RaboResearch - Economic Research

Brazil: Petrobras’ economic fallout contained for now, but risks persist

Economic Comment

  • Petrobras, the Brazilian state-owned oil enterprise, published its audited accounts on 22 April.
  • This averts an immediate deterioration of the fiscal position and related sovereign downgrade to junk.
  • But risks of a deterioration of the already weak economy persist.

Rating downgrade averted for now

Investigations at Petrobras in the past year have resulted in one of the largest corruption scandals in the history of Brazil, also known as the ‘Car Wash.’ In February, the company failed to account for the costs of the corruption scandal in its 14Q3 financial accounts, raising concerns about Petrobras’ ability to meet reporting obligations with bondholders over 2014 on time. Failure to do so could have triggered an accelerated payment to bondholders, which would have pushed the company into a liquidity crisis. As government support was expected in such a case, the situation also raised concerns about Brazil’s already weakened fiscal balances and a subsequent loss of its investment grade rating with S&P. Such a downgrade might have dented investor sentiment, led to capital outflows and pushed the economy deeper into recession. This scenario has been averted for now, as Petrobras published audited accounts on 22 April. 

Economy still in the doldrums, but sounder policies improve perspectives

That, nevertheless, leaves the Brazilian economy in the doldrums, expected to deteriorate in 2015 on the back of a confidence crisis, a weak external environment and a return to sound yet strict macroeconomic policy (see our Country Report Brazil). In the past two months, the economic situation has worsened. Leading indicators for economic activity stayed in negative territory (fig. 1) whilst confidence indicators recently reached new lows (fig. 2). Adjustment of administered prices pushed inflation above 8% in March (fig. 3), and that supports a continuation of the current tightening monetary cycle. Real depreciation will act as a shock absorber and help reduce the large current account deficit (4% of GDP in 2014), though it will also add to inflationary pressure. The Brazilian central bank has already allowed the real to depreciate by 16% against the USD this year, with USD appreciation playing a large role. Austerity measures such as reducing social benefits and tax increases are expected to help reduce the public deficit from 6% of GDP in 2014, though the targeted underlying fiscal adjustment of roughly 2% of GDP will likely be missed.

Figure 1: No GDP rebound in the cards
Figure 1: No GDP rebound in the cardsSource: EIU, BCB
Figure 2: Confidence reaches new lows
Figure 2: Confidence reaches new lowsSource: FGV, CNI, Markit Economics

The sounder macroeconomic policies have short term pains, and only longer term gains for the economy, as they help correct the macroeconomic imbalances built in recent years. We expect economic growth to improve from -1% in 2015 to 1% in 2016. 

Figure 3: Inflationary pressures persist
Figure 3: Inflationary pressures persistSource: IBGE, BCB
Figure 4: Economy expected to contract in 2015
Figure 4: Economy expected to contract in 2015Source: EIU

But risks persist

However, risks are tilted to the downside and consist of events that could jeopardize current constructive economic policy and further hurt sentiment. Fiscal adjustment is particularly important as it is regarded to be crucial for averting a sovereign rating downgrade to junk and resulting economic deterioration. The impeachment of President Rousseff and, possibly, her cabinet poses the main downside risk to policy and sentiment. Based on recent developments, the chances of such an event taking place remain low, but cannot be excluded either. As evidence linking the President to corrupt practices is needed to start such a trajectory, the expansion of ‘Car Wash’ investigations to the political spectrum, including high ranking officials, is not a positive development. As long as investigations continue, there is a chance that such evidence may yet surface. However, since the impeachment procedure requires the support of two thirds of a highly fragmented Congress, such evidence needs to be very strong.

Factors that could influence this are high tensions within the PT-PMBD coalition and high social pressures, which could embolden politicians to pursue impeachment and increase support in Congress. Political tensions could also derail the policy agenda and endanger fiscal adjustment. Social unrest could also have this effect if organized social groups that enjoy political support within Rousseff’s PT get involved. Looking forward, Rousseff has adopted a more inclusive approach towards the main coalition party PMDB, currently presiding congress, and that bodes well for lower tensions. But ‘Car Wash’ investigations could lift the spirits again, also within the Workers Party (PT) and social unrest is likely to persist on the back of deteriorating purchasing power, austerity measures (disapproved of by 90% of Brazilians) and ‘Car Wash’-triggered distrust in government institutions. 

Alexandra Dumitru
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2326 6856

naar boven