Petrobras, but Private.
The Brazilian Petroleum Corporation, commonly known as Petrobras, has made its mark on the Brazilian economy. Founded in 1953, the company is now ranked #58 on the Forbes Global 500 list, generates over $90 billion in annual revenue, and is the world’s 9th largest oil company by market capitalization. The giant also sustains over 2.6 million barrels of oil in daily output and controls over 7,000 production wells.
Petrobas was originally formed under former President Getulio Vargas and was part of a sweeping nationalist movement following the 1940s. The government currently owns a 43% stake in it, valued at $33 billion (15% of which is through BNDES, the state development bank), and considers it a crucial part of the country’s economy. In fact, congressional approval is mandatory for any type of potential sale of the company.
Thus, it comes as another sign of potentially sweeping reform within Brazil when President Jair Bolsonaro and his Economy Minister, Paulo Guedes, proposed to sell off Petrobras in an attempt to promote free-market policies and deregulation. There is good reason to support it.
First, Brazil’s bloated fiscal deficit is in massive need of trimming. In June of 2019 the government reported a primary fiscal deficit of $3.35 billion with a gross debt to GDP ratio of nearly 80%. Pensions and payroll are currently so expensive for Brazil that non-discretionary spending has reached almost 95% of the budget. The fallout of continued instability in the federal budget could range from the inability for Brazil to invest in itself to a severe economic recession. Although President Bolsonaro has made good progress on reforming one of the economy’s most significant liabilities, the pension system, the sale of Petrobras would provide some more funds to tackle the issue.
Privatizing Petrobras would also send a very clear sign to investors that the government is serious about changing the state’s role in the country’s business and economic affairs. The government’s recent oil field auction demonstrates how crucial this is. After over 20 companies registered to bid for four blocks, only three companies ultimately submitted bids — one being Petrobras. Executives from companies such as Royal Dutch Shell explained later that opaque rules behind Petrobras reimbursement, high signing fees and the heavy presence of the state deterred them from making offers. Petrobas won a joint bid with Chinese companies CNOOC and CNODC for the largest field, Búzios, and was the sole bidder for the Itapu field. No company submitted bids for the Sepia and Atapu fields. The two Chinese companies are already required to pay $1.5 billion to Petrobras for its earlier investments in the field and experts predict it will take them 5–6 years just to break even. Although the government claims it is happy with the results of the auction, many foreign investors were hoping to see more action from the big energy companies. It also puts a damper on Brazil’s attempt to become a more influential oil producer on the international stage.
That said, there are various obstacles that could prevent the administration from seeing this through. Political opposition is staunch as many lawmakers see the company as a healthily functioning company that provides important revenue for the country. Others claim it will violate national sovereignty and amount to Brazil “selling out” to foreign interests. The window of time for Bolsonaro to push through significant other reform is narrowing too — an election cycle in 2020 will certainly distract political attention and make meaningful change more difficult.
Besides inevitable push back from a large portion of congress, Bolsonaro and Guedes have a list of nine other companies they would like to privatize first. Some names include Correios, the country’s postal service, and Codesp, the company managing the continent’s largest port in Santos. These are likely more feasible, as they do not carry the political and economic weight that Petrobras does, and will provide many of the same benefits as listed above. The government aims to raise over $300 billion by privatizing these nine firms.
Although a popular goal among investors, there is not much belief that Petrobras will become private during Bolsonaro’s term. The initiative, however, sets an important precedent and signals that the administration is committed to unraveling the state’s clumsy role in markets. For those considering business in the country, that may be good enough for now.
Sources and Additional References
