Hello. Welcome to our Weekly Report. In this issue: Congress’ popularity on the rise—but remains low. How Petrobras lost BRL 32bn in one day. And the most important facts of the week.


The week in review

100 days. President Jair Bolsonaro reached the symbolic 100-day mark on April 10, still having little to show for. The pension reform remains a distant reality, and the public deficit—which

Economy Minister Paulo Guedes promised to eliminate in 2019—increased in February to 1.7% of the GDP. On the flip side, the government was able to push the privatizations of federal assets as planned. </span></p> <p><span style="font-weight: 400;">Tragedy. At least 7 people died and 9 more were injured when two condemned buildings in a militia-controlled community of Rio de Janeiro collapsed on Friday, just days after deadly rains caused chaos in the city.</span></p> <p><span style="font-weight: 400;">Auto industry. China’s truck manufacturer Foton is one of the candidates to purchase Ford’s São Bernardo do Campo plant. Two months ago, the American automaker announced it is abandoning its truck business in Latin America. Foton will have to outbid Caoa—which produces Cherry and Hyundai vehicles in Brazil.</span></p> <p><span style="font-weight: 400;">Diplomacy. The Ministry of Agriculture will send one of its secretaries to Moscow in an attempt to solve a crisis sparked by Foreign Minister Ernesto Araújo, who said the Russians have no business in Venezuela. Brazilian officials believe that Russia will retaliate, imposing restrictions on goods coming from Brazil.</span></p> <p><span style="font-weight: 400;">Pension reform. Due to the government’s struggles to move the pension reform bill along in Congress, markets are becoming less optimistic. Santander now estimates that the Legislature will approve a watered-down version of the proposal. The reform’s savings over 10 years, according to the bank, will be of BRL 615bn—almost half of what the Economy Minister is aiming for (BRL 1.1 trillion). Ratings agency Moody’s believes in savings between BRL 600bn-800bn.</span></p> <p><span style="font-weight: 400;">80 shots. Last Sunday, Army men shot at least 80 times at a car they mistakenly believed was transporting criminals—instead, a family (including a child) was inside. A 51-year-old man was killed, and another was injured. Ten military soldiers were arrested—nine of whom remain in custody. President Bolsonaro only commented on the case on Friday, siding with the Army—and calling the death an “incident.”</span></p> <p><span style="font-weight: 400;">Air travel. Brazil’s national aviation agency has canceled the licenses of one-third of Avianca Brasil’s fleet, after the company failed to pay for the planes’ leases. The airline—which is under court-supervised reorganization—has suspended ticket sales and canceled over 170 flights for the coming days. Avianca has debts of BRL 1bn, and will have its assets split into 7 new companies, to be auctioned.</span></p> <hr /> <h2>Congress’ popularity on the rise—but remains low</h2> <p><span style="font-weight: 400;">In the 2018 election, voters sent a message to the political establishment: they wanted change. Only 48% of incumbents hung onto their seats, in what was a historical level of renewal. Now, two months into the new legislature, more Brazilians approve of Congress, according to Datafolha—which also measured the congressional popularity in 2007 and 2015.</span></p> <p><span style="font-weight: 400;">Approval ratings are higher among Pentecostal Evangelicals (31%), voters in the South (27%), sympathizers of Jair Bolsonaro’s Social Liberal Party (53%), and those who consider the president’s performance as good or great (41%).</span></p> <p><img class="alignnone size-full wp-image-23579" src="https://brazilian.report/wp-content/uploads/2019/04/ecf5b1ac-0e1e-407f-afdc-b2674f5719b4.png" alt="" width="1200" height="472" srcset="https://brazilian.report/wp-content/uploads/2019/04/ecf5b1ac-0e1e-407f-afdc-b2674f5719b4.png 1200w, https://brazilian.report/wp-content/uploads/2019/04/ecf5b1ac-0e1e-407f-afdc-b2674f5719b4-300x118.png 300w, https://brazilian.report/wp-content/uploads/2019/04/ecf5b1ac-0e1e-407f-afdc-b2674f5719b4-768x302.png 768w, https://brazilian.report/wp-content/uploads/2019/04/ecf5b1ac-0e1e-407f-afdc-b2674f5719b4-1024x403.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/ecf5b1ac-0e1e-407f-afdc-b2674f5719b4-610x240.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">Petrobras shares took an epic tumble on Friday after the government interfered with its pricing policy (more below). The decision made investors fear the company may, once again, be used for political maneuvres. According to BTG Pactual bank, it is crucial to find out whether this was a one-time decision or a threat to Petrobras’ operational freedom. A trader heard by The Brazilian Report alerted that the fall may have opened a window for an adjustment to short positions ahead of the stock’s options expiring at B3 on Monday. After that, there could be less pressure on Petrobras stocks.</span></p> <p style="text-align: center;"><b><i>Natália Scalzaretto, TBR markets reporter</i></b></p> <hr /> <h2>How Petrobras lost BRL 32bn in one day</h2> <p><span style="font-weight: 400;">During the 2018 presidential campaign, Jair Bolsonaro said, time and time again, that he “didn’t understand the first thing about economics,” and that his economic guru Paulo Guedes would centralize all decisions. Three months into the new administration, we see that the president’s interference in economic affairs has been quite frequent—and often clashing with his Economy Minister. Mr. Bolsonaro defended protectionist measures on powdered milk, has failed to support the pension reform—and now meddled in Petrobras’ pricing policy.</span></p> <p><span style="font-weight: 400;">The company was set to promote a 5.7% bump in diesel prices (a hike larger than in all of February). But, fearing the risk of disgruntled truckers calling a strike, the administration asked the state-owned oil and gas company to withhold the price change. Petrobras announced that it had reassessed the data and realized that there was still a “margin for preserving current prices.” But the president himself admitted to political interference—saying that he wants the company to justify the hike.</span></p> <p><span style="font-weight: 400;">The move sent shockwaves through the markets, with <a href="https://www.investing.com/equities/petrobras-pn-historical-data">Petrobras shares</a> crashing by 8%—a BRL 32bn loss in market value. What was even more worrisome is that Economy Minister Paulo Guedes suggested he was caught off-guard—as was Petrobras CEO Roberto Castello Branco. Upon taking office, the government promised that political interference would no longer plague the company as it did during the Dilma Rousseff years (when fuel price controls were adopted to tame inflation).</span></p> <p><span style="font-weight: 400;">With Mr. Bolsonaro’s <a href="https://brazilian.report/money/2018/05/28/petrobras-oil-prices-brazil/">price control</a>, Petrobras is set to lose BRL 13m in revenue every day, according to the association of fuel importers.</span></p> <hr /> <p><img class="alignnone size-full wp-image-23581" src="https://brazilian.report/wp-content/uploads/2019/04/f583c138-1437-4e4b-964b-e226938e45a2.png" alt="petrobras fuel prices" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2019/04/f583c138-1437-4e4b-964b-e226938e45a2.png 1200w, https://brazilian.report/wp-content/uploads/2019/04/f583c138-1437-4e4b-964b-e226938e45a2-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/04/f583c138-1437-4e4b-964b-e226938e45a2-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/04/f583c138-1437-4e4b-964b-e226938e45a2-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/f583c138-1437-4e4b-964b-e226938e45a2-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h4>Understanding Petrobras’ pricing policy</h4> <p><span style="font-weight: 400;">Former President Dilma Rousseff (2011–2016) considered Petrobras key to her administration’s economic agenda as a whole. That’s why she used the government’s power as Petrobras’ biggest shareholder to force prices down. The policy cut Petrobras’ revenue, helping debts balloon to nearly USD 130bn. Moreover, once controls were impossible to sustain, price hikes were brutal—and very unpopular.</span></p> <p><span style="font-weight: 400;">When Ms. Rousseff was impeached, in 2016, her successor, Michel Temer, changed the company’s pricing policy—pegging it to international oil prices (which are calculated in U.S. Dollars). Investors saw this as a shield against political interference. Prices went up, following the international trend, and the company recovered market value.</span></p> <p><span style="font-weight: 400;">However, higher diesel prices sparked an 11-day truckers’ strike late in May 2018. As two-thirds of Brazil’s goods are transported through roadways, the country was brought to a halt, with fuel and food shortages being reported after only 3 days. Dozens of billions of dollars were lost—and the strike took a major toll on the country’s GDP. To find a compromise with the truckers, the government decided to subsidize diesel prices. Then-Petrobras CEO Pedro Parente resigned, saying the pricing policy was threatened.</span></p> <p><span style="font-weight: 400;">The subsidies were ended in 2019, and prices started to go up—which led to threats of a new strike. A few weeks ago, Petrobras announced changes to its diesel pricing policies. The company announced new prices would be calculated every 15 days (and not weekly), meeting truckers halfway after they demanded it took place monthly. BR Distribuidora, a Petrobras subsidiary, also announced the creation of a card allowing truckers to purchase fuels in advance at fixed prices—giving them more predictability.</span></p> <hr /> <p><img class="alignnone size-full wp-image-23580" src="https://brazilian.report/wp-content/uploads/2019/04/03d3fbef-368a-4b06-9124-6832e2d41e44.png" alt="petrobras fuel prices" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2019/04/03d3fbef-368a-4b06-9124-6832e2d41e44.png 1200w, https://brazilian.report/wp-content/uploads/2019/04/03d3fbef-368a-4b06-9124-6832e2d41e44-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/04/03d3fbef-368a-4b06-9124-6832e2d41e44-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/04/03d3fbef-368a-4b06-9124-6832e2d41e44-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/03d3fbef-368a-4b06-9124-6832e2d41e44-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h4>Bolsonaro and the truckers</h4> <p><span style="font-weight: 400;">Supported by truckers, Mr. Bolsonaro has always been ambiguous about his commitment to a more liberal pricing policy. His political program said that the company should follow international prices, but with softer short-term changes. After the election’s first round, he said: “You can’t have a predatory policy that saves Petrobras and destroys the Brazilian economy.”</span></p> <p><span style="font-weight: 400;">Newspaper Folha de S.Paulo reports that Wallace Landim, a truck union leader, threatened the President’s Chief of Staff with a strike if today’s price bumps were confirmed. Six hours later, the government informed Mr. Landim that the decision had been suspended.</span></p> <p><span style="font-weight: 400;">This direct connection between the government and truckers’ leaders has worried the markets, the Ministry of the Economy, and even Big Agro—which would have a lot to lose from a new strike. More worrisome still is how easily the government caved under pressure.

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BY Gustavo Ribeiro

An award-winning journalist with experience covering Brazilian politics and international affairs. His work has been featured across Brazilian and French media outlets.