Petrobras, Brazil’s state-controlled oil company, is speeding up plans for what is expected to be one of the country’s biggest privatisations, the listing of its petrol station business, to take advantage of favourable market conditions.
Pedro Parente, chief executive of Petrobras, said he could not confirm market expectations for an initial public offering by the final quarter of this year or that the deal would value the company at between R$30bn ($9.5bn) to R$40bn.
But the strong performance of Brazil’s stock market meant the company was preparing BR Distribuidora for listing “as soon as possible”.
“We have to always be prepared so that if the market grins at us, we can go over there and give it a kiss,” Mr Parente said in an interview.
The listing of BR Distribuidora, the owner of Brazil’s main petrol station network, would indicate that Brazil’s once moribund equity issuing market is recovering.
Appointed last year to turn Petrobras round after a political corruption scandal known as Lava Jato, or car wash, Mr Parente is eyeing the sale as part of plans to reduce the company’s debt.
Brazil’s Ibovespa benchmark stock index has gained 28 per cent over the past year as the country recovers from the deepest recession in its history. Petrobras shares rose 16 per cent during the same period.
Mr Parente said the articles of association of BR Distribuidora had been rewritten with plans to list the company on Brazil’s Novo Mercado, a segment of the market reserved for corporations with higher governance standards.
While the government would still control a fraction over 50 per cent of BR Distribuidora, at least half of the board would consist of independent directors.
Directors chosen by the government would be selected from a shortlist prepared by an international headhunter to try to avoid political appointments. Until recently, Petrobras was riddled with such appointees, who were allegedly tasked by patrons with extracting bribes from contractors as part of Lava Jato.
“The improvement in governance that we are proposing and which was approved for BR Distribuidora, aside from attracting a better evaluation from investors, will increase the protection of the company so that the problems of the past do not repeat themselves,” Mr Parente said.
Analysts have welcomed plans to list BR Distribuidora but warn that investors were likely to discount for the risk that future governments might try to control prices for political reasons.
“In the past, populist parties have at times compelled Petrobras to sell its products at below-market prices,” said UBS in a note.
Concern also exists the company might be forced to buy petrol from Petrobras and not be allowed to import fuel as its competitors do.
At about $89bn, Petrobras’ debt is estimated to be among the highest in its sector.
Mr Parente said he aims to reduce the company’s leverage from 5.1-5.3 times earnings before interest, taxation, depreciation and amortisation in 2015 when the company came close to a technical default to 2.5 times when his current term is likely to end in December next year.
To help achieve this, Petrobras is aiming for $21bn in revenue from asset sales this year and in 2018 after achieving $13.7bn in divestments last year. Net debt to ebitda is about 3.1-3.2 times.
“Today we can see we have a completely different company,” Mr Parente said.
Another important step in achieving this goal was the establishment of market-oriented pricing based on international oil prices, he added. This was a break with past governments that have maintained political control of price-setting in a country with a large population of low income earners who are particularly sensitive to inflation.
“Petrobras does not set prices, it is not a setter of prices, it is a receiver of prices because it is operating with commodities,” he said.
Better productivity than expected from Brazil’s offshore oil finds, known as the pre-salt, is also helping to reduce Petrobras’ debt. Ten years after their discovery was announced, the fields are producing 30 per cent more oil per well than expected and wells are taking three months to drill rather than 11, he said.
“This is one of the reasons were are able to reduce capex without reducing production,” he added.
Credit ratings agency Moody’s upgraded Petrobras on Tuesday, citing lower debt levels, better liquidity and stronger governance at Brazil’s national oil company, which was at the centre of the national ‘car wash’ corruption probe.
In a nod to chief executive Pedro Parente, appointed last year to turn the group around after the scandal, Moody’s said it had bumped up Petrobras’ credit rating one notch from B1 to Ba3 and changed its outlook to stable from positive due to "Petrobras’ material liquidity improvement, declining debt leverage, solid management discipline and strengthened corporate governance."
At about $89bn, Petrobras’ debt is estimated to be among the highest in its sector.
Mr Parente has said he aims to cut the company’s leverage from more than five times earnings before interest, taxation, depreciation and amortisation in 2015 — when the company came close to a technical default — to 2.5 times by December next year.
Nymia Almeida, a senior credit officer at Moody’s, said Petrobras was “on track” to reach that target.
Moody’s added that Petrobras had already shrunk its debt pile by $10bn over the year to June 2017. Moody’s warned that there may still be “uncertainty” around corruption probes and “the resulting consequences for the company”. But it added that the probability of a fine that could significantly dent liquidity had fallen.
Petrobras’ cash on hand stood at $24.5bn in June.
Brazilian state-controlled oil company Petrobras continued its upward trend after delivering its best quarterly results in two years on Thursday.
The company reported a net income of R$4.45bn, a considerable turnaround after a R$1.25bn loss in the same period last year.
The company’s adjusted EBITDA was up 19 per cent in the quarter, reaching R$25.25bn versus the R$21.19bn bagged in the first three months of 2016.
Through a strategy of asset sales, reduced investments and cost-cutting, the company’s chief executive Pedro Parente — the former Brazil head of US-based agricultural group Bunge, who took the reins the oil giant almost a year ago — is seeking to turn around the embattled company’s fortunes.
Petrobras has been hit by a double whammy of lower oil prices and a sweeping corruption scandal that has shaken Brazil’s business and political class. It already reversed its losses in the fourth quarter of 2016, reporting a profit of R$2.51bn compared with a loss during the previous three months.
A Brazilian federal court ruled against the country’s state-controlled oil company Petrobras in an R$8.8bn ($2.75bn) tax case.
Petrobras said in a note on Monday that it would appeal the ruling, which is related to a payment of income tax in the leasing of oil platforms between 1999 and 2002.
The ruling comes as Petrobras’ chief executive Pedro Parente is working on reducing its debt pile, which stood at some $89bn at the end of June this year.
Last week, credit ratings agency Moody’s said Petrobras had already shrunk its debt burden by $10bn over the year to June 2017.
Brazil’s delayed auction of eight pre-salt blocks holding 12bn barrels of estimated oil reserves fell short of expectations on Friday.
Consortiums formed by global big guns ExxonMobil, BP, Shell, Total and Statoil, among others — three of which included Brazil’s national oil company Petrobras — won six blocks, allowing them to explore for hydrocarbons trapped under layers of salt beneath the Atlantic ocean bed. Two blocks were left up for grabs.
The blocks were offered under the production-sharing regime, in which the winners offered the highest percentage of output to the state, instead of a compulsory minimum. The Brazilian government bagged R$6.15bn ($1.8bn) in signing bonuses, instead of the R$7.7bn ($2.3bn) officials expected if all eight blocks were sold.
For authorities the round was still a success, marking the first time Brazil granted private companies the option to operate pre-salt reserves as part reform efforts by pro-market President Michel Temer. Under previous rules, Petrobras was required to participate in the bids for all blocs with a stake of at least 30 per cent.
The government hopes the oil-block auctions held between 2017 to 2019 will bring in more than $80bn in new investment and over $100bn in royalties to the world’s tenth-largest oil producer. Brazil currently produces some 2.6 million barrels of oil per day, but is aiming at almost doubling that in the coming decade.
Friday’s auction was initially suspended after a federal judge issued an injunction to block it, sought by the leftist Workers’ Party, which was later overturned.
ExxonMobil, the world’s largest listed oil and gas group, will start publishing reports on the possible impact of climate policies on its business, bowing to investor demands for improved disclosure of the risks it faces.
The decision is the biggest success so far for investors who have been pushing companies to do more to acknowledge the threat they face from climate change and from policies that curb greenhouse gas emissions.
In a regulatory filing on Monday evening, Exxon said it would introduce “enhancements” to its reporting, including analysis of the impact of policies designed to limit the increase in global temperatures to 2C, an internationally agreed objective.
At Exxon’s annual meeting in May, investors controlling about 62 per cent of the shares backed a proposal filed by a group of shareholders led by the New York state employees’ retirement fund calling for an annual assessment of the impact of technological change and climate policy on the company’s operations.
Supporters of the proposal argued that the disclosures would help shareholders assess the long-term resilience of Exxon’s operations in a world where governments delivered on their pledges to tackle global warming.
The company’s board had opposed the proposal, arguing that, while directors agreed with the need for scenario planning and risk analysis, they were already “confident that the company’s robust planning and investment processes adequately contemplate and address climate-related risks and are sufficient to ensure delivery of long-term shareholder value”.
In Monday’s filing, the company said the board had “reconsidered the proposal . . . [and] sought input from a number of parties, such as the proponents and major shareholders” before deciding to accede to improved reporting on climate policy risk.
Under Lee Raymond, who led Exxon during 1993-2005, the company stressed the “gaps” in climate science, and was vehemently opposed to international attempts to address the threat under the 1997 Kyoto protocol.
However, under previous chief executive Rex Tillerson, who led the company during 2006-16 and is now US secretary of state, Exxon acknowledged the need to address the threat of climate change, and supported the Paris agreement, which set a goal of limiting the rise in global temperatures since pre-industrial times to “well below” 2C.
Darren Woods, who took over as chief executive at the start of the year, has gone further, launching a programme to cut leaks of methane, a potent greenhouse gas, from the company’s operations, and signing up to initiatives to reduce emissions launched by international oil groups and by the American Petroleum Institute, the industry group.
Its new disclosure policies could mean Exxon will have to discuss more radical changes. Among the issues that the company has said it will assess in its new disclosures are the sensitivity of energy demand to policy changes, and “positioning for a low-carbon future”.
Several oil companies, particularly in Europe, have seen an opportunity in climate policy, arguing that more should be done to shift power generation away from coal and towards natural gas, which emits less carbon dioxide for an equivalent amount of electricity.
Norway’s trillion-dollar sovereign wealth fund has proposed dropping its investments in oil and gas stocks, warning that the country — western Europe’s biggest energy producer — already has enough exposure to petroleum.
The Norwegian central bank, which runs the Oslo-based fund, believed dumping its oil and gas holdings, which include stakes in companies such as BP, Royal Dutch Shell, Total, Chevron and ExxonMobil — would make the country’s wealth “less vulnerable to a permanent drop in oil and gas prices”.
The central bank said Norway’s own energy sector and the government’s controlling stake in Statoil, the national oil company, was the driver for its proposal, which will be closely watched given the fund’s clout in global equity markets.
The bank said in a letter to the finance ministry that it took no view on the future path of oil and gas prices or the “sustainability” of the sector, but the proposal follows a three-year downturn in energy prices that has hurt the country’s growth and government revenues.
It said about 6 per cent of its fund, which crossed the $1tn level for the first time earlier this year, is invested in the oil and gas sector.
Oil and gas companies have long-feared divestment by funds on ecological grounds as well as those who have warned about oil demand peaking in the coming decades.
“This is a victory for common sense,” said Truls Gulowsen, head of Greenpeace Norway, who said this would help lower the country’s “financial carbon risk”.
While the Norwegian central bank said the proposal is about diversifying the source of the country’s wealth as it has grown, it nevertheless will be closely watched by other fund managers.
The central bank said its analysis suggested that during times of stable oil prices, energy stocks were closely correlated with the broader market, but tended to fall much harder when oil and gas prices dropped.
The fund, known officially as the Government Pension Fund Global, is not expected to sell immediately because the proposal needs to be approved by the government and parliament.
However, shares in some of the companies most affected fell, with Shell — the biggest oil and gas holding with a $5.3bn stake — down 2.5 per cent in London. ExxonMobil, the second-largest oil and gas holding of about $3bn, was down 1.3 per cent.
The oil fund also holds more than $6bn split almost equally between BP, Chevron and Total.
Norway produces more than 3.7m barrels of oil equivalent a day of liquids and gas output, making it western Europe’s biggest energy producer, despite a population of just 5.2m people.
It was widely seen as having avoided the worst excesses of the so-called “oil curse”, partly by funnelling much of the revenue into funds to help save for the future and insulate the wider economy.
The so-called oil fund was launched in 1990 to make global investments and has expanded to hold almost $200,000 per head of population.
“The fund has grown rapidly and is an increasingly large part of the country’s GDP and government spending, so there is more attention on how it is being managed”, said Hilde Bjornland, an economics professor at the BI Norwegian Business School.
“If there was a large decline in the fund now there would be a much bigger impact on the public finances.”
Norway’s finance ministry said it would study the proposal, with the government expected to make a decision in autumn 2018.
Royal Dutch Shell’s decision to sell electricity direct to industrial customers is an intelligent and creative one. The shift is strategic and demonstrates that oil and gas majors are capable of adapting to a new world as the transition to a lower carbon economy develops. For those already in the business of providing electricity it represents a dangerous competitive threat. For the other oil majors it poses a direct challenge on whether they are really thinking about the future sufficiently strategically.
The move starts small with a business in the UK that will start trading early next year. Shell will supply the business operations as a first step and it will then expand. But Britain is not the limit — Shell recently announced its intention of making similar sales in the US.
Historically, oil and gas companies have considered a move into electricity as a step too far, with the sector seen as oversupplied and highly politicised because of sensitivity to consumer price rises. I went through three reviews during my time in the industry, each of which concluded that the electricity business was best left to someone else.
What has changed? I think there are three strands of logic behind the strategy.
First, the state of the energy market. The price of gas in particular has fallen across the world over the last three years to the point where the International Energy Agency describes the current situation as a “glut”. Meanwhile, Shell has been developing an extensive range of gas assets, with more to come. In what has become a buyer’s market it is logical to get closer to the customer — establishing long-term deals that can soak up the supply.
Given its reach, Shell could sign contracts to supply all the power needed by the UK’s National Health Service or with the public sector as a whole as well as big industrial users. It could agree long-term contracts with big businesses across the US. To the buyers, Shell offers a high level of security from multiple sources with prices presumably set at a discount to the market. The mutual advantage is strong.
Second, there is the transition to a lower carbon world. No one knows how fast this will move, but one thing is certain: electricity will be at the heart of the shift with power demand increasing in transportation, industry and the services sector as oil and coal are displaced.
Shell, with its wide portfolio, can match inputs to the circumstances and policies of each location. It can match its global supplies of gas to growing Asian markets while developing a renewables-based electricity supply chain in Europe. The new company can buy supplies from other parts of the group or from outside. It has already agreed to buy all the power produced from the first Dutch offshore wind farm at Egmond aan Zee. The move gives Shell the opportunity to enter the supply chain at any point — it does not have to own power stations any more than it now owns drilling rigs or helicopters.
The third key factor is that the electricity market is not homogenous. The business of supplying power can be segmented. The retail market — supplying millions of households — may be under constant scrutiny with suppliers vilified by the press and governments forced to threaten price caps but supplying power to industrial users is more stable and predictable, and done largely out of the public eye. The main industrial and commercial users are major companies well able to negotiate long-term deals.
Given its scale and reputation, Shell is likely to be a supplier of choice for industrial and commercial consumers and potentially capable of shaping prices. This is where the prospect of a powerful new competitor becomes another threat to utilities and retailers whose business models are already under pressure.
In the European market in particular, public policies that give preference to renewables have undermined other sources of supply — especially those produced from gas. Once-powerful companies such as RWE and EON have lost much of their value as a result. In the UK, France and elsewhere, public and political hostility to price increases have made retail supply a risky and low-margin business at best. If the industrial market for electricity is now eaten away, the future for the existing utilities is desperate.
Shell’s move should raise a flag of concern for investors in the other oil and gas majors. The company is positioning itself for change. It is sending signals that it is now viable even if oil and gas prices do not increase and that it is not resisting the energy transition. Chief executive Ben van Beurden said last week that he was looking forward to his next car being electric. This ease with the future is rather rare. Shareholders should be asking the other players in the old oil and gas sector to spell out their strategies for the transition.
When Brazil this week realised a milestone by cutting benchmark interest rates to 7 per cent, their lowest since 1986, the government was quick to start crowing.
“This new scenario of low interest rates only became possible after measures that created space for [monetary easing],” the government of President Michel Temer said in a note.
The government pointed to a measure it launched early in its tenure last year that limits budget real spending increases to zero for up to 20 years, as well as a “fiscal adjustment” and “other measures”.
In reality, however, it is far too premature for the government to celebrate.
Its biggest contribution to the lower rates was the appointment of an economic team respected by markets when it came to power following the impeachment of former president Dilma Rousseff in August last year.
The team, consisting of former central bank president Henrique Meirelles as finance minister and private sector economist Ilan Goldfajn as central bank chief, won the confidence of markets after the disastrous Rousseff years.
Under Ms Rousseff, the government first implemented what became as the “New Economic Matrix”, an unorthodox mix of policies designed to artificially force interest rates lower. Instead of generating growth, inflation jumped and the economy went into recession. Ms Rousseff was forced to repeatedly backtrack on her forecasts for a budget surplus, costing Brazil its hard-won investment grade credit rating.
Temer’s economic team helped restore confidence by committing to firm fiscal targets. The new central bank team demonstrated that it would not tolerate high inflation by initially keeping rates higher despite the recession.
The Temer government initially embarked on fiscal reforms, introducing the spending limit. But, since then, it has struggled to introduce crucial reforms that will help underpin the expenditure cap. The principal one of these is to reform Brazil’s over-generous pension system, without which Brazil will soon be spending most of its budget on retirees.
Analysts worry that Mr Temer does not have the political support to pass pension reform, which is unpopular in any part of the world but especially in Brazil, with voters unwilling to surrender rights at the behest of a political class they resent as corrupt and self-serving.
Mr Temer had a chance at passing pension reform early this year. But in May, he was accused by meatpacker boss Joesley Batista of discussing bribes in a taped conversation. The president has since spent his political capital defending himself from the claims, twice winning votes in congress over whether he should face criminal trials.
Mr Temer’s allies in congress are trying to get the pension reform passed before the end of this year but economists doubt they can get the necessary 308 votes out of the 513-seat congress to pass the measure without diluting it beyond reason.
One congressman who voted to absolve Mr Temer of the charges told the FT he could not now support pension reform without committing political suicide in elections next year. “I've already burned off my political fat; I’ve got nothing left to give,” he said.
Without pension and other structural reform, the low interest rates that Brazil are celebrating this week will prove ephemeral.
Brazil’s monthly inflation rate turned negative in June for the first time in 11 years and fell to its lowest level since 1998, according to the national statistics agency, the IBGE.
Inflation declined 0.23 per cent in June compared with May, driven by lower electricity, food and transport prices, bringing good news for the embattled centre-right government of President Michel Temer.
“Of note is that the three [price] groups most important for domestic budgets experienced falls, affecting the principal expenses of the population, which are to eat, to live and to use transport,” said Eulina Nunes dos Santos, co-ordinator of price indices at the IBGE.
The drastic fall in inflation from a 12-year high of 10.71 per cent at the beginning of last year will be used by Mr Temer’s government to underpin its argument that Latin America’s largest economy is set to emerge from its worst recession in history.
Indicted in the Supreme Court for allegedly discussing bribes with a businessman, Mr Temer is battling for his political life with the lower house of Congress set to vote this month on whether he should face trial for corruption.
Under Brazil’s Constitution, a president can only face criminal trial with the permission of two-thirds of the congress.
The inflation index gained 3 per cent on an annual basis in June compared with a year earlier. This was at the bottom of the central bank’s inflation target range of 4.5 per cent plus or minus 1.5 percentage points.
Capital Economics said the result would lay the basis for the central bank to cut its benchmark Selic rate by a further 75 basis points at next month’s meeting to 9.5 per cent.
“The decline was broad based, with inflation in the food, housing, clothing categories all easing,” analysts at Capital Economics said. “And with financial markets remaining calm against the backdrop of political uncertainty, today’s data add to the case for further cuts in the Selic rate over the coming quarters.”
Brazil’s currency, the real, and its benchmark stock index, the Ibovespa, were little changed in trade on Friday.
The IBGE said the lower food inflation, which has a weighting in the overall index of 26 per cent, stemmed from a strong harvest and price cuts by food companies keen to attract cash-strapped consumers.
“Important items such as tomatoes, English potato and fruits, had significant falls in prices,” the agency said.
“This fall in prices reflects a positive harvest and the effects of a fall in purchasing power by the population, which led businesses to create offers and promotions,” said Ms Nunes of IBGE.
Electricity and petrol prices also fell sharply after state-oil company Petrobras cut petrol prices and the price of sugar cane ethanol also fell.
Brazil’s economy expanded for a third consecutive quarter in the three months to September, providing a breather to the scandal-hit government of President Michel Temer as it struggles to pass reforms aimed at improving the country’s fiscal health.
Official data showed gross domestic product expanded 0.1 per cent over the quarter and 1.4 per cent versus the same period last year, as Latin America’s largest economy continues to emerge from its worst recession ever.
The economy is expected to grow by as much as 1 per cent this year, with growth accelerating in 2018. The consensus from economists surveyed by the central bank is for an expansion of 2.6 per cent, compared to contractions of 3.6 per cent in 2016 and 3.8 per cent the year before.
Neil Shearing, chief emerging markets economist at Capital Economics, said, "At face value, our forecast for GDP growth of 1.0 per cent in 2017 as a whole looks ambitious, but it would only require growth of 0.7 per cent quarter on quarter in Q4. This isn’t far out of line with the early survey data. Meanwhile, changes to the historic profile mean that the risks to our GDP forecast of 2.8 per cent in 2018 as a whole may now lie to the upside."
Despite the return to growth, however, Mr Temer is deeply unpopular with the public. Since August he has beaten two attempts to be removed from office and put on trial on graft charges, and the effort has eroded the political capital he needs to pass an unpopular overhaul of Brazil’s generous pension system through congress before the end of 2017.
Brazil’s groundbreaking anti-corruption crusade is at risk of sabotage from entrenched political interests, its lead investigator warned.
The so-called Lava Jato, or Car Wash, investigation into kickbacks at state-controlled oil company Petrobras has so far led to about 110 convictions, including that of Luiz Inácio Lula da Silva, the most popular president in the country’s recent history, and previously untouchable figures such as former house speaker Eduardo Cunha and Marcelo Odebrecht, the former head of Latin America’s largest construction company.
But despite the investigation’s popularity among ordinary Brazilians, “a backlash is growing in intensity”, Deltan Dallagnol, the federal prosecutor at the forefront of the anti-graft movement, told the Financial Times.
“We are at a moment close to a turning point, because as the investigation has expanded and reached the universe of the powerful, they have united. Although they are opponents in the political sphere, they have a common adversary, which is Lava Jato,” he added. “We have different actors who can put Lava Jato at risk.”
Unlike corruption purges elsewhere, such as in China, the Brazilian probe is led by independent prosecutors rather than politicians or the ruling party. Most Brazilians support it in the hope it could end the impunity from prosecution that the rich and powerful have traditionally enjoyed in the country.
Two big plea bargain agreements, with Odebrecht and giant meatpacker JBS, have implicated more than 1,800 politicians from over two dozen political parties.
“Corruption leverages the permanence of the corrupt in power, which in turn generates more corruption. We had entered a vicious cycle,” the 37-year-old Harvard-educated prosecutor said from his cramped offices in the southern city of Curitiba, the headquarters of his 50-strong team of prosecutors, lawyers and investigators.
“They have done this for decades,” Mr Dallagnol said. “Without breaking impunity through Lava Jato we will not be able to change that.”
The survival of this effort depends on its popularity among ordinary Brazilians, he said.
“The future depends on how much society will defend this operation. The great shield that the operation has today is society.”
Mr Dallagnol alleged that powerful interests — ranging from the presidency to Congress — were uniting to water down the investigation, or even block it. The federal police force handling Lava Jato has been slashed while lawmakers have twice voted against the admissibility of charges against President Michel Temer.
In October senators united to allow one of them, Aécio Neves, to remain in his seat after he was allegedly taped discussing bribes with a businessman. Last week Rio de Janeiro’s legislature overturned a court ruling that had put its speaker in jail, and recently there was the controversial change of the chief of the federal police.
“When we look at these big interests and politicians rallying against Lava Jato, the first thought that comes to mind is that it is a matter of time before they can tie up the investigators, destroy the investigative tools, and empty the punishments,” he said of an investigation that, since its launch here in 2014, has charged over 280 people.
Critics accuse Mr Dallagnol and judge Sérgio Moro of the federal court in Curitiba of arbitrarily investigating, arresting, and convicting defendants through plea bargains and by drawing their own conclusions from their evidence.
Mr Lula da Silva, the leftwing former president who was sentenced to nine-and-a-half years in jail, has slammed Mr Dallagnol and other Lava Jato prosecutors as “brats”. Yet the latest Ipsos poll shows that 94 per cent of Brazilians think Lava Jato “should continue the investigations to the end, no matter what it costs”. Mr Lula da Silva, who denies the charges, is appealing against the conviction.
Like Italy’s Mani Pulite, or “Clean Hands”, graft investigations in the 1990s, which inspired Lava Jato and paved the way for the rise of former prime minister Silvio Berlusconi, corruption has spurred an anti-establishment mood ahead of elections next year. This could aid populist candidates promising a different kind of politics.
“What we hope is that all of this that happened generates a movement in civil society, so that in 2018 there is a kind of page turn,” said Mr Dallagnol, stressing the need for systemic reforms in a political system that many see as festering. “If there is no [political] renewal, the greater risk for Lava Jato will come after the election.”
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After gaining a first class degree in history & economics at Cambridge, Merryn became a Daiwa scholar and spent a year studying Japanese at London University. In 1992, she moved to Japan to continue her Japanese studies and to produce business programmes for NHK, Japan’s public TV station.
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He also edited The Economist’s business and Asia sections. His particular interests include American foreign policy, the European Union and globalisation.
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He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999 and a member of its International Media Council since 2006. He was made a Doctor of Letters, honoris causa, by Nottingham University in July 2006. He was made a Doctor of Science (Economics) of London University, honoris causa, by the London School of Economics in December 2006. He was a member of the UK government's Independent Commission on Banking in 2010-2011. Martin's most recent publications are Why Globalization Works and Fixing Global Finance.
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A few months ago journalist Charlie Rose, one of the world’s most well-informed individuals, engaged with a group of Brazilians at a social gathering in New York. He wanted to know: “When is Brazil going to rise again?”
In academic and business circles, Brazil has seen its “emerging” status severely brought into question. There are many ways to measure Brazil’s decline. It has been the worst performing G20 country for three years running. Economic populism has sparked a catastrophe from which other countries wish to keep their distance.
Brazil has been unable to garner legitimacy to pursue greater collective security ambitions. At 50,000 deaths per year, homicide victims in Brazil outnumber casualties in many longstanding conflicts around the world. Such public-safety shortcomings preclude the country from a coveted permanent seat at the UN Security Council, despite diplomatic lobbying.
Obviously, programmes of technical co-operation with Latin America and Africa allow Brazil to wield influence. However, it is the country’s economic clout, not the success of its public policies, that continue to underpin the world’s desire to strengthen partnerships with Brazil. Even initiatives such as Bolsa Família — a poverty alleviation cash-transfer programme that was once a model deemed worthy of export to low-income countries — have seen their viability damaged by a stagnant economy.
In recent months, many have claimed Brazil has left the worst behind. In macroeconomic terms, the country is no longer in decline. Inflation has dropped. State-controlled firms such as Petrobras are now considered well-managed. Certain structural reforms have made headway.
Sound monetary policy and improved governance have helped shore up Brazil’s credibility since Michel Temer took office as president following the impeachment of Dilma Rousseff last year. By the same token, espousing a foreign policy that does not view the globe via a North-South divide means the pursuit of diplomatic partnerships are now less guided by a third-world (ish) Weltanschauung or philosophy.
But this is the least one could expect. Good governance and pragmatic diplomacy are preconditions, not laudable distinguishing characteristics of those who want to thrive. It is as if economic underperformance, systemic corruption and disenchantment with party-based politics blot out the success stories.
From this perspective, Brazil offers little of which to be proud and much to be ashamed of. It follows that, in the field of international relations, the country has supposedly exhausted its stores of “soft power”.
Joseph Nye, the Harvard political scientist who coined the term, defines soft power as “the ability of a country to influence others without the use of force or coercion”. Mr Nye identifies not only the ability of culture to foster soft power, but also a country’s values, institutions and the manner by which it seeks to resolve international or domestic issues.
If that is true, then in the midst of what could be seen as the “global eclipse of Brazil”, the country is actually casting its soft power as an unintended consequence of the Lava Jato, or Car Wash, corruption probe, which has led to the conviction of politicians, businessmen and former executives of Petrobras and its contractors for bribery and money laundering.
Debates held at universities around the world make it clear that the majority of academics, opinion leaders and economic decision makers understand the Lava Jato investigation to be more than merely a source of pride for Brazilians. It is an important tool for the country to leverage its ability to compete on the world stage.
Dani Rodrik, a Harvard economist, asserted that economic players and international public opinion were underestimating Brazil. He commends how prosecutors and judges are combating corruption within the framework of the law and acting above party influences. This will enhanced compliance and other institutional practices that will yield midterm bonuses for those who place their bets on Brazil.
If this is indeed the case, then Brazil is not destined — as stressed by Sérgio Moro, the judge leading the probe — to become a defenceless victim of corruption. Nor should this vice be understood as some sort of “tropical disease”.
The movement to combat corruption in Brazil can be a model for paradigmatic change in both emerging countries and mature economies. Many in other Latin American nations have voiced their wish that something similar to Lava Jato would also revolutionise the way of doing business in their countries.
Of course, the Lava Jato probe could also lead to a few mistakes given the scale of the investigation and its multiple fronts. But the damage it causes pales in comparison to the ills it cures.
The success of Lava Jato may not satisfactorily answer Charlie Rose’s question about when Brazil will rise again. The country requires not just deft management and non-systemic corruption levels, but also a solid strategy to be competitive in today’s turbulent world.
Nevertheless, Brazil has demonstrated that many institutions — backed by the majority of the population — are rolling up their sleeves and getting to work.
This is inspiring and ultimately influences other countries. This is leading by example, the very essence of soft power.
Brazil is in economic, political and moral crisis. This is not my judgment. It is the judgment of a former senior official I have known for decades.
It is hard to argue with this: the economy has suffered a huge recession, with real incomes per head down 9 per cent between 2013 and 2016; growth is structurally too slow; the fiscal position is unsustainable; and a corruption scandal has engulfed the political elite and leading businessmen.
Indeed, the Supreme Court has authorised investigations into one-third of current cabinet members, one-third of senators, and one-third of state governors, as well as the president, leaders of congress and of the main political parties. Not surprisingly, politicians and parties are discredited. As I learnt when in Brazil last month, local experts fear this may lead to an extreme polarisation of politics. Yet a crisis can also lead to change. Brazil should seize that opportunity.
One must not exaggerate the gloom. Life expectancy has risen from 60 years in 1970 to 74 in 2017, while the fertility rate has fallen from five children per woman to just 1.7. The energy of the judiciary in pursuing the Lava Jato, or Car Wash, investigation into corruption is admirable. The recession has even turned into a mild recovery: the International Monetary Fund forecasts growth at 0.7 per cent this year and 1.5 per cent in 2018. The latter could be too pessimistic. The monetary stability gained in the 1990s persists, with year-on-year consumer price inflation down to 2.5 per cent in September.
Nevertheless, the structural economic and political challenges are huge. Income inequality remains among the highest in the world. That is not offset by fast growth: between 1995 and 2016 real gross domestic product per head rose just 25 per cent, putting Brazil behind Argentina, Mexico, Colombia and Chile. Relative to the US, Brazil’s real GDP per head has stagnated over the past quarter of a century. It is a little over a quarter of US levels, which makes this failure to catch up disturbing.
According to the Conference Board, Brazil’s total factor productivity — a measure of its rate of innovation — fell, at an average rate of 0.7 per cent a year between 2000 and 2016. Brazil’s national savings rate, always low, was just 16 per cent in 2016. Consequently, the central bank’s real short-term rate has averaged just under 5 per cent over the past decade. As a result, investment rates are quite low, too. Moreover, the population is ageing. In all, the growth rate of potential GDP is probably below 2 per cent.
Poor growth prospects make the dire fiscal position worse. Brazil has a huge structural fiscal deficit: the IMF thinks it will reach 11 per cent of GDP by 2022. Revenue is already quite close to 30 per cent of GDP. This should rise with the recovery, but not by enough to close the deficit and bring the rise in public indebtedness under control, since spending is close to 40 per cent of GDP. The government’s mandated spending cap will run into mandated spending, especially on pensions. By the early 2020s, it would have to eliminate all discretionary spending.
Brazil needs comprehensive economic and fiscal reform. The most important economic reforms include: opening up a relatively closed economy; tax reform; labour market reform; higher investment in infrastructure; and policies aimed at raising national savings. The latter connects with the fiscal reforms. These must include a comprehensive pension reform, to bring spending under control. A funded pension scheme could raise national savings. The government must also have the freedom to control the numbers and pay of civil servants. Doing all this would liberate resources for other areas.
It would be a mistake to see the needed reforms as technical. They are highly political. They involve making fundamental changes in the way the state, politicians and officials operate. The system needs to move from corruption to honesty, opacity to transparency, discretion to predictability, and from looking after the privileged to serving the people. That is what the corruption scandals, the slow-burning fiscal crisis, the inefficient pattern of government spending and the longer-term economic weaknesses are telling Brazilians.
Particularly in a free and democratic society, making such deep changes poses a huge challenge. This is especially true when the situation is improving in the short term. Furthermore, the embattled current government (perhaps surprisingly) and the central bank (far less so) have done a decent job of restoring confidence in Brazil.
Yet political problems need political solutions. Here, the omens for the presidential election in 2018 are bad. Luiz Inácio Lula da Silva, under sentence for corruption, is leading in the polls, but may be prevented from standing. Second in the polls is Jair Bolsonaro, a rightwinger who makes Donald Trump look moderate and self-disciplined. Neither of these people would provide the reforms Brazil now needs, for different reasons: Mr Lula is discredited; and Mr Bolsonaro is a populist authoritarian. Better candidates exist. But support for them is still modest. Where, one wonders, is Brazil’s Emmanuel Macron?
It is impossible to visit Brazil, even for a short time, and not be enthused by the warmth of its people and the vitality of its culture. But the country has fallen on hard times. Yes, the short-term position is improving, a little. But too many people are unemployed, the economy is too feeble, the politics too corrupt, and the state too captured. That is what history and recent events tell Brazilians. Brazil needs a political and economic rebirth. The crisis makes this necessary. If that does not happen, the future looks sad.
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