(Reuters, Alexandra Alper, Tatiana Bautzer, Rodrigo Viga Gaier, 12.Oct.2018) — Nationalistic and free market advisers to Brazil’s right-wing presidential frontrunner are deeply split about the future of state-run oil company Petroleo Brasileiro, foreshadowing a showdown over divestments and fuel subsidies.
University of Chicago-educated banker Paulo Guedes, economic adviser to frontrunner Jair Bolsonaro, has said he favors full privatization of Petrobras. Failing that, investors hope he can promote a business-friendly agenda such as asset sales to reduce the company’s $74 billion net debt.
Federal prosecutors in Brazil said on Wednesday that Guedes was being investigated over accusations of fraud tied to the pension funds of state-run companies, and Bolsonaro has rejected one of his policy recommendations.
Meanwhile, an increasingly vocal cadre of military generals stressing the importance of maintaining Petrobras as a strategic asset have shown growing influence.
Bolsonaro himself was an early supporter of a truckers’ strike this year over rising diesel prices. The government ultimately ended the strike by meddling in Petrobras’ ability to set prices at the pump, another policy that investors would like to see the government end.
Petrobras shares spiked 10 percent on Monday as investors bet a Bolsonaro administration would mostly give the company free rein in terms of selling off units to cut debt or setting fuel prices according to market forces.
The former army captain’s surge in the polls, topped by his win in the first round of voting, sparked a rally that has added $18 billion to the state oil company’s market value this month. But tensions between the two wings of Bolsonaro’s campaign threaten to cut the euphoria short.
One senior member of Bolsonaro’s entourage, who declined to be identified because of the sensitivity of the issues, said he had called for Petrobras to be broken into four companies and for three to be sold off.
“Now the final word on all this will rest with Bolsonaro,” he said. “I don’t think he really wants to.”
Bolsonaro voted as a legislator to preserve the state oil company’s monopoly on exploration and production and as a candidate he has taken a wide range of stances. Mirroring the views of some of the generals close to him, he has described Petrobras as a strategic asset.
“I believe we need to keep the core of Petrobras,” he said in an interview with TV station Band on Wednesday night. “The question of refining, refineries, I think that you can move gradually toward privatizations.”
In another recent interview he said he opposed privatizing Petrobras but still could reluctantly move to end the oil company’s “monopoly” in Brazil that he said gave it excessive pricing power.
Some 49.6 percent of Petrobras’ stock is traded on the stock exchange.
A key adviser on infrastructure and energy issues, General Oswaldo de Jesus Ferreira, has described the company as a strategic asset that must stay in state hands.
“Given Jair Bolsonaro’s history of voting in his nearly 30-years in congress, his connection with statist military sectors and the contradictory statements of his campaign leaders on the subject, it is hard to believe that he will include Petrobras in a program of privatizations,” said Ricardo Lacerda, chief executive at investment bank BR Partners. “The market seems overly optimistic about this issue.”
Fuel subsidies are another flashpoint. In May, Bolsonaro reacted to the strike by truckers angry about rising diesel prices. He enthusiastically backed the strike, tweeting that the movement showed “how the people are robbed for the benefit of a political caste, which for decades has enslaved everyone.”
The strike brought Brazil’s economy to a standstill. To mollify the truckers, President Michel Temer’s government dismantled a free-market fuel pricing policy and reintroduced fuel subsidies. This prompted Petrobras’ market friendly CEO Pedro Parente to quit, and its share price tumbled.
Oil prices have risen further since May, but subsidies are due to expire in December. Whether to maintain the subsidies could present the first test of Bolsonaro’s free market inclinations, if he wins the election and is inaugurated on Jan. 1.
Bolsonaro’s platform, written by Guedes, among others, states that Petrobras should be able to follow international pricing but ease short-term volatility with hedges. Yet the candidate has declined to say definitively whether he would extend the diesel subsidy.
It is hard to know how a potential Bolsonaro government would handle issues like the truckers strike, said Edmar Almeida, an energy professor at the Federal University of Rio de Janeiro. “Lots of contradictions still exist between Paulo Guedes’ neo-liberal vision and the military’s nationalist vision.”
DEEP DIVIDES
Investors may be more realistic to hope for sales of Petrobras assets to relieve its hefty debt load, which Moody’s Investors Service has said represents one-third of all Latin America’s rated corporate debt.
Bolsonaro’s party platform says the company should be able to sell substantial stakes in refining, wholesale, transport and other areas where it has market power.
Currently, a Supreme Court injunction triggered by a union lawsuit has halted sales of subsidiaries like its $7 billion TAG pipeline.
Some observers fear Guedes’ influence is on the wane. His uneasy alliance with Bolsonaro appeared to fray last month when Guedes proposed reviving an unpopular financial transactions tax known as the CPMF to raise government revenue. That idea was swiftly shot down by Bolsonaro and the once loquacious Guedes has barely been heard from since.
Still, Bolsonaro confirmed on Thursday that he would name Guedes to oversee a “super ministry” combining the current finance, planning and development portfolios.
Despite the tug of war between his advisers, Bolsonaro’s energy policies are more investor friendly than those of Workers Party standard-bearer Fernando Haddad, who will take him on in the second round on Oct. 28.
Haddad’s oil policy guru is former Petrobras CEO Sergio Gabrielli, whom many see as having presided over an era of corruption and mismanagement at the company.
“For now, what Petrobras’ share price reflects is simply a company which could remain free of the kind of intervention which the PT once promoted,” said Marcio Correia, who manages 14 billion reais in equities at JGP Asset Management in Rio de Janeiro.
“But Petrobras shares could still appreciate more depending on what a potential Bolsonaro government does.”
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Energy Analytics Institute (EAI): #LatAmNRG