Inflation pressuring long-term projects in Brazil

Inflation pressures in Brazil have become strong and persistent, fueling fears it could affect long-term projects in the infrastructure and mining sectors. 

Inflation in Latin America's biggest economy began climbing last year on rising domestic demand but is now being driven by international factors, limiting the power of the central bank to keep it in check. 

"We're still seeing a lot of delays across the supply chain, and this causes project delays and increased logistical costs," Rodrigo Menck, CFO of mining and metals firm Nexa Resources, tells BNamericas.

"The logistical problems that started with the pandemic are persisting longer than expected. What we've noticed is that the entire supply chain system is working at its limit. We're still a long way from reaching a balance in this sector." 

The stubborn inflation is also causing concerns about long-term projects and is already having effects on the federal government's agenda of infrastructure concessions.

Last week, the government suspended the auction for a concession for the BR-381/BR-262 highway, which was expected to generate 7bn reais (US$1.37bn) in investments during the 30-year contract term, underscoring worries about ongoing cost pressures among the expected participants. 

Officially, the reason given for the postponement from February 25 was to enable improvements to the contract. The new schedule for the auction will be announced shortly.  

"One of the main reasons for the suspension of this auction is that road concessionaires are currently suffering enormous cost pressures and these risks of increased costs need to be well detailed in the public notices for all concessions," Marco Aurélio Barcelos, president of highway concessionaires association ABCR, told BNamericas. 

According to Barcelos, the main pressure point for highway concessionaires is the increase in asphalt-related costs. He said that if the government does not include compensatory mechanisms in the contracts to cover higher-than-expected costs, this could lead to waning interest among infrastructure companies in the other highways concessions planned by the government this year.

REASONS BEHIND INFLATION IN BRAZIL

"We see that the inflation trend in Brazil is still upward. Brazil has had the highest energy inflation in the world," central bank president Roberto Campos Neto said during a webinar this week. 

Inflation started climbing last year, beginning with hikes in energy prices, as the low level of rainfall at the time led to increased electricity costs in a country still highly dependent on hydroelectric power.

These price increases then had knock-on effects in areas such as foods and services. 

In 12 months ended in January, the country's official inflation index (IPCA) reached 10.4%, far outstripping the central bank's 3.5% target for the year. That has forced the monetary authority to make sharp increases to its benchmark Selic rate, which has been raised from the historic low of 2% at the beginning of 2021 to 10.75% at present. 

However, this year, it is concerning that much of the inflationary pressure is now resulting from international issues, and these have now been compounded by the geopolitical tension surrounding the Russia-Ukraine situation, which is pushing up global oil prices.

POLITICAL DEBATE 

Inflation pressures in Brazil have been at the center of the electoral debate in the campaigns of the main presidential pre-candidates ahead of the October 2022 elections, which surveys suggest will be a battle between incumbent right-wing President Jair Bolsonaro and left-wing former president Luiz Inácio Lula da Silva.

"People say that during Lula's tenure meat was cheaper. Yes, it was, but Lula didn't face a pandemic," said Bolsonaro during his most recent weekly video posted on his social media accounts, arguing that his administration has faced unpredictable problems in the fight against rising prices.