Brazil Update March 2015

Brazil Update March 2015
Brazil started the year of 2015 under a lot of uncertainty, amid the
largest corruption scandal in its History, an agitated political scenario,
low oil and commodities prices and an economy that certainly has
seen better days. Brazilian President, Dilma Rousseff, is having trouble
to implement her agenda as her popularity has reached rock bottom
and protesters are back in the streets at the same that her traditional
backers are turning against her.
On the same date, four managers were promoted to interim directors.
The nomination of Mr. Bendine was seen by the market as more of
the same, which means politically aligned with the Ms. Rousseff’s
administration. Investors expected the new CEO to be someone with a
stronger background from the energy segment. The Board of Directors
has also changed, with Mr. Bendine, Mr. Luiz Navarro (from Veirano
Advogados) and Mr. Deyvid Bacelar (elected by the Employees) taking
three seats out of the 10. More changes in the Board are expected.
POLITICS
After winning last year’s presidential elections by the closest margin
since Brazil was re-democratized, President Dilma Rousseff began her
second term on January 1st. In less than three months, Ms. Rousseff
has probably already realized there is a storm coming in.
With Brazil’s economy deteriorating, Ms. Rousseff had to appoint
a market-friendly name as Finance Minister. To the dissatisfaction
of many of her Workers’ Party (PT) colleagues – of left-wing – she
nominated Joaquim Levy – a Chicago-trained economist – as the new
Finance Minister.
Mr. Levy has set his unpopular – but needed – agenda to put Brazil back
on track. In the first quarter, the goal is to restore business confidence
through fiscal adjustments. The issue is that the newly-implemented austerity policy goes on the opposite direction of Ms. Rousseff’s
platform, which gave her the narrow win on last year’s election. Her
governing coalition has shown signs of weakness as the PMDB – the
PT’s main ally and also largest party in the Congress – felt neglected
after the distribution of ministerial portfolios. In February, the PMDB
succeeded at re-electing the presidents of both houses in the Congress.
In addition to the adverse economic scenario, Brazilians are also upset
with the corruption scandal involving Petrobras, contractors, political
parties and politicians, plus the possibility of an energy crisis. On March
15th, around 2 million Brazilians went protesting against corruption
throughout the country. After the protests, a survey conducted by
Datafolha showed that Ms. Rousseff’s popularity is at an all-time low.
According to the institute, 62% of the interviewed rated the government as “bad” or “poor” and only 13% rated it “good” or “excellent”.
Although an impeachment is unlikely, the increasing levels of rejection
have certainly raised a red flag in Brasília.
THE PETROBRAS SCANDAL
The Petrobras scandal, also known as the Petrolão, is still the main
focus of attention in Brazilian media. As the investigations widen, new
events keep coming to public attention. The Federal Police, along with
several other Brazilian agencies, are making a huge effort to pursue and
punish the people and companies involved in the corruption scheme.
Petrobras has a huge challenge ahead to recover from the losses.
Before resigning, former CEO Graça Foster announced that Petrobras
would reduce its oil exploration portfolio to the minimum necessary as
well as reduce the pace of construction of two refineries. Investments
will be concentrated on production. This is part of Petrobras’ plans to
cut 30% of its investments in 2015.
One of the largest Brazilian newspapers, Estadão, reported on January
9th that Petrobras is seeking leniency agreements with contractors
that were included on the list of companies that were banned from
bidding in future contracts. To lift the ban, Petrobras demands the
companies to admit guilt and reimburse Petrobras’ losses on the
contracts. In order to put pressure on the contractors, Petrobras invited foreign suppliers to bid on a contract for construction services of
24 gas-compression modules, initially tendered to Iesa Óleo e Gás. The
original contract was cancelled by Petrobras in November 2014 and
amounted to USD 720 million.
February 25th, Moody’s cut all Petrobras’ ratings for the second time
this year. On its last cut, the agency downgraded Petrobras’ debt rating
to Ba2 from Baa3, which means that Petrobras lost its investment
grade. The cut by two notches was seen as surprising by the market.
Petrobras’ individual credit rating was downgraded to b2 from ba2
and the agency stated that the Brazilian state-controlled oil company’s ratings are still under negative outlook for further downgrades.
Petrobras has kept the investment grade at Fitch Ratings and Standard
& Poor’s, but the ratings are at the lowest tier for investment grade on
both agencies. Petrobras highlighted that it has no covenants related
to investment grade. Following, several Petrobras’ suppliers have also
been downgraded.
On the investigative side of the scadal, there have been several major
developments.
Alone this year, the Office of the Controller General of the Union (CGU)
has opened responsibility lawsuits against 16 companies involved in
the Operation Car Wash. In total, 24 companies are being prosecuted
by the CGU. If the companies are held accountable, they are likely to
be prevented from signing new contracts with the government. In
addition, the government could impose fines or other penalties established by law.
On January 28th, Petrobras released its delayed third-quarter results,
without any write-downs. The report was expected to be released
in November, but a refusal by PwC to audit the report, following the
Petrolão scandal allegations, led to the delay. The report is still to be
audited. Investors, that expected the company to assign an amount to
the corruption scandal, were frustrated.
Some of the contractors involved in the scandal are putting pressure
on the government and the judiciary to set terms for a deal, in order to
minimize potential heavy penalties. They fear that the investigations
might take years to end, what would severely damage their operations.
The Chamber of Deputies has started a Parliamentary Commission of
Investigation (CPI) to investigate the money diversion and formation
of a cartel to win Petrobras’ contracts.
On February 4th, the Petrobras CEO, Graça Foster, and five top management directors resigned from their positions. On February 6th it
was announced that Aldemir Bendine, former CEO of Banco do Brasil,
would be the new CEO of Petrobras. Ivan Monteiro, also from Banco
do Brasil, was appointed as new CFO of the state-controlled company.
On March 6th, the Prosecutor General of Brazil, Rodrigo Janot, sent
a list to the Supreme Court with names of politicians that might be
involved in the scheme. According to Brazilian laws, politicians in office
can only be judge by the Supreme Court. From Mr. Janot’s list, the court
accepted allegations against 47 politicians, who are now being formally
investigated. The list features 22 deputies, 12 senators, 12 former
deputies and a former governor, from six different parties, including
the presidents of both houses of the Congress.
On March 23rd, the Federal Justice accepted the allegations by the
public prosecutors against 27 people involved in the corruption scandal,
who now become defendants. They are being charged for corruption
and money laundering. Some of the big names involved in the Petrolão
scandal are on this list, including the ones that made plea-bargaining
agreements.
Brazil: Inflation (IPCA) & target zone
Per cent
9
8
7
ECONOMICS
6
Brazilian economy is showing clear signs of weakness, with a major
currency depreciation this year – partly explained by the global US
dollar appreciation – and sluggish GDP growth expected for 2014 –
final numbers are expected to come out soon – 2015. There is a strong
probability of negative growth on both years. Interest rates are on an
upward trend in order to control inflation, which is likely to be above
the target. As investments get more expensive, there will be a negative
impact on the GDP. Brazil has been constantly posting a deficit on the
current account during the last years and foreign direct investments
are not covering the full amount. Government gross debt is on an
upward trend and one of the main challenges of the new Finance
Minister is to control it by achieving his primary surplus goal of 1.2%
of GDP set for 2015. Despite all the adversities, international currency
reserves are at a comfortable level of USD 371bn.
5
4
3
2
1
0
Feb-05
Feb-07
Feb-09
Feb-11
Feb-13
Feb-15
Source:T homson Datastream/DNBM arkets
As of March 20th, the Brazilian real (BRL) was quoted at BRL 3.23 per
U.S. dollar (USD), a depreciation of 21.47% against the USD in 2015
so far. The Norwegian Krone (NOK) per BRL was quoted at 2.498, an
appreciation of 11.12% against the BRL in 2015 so far.
Brazil: Exchange rates
Brazil: GDP
10
On inflation, the consumer price index IPCA rose 1.22% in February.
Year-to-date, the index rose 2.46% and year-over-year (YOY), 7.70%.
The IPCA-15, which is a preview for March’s IPCA, rose 1.24%. Brazil has
an inflation target of 4.5% for 2015, with a 2% tolerance band around
it. According to the March 20th‘s Focus report, the market expects
an inflation rate of 8.12% for 2015, above the upper limit of the band.
4.00
Per cent change, y/y
3.50
3.00
8
2.50
6
2.00
4
1.50
2
1.00
0.50
0
0.00
Mar-05
-2
-4
Q3 2004Q 3 2006Q 3 2008Q 3 2010Q 3 2012Q 3 2014
Mar-07
Mar-09
Mar-11
BRLNOK
Mar-13
Mar-15
USDBRL
Source: Thomson D atastream/DNB Marke|ts
Source: Thomson Datastream/DNB M arkets
The benchmark interest rate, Selic, has already been raised twice this is
year and is currently at 12.75% p.a. from 11.50% at the start of the year.
If inflation persists, further increases in the Selic rate are likely to occur.
Brazil: Stock market
Bovespa, index, 1000
80
Brazil: Key policy rate (Selic)
70
16
60
14
50
12
40
10
30
8
20
6
10
4
0
Mar-00
2
0
Mar-07
The Ibovespa index increased 9.97% in February, ending the month at
51,583 points. This represents an increase of 3.15% in 2015.
Mar-03
Mar-06
Mar-09
Source: T homson D atastream/DNB Markets
Mar-09
Mar-11
Source: Thomson Datastream/DNB Marke|ts
Mar-13
Mar-15
Mar-12
Mar-15
The unemployment rate (IBGE) was 5.3% in January, against a 4.8%
rate in January 2014. This is the highest value since September 2013.
Brazil: Labour market
Unadjusted, six metropolitan areas
12
The net public debt-to-GDP ratio in January was at 36.6% and the
government gross debt was at 64.4% of GDP. At the year-end in 2014
the net public debt-to-GDP ratio was at 36.7% and the government
gross debt was at 63.4% of GDP.
24
Brazil: Government g ross d ebt
10
23
8
22
100
6
21
80
4
20
2
19
18
0
Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15
Unemployment, %
Employment, mill. (ra)
Source: Thomson Datastream/DNB M arkets
Per cent of GDP
60
40
20
0
2002
2004
2006
2008
2010
2012
2014
Source: Thomson Datastream/IMF/DNB M arkets
Brazil posted a deficit of USD 2.842bn on the trade balance in February,
the worst result for February since data collection was started in 1980.
In the same period last year, the deficit was of USD 2.12bn. Year-todate, the deficit is of USD 6.01bn. In 2014, Brazil posted a deficit of USD
3.93bn, the worst figure since 1998.
Brazil: Trade balance (visible)
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
Feb-07
Bill. USD
FORECASTS
The Focus report, an economic survey carried out by Banco Central
amongst economists from 100 financial institutions, came out on
March 20th with the following projections for the year-ends in 2015
and 2016:
Feb-09
Feb-11
Feb-13
Feb-15
Source: Thomson Datastream/DNB Markets
On the current account, the country ended February with a deficit of
USD 6.9bn and Foreign Direct Investments (FDI) were of USD 2.77bn.
Year-to-date, there is a current account deficit of USD 17.55bn and
FDI’s of USD 6.74bn. YOY, the deficit is currently of USD 89.9bn, or
4.22% of the GDP, and FDI’s are of USD 2.769bn, or 2.82% of GDP.
Brazil: Current account balance
Per cent of GDP
2
1
0
-1
-2
-3
-4
-5
-6
1994
The country risk, measured by the EMBI+, was posted at 351 bps on
March 19th, representing an increase of 87 bps in 2015. But despite
recent setbacks in its economy, Brazil is still investment grade on all of
the main rating agencies. On March 23rd, Standard & Poor’s reaffirmed
Brazil’s credit rating with a stable outlook, showing confidence on
Joaquim Levy to implement his fiscal agenda.
1999
2004
Source: Thomson Datastream/DNB M arkets
2009
2014
Indicators
2015
2016
Inflation Index (ICPA)
8.12
5.61
Exchange Rate (BRL per USD)
3.15
3.20
Benchmark Interest Rate (SELIC)
13.00
11.50
Net Public Sector Debt (% of GDP)
38.00
38.95
GDP (%of Growth)
-0.83
1.20
Current Account Balance (USD Billion)
-79.80
-70.00
Trade Balance (USD Billion)
3.50
11.00
Foreign Direct Investment (USD Billion)
56.50
58.00
Whilst every care has been taken in preparing this document, no responsibility or liability is accepted as to the correctness and/or the accuracy of the
information contained herein. Any views expressed regarding future conditions must not be regarded as promises or guarantees. All opinions and estimates
contained in this report may be changed after publication at any time without notice. No liability is accepted whatsoever for any direct or consequential
loss arising from the use of this document.
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