Workers from a company under contract for the Brazilian state-owned oil company Petrobras shout slogans during a protest to demand the payment of three months of wages in arrears, in front of the Petrobras building in Rio de Janeiro, Brazil, on Wednesday. Once worth $310bn at its peak in 2008, a valuation that made it the world’s fifth-largest company, Petroleo Brasileiro is today worth just $48bn. Today, the company epitomises everything that is wrong with a Brazilian economy that has been sputtering for the better part of four years: It’s mired in a corruption scandal that cost the CEO her job this week; it has failed to meet growth targets year after year; and it’s saddling investors with spectacular losses.
Bloomberg/Rio de Janeiro/New York
When Brazil emerged from the global financial crisis as one of the world’s great rising powers, Petrobras was the symbol of that growing economic might.
The state-run oil giant was embarking on a $220bn investment plan to develop the largest offshore crude discovery in the Western hemisphere since 1976 and was, in the words of then-President Luiz Inacio Lula da Silva, the face of “the new Brazil.”
Today, the company epitomises everything that is wrong with a Brazilian economy that has been sputtering for the better part of four years: It’s mired in a corruption scandal that cost the CEO her job this week; it has failed to meet growth targets year after year; and it’s saddling investors with spectacular losses. Once worth $310bn at its peak in 2008, a valuation that made it the world’s fifth-largest company, Petroleo Brasileiro is today worth just $48bn.
While Brazil’s decline on the international stage has been playing out since the commodities-driven economic boom first began to fizzle in 2011, the corruption case at Petrobras deepens the growing sense of crisis in the South American country. The government is posting record budget deficits after a collapse in prices for the soy, oil and iron that the nation exports; Sao Paulo is running out of water amid the biggest drought in decades; and the real dropped the most among major currencies in the past six months.
“Brazil seemed great during close to 10 years of rising commodity prices and a very positive terms of trade,” Jim O’Neill, the former Goldman Sachs Group chief economist who coined the BRIC acronym and who is now a columnist for Bloomberg View, said in an interview from London. “It disguised lots of underlying problems and of course it made policy makers lazy and allowed bad behavioural habits to go on, as this Petrobras story epitomises.”
It wasn’t supposed to go like this. In the halcyon days, the country was awarded rights to host the 2014 World Cup soccer tournament and the 2016 summer Olympics, events that officials sought to use to highlight Brazil’s arrival as a global power. The nation was in the midst of the kind of economic expansion it hadn’t seen in decades, posting growth of more than 5% in three out of four years.
To understand how far Brazil has fallen since, compare the markets’ performance under Lula with that of his protege and successor, Dilma Rousseff. Lula oversaw a 113% rally in the real, the best-performing emerging-market currency during his years in office from 2003 through 2010. A commodity surge also helped stocks reach their peak during his last year in office after the benchmark Ibovespa gauge jumped six-fold.
Since the 67-year-old Rousseff took office in 2011 after serving as Lula’s energy minister and chief of staff, positions that also put her atop the board at Petrobras, the Ibovespa has lost a third of its value and the currency has sunk about 40%. Shares of Rio de Janeiro-based Petrobras are trading close to 2003 levels, having fallen to 10 reais. The stock slipped 0.5% in early trading yesterday.
The expansion has stalled, lagging behind the regional average every year since 2011 as Rousseff took a more interventionist approach to economic policy than Lula. Itau Unibanco Holding forecasts gross domestic product will contract 0.5% this year amid the risk of water shortages and shortfalls in hydropower generation. UBS Group said on Monday that energy rationing could cause GDP to contract as much as 1.5%.
“The scenario is very difficult, and I don’t see it improving in the short term,” said William Landers, who oversees $3.7bn in Latin American stocks at BlackRock in New York. “We’re looking at a possibility of negative growth, shortages of electricity and water, bad prospects for infrastructure investment.”
Inflation, meanwhile, has exceeded the midpoint of policy makers’ target for more than four years. While annual price increases of 6.41% are well shy of the hyperinflation Brazil saw in the early-1990s, bond yields show investors are betting the annual rate will jump to 7.24% over the next two years.
“We have seen a 180-degree turn from, say, eight years ago when Lula was out there announcing that God is Brazilian,” Shannon O’Neil, a senior fellow at the Council on Foreign Relations, said by telephone from New York.
Petrobras’s CEO, Maria das Gracas Foster, and five top managers resigned on Wednesday as police probe accusations that executives took bribes in return for contracts. Shares have dropped every year since 2010 as the company sold imported gasoline at a discount as part of government policies to curb inflation and repeatedly missed output goals.
The graft investigation has uncovered a record 23bn reais ($8.4bn) in suspect transactions, and Petrobras’s credit rating has been downgraded to the cusp of junk as company officials say that so far it’s been impossible to account for losses from the alleged kickback scheme.
The case helps highlight perceptions of the impact of graft in Brazil. The country ranked 135th of 144 nations for diversion of public funds in the World Economic Forum’s 2014-2015 Global Competitiveness Report.
While Petrobras shares have surged 22% in three days amid the management change, erasing losses for the year, the oil producer has lost almost two-thirds of its value since September.
“It’s amazing; what destruction,” Eric Conrads, a money manager at ING in New York who helps oversee about $500mn of Latin American stocks, said by telephone. “You have to inject new blood –- it’s necessary, but not sufficient to restore confidence in Brazil as well as in Petrobras.”
The changes in Petrobras should be similar to what Rousseff aimed for by appointing Joaquim Levy as finance minister to bolster investor confidence, Conrads said.
Levy is up against a budget gap that soared last year to 343.9bn reais, equal to 6.7% of gross domestic product, more than double a 3.25% deficit in 2013. The deterioration in fiscal accounts prompted Standard & Poor’s to cut Brazil’s credit rating last March to one level above junk.
“The country was going very fast toward a cliff, and still is,” Rogerio Freitas, a partner at hedge fund Teorica Investimentos, said by telephone from Rio de Janeiro. “Pessimism still prevails. All you have to do is look at the prices. Petrobras is having a very significant, and very negative, impact on Brazilian assets.”
