On 3 March President Dilma Rousseff accused the political opposition of being “merchants of pessimism” and said it had “placed all its bets on the failure of country”. The president, who was speaking at the national convention of her main coalition ally, Partido do Movimento Democrático Brasileiro (PMDB), denied that Brazil was in economic trouble and insisted that recent measures would produce a recovery this year after real annual GDP growth of just 0.9% in 2012. The leading opposition presidential aspirant for 2014, Aécio Neves, in turn accused Rousseff of early campaigning for the 2014 race. In an official note Neves said that Rousseff’s “obsession” with the opposition was “curious” and recommended that she “come down from the platform” and “face the real challenges” of the country. “Brazil at this moment needs much more of a president and less of a candidate”, he said, noting the “piffling” 2012 GDP result.
The normally controversial finance minister Guido Mantega was on his best behaviour in New York in early March, where he began an international road show seeking upwards of US$230bn in infrastructure investment. Mantega and his entourage are wooing investors in the US, Europe and Asia, and in support of that effort President Rousseff is also firmly on message back home, pledging clear rules of the game and a stable operating environment for investors. Having belatedly realised that private investors were scared off by the rolling and unpredictable policy changes of the past two years, the Rousseff administration is on a major charm offensive to win them back. Brazil bears have been unable to resist a bit of schadenfreude.
Brazil grew just 0.9% annually last year, with investment falling for a sixth consecutive quarter. At just 18.7% of GDP, the rate of gross fixed capital investment is one of the lowest in the region. In the open export-led Andean economies of Peru and Chile, for instance, investment is running at 24%-25% of GDP. In Brazil’s main trade partner China, it is a whopping 48%.
Critics of the government run since 2003 by the left-wing Partido dos Trabalhadores (PT) warn that the country’s long economic run since 2004-2005 on the back of a lengthy commodities-fuelled consumer boom has finally ended, and that the Rousseff administration’s penchant for micro-managing (in a well-intended effort to maintain growth) has had the unintended effect of deterring private investment, with the industrial sector tanking as a result.
The Rousseff team now seems to have come round to the idea that it might be better to let the private sector get on with it, and instead of hyperactively intervening with abrupt (and often schizophrenic) changes to monetary, exchange rate, tax and trade policies, to work to facilitate investment-led growth by tackling the main structural obstacles holding that back, like the exorbitant ‘Custo Brasil’.
It is also the case that under Mantega the finance ministry has had real trouble with the basic stuff - like communications - to the point that The Economist newspaper late last year called on Rousseff to sack him, a call she pointedly ignored. According to the conservative daily O Estado, the finance ministry recently brought in a new private communications team to ‘re-brand’ and rebuild the ministry’s frayed relations with the business sector and the financial community, both in Brazil and abroad.
The shiny new ‘Brazil is open for business’ message and the ‘crusade’ against the Custo Brasil comes ahead of Rousseff’s bid for re-election in October 2014, ahead of which she and the PT desperately need to deliver stronger - and more sustainable - growth. And that means rebalancing the economy.
At an event on 27 February to mark 10 years since the PT’s creation of the council for economic and social development (Conselhão), Rousseff made a clear gesture to the markets in reaffirming her government’s commitment to the three pillars of Brazil’s macroeconomic policy stance - monetary stability, a floating exchange rate and fiscal stability. She also admitted frankly that there are limits to State action. Moreover, the president insisted that inflation was not out of control in Brazil, noting that stable inflation is a policy priority in itself. In the past week Mantega and the central bank president Alexandre Tombini have sent the strongest signals yet that interest rates may go up in response to stubborn inflation – that will also be music to the ears of financial investors.
Tackling the Custo Brasil is no easy task, as evidenced by the continued port workers’ strike against the government’s new public-private reform plans for the sector. And it is unclear where the government’s micro-managing boundaries lie. For instance, Mantega held out for as long as possible against the urgent demands of the state oil company Petrobras for an increase in pump prices, relenting only after Petrobras posted very weak results in 2012, registering its first loss in 13 years.
Petrobras
Following two increases totalling about 10% in 2012, Petrobras has twice lifted wholesale prices since January 2013, most recently as we went to press on 6 March, when the company said it would increase the price of diesel shipped from its refineries by 5%, with the calculation to exclude federal taxes. (It lifted refinery prices for gasoline and diesel by 6.6% and 5.4%, respectively, on January 31). Petrobras lost about US$11bn in 2012 on fuel subsidies, according to estimates by sector analysts.
Mantega’s motivation in seeking to hold down fuel price rises is clear, given the inflation pressures; but with little market appetite for any new debt issues the cash-strapped Petrobras has now followed its regional counterparts in running into the arms of China. Energy Minister Edison Lobão said in early March that Petrobras was seeking help from the Chinese state oil company Sinopec to finish building its new refineries Premium I, in Maranhão, and Premium II, in Ceará. Lobão admitted to journalists that the refinery works in Maranhão were delayed due to “a certain financial difficulty”. Maria das Graças Foster, the Petrobras president, went to China to personally oversee the negotiations.
Lobão also said that the pending round of concession auctions for the ‘pre-salt’ deepwater oil sector would take place from May. That may be wishful thinking; the Supreme Court plenary in early March threw out a previous ruling by one of its magistrates, Luiz Fux, that effectively prevented the congress from going ahead with an urgent motion to throw out Rousseff’s veto over parts of the new regulatory framework for the distribution of oil royalties. The president in December vetoed sections of the new framework - which adjusts the way oil royalties are distributed between producing and non producing states - on constitutional and legal grounds, as they retroactively amended existing contracts. As we went to press the congress seemed set on defying the president, in which case the oil and gas auctions, which require the new royalties framework to be in place, may have to be postponed.
Trying to avoid a Selic rise
With inflation continuing its upward march, both Finance Minister Mantega and the central bank governor, Alexandre Tombini, have indicated that a rise in interest rates may be inevitable. In the meantime, however, the government is trying all it can to avoid pushing the Selic up from its record low of 7.25%. There are now some slight signs that the pressure on consumer prices may be starting to ease.
In early March, a government official briefed the local press about plans to cut federal taxes on diesel and ethanol in an attempt to rein in consumer prices. The tax cuts, initially scheduled for July, may be brought forward if inflation nears the 6.5% upper limit of the central bank’s target over the next two months. The cut in fuel taxes is primarily targeted at easing public transport costs, which rose 0.75% in January. Bringing the measure forward would also help offset some of the pain for consumers of the latest wholesale prices rises announced by Petrobras. In early February President Rousseff announced plans to reduce taxes on food to help tame inflation; massive cuts in electricity rates for homes and businesses also came into effect in February.
There are some signs the attempts to control inflation are starting to work. The inflation index in São Paulo dropped sharply in February, with both food prices and housing costs down. The index is followed closely outside of Brazil’s largest city for indications of the inflation trend. The Real is also a little stronger against the dollar. It was trading at R$1.96/US$ on 6 March.
What of Abreu e Lima?
Venezuela’s state oil company Petróleos de Venezuela (Pdvsa) has yet to fulfil its end of the bargain in the joint Abreu e Lima oil refinery with Brazil’s state oil giant Petrobras. Located in Brazil’s north-eastern state of Pernambuco, in its original vision, as imagined by President Hugo Chávez and his Brazilian ally, former president Lula, the refinery would help to promote the two countries’ industrial integration process by having the capacity to process Venezuela’s heavy crude.
Under a deal struck between Chávez and Lula in 2008, Petrobras would provide the facility and Pdvsa the cash, in a 60%-40% joint venture deal. In the end, Petrobras was saddled with both building the refinery and shouldering the estimated US$15bn cost. Having effectively written off Pdvsa’s participation, it is now unclear whether the refinery will include any heavy crude processing capacity at all. In the initial scheme, about half of the planned 230,000 b/d refining capacity was to be used for heavy crude.
Petrobras’s chief financial officer, Almir Barbassa, told the oil daily Platts in October 2012 that the refinery would begin operations in 2014, a year behind schedule. He said that the refinery would be “60% complete” upon start-up, indicating the strained cash flow at Petrobras as it tries to develop its new deepwater offshore oil fields. Barbassa also made clear that Petrobras’s three other planned new refineries are aimed at meeting Brazil’s growing demand for middle distillates. The oil coming out of Brazil’s new offshore sector is light, sweet crude; and so the country has no real need for heavy refining capacity, which is both expensive and more time consuming.
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