the change in the rules for defining the target made last year had not yet been published in a decree, also reinforced this narrative. 

• The council comprises the finance and planning ministers and the Central Bank chairman, which means the federal government holds two of the three votes necessary to change the inflation target.

Target. In June last year, the National Monetary Council adopted a continuous time frame for the Central Bank to pursue inflation targets, ditching the current system of tracking a calendar year. 

By the numbers. Despite the general downward trend of official inflation, the data is still far from the target. Early in April, the median year-end inflation rate forecast among analysts surveyed weekly by the Central Bank stood at 3.7 percent. It sits at 3.8 percent now.

Monetary tightening. The Central Bank’s Monetary Policy Committee flags an increase in the risk premium and a perception of a worsening fiscal situation over the period, based on a survey sent to economic analysts before each policy meeting. The speculation sparked by Mr. Haddad’s statements reinforces this scenario of uncertainty, contributing to keeping interest rates as they are.

• On Monday, the Central Bank’s weekly survey with financial institutions showed that the median expectations for this year’s inflation rose from 3.8 to 3.86 percent, while those for the benchmark interest rate remained at 10 percent.

Quick catch-up

A study by the National Confederation of Commerce found that imports of women’s clothing items priced up to USD 50 were up 407 percent in 2023. Brazilian retailers try to end tax exemptions on such purchases, claiming that foreign sellers hold unfair advantages.

Finance Minister Fernando Haddad promised to present by next week the government’s proposal to raise revenue and compensate for the payroll tax exemptions Congress granted to 17 economic sectors (to be phased out by 2028). The Supreme Court said the benefit will end unless a compensatory measure is approved.

Brazil’s National Development Bank (BNDES) and mining giant Vale on Monday announced a public bidding process to select an investment fund to invest in minerals related to energy transition, decarbonization, and fertilization.

Experts warn that Brazil’s pension system could make the fiscal framework unfeasible, due to the government’s policy of yearly increases to the minimum wage (to which pensions are pegged), the aging of the population, and the reduction in the number of new workers. 

Mines and Energy Minister Alexandre Silveira opened the third meeting of the G20 working group on energy transition. A big defender of oil ventures, Mr. Silveira said the world must see energy transition as the new social and economic development paradigm. 

 Military officers spread unconfirmed rumors that a dike in Canoas, Rio Grande do Sul, had burst and that a neighborhood should evacuate. The false alert stirred panic and exposed the risks posed by disinformation surrounding events like the floods in South Brazil.

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