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Economy & Business - March 2021

BRAZIL: Bolsonaro moves Petrobras goalposts

Under the leadership of Roberto Castello Branco, oil firm Petrobras, Brazil’s largest state-controlled company, seemed to be doing its homework: debts were down and profits were up. But this did not stop President Jair Bolsonaro from sacking Castello Branco and choosing a retired army general, Joaquim Silva e Luna, to replace him, a move which prompted investors to start a big sell-off of Brazilian assets.

The short explanation for such a move is politics. Petrobras is 36.8% owned by the Brazilian government, which controls 50.5% of its voting rights. Seven out of 11 members of the board of directors are government appointed. As a company listed on both the São Paulo and New York stock exchanges, however, it has an obligation to deliver a commercial return on investment to all of its shareholders. One of its policies for achieving that – keeping the prices of fuels sold in the Brazilian market in line with international prices – came into bruising conflict with Bolsonaro’s political priorities.

Between the start of the year and the sacking of Castello Branco on 19 February, the company increased diesel prices three times (totalling 28%) and raised petrol four times (totalling 35%). Two further small increases were announced on 1 March. Bolsonaro objected to these increases, which are way above the country’s currently low inflation rate, and which prompted the powerful lorry drivers’ sector, which normally supports the right-wing president, to threaten strike action (around 70% of Brazilian freight is carried by road, so a strike could be devastating for the economy).

Petrobras shares take a tumble

Source: Hargreaves Lansdown, FactSet

The irony is that during his two years as Petrobras CEO, Castello Branco had a highly successful run, continuing the process of rebuilding a company which five to six years ago was notching up multi-billion dollar losses, incurring massive debts, and struggling with the fallout of the ‘Lava Jato’ (Car Wash) mega-corruption scandal. In 2015 Petrobras announced losses of US$8.5bn on revenue of nearly US$100bn. By 2019, Castello Branco’s first year in the job, it was back in the black with a profit of US$10bn on lower revenues of US$76bn.

In recent years Petrobras has shaken off its tag as the world’s most indebted oil company. Total debt was US$126bn in 2015 but was whittled back to US$63bn in 2019. The latest available accounts show it has remained in the black throughout the upheavals of the coronavirus (Covid-19) pandemic. In the fourth quarter of last year, it reported earnings before interest, taxes, depreciation, and amortisation (Ebitda) of US$8.65bn, up 41% on the preceding quarter.

In a classic case of moving the goalposts, Bolsonaro made clear that commercial success was not enough. He accused the Petrobras CEO of having a narrow vision and “zero commitment” to Brazil, claiming his decision to work remotely during the pandemic showed an absence of leadership. The president also suggested that the company was being run for the elite, rather than the people. “Does our petroleum belong to us, or to some small group here in Brazil?” Bolsonaro asked rhetorically, adding that “a state-owned company, whichever it is, has to have a social perspective. We can’t have the president of a public company who doesn’t have that kind of view.” The day after Castello Branco’s dismissal, Bolsonaro also suggested he might have to intervene in electricity pricing.

The implications of the change in Petrobras leadership for future pricing are not clear, but the markets appear to have concluded that there will be greater uncertainty, less guarantees for investors, and more political interventions in pricing. In initial trading after the announcements around US$18bn was taken off the company’s stock market valuation and the value of the real dropped markedly against the US dollar (down by 9% in the year to 3 March).

Fears that the government would be engulfed in legal disputes over the replacement of the CEO have receded (although four members of the board of directors resigned). Silva e Luna’s appointment as incoming CEO will be analysed during an extraordinary general assembly on 12 April, when eight new board members will also be selected. Silva e Luna, who was previously head of Itaipú, the binational Brazilian-Paraguayan hydroelectric complex, has not yet outlined his favoured pricing policy, although he has said the company “must see social issues” and seek “balance” in refined product pricing.

There are reasons why some forms of price interventions can be desirable. They include the benefits of ‘smoothing out’ sharp international energy price fluctuations. A range of successful national oil companies (NOCs) pursue a mix of commercial and non-commercial objectives. But the question is one of scale. According to Castello Branco, previous price subsidy programmes in Brazil have cost as much as US$40bn a year, an amount incompatible with current efforts to reduce both an unsustainable fiscal deficit (13.6% of GDP) and an excessive debt-to-GDP ratio (89.7%).

Privatisations ‘yes but no’

The timing of Bolsonaro’s intervention also raises doubts about the government’s much proclaimed privatisation programme, championed by pro-market Economy Minister Paulo Guedes (who kept a low profile during the Petrobras pricing controversy). Petrobras itself is in the process of selling eight of its 13 refineries, as part of an agreement with Cade, the anti-trust division of the justice ministry, to reduce its market share to under 50%. Potential buyers may be scared off, however, because of uncertainty over future price levels and regulations. For them, the Petrobras story is not encouraging.   

Perhaps to try and recover some lost market confidence, Bolsonaro insisted that “our privatisation agenda is going full steam ahead”. On 24 February he submitted a bill to congress which would accelerate the privatisation of power company Eletrobras. Plans to sell off Eletrobras have been languishing since 2019 due to a failure to agree on the desired structure and regulation of a privately-led power industry.

Another bill has been submitted to accelerate the sale of Correios, the Brazilian postal service, with Amazon, Mercado Libre, FedEx, and DHL said to be among the potential bidders. But here too the switch to more populist and interventionist pricing policies may give cause for concern. International ratings agency Fitch Ratings made a sombre assessment, commenting that “The greatest risk to Brazil’s sovereign credit profile is a confidence shock that leads to a sharp increase in risk premia. President Jair Bolsonaro’s action increases political noise and uncertainty over structural reforms this year.”