Bolsonaro intervention could create ‘Black Monday’ for Petrobras

. Feb 22, 2021
Petrobras Bolsonaro intervention President Bolsonaro in photo montage by André Chiavassa/TBR

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This week, we examine the negative knock-on effects of Jair Bolsonaro’s interference in Petrobras. The northern state of Acre faces a perfect storm of floods, epidemics, and a migrant crisis. 

The hand on Petrobras is not invisible

Petrobras, Brazil’s state-controlled oil and gas firm, is under military intervention.

On Friday evening, President Jair Bolsonaro announced his administration is pushing for a change in the company&#8217;s leadership — <a href="">replacing CEO Roberto Castello Branco</a> with retired Army General Joaquim Silva e Luna, who was at the helm of the massive Itaipu dam.</p> <p><strong>What&#8217;s behind the move.</strong> Mr. Bolsonaro was growing frustrated with the company&#8217;s pricing policy, which pegs diesel and gasoline to international rates. For the president, the straw that broke the camel&#8217;s back was a third bump in fuel prices this year, making diesel and gasoline 28 and 35 percent <a href="">more expensive</a>, respectively, since January 1.</p> <ul><li>Amid a generational crisis and with an ailing economy, fluctuations in gas prices have become even more inconvenient for consumers — especially as the pandemic has stimulated individual transportation.</li><li>In his first words as soon-to-become Petrobras CEO, Mr. Silva e Luna said the company &#8220;must care for shareholders, but also for Brazilians,&#8221; hinting at a change to the firm&#8217;s pricing policy.</li></ul> <p><strong>It gets worse. </strong>The president&#8217;s decision to intervene in the economy as a means of taming inflation has quickly metastasized into other sectors. Mr. Bolsonaro announced that the government will &#8220;put [its] finger on electricity [prices], which is another problem.&#8221; Power bills are <a href="">expected</a> to go up by 14.5 percent this year.</p> <p><strong>Why it matters.</strong> Besides fueling investors&#8217; mistrust, artificially holding diesel and gasoline prices has proved unsuccessful in recent history.&nbsp;</p> <ul><li>Dilma Rousseff tried to do so in the 2010s, only to see inflation skyrocket when her administration no longer had the firepower to continue freezing prices. According to some experts, that policy caused USD 40 billion in losses to Petrobras between 2011 and 2014.</li></ul> <p><strong>What they are saying.</strong> Aberdeen Standard Investments, one of Petrobras&#8217; biggest investors, sent a letter to the company&#8217;s board of directors demanding a &#8220;rational and rigorous&#8221; process to select the new CEO.</p> <ul><li>Brokerage firm XP has <a href="">recommended</a> clients to sell Petrobras stock, claiming &#8220;it is no longer possible to defend [how the company is run].&#8221;</li><li>Allies, however, have defended the president. Communications Minister Fábio Faria said markets &#8220;can&#8217;t strip the president&#8217;s right to choose his own team.&#8221;</li></ul> <p><strong>Black Monday ahead? </strong>Markets have reacted poorly to the move, as expected. Not only due to the blatant political interference, but also because a change of command will inevitably cause delays to the sale of Petrobras assets, expected for later in the year.</p> <ul><li>Petrobras American depositary receipts (ADRs) traded in New York slumped 8.9 percent in after-hours trading on Friday, on top of a 7-percent skid during trading hours.</li><li>Adding to the turmoil are the rumors, <a href="">reported</a> by Reuters, that Petrobras executive management is considering resigning en masse.</li></ul> <p><strong>Divorce?</strong> In 2018, financial markets massively supported Jair Bolsonaro, believing that he would champion a libertarian economic agenda — despite his track record suggesting the contrary. Will markets give up on him now?</p> <hr class="wp-block-separator"/> <h2>The multiple plagues of Acre</h2> <figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="768" src="" alt="acre floods amazon" class="wp-image-57053" srcset=" 1024w, 300w, 768w, 600w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>A recent survey shows that 130,000 people have been affected by the floods, with nearly 1,400 families left homeless. Photo: Sérgio Vale/AN-AC</figcaption></figure> <p>The state of emergency in the northern state of Acre reached its seventh day. On the border with Bolivia and Peru, the region is facing a series of calamities, including skyrocketing Covid-19 numbers, a dengue fever outbreak, a migration crisis at the Peruvian border, and record-shattering floods. A recent survey shows that 130,000 people have been affected by the floods, with nearly 1,400 families left homeless.</p> <p><strong>Why it matters.</strong> We are entering the so-called &#8220;Amazonian winter,&#8221; when rainfall increases and river levels rise —&nbsp;which could make a bad situation even worse. Authorities scramble to house displaced families in shelters without putting them at risk for Covid-19 infection.</p> <p><strong>Extreme weather.</strong> According to authorities, Acre has already had 17 percent more rainfall than the level expected for the entire month. There is a risk that roadways will be blocked this week — which could add to the crisis by causing supply shortages.</p> <p><strong>Epidemics.</strong> Dengue fever cases in 2021 are now 574 percent above 2020 levels, and authorities report cases of patients simultaneously contracting dengue fever and Covid-19. Meanwhile, the 7-day rolling average of new coronavirus daily deaths has jumped 110 percent over the past two weeks.</p> <ul><li>While the state of Acre has only allowed essential businesses to operate under social isolation rules, these rules are not enforced — and most stores have gone about their business as usual. &#8220;We can&#8217;t be radical. This is a very poor state, where people depend on selling something during the day to be able to eat at night,&#8221; said Tião Bocalom, mayor of state capital Rio Branco.</li><li>Governor Gladson Camelo said today that the state only has enough money to <a href="">keep its health system working for another three months</a>, and requested financial aid from the federal government.</li></ul> <p><strong>Migrants.</strong> Since the beginning of the pandemic, immigrants have been flooding into Acre in their droves. With Brazil’s economic woes and widespread unemployment, these migrants are arriving in the border town of Assis Brasil to leave the country and set off for Mexico, the U.S., and Canada, as <strong>The Brazilian Report</strong>&#8216;s Renato Alves <a href="">explained last week</a>. Local government reported that around 70 to 80 migrants were arriving in Assis Brasil each day on average.</p> <ul><li>Last week, approximately 400 immigrants left a shelter in Assis Brasil and assembled on the Ponte da Integração bridge, which serves as the entry point into Peru. Law enforcement from the Peruvian town of Iñapari blocked their passage, deploying heavily armed officers to man the border crossing.</li><li>On Thursday, Brazil’s Justice Ministry issued an ordinance authorizing the deployment of the National Public Security Force in Acre. The measure will remain in effect for 60 days and may be extended.</li></ul> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Brazilian web services company Locaweb made important steps toward its expansion plan on Friday, by acquiring fintech Credisfera and e-commerce platform Dooca Commerce. The move offers cross-selling opportunities, as both companies focus on small businesses. Analysts are expecting further acquisitions, after Locaweb raised BRL 2 billion (USD 371 million) in a follow-on offering.</p> <p class="has-text-align-center"><strong><em>Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>A new aid program on the way?</h2> <p>Turmoil created by President Jair Bolsonaro&#8217;s interference in Petrobras could upend discussions over a new cash-transfer program for financially vulnerable Brazilians. At this point, however, lawmakers are set to discuss solutions to create a new stimulus package that would not obliterate the 2021 budget — which has yet to be approved by Congress.</p> <div class="flourish-embed flourish-map" data-src="visualisation/5363536"><script src=""></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Vaccines. </strong>The Health Ministry asked the president&#8217;s office to help the country reach a deal with Johnson &amp; Johnson and Pfizer for Covid-19 vaccines. In a statement <a href=",pressionado-pazuello-pede-ajuda-do-planalto-para-comprar-vacinas-da-janssen-e-pfizer,70003623518">made public</a>, Health Minister Eduardo Pazuello says that negotiations are &#8220;stuck&#8221; due to the companies&#8217; lack of flexibility and that finding a solution is above his pay grade. Vaccine manufacturers reportedly do not want to take any legal responsibility for potential side effects their vaccines may cause.</li><li><strong>Coronavirus.</strong> Brazil surpassed the <a href="">10-million-case mark</a> last week and its 7-day rolling average of new daily deaths has exceeded 1,000 for 32 days running. Meanwhile, vaccination rollout remains slow. Multiple cities are experiencing a collapse of their local health systems, and many others are on the brink of such a crisis. In the state of Bahia, the governor imposed <a href=",governo-da-bahia-aumenta-horario-de-toque-de-recolher-contra-covid-apos-ocupacao-de-uti-chegar-a-80,70003623442">tougher curfew rules</a> (from 8 pm to 5 am), as the occupancy rate for Covid-19 intensive care beds hits 80 percent.</li><li><strong>Economy.</strong> Spanish bank Santander revised its end-of-year forecast for the U.S. Dollar rate against the Brazilian Real, from BRL 4.60 to 5.20. Analysts say the Brazilian currency is &#8220;<a href="">excessively undervalued</a>,&#8221; something which would only change after vaccination picks up steam and the political class sends fewer distress signals to markets.</li><li><strong>M&amp;A.</strong> The massive BRL 63-billion (USD 11.7 billion) merger between vehicle rental firms Unidas and Localiza is expected to face opposition from antitrust regulators. According to finance magazine Exame, watchdog Cade is expected to <a href="">block the deal</a>, as implementing solutions to mitigate the effects of concentration — such as selling off parts of operations — is seen as difficult in the segment. The decision will have an impact on drivers of ride-hailing apps, one of the largest <a href="">job-creating</a> sectors of the Brazilian economy.</li><li><strong>Quarterly results. </strong>It&#8217;s earnings season, and this week will be one of the busiest for major firms. The list of companies posting their latest earnings reports includes oil giant Petrobras, miners Vale and CSN, brewer Ambev, and electric motor producer Weg.&nbsp;</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Congress. </strong>The lower house decided to uphold the arrest of Congressman Daniel Silveira in a 364-130 vote on Friday. The pro-Bolsonaro lawmaker was arrested late on Tuesday night after publishing a video online containing threats against members of the Supreme Court and advocating anti-democratic measures. The decision helps Congress avoid an institutional crisis between itself and the Judiciary, but legal scholars <a href="">disagree over the legality of the arrest</a>.</li><li><strong>Startups. </strong>Asian mega investment conglomerate SoftBank led a group of investors who pumped <a href="">USD 83 million</a> into Brazilian test-prep startup Descomplica, in what was the biggest investment in the history of Brazilian education startups. The sector was hit hard by the pandemic, with dozens of millions of students left unattended as in-person classes were suspended. Many of these so-called “ed techs” propose to fill that gap.</li><li><strong>Telecommunications.</strong> The Supreme Court <a href="">ruled</a> in favor of allowing telephony and internet companies to install cables in public places without paying fees to municipalities. The court states that it is in public interest to facilitate the implementation of telecommunication services as a way of democratizing access to technology.</li><li><strong>Aviation.</strong> Shares of Brazilian planemaker Embraer <a href="">jumped 12 percent</a> last week after news broke that Lufthansa has initiated talks for potential aircraft purchases. The German airline’s CEO, Carsten Spohr, said the company will have to adapt its fleet from bigger to smaller models — in line with the tepid air travel market caused by the pandemic.

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