Brazil is fighting to restore economic growth and its international standing, as the Petrobras bribery scandal continues to wreak havoc on the economy and investment.

Author: Antonio Guerrero

Once lauded as an emerging markets star, Brazil is witnessing a reversal of fortune, as global appetite for commodities wanes and a mounting corruption scandal at state-controlled oil company Petrobras threatens economic growth. With the economy moving closer to recession, Brazilians blame Dilma Rousseff’s administration for the downturn. The road ahead appears bumpy, at best.

Brazil’s economy grew by a meager annual average of 1.2% throughout Rousseff’s first term in office from 2011 to 2014, a period which also saw public spending balloon. The budget deficit doubled to 6.75% last year, as Rousseff campaigned for a second term. Amid a discouraging outlook, Rousseff won reelection last October with the narrowest of margins for any Brazilian president in decades. The outlook has worsened since she was sworn in in January.

The Petrobras scandal has been particularly damaging. Many executives of the company, which is 54%-owned by the government, along with top political leaders, stand accused of taking bribes from vendors and contractors in exchange for padding contract prices. Estimates put the cost of the alleged bribery scheme at as much as $20 billion. While an inquiry continues, the fallout is expected to further dampen growth prospects.

In addition to producing 90% of the nation’s oil, Petrobras owns all local refineries, operates more than 21,000 miles of pipeline, and dominates fuel distribution. It also accounts for some 10% of local stock market capitalization and domestic corporate investment. Its decision to cut capital expenditures by 30% this year is having a ripple effect on the economy. Sharp drops in Petrobras’s stock price have sparked a 35% decline in the Bovespa index.


A survey of local economists forecasts Brazil’s GDP will contract by more than 0.5% this year as a result of the Petrobras scandal, lower industrial output and falling commodities prices. Brazilian consulting firm Tendências Consultoria is even more cautious, revising its GDP outlook from 1.1% at the end of last year to -1.2%. “Considering the news of Petrobras’s 30% cut in its investment plan, and an estimation of how much construction companies involved in the scandal will have to cut their own plans due to restrictions on financing, the total impact on GDP could be around -1.9 percentage points,” says Alessandra Ribeiro, economist and partner at Tendências.

Ratings agency Moody’s believes state-controlled banks are most vulnerable, as their portfolios are brimming with loans to Petrobras and its contractors. Banks at risk, according to the rating agency’s assessment, include the BNDES national development bank—Petrobras’s largest creditor—as well as Banco do Brasil and Caixa Econômica Federal. As high interest rates increased borrowing costs, state banks stepped in to offer subsidized loans. State banks’ market share of loans grew to 55% in 2014.

Private-sector banks are increasing their loan-loss provisions and tightening credit disbursement standards. “The investigation into Petrobras could exacerbate the situation for Brazil’s banks, given that expectations for loan growth in 2015 were already modest,” says a report by Moody’s, which withdrew Petrobras’s investment-grade rating in February, owing mainly to its high debt burden. Petrobras has a net debt load of $110 billion.

Rodrigo Jimenez, CEO of credit insurer Euler Hermes in Brazil, agrees the scandal will have a short-term impact, but thinks the government is taking steps to restore confidence. “The good work by public prosecutors in combating corruption will bring benefits to the country’s image in the long run. It is worth mentioning that the fight against corruption will benefit companies that excel in business ethics, and this could be an important watershed for the relationship between government and private companies.”


Jimenez feels the private sector may benefit from the government’s ongoing need for financing to fund infrastructure development. “The growth opportunities are there;
what we need is a partner state that acts as a promoter of economic development.” He is encouraged by the appointment of Joaquim Levy, a former director at Banco Bradesco’s asset management division, as Finance minister. “This measure aims to restore
business confidence and the government’s credibility with the capital markets, which credits the economic downturn to excessive government intervention. Along with the central bank, the new economic team has two clear objectives: to control inflation and improve public accounts.”

Speaking to investors in New York, Levy said his priority is to stabilize gross debt over the next 10 months. “That’s the commitment of the president, and that’s our responsibility.” Gross debt hit 63% of GDP in 2014, up from 57% in 2013. The administration has reversed tax breaks and introduced a bill to raise payroll taxes, but the moves were met with hostility from legislators.

Higher consumer prices are further fueling discontent. Brazil raised its Selic benchmark rate by 0.5 percentage points in March, to 12.75%, in an attempt to halt inflation, which hit a 12-year high of 7.4% in February. The government’s inflation target is 4.5%, plus or minus two percentage points. According to a central bank survey, local economists expect inflation to be 7.3% by the end of this year, declining to 5.6% in 2016.

Investments around next year’s Olympic Games in Rio de Janeiro may provide some relief, athough they are likely to be insufficient to restore growth. “Based on previous experience with the [2014 FIFA] World Cup, the impact [of the Olympic Games] on the economy will be very modest,” says Jimenez, noting the nationwide FIFA event had a 0.2 percentage point impact on GDP.

Hosting the Olympics could be a double-edged sword, says Michelle Gibley, director of International Research at the Schwab Center for Financial Research. “Economic growth can be boosted by infrastructure spending before the Olympics and by the potential for additional tourism spending during the Games,” she says, but warns that the increased debt assumed to fund construction and pay for maintenance could produce a hangover effect. “Infrastructure upgrades made as part of the Olympics preparations are a positive, but spending on highways, ports and rail would have a longer-lasting benefit to the economy than building sports stadiums.”

Despite being just a few months into a new term, Dilma’s administration could be a lame duck, says Gibley, due to the corruption allegations weighing on her approval rating. She says Rousseff may have a tough time passing unpopular measures needed to protect Brazil’s investment-grade rating. “Losing investment-grade status could make raising capital more expensive, hurt the value of the currency and reduce economic growth.” data Summary: Brazil

Central Bank: Central Bank of Brazil

International Reserves                 

$379.2 billion

Gross Domestic Product (GDP)

$2.2 trillion*

Real GDP Growth




GDP Per Capita—Current Prices


GDP—Composition By Sector  








Public Debt (general government
gross debt as a % of GDP)




Government Bond Ratings
(foreign currency)

Standard & Poor’s


Moody’s Outlook

FDI Inflows

$66,660 million

$65,272 million

$64,045 million

* Estimates                                                                                                              
Source: Country Economic Reports



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